The Economic Implications for the United Kingdom of Scottish Independence
(Limited Text - Ministerial Extracts only)
Read Full debate
The Advocate-General for Scotland (Lord Wallace of Tankerness)
I hope that my noble friend will accept that it is the Scottish Government, not the Scotland Office.
Lord Forsyth of Drumlean
As my noble and learned friend knows, I am still stuck in the past on some of these devolutionary aspects. He is absolutely right. I am referring to the Scottish Government—or the Scottish Executive as they were quite rightly called until he changed that in an Act that I spent quite a lot of time opposing in this House—and the way they behave. My noble and learned friend—I am sure he will not be embarrassed if I say this—was invited to speak at, I think, the 25th anniversary—
Lord Forsyth of Drumlean
He was invited to speak at the 50th anniversary of Loganair. My noble and learned friend must have been a very good customer of Loganair when he represented his constituency so well. He was asked to do that but an official from the Scottish Government rang Loganair and said, “We understand that you have Lord Wallace speaking at this dinner; we think it should be a Scottish Minister”, and it withdrew the invitation. I have no doubt it was thinking about the financial support it receives for its airlines from the Scottish Government. This is the kind of brazen way in which the Scottish Government operate. Are we surprised that few businessmen were prepared to come to give evidence to the committee? The only great nationalist-supporting businessman with any credibility in Scotland who agreed to come and speak to the committee was Brian Souter, who has built a very successful business, but at the last moment—literally days beforehand—he cried off because he did not feel able to do so.
A climate of fear is operating in Scotland. It comes from having a single party dominating a Parliament, without an upper Chamber of this kind and without very much accountability from the Scottish media. Despite that, the First Minister has found it extremely difficult to get cheerleaders for his campaign. He started off with celebrities, all of whom seemed either to live abroad or pay no tax in this country. He has got so desperate to find celebrities for his cause that he is now having to recruit the dead. Only this week we heard from Alex Salmond that Robert Burns would vote yes in the referendum. He quoted these lines from Burns as conclusive proof:
“We’re bought and sold for English gold—
Such a parcel of rogues in a nation!”.
The “rogues in a nation” are not in this part of the United Kingdom; I think they may be north of the border. Of course, that is a reference to how the union came into being in the first place. We should remember how that happened. It came into being because of a financial crisis: something like a quarter of the money in circulation had been invested in the Darien scheme and the Scottish economy was no longer able to sustain that level of financial shock. The Scottish economy could not get access to the single market that was England and her Commonwealth. It was a trade deal. From the English point of view, it was a way of ensuring the succession of the Protestant monarchy, which was a matter of some controversy and of great national security because of the Jacobites.
This union came into being on the basis of maintaining financial security and defence. They are the two matters that come out of this report as being threatened absolutely by the break-up of the United Kingdom now—from Scotland’s point of view, not England’s. The size of the Scottish economy relative to the English one makes it less important for England. Why would Scotland want to give up access to a single market—the rest of the United Kingdom—where most of its goods and services are sold? Why would it, after what we have been through since 2008, wish to remove itself from the security of the Bank of England, the Treasury and a larger country? Why on earth would it want to become so dependent on the revenue from North Sea oil, which, as the report points out, is a very substantial part of the revenue for Scotland as an independent nation, whereas as part of the United Kingdom it is a smaller part and therefore less vulnerable to fluctuations in the oil price? If that sounds like an academic argument, the tax revenue in 2012, as set out in the report, was £6.5 billion. That is 40% less than the previous year. The lack of stability, which dependency on North Sea oil would bring, makes the economic consequences for people living in Scotland very uncertain indeed.
Then we have financial services—financial services that depend on the rest of the United Kingdom for most of their customers, and which also depend on having the security of the Bank of England and the whole apparatus that we have seen working so effectively. As my noble friend pointed out, the Royal Bank of Scotland and the HBOS part of Lloyds account for 1,254% of GDP for Scotland as an independent country. That makes Iceland look as if it was in a very secure position when the financial crisis came along.
