Will Scotland Leave The UK?

Summary

• Scottish parliament elections are scheduled for May 2021
• Several factors suggest ‘Indyref2’ could happen within two years
• But ‘doctrine of unripe time’ will prevail until Westminster election in 2024

Market Implications:

• A threat to the Union will elevate the risk premium on sterling.
• The degree of risk is not significant in the near term.

To Scottish nationalists, independence is more than a lifelong dream; a second referendum is a matter of democracy and justice. The recent stable lead for ‘yes’ in the polls encourages the Scottish Nationalist Party (SNP) that they could finally prevail, while their policy is a tiresome ‘neverendum’ for unionists. Yet for all the parties, including the SNP, the issue represents a series of increasingly tricky dilemmas. And those dilemmas will limit the probability of a second referendum anytime soon.

Key fact: For all the posturing, polling and pressure, only the UK prime minister has the power to allow the Scottish government to hold an official independence referendum.

In the UK, ‘reserved matters’ and ‘excepted matters’ are the areas of public policy where the UK parliament has retained the exclusive jurisdiction to make laws in Scotland, Wales and Northern Ireland. The UK parliament has granted each of these three nations power (their respective devolution statutes) to legislate in all matters except reserved ones.

The first two general reservations listed in the Scotland Act cover major issues that parliament in Westminster always handle. These are first the Crown, and second the Union with England, Wales and Northern Ireland. Therefore, to hold a referendum, the Scottish parliament must ask for an Order of Council from the Westminster parliament. This is an order in the name of the monarch after advice by the privy council; essentially this is in the gift of the UK prime minister.

However, despite these legal aspects, the Scottish government and the Scottish people will influence the UK prime minister’s decision – just as it did with David Cameron in 2012. So, what is the current position of the SNP/Scottish government?

The SNP Has a Three-Point Plan to Force Another Independence Referendum

• Their base case is that winning a majority of Holyrood seats in the May 2021 Scottish parliament elections gives them an automatic mandate. They will argue that to deny them this would be to deny the will of the Scottish people.
• The SNP bolsters their case by claiming that there has been a ‘significant and material change’ in the circumstances of the 2014 referendum. Specifically, this is that the UK removed Scotland from the EU against its will. Their evidence is that in the 2016 Brexit vote, 62% of Scots opted to remain. This is their reserve case, but it also serves to counter the unionists’ ‘once in a generation argument’, which clearly both former First Minister Alex Salmond and current First Minister Nicola Sturgeon signed up to ahead of the 2014 vote.
• The third element to the SNP’s plan is promising another vote if there is ‘clear and sustained evidence’ that a majority of Scots want independence. So, the recent poll evidence of a ‘yes’ vote could be significant. However, in truth, this third element is less an argument and more a trigger point. Losing a second independence referendum would be catastrophic for Sturgeon and, perhaps, even the nationalist movement as a whole. They must be sure they can win the next vote.

On the face of it they present a strong case. But the reality is less certain.

Dilemma One: Internal SNP Expectations

In the year before the 2014 vote, SNP membership was around 25,000. Now it is over 125,000. These new recruits have very high expectations and are increasingly impatient, and Sturgeon knows she must keep her faithful upbeat and united.

But there is a growing split between supporters of the more conservative Sturgeon and those of Salmon, the previous leader. It centres on criminal charges of sexual assault and attempted rape brought against Salmon, who was later acquitted, and on the ongoing Committee on the Scottish Government’s Handling of Harassment Complaints.

The committee’s proceedings have been halted by the government’s refusal to hand over documents. Non-transparency between party and state is another complexity because Sturgeon’s husband, Peter Murrell, has been CEO of the SNP since 1999. In normal circumstances, this inquiry would conclude ahead of the May election, which could prove controversial for the government.

Meanwhile, Sturgeon’s critics within the party want faster progress towards their goal – perhaps even holding a referendum without legal consent along the lines of the Catalan approach in Spain. Sturgeon must juggle these internal pressures and the need to win ‘Indyref2’, and this is important context to the continuous calling for a new vote.

Dilemma Two: The Problem of Polls

Bizarrely, the turn in the polls towards independence has put additional pressure on Sturgeon to deliver independence for the SNP’s growing yet discontented support.

Polls are in essence a model of opinion. And the old adage that ‘all models are wrong, but some are useful’ holds especially true in this case.

The polls have moved decisively towards independence since the UK December 2019 general election. This followed a trend that way when former Prime Minister Theresa May resigned in the first half of that year.

