“As the date of the Scottish independence referendum approaches, the debate on both sides of the campaign has increasingly focused on the economic consequences for an independent Scotland and the Rest of the UK (RUK).
“Perhaps surprisingly, very little (if any) attention has been given to the implications of Scottish independence polls for current economic developments, and in particular what the Scottish opinion polls imply for current borrowing costs in the UK.
“These show that Yes support has lagged behind No support by an average of 15.5 percentage points over the period. The Yes campaign point out that gap between Yes and No has narrowed and, in particular, has halved from 24 points in November 2013 to 12 points in March 2014. The gap has narrowed further in April 2014.
“We argue that movements in the opinion polls are priced by financial markets over and above the impact of other economic fundamentals.
“We estimate* that a 12 percentage point increase in the Yes support, relative to the No support, increases the 10-year borrowing costs, relative to the 5-year borrowing costs, by up to 24 basis points; in fact, a smaller No lead leads to a bigger impact.
“This is to be expected with an increase in Yes support relative to No support because the increased possibility of a Yes vote in the referendum brings with it added uncertainty about the future course of events. Certainly, if there were to be a Yes vote, there are likely to be protracted negotiations between Scotland and the RUK and Europe on issues of the currency, division of debt, position of Scotland within the EU and so on.
“This link between the UK’s cost of borrowing and Scottish independence opinion polls has important implications for current fiscal and monetary policy decisions.
“It could add up to £130 million to annual interest payments on Britain’s longer-term debt. That’s a tiny amount compared to the size of the economy. Nevertheless, policy-makers at the Treasury and the Bank of England should bear this effect in mind when planning bond sales and setting interest rates.”
*A detailed research note is available from: http://www.timworrall.com/wpapers/researchnotemilasworrall.pdf