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Last Updated: Tuesday, 30 October 2007, 17:43 GMT
How to fund Scottish independence?
by Gavin Stamp
Business reporter, BBC News

The Buzzard oil rig 150 miles off the coast of Aberdeen
The battle for control of oil could be key to Scotland's future

Scotland's First Minister Alex Salmond cut a confident figure at the SNP's annual conference last week.

He has been riding high in the polls since his party's historic election victory in May swept him to power.

But the SNP knows that the real battle to secure its main manifesto goal - independence for Scotland - has only just begun.

The fight for public opinion over the key question of whether Scotland can stand on its own two feet economically could be a long and potentially bumpy one.

The SNP has kick-started what it hopes will be a new chapter in Scottish history by launching a "national conversation" about Scotland's future constitutional options.

This puts forward, in broad terms, the arguments for moving towards full independence.

It sets out the powers currently held by Westminster, ranging from full control over tax, spending, borrowing and interest rates to ownership of North Sea oil and gas reserves, which would be "repatriated" north of the border.

It also outlines the competing case for seeking more devolved powers for the Scottish Parliament while stopping short of breaking up the UK's 300 year-old history.

An independence referendum may be at least three years away but for many people, the arguments boil down to one straight forward question.

How would a fully sovereign Scotland pay for itself?

'Economic underperformance'

The SNP's whole case for independence is based upon its critique of Scotland's economic performance or "cycle of underperformance" over the past three decades.

It points to growth rates over the past 30 years substantially below those of the UK as a whole and of comparable European countries such as Ireland and Norway as a powerful argument for radical thinking.

The SNP has already pledged to match the UK's growth rate by 2011 by cutting business rates and channelling investment in enterprise, transport and education more effectively.

It acknowledges that enhancing the Parliament's existing tax-raising and spending powers - something known as "fiscal autonomy" - could grow the economy by 19bn by 2015.

Scottish First Minister Alex Salmond
Alex Salmond wants to lead Scotland to independence

But it says more profound, structural changes are needed if Scotland's real economic potential is to be unlocked.

Only by getting hold of what it describes as "the full set of tools" that independence can provide will Scotland become more competitive and wealthier.

These include the ability to borrow on the financial markets, dictate spending in areas such as defence and gain the power to vary taxes to stimulate commercial investment.

The Scottish Parliament already has the power to vary the basic rate of income tax by up to 3p in the pound although Labour-led administrations have shied away from this.

In the event of independence, the SNP would be less reluctant to pursue a "competitive" tax environment for business which would see it aggressively seek to attract large companies from Ireland, England and other prime European locations.

'Nightmare scenario'

By attracting more investment, it believes a virtuous circle of a more dynamic economy, higher employment levels and healthier tax receipts could become a reality.

But for sceptics, this scenario raises real concerns.

Many economists point to longer-term structural problems in Scottish society and its economy - such as an ageing population and low levels of entrepreneurship and research spending - which mean any perceived benefits of further devolution or full independence may be hard to exploit.

"There is no 'silver' or 'magic bullet to improve Scotland's growth," Brian Ashcroft, policy director at the economic research body Fraser of Allander Institute, said recently.

"There is little evidence that 'small' independent states necessarily grow faster and more prosperous simply because they are small."

The health of Scotland's public finances and what they may look like in the event of independence are a matter of fierce debate.

The share of government spending in Scotland compared to that for the UK as a whole is currently much higher than the comparable figure for money coming in through taxes.

The hands of a pensioner
Scotland could struggle to meet its spending commitments, critics say

This shortfall is filled by borrowing which, according to government expenditure and revenue (GERS) figures, totalled 11.2bn in 2005, equivalent to 12% of GDP.

The methodology used to produce GERS figures is hotly disputed but the message it imparts, pro-unionists claim, is clear.

Scotland would be borrowing heavily post-independence to meet all its current spending commitments and new liabilities such as funding the pensions of an ageing population.

Ministers, it is claimed, would eventually be forced into the unpalatable choice of either cutting public spending or raising taxes.

Labour argues that the Barnett formula - which has governed the amount of the UK's financial pie given to Scotland based on population criteria for more than 30 years - is not broken and doesn't need fixing.

In contrast, the SNP says the current system is "squeezing and short-changing" Scotland and several commentators and Tory politicians who are no friends of independence believe the current arrangements are in urgent need of review.

Oiling the wheels

Much of Scotland's hope for an independent future is vested in the dark, cold waters of the North Sea, whose enormous wealth is currently snaffled by the UK exchequer.

The SNP, which has pledged to take control of oil policy, says this would yield an extra 55bn in revenues for Scotland over the next five years.

In the future, this money could be used to finance projects specifically benefiting Scotland, it says.

Figures suggest full "ownership" of North Sea oil and gas would improve Scotland's public finances hugely, reducing annual borrowing requirements by almost half to about 6bn.

But "black gold" may not be the panacea that it once may have seemed despite the currently soaring price of oil.

Although oil and gas has generated more than 230bn in tax for the UK in the past 40 years, returns are set to fall.

This is due to the rising cost of extracting oil and declining production levels.

Some analysts argue UK oil output peaked several years ago.

The industry maintains that the UK will be nearly self-sufficient as far as its oil needs are concerned this year but is still forecasting sharp falls in output by 2012.

Like the hunt for new oilfields, the political landscape is always fraught with hidden dangers.

For all his apparent confidence and sure-footedness, Mr Salmond is leading a minority administration at Holyrood.

He is also operating in an environment where all other mainstream parties and much of the electorate remains opposed to independence.

Mr Salmond has called for a "robust debate" on Scotland's future and it is likely that his wish will be granted.

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