Business, Innovation and Skills Committee - Minutes of EvidenceHC 504

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Oral Evidence

Taken before the Business, Innovation and Skills Committee

on Tuesday 18 June 2013

Members present:

Mr Adrian Bailey (Chair)

Paul Blomfield

Katy Clark

Mike Crockart

Ann McKechin

Mr Robin Walker


Examination of Witnesses

Witnesses: David Watt, Executive Director, Institute of Directors, Scotland, and Professor David Bell, Professor of Economics, gave evidence.

Q98Chair: Good morning, and can I start by just reminding everybody something that I forgot to do earlier, and that is when you speak, press the button on the microphone in front of you; and of course on the conclusion of your comment, you should press it again to switch off, otherwise any unauthorised or back of the hand comments may be recorded for posterity.

Can I thank you both for agreeing to be witnesses at our inquiry and welcome you here? I think it is fair to say it is certainly the most magnificent venue that I have held a Select Committee in-I cannot speak for the others; but you are very welcome. Could I just ask you, for voice transcription purposes, to introduce yourselves, starting with you, David?

David Watt: Shall I go first, then?

Chair: We will make it David Watt.

David Watt: I will go first; it is David Watt. Yes, this is going to cause a bit of confusion, but he is the one with the brains. I am David Watt from the Institute of Directors. Good morning.

Professor Bell: I am David Bell from the University of Stirling.

Q99Chair: I realise I assumed your Christian name was Professor.

Can I open with a fairly general question? In evidence to the House of Lords Select Committee on this issue, John Cridland, the Director General of the CBI said, and I quote, "Uncertainty is the biggest killer for investment". In your opinion, what are the key areas of uncertainty that need to be addressed in advance of this referendum?

David Watt: If I can kick off just with a few thoughts on that front, uncertainty is not something that business ever welcomes, but we all live in a fairly uncertain world. I think truthfully at the moment one of the biggest uncertainties that business faces is in relation to the euro in Europe, and that is causing, bluntly, more immediate concerns, I have to say, for investment both inside and outside of Scotland at the moment. But absolutely in terms of issues around defence, for example, some of the major industries in Scotland have a very close connection with the rest of the United Kingdom and then international markets tied to that. A company such as Babcock in the defence industry is a classic example of that. That is also true in financial services. We have international links into Europe, into London and well beyond that as well; massive investments in the Middle and Far East. So, there is industry there where that is an issue. We have also highlighted issues around connectivity, transport and energy to all the campaigns and political parties involved.

Professor Bell: I think we are getting into the area of the known unknowns and the unknown non-knowns here. Will I carry on?

Chair: Yes, if we can just stop for a moment. Is there a problem somewhere? I am not quite sure what that noise was. Go ahead, and we will see what happens.

Professor Bell: There are a number of areas that are being discussed quite closely at the moment, but for which I suspect there will be no clear answers prior to the referendum, one of the key ones being what would happen around the currency should Scotland become independent. There is an issue around EU membership, which applies both north and south of the border, I think, of where that might be going and what status Scotland might have potentially post-independence.

Linked to the currency issue are two further issues, which are the fiscal position of a post-independent Scotland. Scotland has a somewhat lower fiscal deficit than the UK as a whole at the moment if one allows for the effect of North Sea oil revenues, but nevertheless, it is still quite a considerable fiscal deficit and the question is what would happen in relation to adjustment for that or what might have to happen in relation to that.

Chair: Sorry, we have to suspend briefly, because it appears that we are not being recorded; a slight technical hitch. As soon as we are confident that we are being recorded, I will invite you, David Watt, to repeat what you said. I am sorry about that.

Professor Bell, you were in the middle of speaking, so if you would just like to repeat yours and then I will go back to you, David.

Professor Bell: I was discussing the potential post-independence fiscal situation. So, as I indicated, Scotland has less of a deficit than does the UK as a whole, if one takes into account what is called the geographical share of North Sea oil revenues. Nevertheless, it still has a fiscal deficit at the moment of over 5% of GDP, and one would expect there would have to be some plan for a reduction of that going from the medium to the long-term at least. There is the question of debt, which is an uncertainty, and how debt might be allocated post-independence, especially since the OBR forecast is that UK debt will be around £1.6 trillion by 2017/18, which might be the earliest time that one might expect independence to occur. Population share would be one obvious way of allocating that debt. Scotland would therefore take around 8.4%, I think, of that total debt, and there are questions around the mechanisms whereby there could be transfer of debt, which certainly are causes of uncertainty, but probably not for business.

I suspect, as David may indicate, key issues will be regulation, particularly for financial services, but it also spreads into energy, and it spreads into competition, right across the spectrum. How differently will the business sector be regulated post-independence? Do you go for the franchise solution, which is just to say, "We will basically follow whatever the rest of the UK does"? That is one possible option, but I think that remains to be seen. Across the whole spectrum of regulation, that may become more apparent when the White Paper is published in November.

Q100Chair: Just before I go back to David Watt, may I just pick up your comment about the fiscal deficit? If you could just very briefly and simply explain how that has been computed, because my understanding is that it is very difficult to assess the proportion of our total tax revenue that comes from Scotland, so logically I would have thought it was very difficult then to calculate the fiscal deficit. But if you could enlighten me, I would be grateful.

Professor Bell: Yes. So, on the tax revenue side, mostly it is done by location or where people are physically located for the majority of their work, and indeed, HMRC next year are going to have to tell people whether they are Scottish for tax purposes or not, because the Scotland Act 2012 allows Scotland powers over income tax. Therefore there has to be some decision as to whether you are eligible for this tax or not, and HMRC does have that work under way at the minute.

On income tax, I think the statistics are relatively robust, but it is certainly true that as in the rest of the UK, a very large proportion of the income tax revenues come from a very small number of people, so the possibility of a small number of people moving can have quite a big effect on revenues. On things like corporation tax, there probably is more room for error, and I think it is done based on employment shares. You might say, "That is not really the way in which corporation tax might be"-well, it is certainly not the way that Amazon’s corporation tax is, for example, allocated.

After that, most of the taxes-National Insurance is fairly straightforward, and then there is debate about the share of North Sea oil revenues. Revenues are both volatile and for a Scottish Exchequer would be quite important. They come second to income tax as the major source of revenue, on the assumption that there would be a legal agreement that around 90% of the oil fields would be classed as being in Scottish waters. Having said that, going back to the fiscal deficit, if you add up income tax and North Sea oil revenues together, you still do not come to the bill for social protection in Scotland, and that is one of the issues around the fiscal deficit.

Another aspect of the fiscal deficit though is that there are some parts of expenditure that cannot be allocated specifically to Scotland and cannot be allocated specifically to anywhere, like debt interest. You can allocate health spending to Scotland, because you know exactly what is happening, but not debt interest. For example, defence is classed as something that benefits all of the people of the UK equally, and therefore you allocate a population share of defence spending to Scotland. Post-independence, a Scottish Government might choose not to spend as much on defence as the current share would imply, which is just over £3 billion, and that would be one way around the 5% or whatever the deficit might be. I suspect it will be lower by the time if independence were to occur, just because the trajectory on deficits for the UK as a whole has been slowly downwards; not as quickly as the Government would like, but it has been slowly downwards.

Chair: Thank you. David, I will just ask you to summarise what you said before.

David Watt: Mr Chairman, very briefly just to say that the point I made was that uncertainty and lack of clarity is something that business does not find welcome, that is for sure. I think in certain industries in particular there is a potential significant impact of independence, and these would be industries like financial services, defence, and connectivity around broadband and the transport connectivity as well. So, there are issues there, and in industries that are particularly important and also require a good bit of long-term planning. So, these industries certainly want to be clear about where we are, although I did also make the point about a real issue around about the European market; the European Union is certainly something that is another significant cause for uncertainty in business at present.

Professor Bell: May I just add one point of information in relation to trade? Scotland’s last recorded exports were around £43 billion. £25 billion went to the rest of the UK, so the UK is the biggest trading partner. The rest of the world comes in a bit lower, but our UK is by far the bigger trading bloc as far as Scotland is concerned.

Q101Chair: What about imports? Have you a figure for those?

Professor Bell: I don’t have them offhand. I think the current situation is that the rest of the UK runs a trade surplus with Scotland, so Scotland is in deficit to the rest of the UK, but Scotland has a surplus with the rest of the world; that is the way it works.

