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What would Scottish independence mean for financial services?

The issue of Scottish independence has blazed into life this year, with Scotland’s first minister Alex Salmond stoking up the issue before a planned referendum in 2014.

Salmond is due to meet Scottish Secretary Michael Moore this week to discuss the terms of any vote but the prospect of an independent Scotland raises questions for the economies of Scotland and the rest of the UK as well as questions for financial services.

The Scottish National Party is pushing for full independence, but has also introduced the concept of “devo max”, which would expand the range of powers of the Scottish Parliament, with only a small number of policy areas, such as defence and foreign policy, set by Westminster.

Full independence remains the ultimate goal but the form of that independence has changed over the last few years. Gone is the idea of an independent Scotland joining the euro, as are the comparisons with the achievements of Ireland and Iceland that were bandied about only a few years ago.

Edinburgh Castle

The current SNP blueprint for independence suggests a partnership of equals between Scotland and the remainder of the UK.
Salmond says: “We will share a monarch, we will share a currency, and we will share a social union but we will not have diktats from Westminster for Scotland.”

However, some commentators believe the SNP’s unclear “monetary union” policy is a recipe for disaster. Questions over governance of interest rates, pro rata transfer of UK debt to Scotland and a separate tax regime have all been raised and there are few suggestions for how this would be settled.

Cicero Consulting head of media relations Mike Robb says: “The SNP has not yet articulated exactly what it is seeking. A lack of clarity is a concern for UK business, especially with a backdrop of regulatory reform in financial services and a global economic downturn.”

One serious concern is whether an independent Scotland would be able to raise sufficient tax revenues to pay for its current level of government spending.

Institute of Economic Affairs editorial and programme director Professor Philip Booth says: “The very high levels of public spending in Scotland will require very high levels of tax. This is not conducive to creating attractive economic growth.”

Salmond has highlighted Scotland’s recent economic outperformance of the rest of the UK but some business leaders are not convinced.

Michelle Mone, a director of MJM International, the company behind Ultimo bras, has already said the company would relocate to London if Scotland achieves independence.

Mone says: “I do not think Scotland can survive on its own and I think it would be really bad for business.”

Current opinion polls suggest around 37 per cent of Scottish voters support independence but the high proportion of financial services businesses either based or with a significant presence in Scotland make this a pressing issue for the industry if the appetite for independence grows between now and 2014.

Robb says: “Financial services is vital to the long-term success of the Scottish economy. Salmond knows that and will do everything he can to ensure the big players not only stay but also expand their presence. The big question is whether Scotland will be able to compete with other financial centres when they are not tied to the UK. This is a major concern.”

One option would be for Scotland to cut corporation tax to retain existing business and encourage other companies to relocate.

Booth says: “Scotland could see an opportunity to lower taxes and reduce government spending, becoming an important business hub. Ease of migration might pressure the Scottish government into keeping taxes low but this is not the most likely outcome.”

However, National Institute of Economic and Social Research director of macroeconomic research Angus Armstrong does not think lowering taxes is feasible. He says: “It is not obvious it will have fiscal room to lower corporation tax aggressively and it has to be done significantly to make an impact. How much space they would have would depend on the debt settlement.”

With the whole of the UK wrestling with the size of the public debt, the level that would be apportioned to Scotland in the event of a break-up would be key in determining Scotland’s viability.

Booth says: “Assuming Scotland takes its share of the debt in relation to its national income, it will struggle to get a decent credit rating, especially as it will not have its own currency and will have no history of servicing debt.”

Armstrong says the extent of the impact of the debt depends on the strength of the monetary union.

He says: “I do not think the initial debt will send Scotland under but that has to be negotiated.”

Another critical issue would be the currency for an independent Scotland. Armstrong says: “Monetary union seems to be Scotland using sterling without any fiscal risk-sharing. Debt will presumably be issued in sterling but since Scotland will not be able to print money, there is the theoretical possibility, with a bad enough fiscal shock, of some sort of difficult situation. In the past, we have said, that is just theoretical, but we know from the euro that these things happen.”

Many of the problems that the euro is experiencing comes from economies running at different speeds tied to the same currency and with the same central interest rates.

Booth says: “An economic boom in England that leads to inappropriately high interest rates in Scotland might create conditions that the Scottish electorate refuse to tolerate. In the end, Scotland could adopt its own currency.”

The other issue that has been dominating the discussion is the potential split in North Sea oil revenues.

Salmond claims Scotland would be entitled to 90 per cent of the oil and with government revenue set to be worth £56bn over the next six years, this would provide a substantial boost its finances.

“Scotland needs that oil,” says Armstrong. “But there is a negotiation to be had. It is not in the rest of the UK’s interests to start off with a country in a difficult situation, it is a two-way problem. Oil will certainly help Scotland’s economy – the question is whether it will help it enough.”

The debate will continue to rage between now and the referendum but the lack of detail in the discussion is causing problems for financial services firms such as Alliance Trust, Standard Life, Aegon, Scottish Life, Royal Bank of Scotland, Lloyds Banking Group and Aberdeen Asset Managers, which are either based or have a substantial presence north of the border.

Scottish Financial Enterprise, the lobby group for financial services companies in Scotland, has called for more details in the debate to help businesses take an informed view of the potential outcomes of a referendum on independence.

Chief executive Owen Kelly says: “It is important that some uncertainties are removed. Issues such as currency, membership of the EU, regulation and the possible impact on the UK as a single market can be clarified ahead of the referendum. And they need to be clarified so companies, employees, customers and shareholders can understand the changes that independence will bring.”

Even if businesses are not actively looking at moving, the prospect of independence raises some awkward practical issues.

Aegon communications director Lesley McPherson says: “We have no plans to change our base, whatever the outcome. However, Aegon is keen to make sure that all implications for financial services companies are fully explored in advance of any referendum. For example, we are looking at how tax relief on pension contributions would work.”


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