Scottish Referendum Primer

BMI View: Although we still believe that the upcoming Scottish independence referendum in September will be rejected by the electorate, the Unionists may only win by a single-digit lead. Such a small margin between victory and defeat for the nationalists mean that either outcome cannot be completely discounted. With this in mind, we take a closer look at the details of the referendum and the main political and economic issues which dominate the vote.

Scottish voters will go to the polls on September 18 for a referendum on independence. The vote represents the single biggest test to the unity of the United Kingdom since the Acts of Union were passed by the English and Scottish parliaments in 1707, and will have significant implications for all members of the UK.

Part 1: Background To The Vote

Polls Narrowing
Scotland - 2014 Referendum Poll Data, Rolling Five Poll Average

Scottish Referendum Primer

BMI View: Although we still believe that the upcoming Scottish independence referendum in September will be rejected by the electorate, the Unionists may only win by a single-digit lead. Such a small margin between victory and defeat for the nationalists mean that either outcome cannot be completely discounted. With this in mind, we take a closer look at the details of the referendum and the main political and economic issues which dominate the vote.

Scottish voters will go to the polls on September 18 for a referendum on independence. The vote represents the single biggest test to the unity of the United Kingdom since the Acts of Union were passed by the English and Scottish parliaments in 1707, and will have significant implications for all members of the UK.

Part 1: Background To The Vote

The Question

The Scottish nationalist government initially proposed the question "Do you agree that Scotland should be an independent country?" The Electoral Commission argued that this wording could lead to a positive bias in the results, which motivated the following amendment: "Should Scotland be an independent country?". Compared to the initial proposal, the final incarnation of the referendum question does not suffer from such loaded phraseology. However, there is still a focus on 'independence' (a positive notion) rather than 'leaving the United Kingdom' (a synonymous result, but with a more negative undertone).

The Timing

The ballot will be held on Thursday 18 September 2014. The year of the vote is particularly pertinent as it coincides with the 700th anniversary of the Battle of Bannockburn, in which Scotland defeated King Edward II's army in the First War of Scottish Independence. Although the historical event has little hold over the public imagination in England, it has resonated with Scottish nationalists.

The vote also coincides with the 2014 Commonwealth Games due to be held in Glasgow, which could similarly fan nationalist sentiment. This was seen with the London Olympics in 2012, which underpinned a surge in national pride, as well as providing a platform to promote the United Kingdom in a positive light abroad. Although the Commonwealth Games has less global reach than the Olympics, successfully hosting the event would nonetheless be seized by the nationalists as evidence that Scotland can function effectively as an independent state.

The referendum will also be held less than a year before the May 2015 United Kingdom parliamentary elections, which will be significant from both the Scottish and UK perspectives. In the case of the former, nationalists have frequently complained that Scottish voters have had to accept Conservative governments in Westminster despite frequently voting against them. As such, a year before the general election, the Scottish National Party (SNP) will argue that only independence would ensure that voters can determine which party governs Scotland. From the UK perspective, the timing of the referendum vote could also have significant implications. Although all three of the traditional UK political parties (Conservatives, Labour and Liberal Democrats) have been fighting the Unionist 'Better Together' campaign, the leadership of the Tory party would be most adversely affected, as a hypothetical breakup of the Union would have occurred on Prime Minister David Cameron's watch. However, and as we point out below, Scottish independence would also mean that the Labour party would lose a large chunk of its support base, which would benefit the Conservatives in future elections.

The Voters

All Scottish residents, whether they are British citizens, members of the Commonwealth or European Union, are eligible to vote. Effectively this includes non-Scottish born residents who may be less emotionally attached to the United Kingdom, or the notion of an independent Scotland. Without this emotional baggage, these voters are more likely to decide on the basis of economic and political arguments rather than cultural factors.

The voting age has also been lowered to 16 from 18, which may affect voting patterns. Younger voters may be more confident in challenging the status quo and potentially less risk averse when it comes to voting for the unknown (independence). Older voters, meanwhile, are likely to be more concerned about the impact of the vote on jobs, pensions and the provision of public services. Younger voters may also be more receptive to the idea that Scots can build a 'better and fairer' society together. However, younger voters may be less disaffected with the Union than many older voters that disapproved of Margaret Thatcher's conservatives policies in the 1980s. There has been little polling data across age groups, but the surveys that have been conducted seem to show more support among young voters for staying a part of the UK.

The Polls

While successive UK general elections have underpinned a refinement in polling methodologies over time, the unique nature of the Scottish referendum has resulted in wildly different polling figures among the main firms. For example, the latest Survation poll conducted for the Daily Record newspaper on June 10 recorded an 18pp lead for the No campaign (36% Yes, 54% No, 10% Don't Know), while an Ipsos MORI poll at the beginning of June projected a lead of just 5pp (39% Yes, 44% No, 17% Don't Know).

