Scots Are Divided Over Independence, and Its Economic Costs

BEITH, Scotland - The case for tearing apart the United Kingdom was made on a recent evening at a community center in this small town near Glasgow. More than 200 people were packed into folding chairs and standing along walls lined with posters promoting an independent Scotland, like the one with the word 'Aye' emblazoned on a Scottish flag. A disco ball hung overhead.

Nicola Sturgeon, Scotland's deputy first minister, spoke from a lectern covered with a tartan drape.

'As a country, we've spent an awful long number of years being told we're too wee, too poor and probably a bit too stupid to be independent,' she said. 'If we were too small and too poor and too stupid, if we were the economic basket case, if we were the subsidy junkies that some of our opponents try to imply that we are, then don't you think Westminster might have offloaded us by now?'

After the applause died down, she asked, 'What's the downside?'

Plenty, in the minds of many business leaders and economists, who are concerned that an independent Scotland will not have the financial strength to prosper alone. The economy would lean heavily on revenue from North Sea oil, which has been falling, and its per capita government spending outpaces the rest of Britain.

The official campaign period kicked off Friday for the referendum that will determine whether Scotland will remain in Britain. If successful, the vote, which will be in September, would fundamentally reshape America's closest ally, redrawing the borders of a union that has existed for more than 300 years.

Although the pro-Britain unionists lead, momentum has swung back and forth. The spread narrowed to just three percentage points in an April poll by ICM Research for the Scotsman newspaper, but it widened to 12 points in mid-May, with 20 percent still undecided.

The movement goes beyond the nationalistic pride that has fed previous calls for a split. For Scottish nationalists, much of the discontent comes down to clashing politics. They believe that the British government is far too conservative and has pushed austerity on a Scottish government that never wanted it.

'We again take a different view about the macroeconomic choices available for the country,' John Swinney, Scotland's finance minister, said in challenging the British approach.

The financial implications weigh heavily on the debate. Top British government officials have ruled out sharing the pound with an independent Scotland, though their resolve has been questioned. José Manuel Barroso, the president of the European Commission, has said it would be ' extremely difficult, if not impossible ' for Scotland to join the European Union. That raised the question of whether Scotland would be left to create its own potentially volatile new currency.

Wealthy Scots are choosing sides. The biggest donor to the pro-union advocacy group Better Together is Donald Houston, a Scottish hotel and whisky magnate who has said 'ripping up' the union 'is a ridiculous idea.' The biggest individual donors by far to the pro-independence advocacy group Yes Scotland are Colin and Christine Weir, who won the $271 million EuroMillions lottery jackpot in 2011. Established Scottish business figures, including George Mathewson, former chief executive of the Royal Bank of Scotland, have also spoken in support of independence.

Executives of large multinational corporations tend to see a breakup as a needless risk. More are speaking out, like the BP chief Bob Dudley, who said ' Great Britain is great and it ought to stay together,' or General Electric's top executive in Europe, who said ' there would be some consequences that are unpleasant.' And two of Scotland's largest employers, Royal Bank of Scotland and the insurer Standard Life, have mentioned a 'yes' vote as a risk in regulatory filings.

The Weir Group, a large Scottish engineering company, released a study that found that independence would 'create a number of costs and uncertainties, but fewer and more uncertain benefits.' The study cited increased borrowing costs and the likelihood of higher taxes and spending cuts. There would also be fees to convert a potential Scottish currency across a new border; the report projected $840 million in annual transaction costs.

The ruling Scottish National Party, however, sees a vibrant future for an independent Scotland, buoyed by North Sea oil wealth, free of nuclear weapons and able to erect a firmer welfare state. Several nationalists pointed to their own government's analysis projecting that Scotland, on its own, would have the 14th-highest output per person among advanced economies. Their findings, however, were recently undercut by a University of Glasgow analysis that said 'foreign ownership in key economic areas' was a drag on national income statistics.

Scotland already runs many of its own affairs after a 1997 referendum on so-called devolution of powers from London gave it authority over its health and education services, justice system and housing policy. The Scots also have some taxation powers.

Nationalists envision a fully independent Scotland as a petro-power. But oil revenue has fallen sharply, by 38 percent from 2010 to 2013. Last year, Scotland paid less into Westminster's coffers than it took out. Total revenue, including its geographic share of North Sea oil, was about $89 billion, against spending of roughly $109 billion. Another recent analysis by the University of Glasgow's Center for Public Policy for Regions projects that Scotland will be 'significantly worse off than the U.K.' for several years to come, with a higher deficit of almost $1,700 a person in the fiscal year ending in 2016.

Then there is the debt. The cost of servicing Scotland's proportional share of Britain's debt 'would be worth twice as much as North Sea oil,' said John McLaren, a professor at the University of Glasgow.

Scotland is threatening to walk away from any share of its debt should it be kept out of a currency union. While there is precedent for that - Russia assumed all Soviet debt - it could lead to an acrimonious split and retaliation by Britain.

Creating a border with Scotland's largest trading partner - the rest of Britain - could also be costly. Researchers at the University of Edinburgh and the University of Stirling project that such a change could reduce Scottish output more than 5 percent.

'Over time, the conduct of business across the border would become more difficult,' said Iain McMillan, head of the Scottish office of the Confederation of British Industry, a leading British trade group. 'People can move from Scotland to England to Wales to Northern Ireland without any restrictions whatsoever, and we believe that is the very best business and economic environment for Scotland.'

If Scots voted for a divorce, dividing up Britain's assets - from the currency to the oil - would most likely be difficult. Beyond the technical issues of disentangling the two, the negotiations alone would be contentious, considering that it can be hard to persuade people in one town to agree on where to draw borders.

Attending the meeting in Beith was a retired British trucker who was pro-Scottish independence and a retired Scottish flight controller who was pro-British union.

One married couple - he's a Scot, she's English - stormed out early because they preferred leaving the European Union but staying in the British one.

'My nationality is British; I was born in England,' said Darelle Elrick, 58, as she stood outside the Beith community center. Her husband, John, 71, had been looking on as his wife upbraided a Scottish nationalist working the door. The Elricks live in Scotland and support keeping Britain together.

Mr. Elrick was asked if he was Scottish.

'I'm Scottish, yeah,' he said.

'He's British,' Ms. Elrick corrected.

'I'm British,' Mr. Elrick said.

'British,' Ms. Elrick said.

'I'm British-Scot,' Mr. Elrick said.

'British,' Ms. Elrick repeated, firmly. 'I was born in England,' she added. 'Never, ever said I was English. My passport says I'm British, and that's what I am.'

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