House of Lords Debate, 26 June 2013

Moved by Lord MacGregor of Pulham Market

That this House takes note of the Report of the Economic Affairs Committee on The Economic Implications for the United Kingdom of Scottish Independence (2nd Report, Session 2012–13, HL Paper 152).

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Lord Hollick (Labour)
My Lords, I would also like to thank our chairman, Lord MacGregor, for shepherding the committee so successfully through this review. As we have just heard from the noble Lord, Lord Forsyth, some committee members held strong and well known positions on the merits of Scottish independence. Others were neutral or undecided. All of us shared the desire to make sure that the Scottish electorate are as well informed as possible on the key economic issues before they vote.

The main question for many voters is whether or not the Scottish economy will perform better as an independent nation, rather than as part of the United Kingdom: a simple question with no certain answer. The committee’s report identifies and sets out a number of crucial long-term issues, such as the choice of currency, the regulatory framework and the fiscal position and a range of transitional challenges. However, in the absence of detailed negotiations between the Governments in London and Scotland or a clear statement on red lines by both Governments, the outcome on all these matters remains, sadly, uncertain, which is far from ideal.

As the noble Lord, Lord Maclennan, said, the Scottish Chamber of Commerce called yesterday, on the basis of a poll of 800 companies, for detailed discussion to fill in these information gaps. Its members complained that they do not know enough to take a view on the implications of independence for their businesses. Both Governments need to heed the demand for more and more detailed information if the referendum is to be more than a noisy beauty parade. A position paper setting out the UK Government’s approach to the division of assets and liabilities, the division of the tax base and of long-term oil decommissioning costs and pension liabilities is essential to any meaningful analysis of an independent Scotland’s fiscal position.

The position papers published to date have been most helpful. Can the Minister give the House details of the further position papers to be published by the UK Government before the referendum? For its part, the Scottish Government must set out their views on these issues in their promised White Paper and respond to the clear message from the Treasury that the Bank of England would have no power to act in or for an independent Scotland. The problems that we have seen in the European Union, where you have a monetary union without a fiscal union, are evidence of the need to have a union around both issues. The Scottish Government also need to respond to the president of the European Commission’s view that an independent Scotland would have to apply for membership of the EU, an issue which they have tried to skirt round. Clarity and candour on these issues is essential if the referendum is to be more than voting for a leap in the dark.

The IFS and other witnesses were in general agreement that, assuming that the split of assets and liabilities was in line with its share of the population and that 90% of oil and gas revenues accrued to Scotland, an independent Scotland would, at the outset, take its place alongside countries of a similar size, such as Denmark and Finland, as a prosperous, stand-alone country. To reach that position, however, some very difficult challenges must be addressed both during the transition and in the longer term. Based on 2012 figures, Scotland would assume a public sector debt of £93 billion, rising to £185 billion when pension liabilities, PFI liabilities and other liabilities are included. This is equivalent to 123% of GDP. Transferring the debt to Scotland in today’s challenging sovereign debt markets would be complex and fraught with enormous difficulty. There is also the continuing need to finance the annual fiscal deficit of some £18 billion. The Scottish Government must set out their detailed plans to manage this transition and to fund this level of debt in these markets.

Upon independence, Scotland would be swapping the known and, by reference to population size, somewhat generous transfer under the Barnett formula for general tax receipts, which have not yet been separately quantified, and the significant and important receipts from oil and gas production. Professor John Kay pointed out that, by their nature, oil revenues are unstable whereas transfers under the Barnett formula are relatively secured. Professor Kemp pointed out that oil and gas tax receipts were vulnerable not only to prices and depletion but to the gearing effect of price and investment levels

on production, so that a sustained rise in prices will lead to increased production of oil, whereas the reverse is true if prices decline.

This uncertainty of income stands in contrast to the certainty of expenditure. Scotland, with free care and free tuition, already bestows a generous level of expenditure on its citizens—a generosity which will be compounded by having a faster rise than the rest of the UK in the share of over-65 year-olds relative to the workforce. The interplay of these factors leads to a higher risk of serious fiscal imbalance. What upsides does an independent Scottish economy have to offer to compete with these downside risks? Will the Scottish economy perform better if there is a greater degree of autonomy? First Minister Salmond and Mr Swinney believe so. Scotland, they say, would not have followed the Chancellor’s policy of cutting back on public investment and infrastructure and would have had the flexibility, subject to convincing the bond markets of course, to increase investment allowances to promote private sector investment and achieve a rebalancing of the economy.

These are of course policies which many in this House have consistently advocated over the past two and a half years. The noble Lord, Lord Heseltine, has written persuasively about the benefits of handing responsibility for growth, investment, skills and business formation from Whitehall to the regions. He cited many examples of successful local and regional growth initiatives in and within other countries, but Scotland has many of these powers already and has chosen not to use some of them. Whatever the outcome of the referendum, all the nations and regions of the UK are likely to have more powers devolved to them.

