Scottish Affairs Committee - Minutes of EvidenceHC 140-II

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Oral Evidence

Taken before the Scottish Affairs Committee

on Wednesday 4 September 2013

Members present:

Mr Ian Davidson (Chair)

Graeme Morrice

Pamela Nash

Mr Alan Reid

Lindsay Roy

________________

Examination of Witnesses

Witnesses: Rt Hon Dr Vince Cable MP, Secretary of State, Department for Business, Innovation and Skills, and Rt Hon David Mundell MP, Parliamentary Under-Secretary of State for Scotland, gave evidence.

Q3581Chair: Gentlemen, I welcome you to this meeting of the Scottish Affairs Select Committee. As you know, in the run-up to the referendum we are very keen to try and make sure that we help to provide as much clarity as possible to people in Scotland about the decision that is going to face them in the referendum choice. Therefore, we very much welcome the papers that this Government and the Scottish Government are producing, and we will review all of those as they appear.

David, you are a regular offender here. I see that you have brought a new assistant with you today. Maybe I could ask you to indicate who you are for the record and speak to the paper and then give an indication of its main findings. We are particularly keen in this session to have not simply a regurgitation of the paper but an indication from you of how you respond to the responses that have been made by others. We want to try and move the debate forward rather than simply covering what is in the paper. We are conscious that any questions you raise will have been described as an element of Project Fear, talking Scotland down and all the rest of it, but we want to move beyond that so that we can get some clarification on the genuine responses that there have been to the issues.

Vince Cable: Thank you for giving us an opportunity to speak to you. The paper for which I am responsible should best be seen as complementary to the paper you have had from the Treasury. A lot of the analysis overlaps. They have come up with their estimate of the cost to an individual Scottish family of having a separate country, but it derives from much of the work we have done on breaking up the single market within the UK.

My broad approach to this is simply to set out those areas which affect my Department and this is about the impact on business. We currently have an integrated single market within the UK, and, if you break up that market, clearly there are costs in establishing separate tax and regulatory regimes. There are very practical things. As a small business, if you are travelling backwards and forwards between England and Scotland, you fill up with petrol on both sides of the border at the moment and you have a common VAT regime. Under an independent country, you would have different VAT reclamation. These are very practical things that we have tried to identify. So there are the costs associated with the disruption of the single market within the UK. We have also described a lot of our common infrastructure, some of which I have ministerial responsibility for-the Post Office, Royal Mail and so on.

In addition, there are a lot of common UK regulations, everything from the minimum wage to insolvency law and the whole corporate governance framework, which is the wiring behind business. We all tend to take it for granted. If Scotland were independent, there is an issue about how much of this system would have to be duplicated under a separate system of regulation.

My basic argument is that, if Scotland were to opt for independence, there would be economic costs to business but, in a way, probably more importantly, a lot of uncertainty. We simply do not know how an independent Scotland would treat the regulatory framework that we currently have. Would they want to create something totally different? We do not know. Equally, we do not know how the rest of the UK would react to it. If you are in business, particularly in the aftermath of this big crisis, uncertainty and its effect on investment and jobs is a big weight hanging over us.

When I have been to Scotland and presented this paper, I have tried to do it in a dispassionate, rational way. I heard about Project Fear and tried to put things in a dispassionate and unemotional way, and I hope that in our discourse today that will be the way we will approach it.

Q3582Chair: If the Scottish Government gave a pledge that said, "Nothing will change," apart from begging the question of why they want separation, "and we will not make any changes or alterations to anything," is there any reason why things should not continue as they are?

Vince Cable: There are some things that would have to change. There would be different tax regimes, and in the course of events these are bound to evolve in different directions. Different countries would have a different approach to, say, VAT exemptions or whatever, so you would get some divergence even if you started out from a common standpoint. You would have different tax administration systems and reporting requirements. Under the European Union, if you are trading within the UK, you do not need to report to them that you are exporting from Scotland to England or Wales; you would do under an independent regime. Different systems of car insurance would emerge. I am quite sure that rational and reasonable people would start off saying, "Let’s change as little as possible," but in the course of time they would evolve.

The figure quoted to you this morning from the Treasury of the cost per household of £2,000 over a 30-year period comes from looking at what happens in countries that are very similar and naturally cooperative, like Germany and Austria, and how they evolve different systems such that the level of trade between them is much less than the amount of trade within their separate countries. We are not assuming that everybody goes berserk and does stupid things. We are assuming, as you do, that we are dealing with fairly rational people, but it is a perfectly legitimate point that, over time, it is likely that systems of tax and regulation would diverge. As I understand the Scottish Government, they have said they want a separate system of regulation anyway.

Q3583Chair: Can I clarify whether or not there have been any responses produced to the document that you consider have substantial merit and have raised issues that perhaps were not fully taken into account when the paper was drawn up?

Vince Cable: Nothing major. There were one or two very specific things. On the day of the report we were attacked-I suspect by people who had not read it-on the basis that we were making unreasonable claims about the problem of picking up roaming charges if you have a separate country. We were accused of not having fully understood the fact that the European Commission had indicated that they were going to get rid of these charges anyway. For clarification, the report anticipated the Commission’s proposals. There was nothing new and shocking. In any event, we simply do not know what the Commission will do. That was one area of controversy. The main criticisms I faced in Scotland when launching the report were that we were scaremongering, but what I and this report tried to do was to be dispassionate, fair and objective. I do not think you will find any emotional language in here at all.

Q3584Graeme Morrice: To an extent, in his introductory remarks the Secretary of State probably answered the question I was going to ask. The paper makes reference to the UK being a single domestic market, and you alluded to that at the beginning. I was going to ask you to go into the detail of that. Perhaps you could go into some detail about how Scotland links into that domestic market and the advantages to Scotland currently in being part of that UK single market.

