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Scottish Drive for Independence Gets Financial Reality Check

Bloomberg logo Bloomberg 8/26/2020 Alastair Reed

(Bloomberg) -- Support for Scottish independence has risen during the coronavirus pandemic, yet the financial reality of breaking away from the U.K. has been thrown back into the argument again.

The government in Edinburgh recorded a budget deficit of 8.6% of gross domestic product compared with 7.4% a year earlier, according to the annual expenditure and revenue report. The deficit for the U.K. as a whole was 2.5% of GDP for the same period, widening from 1.9%, the report said.

a person wearing a suit and tie: Sturgeon GETTY sub © Photographer: Fraser Bremner/Pool/Getty Images Sturgeon GETTY sub

Nicola Sturgeon

Photographer: Fraser Bremner/Pool/Getty Images

“It’s a reflection of Scotland’s position within the United Kingdom now, not a forecast of where an independent Scotland would be in the future,” First Minister Nicola Sturgeon told lawmakers in Edinburgh on Wednesday. The biggest threats facing Scotland are a direct result of U.K government decisions such as the “premature ending” of job retention programs and no trade deal with the European Union, she said.

Cracks within the 313-year-old union between England and Scotland have widened during the Covid-19 crisis as the U.K. recorded the highest death toll in Europe and the biggest economic slump. While Prime Minister Boris Johnson has faced criticism for his handling of it, public backing for Sturgeon and her Scottish National Party has risen.

More significantly, polls show record support for Scotland breaking away from the rest of the U.K. The latest survey by Panelbase published on Aug. 19 showed 55% of Scots back full autonomy, the highest ever, and compared with 45% when Scots voted in a referendum six years ago.

Seeking Control

Scotland has control over health, transportation, education, its own justice system and some taxation.

The report published on Wednesday is based on an estimate of what Scotland spends versus its income, including a geographical share of North Sea oil revenue. It’s for the year to April 5 so doesn’t reflect the full impact of the coronavirus. The shortfall was 15.1 billion pounds ($19.9 billion) compared with 13.2 billion pounds in the previous fiscal year.

The impact of the coronavirus pandemic means the U.K.’s budget deficit could jump to almost 19% of GDP this year, according to David Phillips, an associate director at the Institute for Fiscal Studies in London. Scotland’s deficit could reach around 26-28% of economic output, he said.

The Scottish wing of Johnson’s Conservative Party said the numbers show that being part of the U.K. “is more valuable than ever to Scotland.” “It’s beyond dispute that the economic case for independence has never been weaker,” Scottish Conservative finance spokesman Murdo Fraser said.

But the reality would be different should Scotland become Europe’s newest independent state, said Kate Forbes, the cabinet secretary for finance. Due to restrictions over how Scotland can tax and spend, the deficit reflects “another government’s policy choices, not an independent Scotland’s policy choices,” she told reporters.

Sturgeon has pledged to hold a second independence referendum ever since Britain decided to withdraw from the EU, a move Scotland opposed. But currently there’s no prospect of a vote because Johnson has refused to sanction one. The key test will come in May when elections are held for the Scottish Parliament. If the SNP wins decisively as polls predict, the result is likely to set up a new clash over the U.K.’s constitutional future.

(Updates with economist in eighth paragraph.)

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