Economic Implications for the United Kingdom of Scottish Independence - Economic Affairs Committee Contents

The Economic Implications for the United Kingdom of Scottish Independence

Chapter 1: Introduction

Why this report?

1.  In 2014, the people of Scotland will take a momentous decision. They will cast their vote in a referendum on their country's future. If they vote "Yes" to independence, the 300-year old Act of Union with the rest of the UK would lapse. After a period of negotiation, Scotland would emerge as an independent state. If they vote "no" a divisive issue in Scotland will be settled and it will continue its existence as part of the United Kingdom, with its own devolved government.

2.  The Scottish Government's view of the way forward after a "Yes" vote in 2014 is set out in "Scotland's Future: from the Referendum to Independence and a Written Constitution", published on 5 February 2013. It envisages that Scotland would become independent in March 2016. The deputy First Minister of Scotland calls it a first contribution to clarify the process that would follow a "Yes" vote and proposes to the UK Government "that we now engage in discussions on the process of the transition to independence in advance of the vote".[1]

3.  The British Government's approach is very different. It aims to clarify the issues before the referendum and, in the words of the Chief Secretary to the Treasury, "is undertaking a large programme of analysis to establish a robust body of evidence to inform the debate on Scotland's place in the United Kingdom".[2] But, as the Secretary of State for Scotland told us: "What we will not do is get into pre-negotiations."[3]

4.  The decision the Scots will have to make is not a simple one. It will have far-reaching constitutional, political and social, as well as economic, consequences. Nor will their verdict be confined in its effects to North of the Border. It will have important implications too for the rest of the UK which again will not be solely economic.

5.  It is however on the economic effects that this report will focus. Polling evidence shows that the expected economic impact will be an important factor for the Scots in making their decision. Voters in Scotland deserve the best evidence-based assessment of the likely economic consequences of independence. We have sought to collect and assess that evidence as part of our analysis of the economic implications for the whole United Kingdom.

6.  This report does not make a case either for or against independence. We have examined the leading academic, business and political experts on the economics of independence, and we have sought to present their analysis and conclusions in as clear and digestible a form as we can. We hope to inform the debate both in Scotland and in the rest of the UK in the run-up to the referendum.

7.  This is a simple objective but a complex task. As the evidence we heard made clear, the Scottish and the rest of the UK economies are at present closely integrated. Cross-border trade is far greater than would be the case had they not been for so long a single country: more than two thirds of Scotland's exports of goods and services go to the rest of the UK, mainly to England.[4]

8.  This report considers a number of economic aspects of separation, including:

(i)  What might be the impact of Scottish independence on the single market in the United Kingdom? (Chapter 2)

(ii)  What effects would independence have on international investment in Scotland? (Chapter 2)

(iii)  What implications would independence have for the decisions of major as well as of medium and small companies as to where they decide to locate and to what extent would these be affected by the possibility of different regulatory regimes North and South of the border? (Chapter 2)

(iv)  What currency would an independent Scotland use, and what would be the arrangements for its management? (Chapter 3)

(v)  What would be the role of the Bank of England if Scottish financial institutions needed emergency support? (Chapter 3)

(vi)  What arrangements would be made for the regulation in Scotland of Scottish financial institutions? If the Bank of England were expected to support at-risk financial institutions in Scotland, should it also have authority over financial regulation there? Would this be compatible with EU requirements on national regulation by member states? (Chapter 3)

(vii)  What would be the division of assets and liabilities between an independent Scotland and the rest of the UK? How would an independent Scottish Government assume its substantial share of UK national debt? What impact might there be on the creditworthiness of the rest of the UK? (Chapter 4)

(viii)  What would be the underlying fiscal position of Scotland post-independence without a block grant transfer from Westminster? What fiscal policy would an independent Scotland pursue and would it be constrained by fiscal agreements with the rest of the UK? (Chapter 4)

(ix)  Would an independent Scotland become a member of the European Union and on what terms? What might be the impact of the United Kingdom's renegotiation of its relationship to the EU? (Chapter 5)

(x)  What defence arrangements would exist in an independent Scotland and what implications would these have for the cost of defence in the rest of the UK, including the potential cost of re-siting Britain's independent nuclear deterrent? (Chapter 6)

9.  The economic implications of Scottish independence for Scotland and for the rest of the United Kingdom are not symmetrical. Broadly Scotland's GDP is around one-tenth of that of the rest of the UK. (See Appendix 5). The impact on the rest of the UK might still be important in certain circumstances: for example if significant financial institutions based in Scotland and active in the rest of the UK were to fail, that might hit the rest of the UK as well as Scotland. There would be economic as well as strategic implications for the rest of the UK in defence. The main economic effects of independence would be felt in Scotland. An early, transitional problem would be assuming its share, perhaps £93bn, of the UK's public sector debt. The impact on defence strategy of Scottish independence could have significant economic implications for the rest of the UK; so also could the adoption of sterling as the currency of an independent Scotland in monetary union with the rest of the UK, as proposed by the Scottish Government.