There are several key trends in the polling data conducted since the UK government legislated in January 2012 to allow the Scottish parliament to hold a referendum. Using the rolling average of the most recent five polls, the No vote has trended slightly higher and the Yes vote lower since the beginning of 2012. That said, since the start of 2014 the share of the No vote has fallen and the Yes vote has risen, with the No vote lead halving from around 20pp to 10-15pp.

Despite the gains made by the Yes campaign, the proportion of voters backing independence has consistently failed to breach 40%. However, among Yes voters we believe that there is a block representing around a third of the electorate that would back independence regardless of the political or economic costs. Indeed, the share of Yes voters has consistently remained above 30%, while the failure of the SNP's White Paper to sufficiently address the most basic and important questions about the economics of an independent Scotland (such as which currency will be used, membership to the EU etc) had no material impact among these voters. This suggests that independence is likely to be a more emotive issue among Yes voters, which would make it difficult for the unionists to make additional inroads into this group.

Polls Narrowing
Scotland - 2014 Referendum Poll Data, Rolling Five Poll Average

The key deciding factor will be the 'don't know' group, which has represented 10-20% of the electorate and could swing the vote either way. While it is difficult for either side of the debate to tap into the ardent nationalists or unionists, the 'don't knows' are still up for grabs. However, given that this bloc has not had sufficiently strong conviction to join the Yes or No camp, we expect a disproportionate number would vote against independence as the fear of the unknown will trump the promises made by the SNP. We believe that a wavering voter is more likely to stick with the status quo.

Part 2: The Main Issues


By far the most potent economic issue which has pitted the unionists against the nationalists is the currency that an independent Scotland would use. The SNP has stated that it would seek to enter a formal currency union with the rest of the UK (RoUK), and has argued this case on the basis of the high degree of cross-border trade and financial integration, as well as the transactions costs that would otherwise be incurred by Scottish and RoUK firms. However, the main Unionist parties in the UK have jointly rejected the idea of a currency union. Although the Bank of England would still be free to decide the course of monetary policy, which an independent Scotland would have to accept, the potential for fiscal policy to differ sharply between Holyrood and Westminster would pose a risk to financial and economic stability, as the ongoing eurozone crisis has amply demonstrated. RoUK is unlikely to support a new system that yields few benefits and risks fuelling instability.

Despite rejecting the idea of a currency union, we believe that RoUK would nonetheless reluctantly go along with this proposal in the event of Scotland gaining independence. The SNP has argued that if RoUK does not back a currency union, Scotland would refuse to shoulder its share of the UK national debt. We believe that this is not a credible threat since reneging on its sovereign debt would bode poorly for Holyrood's ability to finance itself in capital markets, which it would need to do given the precarious nature of public finances in light of the long-term decline in oil revenues. A more pertinent issue is the prospect of financial and economic instability in Scotland if a newly independent state were forced to issue its own currency. It is not in RoUK's interest for the Scottish economy to be thrown into turmoil by trying to instate a new and untested currency, which is why we believe that a formal currency union would ultimately be supported in the event of independence. However, political resistance among RoUK from the outset would not instil much confidence at the start of a new currency regime.

Moreover, the currency issue does not stop there. Given that secession could implicitly mean leaving the European Union as well, Holyrood may need to apply for EU membership as a new sovereign state. Assuming that the application were accepted, Scotland could then be obliged to adopt the euro at some point in the future as is common for all new members. Given the lingering systemic risks in the eurozone and the almost negligible influence that an independent Scotland would have on euro area policy, adopting the euro would be even less desirable than forming a currency union with RoUK. If an independent Scotland were to adopt the euro, it would face even more fiscal, monetary, economic policy and political constraints than is currently the case under devolution.

EU Membership

Much like the prospect of joining a formal currency union, the SNP has treated the issue of EU membership matter-of-factly and expects to join the bloc with the same opt-outs (such as not having to adopt the euro) as the UK. Given that there have so far been no cases of secession within the EU, there is no blueprint for how an independent Scotland would negotiate its membership to the bloc, and uncertainty over whether it is even possible. In all likelihood a new application would need to be submitted, which may then require ratification by the existing 28 member states. The UK government may or may not support this. If Scotland gained independence, then at that point there would be little to be gained from opposing Scottish membership to the EU, which would instead only risk souring political relations between Westminster and its neighbour. Even if the UK supported an independent Scotland's EU application, other member states may still reject it. There are several secessionist movements across Europe, notably the Basque Country and Catalonia in Spain, and so paving the way for Scotland to re-join the EU would set a powerful precedent for other budding independence movements, which the likes of Spain, France, and Belgium would want to avoid.

In the interim, it is unclear whether Scotland would have any access to the European Single Market. If it didn't, then Scottish exporters would face the EU's external tariffs, while farmers (a politically sensitive group) may miss out on vital subsidies. This would cause significant economic disruption and political damage to the SNP.

