In a recent post Paul Krugman contrasts Florida and Spain to illustrate the point that optimal currency areas are
much more likely to be workable if you have fiscal federalism, so that there are large automatic transfers to depressed regions. Now, I often compare Spain with Florida: both had huge housing bubbles followed by busts. Florida, however, has its retirement and much of its health care paid for from Washington. .... (In the recession) ... Florida received what amounted to an annual transfer from Washington of $31 billion plus, or more than 4 percent of state GDP. That's a transfer, not a loan. And it's very big. ... Aid on that scale is inconceivable in Europe as currently constituted.
Yet aid on that scale does exist within Europe but within fiscally integrated nation states such as Britain. Scotland is a case in point. Using the GERS data we see the following change in the tax receipts Scotland paid to the UK Treasury and the change in public spending in Scotland during the recession - 2007-08 to 2009-10
In the recent Great Recession Scottish tax receipts fell by £2.8 billion in the recession if North Sea Oil revenues are excluded. If the change in North Sea Oil revenues are added in the deterioration in tax receipts was worse with revenues falling by £4bn.
Yet, not only did Scottish residents retain the same level of public benefits they actually rose by £5.9 billion. This includes an increase in social protection payments by £3 billion and a rise in health spending by under £1 billion - all in nominal terms.
The total benefit to Scotland of fiscal integration with the UK during the recession amounts to 7.6 per cent of GDP ex oil and 7 per cent of GDP including oil. This is substantially bigger than Florida's fiscal integration with the US Federal government as Florida's fiscal integration is much bigger than that of Spain with the EU and Eurozone.
Supporters of Scottish independence will argue that when a geographical share of oil is included Scotland's deficit would have been slightly less than the UK in 2009 -2010 at -10.6% compared to -11.1% in the UK.
But that is not the issue.
The key question is whether an independent Scotland using sterling would have been able to borrow to fund the rise in its deficit during the recession. Would it have experienced the difficulties of Spain or the ease of the UK?
I leave it to the reader to judge.