Q102Katy Clark: How important do you think it is to have clarity over whether an independent Scotland would remain part of the European Union or would have to reapply?

David Watt: I think it would be very helpful to understand the UK and Scotland’s long-term position with the European Union, but to be honest with you, if you look at the European Union-and I constantly explain this to people in business-most of the decisions are political decisions, they are not based even on the rules, because the rules seem to be bent to accommodate other countries who don’t quite meet their fiscal targets or fiscal arrangements. So, it is very difficult to forecast. Equally, one could argue that one or two countries have a very vested interest in not allowing any part of their union to become independent, so there are issues there, but certainly the European Union is significantly important. A point David made about exports-if you look at our exports externally, which are about £25 million, I think it is-or £24.9 million the latest count said-America was by far and away the biggest single nation, but outside of that, I think nine out of the top 10 were countries within the European Union that we export to.

Professor Bell: I do not have much to add to what David said, but if we come to talk about higher education, there are issues around the European Union and status there that probably are worth exploring, but I think it is going to be difficult-because the decisions are essentially political-to have some kind of absolutely clear statement prior to the referendum.

Q103Katy Clark: If Scotland had to reapply as an independent country, what impact do you think that would have?

David Watt: The answer really depends on the transition arrangements, and I don’t think there is a comparable example from the past. There have obviously been other states like Czechoslovakia that have split, but then that happened before the EU, so it is difficult to make a precise comparison. Indeed, if you ask people around the European Union, in Germany and Ireland you get different answers and things, and regularly quoted in newspapers in the last month really in particular, different opinions from different European politicians saying, "Yes, fine, no problem. You would remain in and then we will renegotiate", and others saying, "No, that is not possible".

So, I think it is really difficult to forecast and, equally, there are assertions being made that it would be automatic and I do not think that is going to happen either, given there is a queue of countries waiting to get it in as it is. The view that we are already there and they would not throw us out, I don’t really know what that means, to be honest with you, because Scotland would be a separate country and wouldn’t automatically get back in. One would hope that there would be sympathetic transition arrangements, given that we are currently a part of the United Kingdom and part of Europe, but there is no guarantee of that, and, as I say, the last people to forecast what politicians are going to do are businesspeople.

Professor Bell: I would just add to that, one cannot know, but it is important to know whether-or it would be good to know-if Scotland could have the same exceptions as the UK does from things like Schengen, but I am afraid that is one of the unknowables, it seems to me.

Chair: Interestingly, a Catalonian MEP has just made some public observations that France and Spain would not okay it, presumably because it would set a precedent for regions that might secede from them, but I am not quite sure what weight that has in the total debate.

Q104Ann McKechin: Good morning. Yesterday we took evidence from Business for Scotland, who have argued that independence would, and I quote from them, "Act as a catalyst for Scottish people to become more entrepreneurial, confident, successful, ambitious and international in their outlook". When we took evidence from their representative yesterday, I asked him whether he would be seeking a lower tax type of economy or would he be happier with perhaps higher taxes and greater spend on the public sector. He seemed to be indifferent to whichever option might be chosen, because he said if it was chosen by Scottish people, then it would be the better solution. I just wondered what you thought were the opportunities for business if Scotland was independent and had greater control over tax and economic levers?

David Watt: That is an exceptionally good question, and I think that business is still to be convinced of a significant number of practical opportunities and differences. I suppose all businesses like vision and there is a vision of a new nirvana of Scotland sort of thing that I think everybody buys into. It is very interesting that Jim McColl from Clyde Blowers has been quite outspoken in supporting independence, and some interesting people like Crawford Beveridge and Robert Crawford, who used to run our Enterprise Agency in Scotland. All three of them share a view that almost the only way to rekindle Scotland’s entrepreneurial spirit is to do so as an independent nation. I don’t think that necessarily follows, but I certainly think there is no question but that we have a bit of a dependency culture at entrepreneurial levels, with respect to friends or to members who are largely based outside Scotland.

This is, as you sit in it, the most entrepreneurial country the world has ever seen, or it used to be, and we would like to see it back being that. The question you have put very wisely is whether independence makes all that much difference. I think it could, but there needs to be a number of very precise and concrete measures proposed to convince business that that would happen. There is certainly no question but that we have fallen behind where we used to be. Our heritage is enormous and the potential of our young people is enormous, but there is a blocking point. Is that caused by being part of the United Kingdom? I am not totally convinced of that. Equally, I think there is no question but that, for example-and it is interesting your Committee is here-even some of the departmental initiatives by BIS are not springing to life in Scotland in the way they are in certain regions of England. So, there is some disconnect there perhaps in terms of governmental impetus and help and support around about seed enterprise initiatives and things like that that don’t seem to go out to the same extent in Scotland. So, there are some issues there, and yes, I have no doubt we could do things better than we do.

Would the governance of the country be the key deciding factor? I am not totally convinced. I wait with interest to see some very practical measures, and I suspect the point you make is-have we had a list of five or 10 completely different new initiatives that would come through? The answer is not yet. Maybe we will get them in the months to come, and I think when we met with the Yes campaign they were saying some of these issues and ideas were under further development, so we wait with interest to see if something comes out. There is no magic bullet yet that has been shown to us in any way.

Professor Bell: All I would add to what David has said essentially is that it is around timescale. It is important to bear in mind that, for example, Ireland took quite a long time before it found its entrepreneurial wings and then they were unfortunately clipped because they went a little bit too far with the financial sector, but it did-particularly during the 1990s-grow very strongly. One wonders whether that is very context-specific, that time, that place. There was a niche there for an English-speaking country with close links to the US to provide an outpost in Europe, but there are certainly areas around taxation where you might think that things could possibly aid the entrepreneurial spirit a little bit more effectively. We discussed air passenger duty before we came in and what effect that has on some of the airports in Scotland, and also of course the north of England. A lot of what can be said in respect of Scotland could also be said in respect of the north of England.

Q105Ann McKechin: Can I just press you on one point? A lot of the larger employers in this country have their head offices in other parts of the United Kingdom or internationally. Is there a critical mass of business expertise in Scotland to create a successful business environment, because you, David Watt, said that there is a huge amount of interconnectedness in the way that businesses have grown up, because they have grown up within a very stable UK market and there still is a huge concentration in the south-east and London. So, I just wondered to what extent Scotland could successfully have the level of expertise if it was on its own?

David Watt: That is also a very interesting question, for a number of reasons I will illustrate, but I think the answer to that is I am not quite so convinced that borders make any difference any more, for example, within Europe or even within the world. I was talking, for example, to somebody from Aberdeen Asset Management last week, and about half of their investments are in Singapore. They are a fantastically successful company, listed on the London stock market, so these barriers are slightly artificial now.

You make another interesting point. It has not been scientifically researched, but if you look around Scotland and look at the people who are running many of the corporates in Scotland, and the biggest successful companies in Scotland listed on the stock market, for example, very few of them are run by Scots. Yet if you look outside Scotland into England and further afield, you will find exactly the opposite situation. So, I think you could argue quite strongly that an independent flourishing Scotland would attract some of these individuals back to run their businesses in Scotland, and there is an interesting question as to why they have left. Is it too easy to leave, too attractive to leave? Could we build Edinburgh into a wage level nearer London if it was an independent Scotland? I am not totally convinced of that, but there are some really interesting arguments.

Norway, which went independent quite a number of years ago, is extremely successful and probably more entrepreneurial than it has ever been, fortunately through oil and gas and energy. It is now a worldwide brand, and a very small country. So, there are opportunities that could be made, but as I say, there is a really strange sort of dichotomy with this balance of Scots inside and outside. Scots seem to be valued more outside Scotland than they are inside Scotland. It is a national characteristic, as you are well aware. But I do genuinely have a real concern over this entrepreneurial spirit that we have lost, and whatever we have post the referendum, we need to do something about that in this country. We really do need to do something about it. Our view very clearly is that the state is growing too big and business is not growing fast enough in terms of jobs, employment and the future economy of this country, whether it is part of the UK or not.

Chair: It is one of the peculiarities about international perceptions. I find the English are more valued outside England, but not in Scotland.

Q106Paul Blomfield: I want to turn to issues in relation to banking, and one of the issues that has concerned us as a Committee, and indeed the Government, is the problems with bank lending to business. One of the concerns is the lack of competition in the sector in the UK overall. Potentially that is writ large in Scotland, with the dominance of Scottish banking from HBOS and RBS. I wonder what thoughts you had on how that dominance would affect bank lending to business in an independent Scotland?

