Of whisky, oil and banks

SCOTS have had plenty to worry about since their referendum on independence last September 18th. Oil prices have halved—bad news for a country where the oil and gas industry provides jobs for 200,000 people, or about 10% of total employment. Meanwhile, the pound has strengthened and world trade has stumbled, both awkward for a country that depends on exports. Yet despite all this, Scotland’s economy seems to be coping. GDP growth is holding up; the employment rate has risen to 74.1% and is now higher than Britain’s average of 73.4%; and by some measures wages are rising faster than they are south of the border. Why?

Exports are doing better than many predicted. The Index of Manufactured Exports for Scotland shows that in the past year manufacturing export volumes have risen by 2.7% in real terms. Some industries, like tourism, are doing particularly well, says Ronald MacDonald of Glasgow University. The publicity surrounding the referendum lured foreigners to hike in Scotland’s windswept mountains and taste its smoked salmon and whisky. During the first quarter of 2015 spending by overseas visitors rose by 13% year-on-year. Mr MacDonald, who also runs a landscape-photography shop on the island of Skye, says his business has had its “best year ever”. Tourism revenues have helped to offset the impact of rising imports, as Scots take advantage of the strong pound.

The Scottish government has boosted growth with various big spending schemes. A report from Gary Gillespie, its chief economist, highlights a series of infrastructure projects, including a railway from the Borders to Edinburgh which the queen officially opened on September 9th. Last year public spending on housing rose by 45%. The Scottish government, which is allowed to take on only a tiny amount of debt, has found the cash by diverting funds from local government and projects on climate change, among other things.

Aberdeen, Europe’s oil-and-gas capital, is in a rut but not a slump. In the past year house prices there have risen by 9%. Its harbour is still clogged with ships that supply oil rigs with equipment and food. Although things could get worse if oil firms start to drive harder bargains with contractors, a few things have helped to soften the blow of lower oil prices. A number of fields recently came back on stream following maintenance work. Oil and Gas UK, an industry body, reckons production in the first half of this year was 2.5% higher than the same period last year. In coming decades about £50 billion ($77 billion) will be directed towards “decommissioning” old rigs in the North Sea, creating more jobs.

Outside the Granite City, things look better still. For each of the past three months Aberdeen and Aberdeenshire were the only two of Scotland’s 32 local authorities to see an increase in unemployment compared with the previous year. For the rest of the country, lower oil prices have acted like a tax cut for firms and consumers, boosting growth, argues John Swinney, Scotland’s finance minister and deputy first minister. Scots probably benefit more than other Brits from cheap oil, since they use more energy per person.

All this, the SNP asserts, bolsters the case for independence: contrary to dire warnings from England, Scotland has stayed afloat despite low oil prices. This ignores the fact that the union has shielded Scotland from the worst effects of the price slump. Britain’s fiscal union means public spending is funded by taxes that are pooled from across the country. Nearly 90% of Scotland’s funding comes from a Britain-wide pot, rather than money it raises itself. This is fortunate, since oil revenues (which are shared nationwide, to the Scottish government’s annoyance) have fallen by half in the past year and are unlikely to recover soon. If Scotland were independent or fiscally autonomous, it would face a budget deficit this year of around 10% of GDP, calculates Mr MacDonald—around twice Britain’s deficit.

Still, Scotland receives more foreign direct investment (FDI) than any British region bar London. Small wonder: it has the highest productivity rate outside London and the south-east. Much of that FDI goes to knowledge-intensive industries like financial services, which contribute roughly one-tenth of Scottish GDP. Edinburgh is Europe’s fourth-largest financial centre.

But Scotland’s appeal to investors is bound up with the fact that its firms have easy access to the rest of Britain. Owen Kelly of Scottish Financial Enterprise, an industry group, points out that the majority of Scottish financial firms’ work is done outside Scotland. Independence would complicate this happy arrangement; even the lesser step of fiscal autonomy would mean Scottish firms operating on both sides of the border could face two regulatory and tax regimes. “Try to trade across borders and your paperwork doubles,” sighs a seasoned Scottish businessman.

The value of economic union to businesspeople is revealed in how they have responded to the prospect of losing it. Private-sector spending on infrastructure has stagnated. According to figures from UK Trade and Investment, a government body, in 2014/15 Scotland saw a small fall in the number of inward-investment projects, while England and Wales saw rises. The number of Scottish startups has slipped this year compared with last, according to BankSearch, a consultancy. Business-registration lawyers in Berwick-upon-Tweed, an English town just south of the border, say that they have had a busy year.

All this bodes ill for Scotland’s future growth: lower investment means smaller productivity gains, and with them slower improvements in living standards. If Scotland slipped further away from the union, these problems would only worsen.