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

Chapter 7: Summary of Conclusions and recommendations

Chapter 1

152.  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. (Paragraph 5)

153.  This report does not make a case either for or against independence. We hope to inform the debate both in Scotland and in the rest of the UK in the run-up to the referendum. (Paragraph 6)

154.  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. 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. (Paragraph 9)

155.  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. (Paragraph 12)

156.  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. (Paragraph 16)

Chapter 2

157.  The UK's single market brings economic benefits to Scotland and the rest of the UK. If it fragmented after Scottish independence, Scotland's smaller economy would be disproportionately affected. (Paragraph 21)

158.  A single market is not simply a matter of free trade and investment. Its cohesion can also be weakened by divergences over currencies, regulation and taxation. The severity of the threat to the UK single market would depend to a large extent on the decisions of the Governments of an independent Scotland and of the rest of the UK. (Paragraph 25)

159.  A post-independence Scottish Government and its counterpart in the rest of the UK should try to preserve, as far as possible, the single UK market, which brings economic benefits to both. (Paragraph 29)

160.  Any reduction in intra-British trade and investment following erosion of the single market would be felt in the rest of the UK as well as in Scotland. Given the disparity in size between the Scottish economy and the rest of the UK economy, the effect on the rest of the UK as a whole would be much smaller than that on Scotland. (Paragraph 33)

161.  As a starting point, the division of UK physical assets should be on a geographical basis. Financial assets and liabilities should be divided by share of population. (Paragraph 36)

162.  North Sea oil decommissioning costs will be very substantial. The oil companies will want to offset them against future tax due, which would reduce an independent Scottish Government's revenues. How these matters are resolved will have an important bearing on the value to Scotland's economy of oil. (Paragraph 41)

163.  It remains the case that the Scottish economy would be likely to gain from North Sea Oil revenues. The scale of that gain is much more uncertain as is how long it will last. So is its value to the underlying health of the rest of the Scottish economy, especially given the very real possibility of volatility in output and revenues. Oil alone will not ensure that an independent Scotland is a prosperous Scotland. (Paragraph 43)

164.  After a "Yes" vote in the referendum, the Scottish Government would need to make timely arrangements to levy its own taxes on independence. Even if an independent Scotland's oil revenues broadly made up for the loss of the Barnett formula's effect on the block grant, they would be a less predictable source of revenue than transfers from the British Treasury. (Paragraph 44)

165.  Negotiations on division of assets are likely to be intricate and lengthy, leading to uncertainty until successor systems and institutions prove themselves in Scotland and the rest of the UK. (Paragraph 45)

166.  Added together, an independent Scotland's share of the UK's public sector debt and its share of the UK's known future liabilities, based on relative size of population, would be around 123% of GDP. (Paragraph 46)

An independent Scotland would need to service its own sovereign debt and to manage its spending, borrowing and taxation in such a way as to win and retain the confidence of global lenders that its debt burden is manageable. (Paragraph 46)

167.  It is for the Scottish Government to explain to voters well ahead of the referendum how it intends to take over its share of the UK's public sector debt. (Paragraph 47)

168.  There can be no definitive answer to the question of whether an independent Scotland would be more prosperous, less prosperous or as prosperous as Scotland is now. Our report identifies clear threats to Scotland's prosperity under independence; while the upside is uncertain. (Paragraph 53)

Chapter 3

169.  The choice of currency is perhaps the most important economic decision an independent Scottish Government would face. What may seem like a dry and technical issue is, as Professor Gavin McCrone reminded us, "of the greatest importance for those of us living in Scotland". (Paragraph 54)

170.  The position of both the UK and Scottish Governments on how an independent Scotland could retain sterling as its currency and what it would entail needs to be made clear. Both Governments have a duty to inform Scottish voters ahead of the referendum. (Paragraph 58)