David Watt: I will just give a few thoughts, and David might have some facts and figures as well. Absolutely, the impact of the demise of RBS and HBOS in Scotland has been massive in terms of business in a variety of ways, but particularly, for example, if we look at HBOS, which had massive investments in a whole lot of property and other arrangements, bizarrely ended up owning a half share of a golf club. I have never really understood how a bank could do that, but there we go-although it is a very fine golf club. So, there were really strange arrangements.

Five, six or seven years ago-this is the thing that is really most difficult for my members and other people in business-banks would have been knocking at your door and throwing money at you on fairly attractive terms, in all honesty, and now they will not give you any money, even if you knock on their door for a long time, and the terms are very demanding. So, banks are not very popular, generally speaking, and they are quite difficult to deal with. We all understand why, because we all want them to build their balance sheets. So, they have, truthfully, whether they like it or not, less money to give away, and they are trying to do that at the same time as we in business want to get more money. They are more demanding and that is probably rightly so. They were involved in deals-I have just mentioned one-that probably they should never have been in. But that is the general situation.

Specifically, in Scotland, we are very strong advocates of a bigger, more competitive market. It is better for retail customers; it is better for business. I, personally, in my effort not to disadvantage the banks, do genuinely send members to other banks when they come and complain about one bank. I always say, "Well, here are four or five other people you can go and speak to. Go and speak to the Clydesdales and HSBCs and the Barclays and see if they will help create that competition. I will not say they will necessarily deal with you, but it is better". So, we must break out of that model in any case; independence or not, it has to be broken. I think the more competition the better, although truthfully, if you look, probably there are one or two of the banks that might even be up for sale potentially, but buying a European bank is not anything anybody is really going to do at the moment, I have to tell you.

Professor Bell: This comes back to the currency issue again. It seems to me that it will be possibly more difficult just because of transaction costs, I guess, for banks. That will be maybe a minor barrier to them operating across the UK. It seems to me that if Scotland was to become part of a sterling zone, you might expect banks from England to operate in Scotland and to continue to operate in Scotland and vice versa. The key question though is this thing about whether the dictum that banks may operate internationally but they die nationally would still apply, which would mean that the Scottish Government would have to bear the potential cost of any difficulties, in the way of course that the Irish Government bore the costs associated with the demise of the Anglo Irish Bank.

The message from that is that if Scotland were to become independent and to promote competition, it would have to pay a great deal of attention to the way in which the financial sector was regulated. Of course, this does matter too for those companies in Scotland that might wish to continue to trade in England, because one wouldn’t want massively different regulation for someone in England buying a pension from a Scottish pension provider from that which they might expect if they bought it from an English pension provider. If there is a big disconnect there, there is going to be a competitive advantage one way or the other, so I think these issues do exercise the financial sector to a considerable extent. There has been some discussion that Scotland would just have the same-again, the franchise solution-regulation as in the rest of the UK.

Q107Paul Blomfield: Thanks very much, and I think we will be coming back to the question of regulation in subsequent questions. I just wondered if I could push a little bit more on this question of competition in the banking sector, because you suggested that there is a need for more competition. How do you think that would be achieved, recognising some of the concerns that have been expressed, within an independent Scotland?

David Watt: I think the answer is it is pretty difficult to do even at the moment, as you are probably well aware, and Lloyds have been trying to sell off or have been forced to sell off some of their branches. As I said to you, nobody wants to buy them. To be fair though, Edinburgh has-despite these issues, one could argue, of uncertainty-continued to attract significant investment of funds internationally. I find it a great source of pride that we administer the Canadian Teachers’ Pension Fund in the city and stuff like that as well, so we do a lot of amazing stuff, and it continues to grow. You have players like Virgin Money and Tesco Bank who have established in the recent past as well.

It is very unfortunate, to put it mildly, that Co-op is going through problems, and I think we need to look to strengthen these smaller nascent banks as well as one of the ways to do it. I do think Tesco, who don’t tend to do things on a small scale or to do them badly, will come to the marketplace more aggressively and as time goes on as well, and I think the same is also true of Virgin Money, which is gradually growing. So, there are some lights on the horizon. As I say, it is a difficult marketplace at the moment, because banks across the world literally are not a place that many people, even shareholders, want to invest massive amounts of money in. So, it is a challenge, but I think it can be done. As I say, it is difficult enough even in the UK situation.

It would not probably, truthfully, be a great deal more difficult in Scotland. The customer base would be smaller, but then again most banks setting up, regardless of some sort of border, would still be trading in all parts of the UK. They are not going to set up to trade in a five-million-person nation and very few do that as well. We also have to face the fact that, as with a very successful bank like first direct, so much banking now is done online that to some degree where a bank is headquartered is less relevant perhaps than it was a few years ago. That is true of many businesses and certainly the retail side of business. I am sure we all regularly buy apps for our iPads from America at the press of a button.

Professor Bell: I pretty much agree with David. The Edinburgh financial sector seems to have almost a critical mass that would make it attractive as a location, irrespective of the constitutional situation. The number of corporate headquarters in Edinburgh, or in Scotland, has declined fairly significantly over the last couple of decades, but the financial sector has been pretty robust, and that alone, with the skills that are available in Edinburgh, gives it a comparative advantage that should-so long as there are no significant regulatory disasters-allow it to continue, no matter what the constitutional situation.

Q108Paul Blomfield: What barriers do you think there would be to business raising finance or capital from the rest of the UK in an independent Scotland?

David Watt: Apart from potentially additional cost, there is probably not really a great deal. The rather interesting thing-perhaps I should have mentioned it earlier-about the banks, and one of the real challenges in Scotland as well, is that all the Irish banks, for example, and a number of other foreign banks, who had significant business partnerships in Scotland, just disappeared when the recession came along. They all went back home and basically took their money and started to finish all the arrangements they had in Scotland, and stopped them pretty sharply. In large part they have done that. There is a minimal presence of Allied Irish still in Glasgow, but it is pretty sparse.

There is still a significant amount of foreign investment and access to capital internationally as well. Jim McColl always says, "I already operate in 27 countries. If Scotland becomes the 28th does that really make any difference?" To some degree, businesses already are trading internationally and meeting all the costs of trading internationally. There is the issue potentially of increased cost, but I do not think it will massively increase complexity, and I do not think a bank in London in an independent Scotland would not necessarily give me money to invest in Aberdeen. I don’t think it works like that. The bank would look at the business case, wherever the base is.

Professor Bell: It seems to me it is the business case that matters. We have huge investment going on in the North Sea at the moment by lots of foreign companies, so they are not having any difficulty accessing capital. I cannot imagine they would have difficulty in a different constitutional situation.

Q109Mike Crockart: You have talked a lot already, in passing at least, about regulation and regulatory uncertainty. My question relates to that topic, and particularly whether you are aware of any work that has been done on what the extra costs might be of setting up new business financial institutions, such as the Financial Conduct Authority, the Pensions Regulator and the Competition Commission. There are numerous regulators and institutions that would need to be set up. Putting aside the franchise model for a moment, which I will come back to, is there any feeling for what the extra costs would be to Scotland to set those up?

David Watt: Perhaps again I will leave the learned gentleman on my left to fill in any figures, if there are some available. Interestingly, we had a joint conference last week with Scottish Financial Enterprise, AFSB and other business organisations, and we involved a number of people, for example, from Northern Ireland to ask them about trading across borders. Certainly the VAT complication, if you like, and the potential cost-there is additional cost in that. I do not know if anybody has ever quantified it-they certainly have not in that particular setting-but it did increase the complexity of dealing across borders and it increases the costs. So, it is probably somewhat difficult to put a figure on it until you know the sort of regulation you are facing. Whether Scotland lifted the same regulatory regime, it would certainly be very similar to that in the rest of the United Kingdom. Now, that still means there is additional cost because it would have to be established, and if we had the equivalent of an FSE in Scotland, you would have the cost of that and that would be met by the industry, ultimately, so absolutely.