But many oddities surround the polls that challenge the SNP case.

1. Independence is currently low priority. The Scottish population disagree with Sturgeon’s belief that a majority win in the 2021 Scottish Assembly gives the SNP a clear mandate to demand ‘Indyref2’. A recent poll suggests that only 18% of Scots think that the 2021 election should be about independence. Moreover, the poll lists nine issues more important than independence for Scots right now, including Covid-19, the NHS, the economy, jobs and education.
2. It’s Boris, not Brexit. The period immediately after the EU referendum, up until May’s resignation, saw no discernible influence on the polls. So it’s hard to say Brexit has altered Scots’ views on independence. In fact, the poll change happening in 2020 suggests that it is Prime Minister Boris Johnson who is driving the Scots away from the UK, rather than Brexit per se. Of course, an alternative explanation is that Scots didn’t really believe Brexit would happen until Johnson won the December 2019 election.
3. Asking the correct question. As ever, the question matters. Replace ‘Should Scotland become an independent country?’ with ‘Should Scotland leave the United Kingdom?’ and the answer has always been a resounding ‘no’. That includes such a poll undertaken in recent weeks. The Electoral Commission must approve the official question. And it is more likely to be nearer the former than the latter. But, given the vociferous nature of campaigning, polling evidence just prior to the 2014 vote (which was a much stronger ‘no’ compared with the average of polls in the weeks beforehand), and the results from different poll questions, it is clear the ‘shy’ vote lies with the Union.
4. Polls are volatile. Even on such an important issue, the polls can flip dramatically from time to time. Remarkably, out of the first nine polls released immediately after the ‘no’ campaign’s 55%-45% victory in the first independence referendum, six had a pro-independence result.

Given the problem with polls, the vital importance of winning the next referendum, and the growing expectation within the party, the SNP must time ‘Indyref2’ perfectly.

Dilemma Three: Labour Are Unreliable Unionists Yet Need Scottish Seats to Win in Westminster

Not since 1955 has the Labour Party won in Westminster with less than 40 seats in Scotland. It currently has one MP north of the border.

The past few years were a low point for the Labour Party, but in Scotland this is especially true. In the matrix that placed votes between Brexit (‘remain’ or ‘leave’) and Scottish Independence (‘yes’ or ‘no’), there was no obvious place for Labour votes. There was always another party more ‘remainy’, more ‘unionist’ and vice-versa than Labour during that period. And therefore their support seeped away.

For the moment, the new Labour leader, Sir Keir Starmer, is maintaining former leader Jeremy Corbyn’s position: this is the incorrect time for another independence vote in Scotland. But the position sounds equivocal. Many of Labour’s losses to the SNP have been in Glasgow and other industrial heartlands. In the past, those voters have not seen unionism as the solution. To win these seats back, it is suggested that Labour has to give the second referendum a chance. Recent polls suggest that 37% of Labour voters would now vote for Scottish independence, while 13% more are undecided – so even existing Labour support is at risk from a pro-union stance.

Historically, Labour have always been more pro-devolution than the Tories. Their hope was that devolution would ultimately eliminate the need for independence. This approach has failed. Also, Labour has never been averse to doing deals with fellow progressives like the SNP in order to support their electoral chances in Westminster. So, in a sort of David Cameron-style gambit, it is argued that Labour have to be open to a second referendum while praying that the result is ‘no’. But if (like with Cameron’s EU debacle) a ‘yes’ vote prevails, then Starmer’s legacy would be secure. He would be the Labour leader who gave power to the Tories in Westminster for a further generation. Perhaps this is too much of a gamble – safer merely to hint at possible future openness rather than to give actual support for the SNP now.

Dilemma Four: Without Scotland, the Tories’ Westminster Majority Would Climb Further

Perhaps it is the Conservatives, not Labour, that push for the second referendum? There are some immediate advantages.

1. Removing the yellow colour of Scotland’s SNP-dominated political map mitigates the risk of a few red bricks returning to Northern walls.

There are 650 seats in the UK parliament, and the government has 363 seats. So in theory the Tories have an 80-seat majority. But with 11 non-voting members (Sinn Fein seven, and the Speaker and Deputy Speakers four), the working majority increases to 87. But then without Scots MPs, the situation changes dramatically. Only six Tory MPs are in Scottish constituencies, whereas 53 (including 47 SNP members) in other opposing parties.

Therefore, without Scotland, the Conservatives majority leaps ahead even further to 134.