The Scottish Government need to address the concerns of Scottish business. Uncertainty is no friend of business or inward investors. The refusal of many Scottish businesses to give evidence was indeed disappointing. Those companies we met were, as noble Lords have said, insistent that Scotland remains part of the EU. Ironically, the UK Prime Minister’s in-out referendum might have handed a buttress to the SNP campaign for independence. RBS chairman Sir Philip Hampton was clear about the importance of the single market to Scotland’s important financial services sector. An ebullient Rupert Soames, CEO of Aggreko, who has been referred to, pointed out that although his HQ was in Scotland less than 10% of its business was there, and that if Aggreko is to continue to thrive it needs a single market and the benefit of an EU trade agreement. Mr Soames went on to say that the beneficial impact of independence on his business would be small, tenuous and unlikely to arise, whereas the disadvantages could be large, serious and very likely to arise.

An independent Scotland’s decision to expel the Trident nuclear fleet from Faslane within days of independence would place a large question mark over the future of some 10,000 jobs, many of them highly skilled. When he gave evidence, Mr Swinney was vague to the point of complacency about the plans to replace those jobs and redeploy the skills. Other witnesses suggested that job losses among service, civilian and defence manufacturing personnel could amount to an additional 30,000. We had the benefit of the noble

Lord, Lord West, to help us on this. The surprising reluctance of the MoD to give evidence deprived us of the opportunity to hear its assessment of the estimated job losses among military and civilian personnel if the policies of the Scottish Government were implemented. Can the Minister tell the House the UK Government’s estimate of the likely level of job losses in the defence and related sectors?

There is no easy answer to the question, “Will an independent Scotland be more prosperous?”. Will it, at one extreme, be a huge hedge fund, heavily exposed to the volatile oil and financial sectors while burdened with a growing public sector deficit and unfunded pension and decommissioning liabilities? Or will it, at the other, become a munificent tiger economy like some of its Nordic neighbours? Unless and until the Scottish and UK Governments set out their positions clearly and address the questions set out in the report, the Scottish electorate can only guess at the answer.

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Lord West of Spithead (Labour)
My Lords, to my mind the separation of Scotland would diminish the defence and security of all of us. The SNP statements on defence just do not stack up. The complexity and cost of establishing a new Ministry of Defence, all of the administrative functions and intelligence, logistics, medical support, training and procurement organisations are absolutely huge. Just looking at the intelligence world, for example, would a separate Scotland want a GCHQ equivalent? Having worked in that world for a time, I can assure your Lordships that this is hugely difficult to create and hugely expensive. Would it have an SIS? Again, there are huge complexities in doing something like that. Would Scotland be part of the Five Eyes arrangement? I have severe doubts, because the Americans would not be at all happy to have a country in the Five Eyes which has said the sort of things about nuclear that the SNP has said. Bearing in mind all of those costs and with the money that, by any calculation, one could see being available for defence in a separate Scotland, the front line would be dramatically smaller than the figures that the SNP has talked about.

To talk of Denmark as a comparator is nonsense. Denmark at one stage had a very large military and over many, many, many years has reduced it, so the infrastructure was all there and all those things were there. That is not an accurate comparator. There would be huge implications for the forces available. There would be massive job losses, to my mind, at Faslane,

where jobs would be down from about 8,500 to, at a maximum, about 500 if you consider the force level that Scotland will have in terms of ships. I believe that there will be massive job losses elsewhere in Scotland. It is very unfortunate that we have had no accurate assessment from the MoD or the SNP of the reality of what those would be. A lot of nonsense has been talked.

As has been mentioned, the large defence firms would without doubt come south. I have talked to the boards of some of those firms; they are scared stiff to mention anything about it. I think that that is appalling. There is a climate of fear. They would move south because there will be no money, or tiny amounts, for procurement in Scotland. Those firms move where the money is. That is bound to happen. I think it is quite likely—a horrific thought, because I went to school up on the Clyde and remember seeing magnificent ships being built there—that warship building would finish on the Clyde.

The SNP positions on nuclear weapons and being part of NATO, which is a nuclear alliance, are, to say the least, confused. I think that they are totally confusing and make no sense at all. I am not sure where the SNP stands on that.

To end, because I may speak for only a short time in the gap, I believe that it is the task of the military to plan for the unexpected. That is our job; that is what we have to do all the time. Even with very unlikely things, we have to be prepared for the unexpected. For us not to be looking at the defence implications of the separation of Scotland and doing contingency planning is, I believe, dereliction of duty. That work should be going on. I hope to goodness that it is going on somewhere, because if it is not, that is wrong. There is a very short timescale and it is important. Should separation occur, I fear for the future security of our islands, on which we all live.

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Lord Wallace of Tankerness (Advocate General for Scotland; Liberal Democrat)
My Lords, the Ministry of Defence, as I am sure the noble Lord, Lord West, knows, makes contingencies for many things. As for saying any more on issues of our nuclear deterrent and matters of national security, I am not prepared to go there.

The noble Lord, Lord McFall, referred to Michael Ignatieff and his point that we can have different identities. There is a British identity, although I appreciate that some, if not all, feel a European identity, and there is a Scottish identity. Having made my adopted home in Orkney for the past 30 years, I can share and feel affinity with that Orcadian heritage. I am sure that the point that was being made was that we do not want to choose between these. What we wish to secure by winning this referendum is that we are not forced to make that choice—something that I reflect on after my noble friend Lord Caithness’s comment as to whether I would have to choose between an Orcadian and Scottish identity and a British identity and affinity. Issues of the heart will be involved, but this debate has focused on the importance of the arguments of the head as well.

