A Fresh Start with Independence: The macroeconomic framework of an independent Scotland and the measurement of economic flows

The measurement of economic flows

This technical paper accompanies A Fresh Start with Independence and provides technical information on the measurement of trade, income and investment flows under the macroeconomic framework of an independent Scotland.

Background

Major policy shifts are reshaping the global trading system and capital flows, increasing trade tensions and financial market volatility.^[1] Against this background there is a need to preserve macroeconomic and financial stability, ensure debt sustainability, address imbalances that exist between countries, and lift growth.^[2] This requires an understanding of economic fundamentals and fiscal, trade and financial flows. Countries trade with, borrow from and invest in other countries and so money flows in and out of countries, reflecting investment and trade outcomes and opportunities.

Since the global financial crisis of 2007-09 and with subsequent global shocks, including the pandemic, there has been an increasing focus on the fiscal and external positions of countries^[3] and the extent to which countries run sustained external deficits or excess surpluses.

Two key metrics on balances are typically the fiscal balance (which measures expenditure and revenue) and the current account balance (which captures the overall flow of trade and incomes, including investment income that flows in and out of a country).

This technical paper provides further information on the measurement of economic flows (trade, income and investment) in an independent Scotland and the currency arrangements set out in A Fresh Start with Independence. It provides an overview of a macroeconomic framework and then summarises what current account balances in the global economy currently look like. It describes the key economic indicator of transactions with the rest of the world – known as the Balance of Payments - and what the UK Balance of Payments looks like. It then sets out how Scotland, as part of the UK, is reflected within the context of the UK economy macroeconomic data. Finally, it considers what the starting current account and fiscal balance position may look like for an independent Scotland and data gaps that would need to be filled.

Overview of Macroeconomic Framework

A macroeconomic framework typically consists of three interdependent elements: monetary policy, fiscal policy and arrangements for financial system stability. The box below sets out further detail.

What are monetary policy and fiscal policy?

Monetary policy covers the management of the money supply, credit and interest rates in an economy. It influences the value of goods and services produced in an economy and the value of currency. The monetary policy tools available to an independent Scotland would depend on the choice of currency and the details of the currency regime. How monetary policy is conducted affects prices, business and consumer confidence, investment, trade flows, the cost of public and private borrowing, financial prosperity and wealth.

Fiscal policy covers the use of tax and spending to fund public services, transfers and public investment, for example in transport and other infrastructure. Effective management of the public finances is a critical requirement for all countries. Decisions on tax, spending and borrowing must be balanced to ensure a sustainable fiscal position. A clear strategy and robust governance contribute to credibility, predictability and transparency. Fiscal policy plays an important role in stabilising the economy over the economic cycle. Fiscal sustainability is a pre-condition for a successful monetary policy and the credibility of the policy is reflected in financial markets in the cost of borrowing. The stabilising function of fiscal policy takes two forms. The first is automatic, operating without further government intervention: when, for example, tax revenues move in line with economic growth. The second is discretionary and takes place when policy decisions are made: for example, spending pledges or tax changes in order to respond to the economic cycle, to support particular groups within society and to deliver wider policy objectives.

A stable financial system is essential to the smooth functioning of the economy and is underpinned by a financial regulatory system that is designed to avoid excess risks and ensure consumer confidence.

The macroeconomic framework currently in place in Scotland is set by the UK Government. The institutions that support its management, including the Bank of England, financial services regulators, and the Office for Budget Responsibility are established in law, but the performance and degree of stability, or otherwise, in the present macroeconomic system is driven by policy decisions made by the UK Government. With independence, Scotland will have responsibility for the macroeconomic framework and for the operation of supporting fiscal (and financial) institutions.

A Fresh Start with Independence sets out the institutional framework for the macroeconomic framework of an independent Scotland. As part of this, existing fiscal institutions, such as the Scottish Exchequer, the Scottish Fiscal Commission and Revenue Scotland, would be expanded. Essential new ones, like a Scottish Central Bank and a Debt Management Office, would also be established with clear remits and strong governance structures.