NATO And The UK Nuclear Deterrent

There are several issues surrounding defence which have not been sufficiently answered, and which pose a particular challenge given the shared military competencies and Scotland's strategic importance to the UK. First is the issue of the Trident nuclear missile system which provides the UK's continual at-sea nuclear deterrence. The SNP is vehemently opposed to nuclear weapons and has vowed to remove them if Scotland gained independence. For the UK, however, Scotland's deep lochs provide the only viable location to host the Vanguard-class submarines which can deploy Trident missiles. With no other obvious options for relocation, the UK could be forced into nuclear disarmament in the event of Scotland gaining independence. This would in turn jeopardise the UK's position as a leading NATO member. Similarly, despite the SNP's assertion that it could expel the UK's nuclear weapons and remain a part of NATO, this is again far from assured and more likely to prove fallacious.

Second, Scotland host the Trident system, but it also plays an instrumental role in both building and maintaining the Royal Navy's warships. The defence group BAE systems, which is responsible for the construction of the Ministry of Defence's two new Queen Elizabeth-class supercarriers (split between Scotland and Portsmouth), is a major employer in Scotland and has voiced concerns about the referendum vote. Although the SNP has indicated that it would want to build up its own Navy, it is likely that defence contractors would need to relocate to RoUK over the long term in the event of independence.

Third, Scottish independence could also compromise the ability of the UK to maintain the integrity of its airspace. In particular, the Royal Air Force regularly dispatches fighter jets to intercept Russian aircraft that come close to UK airspace, which is partly a show of military strength by Moscow as well as a test of the responsiveness of the UK's military assets. Whether or not the airspace surrounding the British isles would continue to be sufficiently patrolled would depend on the size of an independent Scotland's air force, and whether Holyrood would allow British fighter jets to be stationed in Scotland.


The prospect of independence has led to several employers speaking out about the future of business in Scotland. Similar to the warnings issued by firms operating in the UK about Britain's potential withdrawal from the EU (the Conservatives have promised a referendum on membership of the EU in 2017, provided the party is in government), several major companies have argued that access to the rest of the UK is a key reason for locating in Scotland. For firms that trade mainly with RoUK, or depend on its institutions (such as Scottish banks which benefit from the financial backstop provided by the UK taxpayer), independence could jeopardise their future and motivate relocation to elsewhere in the UK. While there is no way to credibly estimate the scale of such a movement, the implicit loss of jobs and tax revenues could deal a severe blow to the Scottish economy in the years immediately after independence. Up until now there has been little evidence of any wholesale relocation of Scottish firms, which suggests that many of those that would be affected expect independence to be rejected by the electorate.


The status of the North Sea oil fields is a key economic variable in the argument for independence. Around 90% of the oil fields are located in Scottish territorial waters, with the SNP arguing that revenues generated from natural energy resources would allow for greater investment in public services than is currently the case. While oil revenues would provide a major support to the Scottish budget, prices in international markets are volatile and North Sea oil reserves are in continued decline, which would pose a lingering risk to fiscal stability. If oil prices were to fall sharply in any particular year, the Scottish government would no longer be able to rely on the taxbase from RoUK to smooth out an unexpected fall in revenues.

Oil Is Key To SNP's Economic Argument
UK - Gross Value Added, % chg y-o-y

Head Of State

The SNP has indicated that it would want to keep the monarchy and seek membership of the Commonwealth. Given that the British monarch is more of a ceremonial position, the political and economic implications of choosing the head of state are fairly limited. That said, there is a republican movement within the SNP that would likely push for a referendum on the monarch in an independent Scotland.

Electoral Map

Independence would ensure that the Scottish electorate would no longer be out-voted by English voters in general elections. For Scottish voters that have consistently voted against Conservative governments, the SNP argues that this would restore the democratic legitimacy of national ballots.

Scotland currently holds 59 seats in the Houses of Parliament and at the last general election in 2010 the Conservative party secured just one seat, while the opposition Labour party won 42 seats. As such, an independent Scotland would lead to a significant drop in Labour support and automatically boost the electoral prospects of the Conservatives in future British elections.

Independence Would Provide An Electoral Boost To The UK Conservatives
UK - Scottish Seats In The Houses of Parliament

Implications Of Voting No

The immediate implications of a No vote in September would be fairly limited for the UK, as the status quo would continue. The main casualty would be the SNP, which has staked a lot of political capital on independence. A rejection of the referendum bill would put off the issue of independence for a generation and would take the shine off the SNP. Moreover, the inevitable post-vote autopsy could divide the SNP, as disparate factions argued over the future direction of the party.

The most significant implication for the longer term is the status of devolution. The UK's main political parties have hinted at the prospect of an additional devolution of powers should Scotland vote against the referendum. This would be a political sweetener to placate Scottish voters and would further reduce the probability of another independence vote in the near term. Over the longer term, however, continued devolution would further weaken the links that bind Scotland to RoUK and could increase the likelihood of another vote further down the road.


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