Scottish Separation

William Bain Excerpts

Tuesday 10th July 2012 Westminster Hall

[Graeme Morrice]

I certainly agree that Scotland is capable of sustaining a renewable energy industry, but we will do better together within the United Kingdom.

I now want to move on to the share of the UK public debt burden that should be assumed by a separate Scotland. That a breakaway Scotland would have to shoulder some of the UK’s public debt is beyond question. What is certainly open to debate, however, is how the debt to be assumed should be calculated and what factors would contribute to those calculations, including the share of the debt accrued through the bank bail-out. Members are aware of a number of recent studies to have explored this critical question.

February’s National Institute of Economic and Social Research report on the economy of a separate Scotland explored the difference between apportioning debt per capita or pro rata, concluding that there is only marginal difference between the two. The report stated:

“With a pro rata transfer of existing UK public debt, Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK.”

The Institute of Economic Affairs report published just last month suggested that a separate Scotland could be saddled with an eye-watering £110 billion national debt. The report highlighted that, with the UK’s debt having recently topped £1 trillion and the expectation that it will rise even further by 2015, Scotland’s share could be even greater than £110 billion. The report’s author, Dr Richard Wellings, suggested that that high debt, which would be comparable to Portugal’s at present, coupled with decreasing oil revenues, as already referenced, would almost certainly require urgent cuts to public spending. Even calculating the public debt on the basis of population size, a proposal described as reasonable by a spokesperson for the First Minister, the report made Scotland’s share of the debt around £93 billion—still a significant burden for a small nation—and around three times greater that the Scottish Government’s current budget.

[Mr William Bain (Glasgow North East) (Lab)]

My hon. Friend is making a compelling argument for Scotland staying part of the United Kingdom. Does he think that it is unbelievable arrogance by those who want Scotland to leave the United Kingdom that they have not yet devised a debt target for a separate state? How on earth can the public be informed in a referendum if they deny people that information?

[Graeme Morrice]

My hon. Friend makes a valid point. The SNP’s argument seems to be predicated on contesting the robust figures provided by the experts in support of Scotland remaining part of the UK. Despite the differences in some of the figures that have been suggested, there is absolutely no doubt that, as the David Hume Institute report that was published in March indicated, the figures reached

“will be determined as much, if not more, by politics as by statistics”.

The undeniable point is that a separate Scotland would have to take on considerable and currently unknown public debt. Regardless of what the exact figure might be in the hypothetical scenario of a yes vote—clearly, we would not know that until negotiations on Scotland’s secession from the UK were complete—that debt, coupled with a relatively volatile tax revenue base, is likely to have a significant effect on future public expenditure, so why take the risk in the first place? Furthermore, a whole raft of additional costs that a separate Scotland would incur in setting up embassies, collecting taxes, creating new institutions to replace those broken up by separation and establishing a welfare system and armed forces, and so on, would add further to that uncertainly.

The currency to be adopted by a separate Scotland is arguably the question on which the SNP and those who advocate separation have undergone most contortions in recent times, and that is saying something. Until recently, most nationalists were strongly in favour of joining the euro, and lukewarm, at best, about the pound. As the influential SNP MEP Alyn Smith said at the party’s 2009 conference:

“We are a Nordic, European country, currently part of a debt-laden sub-prime toxic assent currency…we don’t want to be part of and which is not serving our interests well.”

At the same conference, the Scottish Government Finance Minister, John Swinney, declared that he was in favour of joining the euro, but that the final decision to join should be determined by a referendum. In January 2009, Alex Salmond said:

“I think there is a strong argument for the euro, and I think as sterling declines even further that argument is being made very strongly.”

Now, even they have realised that that is not such a sensible idea, and they have become converts to retaining sterling, although without bothering to have any discussion whatever with the UK Government. That is an astonishingly cavalier approach to such a vital question.

Between the SNP’s enthusiasm for the euro and its recent conversion to keeping the pound, it has debated options for introducing an entirely separate Scots currency. Veteran nationalist, Jim Sillars—a former key ally of Alex Salmond—even proposed last year that a separate Scotland should adopt a Scottish dollar, although I understand that no one from the Scottish Government has written to Barack Obama about it yet.

