Scottish independence

21 May 2014

September is crunch time for Scotland: should it be an independent country?

With many clients shareholders and offices based in Scotland, we guide you through some of the key issues in the referendum debate that may impact the business world.

The economy
The SNP argues that if Scotland becomes an independent country, it would be one of the top 10 richest countries in the OECD. North Sea oil revenues are an important part of the SNP’s economic plans and they predict that oil production could generate £57bn in tax revenues by 2018. Those opposing independence have argued that North Sea oil reserves are depleting and cannot be relied upon. “It seems to me that the Scottish government has based a lot of their forecasts on the most optimistic assumptions they can come up with,” explains Brad MacKay, Professor in Strategic Management at the University of Edinburgh. “Scotland is a relatively wealthy country, but the fundamental question is – will Scotland be better off outside of the UK? And we just don’t know the answer to that. What we do know is that the debt to GDP ratio would probably be about 81%. For a young country, Scotland would be fairly indebted.”

The business environment
Scotland’s Future, the Scottish Government’s White Paper says that an independent Scotland could create a “more supportive, competitive and dynamic business environment” as the Scottish Government will have full control over taxation, business regulation and investment. The SNP is also proposing a reduction in corporation tax of up to 3%. “I think there are opportunities to tailor policies to the sectors that are important in the Scottish economy and business would have closer access to government by virtue of the fact that it would be a smaller country,” says Brad. “There would be a natural rebalancing of the economy. If you are a large PLC that is headquartered in Scotland and 90% of your trade is in the rest of the UK, then independence is an issue as these companies would, in effect, find themselves operating in a separate jurisdiction than 90% of their trade. If you are a large PLC trading primarily globally, then independence probably doesn’t have as much as a concern for you. If you are a subsidiary of a global company that’s operating in Scotland, then you are probably trading all over the world anyway and Scotland would just be one more jurisdiction, provided that the investment climate would continue to be favourable. If you are a small business, and you are looking for specific, tailored government support, like subsidies, chances are you are pretty optimistic about the opportunities.”

The currency union
The SNP is proposing a currency union with the rest of the UK and the Bank of England would be Scotland’s central bank. Critics argue that this would mean the Bank would influence Scotland’s borrowing and spending and the UK’s main parties have already ruled out the union. The SNP argues that this decision is likely to be reversed with a ‘yes’ vote as it would be damaging to the rest of the UK if Scotland could not keep the pound. “The advantage of a currency union is that you cut down on the transaction costs associated with having to trade in different jurisdictions,” says Brad. “But the reality is, which I think has come to dominate the thinking in London, it is very difficult to make a currency union work when there is no political union. You would have a very small Scottish economy attached to a very large UK economy. If the fiscal position in Scotland deteriorated for any reason, the potential is that the rest of the UK would have to bail out a sovereign country. I think most economists are coming to the view that a currency union would be unsustainable in the long term.” Critics believe that Scotland would be forced to adopt the euro as a prerequisite for gaining EU membership. There is still much uncertainty on whether Scotland would be a continuing member of the EU or whether it would need to re-apply. It may not receive some of the exemptions the UK currently receives in negotiations, including exemption from the euro.

In the White Paper, the SNP is proposing a safe, ‘triple-locked’ pension system where the basic state pension will be increased either by average earnings, inflation or 2.5% - whichever of these is the highest. They have also committed to protecting private pensions and will continue to roll out auto-enrolment. Gordon Brown, however, recently said that pensioners will be “better protected” if Scotland remains part of the UK. The SNP believes it will be possible to agree transitional arrangements for existing UK-wide schemes. “As I understand it, under EU law, you can’t have cross border pensions that are in deficit and the reality is that a lot of them are in deficit so they would have to be made solvent,” says Brad. “So where does the money come from? If it doesn’t come from the government, then it probably comes from reduced benefits and increased contributions by both employers and savers. Again, it is a huge uncertainty. Scotland, like the rest of the UK, also has an aging population and that could be shaped by different immigration policies, but to what extent is difficult to say.”

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