The Economic Implications for the United Kingdom of Scottish Independence

Debate between Lord Kerr of Kinlochard and Lord McFall of Alcluith

Wednesday 26th June 2013 Lords Chamber

[Lord McFall of Alcluith]

My Lords, it is a pleasure to follow the noble Lord, Lord MacGregor, in this debate. I am open to intervention if need be on that issue. I thank him for his chairmanship. Allied to the question asked by the noble Lord, Lord Steel, the committee deliberately visited both Edinburgh and Glasgow, and spoke to the leaders of every party, including the former Chancellor, to the leader of Glasgow City Council and to business people. The only person missing was the First Minister. He would not come along to engage in the debate. That was an omission from the Scottish Government on this very important issue.

The debate in Scotland will centre around two themes: identity and economics. On the issue of identity, there is an assumption that if one feels intensely Scottish one will vote for independence. The paradox is that the debate in Scotland will not be about how Scottish one feels but how British the people of Scotland still regard themselves. That is according to the Scottish Social Attitudes survey. So it is about the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the United Kingdom. That will be central to the choice that is made. It is important that we highlight that in the debate in this Chamber today. It will come down to whether Scots feel that they can assert their Scottishness by parting with the unionist part of their soul.

Michael Ignatieff, the UK journalist and leader of the Liberal Party in Canada, has a number of cautionary words for us in that area, because he took part in a referendum in Quebec. He said:

“We learnt the strongest argument for leaving countries as they are turns out to be that most people don’t want to choose between different parts of their identity”.

He added that post-referendum in Canada,

“Canadians were able to joke that what Quebeckers really wanted was an independent Quebec inside a united Canada. I suspect a majority of Scots want something similar”.

I was interested to see the Early Day Motion put down in the House of Commons on Dundee’s bid to become the UK City of Culture in 2017. It stated:

“That this House welcomes the decision of Dundee City Council to bid to become UK City of Culture in 2017… and wishes the city of Dundee every success in its bid to become UK City of Culture in 2017”.

It was signed by two prominent SNP Members of the House of Commons. Maybe there was an element of identity confusion there, along with the rest of the Scots.

The conclusion on identity is that both sides need to engage. If this is about a sense of Britishness, we cannot stand back; there has to be full engagement. The letter to which the noble Lord referred was from the Chief Secretary to the Treasury on 10 June. I commend every noble Lord to read paragraph 9 of that letter, because more pressure needs to be put on the British Government. Otherwise they will seem to be complacent, since the evidence shows that we must demonstrate that sense of Britishness.

What has characterised the debate in Scotland and elsewhere to date is the lack of good information. That is why it was wise of the Economic Affairs Committee, under the chairmanship of the noble Lord, Lord MacGregor, to start this debate. At the beginning, there was a sparsity of information, indeed a reluctance to talk, on the part of business. Rupert Soames, the chief executive of Aggreko, which was based in my former constituency and started life as a very small company—a two-man business—and is now a FTSE 100 company, built his new headquarters in Dumbarton. It was the last thing he did before I stood down from the House of Commons. He told the committee that if business opens its mouth, “bile and ire” rains down on people, the language is intemperate and business people feel that there are better things to do than be hauled over the coals.

The situation is now changing, and one thing that we have to remember is that the tone of the debate will matter greatly. Michael Ignatieff said that the referendum in Quebec produced fracture and division. We want to minimise that, because we have to live with each other after this referendum. That tone is still very important, but the uncertainty remains and I am glad to see that the CBI, the Scottish Council for Development and Industry and universities have been participating in this debate in asking the question.

Along with lots of others, I have no doubt that if Scotland decides to become a politically independent nation, it can do that, but the crucial question is how much economic independence Scotland will achieve. Jim Sillars, a former leader of the SNP, says, “Not very much”. That is why he rejects the proposals by the present SNP Government. Professor Gavin McCrone, a most esteemed economist for the Scottish Government over the years, has said that currency choice is the most important economic decision that Scotland will make.

