Scotland talks independence – but can it afford it?

The recent revival of the debate on Scottish independence has sharpened focus on a pressing question: Can Scotland stand alone economically?

First Minister Alex Salmond, head of the Scottish government, today outlined his vision for the referendum, which he said will be held in fall 2014. 

"Our nation is blessed with national resources, bright people, and a strong society. We have an independent education system, legal system, and [National Health System]. They are respected worldwide. I believe that if we connect the wealth of our land to the well being of our people, we can create a better country," he said. 

Scotland has some control over its finances, but has no central tax-raising powers of its own, instead receiving a share of the British public purse. Critics say that share is disproportionately high, while Scottish nationalists say it is too low and doesn't accurately reflect the Scottish contribution to the economy.

Central to the economic argument is North Sea oil and gas, a key component of the Scottish and British economies that is expected to generate £13 billion ($20.2 billion) in tax revenues during the current financial year.

With the pro-independence Scottish Nationalist Party now in control of the Scottish parliament in Edinburgh for the first time, the idea of independence is gaining traction. First Minister Salmond vowed when his party won in 2011 to hold a referendum on independence before the end of his term. But British Prime Minister David Cameron and his ruling coalition in London said earlier this month that Scotland's devolved parliament does not have the constitutional powers to call a referendum, or to dictate its terms, sparking a heated debate. 

That argument died down, left unresolved. But now that the issue of independence has been seriously broached, Scots are questioning more than who should be in charge.

North Sea resources 

The North Sea oil and natural gas resources are critical to the British economy, and if Scotland does break free, negotiations over how to share them are likely to be fierce. The Scottish National Party insists that Scotland's 90 percent geographical share of the deposits means that the country has consistently contributed more to the British economy than it receives back.

London is likely to argue that claims to the resources should be based on more than geography, such as substantial British investment in the industry. The prevailing opinion in England is that the North Sea resources are "extra-territorial," meaning they don't belong to Scotland and Scotland has actually been subsidized by the UK government. 

Scottish nationalists envision an economy built on what they see as their rightful share of North Sea natural resources and an ambitious renewable energy program. The Scottish government has selected 2020 as its target year for deriving 100 percent of the country's energy from renewables – mostly through offshore wind and wave energy. Authorities are currently investigating whether Scotland met an interim target of 31 percent annual electricity consumption from renewables in 2011.

Salmond has said that between renewable and conventional energy generation, Scotland could export as much energy as it consumes. Many nationalists believe renewables could "re-industrialize" the country, which has suffered greatly from a decline in industry and manufacturing.

Critics say an independent Scotland's small population would not provide enough demand to support the renewable sector. Salmond argues that revenue from exporting renewable energy could cover some of the costs – while helping "keep the lights on in England."

Pounds and pence

If it approved independence, Scotland would have to decide whether to remain on the British pound, adopt the euro, or use a currency of its own. Salmond has said that Scotland would initially keep the pound, but eventually join the eurozone – a move that the UK has steadfastly resisted.

Scotland would have to renegotiate with Britain if it wants to retain the pound after independence. Alistair Darling, chancellor of the exchequer under the former Labour government and widely touted as the leader of efforts to keep Scotland in the union, warns that if Scotland left the union, it would be giving up its right to have a say in interest rates and other financial decisions pertaining to the pound.

"This is precisely the argument that is being engaged in the eurozone at the moment," Mr. Darling told London-based newspaper The Observer. 

Scotland's share of Britain's debt would also require tough negotiations. Two of the British banks heavily mired in the economic collapse of recent years were Scottish: the Royal Bank of Scotland and Bank of Scotland.

Can it manage its finances?

Few critics of Scottish independence argue that it wouldn't be able to stand alone – they simply believe it is stronger as part of the UK. Douglas Alexander, a Scottish member of Britain's Parliament for the constituency of Paisley and Renfrewshire South, said earlier this month that the entire union "benefits from the sharing of risks, rewards, and resources in the most successful political union in history."

While Scottish economic growth has traditionally lagged behind that of the UK, in the third quarter of 2011, it kept pace, matching the union's 0.5 percent growth. And although Scotland has a deficit, its deficit spending is less than that of the UK, Douglas Fraser, the BBC Scotland business and economy editor, recently reported.

Some Scots feel that being a part of the UK has actually held them back. 

"I just don't think we have lived up to our full potential as part of the union," says Barry Boylan, a Scottish construction worker who travels to Belgium for weeks at a time to find work. "I feel we could do so much better. Just [look] at places, like parts of Glasgow, that have been let down really badly."

The improvements since the Scottish National Party was first elected to power nearly five years ago preaching a nationalist message are noticeable, he says, noting local improvements such as a renewable energy park and regular announcements of deals with overseas investors, "but they can only do so much with their hands tied."

Alistair Hunter, a local politician for the Scottish National Party, goes further. "If Scots are better in the union," he says, "why am I watching a BBC Scotland report on the shameful number of children in poverty in Scotland?"

Unionists say that Scotland is ill-equipped to govern itself and has developed a track record of financial mismanagement since 1998, when devolution gave it some control over its public spending. Expenditures on some major public works projects have far exceeded their initial cost estimates.

Kevin Funnell, a local government worker in the eastern town of Glenrothes, notes that when the previous Scottish government decided to build a national parliament, it severely undershot the cost. It budgeted roughly £50 million ($78 million), but in the end, the project cost roughly £430 million ($669 million).

"The same bunch of elected MSPs (Members of the Scottish Parliament) then opt to build a tram system in Edinburgh for a measly £375 million ($583 million) to now get a price of £1 billion ($1.5 billion). Oh, and you might not get the full system, they now tell us."