Comparison of Current Account Balances across selected countries

The International Monetary Fund (IMF) publishes an annual report on external balances across countries.^[4] Figure 1 shows current account balances across advanced economies with some countries, such as Singapore, having current account surpluses and others such as the US and UK having current account deficits (with the gap being financed either by borrowing from foreign lenders or from foreign investment). Both the US and UK also run a fiscal deficit^[5] alongside the current account deficit.

Source: International Monetary Fund 2025 External Sector Report: Global Imbalances in a Shifting World

The IMF notes that external surpluses or deficits need not be a problem and can be desirable to a degree.^[6] The IMF advises that excessive current account surpluses (especially if persistent) can create inefficiencies and risks^[7] and that excess balances can be judged in relation to an economy’s fundamentals. Countries can take action to reduce excessive balances and domestic macroeconomic policies are key to addressing excessive external balances.^[8] In the case of a current account deficit, Governments can take action such as improving the competitiveness of exports. Similarly for countries with a current account surplus, governments can invest more in their economy to increase aggregate demand.

The most recent IMF report for 2025 shows global imbalances widening.

The assessment of imbalances is not just about the current position but about whether the trajectory is for the imbalances to persist and so pose a specific risk for a country in the advent of an economic shock or on their ability to borrow sustainably. Countries should continue to enhance their resilience by strengthening domestic macroeconomic fundamentals.^[9]

The Balance of Payments

The Balance of Payments summarises the balance of all economic transactions between the economy of an individual country and the rest of the world, recording inward, outward, and net transactions, as well as how these flows are funded. It is based on a double entry accounting system with each flow (debit or credit) having a corresponding entry. The Balance of Payments is comprised of three components as shown in Figure 2.

The Current account is made up of the trade in goods and services account, the primary income account (which covers compensation of employees and returns on investment, such as dividends and interest payments) and the secondary income account (such as intergovernmental transfers and remittances sent by foreign workers). The difference in the monetary value of these accounts (i.e., the net balance of all of these transactions) is known as the current account balance. A current account balance is in surplus if overall credits exceed debits, and it is in deficit if overall debits exceed credits. As shown in Figure 2, the largest element of the Current account tends to be the trade balance which relates to goods and services).

The Financial account covers transactions that result in a change of ownership of financial assets and liabilities between residents and non-residents. For example, the acquisitions and disposals of foreign shares by UK residents. Components of the financial account include:

• direct investment (associated with control or significant influence over the management of an enterprise in another country),
• portfolio investment (cross border transactions involving debt or equity securities), financial derivatives and employee stock options, reserve assets (external assets controlled by monetary authorities for meeting Balance of Payments financing needs and intervening in exchange rates)
• and other investment/banking flows (such as currency, deposits and loans).

The Capital account is made up of capital transfers and transfers of non-produced, non-financial assets. It is typically the smallest aspect of the Balance of Payments. Capital transfers are those involving transfers of ownership of fixed assets, transfers of funds associated with the acquisition or disposal of fixed assets, and cancellation of liabilities by creditors without any counterparts being received in return (write down or elimination of external debt). The sale or purchase of non-produced, non-financial assets covers intangibles such as patents, copyrights, franchises, leases and other transferable contracts, and goodwill.

Trends in the Balance of Payments in the UK

Despite the clear conceptual framework on the components of the Balance of Payments, measuring the Balance of Payments is difficult and there are often large discrepancies between how countries measure bilateral flows, which means the data always require careful interpretation.

This section reports trends in the UK Balance of Payments.^[10] Although Balance of Payments data is available for the UK, as Scotland is part of the UK there is no full equivalent data within Scotland’s National Accounts for the reasons set out further below.

The UK’s current account balance has been negative in recent decades, driven by a persistent deficit in the balance of trade. This places the UK as a net borrower with the rest of the world, indicating that overall expenditure in the UK exceeds national income (i.e., households, businesses and government are collectively spending more than their income).

In order to finance current account deficit, the UK must attract financial inflows, and this can be achieved by either UK residents selling overseas assets or UK residents accruing liabilities with the rest of the world (or a combination of the two). These financial flows are recorded in the financial account.

