If Scotland votes for independence the best that can be said is it doesn't have to be an economic disaster. And that's all.

On Thursday, Scots will take to the polls to decide the fate of the for-now United Kingdom. Specifically, whether to vote "Yes" to leave Britain, or "No" to stay in it. The Nos seem to have a slight edge over the Yeses, but only that. It's close. The pro-independence Scottish National Party (SNP), meanwhile, argues that self-determination isn't just an inherent right, but also the only way to create the kind of society that Scotland wants. That's one where they use their North Sea oil to fund a bigger welfare state; a kind of Norway-in-the-highlands. They can't do that now, of course, because the ruling Tories are cutting spending, not adding to it. So liberal Scotland, the SNP says, has nothing to lose but the chains of English conservatives.

That's not true. Even in the best case, independent Scotland would have to save more for rainy days, which could very well be more frequent when it's on its own. And in the worst case, it could get stuck in the same kind of self-perpetuating slump that the euro crisis countries have. The question then is whether the economic costs—and there will be some—are worth the political benefits. That's a much different calculus than the SNP's, who seem to think independence isn't just a free lunch, but a free dinner as well.

Here's why Scotland might find out that going it alone isn't any better, and maybe worse, than staying together.

1. Oil. The Yes campaign thinks Scotland has more oil, will get to keep more of it, will sell it for more, and can produce it for less than Britain's Office for Budget Responsibility (OBR) projects. Now, as John McDermott of the Financial Times points out, none of these assumptions are unreasonable on their own, but the cumulative effect is certainly aggressive. How much so? Well, as you can see in McDermott's chart below, the Yeses think Scotland would have somewhere between 50 and 143 percent more oil revenues the next five years than the OBR does.

Source: The Financial Times

That's not exactly chump change. Indeed, the Yeses are counting on an oil windfall to pay for 1) free childcare for three and four year-olds, 2) indexing benefits and tax credits to inflation, 3) small pension and caretaker allowance increases, 4) shoring up health and education spending, and 5) creating a sovereign wealth fund. So if there isn't as much oil money—and there probably won't be—then there won't be as much of a welfare state as the Yeses hope for, not without tax increases.

2. Currency. The Yeses want to leave Britain, but keep the pound. This, as Paul Krugman points out, is a miserable idea. If the euro crisis has taught us anything, it's that sharing a currency without sharing a budget can turn recessions into depressions. That's because it forces countries to pick up all the costs of a slump, while preventing them from actually doing so—or from using monetary policy to help. See, unless the government has a lender-of-last-resort—i.e., its own central bank—a self-fulfilling prophecy of financial doom can force it into austerity at the worst possible moment. That's what happened to the euro crisis countries, and it's what could happen to independent Scotland if it stayed on the pound.

Scotland would have to, as The Economist argues, create its own currency with its own central bank. But this would have its own difficulties. They'd probably want to peg their new currency to the pound, at least at the beginning, to ease the transition and preempt any capital flight. This means, though, that Scotland would need to run significant fiscal and trade surpluses to defuse any fear that they'd break the peg, and defend it if needed. Independence, in other words, could force Scotland into the same austerity it's trying to escape.

3. Smaller is not better. Independent Scotland would—crucially—be a less diversified economy than it is as part of Britain today. That, as Adam Posen points out, would make it more vulnerable to the vicissitudes of the global economy. Not only that, but the big banks that make up a big part of Scotland's economy would likely migrate south to the safety of the Bank of England, starving its economy of credit.

And then there's the debt. Scotland would presumably inherit a decent chunk of it, and, in all likelihood, would have to pay higher interest rates on it than Britain does now. That, along with a less optimistic oil outlook, is why the Institute for Fiscal Studies thinks that Scotland's finances would be better inside Britain than out of it.

In other words, even if everything goes right, Scotland would probably be a little worse off by itself than it is now.


Maybe this is worth independence. But the Yeses shouldn't pretend that these costs don't exist. Especially since Scotland might find out that independence means economic exigencies, rather than English conservatives, keep them from building the welfare state they want.

Related links:

9 big questions before Scotland's big vote on independence

What do the polls really say about Scotland’s referendum on independence?

If Scotland votes for independence, it’ll be Margaret Thatcher’s fault

Forget ‘Braveheart.’ Here are 8 movies about Scotland you should watch.