Convincing the Scottish people that they would be better off after independence proved beyond Alex Salmond in 2014. Project Fear failed to deliver for David Cameron in the EU referendum last June but it did the trick in Scotland 21 months earlier.
Nicola Sturgeon faces the same tough challenge. Indeed, constructing an economic case for independence looks harder now than it did three years ago. Harder but not impossible.
Scotland has some real economic strengths. It has a thriving financial sector, is strong in food and drink, attracts millions of tourists each year and has the potential to be a world leader in renewable energy.
True, Scotland has a small population but when it comes to economic success size doesn’t really matter. Norway, just across the North Sea, also has only just over 5 million citizens and has rather less economic diversity, but it is one of the richest nations in Europe.
Scotland’s first minister will also argue that her plan involves the best of all worlds: retaining free and unhindered access to the rest of the UK while also remaining part of the EU single market. US banks looking for a new home after Brexit might find Edinburgh attractive.
But the 2014 campaign threw up serious weaknesses in the economic case for independence and these will need to be addressed.
The most obvious issue is that the oil price has halved since the 2014 poll, making Scotland’s public finances after independence look far less rosy. To make the sums add up, those advocating independence assumed an oil price of $100 a barrel, double today’s level. According to estimates made last year by the Institute for Fiscal Studies, Scotland will have a budget deficit of more than 9% of GDP this year, more than three times as big as that for the UK.
As the IFS noted, Scotland is insulated from the consequences of its spending being higher than its tax revenues because the UK government hands Edinburgh a block grant each year that covers non-devolved items such as defence and social security. An independent Scotland would be responsible for its own finances and could not rely on North Sea revenues to balance the books. There would be pressure for taxes to go up and for spending to be cut. All this at a time when the economy has been struggling. In the year to the third quarter of 2016, Scotland grew by 0.7%, well below the 2% recorded by the UK as a whole.
An ageing population means demands on the public finances are certain to increase in the years ahead, although an independent Scotland could mitigate these problems – in the short term at least – by adopting a more liberal approach to immigration than the rest of the UK.
Another key decision for Sturgeon is whether an independent Scotland should have its own currency, shadow the pound or – assuming it is allowed to become an EU member – sign up to join the euro. In 2014, Salmond said a post-independence Scotland would continue to use the pound sterling but his proposal ran into strong opposition from the UK government. Some supporters of leaving the UK said Salmond’s version of independence was not really independence at all.
Having its own currency and setting its own interest rates would make it easier for Scotland to adjust to gyrations in the oil price and to cope with its budget deficit. A crash in commodity prices – of the sort seen in 2014-15 – would result in borrowing costs being cut and the currency falling in value. Exports would become cheaper and foreign investors would be wooed by the prospect of being able to purchase assets more cheaply.
But as with the post-Brexit vote drop in sterling, this flexibility would not be cost free. Scottish voters would have to decide whether higher inflation and squeezed living standards were a price worth paying.