Sturgeon’s case for Scexit doesn’t add up

No one should be too perturbed by Nicola Sturgeon's latest referendum pronouncements. There will not be a referendum next year. The thought of the First Minister flying to London to start secession negotiations after gaining a majority of votes in Scotland at the next general election is Pythonesque in its absurdity.

At some point this century a politician might emerge who kicks off an era-defining trend of breaking apart established liberal democracies – but that politician is unlikely to be Nicola Sturgeon. Scotland can, and will, ultimately shrug its shoulders at this week's Holyrood melodrama.

The same goes for the First Minister's latest attempt to create an economic narrative to justify exiting the UK. Speaking ahead of her indyref statement to MSPs, Sturgeon tried to link the thing that is vexing Scots, the cost-of-living crisis, to being in the Union. Making the case that Westminster-imposed Brexit and austerity policies are the root cause of the crisis, she said: 'It is clearer than ever that when it comes to tackling the cost-of-living crisis, Westminster is not the solution to the problem, Westminster is the problem.'

The way to tackle the cost-of-living crisis is, therefore, and of course, to get out of the UK. It is a line of argument that makes sense politically but completely fails the reasonableness test economically.

The key defining driver of the cost-of-living crisis is inflation, which is a global phenomenon related to supply chain inefficiencies and the rising cost of energy. Supply-side constraints have their roots in the pandemic and have been exacerbated by the war in Ukraine.

There is a credible argument to be made that Brexit has exacerbated inflation in the UK. In part this is due to a weaker pound, which has increased the cost of imports. But it is also because Brexit-induced trade friction with the UK's biggest trading partner has added to the supply-side issues.

The problem with the First Minister's argument is that leaving the UK could induce inflation in Scotland, partly for the same reasons Brexit might well have added to inflation across the UK. Trade data shows that well over half of Scotland's exports and imports are with other parts of the UK. Secession would create a new international border, which would lead to higher trade costs.

Trade economists at the London School of Economics estimate that under an optimistic scenario, where new trade frictions are minimised, trade costs between Scotland and the rest of the UK would increase by 15 per cent after independence. Under a more pessimistic scenario, those costs would go up by 30 per cent. They find that the changes in trade costs due to independence would be two to three times more costly for the Scottish economy than the impact of Brexit.

What's more, the researchers find that the trade-related costs of exiting the UK are similar regardless of whether an independent Scotland joined the EU. This is because the benefits of lowering trade barriers by joining the trade bloc would roughly be offset by the costs of implementing the EU’s external border between Scotland and the rest of the UK.

'Scexit'-induced trade friction, therefore, would likely increase the cost of imports, meaning higher prices for those already struggling with the cost-of-living crisis.

Then there is the currency situation to consider. The plan is 'sterlingisation': unofficially using the pound sterling outside of a formal monetary union, with no effective central bank support. Leading economists have warned this would lead to a currency crisis. There is every possibility sterlingisation would quickly be abandoned and replaced with a new separate currency at a sharply devalued rate.

This devaluation and its impact on the cost of imports would be another factor pushing up inflation. As the former chief economist to the Scottish Office Gavin McCrone notes in his book, After Brexit: The Economics of Scottish Independence:

'The upheaval caused by leaving the UK would undoubtedly be major and costly - it might well result in a fall in living standards for several years and significant inflation. It is not clear that this is understood even by those who seek independence.'

Does the First Minister understand any of this? Does she care? The answer, alarmingly, appears to be 'no' and 'no'. While failing to acknowledge the fundamental driver of the cost-of-living crisis, Sturgeon also blithely assumes an independent Scotland would have more money to bolster household incomes. This is despite evidence suggesting the first government of the new state would have no choice but to drastically cut government spending.

That is a reality the First Minister simply refuses to accept, opting instead for grandstanding and mythmaking.

The solution to the cost-of-living crisis is delicate and complex. It relies on governments tackling supply chain issues and central banks and policy makers keeping inflation expectations anchored at low levels. Independence would create an international border across the middle of Britain and a currency crisis in Scotland. That could only make the situation worse for Scots.