Vince Cable: The fact that you have a single market makes it much easier to trade because you have a common system of regulation and all the costs of compliance with regulation are not duplicated. As a consequence, Scotland exports more to the rest of the UK, with all the jobs associated with that, than it does to the rest of the world. Indeed, the growth of trade within the last 10 years to England, Northern Ireland and Wales has been quite rapid. This is a practical effect of being part of that single market in which Scottish companies and exporters participate.

I would also argue that one of the reasons Scotland has done relatively well in attracting inward investment is the fact that firms that invest there know that they are investing not just in Scotland but they can sell their products throughout the United Kingdom freely and, of course, within the European Union, but there are more barriers there than within the UK. Essentially, it is a good framework for exporting to other parts of the UK and attracting inward investment.

Q3585Graeme Morrice: On the point of attracting inward investment to Scotland because it is part of the single market that is the UK, have any concerns been expressed to you personally or others in your Department by companies about the prospects of separation and the impact it would have on their business either because they are located in Scotland or they trade with Scotland?

Vince Cable: Yes, they have. Whenever I go to Scotland, which I do quite frequently, I take time to meet chambers of commerce and bodies like the CBI and other organisations representing big and small business. Concern is expressed. At this stage of the argument business people are not rushing out of the trenches to engage in verbal warfare, but they are apprehensive. In the first instance they want to hear all the arguments, but there is little doubt that it adds to their uncertainty and potentially their costs. Certainly, I have been encouraged to believe that the kinds of arguments we have been setting out at a UK level are broadly accepted-as we know, there is a wide variety of views in Scotland-within the business community.

Q3586Graeme Morrice: Obviously, Scotland and the UK are part of a bigger single market, and that is the European Union. How would you assess the views out there in relation to an independent Scotland not being part of that bigger single union that is the European Union, on the basis of the assumption that an independent Scotland would not be part of the EU? It could apply to rejoin, but it would not automatically remain a member. As I understand it, the rest of the UK would remain a member of the EU.

Vince Cable: There are two points. One is the uncertainty, and I think you have captured it in your question. The Scottish Government, as I understand it, make it very clear that they would like to remain within the European Union and the single market. I am sure they are quite genuine about that, but we do not know because the arrangements would have to be negotiated from scratch. The other point is that, although there is a single market in Europe and within Britain, the latter is much deeper. You can see this from the trade between Northern Ireland and the Republic of Ireland. Northern Ireland exports considerably more to England, Wales and Scotland than it does in its trade with southern Ireland. The movement of people from Northern Ireland into the rest of the UK is at much higher levels than across the border with the south. Although there is a single market between Northern Ireland and southern Ireland, it does not have the same significance as their involvement in the rest of the UK.

Q3587Graeme Morrice: I have a final question and maybe I could ask the Under-Secretary of State also for his views on this issue. Like me, have you been approached by foreign firms currently located in Scotland concerned about an independent Scotland not remaining part of the European Union?

Vince Cable: When I am in Scotland I tend to meet business groups and individual companies, many of which ultimately have foreign ownership. As you know, we have a high level of foreign ownership of business in the UK. In the course of discussion some uncertainty emerges. Nobody is getting angry and panicky about it, but it is an underlying uncertainty that people worry about, in much the same way that foreign investors in the UK worry about our future relations with the European Union. These just add to uncertainty in a world that is already uncertain and there are also economic difficulties.

David Mundell: More and more businesses and individuals are beginning to address these issues as we are getting closer to the referendum. An important part of what the Scotland analysis papers are about is to set out issues that people might wish to address in terms of coming to their decision or coming to a view as to how it would impact on their own business. The first paper we issued, on which I and the Secretary of State for Scotland came before the Committee, set out the legal status of Scotland and the issues around EU membership and brought that issue to a head. We had been previously told by the Scottish Government-in particular the Deputy First Minister-that Scotland’s membership of the EU would be automatic and there would be no change, and over a period of time, when presented with these important facts and engagement with the EU, it has become clear that Scotland’s membership of the EU is not automatic. Even the First Minister has had to concede that.

We have also found that, particularly in relation to the EU, many businesses were disconcerted by the fact that the First Minister stated on television that there was legal advice on this issue, and it subsequently unfolded that there was no such advice. For the business community and wider public, that is very disconcerting and adds to uncertainty.

Q3588Mr Reid: Secretary of State, you referred earlier to different taxation regimes and how that would be complicated for business. The Scottish Government have said that if Scotland was independent they would slash corporation tax in Scotland. Would businesses not benefit from that if they were trading on both sides of the border and arranging to make all their profits in Scotland for tax purposes?

Vince Cable: Superficially, they would, until you address the question: where does the revenue come from to replace the revenue that you got from corporation tax? Other things being equal, they would either have to cut spending or raise some other tax. It is certainly true that the UK Government are trying to reduce corporation tax to 20% year by year, so the aspiration of having lower corporation tax is well understood. The feature of the corporation tax regime that I do not pick up in the Scottish debate is that its key attractions are things like the R and D tax credit and the patent box. It is not clear how an independent Scottish
Government offering more generous corporation tax would afford those specific concessions within the corporation tax regime.

Q3589Mr Reid: If Scotland and the rest of the UK were separate tax jurisdictions, do you see a problem that both Scotland and the rest of the UK would lose tax revenue from businesses by them taking advantage of the border to arrange their affairs in such a way as to minimise the tax they would pay?

Vince Cable: There is always the issue of tax arbitrage. This is an issue between the two halves of Ireland, and it would apply in Scotland too. In principle, having a degree of devolution of taxation is something you and I believe in, but, if you go the whole hog and have a fully independent system with different tax regimes, you open up those problems on a much bigger scale.