The Scottish Government has an overall desire to set up a regulatory body that would look after all regulation in and outside of the financial services industry, but to some extent the Scottish Government does a lot of that regulation over environment, over the Scottish Environment Protection Agency and through SNH and various others, so these sort of environmental areas are really a devolved function already. Bringing these bodies together would probably be quite welcomed. In fact, the Scottish Parliament tomorrow are talking about that as well. So, that area of regulation could be relatively easily brought together, but there is no question, especially as an EU member, but that you are compelled to have your own independent regulatory authority. You would have to have it. There would be an additional cost to business, but as I say, to be fair, businesses are already meeting that cost in the countries they already trade in and complying with these wherever they are, and obviously HSB trades worldwide and meets all these regulatory costs on all occasions in any case.

Professor Bell: I do not know of detailed work on these costs, but we do have in a sense not an ideal example, but a parallel at least in that the Scottish Government is just in the process of setting up Revenue Scotland, which will be collecting the landfill tax and the replacement for stamp duty. It is also paying additionally to HMRC for the additional bureaucracy associated with the Scottish rate of income tax, I think the total of these two-although I might come back to you with some more precise figures-is around £100 million.

Q110Mike Crockart: If I could return to what you have described as the franchise model, is it feasible, do you think, for an independent Scotland to share the current institutions with the remainder of the UK, or to do that would it need to accept that all regulation would mirror the regulation that applies in residual UK?

David Watt: I think it would imply that perhaps the majority shareholder, in other words, the rest of the UK, England perhaps would have more say if the regulatory bodies were shared. I think that is inevitable. The stakeholders would be larger and smaller, so I think they would have that balance of input. I think also, having said that, to set it in context, that many of the regulations we are talking about are-first, look at the G8 today. I think, to be honest with you, we are going to become increasingly global and they are certainly European as well, so I think there is a massive input from the European Union-assuming the UK stays in the European Union-that has a massive effect on that as well.

So, Scotland has a limited amount of wriggle room in what it can do if it wishes to go into the EU, or remain in the EU they would say. So, it is quite clearly dictated they must have their separate regulator, so there is no wriggle room with that. That is a fait accompli if you want to join the EU. It would need to be independent. It would not be possible to be governed by another state. That is not acceptable to the EU. To be honest with you, as I said earlier, I think even if Scotland were setting up let’s call it a Scottish Financial Services Agency, it is going to adopt the relatively good practice that has been seen in the UK and maybe avoid some of the bad practice we have seen as well. So, it is going to mirror it, at least in the short term, until many other things have bedded down and it develops. That particular issue, I don’t see the franchise model working, because I do not think the EU would allow the franchise model. It could work in other areas, it could work around about transport and train operators and things, and we could have partnership arrangement on that basis. I just do not think it is EU allowable in financial services.

Professor Bell: I think you could just mirror the rest of the UK at least in some areas of regulation. I think Ireland did, to some extent, mirror what the UK has done in the past, and that I guess does not need a formal agreement. So, the franchise arrangement would need some kind of agreement and there would be a question of bargaining power and, as David says, Scotland would be by far the smaller of the two parties in the bargain. There are areas where just mirroring with no clear connection would be obviously very difficult, and I think energy or policy around decarbonising the RUK and Scottish economies could not be done without some kind of formal interaction between the two parties, particularly since the costs of renewables are borne by all electricity bill-payers, but Scotland provides a larger share of the renewables than does the rest of the UK.

Q111Mr Walker: Professor Bell has already commented on the fact that over the last decade, Scotland has seen a decline in the number of corporate headquarters. I just wonder if you could both comment on whether an independent Scotland would be more or less likely to attract headquarters based in Scotland?

David Watt: I wish I had that crystal ball, to be honest with you. That is partly a function of globalisation and the attraction of businesses to the major capitals of the world, not just a reflection on the Scottish economy, and also companies growing really through acquisition. So, it is a natural business progression. I would love to see that trend reversed, but truthfully, I am not sure it is reversible; it may be. There is a fantastic but ancient book now called the Global Paradox by John Naisbitt, which talks about the strengths of the smaller unit as we globalise. I am not sure that has happened. The interesting thing that has happened and is happening-I always remind people that Google started with two guys in a garage-is that it is not that complicated literally to build a world power from Inverness now, whereas a few years ago, that would have been completely and utterly impossible. So, I think there are opportunities that have never existed before, and I would love to see things like that happening. But in general terms, I don’t think it is realistic.

Even in the financial services, we have lost a lot of the ultimate power of a number of our significant insurance companies, for example, who have gone out of Scotland, in some cases out of the UK. There is a constant issue, for example, that is going on, rightly so, about how successful the whisky industry is. It is doing enormously well and growing by the minute, but a significant amount of those earnings are going outside Scotland certainly, and some of it outside of the UK. I think that is an international trend. There is a conceivable argument that being an independent country is slightly more attractive for headquartering companies, particularly if you can do an Ireland and really lower corporation tax. However, there is a great debate I have had with a number of learned people about whether that means jobs necessarily. It can just mean almost a postal address or an office with one or two people, which is the company headquarters, in theory, for tax purposes while the businesses are around the world. I know that is something that post offices generally are addressing literally as we speak in Northern Ireland at the moment.

It is difficult to see that trend reversing, but I would love to see that happening. You could argue that if I thought that would happen in Scotland tomorrow through independence I would probably be voting for it. Although I am not saying I am and I am not saying I am not. I am not even going to tell my wife how I am going to vote.

Q112Mr Walker: Professor Bell, did you want to add anything on that?

Professor Bell: I think I subscribe to a certain extent to this notion of the global cities; that headquarters, industry in general, business services, are increasingly being attracted to major cities in the world rather than to countries. You have to have a certain amount of critical mass. You have to have a certain quality of life in these cities. Edinburgh is probably Scotland’s best candidate for being part of that network, but clearly London is Europe’s global city and, of course, proximity to London is not necessarily, in that sense, therefore a good thing. However, as David says and in addition, it may be true that having the headquarters per se is not necessarily that important because, although Edinburgh may have lost a lot of key decision-making, as I said earlier, it does have a critical mass of skills in financial services. Therefore, the level of employment in financial services, jobs on the ground, is still reasonably good.

Again, on the whisky industry, which is thought to be one of Scotland’s major industries, in terms of the exports, yes, that is absolutely true. In terms of employment, there is not all that much employment in the whisky sector. The value-added is further up the supply chain. These exports would not generate the same level of employment and basically the level of income within Scotland, that, for example, with the same level of exports the higher education sector would generate.

Q113Mr Walker: If I may just follow up on the exports point, Scotland has done well in terms of both exports and inward investment over the last decade and that is an area where it has, at the moment, access to the UK’s diplomatic network, UKTI and the institutions underpinning that. How would that be potentially replicated in an independent Scotland? What would be the cost of trying to replicate that network?

David Watt: I can’t sit here as someone who was born 20 miles from Glasgow and listen to David sing Edinburgh’s praises quite so loudly, bearing in mind that there is another significant city in this country.

Also it would be enormously remiss not to say that one of the real issues, interestingly enough, for the UK in terms of potentially losing Scotland is Aberdeen. Aberdeen is genuinely a global centre for oil and gas exploration and energy and significant headquarter companies are in Aberdeen and will continue to grow in Aberdeen as the oil services industry. It is worth a visit. The health of Aberdeen is mindboggling. It has notionally 2% unemployment, for example, which statistically means nil, and the companies and the salaries and wage levels. It has the biggest square mile of millionaires outside Mayfair. I think it is just astonishing. That is almost like a country on its own in that area as well. That is to balance those nice remarks about Edinburgh, which I do share but I did not want that to pass.

In answer to your question, I am a great fan of UKTI and I think it is helpful to business, but we do have Scottish Development International and the Scottish Government is very active in that area. To be fair, whatever anybody may say about our First Minister, he is genuinely a massively passionate Scot and a great advocate for Scotland, and he has been helpful and successful in convincing businesses that Scotland is a great place to be. There is no question but that he has done that, regardless of politics. That is not meant to be a political statement. It is a factual statement. He has helped galvanise the resources of the Scottish Government at present. I think that would continue and possibly grow.

There could be a potential massive cost to losing the services of the British embassies and high commissions worldwide. You are absolutely correct. Although, not to be negative but I have been in one of two myself over a period of years and I have sometimes wondered if Scotland was recognised at all. If I am honest, I think we still miss a trick in the embassies and high commissions around the world in not singing about the four nations that make up Britain to make it a strong United Kingdom, and sometimes we do tend to talk about London and other places when there are fantastic other areas of the United Kingdom. We would lose a bit, without a doubt. You could argue we might gain a bit.