It is widely accepted that a separate Scottish currency would be a serious disadvantage to business. Although the commitment to a separate Scotland retaining sterling may sound more credible, as the recent article on the high price of separation in The Economist highlighted, it would be a monetary union without fiscal union, which has proved disastrous for the eurozone. It would, of course, be fraught with well documented problems, especially on fiscal responsibility and the lender of last resort, which were highlighted in the Library’s standard note on Scotland’s economy, which I referred to earlier.

Under formal monetary union with the UK, as has been widely highlighted, the Bank of England would continue to form monetary policy for both the remaining UK and the separate Scotland, so removing a key aspect of economic independence from the tools available to a Scotland operating outside the UK. Even if no formal monetary policy was agreed, the Library note states that

“in such a scenario, Scotland’s monetary policy would be determined by the Bank of England which would only be considering the interests of the rest of the UK.”

[Mr Bain]

My hon. Friend is being generous in giving way. Is the situation not even worse? The economic madness of separating fiscal and monetary policy would be detrimental to Scotland’s economy, and a democratic deficit would be created. As Members of Parliament, we can scrutinise what the Chancellor does on defining financial stability and regulating the banking sector. Which of Scotland’s parliamentarians would have democratic accountability in the proposals that Alex Salmond has come up with?

[Graeme Morrice]

None of them. That is clearly a problem, and a step backwards.

--- Later in debate ---

[Dr Whiteford]

The Minister makes an interesting point, and it is important to look at the performance of small nations in the vicinity of Scotland. My constituency in the north-east of Scotland is close to Norway, which I think has outperformed every country in Europe over the past three decades. We should also look at the impact of the recession and at how smaller countries such as Austria, Denmark and Sweden have been more resilient and managed to experience a less deep economic crisis. Even countries such as Iceland that went so far down during the economic crisis have bounced back with much greater dexterity than the UK economy—[Interruption.] The Minister is smiling, but he should be hanging his head in shame at the economic recession that this country is slowly trying to scramble out of. That is a shameful record for a country that has the potential to be prosperous.

[Mr Bain]

Will the hon. Lady give way?

[Dr Whiteford]

I will not give way to the hon. Gentleman just now, but I will later in the debate.

The other key issue connected to the economic languishing of Scotland is the inequality that we have allowed to develop, and the impact that that has had on our society. We live in a United Kingdom in which the top 10% of earners receive about 27% of the income, while the bottom 10% receive just 3%. To my mind, that is not a United Kingdom but a deeply divided kingdom that puts the UK in the top quartile of most unequal countries in the OECD. According to the Institute for Fiscal Studies, inequality has increased by around a third in Great Britain since 1979. In Scotland today, 780,000 people are living in relative poverty—15% of the population. That is way too high; it is causing real hardship and the long-term cost is immense.

[Mr Bain]

I agree with the hon. Lady about the scarring effect that poverty has on the people of Scotland. While on the issue of high pay, will she explain why last week in the Chamber her hon. Friend the Member for Dundee East (Stewart Hosie) was complaining about the potentially burdensome effect that proposals put forward by the Business Secretary could have on large companies in Scotland? It did not sound as if he was much of a friend to the workers.

[Dr Whiteford]

The Scottish Government have introduced a living wage for all public sector jobs for which they are responsible, and I welcome everybody who supports decent pay for working people. I did not hear my hon. Friend’s speech last week, so I cannot explain its context. I think, however, that we have to tackle inequality, and particularly women’s inequality in the workplace, which has been a long-standing problem in Scotland.

--- Later in debate ---

[Mr William Bain (Glasgow North East) (Lab)]

It is a pleasure to serve under your chairmanship once again, Mr Robertson. I congratulate my hon. Friend the Member for Livingston (Graeme Morrice) on securing this important and timely debate, coming as it does in the week when support for separating Scotland from the rest of the UK has fallen to as few as three in 10 people.

[Mr Weir]

rose—

[Mr Bain]

I will give way to the hon. Gentleman a little later; I want to make progress first.