When confronted with these issues, answers come there none. On the question of the security of the Bank of England, we are told that it will be fine because, “We will have a representative on the Bank of England and the Bank of England will still stand guarantee”. Why would any English taxpayer wish to put their money on the line for a foreign country called Scotland? This is Walter Mitty economics coming from the First Minister of Scotland, who refused to come to the committee to justify his view.
For those who think that there is some easy way out of this from North Sea oil, there is also the whole question of the decommissioning costs, estimated at some £30 billion and which have to be met by relief on the tax that would otherwise be levied on those oil revenues. Again, answer comes there none, except that the English should pay for the decommissioning because they had the benefit of the revenue in the early years. The lines that are being put are, “We can keep the monarchy and be independent, we can keep the welfare system and have the pensions and welfare administered by the English but be independent, and we can keep the security of the Bank of England”. They are nonsense lines and they are not being properly debated in Scotland as they should be. That is the danger, as the noble Lord, Lord Rowe-Beddoe, pointed out, when things happen on the basis of emotion.
For those who want to see the future, the Minister very unwisely championed the Scotland Act through this Parliament. We are already seeing the first effects of what will happen. The Scottish Government now have the power to set stamp duty. They have just issued a consultation document in Scotland. They are refusing to say what the levels of stamp duty will be until after the referendum—I cannot think why. Everyone in the House will know that stamp duty on houses up to a threshold of £250,000 is 1% in the United Kingdom. In the consultation paper, the Scottish Government propose, as an example, that stamp duty should increase to 7.5% on any amount over £180,000 and 9.5% on properties worth more than £250,000. That is the first effect of these tax-raising powers. To say that an independent Scotland, with the volatility of North Sea oil revenue and all the other matters that I have pointed to that would damage the economy, would be able to reduce tax and not add to it is extraordinary.
The Scottish Government are also, even now, setting up their own inland revenue called Revenue Scotland. We will have two sets of bodies collecting tax north of the border. It is being set up specifically to collect this new land and property tax—this mansion tax that is being imposed on the Scottish people.
I am conscious that time is moving on. I started with a quotation from Robert Burns, which Alex Salmond claimed as his own. I have my own quotation, which I will try to translate later for those who may find some of it a little obscure. It is from the address to the Dumfries volunteers:
“O let us not, like snarling curs,
In wrangling be divided,
Till, slap! come in an unco loun,
And wi’ a rung decide it!
Be Britain still to Britain true,
Amang ourselves united;
For never but by British hands
Maun British wrangs be righted!”.
That echoes the sentiments that are included in this report and is a clear endorsement that Burns was on the side of the Unionists.
The Advocate-General for Scotland (Lord Wallace of Tankerness)
My Lords, first, I welcome today’s debate discussing the important report from your Lordships’ Economic Affairs Committee. I thank all committee members, but I thank in particular the committee chairman, my noble friend Lord MacGregor of Pulham Market, who introduced the debate. Although I pay tribute to all who have contributed to the debate, perhaps I may pick out the noble Lords, Lord Rowe-Beddoe, Lord Hollick, Lord Lipsey, Lord West and Lord Davies of Oldham, on the basis that they are non-Scots. In making the case of the United Kingdom, I think it is very important that we hear voices from outwith Scotland saying how important the union is for all of us.
We have heard valuable contributions. I share the view of the noble Lord, Lord Davies, that it is perhaps unfortunate that there is no representative of the Scottish National Party in this House. That is the party’s choice and a matter for it, but it would have been useful, not least to answer some of the legitimate questions put. My noble friend Lord Steel of Aikwood interrupted my noble friend Lord MacGregor to say that it was odd that, having had two years since we knew that this referendum was coming, the Scottish Government had not come up with the answers. My noble friend Lord Forsyth hit the nail on the head when he said that it has been Scottish National Party policy for more than 50 years. One might have expected that, as it has been its policy, it might have had some answers, rather than either the deafening silence or the change of position which we sometimes get.