Trends in the Current Account

Since 1998 the UK has generally seen a prolonged and persistent increase in the current account deficit (albeit with cyclical variations). In 1997, the current account deficit (excluding precious metals) was valued at £1,238m (0.1% of GDP), whereas latest data for 2024 show it was £72,138m (2.5% of GDP). Over this period, the current account deficit reached its highest in 2023 in absolute terms, where it stood at £112,773m.^[11]

It is important to note that much of the variation observed in the current account deficit is cyclical (e.g., trade deficits decrease during recessions) and fluctuations in prices of tradeable goods, commodities and services can affect the trade balance, which is a major component of the current account.

Figure 3 shows that the UK economy has been largely characterised by a surplus in trade in services and deficit in trade in goods. The widening of the current account deficit over time has largely been driven by an increasing deficit in trade in goods, partially offset by a substantial but smaller increase in a trade in services surplus.

Source: Office for National Statistics (2025) Balance of Payments, UK table BX (last accessed 27 August 2025)

Trends in the Capital Account Balance

Although it is the smallest component of the Balance of Payments, the capital account has also seen significant changes in recent decades, moving from a surplus of £509m in 1997, to a deficit of £5,516m in 2024.^[12] Figure 4 shows the trend in the UK capital account balance – which has been affected by a reclassification in 2017. The capital account balance has in general been driven by an increase in capital transfer debits reflecting a capital outflow by the central government, partially offset by some increases in capital transfer credits by other sectors. These flows are, however, negligible in terms of UK GDP.

Source: Office for National Statistics (2025) Balance of Payments, UK table I (last accessed 27 August 2025)

Trends in the Financial Account Balance

A current account deficit places the UK as a net borrower with the rest of the world, so the UK must attract net financial inflows on the financial account to finance its current (and capital) account deficit. Figure 5 shows the trend in the UK financial account balance. The primary sectors contributing to the UK’s financial account are: central government, monetary and financial institutions, and other sectors (i.e., the non-financial private sector). Over time, central government flows have consistently been a net liability since the turn of the century - largely reflecting the UK’s government borrowing in international debt markets - whereas flows from monetary and financial institutions appear to be more volatile, switching between net credits and net liabilities. Net flows in the non-financial private sector have been increasing and been volatile in recent years.^[13]

Source: Office for National Statistics (2025) UK Balance of Payments, The Pink Book: 2024 table 7.2 (last accessed 27 August 2025)

Measuring economic flows between Scotland and other countries

This section considers whether there is equivalent Balance of Payments data available for Scotland, where the gaps in data lie and how the economic flows might change under independence.

For Scotland, the available economic flows data relates primarily to the UK as the relevant statistical economic unit with trade, income and investment flows captured at UK level or territory. Similarly, the UK Government is the sovereign state in terms of UK debt and borrowing.

It is possible to estimate trade, income and investment flows for Scotland and sub-UK country/regions but only on a partial basis. It is important to recognise that these data reflect the current UK economic structure. They are also based on economic accounting identities which can differ from actual flows. In addition, changes to economic structures, governance or institutions would change these flows. Therefore, sub-UK Balance of Payments data will reflect the structure of the UK economy, the geographical balances of economic activity, intra-UK trade, the concentration of UK capital markets and the location of UK head quartered businesses.

A lack of subnational estimates for certain components of the Balance of Payments, coupled with a lack of agreed methodology in calculating subnational statistics, means that it is difficult to estimate Scotland’s current Balance of Payments position as part of the UK.

Trade Data for Scotland

There are already several sources of trade data for Scotland (see box below) and these reflect different sources as well as scope of activity (whether goods, services, intra-UK and international).

The latest statistics which include estimates of all international and intra-UK trade flows for Scotland, including exports from and imports to offshore oil and gas producers, show that Scotland has had a trade deficit in most of the last ten years, with a value ranging between 2% and 9% of GDP.^[14] The overall trade balance is strongly linked to oil and gas prices and industry activity, with trade surpluses occurring in the previous decade before the oil price crash of 2014, and provisionally estimated to be in surplus due to the high prices experienced in 2022.

