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Negative economic impact of independence would be ‘two to three times greater’ than Brexit, study finds

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Negative economic impact of independence would be ‘two to three times greater’ than Brexit, study finds

The negative effect of independence on Scotland’s economy would be two to three times greater than the cost of Brexit, a new study from the London School of Economics (LSE) has found.

According to LSE researchers, the economic hit from Brexit and independence together would be the equivalent to a loss of between £2,000 and £2,800 per person per year.

While Brexit alone is estimated to reduce Scotland’s income per capita by two per cent, the study, ‘Disunited Kingdom? Brexit, Trade and Scottish Independence’, published today by LSE’s Centre for Economic Performance, estimates that the combination of Brexit and independence would reduce it by between 6.3 per cent and 8.7 per cent over the long term. 

That is solely taking into account increased trade costs within the UK and not any other economic consequences of independence, such as changes in fiscal arrangements, currency or productivity. 

The report concludes that the loses from independence would be similar regardless of whether an independent Scotland re-joins the EU or maintains a common economic market with the UK.  

This is because Scotland’s trade with the rest of the UK is around four times larger than its trade with the EU, which means that creating a border within the UK would be more costly than the increase in UK-EU trade costs due to Brexit. 

The report says: “It is uncertain how large the effect of independence on Scotland’s trade costs with the rest of the UK would be.

“Based on existing estimates of border costs and the effects of economic disintegration, we study an optimistic, low border cost scenario in which trade costs increase by 15 per cent and a pessimistic, high border cost scenario where costs increase by 30 per cent.

“These cost increases apply in the event that an independent Scotland maintains a common economic market with the rest of the UK.

“If Scotland re-joins the EU, its border with the rest of the UK would become one of the EU’s external borders, leading to additional trade barriers.”

In 2017, the rest of the UK accounted for 61 per cent of Scottish exports and 67 per cent of Scottish imports.

The report’s authors, Hanwei Huang, Thomas Sampson and Patrick Schneider, estimate there is around six times more trade between Scotland and the rest of the UK than would be predicted by a standard gravity trade model, which estimates trade flows based on the relative size of the trading partners and their proximity to each other, highlighting the benefits of being part of the UK.

Schneider, a PhD student at LSE, noted that re-joining the EU would only support the Scottish economy in the long run if the move to independence reduced trade with the rest of the UK so much that the EU became Scotland’s largest trading partner.

Huang, assistant professor at the City University of Hong Kong, said: “This analysis shows that, at least from a trade perspective, independence would leave Scotland considerably poorer than staying in the United Kingdom.

“While many considerations will play a role in shaping the outcome of a second referendum, voters need to know what the likely costs and benefits of each course will be.

“This briefing contributes to that knowledge.” 

Sampson, associate professor of economics at LSE, added: “We find that the costs of independence to the Scottish economy are likely to be two to three times greater than the costs of Brexit.

“Moreover, re-joining the EU following independence would do little to mitigate these costs, and in the short run would probably lead to greater economic losses than maintaining a common economic market with the rest of the UK.” 

Commenting on the LSE analysis, Scottish Labour constitution spokesman Anas Sarwar said: “This report confirms that the SNP’s plans for independence would create deeper austerity, which is why Scottish Labour firmly opposes it.

“The difficult years ahead of us must be about economic recovery, not inflicting further economic pain on our communities and people who are already struggling.

“Rather than return to the old politics of division, the next parliament must be a COVID recovery parliament that focuses on bringing people together.”

Liberal Democrat Scottish affairs spokesperson Wendy Chamberlain said: “It is very strange that the SNP would look at the chaos of Brexit and say we want even more of that with leaving the UK.

“We should be looking to build bridges with our neighbours, not barriers.

“This analysis shows that the economic turmoil imposed by independence would be enormous.

“That's money that should be spent on education, mental health and helping our NHS recover from the pandemic.

“What Scotland needs is to put recovery first, not another divisive independence referendum.”

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