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Why business leaders are saying No to independence

The NHS and Scottish Independence.

September 4, 2014 Comments (0) Views: 1222 SRS Research 2014

Q&A on the financial implications of independence

Robert Lyddon is an international banking expert and author of The Lyddon Report into the financial implications of Scottish Independence

 

In what way is the uncertainty damaging the economy?

Investment decisions will certainly be delayed by potential foreign direct investors. That could last a long time until they know the profile of the economy into which they will be investing (what will the currency be? Will the country be in the EU? What will the relationship be with the remainder of the UK? The UK government will not want to relocate any facilities into Scotland from the rest of the UK (“rUK”) until future relationships are clear.

A depositor of funds in rUK will now eschew Lloyds/Bank of Scotland and RBS in favour of HSBC, Barclays and Santander – because they know where they stand: up to £85,000, they know that the Bank of England will stand behind their deposit.

Pension investors faced with a choice between buying from Scottish Widows and Liverpool Victoria will choose the latter – they know that Liverpool is remaining in the UK and they know the regulatory and redress arrangements in case of mis-selling, maladministration and so on.

As a business in rUK looking for suppliers, why strike up a business relationship with a Scottish supplier when there is an equally good one in Wales, and there is certainty that the trade between England and Wales will not be disrupted by extra costs, VAT administration if Scotland becomes a different EU member state, a change in the governing law of the contract and place of jurisdiction, and then, in the worst case, higher costs to transfer funds, imposition of customs duties, or even exchange controls?

It is in all the small decisions by businesses and government in rUK that the uncertainty will bite, to favour a different supplier, to delay engaging business with Scotland, to do less volume and so on.

This will cause GDP growth in Scotland to lag, and rUK to benefit in a relative sense, but in a global sense to cause the whole of the UK to suffer.

 

What are the key concerns regarding independence from the viewpoint of a business leader?

The atmosphere in which the campaign is being conducted – and most notably the posture of Alex Salmond in the debate on 25 August – is confrontational and hostile to rUK in general, and England in particular – the destination of 80% of Scottish exports. The SNP prospectus takes Scotland’s right to a monopoly over oil and gas tax receipts as a given, and seeks to narrow the debate to a discussion of whether Scotland should take over any of the UK national debt if it cannot retain the pound and what share of other UK assets Scotland should receive.

This posture is being received badly in rUK: it is as if the SNP perceives that their arguments are only heard in Scotland. The big fear is that, whether the vote is a Yes or No, the SNP’s prospectus and posturing will have permanently damaged the relationship with rUK and England in particular. One suspects that this is the SNP’s objective, that even with a No vote the Union becomes unsustainable because the well has been poisoned, and then a separation becomes inevitable.

But a separation that is bitter and acrimonious cannot be in Scotland’s interests. The rUK government will surely always be a friend of the Scottish people, but against this background will never be a trusted friend of a Scottish government run by the SNP.

 

In the event of a Yes vote what would businesses fear most?

The SNP persists with ‘sterlingisation’ as the currency option, not recognising that the rUK government will never sign a separation treaty that allows Scotland to absolve itself from a proper share of UK national debt, while still continuing to use the pound and keeping the oil and gas tax revenues.

The SNP seems to believe the rUK government is bound by the “sovereign will of the Scottish people” to assent to a separation treaty on these terms, but this is really not true. It does not reflect the reality of the way in which negotiations have to be engaged: Scotland is part of the UK, it is jointly and severally liable for the whole UK debt, and the oil and gas belongs to the UK. It is Scotland that needs to put a deal on the table for the rest of the UK in order to induce the rUK to sign the treaty of separation. It is not the rUK that has to sign a deal on Scotland’s terms. Scotland has no real cards to play to force rUK to do this beyond referring to a referendum, which many possible Scottish voters were excluded from, and for which the SNP put down a prospectus that contained many flaws.

Scotland’s ‘card’ is to leave the UK unilaterally, refuse to accept any of the debt, and then what? rUK would block Scotland’s application to join the EU, NATO, the Commonwealth, the European Economic Area and so on. rUK could easily negate Scotland’s usage of the pound by blocking access to the payments settlement systems through the Bank of England, and refusing to supply any banknotes.

The SNP’s current position is not one that the rUK could accept, and so the biggest fear is that we go through a Yes vote with no idea of what the separation treaty would look like and how long it would take to sign, but with the possibility that the SNP could launch Scotland on a pathway to international oblivion if it plays its card of threatening to walk away from the UK without a proper treaty being signed.

A treaty is a contract, and a contract built to last is one signed between a willing buyer and a willing seller, not one signed under the duress of threats.

 

What are the key points that the Yes and No politicians should be addressing and how?

First and last, what will be the contents of a separation treaty that rUK will be willing to sign in the event of a Yes vote?

For sure it is not the contents of the SNP Prospectus. The basic trade off the rUK will be willing to sign is surely:

  • To allow Scotland a monopoly over oil and gas tax receipts
  • To allow Scotland to be released from responsibility for the vast bulk of the jointly-owed UK national debt and
  • rUK support for Scotland’s application for EU membership

And in exchange for:

  •  Scotland taking on £100-150 billion of the national debt on its own name; and
  •  Scotland ceasing to use the pound.

The above seems a reasonable and balanced place to start the negotiations, and could be shaken on very quickly.

Then business could calculate the Day 1 debt-to-GDP and know what Scotland’s likely credit rating would be, what the arrangements with rUK would be for import/export duties, VAT, payments etc, and most of all, they would know the ongoing relationship with rUK would be friendly and orderly.

Businesses could then make investment decisions.

Instead, we have a confrontational stand-off where the SNP pretend that the separation treaty will be far more favourable to Scotland than it can possibly be. The No campaign post scenarios that may be conceivable but are rather unlikely, and the Scottish people do not know where they are.

 

 

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