Little over a year ago, the Scottish National Party (SNP) became the largest party in the Scottish Parliament by just one seat.  Failing to find a coalition partner, the party pressed ahead with the untested option of minority government in Scotland, electing Alex Salmond MSP as First Minister of Scotland.

For decades, the primary aim of the SNP has been to take forward plans for Scottish independence - arguing that the country’s economy is being held back by the economic policies of Whitehall.  The Nationalists argue their forecasts show the break-up of the Union would ‘let Scotland flourish’, but debates about the figures continue to rumble on amongst economists and business leaders alike, many of whom think the economic success of an independent Scotland would be uncertain at best. 

This week’s Knowledgeshop Briefing therefore looks in more detail at what Scottish Independence would mean for Business.

One year on: What does Business think?

After a fairly ‘business friendly’ year in power, those who have been persuaded to publicly back independence include former RBS chairman, Sir George Mathewson; Stagecoach chief executive Brian Souter; Crawford Beveridge, the former chief executive of Scottish Enterprise; and Sir Tom Farmer, the founder of Kwik-Fit.   In addition, the free market economic think tank, the Adam Smith Institute, published a report last November which claims that the economy of an independent Scotland could significantly outstrip the performance of the UK.   The feeling amongst supporters could perhaps be best summed up by Ben Thomson, chairman of the Edinburgh-based investment bank, Nobel Group, who views independence as, “more of an opportunity than a threat”.

Yet rather than clamouring for independence, many in the business world seem rather satisfied with the status quo.  Since devolution, cuts in rates for small businesses and the axing of tolls on the Forth and Tay road bridges have helped them save thousands of pounds a year, boosting profit margins by up to a third.  Scotland continues to perform impressively in most professions, including law, accountancy, actuarial consulting and chartered surveying, as well as emerging as a world leader in the life sciences.

However, there are growing numbers speaking up in defence of the Union.  Last year a group of 150 senior bankers, businessmen and broadcasters, including Sir George Mitchell, the former governor of the Bank of Scotland, Sir Peter Burt, former chief executive of the Bank of Scotland, and Charles Allen, former chief executive of ITV, issued a joint statement claiming that independence would “damage Scotland”.   On the same day, the Financial Times published an article expressing doubts over the economic viability of an independent Scotland, predicting that it would be forced to raise taxes within a decade due to Scotland’s disproportionate levels of public spending. 

A “National Conversation”

After 100 days in power, the SNP took the bold step of launching a Scottish Government consultation they call the “National Conversation”.  The ’conversation’ looks at Scotland’s future constitutional options, and puts forward arguments for moving towards full independence, as well as other options like further devolution of power to Holyrood. 

The responses have been mixed, but from a business viewpoint some have not been encouraging for the Nationalists.  Both the Confederation of British Industry (CBI) and the Federation of Small Businesses (FSB) have expressed concerns.

The CBI expressed doubt over the SNP’s plans for corporation tax, citing the considerable costs involved which, it claims, the party has not fully quantified.  Referring to the decision to become independent, the report states; “Any such decision would be costly, at least in the short to medium term, and would not be supported by CBI Scotland on business and economic grounds.”

The FSB have expressed similar doubts.  They comment: “We would also caution against the risk of introducing new measures or failing to review current regulations which apply to Scotland only and which could place small firms at a disadvantage against other UK businesses. Equally, any changes in the fiscal regime resulting from fiscal autonomy must not impact on small businesses which are vulnerable to even small changes in the fiscal framework.”

While the consultation has helped to ensure that independence debate continues in the bubble on in the background, it has already been largely dismissed by the Scottish Conservatives and Labour.  Just this week, Tory Finance spokesman and Deputy Leader in the Scottish Parliament Murdo Fraser accused the First Minister of holding his “conversation” everywhere in Scotland except in the parliament, claiming he is too “feart” of the political arguments in favour of the Union.

Minister of State for Scotland, Labour’s David Cairns went one step further telling his parliamentary colleagues that the “conversation” website was nothing more than “a forum for every swivel-eyed, bigoted, anti-English lunatic in Scotland and beyond to spew forth hate-mongering and obscenities”.

Despite the arguments, the issue of the Scotland’s constitution remains on the agenda and it looks unlikely to shift any time soon.  At the start of the month, this led to Scottish Labour leader Wendy Alexander attempting to call the SNP’s bluff by demanding that any independence referendum be brought forward as soon as possible to end the uncertainty over Scotland’s future. She added that the current situation was damaging investment prospects north of the border.

The lure of independence

Independence would bring with it the power to vary taxes, which the SNP claim could be used more effectively in Scotland’s favour to stimulate commercial investment.   Given the power to do so, the party would then pursue a competitive tax environment for business which they claim would help attract large scale inward investment.

In particular, the SNP have pledged to cut corporation tax to 20 per cent.  Attracting more capital to the country, they claim, would lift Scotland’s thriving financial services sector.  As an example, they point to the high growth rate in Ireland, driven by a low corporation tax of 12.5%.  The party would also implement an immigration policy to bring in new citizens – and attract existing graduates – to best match the skills needed in Scotland. The SNP claim that allowing full control over tax-raising and spending could grow the country’s economy by £19bn by 2015.  