There are important things that we can say. The United Kingdom Government are producing an increasing amount of information, and I will say more about the communication of that later. We know that the United Kingdom is one of the most successful monetary, fiscal and political unions in history. It is a union that has brought economic benefits to all parts of the United Kingdom, because taxation, spending, monetary policy and financial stability policy are co-ordinated across the United Kingdom.

We know that Scotland and the rest of the UK are economically well placed as members of a single market and a single currency area in the current United Kingdom arrangements. Data published by the Scottish Government suggested that in 2011 nearly 60% of Scottish exports went to the rest of the United Kingdom and that 70% per cent of Scottish imports came from the rest of the United Kingdom. We know that Scottish independence would create an international border between Scotland and the rest of the United Kingdom. International experience shows that there is a border effect. It reduces flows of product, money and people.

We know that the current currency and monetary policy arrangements within the United Kingdom serve Scotland well. Perhaps I can take issue with what my noble friend Lord Caithness said about the First Minister setting out his case very clearly. As my noble friend Lord Forsyth pointed out, within the past five years the Scottish National Party has supported the euro. We were told that sterling was a millstone around Scotland’s neck, but then it supported sterling, either by a currency union or by so-called sterlingisation. Some people in the yes campaign have called for an independent Scottish currency.

The paper that we produced on the currency identified the four options. First, there is an independent Scottish currency. Secondly, there is the euro. Thirdly, there is a sterlingisation, where the Scots keep sterling but are not part of a formal monetary union. Fourthly, there is formal monetary union. None of these is as successful and workable as having our current arrangements within the United Kingdom. The alternative currency arrangements open to an independent Scotland would be less economically suitable for Scotland and the rest of the UK.

We know that the Chancellor, when launching the Treasury paper on currency, said:
“The SNP asserts that it would be in everyone’s interests for an independent Scotland to keep the pound as part of a Eurozone-style sterling zone. … Let’s … look at the evidence… Could a situation where an independent Scotland and the rest of the UK share the pound and the Bank of England be made to work? Frankly, it’s unlikely”.

While the Scottish Government might like to tell people what they think that they want to hear, we are focused on telling people what the evidence says, what the options are and what the consequences of those options are. You do not have to know too much about economics or look too far to see that the eurozone cannot exactly be described as dream currency union. This was reflected in what my noble friend Lord Maclennan of Rogart said. It was mentioned too by the noble Lord, Lord Hollick, who said that you cannot have monetary union without fiscal union. Countries with the euro are witnessing closer fiscal integration at a time when the Scottish Government would have you believe that you could sign up to a currency union and achieve political and fiscal independence.

It is not just Scotland’s overall economy and currency that we know about. We know that in Scotland we have a strong and vibrant financial services industry as part of the United Kingdom. Financial services contributed £8.8 billion to the Scottish economy in 2010, more than 8% of Scottish onshore economic activity. The sector directly employs 85,000 people in Scotland and a further 100,000 indirectly, which is around 7% of total Scottish employment. We know that our firms and individuals benefit from a world-leading financial services sector and a large integrated domestic market. Our consumers benefit from the UK’s protection and compensation bodies that are able to pool risk across a large and diverse market.

Noble Lords who have contributed to the debate have reflected on the fact that the United Kingdom Government came to the rescue when the Royal Bank of Scotland and HBOS experienced their catastrophic difficulties. In evidence to your Lordships’ committee, Mr David Nish, the CEO of Standard Life, said that what he benefited from today was having a single regulator in a geographical area and that he did not think that there was a working model of cross-border regulation that he could find.

I pick up on the point made by my noble friend Lord Lyell that 70% of pension products bought by Scottish consumers are from firms based in the rest of the United Kingdom, and work by the Institute of Chartered Accountants of Scotland shows that if Scotland were to become independent, the,
“potential impact on funding requirements for employers operating defined benefit or hybrid schemes across the UK is likely to be substantial”.
Another important industry for Scotland is oil and gas. My noble friend Lord Shipley and the noble Lords, Lord Lipsey and Lord Hollick, referred to this. They made the point that wherever this valuable resource is, the revenues are volatile and in long-term decline. The UK has a broad and diverse enough economy to be able to absorb this volatility, but it would loom larger in a Scottish economy that would be less able to absorb it. My noble friend Lord Forsyth asserted that the First Minister would clearly want the United Kingdom to bear the decommissioning costs and quoted the Minister who, when asked on 25 April last year whether Scotland would take these costs on, said that the answer was yes. That contrasted with what his Energy Minister, Fergus Ewing, said on 17 April, which was that the UK had a moral and certainly a legal obligation to be responsible for the decommissioning of these rigs. Within a period of 10 days, there had been a diametrically conflicting view of what the position would be on these costs. It is incumbent on the Scottish Government to be a bit more direct in giving answers to these questions.

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