Q3590Mr Reid: You referred earlier to Austria. Austria seems to be an economically successful country. There are other small countries in Europe that are successful. Why could Scotland not be equally successful with a small domestic market?

Vince Cable: Small countries often are economically successful. There is no reason why a well-run Scotland should not do relatively well. The argument we make here is that there are additional advantages to being part of the UK and there would be real costs in departing from the UK, but clearly it would depend on future Scottish Governments and how they behave. Some small countries have been a complete and utter disaster. Iceland, which I think Mr Salmond was admiring at one stage, collapsed in a terrible heap; others like Finland are great role models, but we do not know in what direction they would go.

Q3591Lindsay Roy: Can you highlight some of the advantages of remaining within the UK that you mentioned?

Vince Cable: We are talking here about business rather than the general political arguments. There is the advantage of having a common system of law and regulation and making it easier for business to operate. There is freedom of movement. The movement of people, as we know, over generations has been on a very large scale. Something of the order of 90,000 to 95,000 people a year move freely between England and Scotland. That becomes much more difficult when you have border limitations. There is all the freedom of trade that I have described earlier, and there are all the advantages of having a common infrastructure around transport systems and distribution. These are all positives.

Lindsay Roy: That is very helpful.

Q3592Chair: Pursuing that point, would it be fair to say that the question of the continuity of the single domestic market is not one of the strongest arguments for retaining the union? Upon reflection or on balance I am possibly inclined towards retaining the union, but this is not one of the arguments that is necessarily going to make a major decision. It seems to me that essentially you are saying that, if things are kept pretty much the same and change is made incrementally over a period, it could be absorbed by the system. If we are dealing with responsible people, when they do get independence, in order to keep things the same, this is not really an area that will cause a tremendous amount of difficulty, and it could easily be absorbed and any difference will be marginal.

Vince Cable: I think that is minimising it. There would be significant costs of disruption, and there is all the uncertainty. We do not know whether people on both sides of the border would be reasonable subsequent to any separation. We do not know how far their regulatory systems would diverge, so that is the source of uncertainty. I understand your question. The really big issues are whether you have a separate currency, how you deal with the oil, the underlying politics, and the emotions around national identity. Those are the things that get people going of course. For business, there are very real practical issues here that are highly relevant.

David Mundell: On that point, this is the fourth in a series of papers, of which there will be more to come, seeking to cover a whole range of issues. The Government have never set forward that one particular paper or matter within the paper was to be the definitive issue. For example, with reference to mobile roaming charges, no one-certainly not the UK Government-has ever suggested that people would vote in the independence referendum and breakup of Britain on the basis of how much their mobile phone bill would be. It was simply pointing out one of a whole range of issues that will be impacted upon should Scotland vote for independence.

Q3593Chair: There is one point on which I am still slightly unclear. If the policies are kept in line and there will be, however, some inevitable disruption but it will be marginal and so on, I am not entirely clear what the logic is for assuming that trade between Scotland and the rest of the UK will be less than would otherwise be the case. Surely, as you discussed, the differences in some of these things will be administrative but essentially marginal. Scotland will not have another major market available to it and surely will have no choice but to continue to seek to sell into England, Wales and Northern Ireland. Therefore, things will behave pretty much as they did before and, essentially, if the SNP give a pledge that nothing will change in this area, we should not really spend any more time discussing it.

Vince Cable: The pledge would have to be delivered and reciprocated. We would hope that both those things were true, but they might not be. I understand where you are driving. We are not forecasting Armageddon; this is clearly not what happens. As David said, we are dealing with one aspect of a much bigger argument about the merits of the union. All you have to do is look at the experience of different regions within a country, as opposed to different countries. Even if those countries are very friendly and get on well-Germany and Austria, Norway and Sweden, which were once part of the same country, or Canada and the United States-once countries develop their own jurisdictions they start to diverge. Even if there is goodwill, you get divergence and different systems. Trade and freedom of movement become more difficult and it is a gradual process, even if, as you said in your introduction, people are perfectly reasonable and make pledges. You do drift apart.

Q3594Chair: I think we could possibly put out a press release at the end of today saying that Armageddon was not predicted at this particular meeting and that will relieve some people.

Vince Cable: No, that is right.

David Mundell: Just to be clear on that, Armageddon has not been predicted at all in any of the papers, and the UK Government have never said, and will not say, that Scotland could not function as an independent country. Of course it could. The issue to which our papers relate is whether it would be better. The key point we seek to make is that it would be better for Scotland to remain part of the United Kingdom.

Q3595Pamela Nash: Secretary of State, the report refers to 95,000 people within the UK moving either in or out of Scotland over the last 10 years annually. We have increasing numbers of Irish people and people from all over the EU coming here to work, as we see in the Daily Mail every day. Why do you think the mobility and flexibility of the Scottish labour market would be reduced by separation?

Vince Cable: At the moment we are part of the same country. There is no uncertainty around future border restrictions, and there are not currently within the European Union. As you know from what is going on in British politics, there is constant argument about whether people from other European Union countries should be allowed access to benefits and other things associated with the freedom of movement. Within the UK there is no uncertainty whatever. You are part of the same country and you move freely backwards and forwards. It is quite a balanced relationship. I do not have the exact figures, but there are roughly equal numbers of Scots and other UK people moving backwards and forwards across the Scottish border, and there is not a big difference between the number of people from the UK who are long-term resident in Scotland and Scots resident in the UK. It is a balanced labour market that benefits both sides.

Q3596Pamela Nash: For a business layperson like me, can you explain a bit more about the benefits to business and employment opportunities in Scotland of retaining the flexibility of the labour market that we have at the moment?