That said, the cornerstone of the SNP’s aspirations firmly remains control over North Sea oil revenues.  Independence, they claim, would give Scotland control of oil policy which, as a result would allocate an extra £55bn to the Scottish Government over a five year period.  The SNP claim that by investing just part of this oil wealth, Scotland could have an Oil Fund like Norway’s worth billions within a decade. Citing a report from PricewaterhouseCoopers, a recent article in the Spectator by Martin Vander Weyer even claimed that a British sovereign wealth fund would now be worth nearly £450bn, had the government invested, rather than squandered the proceeds of the oil boom. In addition, although North Sea Oil reserves are fast diminishing, they still reaped the Chancellor a colossal £9.9bn in 2008-09, and £200bn since resources were discovered. Vander Weyer even claimed that the proceeds from North Sea Oil have allowed the government to keep other taxes artificially low throughout the United Kingdom.

They also believe that the Government of an independent Scotland would be more focused on the country’s specific needs.  In particular they point to Scotland’s vast renewable energy potential, which they claim the UK Government is failing to tap into.

It is also argued that an independent Scotland would have a greater role shaping the decisions of the European Union that directly affect it and have a crucial impact on key industries such as fisheries and agriculture.   Furthermore, the SNP envisage making the switch to the Euro.  The Irish ‘Celtic Tiger’ has been held up by the Nationalists as an example of independent membership of the EU providing access to the biggest single market in the world.  It has succeeded in attracting ever growing numbers of tourists, as well as business, and the SNP think Scotland could emulate this. 
 
Negative Impact

For every SNP claim that independence would boost the economy, there is also a counter argument from political and business opponents alike.   The party, it is claimed, spends a lot of time comparing Scotland to the “Arc of Prosperity” countries it hopes to join, essentially attributing their economic success to their size.  However, there is little evidence that to show this would necessarily happen.  India, China, Ireland and Norway all share high economic growth rates, but not a common size.   

The uncertainties that would come with a new and separate tax and fiscal system could also push companies, keen to avoid risk, away from Scotland, while corporate behaviour could also be affected by firms aiming to rearrange their affairs in order to play the new system to its full advantage.  Scottish firms expanding into England - currently their largest market - could face increased costs, while firms based in other parts of the UK would face similar increased costs when expanding into Scotland.

Although the SNP claim they would reduce red-tape, the break up the Union would complicate things for big business.  Profits earned in Scotland would need to be accounted for separately, and they would be subject to different tax laws and rules to England.   Moreover, those opposed to independence assert that Scotland would need to borrow heavily to meet all its current spending commitments and new liabilities such as funding the pensions of an ageing population.  Ministers may eventually be forced to either cut public spending or raise taxes. Although this argument is often countered by the example of Ireland that has repeatedly cut taxation and increased public spending. However, it is unclear where tax cuts would leave the grand fiscal policy plans for improving business and investment, and it puts claims that Scotland would become more attractive to business in doubt.

While the party claims North Sea oil revenues would alleviate the financial pressures of economic independence, these too are also hotly contested.  Analysts argue that oil returns are set to fall and many argue that North Sea output peeked several years ago.   The shortfall between total revenues and total expenditure in Scotland has risen to £11bn according to the last Scottish Government.  In an independent Scotland, it is claimed all these oil revenues would be needed just to plug the gap left behind by the withdrawal of the so-called “union dividend” Scotland receives as being part of the UK.

In March this year, the Scotland Office Minister David Cairns told The Scotsman newspaper that he was certain the defence industry, important to the Scottish economy, would suffer in an independent Scotland.   It has been suggested that the government in Westminster would not be prepared to award valuable contracts to companies in an independent Scotland, although with a lower tax base, industry could have other ideas. 

The EU is one of Scotland’s biggest export markets so should the passage to membership prove difficult for an independent Scotland, as some have warned, business would certainly suffer.  It seems more probable that Scotland would be admitted to Europe, however, if all were to go to the SNP’s plan and Scotland began using the Euro, this would create new barriers with England, another important trading partner. 

The industries in Scotland that have provided most growth, such as financial services, oil and gas, manufacturing, biotechnology and whisky, are all extremely open to international market pressures, and there is a fear that ending the Union would leave Scotland weakened internationally as far as trade is concerned, having a negative impact on business.  The Union provides a stronger and bigger economy to withstand global shocks than Scotland could provide on its own.

Uncertainty

Certainly the independence debate is hotly disputed.  It is a debate which is now centre stage at the CBI, underling the significance of the issue to the business world.  Whatever happens, however, it would seem that the debate itself poses a threat to Scotland’s economy.  The uncertainty surrounding Scotland’s future is not an attractive prospect to business looking to invest there.  The overwhelming view in the business sector at the moment seems to be that the current Scotland Government should focus on achieving real results, rather than continuing this debate.   While there are convincing arguments to be found on both sides of the tussle, the true overall impact of independence is still very difficult to decipher.