Excluding offshore oil and gas activity, Scotland’s underlying trade balance is more stable. Statistics show that there has been an overall trade deficit with the rest of the UK and the rest of the world combined in all years since estimates begin in 1998, of between 5% and 12% of onshore GDP (around 12% in 2021).^[15] Although this varies by sector, Scotland’s onshore economy is generally estimated to be a net importer from the rest of the UK and, since 2018, the rest of the world. Some statistical sources, such as His Majesty’s Revenue and Customs (HMRC) and the Office for National Statistics (ONS), report a partial trade surplus for Scotland but these are not comprehensive (see box below for further detail on trade data sources and what they cover). Historically, Scotland’s overall trade balance has been strongly linked to oil and gas. In the 2010s, Scotland moved from having an overall trade surplus in most years of the preceding decade towards an increasing deficit.^[16]

Trade Statistics

The trade statistics landscape for Scotland is a relatively crowded one, with a range of sources of data available to users (each with strengths and limitations). As such, care should be taken when comparing these data.

The most comprehensive publication on exports is Export Statistics Scotland. This includes trade in goods and services and covers exports both internationally and to the rest of the UK. These statistics are based on business surveys and modelling, but cover exports only. They are also structurally consistent with and integrated into Scotland’s National Accounts.

HMRC Regional Trade Statistics are published quarterly, including data on both imports and exports, covering international trade in goods only, in nominal terms. Recently, the Scottish Government has expanded this data to include trade in real terms for Scotland (using Chained Volume Measure). These statistics are timely and are useful for exploring recent trends in international flows of goods, and for detailed analysis by product and partner.

The ONS produce Official Statistics in Development covering UK regional trade in both goods and services. These estimates are classified by industry and are derived from UK level trade volumes that are then apportioned to regions and nations of the UK. While these statistics can provide useful insight into regional comparisons, they need to be treated with caution particularly because of the large portion of unallocated exports. These are experimental statistics in development and as such can be subject to substantial revision, and are generally not consistent with Scottish Government sources and in some case differ from some Scottish Government statistics.

Much of the variation is likely to be related to methodological differences and apportionment methods. In particular Export Statistics Scotland does not apportion UK level data but instead builds a picture of Scotland’s exports from the bottom up. The different treatment of the Oil and Gas Industry across sources (as well as other important industries like Financial Services) also have important implications for Scotland.

Primary Income Data for Scotland

Results for Scotland’s primary income up to 2021 were published in June 2023 and are shown in Figure 6.^[17] In all years between 1998 to 2021, Scotland’s primary income debits (such as profits generated in Scotland returned to overseas investors) have been higher than credits (such as foreign profits being returned to Scottish investors). This means there is a net outflow, or deficit, of primary income from Scotland.

Source: Scottish Government (2023) Primary Income Account and Gross National Income (GNI) for Scotland, 1998-2021, Table 1 (last accessed 27 August 2025)

Over time, movements in Scotland’s primary income balance have been largely driven by changes in returns on direct investment (accounting for 57% of the net outflow in 2021) – see Figure 7.^[18] However, income flows such as other investment flows (which are largely associated with financial services) and portfolio investment (equity and debt securities) have also contributed to Scotland’s primary income deficit. Although flows associated with other investment have decreased in scale since the global financial crisis, this has been driven by changes in the pensions and insurance sector.

Direct investment (DI) flows between Scotland and the rest of the world are fairly volatile in comparison to DI flows between Scotland and the rest of the UK. These are due to fluctuations in profits in large companies (mostly financial and oil companies). DI flows are calculated using company level revenue information from the Foreign Direct Investment survey.

Source: Scottish Government (2023) Primary Income Account and Gross National Income (GNI) for Scotland, 1998-2021, Table 4 (last accessed 27 August 2025)

Information on the Current Account Scotland is partial because there is no secondary income data (see Figure 3 above for the different components of the current account as illustrated for the UK as a whole).