Vince Cable: It is often said-a great many studies have tended to confirm this-that the UK has one of the most flexible labour markets in the world, probably after the US and maybe Canada, and that accounts for the fact that, even after this horrible crisis, we have relatively low unemployment by international standards. That is a product of the way we do things here. As the Chairman has said on several occasions, we do not know how an independent Scottish Government would change things. They may choose not to change anything, but, as it stands at the moment, we have a lot of flexibility within the different parts of the UK and across the border, and it is a considerable asset to our economy.

Q3597Pamela Nash: Some may argue that the flexibility of the work force might not be better for workers whilst better for business. Is there not a possibility that, if that flexibility and mobility decreased, there would be more protection and stability for workers in Scotland?

Vince Cable: Obviously, we have to strike a balance between complete freedom within the labour market and labour protection. I have always recognised that, and I am certainly not in favour of a hire-and-fire culture. We have had political battles over that. My Department is currently looking, for example, at the whole issue of zero-hours contracts because there are potential abuses in that area, but at the moment I do not sense any great divergence between the way these issues are dealt with within Scotland and England. It is a generally flexible and sensible system; it helps trade, and it is good for inward investment to all parts of the UK. Why would we want to change that?

Q3598Chair: Leaving aside the question of migration from outside the EU, within the EU there is free movement for everybody except Romanians and Bulgarians until 1 January. If Scotland and the UK remain within the European Union, there will be no change to the pattern of free movement as a result of any decision on independence. Is this not another issue where there will be no difference as a result of separation?

Vince Cable: I would hope so, but you cannot completely assume it. Let’s raise a possibility. Suppose an independent Scottish Government decided to have an approach to immigration different from that of the current UK Government. They may well decide, because the demography of Scotland is different, to have a much freer approach to migration that diverges from what the rest of the UK wants. You would then have to have border checks within the former UK in order to prevent the rest of the UK’s immigration rules being undermined. You can see how an unintended consequence of an independent system leads to restrictions on movement within the UK. It would be an inevitable consequence.

Q3599Chair: I do understand that. That was why I prefaced my remarks by leaving aside the question of movement external to the EU. We are going to have papers on immigration and nationality at a later stage. Rather than getting into that just now and leaving aside external migration, surely there will be no difference as a result of Scotland becoming separate on internal migration, unless conscious decisions are taken either by the UK or by Scotland.

Vince Cable: I think your last word "unless" is absolutely crucial. If everything was left otherwise unchanged, there is no reason to assume that there would be any disruption within the UK.

Q3600Chair: It is reasonable for us to expect the Scottish Government, and similarly the UK Government, to clarify their view on these matters before any decision is taken.

Vince Cable: Exactly.

David Mundell: On a factual basis, if we take the comparator of Northern Ireland and the Republic of Ireland, in the year ending April 2012, 1,566 people moved from Northern Ireland to the Republic of Ireland, whereas the latest available figures (year ending 2011) show 11,121 people moved from Northern Ireland to the rest of the United Kingdom. If people did not have those statistics, they might not have thought there would be such a significant divergence in the sense of people moving within Ireland and between Northern Ireland and the rest of the United Kingdom.

Q3601Chair: Surely, that is partly explained by the fact that London and the south-east of England economically are Nirvana compared with the condition of the Republic of Ireland. Leaving aside the "arc of prosperity" for a moment, people are migrating where they think the jobs are. Therefore, the link within the UK is simply people seeking employment and going to areas where there are job opportunities, rather than because of being within the one nation state.

David Mundell: As Dr Cable and the report set out, there is a lot of evidence to suggest that people are much more inclined and willing to make that move if it is within the one nation state. As we have alluded to, we have economic migration within Europe and elsewhere, but the underlying statistical basis set out in the report citing the examples of Austria and Germany and the United States and Canada suggests that people are more likely to move within a unitary state.

Q3602Lindsay Roy: We had an excellent presentation yesterday by Scottish universities about their international standing and success. What are the UK programmes that encourage business and universities to work together, and what effect have they had on jobs and growth in Scotland?

Vince Cable: The current arrangements as regards research and research funding work extremely well. Both Scotland and the rest of the UK benefit from a high level of Scottish research. The funding arrangements at the moment are that, on a per capita basis, Scotland would probably get about 8.4% of research funding through research councils. They currently get about 13%, which obviously reflects their quality, but it is one advantage that Scotland gets from being part of a common research community. Professor Diamond made the comment that, were Scotland to be independent, naturally they would wish to continue to be part of that research community. As with so many of the other questions, we hope common sense would prevail and that would obtain, but we do not know. As it is at the moment, Scotland does benefit disproportionately but fairly-it is not a complaint-from research allocations.

Q3603Lindsay Roy: Proportionately, it is significantly higher.

Vince Cable: It is a significantly higher percentage, and that is a reflection of their quality; it is not a criticism.

Q3604Lindsay Roy: That relates to jobs and growth in Scotland.

Vince Cable: Yes, obviously. There is some very interesting work by a guy called Andrew Witty, CEO of GlaxoSmithKline and lead non-executive director of our departmental board, which has looked at the impact of universities on research. It has established that a lot of the research that goes on in universities now feeds through directly into growth. To take one or two examples, in Glasgow, two of the so-called catapults established through my Department and the Technology Strategy Board-one relating to renewable energy technologies, which is now well established, and the other on advanced manufacturing, both at Strathclyde university-are part of a UK network of research that is linked directly to innovation and business in Scotland.

Q3605Lindsay Roy: You also mention in your paper intellectual property and intellectual rights. What significance does that have in the debate about separation?

Vince Cable: As economies become more developed, as an advanced country, we get an increasing amount of our wealth from intellectual property, whether it is patents, copyrights, trade marks and so on. An increasing amount of the value of companies is in the form of these intangibles-intellectual property. Having a good intellectual property regime is a key part of our success as a country. The advantage that Scotland has from being part of a unified system is that we can enforce these rules across the UK. For example, in terms of dealing with piracy, which undermines copyright, it is easier to police these things in a bigger nation state than as separate states.