This would be the fifth biggest working majority in Westminster since World War I (excluding coalition and national administrations). Holding on to all of the blue bricks in the Northern wall will be less crucial without Scottish MPs to worry about.

2. Scotland is an expensive and ungrateful partner.

The Scottish Government Expenditure and Revenue (GERS) report for 2019/20 released at the end of August shows that, largely as a result of the so-called Barnet formula, public spending per head in Scotland was £14,829. That’s £1,633 higher than the UK average. In addition, tax revenues per head in Scotland were £308 less than in the UK as a whole, meaning the combined ‘fiscal gap’ benefits Scotland by almost £2,000 per person. After Covid-19, this number may rise even further. But despite this exceptionally generous transfer support, the Union is not guaranteed. The UK government could be forgiven for thinking the money would be better spent elsewhere.

3. Scots Tories might flourish as voters would concentrate on non-constitutional issues, which are growing rapidly.

Despite a reputation for competence in England, the Scottish government is facing pressure for its poor record in several departments. Education is its stated domestic policy priority, but the Scottish government has failed to meet its own targets in this area for a decade and standards keep falling by international comparison. The economy continues to develop a weakening trend. The record of the NHS in Scotland has been under fire for some time. And in many ways, the Covid-19 response, especially with respect to care homes, has been at least as bad as in the rest of the UK. However, the independence issue has a tendency to divert any attempt to properly hold the government to account for these problems.

In an independent Scotland, in addition to these above issues, there will be new challenges with no place to hide. And, at least in time, there will be no opportunity to blame Westminster for these ills (not least of which is dealing with a new currency, an issue side-stepped last time). Innovation, private enterprise, vast improvements in education and investment will be required to support renewal in Scotland. The Conservatives, as the main opposition in Scotland, would be well placed to benefit from such developments.

The decisive problem for the Tories is in their name.

These are all good reasons for the current Westminster government agreeing to the first minister’s request. Yet there is one significant issue with this logic. The Conservative party is the oldest political organisation in the UK, but it started to develop into its current form as electoral reform began during the 1830s. In 1909 it renamed as the Conservative and Unionist party, and in 1912 it formally merged with the Unionist wing of the Liberal Party. Abandoning the Union would be akin to the Labour Party cutting its ties with the trade unions. It’s not going to happen soon.

So, despite the immediate improvement in parliamentary arithmetic, the Tories would risk becoming the English Nationalist Party. Peak nationalism in Scotland highlighted above could eventually be followed by peak nationalism in England.

The Odds of a Second Referendum

The probability of a second referendum soon after the Scottish Assembly election next year remains low, despite all of the dilemmas. The doctrine of unripe time has significant longevity.

The Scottish government and the SNP will never stop talking up independence and never stop finding reasons why independence is inevitable now. It is in their DNA. In fact, it is their DNA. The first minister, effective as she is in the eyes of the press and of a growing number of English admirers, will continue to sing the only hymn she knows.

Having paused work on preparations for a ballot as the coronavirus pandemic took hold, the Scottish government now says it will draft a bill setting out the timing, terms and question for a new Scottish independence referendum. Further, that based on this, ‘at next year’s election we will make the case for Scotland to become an independent country’.

It is this tune that markets will hear, continuously, before and after the May Scottish parliamentary elections. So markets have to be able to discern the signal from the noise. The signals to watch out for are mostly specific to the policy of ‘the doctrine of unripe time’ in either the Labour Party or in the UK government, rather than political pronouncements from Edinburgh.

• The Johnson government will continue with the ‘once in a generation’ approach initiated by Theresa May’s government. While this will eventually become unacceptable, we have seen in Spain that it can also have significant longevity. Currently, there is a lot on. So the ‘not yet’ argument can easily hold to allow the government to stabilise the economy after Covid-19 and Brexit, then to make a better case for the UK throughout the remainder of this Westminster parliament.
• It is also very risky for Labour to try to undermine the Westminster government’s approach at this time. Starmer needs to quietly abstain from this issue until his plans to rejuvenate the Labour Party have developed much further.
• Sturgeon’s strategy is designed to keep her party united and maintain the independence momentum simultaneously. She can do this by repeatedly calling for ‘Indyref2’ while expecting Westminster to deny her call. The process guarantees the nationalist movement’s anti-Westminster sentiment. And that, in turn, keeps the support for independence strong. However, any sense that she is losing control of the internal party ‘debate’ could prove interesting. It could trigger a change in her plan, a change in the SNP leadership, or start a more critical split in the movement as a whole.