Perhaps I may say something about the tone of the debate that we expect in Scotland. It is important that we have a rational and well reasoned debate. I have heard the concerns expressed by a number of your Lordships from all parts of the House about the fears expressed to the committee. I will not comment further, but I can confirm the withdrawal of my invitation to a 50th anniversary dinner referred to by my noble friend Lord Forsyth.
It is healthy when we get contributions from people who do not necessarily have any axe to grind. My noble friend Lord Lyell declared his interest as a member of the Institute of Chartered Accountants of Scotland. That institute, with its distinguished history, has indicated that it will not come out on one side or the other but has already shown its willingness to ask pertinent questions, not least with regard to pensions. It is important that bodies such as that, which have a track record and can be seen as having professional status in Scotland but are not backing one side or the other, make such a contribution.
As we approach the referendum in September next year, it is important that both sides of the debate are robust in their arguments but conduct them with respect and, echoing what has been said, with information. I welcome the fact that a number of your Lordships who have contributed to the debate have commented on the Scotland analysis papers. The three that have been published so far are fairly heavy tomes. I can confirm that another will be published in the next few weeks. To inform the debate, we as a Government have undertaken that programme. There will be further papers on the United Kingdom’s position in the world, the protection of our citizens and defence, the economic benefits of the United Kingdom, and as my right honourable friend the Chief Secretary said in replying to the committee, on issues such as energy and welfare, as well as the important issue of pensions, mentioned by my noble friend Lord Lyell.
In addition, I have heard the disappointment expressed about the Ministry of Defence, but it has contributed to a number of other Select Committees. My right honourable friend the Secretary of State for Defence is to give evidence to the Defence Select Committee next week. There have been reports by the Scottish Affairs Committee, to which evidence has been given. The noble Lord, Lord Rowe-Beddoe, mentioned postal services. I understand that the Business, Innovation and Skills Select Committee in the other place is conducting an inquiry into the implications of Scottish independence for business, higher education, research and postal services. Undoubtedly the Government will give evidence to that committee.
With the possible exception of the constitutional issues raised in the comments of my noble friend Lord Mar and Kellie, there was general unanimity across the Chamber about the importance of Scotland as part of the United Kingdom. Also mentioned in one or two contributions was that it is important that we are not complacent. I assure your Lordships that the Government are not complacent. Earlier today I heard my right honourable friend the Secretary of State for Scotland refer to the referendum in Quebec. It is difficult to draw too many parallels, but he reflected on the fact that the federalists thought that it was in the bag and won by 1% only. We had the benefit of a lecture in Dover House last month by Monsieur Jean Chrétien, who was Prime Minister of Canada, and we certainly got the message from him. That will keep us on our toes. We know that this is a battle that we must win with both head and heart.
Lord Forsyth of Drumlean
Does my noble and learned friend not think that it is a trifle complacent of the Ministry of Defence, taking up the point made by the noble Lord, Lord West, to say that it is not looking at any contingency plans for the future of Trident, because it takes the view that Scotland is going to remain part of the United Kingdom?
Lord Wallace of Tankerness
My Lords, the Ministry of Defence, as I am sure the noble Lord, Lord West, knows, makes contingencies for many things. As for saying any more on issues of our nuclear deterrent and matters of national security, I am not prepared to go there.
The noble Lord, Lord McFall, referred to Michael Ignatieff and his point that we can have different identities. There is a British identity, although I appreciate that some, if not all, feel a European identity, and there is a Scottish identity. Having made my adopted home in Orkney for the past 30 years, I can share and feel affinity with that Orcadian heritage. I am sure that the point that was being made was that we do not want to choose between these. What we wish to secure by winning this referendum is that we are not forced to make that choice—something that I reflect on after my noble friend Lord Caithness’s comment as to whether I would have to choose between an Orcadian and Scottish identity and a British identity and affinity. Issues of the heart will be involved, but this debate has focused on the importance of the arguments of the head as well.