Lindsay Roy: That is very helpful.

Q3606Chair: Can I come back to the question of research grants? I can understand why Professor Diamond would want to have research grants by the UK funding research in Scotland. It is not quite as obvious why British taxpayers after separation would want to fund research in Scotland, because presumably the lobby in England, Wales and Northern Ireland would be to have research money spent in their own areas.

Vince Cable: Yes, it would. I was assuming in my answer that English, Welsh and Northern Irish researchers were broad-minded people, who were happy to support good academic quality wherever it was, but you are right that, if people became parochial and said they wanted their money spent here, that issue would be raised.

Q3607Lindsay Roy: In other words, vested interests might prevail.

Vince Cable: They might. I like to share Professor Diamond’s optimism, but we don’t know, do we?

Q3608Chair: That sounds to me a bit like my policy on cake, which is to have it and eat it.

Vince Cable: Well, exactly.

Q3609Chair: How much money do the research councils spend in the Republic of Ireland, France or Germany?

Vince Cable: Very little.

Q3610Chair: But they do actually spend some money in those countries, do they?

Vince Cable: You are completely logical, and I was trying not to be provocative and drawn into saying that English and Welsh academics would simply cut off Scottish research funding, because I think academics are generally a bit more broad-minded than that, but, if one were being brutally frank about self-interest, that is what would happen.

Q3611Chair: That is what separation is all about, is it not? It is about being brutally honest about itself, and that is why it is being promoted.

Vince Cable: It is from the Scottish end, yes.

Q3612Chair: That is right. Presumably, the money given by the UK Government to academics is not without any strings whatsoever. They are not free, are they, to spend it in the United States, Japan, Russia, China or anywhere else in the world, depending on what takes their interest? Is there not at least an expectation that they are going to spend it to encourage intellectual development within the United Kingdom?

Vince Cable: It is not narrowly tied. We give money to the research councils and the Technology Strategy Board, and they use their professional judgment. I do not interfere and attach political conditions to it, but it is naturally the case that they are going to invest in their own research teams, though in some cases they spread their money among international collaborations.

Q3613Chair: International collaborations are not quite the same thing-

Vince Cable: -as giving the money away; I know.

Q3614Chair: That is right. Can you clarify for us at some stage, maybe in a written note, how much of the research councils’ money is sent furth of the United Kingdom to be spent in other universities, leaving aside the question of putting money into a pool that is a joint collaboration? I ask that because, when we were investigating defence procurement, we went to see SELEX Galileo in Edinburgh, who were very much dependent upon university council funding for the cooperation that they had with Manchester and, if I remember correctly, Heriot-Watt. They expressed doubts about whether or not that would continue in the event of separation, because obviously it would have additional influence upon any decision they might make to relocate.

Vince Cable: I am happy to give you a note on how the research funding is allocated. The logic of your arguments, Chair, is inescapable, but I was trying not to be alarmist about it.

Q3615Chair: Why do you think this logic has escaped Professor Diamond?

Vince Cable: He was expressing a hope.

Q3616Chair: As a hope-sorry, I thought it was a judgment. It was a hope.

Vince Cable: As an excellent Scottish vice-chancellor, I think he was expressing a hope that he would wish to remain part of the UK research community. I think that was what he was trying to say.

Q3617Chair: We can respect his hope but not necessarily his judgment in those circumstances.

Vince Cable: Yes.

Q3618Pamela Nash: Secretary of State, you refer to the UK’s shared communications network and how that improves the possibilities for trade and promotes trade between Scotland and the rest of the UK. Can you tell us a bit more about why that is the case?

Vince Cable: On which aspect of communications do you want me to dwell?

Q3619Pamela Nash: I think you had concentrated on broadband. That was one of your examples.

Vince Cable: Broadband is an area where I think it is fair to say Scotland has benefited disproportionately, again for good reasons. I think 20% of the funding of the roll-out of high-speed broadband in rural areas is taking place in Scotland-particularly rural parts of Scotland. Scotland has benefited particularly from the broadband programme, and I think the figures are in the report.

Q3620Pamela Nash: Could you envisage that level of investment being affordable if Scotland had left the UK?

Vince Cable: If Scotland was independent, the Scottish Government would have to fund it themselves, and quite substantial sums of money are involved.

Q3621Pamela Nash: Broadband is what I am most familiar with as it has affected my constituency in trying to get money out of the rural broadband programme. Is there any other aspect of shared communication infrastructure throughout the UK that benefits Scotland and trade between Scotland and the rest of the UK?

Vince Cable: There is one aspect for which I have particular responsibility. It is controversial for other reasons. The whole postal system is a shared infrastructure service. There is a very large subsidy involved in maintaining the universal service which Parliament has legislated will continue, whoever owns the Royal Mail. It is about £7 billion across the UK. I do not have figures, and they are probably quite difficult to get, but, given that Scotland is geographically very dispersed, I would be surprised if it did not have substantially more of that cross-subsidy per head than other bits of the UK.

Q3622Pamela Nash: I know that at least one of my colleagues is anxious to question you more on that, so I will leave it and let them go back to it.

I want to talk also about transport projects. It has been said that, when the Government are looking at transport projects in the rest of the UK, the benefits to Scotland are taken into account, even if those projects are confined to England and Wales. Can you give recent examples of that?

Vince Cable: It is inevitably the case. To take the controversial issue around High Speed 2, to which the Government are committed, the line will go to the north of England, but by reducing congestion and journey times it will indirectly improve communications with Scotland, and all the benefits are factored into the calculations. So, yes, even on an England project, which that is, Scotland benefits, and those benefits are currently necessarily counted into the calculations. The electrification of rail routes around the northern cities of England, by reducing congestion and freeing up lines, improves crossUK communications generally.