It is interesting, if you look at a lot of international media attention that Scotland is getting at the moment, I wonder if that is slightly related to the inward-investment programme, that we are more in the world eye perhaps because we are having this interesting debate about independence.

Q114Mike Crockart: You talked earlier on about the uncertainty around fiscal policy. My question relates pretty much to that. Have you identified what the risks are of having diverging tax and economic policies across the current geographic market of the United Kingdom?

David Watt: Yes, there are potential risks. There are also potentially opportunities in terms of taxation. To be fair, what we have done as an organisation-I should perhaps have mentioned earlier-is I initially challenged the campaigns to detail basically a business plan for Scotland going forward after 2014, whatever the outcome. We quickly found out that the campaigns are set up to say yes or no and do not develop policies and, it is perhaps naivety, we believed they would. We are now engaged with political parties asking them that same question. We want to know, on behalf of our members and on behalf of businesses in Scotland-what is Scotland going to be like post-September 2014 and in 15 and 20 and 30 years’ time? I think business is convinced on either side what it is going to be like and how it is going to prosper. If you are advocating, as the Yes Campaign and the SNP are, that we will have changes, what is the evidence and what are the changes you are going to make that are going to reduce cost to business?

Potentially, as I mentioned, an additional FSA charge, a difference in VAT in the longer term or something could make a difference across borders. So, how would you alleviate that cost, and what are the benefits you are bringing? To be honest, there is not a lot of evidence coming forward yet but I think, from our own point of view, both sides of the campaign need to give us this business plan for Scotland and promise us a healthy future and face up to the question, for example, as mentioned earlier, about, "How do we build entrepreneurship in this nation of Scotland?" If you believe we should stay in the United Kingdom, how do we do it under that structure? If you believe in independence, how do we do it under that structure? In both cases we are desperately short of facts and figures, I have to say.

Q115Mike Crockart: You are basically saying that it would increase costs. That might be worth it but you need to see the detail?

David Watt: Yes.

Professor Bell: This is an area where we, as with many that we have talked about, do not know all that much. Clearly, if there were differences in income tax rates, for example, there would come a point at which you might see people starting to move on the basis of these differences in whichever way. As I said earlier, this is particularly important for high-income individuals because if high-income individuals start to move across the border, in either direction, it has a very significant effect on income tax revenues. Clearly there are some resources that are removable, like the North Sea, but on people you might end up with some flows. Against these sorts of risks there are also possibilities of learning from each other, which I don’t think we do very well at the moment.

For example, reform in certain areas of taxation and the like, property taxation where we have a bit of a mess, if it was possible to carry that forward in one jurisdiction then the other might follow. It might politically become easier to do that in one jurisdiction or the other instead of the current impasse that we have had. I have just completed a new house, and the valuer estimated what its value would have been in 1992, which must have been quite an exercise. Property tax may be a particular example, but there are others of where our system is not perhaps the best of all possible worlds.

Q116Ann McKechin: But that is a tax that has already devolved. That is a tax that has fully devolved and has been since the start of devolution.

Professor Bell: Indeed. There is the possibility of sharing some change.

Q117Mike Crockart: Can I just ask one quick follow-up question because I am particularly interested in this point that you make about the high-net-worth individuals and the preponderance of them in Aberdeen and the potential impact that diverging income tax rates could have. Are you seriously suggesting that what might happen is people spending a bit less time in Aberdeen and having a main residence south of the border to try to pay tax in a different area?

Professor Bell: I suppose there will come a point at which people would certainly consider that. It will be interesting to see how HMRC allocate people next year, which is meant to be around your main social location, and I think people will be given the option of deciding whether that is correct or not. There will be some interesting pointers next year. I am not sure whether it happens pre- or post-the referendum, but clearly there are some people who are in a position to effectively make a decision. Most people are not, but they could determine-

Q118Mike Crockart: The Scottish Parliament have had the power, although they lost it briefly, to vary the tax rate already. Surely this should be a fairly easy exercise.

Professor Bell: Unfortunately, there is not all that much work on this. The Institute of Fiscal Studies does most of the work on how people respond to changes in income tax rates, but it has not ever specifically looked at top-end people moving. It has looked more at whether married women would join the labour force or not, and the effect of income tax rates on that, but I saw one of the deputy directors last week, and I think they are thinking of doing some work on this.

Q119Chair: I think that concludes our questioning. Thank you for that contribution. I would just say that it is perfectly legitimate and we are very happy to receive any subsequent evidence that you give. It may well be that you go away and on reflection feel that you could have added this or that to an answer, or you may wish to refine some of the statistics that you have given us. Please feel free to write to us with any supplementary evidence. It will have exactly the same weight as the comments that you have made here today. Similarly, of course, we may go away and realise that we should have asked you a question but did not and would like to take the opportunity to write to you to rectify that particular omission and would be grateful for your response. That is very helpful indeed. Thank you very much for your contribution.

Examination of Witness

Witness: James Barbour, Director, Technical Policy, Institute of Chartered Accountants of Scotland, gave evidence.

Q120Chair: Good morning, and thank you for agreeing to address us. You are indeed the panel. I will say the same to you as I did to the others. Will you introduce yourself for voice transcription purposes, and we will hope that you are being recorded this time.

James Barbour: I am James Barbour, the Director of Technical Policy at ICAS.

Q121Chair: Thank you very much. I will start off with a fairly general question. How do you think UK liabilities should be divided between an independent Scotland and the rest of the UK?

James Barbour: I can’t give a personal opinion on that, I am afraid, but what I can do is say there are various mechanisms that could be used. One is the per capita basis, basically done on the split of the population of the Scotland in comparison with the population of the UK as a whole. I think the figure calculated there is about £92 billion or £93 billion, but that, of course, was based on the figures at the end of March 2012. Given the forecast-

Chair: Sorry, could I just interrupt. Could you give me that figure again?

James Barbour: £92 billion or £93 billion. That is the figure that is generally quoted that would be allocated to Scotland based on the figures as at March 2012 but, of course, the earliest anticipated date of an independent Scotland would be March 2016. At that time we are expecting the UK public-sector net debt to be in the region of £1.5 trillion, and so the figure that would be allocated to Scotland would probably be nearer to £126 billion. Using that basis would probably be favourable to Scotland.

Other mechanisms for allocation, of course, would need to take account of the fact there is another party to this. There are those who own the debt. What are their views going to be and what are they going to look for in return? It could well be they will look for the future prospects of Scotland and assess them against the future prospects of the UK and look for an allocation on that basis. That might be anticipated future tax revenue or anticipated future GDP. I am sorry I could not give you a figure based on that, but there have been some calculations, and that might, by and large, based on recent revenues and so forth in Scotland, lead to a higher allocation of debt to Scotland.

The Scottish Government also produced its opening balance sheet paper, which took account of the last 30 years, saying that the majority of the UK public sector net debt has basically been accumulated in the last 30 years. If you look at that period, Scotland has done proportionately better than the rest of the UK, and they came up with an allocation of £56 billion. That is almost half what the figure would be in the per capita. You are approaching half. So, there will be a substantial difference there.

If we go back to the allocation of debt when Ireland left the United Kingdom in the 1920s the situation was such that Ireland agreed to take its share of the debt but ultimately took nothing because the UK Government waived it. I am not saying in the current climate the UK Government waive any right, but let us be clear here, the debt is the United Kingdom’s debt. I would expect Scotland to be given an allocation, but the debt, as it stands legally, would be the United Kingdom’s, and I think that is why it is essential that we would need the views of who owns the debt because ultimately they will want to be repaid. There also is an argument that, if Scotland wants to exert itself and show its financial credibility, it would be good for it to take its apportionment of the debt.

There are various mechanisms and unfortunately-we mentioned this earlier-this is one of the known unknowns and this is the big issue in this whole independence debate. There are a number of known unknowns.

Q122Chair: Yes, and can I just introduce another possible known unknown? Given the fact that it is likely that there will be an allocation of debt and given the fact that repayment of that debt may in part depend on the assessment of the credit rating agencies, do you think that an independent Scotland is likely to incur, shall we say, a more negative perception from the credit rating agencies or not?

James Barbour: Again, that is another one of these known unknowns. The situation will be such that Scotland will be a far smaller nation and you could argue on one hand that that would immediately lead to a higher premium in relation to any debt it was taking on. It would be normal economics-smaller, more risky, and we want a greater risk premium. Against that, I would imagine that the other side would say, "Well, we have all these oil revenues that will come through from the taxation of the oil, and over the last 30-year period we have performed, on a fiscal basis, better than the rest of the UK". So, they would use that argument. If you were pressing me, I would probably say there would be a risk premium based on the balance of probabilities.

