UK: Fiscal update highlights downside of Scottish independence – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound continues to trade on a firmer footing in the near-term supported by the easing of initial Brexit fears as the UK economy appears to be holding up better than expected.

Key Quotes

“The Brexit vote also prompted concerns that it could trigger a second Scottish independence referendum after Scotland voted to remain within the EU. SNP Leader Sturgeon has made noises about the Brexit vote strengthening the case for Scottish independence but has so far refrained from explicitly pushing for a second referendum and will most likely wait until details of the UK’s future relationship with the EU become clearer.

The release yesterday of the latest fiscal update from Scotland highlighted the risks of independence which were emphasized in the “remain” campaign. Scotland’s budget deficit widened to 9.5% of GDP in 2015 from 9.1% of GDP in 2014. In contrast, the overall UK deficit narrowed from 5% to 4% of GDP in 2015. The collapse in Scotland’s oil revenues to just GBP60 million down from GBP1.8 billion in the previous year further highlighted the vulnerability of an independent Scotland to oil price volatility and declining North Sea production.

As part of the UK, Scotland benefits from generous fiscal transfers which allowed GBP1,200 more government spending per head last year than for the UK as a whole. As a result it is not clear that a holding a second independence referendum would lead to a different outcome.”