Q3623Pamela Nash: There have been legitimate questions or assumptions that Scotland would not go for HS2 if it was separate from England and Wales because it would not be able to afford it. Obviously, the residual UK would not be contributing to a competitor, but, if Scotland goes it alone, would that put HS2 at risk for England and Wales if the benefits to Scotland had previously been included?

Vince Cable: If the cost benefits were on the margin, it could be a decisive factor.

Q3624Pamela Nash: Are there any other transport projects you can think of that are dependent on benefits to Scotland as well or include the benefits to Scotland in the calculation?

Vince Cable: There are a lot of complex issues around aviation and support for crucial lifeline services and so on, which are part of our common UK regulatory framework for aviation. I guess my colleague Mr McLoughlin is perhaps best placed to answer those, but clearly that is another area where there is a lot of common interest too.

Q3625Mr Reid: Phase Two of HS2 goes as far as Leeds and Manchester. The Government are looking at a third phase going to Glasgow and Edinburgh. If Scotland were an independent country, do you think the population of Carlisle would have enough sway with the UK Government to persuade them to extend HS2 from Manchester to Carlisle?

Vince Cable: You answer your own question: it is highly improbable. It would become much more difficult.

Q3626Chair: To be clear about the whole exercise, as I understand it, you are saying to us that the gains to Scotland are factored into the decision to run HS2 as far as Leeds, which I can understand, but if the advantages to Scotland were not in that balance that might change the decision on HS2, and certainly in the extension beyond Preston, or the third phase, any advantage to Scotland would not be considered. I would have thought it would make it virtually impossible to see an extension of HS2 to Glasgow or Edinburgh as viable.

Vince Cable: The last point is clearly right. On the first, the Government are totally committed to the project, but if it were marginal that could be a factor. I am not familiar with the details of how this is being done, but at the moment nobody would seriously separate out Scottish passengers to exclude them from the benefits of faster and less crowded trains. They are part of the British community, so they are included even though currently the rail lines at the end of Phase Two do not go to the Scottish border.

Q3627Chair: We discussed earlier that some of the impacts were marginal and were not Armageddon, and it was difficult to distinguish exactly what difference separation might make except at the margins, but in relation to HS2 I think we are agreed-

Vince Cable: As you say, it may be yes or no; it may make a difference.

Q3628Chair: That is right. This is an area where I think you are saying to us that, as far as you can see, separation would make HS2 a non-runner beyond Manchester.

Vince Cable: I would think that is a reasonable conclusion.

Q3629Chair: Yes, so do I, but you are saying it. You are not a lawyer, are you, but you are beginning to sound like one? I want to be clear that that is really what you are saying to us.

Vince Cable: Yes, yes; I am sure that is right.

Chair: That is helpful.

Q3630Lindsay Roy: You spoke earlier about the impact of separation in relation to the postal services. Could you amplify that? Could you give us details of the cross-subsidy, because we think that is important? You spoke earlier about an evidence base. What is the cross-subsidy at the moment in relation to postal services?

Vince Cable: As I said, I do not have a number. I did ask because I know this is an important question. The Royal Mail do not calculate the numbers in a way that I can give you a direct answer. If it was proportionate to the population of Scotland, we are talking of a total crosssubsidy of about £700 million a year, and presumably an independent Government would have to fund that. I would guess that the figure is significantly higher precisely because of Scotland’s geography. I have asked if we can get an exact number and we have not got one.

Q3631Lindsay Roy: Will we be able to get that prior to the referendum?

Vince Cable: It is an important question. I don’t have the numbers. We could certainly ask for more research to be done. We could go back to the Royal Mail and ask them if they could give us a better geographical breakdown, but I do not have it at the moment.

Q3632Lindsay Roy: It is important because you spoke about being dispassionate and evidence-based. The more accurate information we can have the better.

Vince Cable: I can see it is important to the argument.

Q3633Chair: We would press this a little further and ask you to go back and try to clarify the scale of cross-subsidy to the postal service in Scotland that comes from the rest of the United Kingdom. While we appreciate that it might be difficult to get it to the 12th decimal point, an indicative figure would be more helpful than what we have at the moment-which is nothing at all. So next week then, that’s fine.

Vince Cable: I will ask certainly.

Q3634Chair: That is a euphemism for you will command and figures will be produced. That would be very helpful. To come back to the question of expecting the Scottish Government to explain and justify their proposal, it is reasonable for us to expect them to come out with an explanation of how they would fund this additional cost of postal services in Scotland when they produce their White Paper. This has to be part of an accounting process of how money would be spent. Therefore, rather than just have it at some time in the future, we would want to have that.

Vince Cable: I will try to get what you need.

Chair: We have faith in your abilities to get this figure for us.

Q3635Lindsay Roy: Would privatisation change that cross-subsidy?

Vince Cable: No, it would not. That is one thing that would not change. It is very clear-

Q3636Lindsay Roy: That is guaranteed.

Vince Cable: The universal service obligation, which is what determines the cross-subsidy, is written into law. As you know, we have debated this in Parliament. Six-days-a- week delivery, five days for parcels and the uniform price, whoever owns it, will still apply.

Q3637Lindsay Roy: The figures you are about to provide us with are all-

Vince Cable: They would be robust regardless of ownership.

Q3638Chair: If Scotland separates, some arrangement would have to be made about who controlled the privatised Post Office.

Vince Cable: Correct.

Q3639Chair: While I appreciate the generosity of English, Welsh and Northern Ireland taxpayers and their willingness to support the Barnett formula, I am not sure they would for ever be willing to have a cross-subsidy of a Scottish Post Office. Surely, there would have to be some disengagement of a privatised Post Office.

Vince Cable: It is the Royal Mail. Sorry, I am being boring about labels.

