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Post-referendum, cost of keeping Scotland in the UK likely to rise

Experts fear that greater fiscal devolution will put greater austerity pressure on England

Shishir Asthana  |  Mumbai 

The United Kingdom will keep its ‘united’ status after a Scottish referendum voted emphatically to reject independence from the Union. Emotions ran high as the voting day neared with financial markets reflecting the volatility. With a clear majority of Scots – 55% of the total voters – saying that they would prefer to stay united, the FTSE opened 0.58% higher over its previous close. The British pound too opened stronger by 0.5%.

However, the market reaction does not exactly reflect the price of the ‘No’ vote. Credit Agricole’ strategist Adam Myers has been quoted saying that uncertainty over promises by London for more Scottish autonomy if the region stayed in the UK would act to limit the upside for the currency. The result is not a vote for the status quo, and as such, some uncertainty will remain, limiting gains, he said.

Philip Shaw of Investec told the Financial Times that “The battleground for the Scottish nationalists now becomes the nature of concessions made by Westminster on an additional degree of autonomy for Scotland over tax raising and spending power…. Our suspicion is that there will be an examination into constitutional issues which could also have deep-seated implications for other parts of the UK.”

Soon after the results were announced British Prime Minister David Cameron promised to live up to commitments made to Scotland ahead of the independence vote, including plans for new powers on tax, spending and welfare. He also acknowledged that the people of England, Wales and Northern Ireland must have a bigger say over their own affairs. And he promised a resolution to the West Lothian question - the fact that Scottish MPs can vote on English issues at Westminster.

The Scottish Parliament was restored in 1999, with control over education, transportation and health. England’s political parties had offered Scotland an accelerated plan for more financial power, including control over income tax, to help keep it in the union. Scotland, with its aging population and falling contribution from North Sea oil, will need more support from the UK. These measures will result in more pressure on the British

A Bloomberg report says strategists are predicting that further gains in the pound may be limited, with sterling already giving up some of today’s advance. Britain’s currency has risen to meet the median year-end forecast of 62 analysts and economists in a Bloomberg survey.

“The relief that the currency won’t have to cope with the uncertainty of Scottish independence means the pound has rallied to remove the earlier political-risk premium,” HSBC Holdings Plc analysts, including global strategy head David Bloom, said in a client note as quoted by Bloomberg. “But the shine had already begun to come off (the) sterling. Any disappointment on growth, or renewed focus on the large current-account deficit, could still weigh on the currency.”

Lena Komileva of G+ Economics says in the Financial Times article that “The Scottish No vote now kicks off an ambitious programme of UK devolution legislation, the end result of which will be a more fragmented political and fiscal union between various regions. This will divert more UK fiscal revenues towards regions, and especially the north, without growing the total UK budget. Fiscal devolution would mean greater austerity pressures on Westminster, with implications for UK taxes, growth, debt and credit prospects, whichever party wins the next general elections.”

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First Published: Fri, September 19 2014. 16:43 IST