The Economic Implications for the United Kingdom of Scottish Independence

Lord Shipley Excerpts

Wednesday 26th June 2013 Lords Chamber

[Lord Shipley]

My Lords, I have spent much of my life as a firm advocate of increased devolution in the United Kingdom. I would have voted for a Scottish Parliament had I lived north of the border. I have watched with enthusiasm the devolutionary trend in Wales, Northern Ireland, Scotland and London, and now increasingly in England, through local enterprise partnerships and the single local growth fund announced today. This will require local authorities to work more closely together in much more strategic ways.

The debate today is about the extent of devolution and what responsibilities should follow from it. In recent years, the Calman report has made a number of important observations and recommendations about Scotland. In the north-east of England we had a referendum on whether to have a regional assembly, which would have introduced an elected regional dimension of a kind similar to Wales. As we know, in that referendum an assembly was rejected, but other solutions for joint working have had to be found. Coming from the north-east of England, I feel a very close association with Scotland. There is a lot of close working between Scottish and north-east institutions, which I want to see enhanced rather than being made more difficult.

The report of the Economic Affairs Committee on the economic implications for the UK of Scottish independence is therefore timely and important. As we have heard, it is the outcome of a lot of work. I, too, pay tribute to our chair, the noble Lord, Lord MacGregor of Pulham Market, for his leadership of our committee over many months. We concluded that the implications of Scottish independence are too important to be left unexplained, either for those in Scotland with a vote in the referendum, or those elsewhere in the UK with an interest in the outcome of that vote.

The title of our report is important. It addresses the economic implications because this can never be just a political debate, which takes me to the referendum. Like others, I have not understood why the referendum due next year will be a vote in principle. In the case of a yes vote, negotiation after that decision in principle will be undertaken in a very limited period of time, which is clearly too short. This does not seem to me to be the right way to run a referendum. As our report states:

“Voters in Scotland deserve the best evidence-based assessment of the likely economic consequences of independence”.

Because independence would have consequences for the whole of the UK, everyone living in the UK needs to understand what the economic consequences may be for them. It follows that voters who will make the decision in Scotland should not be expected to do so without a full explanation of the matters they should consider before casting their vote. For example, Scotland and the rest of the United Kingdom have benefitted from a single market which enables free trade and investment. Differences in currency, regulation and levels of taxation could all have a significant impact on both the United Kingdom and Scotland. Voters need clear information.

Paragraph 20 of our report makes the point that:

“The United Kingdom single market has helped the Scottish financial services sector to grow”.

However, as we point out, on its own the Scottish economy is dwarfed by the balance sheets of Scottish banks, with the total assets of RBS and HBOS being over 15 times Scottish GDP. The Chief Secretary to the Treasury and the right honourable Alistair Darling were correct to remind us that UK government support for RBS amounted to more than 200% of Scotland’s GDP. As the Chief Secretary to the Treasury said in his reply to the Committee's report, if Scotland were to separate from the UK, this integrated domestic market would split into two separate markets, subject to separate legal and regulatory regimes. This could create additional difficulties for financial services firms and increase costs for households and businesses in areas such as pensions, ISAs and insurance. It could also mean that consumers living in different parts of the UK were offered different standards of protection when purchasing financial services. I am not sure that all these matters have been fully understood by consumers both sides of the border and they need to be so.

I shall not say much about defence or currency—the issues have been well explained in our report. However, on defence, I was interested in the report of the Scotland Institute, published on Monday this week, which said that independence would result in a “wholesale dismantling” of Scotland’s defence industry and that the process of separation from the UK would be “a monumental task”, with the consequences “deleterious” in which Scotland would have a defence force which,

“hardly constitutes an armed force in any meaningful sense”.

That report should be taken note of.

Public spending per head in Scotland is higher than in the UK overall. It is not clear why it should be, although one understandable factor is geographical size—and then, of course, there is the Barnett formula. In 2011-12, spending in Scotland was 11% higher than in the UK overall. If Scotland became independent, that level of public spending as a share of the UK’s budget would not continue. As we have heard, oil revenues might make up the difference, but they could be uncertain and would fluctuate. The best estimates are that the Scottish sector would receive net tax revenues from oil production of between £5 billion and £10 billion a year. The difference in revenue between years could of course be substantial. If the division of the physical assets was on a geographical basis, 90% of oil reserves would be in Scotland and, broadly speaking, the tax gain would make up the loss of the Barnett formula, although people would need to be clear—again, as we have heard—about the consequences of decommissioning costs. Overall, it would seem that in the past five years the average annual tax revenue from oil and gas has been just over £9 billion, but that is one-fifth of onshore tax revenues for Scotland but less than 2% of the UK’s onshore tax revenues overall. I think that there would be a serious overdependency on oil if Scotland became independent.

The committee concluded that that a division of financial assets and liabilities should be on a population basis, but that the process would be complicated. We emphasise in paragraph 91 that the Scottish Government should explain to voters before the referendum exactly how they would plan to take over their share of public sector debt and liabilities.

Then there is Scotland’s credit rating. It will almost certainly have to pay a premium on its debt because of its small size. It is important that the Scottish Government should be clear to voters what level of debt Scotland will carry and how that debt will be serviced.

On tax revenues, the Institute of Chartered Accountants of Scotland reminded us that there are no official statistics for tax raised in Scotland; in other words, we do not know what the gap is between tax revenue raised and the spending of block grant. It seems pretty fundamental to the referendum that people should understand the current tax yield for Scotland. I understand that Oxford Economics has done an exercise which has shown that there could be a fiscal deficit even if we counted all oil and gas as Scottish, which is unlikely to be the case. Official statistics are needed nevertheless, otherwise how do Scottish voters make an informed decision? We should note that the Institute of Chartered Accountants of Scotland also said that to design a new tax system for Scotland could take a decade.

There is a whole set of assumptions about how independence would be progressed in the event of a yes vote, but the issues are not as straightforward as some would wish them to be: on currency, on credit rating, on tax, on assets and liabilities, on loss of the Barnett formula, on oil and gas reserves, on EU membership, on pensions, on regulation and on defence. All need to be clearer before people are asked to make an irrevocable decision. The Chief Secretary to the Treasury, in his reply to the report, agreed that:

“It is crucial that the referendum debate is properly informed”.

As we have heard, papers are now being published and we should welcome that.

However, we also need to identify the cost of independence—of the process and the need to create a separate system of government. The issue cannot simply be: “Should Scotland be independent?”. Rather, it is whether Scotland—or any other part of the United Kingdom for that matter—can be independent in economic as well as political terms. Our report shows that Scotland would face similar constraints to now should it become independent. Indeed, it shows that those constraints may well prove to be even greater than they are now.