Q3640Chair: Yes; okay, Royal Mail then. There would have to be some disengagement and, surely, if it was to be arranged as part of the negotiations post any referendum, there would have to be a basis upon which negotiations took place. Therefore, the Government would have to be drawing up these figures now in preparation.

Vince Cable: They would have to set up their own regulator. The regulator would have to set the Scottish definition of a universal service, which might be more or less generous than it currently is. That would be up to them, but if it was as generous, or more generous, it would have to be paid for, and the Scottish Government would have to find the money for it.

Q3641Chair: That is right, which means there would have to be an end to cross-subsidy and the Scottish Government would have to pay a great deal more.

Vince Cable: Correct.

Q3642Chair: We will have to have an indication of the scale of that figure.

Vince Cable: That is correct.

Chair: We come back to the distinction between Armageddon-like figures-the abandonment of HS2 and the break-up of the Post Office-as distinct from some of the things that are perhaps less significant. That is helpful.

Q3643Mr Reid: I want to explore that scenario further. Am I correct in saying that the Government plan to sell the Royal Mail to the private sector before the referendum?

Vince Cable: The plans are to sell it within this financial year.

Q3644Mr Reid: That would be before the referendum. If Scotland became a separate state, the Royal Mail and all its assets would be owned by one private company but operating in two separate countries. How would it be regulated? UK law already says that the company must deliver to every address and collect from every post box every day. Clearly, the UK Government could not legislate for that to happen in Scotland and the Scottish Government could not legislate for that to happen in England, so how can you envisage this single company operating in two separate states but still delivering the USO?

Vince Cable: As the Chairman said earlier, it is a challenge to the Scottish Government to explain how they would manage this arrangement. They would have to set up their own regulator to meet separate Scottish objectives, whatever they may happen to be.

Mr Reid: They could not legislate for mail posted in, say, London to be sent up to Scotland within the target times. I am not quite sure how it would operate.

Vince Cable: The issue about target times is a separate one. There are two issues here. The universal service is a vital protection, I would argue, particularly for Scotland, but it is couched in very broad terms: affordable uniform prices and the six and five-day delivery timetables for letters and parcels. The precise requirements to deliver so many, say, first-class letters the following day would be part of their licence conditions, which would be overseen by the regulator, as they are at the moment. So, in fact, the whole process of disentangling this, were Scotland to become independent, would be very complicated. We would be talking about having to have a separate Scottish system of universal service-all European Union countries have to have one-and also a separate licensing regime, which would apply to this company or whatever company the Scottish Government wanted to deal with.

Q3645Mr Reid: Should separation happen, if I posted a letter in London to be delivered in Scotland, presumably I could not just stick a UK second-class stamp on it; it would have to be the international postal rate.

Vince Cable: You are raising a whole new possibility that I had not thought of, but that is true. It would be like sending a letter to France.

Q3646Mr Reid: There would be all these complications if separation happened. Can I also explore the Government’s intentions if the vote is no and the union continues? You referred to the universal service obligation to deliver to every address every day and collect from every post box. Can the Government give a guarantee that that will continue and they have no plans whatsoever to water that down in any way? Are you able to give that guarantee?

Vince Cable: We have absolutely no intention of changing it, and, under the law which you in Parliament passed in 2011, Parliament itself would have to authorise a change. I cannot do it unilaterally.

Q3647Mr Reid: The Government could not do it; Parliament would have to do it, so there is that guarantee. What guarantees do people have about first-class mail? As I understand it, the universal service obligation could be met simply by second-class mail. What guarantees do people have regarding first-class mail?

Vince Cable: As you say, the universal service does not cover the first-class mail service. There is a requirement that prices should be reasonable, but it is at that very general level. The requirement that a certain percentage of mail is delivered the following day is subject to their licensing conditions. We are not here arguing about the issue of independence.

Q3648Mr Reid: Yes. Those who advocate separation and the media tell us that we also have to explore what would happen if separation did not happen.

Vince Cable: As I understand it, there are exemptions at the moment from the universal service for parts of Scotland where, because of ferry timetables, for example, it is not possible to deliver the following day-

Q3649Mr Reid: CalMac give a poor service to those islands.

Vince Cable: -to Orkney, Shetland and the Western Isles, but I don’t think Argyll is affected.

Q3650Mr Reid: Coll and Colonsay do not get a daily ferry service, but that is CalMac’s fault-not the Royal Mail’s. What guarantee do people have about the first-class service? Is that down to the regulator through the licence conditions?

Vince Cable: It is. There would be specific licence conditions that operate at the moment-performance standards that they are required to meet-and the general requirement of uniform price. It would remain uniform, whatever the charge was.

Q3651Chair: But all of that applies only while the United Kingdom remains as is.

Vince Cable: Correct.

Q3652Chair: It is reasonable now for us to expect the Scottish Government in their White Paper to outline all of these things about how they would deal with the postal service, unless they simply say that the objective of independence is to keep everything the same, in which case issues would then arise about cross-subsidy and costs. It is reasonable for us to expect that we would have those costs spelled out and how they would be met.

Vince Cable: There is an additional point. Like many people-it is not a criticism-you referred to the Royal Mail as the Post Office.

Chair: Sorry.

Vince Cable: But it is quite a useful point to make because there are separate issues to do with the Post Office. The Post Office will remain a publicly owned entity, but the post office network at the moment is quite heavily subsidised in order to keep open rural and subeconomic branches. The Government have made the conscious decision to subsidise the post office network. Given the geography of Scotland again, there is a genuine benefit that it derives from the fact we are supporting the network of post offices, quite apart from the mail.

Q3653Chair: Perhaps it would be helpful for you to give us, or obtain for us, figures about the post office network and the extent to which the subsidy provided for the UK as a whole is disproportionately directed towards Scotland, which I think is the point you are making to us. Again, it is reasonable for us to expect the Scottish Government in their White Paper, or subsequently, to give us an indication of how these extra costs would be met.

