Income of Scots Could fall 6.5%-8.7% in Wake of Scottish Independence: CEP

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Research conducted by the Centre for Economic Performance shows that the incomes of Scots would likely fall sharply in the years following a split from the rest of the UK, while the negative impact of trade disruptions would potentially be three times more costly to the economy than those resulting from Brexit.

The research published on February 03, comes weeks ahead of Scotland's parliamentary elections which will deliver a solid majority to the Scottish National Party (SNP), according to the polls.

The SNP have said such an outcome will give them the mandate to conduct another referendum on independence, regardless of whether Westminster grants consent.

The wheels are therefore potentially n motion towards a breakup of the UK, leading economists to try and quantify the costs and benefits to Scotland of such a move.

Above: Aggregate polling data for Scotland's Parliament (constituency) from Britain Elects. Image courtesy of The Spectator.

The Centre for Economic Performance (CEP) - which is part of the London School of Economics - cites data that showed in 2017 the rest of the UK accounted for 61% of Scottish exports and 67% of Scottish imports.

The data confirms Scotland’s trade with the rest of the UK to be around four times larger than its EU trade.

"We estimate there is around six times more trade between Scotland and the rest of the UK than predicted by a standard gravity trade model. Alternative methods imply there is from 2.6 to 7.8 times more Scotland-rest of UK trade than predicted. This excess trade is partly the consequence of Scotland’s union with the rest of the UK," says the research report.

Above: Support for Scottish independence has grown notably since the onset of the covid crisis. Source Britain Elects, chart courtesy of The Spectator.

According to economists at the CEP, independence would create a new international border between Scotland and the rest of the UK, leading to higher trade costs.

"We use the CEP trade model to study the impact of these new trade costs on Scotland’s economy. We do not consider other effects of independence, such as changes in investment flows, fiscal arrangements or Scotland’s currency," says the report.

Drawing upon research on the magnitude of border costs, the CEP analyse an optimistic scenario where trade costs between Scotland and the rest of the UK increase by 15% after independence and a pessimistic scenario with a 30% increase.

But they find that changes in trade costs due to independence would be two to three times more costly for the Scottish economy than the impact of Brexit.

The impact on the wealth of Scots will be significant, shows the research.

Together, Brexit and independence (without rejoining the EU) are estimated to reduce long-run Scottish income per capita by around 6.5% in the optimistic scenario and 8.7% in the pessimistic scenario say researchers.

Per capita income is a measure of the amount of money earned per person in a nation and can be used to determine the average per-person income for an area and to evaluate the standard of living and quality of life of the population

But, these numbers likely underestimate the losses caused by higher trade costs, as we do not account for any dynamic effects of trade on productivity.

"The trade-related costs of independence are similar regardless of whether Scotland rejoins the EU, since the benefits of lowering trade barriers with the EU by rejoining are roughly offset by the costs of putting the EU’s external border between Scotland and the rest of the UK," says the report.

"Rejoining the EU would be preferable to maintaining a common economic market with the rest of the UK only if independence is sufficiently trade-destroying that the rest of the UK becomes a less important trade partner for Scotland than the EU," it adds.

But, the change would not likely be sudden and the CEP says changes in Scottish trade patterns following independence are likely to occur gradually, over a generation or more. Consequently, in the initial decades after independence, the rest of the UK will remain Scotland’s biggest trade partner.