If Scotland separates, where goes the U.K.?

The British Prime Minister’s final plea to Scottish voters dominates today’s UK papers. The Telegraph leads with “PM begs Scots not to leave the UK”; “Sob Tory” is the splash across Sun; “Cameron’s parting plea to Scots” says the Guardian and “Heartbroken if you leave” is the Herald’s take.

Meanwhile the Independent reports that “Millions of banknotes sent to Scotland in case Yes vote sparks run on ATMs.”

Today it is Ed Miliband, the Labour leader’s, turn to appeal.

But has the proverbial ‘fat lady’ sung? Is it already too late? “Cameron in final pitch to Scots as blame game begins” is the FT’s headline. “Unionists outgunned in final push of campaign” says the Times, reporting that it is Yes for Scotland.

Scotland has been debating the idea of separation from the United Kingdom for years. While the issue can clearly become patriotic, nationalist, and a big talking point culturally, an objective financial analysis of a separation eventually needs to be performed to truly anticipate the effects. Too often in the past, regional separations have been followed a few years later by the discovery that major resources, municipal income streams, and services were sorely missing. This is the nature of a government separation. It’s a boring topic — not near as flashy as patriotic and nationalist pride — but it has to be done for a proper separation.

While it did not conduct an in-depth analysis, the FTSE recently reviewed the matter with 100 business and corporate chairmen. Their position on the matter, based on their own motivations and business positions, was loud and clear: 80 percent stated that a separation would financially hurt the U.K. This response is 14 percent higher than the same survey performed in February 2014, months before the decision was to be voted on. The timing is likely to be considered political, especially with a referendum on the matter just a few days away from mid-September 2014. However, that would diminish the value and background of each of the respondents and all of their combined industry knowledge.

Yet what exactly are the consequences that would be felt? This question is an entirely fair one and well within the domain of good, qualified economists if not the industry leaders themselves. A comparison can be somewhat drawn to Ireland’s separation, but that was in 1922, so it’s limited as guidance.

Let’s start with the Scottish banking industry. Two of the region’s biggest players have stated publicly that they would move their headquarters to the U.K. if a split occurs, according to Forbes. The reason is business-related; they believe that a political split would cause their institutions to suffer in their ability to borrow if they were to stay in Scotland. That’s a pretty dramatic position, and it came from the Royal Bank of Scotland. Institutional borrowing is key for banks to operate, especially when managing cash flow between business income and recoveries. The inability to borrow would essentially make a bank insolvent, shutting it down. Lloyds and Standard Life are in the same boat, and other Scottish banks are nervous.

Second, retailers, including John Lewis, expect that costs would go up for moving product from wholesale and commercial business-to-business to the retail end of things. As a result, large retailers expect their costs to consumers to rise. How much is uncertain, but there would definitely be some kind of a negative effect on the pocketbook on the Scottish side. Much of this rise in cost would be due to a currency change likely to occur after a separation, hedging against losses if the currency begins to fall in value, which usually occurs with new country currency establishments. The sentiment is, it would seem,3 shared from the grocery level to the high-end clothing level.

Telecommunications would also be affected, with service providers likely raising their prices. This would be necessary to offset new regulatory costs, taxes and fees that a new government would very likely implement within its new jurisdiction. In essence, after separation, the same telecommunications infrastructure would be paying for the permission to operate in two countries instead of one. So, to some extent, a duplication of fees would occur.

Fourth, the creation of a new Scottish government would create an entirely new body of government agencies and personnel. Some offices would be taken over from the U.K., but some services would need to be re-established as the U.K. home offices pull back their own resources to south of the border. That means more government personnel to be paid for along with new pension costs. There would be some offset in not having to pay for southern U.K. public resources, but that would take time to separate from. Most such actions usually involve some kind of a tax and fee division agreement that the public won’t get to see in the vote. These details are usually hashed out in government meeting rooms.

Finally, the independent analysts have determined that £13.8 billion per year would be lost in government revenues with a split. Scotland doesn’t get to just walk away as a new country — but it might, causing a U.K. tailspin. It has to take some share of the U.K.’s £93 billion debt. The revenue loss figure is also calculated by including a loss of income from North Sea oil companies hedging against separation, and finally there would be value lost in a weak currency losing against the pound and other currencies.

Clearly the impending vote is already having an impact. Indeed, last week deVere Group’s Head of FX, James Stanton, was quoted on The Telegraph’s front page talking about the current trend of investors offloading the pound.

Numbers are likely to flurry right up to the vote. But one thing seems to be agreed upon by most: A Scottish separation will have a price tag on it that will be paid for by generations to come in Scotland.

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