171.  Effective governance of monetary policy requires the Monetary Policy Committee (MPC) of the Bank of England to continue to consist of experts. It would be unacceptable for the MPC to have members representing the interests of a separate country. (Paragraph 62)

172.  For the Bank of England to provide central bank services to substantial financial institutions operating in an independent Scotland and regulated by a body reporting to an independent Scottish Government implies that the Bank would accept risks over which it had little control, which seems implausible. (Paragraph 67)

173.  The Fiscal Commission's unprecedented proposal for the Bank of England to be overseen by both the rest of the UK and Scottish Governments would lead to significant governance and accountability problems. We do not see why the UK Government would agree to this proposal. (Paragraph 69)

174.  A separate Scottish financial regulator may be a requirement for an independent Scotland to join the EU but it would be likely to add to compliance costs and complexity for Scottish financial institutions with large cross-border businesses. (Paragraph 71)

175.  It is difficult to see how the UK Government could extend central banking services to an independent Scotland since the UK Government would lack control over the tax and spending policies of an independent Scotland. (Paragraph 75)

176.  Continued use of sterling by an independent Scotland in monetary union with the rest of the UK is the stated preference of the Scottish Government. But it would raise complex problems of cross-border monetary policy, multiple financial regulators and taxpayer exposure and could only come about, if at all, on terms agreed by the UK Government. Arrangements should be clear before the referendum. But the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful. (Paragraph 77)

Chapter 4

177.  An independent Scotland would benefit substantially from tax revenues from a geographical share of North Sea oil and gas reserves. But as the revenue from North Sea oil and gas would be a much larger proportion of total tax revenue in an independent Scotland than in the UK, its volatility would make it more difficult to conduct economic policy. (Paragraph 85)

178.  We recommend that existing UK public sector debt should be apportioned between an independent Scotland and the rest of the UK by share of population. We also recommend that the UK's known future liabilities, such as public sector pensions and private finance initiatives, should be apportioned on the same population basis unless they can be clearly identified as applying to a particular nation only. (Paragraph 89)

179.  Transferring to an independent Scotland its agreed share of UK liabilities would be fraught with difficulties. Creditors might not agree to a straight transfer of public debt from the UK to an independent Scotland on otherwise identical terms. The Scottish Government should explain to voters before the referendum how it would in practice take over its agreed share of UK public sector debt and future liabilities on independence. (Paragraph 91)

180.  Lack of data on the tax base in Scotland impedes full understanding of the economics of independence. Although there can be no certainty we recommend that the Scottish Government and HMRC work together to make the best possible estimate of the tax base in Scotland. (Paragraph 95)

181.  A monetary union as advocated by the Scottish Government would require robust and credible limits on borrowing and indebtedness by both member states. So far the Eurozone has found this problem intractable. The Scottish and UK Governments would need to reach agreement on detailed and credible fiscal restraints, including sanctions for breaches, before the referendum if Scottish voters are to make an informed choice. We believe that it would be difficult for any such agreements to be made binding in all circumstances. (Paragraph 104)

182.  Dismantling the current fiscal union would result in a loss of risk-sharing mechanisms between an independent Scotland and the rest of the UK. This would be an adverse consequence for the citizens of both states, but particularly for people in Scotland given the relative size of the two countries. (Paragraph 106)

183.  With no track record of issuing debt securities, the difficult mechanics of taking on a share of the UK's public sector debt, volatile tax revenue and the loss of risk-sharing with the rest of the UK, an independent Scotland would face considerable fiscal challenges. (Paragraph 107)

Chapter 5

184.  The Scottish Government's commitment to EU membership for an independent Scotland recognises the economic importance of the single market and the need of Scottish business to remain part of it. But it is not clear how Scotland would make the transition from its current inclusion in an EU member state to EU membership as a state in its own right, since there is no precedent in EU history. (Paragraph 111)

