Attempts to rebalance the economy could be thrown off course if the UK were to split.
With just over a week to go to Scotland’s independence referendum and the polls nail-bitingly close, much of the rest of the UK have finally woken up to the fact that their country might soon be fundamentally and irrevocably altered.
Until now, it has felt as if many, perhaps most, English people have taken the view that separation would never happen, or that if the Scots want to go it alone then they should be wished good luck. Views in Wales and Northern Ireland are likely to have been different, of course.
Faced with the reality of a split, more and more English people (driven by the overdue awakening of the politicians and the media) have now begun speaking of their somewhat intangible sadness at the idea. Perhaps if more notice had been taken sooner then the country wouldn’t be in such a position.
But few seem to be expressing a sense that Scottish independence would have a material effect on their lives. After all, over 90% of the UK’s population and GDP would remain and, whatever the resolution to the currency question, the two economies would remain highly integrated. Businesses would continue to trade and operate across the border; families would continue to visit one another; no one is (yet) talking about an exodus of companies to a new low-tax haven in the north.
However, put things in the context of our stated national aim of rebalancing the economy towards manufacturing and exports and the future for the rest of the UK starts to look a lot shakier.
Despite our best efforts, the trade deficit has widened to near record levels. According to the Office for National Statistics, exports are actually increasing driven in particular by oil and chemicals, two particularly strong sectors in Scotland. But imports are rising more than twice as fast with large purchases in the automotive and aerospace sectors – supposedly two of the UK’s exporting superstars.
Instead of rebalancing, our economy seems to be more entrenched than ever towards domestic consumption and services. Total output has returned to pre-recession levels but manufacturing has yet to fully recover. Instead of heralding a new era of British international trade, most manufacturers are focused on the domestic market for growth, according to the latest Manufacturing Advisory Service (MAS) Barometer, and many are attributing current improvements to yet another credit-driven house price boom.
On this basis, you might think that the recent fall in the value of the pound sparked by Scotland’s Yes campaign pulling level in the polls would be something to welcome. If the Scots choose independence, it’s not hard to imagine a further devaluation helping make British goods (or whatever we would call things made in the remainder of the UK) cheaper abroad and boosting exports.
But according to Lee Hopley, chief economist at manufacturers’ organisation EEF, the exchange rate is much less of a problem than the sluggish performance of the rest of the global economy. UK manufacturers are focused on developing new products for export, she says, but that takes time and requires a willing market. It’s hard to sell when no one wants to buy.
Independence would create a new export market for the rest of the UK as it currently sells more goods and services to Scotland than it buys. Independence might also deliver Scotland’s £1.4bn financial services industry to London, although that will hardly help the rebalancing effort.
However, the loss of the oil and gas industry (currently a major factor in rising exports) is likely to have a serious impact on the rest of the UK’s trade imbalance. The BBC’s Robert Peston calculates that it would have increased last year’s deficit of 4.4 per cent of GDP to nearly 7 per cent.
If the rest of the UK were to continue buying so much more from the rest of the world than it sells, it would raise serious questions about the country’s ability to pay its way, increasing the country’s borrowing costs and discouraging investment – another key aspect of rebalancing. Manufacturers relying on the domestic market may find their growth prospects disappearing as consumers tighten their belts again and lending dries up. And this is without the inevitable uncertainty that will come from 18 months or more of wrangling over currency, debt and many other issues.
The reality of the independence debate is that it’s impossible to know what the long-term economic impact would be on either Scotland or the rest of the UK. But it in the short-term it seems unlikely that separation would cause anything but a bumpy ride for all of us.