10.  One factor in particular adds to the complexity of our task. A "Yes" vote in 2014 would be a vote for independence. It would be followed by a long period of negotiation between the Government of Scotland and that of the rest of the UK on a whole host of issues included in the list of questions above. That process might last for years, said Professor John Kay of Oxford University[5] and other witnesses. Moreover, the President of the European Commission, Mr Jose Manuel Barroso, also made clear to us that a newly-independent Scotland would not automatically remain a member of the European Union.[6] Some EU foreign ministers, including the Spanish, have since expressed agreement.[7] If Scotland wanted membership, it would have to apply and negotiate terms. A newly independent Scotland would not inherit some of the special terms with Europe that currently apply to the United Kingdom, for example its opt-out from the Euro.

11.  Given the complexity of these issues, and the relative shortness of time before the referendum, it is of the utmost important that Scottish voters are presented with the key issues as soon and as clearly as possible. Since the consequences of the Scottish vote will also be felt throughout the country, the people of the whole of the UK also need the British Government to state its position. In the course of our inquiry, however, we have become increasingly concerned that both Edinburgh and Westminster are not being open with the Scottish people or the British people as a whole. Examples of the former include the First Minister's rejection of our invitation to give us evidence and the complete refusal of the Scottish Government to accept that it would have to apply for EU membership, as shown by the evidence of the Cabinet Secretary for Finance, Employment and Sustainable Growth.[8] An example of the latter is the official reticence by the British Government on the implications and costs of Scottish independence for defence. Although the British Government has now published the first in a series of papers on the issues, on the UK's legal and constitutional framework,[9] they failed to respond in time for our committee's report to a request for a simple list of planned papers on economic themes and a timetable for their publication

12.  Even more concerning, many Scottish companies whom we asked for evidence simply refused (though some to their credit accepted: the Chairman of RBS and the CEOs of Standard Life, Aggreko plc and the Weir Group). This was so even though the committee visited Edinburgh and Glasgow to take evidence. Regrettably, and without attributing blame, we formed the impression that a conspiracy of silence seems to have developed in Scotland which is inhibiting open debate; Councillor Gordon Matheson, Labour Leader of Glasgow City Council, even spoke of "a climate of fear [that] even extends to asking the questions publicly".[10] Scotland needs and deserves a fully-informed debate, based on fact and free from rancour, well before the referendum vote. To help bring it about the Scottish and British Governments should be more open about how they see the outcome of negotiations after a "Yes" vote; each should indicate the "red lines" of its negotiating stance on such crucial issues as currency, defence, division of assets and debts and negotiations with the EU before the referendum so that voters can make an informed choice.

13.  The task we set ourselves of providing an objective account is therefore a challenging one. However, amongst academic economists, there is a wide and broad consensus on the issues and the likely scale of their impact. For example, the importance of the future price of oil to an independent Scotland's future fiscal balance, and the blow which even a modest fall would represent to it, came through from much evidence we heard, including the important paper by Professor Alex Kemp of Aberdeen University.[11]

14.  The downside risk, of things going badly for Scotland alone, is clear. Its people enjoy an insurance policy against disaster in the form of the willingness of the United Kingdom to draw on its broader resources to protect them in hard times. This would not be so if Scotland goes it alone. On the other hand, the rest of the UK would lose the economic benefit of most oil reserves in the UK Continental Shelf.

15.  There are potential upsides too, even though they are harder to quantify. Few of our witnesses endorsed the view that independence would set loose Scottish entrepreneurial spirits in a way that would improve its economic performance, but they could not rule out such an effect either.

  1. It will be for the Scottish people to balance their assessments of the risks, which are undoubtedly great, with their hopes for the benefits; and indeed to weigh in the scale with economics the non-economic factors which should inform their decision. We aim in this report to set out the economic facts and the arguments to help the people of Scotland make their once-in-a-generation decision.

1   Foreword, Scotland's Future: from the Referendum to Independence and a Written Constitution, Scottish Government 5 February 2013 Back

2   Q 500 Back

3   Q 901 Back

4   Q 228 Back

5   Q 85 Back

6   Jose Manuel Barroso letter of 10 December 2012 to Lord Tugendhat  Back

7   The Guardian, 'Join the queue' for EU membership, Spain tells Alex Salmond, 24 October 2012 Back

8   Q 865 Back

9   Scotland analysis: Devolution and the implications of Scottish independence, Cm 8554, February 2013 Back

10   Q 714 Back

11   Professor Alex Kemp  Back

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