185.  Taking as authoritative the view on process of the President of the European Commission, the European Treaties would cease to apply to Scotland on independence. Scotland would need to apply for membership of the European Union in its own right and the outcome of negotiations on Scotland's admission would need to be ratified by each EU member state. (Paragraph 114)

186.  Negotiations after a "Yes" vote for independent Scottish membership of the EU would most likely be protracted and complex; Scotland, the rest of the UK and the EU itself would have to navigate through EU procedures as well as settle many intricate points of substance then win acceptance of the outcome by all other EU member states. (Paragraph 117)

187.  Separate Scottish representation in international bodies might be seen as reducing the standing of the rest of the UK, with possible adverse consequences for its voting strength or shareholding in some international bodies. (Paragraph 118)

188.  An independent Scotland would need to have a double taxation agreement with the rest of the UK and to negotiate tax treaties and similar agreements with a range of countries. (Paragraph 121)

Chapter 6

189.  We do not set out to make recommendations about the defence policy of an independent Scotland or of the rest of the UK. Instead we try to tease out the economic implications in the defence field of Scottish independence. (Paragraph 122)

190.  After a "Yes" vote defence and currency-related issues would be main strands in negotiations between Scotland and the rest of the UK on the terms of Scotland's secession. The outcome could have significant economic implications for the rest of the UK as well as Scotland. (Paragraph 123)

191.  A "Yes" vote in the referendum on Scottish independence would raise many complex issues of defence policy for the rest of the UK. We believe the Government and Ministry of Defence should be assessing the implications, economic as well as strategic, and planning in the event that Scotland becomes independent, and communicating these implications to Scottish voters and to the rest of the UK as clearly as national security considerations permit. (Paragraph 130)

192.  We were disappointed by Defence Ministers' refusal to attend a hearing and answer our questions. In defence, as in other areas, facts are lacking to help Scottish voters make an informed decision, and the rest of the UK to understand the implications. The Government should take every chance to make things clearer. Its acknowledgment of time and cost implications if an independent Scotland demanded the withdrawal of the UK deterrent is a step in the right direction. But there is a long way to go. (Paragraph 132)

193.  We welcome the Government's intention that defence should feature significantly in the evidence and analysis it plans to produce of the benefits of maintaining the United Kingdom. The Government should be much more active in making the whole UK aware of the defence-related economic implications of next year's referendum in Scotland. (Paragraph 133)

194.  We note the MoD's unwillingness for national security reasons to disclose contingency planning arrangements in relation to the Clyde naval base. But we would welcome assurances that plans are in place in case the outcome of next year's referendum results in the UK's nuclear deterrent force no longer being based in Scotland. (Paragraph 137)

195.  Given the SNP's firm commitment to removal of nuclear weapons from an independent Scotland, it is clear that a "Yes" vote in the referendum would raise a major issue for the Government of the rest of the UK to consider in order to find a workable and affordable solution. We urge the Ministry of Defence, building on its response to the report on Trident of the Scottish Affairs Committee of the House of Commons, and without compromising national security, to release more information about the cost and employment implications of a decision by an independent Scotland to require their removal. (Paragraph 138)

196.  We invite the Ministry of Defence to publish its estimates of the overall cost implications for the rest of the UK of a division of conventional military assets with Scotland on the lines suggested by Lord West. (Paragraph 139)

197.  Lord West suggested to us that defence-related job losses in an independent Scotland could range up to 25,000. If they were realised, they would represent an unwelcome transitional effect of independence. (Paragraph 144)

198.  There is not enough information about the defence policy of an independent Scotland to enable Scottish voters to make an informed judgment in next year's referendum. We recommend that the Scottish Government should make a sustained effort to clarify the issues before the vote, giving an indication of its expected defence budget, military establishment, scale of procurement and impact on Scotland's workforce skills base, as well as indicating the terms of Scotland's application to join NATO. This would help Scottish voters assess the employment and economic as well the security implications of an independent defence policy. (Paragraph 151)

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