Over the past 25 years, the Scottish National Party has adopted the stance of supporting an independent Scottish pound, then the euro and now the pound sterling, but the First Minister is on record as saying that the pound is a millstone around the Scottish neck. That is a most inauspicious start to a monetary union between Scotland and the rest of the United Kingdom. If we go ahead with this, it will raise the most complex problems of cross-border monetary policy, taxpayer exposure and multiple financial regulators. We have only to remember the crisis in the financial services in Scotland in 2009, when both our major banks, RBS and the Bank of Scotland, were bailed out to the tune of 211% of the GDP of Scotland. That is the extent of the issue if problems arise as a result.

Any monetary union can come about only on terms agreed by the UK Government. The question then will be: who will provide the lender of last resort facilities to an independent country if there is little control over the tax and spending risk to which the larger entity is exposed? The committee put it in very straight language—language with which I agreed—when we said that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

We have to go back to square one in how we approach monetary union. It is for the Scottish Government to come up with proposals, vague as they are at the moment.

Another area that affects us is the issue of the single market in both domestic and European terms. If the integrity of the domestic single market has to be maintained, a lot of thought must go into the relationship between manufacturing and the financial sector on both sides of the border. I mentioned Aggreko. The chairman of Aggreko said that for his FTSE 100 company, it would impose a permanent layer of additional complexity, with headquarters and manufacturing in Scotland and listing elsewhere. We received a lot of evidence from the financial services community, particularly in Edinburgh, on that point, because 96% of its financial products are sold elsewhere in the United Kingdom, with 4% being sold in Scotland.

The issue of the single market in Europe will also matter. I know that the noble Lord, Lord Kerr, has written extensively on the subject and made very wise comments on it. We have to assume that there will be a smooth entry, but there are big question marks over whether there will be. That smooth entry might provide some reassurance, but it will not provide much if the EU imposes tougher membership conditions relative to those of the rest of the United Kingdom in, say, financial regulation and employment law. The question that that sparks is: will that weaken Scottish competitiveness with the rest of the United Kingdom?

One could say that that being the case, the Scottish Government might soft-pedal the negotiations on EU entry to delay such problems, but that would be a mistake. It would also be a mistake for the British Government not to come out with further information, as we have required. Professor John Kay, in giving evidence, said that post the referendum, that will entail years of complex negotiations. We must face up to that. We should not minimise the complexity of the negotiations but start to understand what the issues and problems are.

Is there a climate of fear and uncertainty in Scotland today? Yes, there is an element of that. That was articulated by the leader of Glasgow City Council. It is for us to reduce that climate of fear and uncertainty and speak to one another in a civilised tone in this debate.

[Lord Kerr of Kinlochard]

I thank the noble Lord warmly for his reference to me. On the EU angle, does he agree that if an independent Scotland applies for membership of the European Union, the one thing that it cannot possibly obtain as an applicant from outside is a rebate on its budget contribution? Does he agree that if/when an independent Scotland becomes a full member of the European Union, all Scots will pay more into the budget than all English people?

[Lord McFall of Alcluith]

Absolutely. Mention has been made of the letter that President Barroso sent to the committee on 10 December 2012. I will quote two parts of that. First:

“If part of the territory of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory”.

This means a renegotiation of all these treaties. The letter continued:

“In other words, a new independent state would, by the fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory”.

The notion of a rebate, on that point, is really out the window.

Secondly, speaking of Article 49, President Barroso went on to say:

“If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state”.

I ask noble Lords whether we will have unanimity on a rebate for an independent Scotland. That notion not only vanishes; it is non-existent. I agree with the noble Lord on that.

In my peroration I said that one of the chief executives said of the debate that nothing dispels a climate of fear and uncertainty better than the sunshine of information. I thank the noble Lord, Lord MacGregor, for providing that ray of sunshine in this debate on the economic implications of Scottish independence.