Changing economic flows under independence

Despite the gaps, the available data can be used to infer the scale of flows for key economic variables. The data suggest that Scotland - within the UK - has a primary income deficit with larger outflows than inflows and in Balance of Payments terms relies on foreign investment and borrowing. In the current context, this reflects not only the UK fiscal framework, but also the UK’s economic relationship with the rest of the world as well as Scotland’s relationship with the rest of the UK.

Independence would change the nature of many of these economic flows in the Balance of Payments for both Scotland and the rest of the UK. The key changes would relate to the operation of the macroeconomic framework, adjustments in the private sector, new institutions and the economic policy choices of future Governments. However, some aspects would remain as before, given shared institutions, security, energy and wider trade and economic interests.

The requirement of businesses to register Scotland accounts for tax, trade and governance under independence would also lead to changes in the corporate structure of businesses currently operating across UK and affect economic flows. This would, however, improve reporting and data at the Scotland level for key economic data.

The currency in use is also a determinant of economic flows. In terms of the continued use of sterling, Scotland would start from the position of that currency being already in use. Also the fact that sterling is a reserve currency/asset and internationally traded means that a wide range of economic actors will already be doing business in sterling. The introduction of the Scottish pound and the process of exchange from sterling would also affect Scotland’s Balance of Payments position and changes would happen over time.

In the initial period Scotland’s relative flows/balances with the rest of the world using sterling will be one key adjustment. The speed at which previous intra-UK flows adjust will be influenced by relationships and agreements with the rest of the UK.

One aspect highlighted in the IMF report is the fiscal balance – the extent of borrowing required to support government expenditure including investment. This typically correlates with the Current Account position. As the paper A Fresh Start with Independence highlights, official estimates for the fiscal position of Scotland - within the UK - are estimated to be in deficit with expenditure (including capital investment) exceeding revenue (including oil).

This current fiscal position reflects the current structure of UK economy reflecting current UK economic structures and economic flows. This position would also change following independence as the current fiscal framework would no longer be in place and tax, borrowing and spending decisions would be the full responsibility of the government of an independent Scotland. At present, around 30 per cent of the total tax revenues raised in Scotland are devolved, with Scottish income tax the largest element. The starting position would also be influenced by the negotiated settlement of division of assets and liabilities between Scotland and the rest of the UK.

Therefore, current fiscal balance estimates provide at best a starting point for understanding revenue and expenditure patterns however these would be influenced by the policy choices of the new government and decisions made by the Scottish Central Bank, as set out in A Fresh Start with Independence.

Overall, important drivers of economic flows are economic stability, competitiveness as well as fiscal and financial policy choices. As the IMF external sector report highlights, the assessment of external balances uses a wide range of indicators to form a view on the external position of each individual economy and whether it is weaker or stronger than implied by its economic fundamentals.

Conclusion

Despite the clear conceptual framework on the components of the Balance of Payments, measuring the Balance of Payments is difficult and there are often large discrepancies between how countries measure bilateral flows, which means the data always require careful interpretation

The UK has a full set of Balance of Payments and they show that the UK has a current account deficit. At present, Scotland only has partial information on its Balance of Payments.

An independent Scotland, as a smaller advanced economy, would start from a position of relative strength given existing natural resources, human capital, industries and international connections - as highlighted in A Fresh Start with Independence and the Building a New Scotland series of papers.

As set out in A Fresh Start with Independence, given the uncertainty over the outlook for the global, UK, and Scottish economies, and future fiscal and economic policy decisions by the UK and Scottish governments prior to independence, an estimate of the starting fiscal position of an independent Scotland is not presented.

Nevertheless, the available data suggests that an independent Scotland could start from a position of a current account deficit and a fiscal deficit but this position reflects the current constitutional arrangements. These flows would change under independence for some of the reasons set out in this paper.

Scottish Government statistics on trade and international trade balance provide a more complete picture, as they are consistent with our National Accounts and GDP statistics for the whole of Scotland. For overall balance of trade, the best estimates that we have available are those contained in Scotland’s National Accounts.