Vince Cable: I think that is a reasonable challenge.

Q3654Chair: Since we have covered a couple of points on postal services, is there anything we have missed on which we should also be asking you to give us information?

Vince Cable: No; I think you have been pretty comprehensive.

Chair: Good. Just in case we have not been, could we ask you to reflect on it and, when you write to us about these other things, add anything else that is germane to the question of what the costs would be after separation?

Q3655Pamela Nash: I want to move on to something totally different about foreign direct investment and the benefits that Scottish companies have in exporting their products overseas as part of the UK. Looking through the report, what do you think would be the impact on Scotland’s ability to export its products and attract foreign direct investment in its companies?

Vince Cable: It goes back to what I said at the very beginning. Scottish companies benefit from having this common regulatory framework. If they are talking about exporting to the European Union, we assume that all the uncertainties around Scottish membership of the European Union would be clarified. As the Chairman keeps indicating, we do not know. Quite a lot of the support for business operates through the Scottish Government and bodies such as Scottish Enterprise. None the less, there is quite a lot of close collaboration with the UK body-UKTI. If you are a Scottish exporter wanting to export to China, you may well be getting direct help from Scottish Enterprise but you will be relying on the UK service as well. There is a slightly messy overlap between business support in export services but an important UK dimension to it.

Q3656Pamela Nash: Why has some of that power been retained by UKTI? Why do companies still require that help from UKTI rather than just Scottish Enterprise?

Vince Cable: Because in many ways there is a lot of common sense in having a UK role. If we are talking about, let us say, Chinese companies thinking about investments in the UK, the UKTI will try to make the case to them for investing in the UK as a whole. The Scottish Government may well come in and say, "Why don’t you come up here?", and they have their own promotional work, but the key part of the promotional effort is at a UK level, the UKTI operating overseas and working with inward investors. If Scotland were independent, they would lose that wider dimension.

David Mundell: We and Dr Cable’s Department encourage very close working between UKTI and SDI, and that has been very successful. It is an example of the "best of both worlds" argument of Scotland remaining in the United Kingdom. SDI is able to provide a very distinctive Scottish service, but UKTI has the global reach that SDI could not have on its own. Britain’s embassies and consuls around the world give us an enormous global reach. When the Foreign Secretary and I met businesses in Scotland recently, one of the points they made was that the fact Britain was represented in all the major south-east Asian economies meant there were possibilities for events and advice in all those locations, which is something that simply would not be possible to provide within a Scottish context alone. So I think the current arrangements are a really good example of how Scotland in that environment gets the best of both worlds: a distinct Scottish element in SDI but the UK’s global reach through UKTI.

Q3657Pamela Nash: Do you feel that has a benefit both for foreign investment in Scottish companies and also the opportunities to export products?

Vince Cable: Yes.

David Mundell: Absolutely.

Q3658Pamela Nash: Do you think that could be diminished by Scotland being on its own?

David Mundell: Scotland would not have the consular and embassy network that the UK currently has. It is as simple as that.

Vince Cable: It could have, but at considerable cost.

Q3659Chair: Could I finally draw things together and seek to clarify how the paper you produced yesterday ties in with this-maybe we can stay off the question of oil, because that is another subject altogether-and in general terms the extent to which the two slot together? Perhaps you could also clarify whether or not there are any other papers you are working on that would impact upon the sort of things we have heard today.

Vince Cable: I was asked by Lindsay Roy about research funding. We are having a separate paper on that. Science and innovation research will be separately quantified, so you will get more information on that in any event.

Q3660Chair: In terms of the other paper you produced on macroeconomics, is there anything in there that you think impinges directly upon what we have been discussing today?

Vince Cable: The big area of overlap was the estimate made in the first paper about the long-term effects on living standards in Scotland and the benefits of being part of the UK single market. They came out with the cumulative figure of £2,000 per family after 30 years. It is really saying that, if Scotland had become independent 30 years ago, the standard of living of a Scottish family might be £2,000 lower than it is today as a result of the benefits that we get from integration. That is not an Armageddon-type argument; it is about all these small cumulative things gradually adding up over time.

Q3661Chair: Surely, £2,000 over 30 years is not the sort of thing that will get people out into the streets, is it, marching or anything else?

Vince Cable: No, it is not, but there are these surveys that suggest that, for perfectly reasonable reasons, people in Scotland are being very hard-headed about this and not emotional, and are looking at how it will impact on their living standards.

Q3662Chair: These are all on the lines of the British Cycling mantra of "the aggregation of marginal gains".

Vince Cable: That is exactly what it is.

Q3663Chair: There is a series of marginal gains as distinct from, say, postal services and the possible effect on HS2, which are major issues. That is the distinction we would draw.

Vince Cable: The phrase you use-the cumulative effect of marginal changes-is exactly what we are talking about.

Q3664Chair: At the end of our sessions we normally ask people-we will ask you-whether or not there are any answers prepared to questions that we have not asked. Is there anything that you want to get off your chest and tell us that we have not already given you an opportunity to raise with us?

Vince Cable: No. It is a fair range of questions and I would not tempt you to go into other fields I am not prepared for.

Q3665Chair: That was what I was worried about. The fact you are happy with this is an indication that maybe we have not given you as hard a time as we should have, and we will bear that in mind next time Mr Mundell comes in front of us.

Vince Cable: I think it is fair questioning.

David Mundell: I could have told you that the Scottish Government have made up their figures on oil and gas, but obviously you want to hear that-

Chair: We probably know that, but I don’t think we want to get into a diversion. That is for another day, and we want to touch on that on another occasion. Thank you very much for coming along. This has been a very interesting session.