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Scotland's economy benefits from being part of integrated UK

Analysis finds Scotland’s economy benefits from being part of larger, integrated UK economy.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Diagram showing economic output in Scotland

New analysis released by the Treasury demonstrates that Scotland’s economic performance is stronger because it is part of the larger integrated UK economy.

The fifth paper in the Scotland analysis series Scotland analysis: Macroeconomic and fiscal performance looks at Scotland’s economic performance and finds that, as part of the UK, Scotland is outperforming most other parts of the country as a result of the benefits of deep economic integration with the rest of the UK.

These benefits include free access to the larger UK market, a common regulatory framework, integrated supply chains and a highly flexible labour market. As a result, Scottish companies trade more goods and services with the rest of the UK than with the rest of the world, exporting £36 billion of goods and services to the rest of the UK. Flexible labour movement between Scotland and the rest of the UK allows businesses to recruit the best people from across the whole UK, and the benefits of being in the UK have made Scotland an attractive destination for foreign investment.

The paper finds that the absence of a border is key for economic integration. Even where free trade agreements exist and physical borders are weak, neighbouring countries with similar economies are affected by the presence of a border. The analysis finds, for example, that trade between the US and Canada is thought to be 44 per cent lower than it could be as a result of the border between them. Canadian provinces trade around 20 times more with one another than with US states of a similar size and proximity, despite a free trade agreement between Canada and the US. Labour migration between Scotland and the rest of the UK is also estimated to be as much as 75 per cent higher within an integrated UK, allowing the sharing of skills and knowledge.

The UK’s diverse economy protects Scotland from economic shocks and the volatility of oil prices. An integrated UK and a broader and more diverse tax base helps to maintain the stability of public spending in Scotland and smooth the impact of volatile sources of revenue, such as North Sea oil and gas.

The paper shows that, since 1999, Scotland’s onshore economy has generated 8.3 per cent of the UK’s tax receipts, while at the same time Scotland has received an average of 9.4 per cent of UK public spending. Relative to the UK generating and spending £100, this means that Scotland’s onshore economy has generated £98 for the UK Exchequer, while receiving £112 of public spending.

The UK standing and working together has the broad shoulders to maximise volume and value from the North Sea oil and gas reserves. The Chancellor has today unveiled deeds that will give the oil and gas industry long-term certainty on the tax relief they will receive from decommissioning. This is an incentive which is expected to unlock billions in new investment, giving a further boost to maximising the volume and value of this important asset.

Integration is at the heart of the UK’s current economic and fiscal union. Independence would fundamentally transform and fragment this relationship, ending the pooling of resources and risk-sharing between Scotland and the rest of the UK, and erecting a border where one doesn’t currently exist. Research in the paper concludes that remaining part of the borderless United Kingdom could boost real incomes in Scotland by as much as 4 per cent after 30 years, equivalent to £5 billion in 2012 prices or £2000 per household, compared to the outlook if Scotland were to become independent.

Chancellor to the Exchequer, George Osborne, said:

Scotland benefits from being a strong part of the UK, and the UK also benefits from Scotland’s place within it.

Today, I’m unveiling the final decommissioning deed. This is a concrete example of the tax certainty this government is providing. The industry estimates that this decommissioning certainty will drive at least £17 billion of increased investment, extending the life of the North Sea basin.

Chief Secretary to the Treasury, Danny Alexander said:

This research confirms that being part of a strong, integrated and diverse UK economy has helped to drive economic performance in both Scotland and the rest of the UK, delivering real benefits for households and businesses. Remaining part of the borderless UK could boost real incomes in Scotland by as much as 4 per cent after 30 years, equivalent to an additional £2000 per household.

The Scotland analysis programme is a series of publications designed to inform the debate on Scotland’s future within the United Kingdom. Future papers in the programme will be published over the course of 2013 and 2014 to ensure that people in Scotland have access to the facts and information ahead of the referendum.

Published 3 September 2013