Where there's oil ...

If Scotland were to become independent, could it really survive economically? From public spending to North Sea revenue, Ashley Seager does the maths

Many Scots dream of going it alone, believing that an independent Scotland, even without subsidies from elsewhere in Britain, could sustain itself using oil revenues from the North Sea, and thus mimic the economic success of their Celtic neighbours in Ireland. But how realistic is that?

First some basic facts. Scotland has a population of just over 5 million, about 1/12th of the British population. The number of people living there has, however, been in long-term decline, a situation that, thanks to the country's low birth rate, is likely to continue. Over recent decades, the Scottish economy has grown slightly more slowly than the English one, although gross domestic product per head remains broadly similar north of the border to that in England, as in recent years rapid growth of the service sector in Scotland has compensated for the deindustrialisation of the past few decades. Only London, the south-east and East Anglia have higher GDP per head than Scotland.

The Scottish economy, in other words, is neither particularly richer nor very much poorer than most other parts of Britain, so policies such as interest rates, decided in London, are likely to be as appropriate in Scotland as in England. One difference is that house prices are much lower north of the border, so financially it is easier for English people to relocate to Scotland than the other way around. There is one other big difference, and that is a fiscal one. Scotland spends more public money than England, especially on education and public-sector employment, and has a substantial and persistent public deficit. An independent Scotland would thus face "tough choices" on tax and spending, to use the language of the Scottish MP for Kirkcaldy and Cowdenbeath, one Gordon Brown. Scotland may only account for 8.5% of the British population but it accounts for 9.7% of all spending. The difference may not sound huge, but it is. And this is where much of the fight about Scottish independence centres.

The latest figures from the annual Government Expenditure and Revenue in Scotland (GERS) report illustrate the problem. Public spending in Scotland in 2004-05 was £47.7bn, while total revenues are estimated at £36.4bn, equivalent to 8.1% of all UK revenues. The deficit was thus more than £11bn, or 12% of Scottish GDP - three times the percentage deficit of the UK as a whole.

Nationalists dispute the GERS figures, but few fiscal experts do. Now, that is a big deficit and matters in all sorts of ways. This is the origin of the fiscal "black hole" that is often talked about in relation to Scotland. If you are a member of the European Union, especially one that might want to join the euro one day, as the SNP wants to, you are required to have a maximum deficit of 3% of GDP. Currently the Scottish deficit is covered by the rest of the UK, but that would cease to be the case if Scotland became independent.

Ah, say the supporters of independence, you've forgotten North Sea oil - Scotland would be OK if it had all of that. Would it? In 2004-05, North Sea oil revenues amounted to £5.2bn, which would roughly halve the Scottish deficit. This year, the Treasury expects it will be double that, at £10.4bn, as oil prices and taxes on the North Sea have risen sharply. That looks almost enough to plug the deficit. But because of arguments over which country the different oilfields are attached to, it is highly debatable how much of that revenue would go to an independent Scotland. Some critics say that even if it did manage to secure everything, it would still not be enough. "Even if all revenue from North Sea oil and gas had come to Scotland, the country would have had a 'persistent deficit'," says Professor Arthur Midwinter, an adviser to the Scottish Executive's finance committee.

There are other factors, too. Oil prices are highly erratic and already well down from last year. Moreover, North Sea oil production peaked in 1999 at around 3.5 million barrels per day, and is now down to half that and falling rapidly. So independence forged on expectations of an oil bonanza would clearly carry risks.

In any case, whatever share of North Sea oil Scotland might finally grab, it would still struggle to be the new Ireland. Public spending is currently more than 50% of GDP and tax revenues about 40%, with the balance made up by other UK taxpayers. Ireland's public spending is only 35% of GDP (Britain's is 46%). Scotland currently enjoys Scandinavian levels of spending and American tax levels. Independence would necessitate action to tackle the deficit - either tax rises or spending cuts, or both. Copying Ireland would require a massive reduction in the scope of the state. Tough choices indeed.