Q123Chair: Thank you. We could probably try to second-guess a whole range of perceptions, but is there any evidence that, in general, smaller countries incur a higher risk premium than larger countries?

James Barbour: I think there probably is evidence. I could not point you exactly to it but, again, you could point to countries like Norway that are not big but are probably paying a lower premium than some other countries. Again, it would all come back to exactly how these third parties would view the future of Scotland, and David Watt referred to this. This is what we need. In the White Paper we need for the Yes Campaign to set out exactly what they see as this future Scotland-what will it look like?-and we need to know what the starting position will be, because another aspect that we just discussed was the debt that would be allocated to Scotland. If Scotland was allocated nothing, it would appear a far better business proposition than one that is allocated £126 billion, so we need information as to what the starting position will be if there is to be an independent Scotland.

Q124Chair: I accept that point. I just think it is highly unlikely. The Barnett formula: how is this factored into the assessment, and do you think it is helpful or unhelpful?

James Barbour: Sorry, in what sense? Are we referring here to, going forward, whether Scotland would be better off in terms of the revenues that we are getting from the oil industry as opposed to the allocation that it currently gets under the block grant? I am just seeking clarification.

Chair: Yes. Basically, do you think, with the revenues you would be likely to get, you could sustain the same level of public support as you do at the moment through the Barnett formula?

James Barbour: I think in the short term the answer probably is yes, but the oil won’t last forever. There would be this need to somehow look to the future to see where Scotland would get its revenues from 50 years hence, for example, and that is one of the big issues. Of course, the block grant might not last forever either. There might be changes to that, but one of the worries certainly would be that at the moment the oil will run out at a period of time. How would Scotland then have its economy rebalanced?

Also, if you look at the UK, the whole idea of rebalancing the economy is very much in the Government’s agenda as well because we have been to the line in financial services. To a lesser extent the same issue applies to the UK. There is a need to rebalance the economy. In Scotland we would need to see how, when the oil runs out, we can be in a position to have additional revenues that will compensate for the loss of that revenue.

Q125Katy Clark: In your evidence to the House of Lords Committee you stated that there were no official statistics for tax paid by those in Scotland simply because there had never been a need to measure them. Is it possible to disaggregate the figures to provide statistics about tax?

James Barbour: I am not a tax expert, but I have spoken to the tax experts within our organisation, and they say it is not. They do say, though, that the income statistics are fairly reliable. The big issues kick in when you get into corporation tax because there has never been a need to allocate these on any basis.

Q126Katy Clark: How, as a Committee, do we try to come to some clear understanding of the financial position of an independent Scotland because, of course, what we are trying to do is inform the debate to enable people to make a decision? How are people going to make a choice if we can’t get these types of information?

James Barbour: I very much agree with that statement. I have highlighted not only the opening position but, just as you are saying there, what would be the future position going forward in terms of tax revenues. I think it is very difficult. Some of the information will exist within the UK Government at HMRC and some of that information may be made available, but I am just speculating on that. It is something that has never had to be done and sometimes, if you have not set up the systems to provide the information at that point in time, it can be very difficult in retrospect to reproduce that information that obviously everyone is looking for, and I fully appreciate where you are coming from on that question.

Q127Chair: Can I just follow this up? I am not an accountant and what I may be saying may be complete gobbledygook. However, it just seems to me that in effect there must be some point at which a company qualifies to pay corporation tax, whether it is headquartering of that company or whatever. Would it not be possible to at least do some projections, say, based on Britain’s total corporation tax take and allocated according to the percentage of companies that are known to be headquartered in Scotland as opposed to the rest of the UK?

James Barbour: It would be possible to do a calculation of that sort. How accurate it would be I don’t know, and, again, we would come back to this aspect that the vast majority of corporation tax is paid by a very small number of large companies. Maybe if you had the information to go within those organisations, but I am not sure how many would be applicable in Scotland. That would be where you would be starting to look to try to assess what it is you are looking for.

Q128Chair: It does seem to me that it would not be impossible for the accountancy profession to work out a number of tools by which such a balance could be determined, particularly given the fact that you have said there is a relatively small number of companies paying the greater part of the corporation tax. Do you think that would be possible, and do you think it could be done prior to the referendum?

James Barbour: HMRC will have all the information in relation to who is paying the tax. The accountants would not be able to come out and publicly state who is paying what in terms of tax.

Q129Chair: From your perspective as an accountant, do you think HMRC, the Treasury, has the appropriate degree of expertise to do that?

James Barbour: I think they would be able to form some form of assessment based on the information that is within the system. How long that would take and, as I say, how accurate I am not sure.

Chair: Okay. We will probably pursue that with other bodies at some stage.

Q130Ann McKechin: You have also argued that to design and implement an independent tax system in Scotland from scratch could realistically take a decade, if not two; shorter if more limited devolution occurs than is involved. Does that suggest that Scotland should start by retaining the structures of the current UK tax system, or is it more complicated than that? We have obviously had this discussion about corporation tax, but the other issue on which HMRC are already working is about now defining within the UK who are Scottish residents. I just wondered what the challenges are for the tax systems.

James Barbour: There are a number of challenges in the tax system and, again, it comes back to a point that the panel discussed earlier on. What is the vision for Scotland? Once you have the vision you can then decide what taxes we want to have. The easiest solution is just to take exactly what we have in the UK and that would probably be the quickest but, by doing so, we will be taking all the faults that also exist within the UK tax system at this moment in time, which is very complex and everyone recognises that there is a need for simplification. When I sat my tax exams there were two thick books on that, and now we are talking far greater than that, so I pity all the students who have to sit these exams nowadays.

Being serious again, it would be a major effort and there would be major cost implications of Scotland implementing its tax system. These cannot be underestimated.

Q131Ann McKechin: Would this include the fact there would be additional issues about trying to establish, for example, in corporation tax exactly where the profit arose and, in the case of income tax, because people can have more than one address as we know, where they decide and determine where their address is and whether that is their real address from the point of view of the tax regulations?

James Barbour: Well, this would need to be confirmed in the legislation that was set and, of course, we could have issues with people transferring across borders. Transfer pricing would be an issue. If we look at a lot of the tax avoidance cases, it relates to either transferred pricing or different schemes in different jurisdictions. Now, what would be happening here is we would have another jurisdiction, which possibly increases the potential for further tax avoidance schemes to be put in place.

As well as that, there are figures out there that I believe indicate that the costs of running the equivalent of HMRC in Scotland would be anywhere between £311 million to £600 million a year. Now, I will find my source for that and I will provide it to the Committee, but again it is a substantial cost. We really need to identify what taxes we would be looking to introduce in Scotland. Much has been made of the corporation tax and Scotland would look to have a lower rate of corporation tax. The UK already has a very effective rate of corporation tax against other major powers. It is coming down again to 20% in 2015, so a lot of work has been done there. How much scope would there be for an independent Scotland to reduce that even further? Corporation tax is not always the key factor in companies deciding whether to locate in a region or not. There are other factors that are out there.

Q132Ann McKechin: I just wonder because the Scottish Government were originally, I think, talking about a figure around about 17%, 15%, and then they changed because of the UK Government decision to lower the tax. They are now talking about a 3% difference from the UK as a consistent standard. How difficult is it for them to keep changing the tax rate round dependent on the neighbouring country?

James Barbour: Well, again, it will come back to a formulation of how much tax revenue would Scotland get from corporation tax. They would need to have an assessment of how much corporation tax and how low could we afford to go. Other factors: what would the UK do if there was an independent Scotland and Scotland decided to reduce its corporation tax? Is it going to sit back and say, "That is fine" or is it going to retaliate? Now, I do not know the answer to that but behavioural aspects will come into this as well.

Another factor: when Scotland joins the EU would it be seen as favourable if Scotland sets out its intention to be one of the lowest corporation tax rates in the EU? Would Ireland, but for the financial crisis, still have a low corporation tax rate or would greater power have been exerted by the EU to get them to fall more in line with the rest within Europe? These are all questions that are out there and I do not think it is just quite as simple as saying we are going to have a low rate of corporation tax.

