United Kingdom Politics

United Kingdom

Scots' decision to stick with UK could lead to historical upheaval in country's political structure

The referendum on Scottish independence, which took place on 18 September, marked a historic day not only for Scotland, but also for the rest of the United Kingdom. Even though the pro-separation Scots did not manage to achieve full independence, they were able to put enough pressure on the central government so that significant concessions were promised. The concessions could trigger a reshaping of the country’s entire political structure. While the latest developments may lead to the biggest political changes seen in years, the result is not expected to affect the domestic economy, at least not in the short run.

Two days before the referendum, Prime Minister David Cameron and the head of the Conservative Party, along with the leaders from the other main parties, agreed to give to Scotland more autonomy on tax, spending and welfare decisions. They did so in an attempt to persuade the Scots to say “No” to independence. In addition, the central government committed itself to increasing spending per capita and, as a result, Scotland would receive more funding per head than the rest of Great Britain. Cameron has promised to secure a cross-party agreement regarding the Scottish deal by November, publish it in January and deliver it after the general elections, which will take place in May 2015. Doubts remain regarding whether the proposals will ever pass the parliament since representatives of both the left and right parties believe that major constitutional changes should not be introduced with such haste.

The move to devolve more powers to Scotland was seen as unfair by the MPs who represent the other regions of the UK, especially England. They are now asking for greater autonomy for their respective regions. Even though England is the biggest nation within the UK, it is the only part that has not been given any devolution of power. Plans to tackle the “West Lothian” question—the anomaly that allows Scottish MPs to vote on matters that pertain only to England, while English MPs cannot vote on matters that pertain only to Scotland—could involve changing the status of Scottish MPs at Westmister. The issue will be addressed by a cabinet committee before the elections. However, according to Cameron, the Scottish deal won’t be contingent upon the English deal.

Scotland’s vote to stick with the UK has restored consumer and investor confidence in the British economy. It has also averted scenarios like the depreciation of the pound and capital outflow that could have affected the economy materially. Meanwhile, by keeping the pro-EU Scots within the UK’s boarders, chances that the country would leave the EU after a referendum next year have been reduced.

The current political uncertainty could still weigh on economic growth as the ruling coalition will find it difficult to push forward reforms. Rob Wood, Chief UK Economist at Berenberg Bank comments:

“Consumers themselves often need to see a huge political shock before they react. So few of these risks will dramatically threaten much of the domestic economy in the near-term. […] But the real issue here is that it is very hard to figure out exactly what direction UK politics will head in over the next few years. […] The risk that political uncertainty seriously ramps up over the coming months and years is worth watching very carefully. That is what would cause really serious market and economic fallout in the UK.”

The Scots’ decision to remain part of the UK, may have restored confidence in the economy; however, the implications for the political structure of the country are still not clear. This uncertainty has the potential to weigh on growth. The Bank of England projects that the economy will grow 3.4% in 2014 and 3.0% in 2015. FocusEconomics Consensus Forecast panelists upgraded their forecast for this year. They now expect the economy to grow 3.1% in 2014, which is up 0.1 percentage points from the previous month’s estimate. The panel sees GDP expanding 2.6% in 2015.

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United Kingdom GDP Annual September 2014 2

Note: Annual variation of GDP in %.
Source: Office of National Statistics (ONS) and FocusEconomics Consensus Forecast.

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