I commend my hon. Friend the Member for Livingston and other hon. Members who have participated this morning in helping to ensure that the discussion on Scotland’s constitutional and economic future is informative and comprehensive, as we head towards what the Scottish people want—a clear, decisive, legal, single-question referendum on whether to stay within the United Kingdom or leave for good.

There are three points that the debate this morning has crystallised in the minds of hon. Members and those we represent. At a time of economic uncertainty in the eurozone, with economic demand predicted to fall this year and 16 million people out of work, it would be an act of folly to separate fiscal, monetary and financial policy in the way that Scottish National party members have proposed. Both the eurozone and our economies are faced with a classic liquidity trap. Keynes was very clear that fiscal, monetary and financial policy must not work against one another in such circumstances. We in the Opposition have huge concerns about how the Government are avoiding any flexibility on fiscal policy to stimulate demand and kick-start growth at home. It is a failure of policy, not a failure of the state of which we are an integral part.

The overwhelming evidence from respected economic commentators, such as Martin Wolf and John Kay in evidence to the Select Committee on Scottish Affairs, is clear and unambiguous: separation would lead to higher borrowing costs for a separate Scotland. Even under the SNP’s purported split of oil and gas revenues, with 90% being apportioned to a separate Scotland—not the universally accepted position under international law—the national debt inherited by a separate Scotland would be 70% of GDP.

On a per capita split of oil and gas revenues, debt would rise to 80% of GDP by 2014. On the deficit, even using the SNP’s preferred measure, including a geographical split of oil and gas revenues, the average deficit would have been 4% over the past five years. Three leading credit agencies have indicated that Scotland would not inherit the UK’s credit rating on separation, which would increase borrowing costs.

The First Minister says that, with the oil and gas revenues, Scotland would be the sixth richest country in the world, but to achieve that the great centraliser would have to become the great nationaliser, and there is no prospect of even the present First Minister expropriating the assets of overseas oil and gas companies to which he is in such thrall.

[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

Is my hon. Friend aware of what was said at the meeting of the UK oil and gas industry group a few days ago—that it is likely that the gas price, because the US is about to go into surplus in gas and the price is falling, may be set in the North sea area at a much lower level than now, which would undermine the revenues coming from the North sea to any future Government of the UK or Scotland?

[Mr Bain]

Indeed, that is a powerful point. This year’s report by the National Institute of Economic and Social Research concluded that Scotland would be a significantly indebted nation on separation, with a substantial trade deficit, no insurance from risk sharing and no further fiscal transfers, which would leave us over-dependent on those very fluctuating oil and gas revenues. The strain would have to be put on borrowing or tax hikes to fund current spending.

As the economist, Brian Ashcroft, pointed out recently, the only tools available to a separate Scotland to manage aggregate demand would be of the limited fiscal variety remaining under the terms of a currency union treaty with the United Kingdom; so if inflation took off, there would have to be tax rises, a fall in public spending, or a combination of the two—hardly a recipe for economic stability or social fairness.

Those campaigning for separation never tell us what the size or role of the state would be in a post-separation world. They are keen to promise voters everything from higher benefits and pensions to lower taxes, but never with any viable fiscal prospectus to underpin such aspirations. Their ambition is to have Irish levels of taxation, but Scandinavian-style public services. That is a cruel deception to sell to the electorate, and that fatal flaw in the argument has contributed to the fall in support for separation in recent months.

[Mr Weir]

Will the hon. Gentleman give way?

[Mr Bain]

I will make this point and then give way to the hon. Gentleman.

Without a central bank to print money and control the money supply, a separate Scotland would find itself with higher long-term borrowing rates and higher interest payments on Government debt, whether with the Bank of England as lender of last resort or even with a less structured relationship with sterling. Those problems with rising costs of borrowing would manifestly worsen if oil and gas revenues continued to fluctuate as predicted. Martin Wolf wrote in the Financial Times on 19 January about the higher borrowing costs that a separate Scotland would face:

“It would need to lower its debts quite rapidly. This would require even greater austerity than in the UK as a whole. Given its close ties to the rest of the UK, Scotland could not get away with taxing corporations or skilled people more heavily than its neighbour. So the bulk of this extra austerity would surely fall on public spending.”