Q133Ann McKechin: Just one further point, you mentioned that the alternative is more limited devolution in the transitional period. Would that imply that an independent Scotland would share formal tax arrangements with the UK, perhaps in some of the taxes until they were in a position to take over the administration?

James Barbour: I believe that is one option that is certainly there. I would really struggle to see how, if Scotland was to have a yes vote and then become independent in March 2016, we could possibly have all the relevant systems in place to operate a completely new tax system. It certainly does remain an option. Over time, the likelihood is that if that was the option that was taken, things would change as time went on, but we cannot underestimate the costs that will be involved in setting up this independent tax system in Scotland.

Q134Paul Blomfield: You have touched briefly on membership of the EU, which is clearly a critical issue. How important do you think it is to have clarity in the lead-up to the referendum on whether an independent Scotland will remain part of the EU or will have to apply to become a new member?

James Barbour: I believe it is absolutely essential that we get clarity on this question. At the moment, Scotland is part of the UK, which is a member state of the EU. There are a number of businesses who I think would look on it adversely if Scotland was to come out of the EU. The EU offers access to markets, and not just within the EU. There are a number of global agreements with other countries, which a number of companies within Scotland would not be happy to see lost.

If the UK remained part of the EU and Scotland was not part of the EU, you would have a situation where two-thirds of our exports would be to this country, which was part of the EU and of which we were no longer part. That potentially could lead to additional costs, additional barriers to trade, which certainly would not be good for Scotland at all.

It is also essential to know exactly where we will stand as a country. Are we going to be part of Europe or not? There have been-it was alluded to earlier by the panel-comments made by certain people in Europe that certain countries might not look favourably on Scotland applying to the EU. Now, I personally think that Scotland would become a member of the EU regardless. The only thing I am not sure about is the timetable. Another factor is whether Scotland would have to join the euro; again, a major factor. We have the Schengen situation. There are a number of factors. Would Scotland have any opt-outs? Now, if you look at this from the outside it is hard to see how Scotland would be able to stand in the same position as the UK in negotiating opt-outs. I think it is quite difficult to see how we would be in that position. The argument against that would be that during the time of any yes vote to the transition to Scotland becoming independent the negotiations would take place as Scotland was still part of the EU through the UK membership, but it does seem difficult from the outside to assess how Scotland would be able to take advantage of any options. I certainly think it is vital we know the answer to this.

Q135Paul Blomfield: I think there has been a consensus of all the witnesses that we have had the opportunity to talk to that Scottish membership of the EU is clearly important, but it is right that we look at the terms. If, as the general assumption is, Scotland would have to reapply and as a new member state, for example, would be required to join the euro, what difference do you think that would have for the Scottish economy?

James Barbour: Well, I have mentioned one of the issues straight away and that would be that two-thirds of the exports are going to the rest of the UK. The rest of the UK would still be using sterling and we would then be using the euro, so straight away you have transactions costs. The public, never mind business, do not like transactions costs. You know when you go on holiday and you have to transfer your currency. Even if you were not to spend anything, when you come back you still have less than you went with. It is that feeling. Any barriers to trade would not be welcome by business. If we were in the euro, that is one of the potential issues.

Another issue again would be monetary policy would be, in effect, being set. We have seen the consequences of that when it is set, in effect, taking account of the larger states such as Germany, France, what has happened in Greece and so forth. There would be worries that monetary policy, which is one of the key economic levers, would be being set in Europe. Interest rates would be being set by the European Central Bank, so again it would take away another pillar of this argument of independence and having access to these key economic levers.

Q136Mr Walker: I think you heard the earlier panel talking about the issue of the banking system and the dominance of the Scottish banking set-up by really two banks, HBOS and RBS. Do you have any comments on what effect that dominance is likely to have on lending to businesses in an independent Scotland?

James Barbour: Well, at the moment lending is not very great so I am not sure that going forward it would have a much greater detrimental impact. At the moment, businesses really are saying the banks are not lending. The banks, of course, have to ensure that they have been increasing their capital buffers, so it is difficult to put the blame on the banks because they are really caught between two different lines of action here. I am not sure that there would be a major deterioration in the current situation, to be honest, although other factors do come into play. One is if Scotland was in the euro and so forth, how would that impact? Unfortunately, we just really need to wait and see how that one would then actually roll out. There would be worries from consumers, however, if we were to get into a different currency. What would happen to their mortgages, all the financial products? Even if you take the extreme and Scotland had its own currency, what would be the immediate aftermath of Scotland having its own currency? There would be, I certainly believe, a slight concern among most of the public at this moment in time if that was to be the case.

Q137Mr Walker: I think there would probably be concern from both sides of the border on that front. I suppose I should declare an interest in having a small private pension with a Scottish pension company. Presumably, there would be a similar impact in terms of concerns and worries if there were to be a different currency from all those people in the southern part of the UK who might hold financial policies based in Scotland.

James Barbour: Yes, most certainly.

Q138Mr Walker: Just in terms of the competition situation, do you see any aspects in which Scotland might be better placed to attract competitor challenger banks if it were independent, rather than remaining part of the UK?

James Barbour: Again, it would come back to what this Scotland looks like and so forth in my view. If Scotland really was seen as this attractive proposition, then possibly, but I think, as was mentioned earlier, banks really now-in terms of the larger banks-will go where the business is and so forth. They can still allocate funds across borders. If you really have this great business proposition, the chances are that someone will provide the funding for that proposition. I think businesses still would be able to attract finance, whether it was coming from banks within Scotland or financial institutions outwith Scotland, if they had the right business plan and it was seen as something that could be taken forward.

Q139Mr Walker: Would an independent Scotland be more or less attractive as a country in which to headquarter companies and also in terms of attracting inward investment from elsewhere in the world?

James Barbour: In terms of inward investment, Scotland has done reasonably well and the recent Ernst & Young figures again indicate that. I think Scotland was second out of regions in the UK in terms of attracting foreign direct investment. Provided the right infrastructure and so forth was in place, Scotland may be able to continue to do that. I do know the points made earlier on, that it would lose access to some UK agencies and so forth, but it might be able to still continue to do so.

In terms of companies looking to headquarter in Scotland, I am not so sure. I think there were concerns raised about this earlier on. The larger companies now do tend to centralise themselves near large key cities, such as London and so forth, around the globe, and I am not sure if Scotland would fit into that particular dynamic.

Q140Mr Walker: You mentioned putting the right infrastructure in place. Can you just describe what you see as the right infrastructure to attract?

James Barbour: Well, to a certain extent Scotland would need to mirror what is in place in the UK at the moment in terms of the UK having this good governance structure and how it is perceived globally. People invest in UK companies because they believe there is a governance structure, a regulatory structure in place that is conducive to investment. The tax system again would be vital. You would need to have competitive tax rates and so forth, but you would want to attract the right type of companies as well. These letterbox-type companies were mentioned earlier. Well, they are not going to contribute significantly to the Scottish economy. We need corporations here that would bring in jobs and so forth. All these factors would need to be looked at in order to try to bring in the types of organisations that you believe would fit the model you see as your Scotland going forward.

Q141Katy Clark: You have touched on this issue already in relation to corporation tax and the possibility of a race to the bottom between Scotland and the rest of the UK if Scotland were to go independent. What do you think the risks are of having diverging tax and economic policies given the current geographical market within the UK? In what areas do you think it might make sense to have different policies and in other areas where do you think it would be very risky?

James Barbour: I have already alluded earlier to how important the UK market is to Scotland, so anywhere there is a difference in theory could act as a negative, a disincentive to business across those borders. Earlier on it was mentioned how much of the UK business goes to Scotland. I think the figure is roughly 10% so the significance to Scotland is far greater in terms of its sales to the rest of the UK, but 10% is not an insignificant sum either. There is a great deal of interdependency between the two economies.

In terms of where I think things would be better, at the moment I think Scotland already has certain powers that it can use to help bring in companies and so forth. I am not sure there are areas where I would specifically set out and say I would do this or that to improve things. I think such is the interdependency of the two economies and the importance of the UK economy to Scotland that as soon as you go down a divergent route you are in theory creating barriers. Now, if we look at the tax situation, if we go down different tax routes or even different types of tax that potentially creates opportunities for tax avoidance, which is not something that we would really relish. Again, we believe at this moment in time that it is absolutely crucial that whatever happens post the referendum absolutely what is key is ensuring that the UK market that exists at the moment would still exist with the minimum amount of barriers. Now, the divergences between the Republic of Ireland and Northern Ireland were alluded to earlier, and businesses have commented that even the simple VAT situation there does cause problems. Even simplistic matters such as VAT and administration of VAT add to the costs of businesses trading across these borders, and if you have additional costs, it does not help anyone.