There are important things that we can say. The United Kingdom Government are producing an increasing amount of information, and I will say more about the communication of that later. We know that the United Kingdom is one of the most successful monetary, fiscal and political unions in history. It is a union that has brought economic benefits to all parts of the United Kingdom, because taxation, spending, monetary policy and financial stability policy are co-ordinated across the United Kingdom.
We know that Scotland and the rest of the UK are economically well placed as members of a single market and a single currency area in the current United Kingdom arrangements. Data published by the Scottish Government suggested that in 2011 nearly 60% of Scottish exports went to the rest of the United Kingdom and that 70% per cent of Scottish imports came from the rest of the United Kingdom. We know that Scottish independence would create an international border between Scotland and the rest of the United Kingdom. International experience shows that there is a border effect. It reduces flows of product, money and people.
We know that the current currency and monetary policy arrangements within the United Kingdom serve Scotland well. Perhaps I can take issue with what my noble friend Lord Caithness said about the First Minister setting out his case very clearly. As my noble friend Lord Forsyth pointed out, within the past five years the Scottish National Party has supported the euro. We were told that sterling was a millstone around Scotland’s neck, but then it supported sterling, either by a currency union or by so-called sterlingisation. Some people in the yes campaign have called for an independent Scottish currency.
The paper that we produced on the currency identified the four options. First, there is an independent Scottish currency. Secondly, there is the euro. Thirdly, there is a sterlingisation, where the Scots keep sterling but are not part of a formal monetary union. Fourthly, there is formal monetary union. None of these is as successful and workable as having our current arrangements within the United Kingdom. The alternative currency arrangements open to an independent Scotland would be less economically suitable for Scotland and the rest of the UK.
We know that the Chancellor, when launching the Treasury paper on currency, said:
“The SNP asserts that it would be in everyone’s interests for an independent Scotland to keep the pound as part of a Eurozone-style sterling zone. … Let’s … look at the evidence… Could a situation where an independent Scotland and the rest of the UK share the pound and the Bank of England be made to work? Frankly, it’s unlikely”.
While the Scottish Government might like to tell people what they think that they want to hear, we are focused on telling people what the evidence says, what the options are and what the consequences of those options are. You do not have to know too much about economics or look too far to see that the eurozone cannot exactly be described as a dream currency union. This was reflected in what my noble friend Lord Maclennan of Rogart said. It was mentioned too by the noble Lord, Lord Hollick, who said that you cannot have monetary union without fiscal union. Countries with the euro are witnessing closer fiscal integration at a time when the Scottish Government would have you believe that you could sign up to a currency union and achieve political and fiscal independence.
It is not just Scotland’s overall economy and currency that we know about. We know that in Scotland we have a strong and vibrant financial services industry as part of the United Kingdom. Financial services contributed £8.8 billion to the Scottish economy in 2010, more than 8% of Scottish onshore economic activity. The sector directly employs 85,000 people in Scotland and a further 100,000 indirectly, which is around 7% of total Scottish employment. We know that our firms and individuals benefit from a world-leading financial services sector and a large integrated domestic market. Our consumers benefit from the UK’s protection and compensation bodies that are able to pool risk across a large and diverse market.
Noble Lords who have contributed to the debate have reflected on the fact that the United Kingdom Government came to the rescue when the Royal Bank of Scotland and HBOS experienced their catastrophic difficulties. In evidence to your Lordships’ committee, Mr David Nish, the CEO of Standard Life, said that what he benefited from today was having a single regulator in a geographical area and that he did not think that there was a working model of cross-border regulation that he could find.
I pick up on the point made by my noble friend Lord Lyell that 70% of pension products bought by Scottish consumers are from firms based in the rest of the United Kingdom, and work by the Institute of Chartered Accountants of Scotland shows that if Scotland were to become independent, the,
“potential impact on funding requirements for employers operating defined benefit or hybrid schemes across the UK is likely to be substantial”.