The First Minister came to London a few months ago and, as my hon. Friend the Member for Glasgow North (Ann McKechin) said, boasted to the Institute of Directors that he would always align income tax rates in a separate Scotland with those of the United Kingdom. He now says that his key fiscal policy would be to cut corporation tax to 20%. However, the Institute for Fiscal Studies said in its green budget report this year that increasing corporate tax competition between the nations of the UK would increase business compliance costs and lead to a race to the bottom on tax rates and revenues collected. The Scottish Government’s own figures reveal that lowering corporation tax by just 1% results in a loss of revenue for the Scottish taxpayer of between £67 million and £83 million a year. So the First Minister is prepared to throw away up to £166 million of taxpayers’ money a year on a punt that Laffer curve economics works, when the evidence from the United States is that it fails every test of economic fairness.

Whatever happened to that young radical who interrupted a Tory Budget in 1988 to protest against the reduction in the top rate of tax by Lord Lawson? Whatever happened to his dream of a land of bountiful plenty with freedom from London rule? He wants London to regulate Scotland’s banks, insurance, mortgages and pensions, and to set Scotland’s interest rates—with no reference to the needs of our economy—and income tax rates. We are told that Scotland would have equality in the world, but that is instead a manifesto for complete economic instability.

With business investment slumping, the construction sector on its knees, infrastructure crumbling and our green jobs sector without the capital that it needs, how on earth can the First Minister believe that Scotland’s future lies in lining the pockets of the banks and big business, by promoting a fiscal climate that would encourage short-term profit taking instead of long-term investment? If he cannot identify crony capitalism as being as much a part of the problem in Scotland’s economy as it has been in the rest of the UK, no wonder he can never be part of the solution.

As my hon. Friend the Member for Livingston has said, having to join the euro would also damage Scotland’s economy. The evidence from most credible experts is clear: if Scotland were to be admitted to the EU as a new state, having left the United Kingdom, it would have to make an in-principle commitment to membership of the euro. That would mean compliance with the Maastricht convergence criteria, with further spending reductions to follow. The destination would be clear, and it would be bad for job creation and growth in Scotland.

At a time of uncertain economic prospects in the UK, we need strong fiscal and monetary union to support job creation and diversification of the Scottish economy. Scotland Office figures from January 2010 show that net fiscal transfers from the UK to Scotland over the two decades to 2008 were of the order of £75.8 billion, and, even factoring in every penny from oil and gas revenues, there was a net transfer of £30 billion over the same period.

We need a central bank that can fully support the Scottish economy, without ifs or buts. The best means of securing that is by maintaining the fiscal and monetary union that has been successful within the United Kingdom for three centuries. Some nationalists claim co-ownership of the Bank of England, even in the event of separation, and the Finance Secretary laughably even claimed to have the right to appoint a member to the Monetary Policy Committee, but that is the politics of denial. In quitting the United Kingdom’s fiscal and monetary union, Scotland would also abandon the unconditional guarantees provided to it by that financial system, including the Bank of England’s role in ensuring macro-economic stability for Scotland.

Paying another state to set interest rates and prop up part of the banking system, without a collective institution that could be held democratically accountable by Scotland’s elected representatives, would be the worst of all worlds. Scotland’s parliamentarians would not be able directly to scrutinise or influence the Chancellor’s decision on the fiscal mandate or the definition of financial stability under the Financial Services Bill, which is vital in the precise remit that the Financial Conduct Authority will have in relation to our financial system. We would lose the potential to influence the Chancellor’s decisions on income tax, even though the First Minister has said that he would always follow them. There would be no influence over major macro-economic issues such as the Bank of England’s inflation target, set by the Chancellor in consultation with the Governor.

Labour Members consider it clear that Scotland benefits from fiscal, welfare, monetary and financial union with the rest of the UK. When other countries across Europe are bringing down obstacles to co-operation, it would be absurd for us to erect new barriers at home. We would survive as a separate state, but our ambitions should be higher than that for the people of Scotland. If we are to thrive and prosper, strong devolution within the United Kingdom, while meeting the current huge economic challenges together, is the best solution. I hope that the Minister will reflect the message that we have heard this morning and increasingly from the Scottish people about their future: we are far weaker as separate states, and far better together.