Q142Mike Crockart: Thank you very much. I have a particular question, but, before we move off the subject of tax, much play is made of the creation of a sovereign oil fund, eyes cast longingly across the sea at Norway. We have already heard in evidence session today about the state of the deficit for Scotland even with oil revenues on a geographical basis taken into account. I just wonder if you have any figures or knowledge of any studies that have been done on what would need to happen in the tax or spending of the Scottish economy to enable a sovereign oil fund to even be created.

James Barbour: I am sorry, I do not have figures available that would enlighten us in relation to that. Assuming that Scotland does get an allocation of the debt and if we assume for this moment it is in the £92 or £93 billion mark, then Scotland would have to make a decision as to how it was paying back that debt and also if there would be funds available to set up this separate fund. If we went back in time, it probably would be a great idea for Scotland to have set up its separate oil fund. We are now at a different point in time, and it would very much depend on the opening position of Scotland and the anticipated revenues coming forward as to whether such a fund could be set up or not.

Again, if it was able to set up a fund, that could help alleviate some of the concerns in relation to what would happen when the oil ran out. It would maybe give greater time to rebalance the economy, but ultimately you could not keep funding something if the revenues from that area dried up either. It really does depend on what this future Scotland looks like and I am afraid it goes back to this: it is another known unknown; we do not really know what position this Scotland would be in. I do agree it would be really helpful to have the information that you have asked for.

Q143Mike Crockart: It is clear that there would be difficult choices to be made there because in the evidence session that we had yesterday one of the witnesses who talked about a sovereign oil fund dismissed the use of the oil revenues to pay back debt saying that other savings could be made to pay back debt and that the oil should be put into a sovereign oil fund. There would be a significant impact if the choice were made to do that either in the tax take or in Government spending.

James Barbour: Yes. As I say, we would need to know what the tax take was. Once we knew what the income was Scotland was getting in, we could then assess what could be done with that money. Until we actually know what is coming in, it is almost impossible to say. Yes, it would be great to pay back the debt and also set up this separate fund at the same time, but would there be sufficient revenues there to do it? What would that mean in terms of the other side of this, the public spending? Would there need to be significant cuts in public spending? That is why I keep going back to this. What is the vision for this Scotland? In the White Paper it really has to be set out what the vision is for Scotland. Are we looking at an economy that will be higher taxed, greater social welfare type economy, or are we looking at a different type of economy, possibly with lower tax, et cetera, and lesser spending on welfare and so forth? This is what really needs to be set out so that then proper assessments can be made, because the tax rates will obviously have an impact on what income comes in and then you can look more properly at what you can do going forward.

Q144Mike Crockart: Okay; thank you. Moving on to the point that I was wanting to ask the question about, which is more to do with the financial services sector, according to evidence submitted to the House of Lords Committee the Scottish financial services sector, Scottish insurers, sell 94% of their products to the rest of the UK. About 84% of mortgages sold by Scottish companies also go to the rest of the UK. How do you think that will be affected by independence?

James Barbour: I would have a concern that those numbers would decrease going forward. There is some research out there that would indicate that people like to buy from the jurisdiction in which they are based. If you are no longer in that jurisdiction, would it have the same attraction? There might also be nervousness: will this eventually pay out if it is a pension? What are the risks attached to this? Would they be looking for greater returns? And so on; there are so many factors involved in this that I think the best I could say is it would be a concern.

Q145Mike Crockart: Do you think that the impact depends more on possibly international agreements that might be drawn up between RUK and Scotland or if there were different financial regulations that applied north and south of the border? Would they make the impact greater or lesser?

James Barbour: If there were different regulations, that would be a negative. Anything that adds to complexity I would see as a negative compared with where we are at the moment. People would perceive that greater complexity, different regulators, additional cost, and the consumer ultimately will pay the cost at some stage. If we had that situation, I think consumers would be worried and it might have an impact on where they invest their money, whether it be in pensions or other types of investment products, or whoever they take their mortgage with as well. They might look to the aspect that because of these additional costs that would again potentially increase the cost of their mortgage through interest rates, et cetera.

Q146Ann McKechin: Thanks very much. I think I do recall that when Scottish Power was bought by a Spanish company and was subject to Spanish tax law many people in Scotland decided to dispose of their shareholdings. I think this issue you have mentioned about potential different tax rates is a very good point. Sorry to put you on the point, but your own institute I think is arranging a conference today about pensions and I think the Finance Secretary is addressing the conference about the issue of pensions. We had from the evidence yesterday some discussion about the pension arrangements for, for example, university lecturers and also for the thousands of people who are employed by Royal Mail and the Post Office. I think one of the pension schemes that was mentioned is currently in deficit. If pension schemes had to be separated out between Scotland and the rest of the UK, am I correct in considering that the fund, if they were in deficit, would have to be capitalised before it could be then divided?

James Barbour: That would relate to the private sector schemes, yes. They would need to make good the deficit under the EU law because it would then be different jurisdictions. But let us be honest, in the whole pensions issue, the UK has a pensions issue and the pensions issue is that most of the public sector pensions and also our state pensions are unfunded. Now, at the whole of Government accounts at the end of March 2011-which is the most recent set available-£960 billion was the estimated liability in those pensions. Now, Scotland again would need to get its share of that particular debt and in theory that would relate to whether someone was considered to be on the Scottish side of the fence or the rest of the UK side of the fence. I do not have access to specific figures at the moment as to what that would amount to, but again it will be another substantial debt that Scotland would have to take on board. It is something that I think you will find there will be a lot of discussion at this conference today on, but I think there will also be a lot of discussion going forward on this particular issue.

Q147Ann McKechin: Another known unknown?

James Barbour: Yes. There will be unknown unknowns out there, but I really have to emphasise there are enough known unknowns in this situation and that does create uncertainty. Business does not like uncertainty. At the moment that has not really played out, but the closer we get to this referendum there is the likelihood that the uncertainty might start to creep up and have an impact on business decisions. I hope that is not the case but, as I say, it is just one of those factors that is out there.

Q148Chair: Could I just take this pension issue one step further? You have alluded to the deficit with public sector pensions. Off the top of my head I do not know the figures myself, but my instinct would be to say that there is probably a higher proportion of employees in the public sector in Scotland than certainly in the south and London area of England. Would it be fair to say that a disproportionate amount of that public sector pension deficit would be attributable to Scotland? By disproportionate I mean slightly more than if you allocated it on a purely population basis.

James Barbour: It might, on the face of it, appear to be the case, but we would really need to look in detail to see who these pensions actually belong to because you might find there are a lot of higher earners south of the border with far higher pensions. It is a difficult one and we would really need the detail to give you a proper assessment of that particular question.

Q149Chair: If I can just come back, how do you think that could be done?

James Barbour: Well, the information should be available within a number of sources as to what makes up this pension liability. Whose pensions are we talking about? For each individual again it would come back to whether they are perceived as being Scottish for this purpose or rest of the UK. For example, what happens to someone who is based in Scotland but has worked all of their life in London as a civil servant and built up the pension there? Who should take responsibility for that pension if the person retires to Scotland?

Q150Chair: Thanks. You have highlighted a whole number of issues and-I love this phrase-known unknowns. Obviously, it is as difficult for this Committee to come to hard and fast conclusions on them as it is for people to give their opinion. One of the benefits of having people like yourself to be interviewed by us is that, of course, we now have a greater clarity on what are the known unknowns and, perhaps, what are the steps to make them slightly less unknown. In that respect, we are very grateful to you for helping us take this forward and, if you like, clarifying where we need to go as a Committee to try to resolve some of the very imprecise and vague areas on which voters are going to have to base their judgment.

That is a rather longwinded way of saying thank you very much. You have helped the Committee take our deliberations forward and we very much thank you for your contribution. As I said to the previous panel, do feel free if you wish to either refine, clarify or supplement anything that you have said to us today with further written evidence, we will be very happy to receive it. Similarly, if we feel that we need to probe you further on any aspect of it, we may write to you and we would be grateful for your reply. Thanks very much.

James Barbour: Thank you very much for the invitation. Thank you.

Prepared 6th August 2014