Another important industry for Scotland is oil and gas. My noble friend Lord Shipley and the noble Lords, Lord Lipsey and Lord Hollick, referred to this. They made the point that wherever this valuable resource is, the revenues are volatile and in long-term decline. The UK has a broad and diverse enough economy to be able to absorb this volatility, but it would loom larger in a Scottish economy that would be less able to absorb it. My noble friend Lord Forsyth asserted that the First Minister would clearly want the United Kingdom to bear the decommissioning costs and quoted the Minister who, when asked on 25 April last year whether Scotland would take these costs on, said that the answer was yes. That contrasted with what his Energy Minister, Fergus Ewing, said on 17 April, which was that the UK had a moral and certainly a legal obligation to be responsible for the decommissioning of these rigs. Within a period of 10 days, there had been a diametrically conflicting view of what the position would be on these costs. It is incumbent on the Scottish Government to be a bit more direct in giving answers to these questions.
Lord Forsyth of Drumlean
I apologise for interrupting my noble and learned friend again, but is it not a matter of choice because the decommissioning costs are given by tax relief on the tax revenues? If the oil becomes part of Scotland’s assets, it is not a matter of choice whether it meets the decommissioning costs; they would have to be met because they would be part of the tax regime. Otherwise, it would be too expensive to take the oil out of the ground, in which case the revenue would be zero.
Lord Wallace of Tankerness
My noble friend makes an important point. I am simply pointing out that the Scottish Government do not seem to have worked out which way it is. I am not trying to offload a moral or legal obligation on to the United Kingdom.
A number of noble Lords, including my noble friend Lord Caithness and the noble Lord, Lord Hollick, mentioned the assets and liabilities. Clearly the division of liabilities and assets would be a significant part of any negotiations to create a new state. In the case of Scotland and the rest of the United Kingdom, it would have to be settled by negotiation. Unpicking the United Kingdom’s institutional and governmental infrastructure framework would be a huge task, and it is impossible to say with confidence what the outcome would be. Although there are some general principles of international law that could impact upon this matter, there is no clear set of rules in international practice about the precise allocation of national debt in these circumstances, but there would be an expectation that an independent Scottish state would take on an equitable share of the UK’s national debt. How an equitable share would be calculated is open to question, although I think the Finance Secretary, Mr John Swinney, accepted that there would be that obligation when he gave evidence to your Lordships’ committee.
Europe and Scotland’s place in Europe also featured in the report and in our debate. Again, we know that if Scotland left this union, the rest of the United Kingdom would be a continuator state. That was set out very clearly in the first Scotland analysis paper that we produced. The United Kingdom as a continuing state would maintain the same set of terms and conditions, rights and responsibilities that we enjoy today in Europe, NATO and the G8. Scotland would be a new state and would have to seek to join all those international bodies. That is a fact that the Scottish Government initially sought to deny. With regard to Europe, they said it would be seamless, automatic membership. Now, in the face of the evidence, they publicly accept that they would have to negotiate their way in. We could debate this. There are differing views about how that negotiation would take place, but there can be no doubt that it would be a very difficult negotiation. As the noble Lord, Lord McFall, pointed out, there would be no guarantee of an exemption from euro membership, or from Schengen, as the noble Lord, Lord Kerr of Kinlochard, stated. My noble friend Lord Caithness asked about the share of the rebate. It is impossible to say what the share of the rebate would be or whether the European Union would even grant any rebate to the Scottish Government. It would be a matter of negotiation not with the United Kingdom Government, although as a member state we would have a part to play in it, but, after the accession of Croatia next week, with 27 other Governments, and there is no guarantee about the outcome of such negotiations.
Defence was quite properly raised by a number of noble Lords. In our responses to other Select Committees we have sought to give some indication of the number of defence-related jobs in Scotland. How many would be lost would to some extent depend on the configuration of Scottish defence. My noble friend Lord Shipley mentioned the report this week from the Scotland Institute, which did not really offer much about what the profile of Scottish Armed Forces would be. As at 1 April 2103, there were more than 11,000 regular armed forces and 4,000 Ministry of Defence civilian personnel in around 50 sites throughout the country. Following the Defence Secretary’s announcement on 5 March about the Army basing plan, by 2020, there will be some 12,500 regular armed forces based here and Scotland will be home to all the Royal Navy’s submarines, one of the Army’s seven adaptable force brigades and one of the three RAF fast jet main operating bases.
