Contents
Executive summary 5
Introduction 10
Chapter 1: An integrated economic union 12
Economic alignment between Scotland and the rest of the UK 13
Scottish economic performance over time 15
Performance during the financial crisis 16
Including North Sea oil and gas 17
Scottish economic performance compared to similar small advanced economies 20
Benefits of economic integration for economic performance 21
Scotland's integration with the rest of the UK 22
Trade 23
Labour 24
Capital 25
Integration and economic stability 26
Chapter 1 Conclusion 27
Chapter 2: The UK's integrated fiscal model 28
Fiscal alignment between Scotland and the rest of the UK 30
Including North Sea oil and gas 33
Pooling of resources 34
Policy flexibility within an integrated fiscal model 39
Scotland's spending policy flexibility 40
The UK's integrated tax system 42
Scotland's tax policy flexibility introduced with the Scotland Act 2012 43
Chapter 2 Conclusion 46
Chapter 3: The Border Effect 47
The "border effect" impact of independence on economic integration 48
Characterising the potential border between an independent Scottish state and the continuing UK 48
Assessing the impact of a border on economic integration between Scotland and the rest of the UK 51
Conclusion 60
Chapter 4: Managing volatility in the public finances 61
The case for an oil fund and its implications 62
Economic rationale for an oil fund 62
Fiscal implications of an oil fund 63
Modelling an oil fund for an independent Scottish state 68
Conclusion 74
Chapter 5: Conclusion 75
Annex A: Scotland's economic performance as part of the UK 77
A picture of Scotland's economic place in the UK 77
Performance over time relative to the UK long-term trends and the impact of the recession 83
Scotland's economic performance relative to comparable independent countries 87
Scotland's performance relative to independent comparable countries 87
Annex B: Scotland's tax and spending as part of the UK 93
Assessing Scotland's tax and spending as part of the UK 94
Scotland's public spending as part of the UK 96
Scotland's funding as part of the UK 98
Scotland's onshore revenues 98
Scotland's revenues including North Sea tax revenues 100
Factors affecting North Sea tax revenues 101
Annex C: Modelling the Effect of the Border 106
Estimating the border effect on trade and migration for Scotland 106
Data 107
Specification 107
Alternative estimation2 108
Calculating Welfare Effects 110
Conclusion 111
Annex D: References 112
Table 1A: Onshore economic growth in Scotland and the UK 16
Table 3C: Impact of Scottish Independence on output and growth in Scotland and the continuing UK 59
Table 3D: Effect of decline in trade flows on real income 60
Charts
Chart 1A: Onshore economic output per head of nations and regions (2011) 13
Chart 1B: Economic output per head of London and Scottish cities (2011) 14
Chart 1C: Labour productivity (2011) 14
Chart 1D: Labour market in the three months to May 2013 15
Chart 1E: Growth in onshore activity per head, Scotland and the UK 16
Chart 1F: Impact of the recessionChart 17
Chart 1G: Size and composition of the Scottish and UK economies 17
Chart 1H: Quarterly Scottish nominal GDP growth 19
Chart 1I: Scottish exports to the rest of the UK and Rest of World as a share of demand 24
Chart 2A: Comparison of Scotland and UK onshore tax revenues per head 31
Chart 2B: Comparison of Scotland and UK spending per head 32
Chart 2C: Breakdown of Scotland and UK spending per head 32
Chart 2D: Scotland's onshore tax and spending compared to the UK average 33
Chart 2E: Scotland's overall tax and spending compared to the UK average 34
Chart 2F: Onshore tax mix in Scotland and the UK 35
Chart 2G: Tax mix in Scotland and the UK including North Sea revenues 35
Chart 2H: Volatility in UK and Scottish receipts 36
Chart 2I: Successive official forecasts of UK offshore revenues 37
Chart 2J: Volatility in UK and Scottish receipts and spending 38
Chart 2K: Devolved and reserved spending for Scotland 39
Chart 4A: Oil fund including all oil revenues starting in 2021-22 70
Boxes
Box 1A: The impact of North Sea oil on economic performance: GDP versus GNI 18
Box 1B: Valuing remaining North Sea reserves 19
Box 2A: The UK Government's spending for Scotland 40
Box 2B: Examples of the Scottish Government's spending policy choices 41
Box 2C: The Scotland Act 2012 tax and borrowing powers 45
Box 3A: Currency options and transaction costs 49
Box 3B: Administrative and transaction costs of independence - Summary from the Scotland analysis: Business and microeconomic framework 50
Box 3C: Estimates of the "border effect" on trade 52
Box 3D: Case study of Czechoslovakia 54
Box 3E: Case study of Ireland 56
Box 3F: Estimating the trade and migration effects if Scotland and the rest of the UK were to adopt a euro area-like relationship - an empirical study 58
Box 4A: Norway's oil fund 64
Box 4B: Alternative scenarios for a Scottish oil fund 71
Table A.A: Composition of output in UK and devolved countries (2010) 80
Table A.B: Industrial composition of jobs 82
Table A.C: Onshore economic growth in Scotland and the UK 84
Table A.D: Growth Rates in GVA per head 90
Table A.E: Impact of the recent global financial crisis 91
Table C.A: Results from estimating the trade gravity equation 109
Table C.B: Results from estimating the migration gravity equation 110
Annex Charts
Chart A.A: Output per head of regions and devolved countries (2011) 78
Chart A.B: Economic output per head of London and Scottish cities (2011) 79
Chart A.C: Labour productivity (2011) 79
Chart A.D: Labour share of output (2011) 80
Chart A.E: Expenditure decomposition of output (2011) 81
Chart A.F: Labour market in the three months to May 2013 81
Chart A.G: Median earnings in UK regions and devolved countries (2012) 82
Chart A.H: Annual growth in onshore economic activity per head 85
Chart A.I Impact of the recession 85
Chart A.J: Employment rate (proportion of the population aged 16 to 64 in employment) 86
Chart A.K: Unemployment rate (unemployment as a proportion of the population aged 16 and above) 86
Chart A.L: Productivity growth 86
Chart A.M: Historical comparison of Scotland's output performance per head 90
Chart A.N: Standard deviation of annual growth per head 90
Chart A.O: Output growth, pre-recession 91
Chart A.P: Scotland's employment rate relative to comparable countries 91
Chart A.Q: Scotland's unemployment rate relative to comparable countries 92
Chart B.A: How the UK's public spending is funded 94
Chart B.B: Scotland's onshore tax and spending compared to the UK average 99
Chart B.C: Scotland's spending and funding (excluding North Sea revenues) 100
Chart B.D: North Sea tax revenues 100
Chart B.E: North Sea oil and gas production 102
Chart B.F: Oil prices 103
Chart B.G: North Sea Investment 104
Annex Boxes
Box A.A Sources for Scotland's economic statistics 92
Box B.A: Identifying Scotland's spending as part of the UK 95
Box B.B: Summary of the impact of key factors on North Sea tax revenues 105
Box C.A: Multilateral Resistance 108