With regard to civilian defence jobs, the Scottish Government’s agency Scottish Development International estimates that the defence sector in Scotland employs more than 12,600 people. The building of the Queen Elizabeth class carriers, initially on the Clyde and with further construction in Rosyth, underlines the commitment to defence jobs in Scotland. We can confidently say that that could not by any stretch of the imagination be maintained at that level in an independent Scotland.
I recognise that calls for more information have come in this debate. We are committed to setting out facts and evidence to ensure that people take an informed decision. I take the point that we, not just as a Government, but all of us who support the union, have an obligation to go out and sell the message. It may be that these weighty tomes are a bit weighty for leaflets or for a snappy column in some of our newspapers. Certainly, that has been represented to us, and the tenor of some of the contributions to this debate was that we should think of ways in which we can put out a more popular version. We are aware that these requests have been made, and we will give consideration to that.
Ministers have a particular responsibility, but others can get out and talk. On Friday, I will be speaking to the Scottish Council for Development and Industry in Aberdeen on constitutional issues. I know when my right honourable friend the Secretary of State for Scotland saw the report about the Scottish Chambers of Commerce and those who did not think that they were informed enough, he said—he will probably not like me for this—that he would be happy to go to talk to some of the chambers of commerce up and down Scotland. If anyone is listening from the various component parts of what I think is a federation of SCCs, there is an opportunity there to invite the Secretary of State for Scotland, but others of us would be willing to do so.
I heard the request that we should engage in pre-negotiation. I am not going to side-step it, and I know it will be a disappointment to my noble friend Lord MacGregor, but the United Kingdom Government have made it clear that we are not going to enter into pre-negotiations. My noble friend Lord Caithness said that the First Minister had said that we should. In fact, in a letter to my right honourable friend the Deputy Prime Minister, the Deputy First Minister said:
“The Scottish Government has not asked you to pre-empt the referendum vote in that way. Indeed, I was clear in my speech at Strathclyde University on 3 December that ‘independence negotiations [... ] will follow a yes vote’”.
There are a number of reasons for this. Many people in your Lordships’ House are involved in business, and I do not know how many of them would go into a negotiation showing their negotiating hand and their red lines. Perhaps more fundamentally than that, I belong to a Government who represent the whole of the United Kingdom. If we were to have that kind of pre-negotiation, I suspect it would not be possible for my right honourable friend the Chief Secretary to be part of it because, in the event of independence, he would have a different standpoint. He is a Scot. You would then have part of the United Kingdom Government perhaps debating against another part. My noble friend Lord Caithness might expect me, as someone who is resident in Orkney, to have an interest in that too, and I might not be able to take part either. I cannot think of anything that would better suit the argument of those who want to break up the United Kingdom than that those who want to maintain the United Kingdom spend the next 15 months arguing with each other about what the negotiating position would be. This Government believe in a United Kingdom. If there are negotiations post a referendum, someone will need to represent the interests of England, Wales and Northern Ireland, but that cannot happen before the referendum. We believe in the integrity of the United Kingdom, and once you start unstitching the threads of the United Kingdom by that kind of approach, I fear that we would be in a very difficult position indeed.
When my noble friend Lord Forsyth was quoting the First Minister quoting Robert Burns, I sent a note to the Box asking for the words of a poem that starts:
“Does Haughty Gaul Invasion Threat”.
The Box came back with the verse:
“Be Britain still to Britain true,
Amang ourselves united;
For never but by British hands
Maun British wrangs be righted!”.
I got the words from the Box, but my noble friend quoted the poem by himself. There is so much truth in it. If we want to put out a very clear position, there is a way in which people in Scotland can have the same currency as people in the rest of the United Kingdom, the same financial regulations, the same passports, the Bank of England as lender of last resort, the same welfare provisions and the BBC. It is called the United Kingdom, and I hope people will vote for the United Kingdom on 18 September next year.