Motion to Take Note

The Economic Implications for the United Kingdom of Scottish Independence – in the House of Lords at 3:56 pm on 26th June 2013.

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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).

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Chair, Audit Committee (Lords), Chair, Economic Affairs Committee 4:17 pm, 26th June 2013

My Lords, we launched our inquiry in February 2012, when it seemed likely that there would be a referendum on independence in Scotland in autumn 2014. Since then this has, of course, been confirmed. We did so because we were concerned that, on what was widely recognised as an issue of momentous consequences not only for the people of Scotland but for the rest of the UK, it was vital that such a vote should be based not only on sentiment and patriotic fervour but on a full understanding of all the implications. At that time, these consequences had simply not been fully analysed, let alone widely exposed to public debate. We did not make the case for or against independence. We did not go into the constitutional or legal issues on the referendum process. We focused entirely on the economic implications, primarily for Scotland, but which are just as important for the rest of the UK as well.

The need for a properly informed debate before the referendum seemed to us to be all the greater as it became clear that if there were a yes vote for independence, it would probably take years to separate the Scottish economy from the rest of the UK and for it to negotiate entry into the EU as a new state. This would cause great economic uncertainty and possibly damage to Scottish businesses in the mean time. In our view, all the key issues and consequences needed to be fully explored beforehand, and not left to negotiations afterwards.

We heard from 44 witnesses in all, including British and Scottish Ministers, academics, trade unions and local authorities, with a wide range of opinions on business, finance and politics. We heard evidence in Glasgow and Edinburgh, a first for the committee. One disappointment was that some Scottish companies from which we would have liked to have taken evidence declined to do so. One witness described there being a possible “climate of fear”, with witnesses having fears about the impact on their business of speaking out. Another disappointment was the First Minister’s declining to give evidence himself before the Committee, much as we pressed him to do so.

I would like to stress yet again that our report is based on the evidence that we received. I thank all our witnesses, and on behalf of the committee express especially warm thanks to our specialist adviser, Dr Angus Armstrong of the National Institute of Economic and Social Research, for his most helpful contribution to our deliberations. As always I thank Bill Sinton, clerk to the committee, and his staff, for the huge amount of work they undertook. I am also most grateful to all my colleagues, who gave a great deal of their time to this inquiry and contributed greatly to the lengthy discussion that we had on the final report.

As our inquiry progressed, it helped to shine increasing light on the economic implications of a yes vote and what they might entail. As we reached the drafting stage of our report, the British and Scottish Governments have each started to publish their own analyses of the various economic implications, which we warmly welcome. Much more needs to be done, however, if the Scottish voters are to make a fully informed choice in October 2014, and the wider British public—and I do mean the wider British public—are to understand the implications for them. As the UK Government say in their response to our report:

“It is crucial that the referendum debate is properly informed”.

I turn to some of the main issues and, given the time available, can only highlight the key ones. Some are already much clearer than when we embarked on our report. For example, it became apparent during our inquiry, not least because of the exchanges that we had with the President of EU Commission, President Barroso, and then of the UK Government’s own analysis, that in the event of a yes vote Scotland would become an entirely new state and that the continuing UK would retain the rights and obligations of the UK as it currently stands. This is important particularly in the context of the EU, but, for Scotland, it would also apply to many other international bodies and treaties. Indeed, it was during our visit to Scotland that the Scottish Government’s claim to have legal advice to the contrary was blown apart.

Given the complexities in particular of negotiations with the EU and the need for unanimity of all member states in the EU in accepting a new member, it must be extremely unlikely that these negotiations would be completed by the spring of 2016, as some hope, and there is no certainty of outcome. Meanwhile, there would among other things be great uncertainty for Scottish companies operating internationally, for inward investment to Scotland and for other sectors of the Scottish economy.

One particular impact is on international trade. Most of our business witnesses spoke of the importance of being within the EU. One particular advantage was stressed by some chief executives of Scottish-based international companies, who spoke of the benefits of international trading deals done by the EU for their companies. The significance of this is underlined by the launch of the negotiations for an EU-US trade agreement at the recent G8 summit.

I turn next to currency choices. Our analysis is very similar to that of the UK Government. After some toing and froing, the Scottish Government seem to have settled for continuing to use sterling in a sterling currency union. The UK Government state in their Scotland Analysis document:

“A formal … currency union is very different to the current arrangements and would be a profound economic change for both states … the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”.

We in our report are even more specific, as we state:

“A monetary union as advocated by the Scottish Government would require robust and credible limits on borrowing and indebtedness by both member states. So far the Eurozone has found this problem intractable”— a point acknowledged also by the UK Government in their document. We continue:

“We believe that it would be difficult for any such agreements to made binding in all circumstances”.

On Bank of England and monetary policy, again our report and the Government’s analysis are similar. The Government’s conclusion is that,

“the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”, and that it is likely that economic and fiscal plans of a separate Scottish state would be subject to rigorous oversight by continuing UK authorities. We agree with that but are rather more direct. We do not see how the UK Government could extend central banking services to an independent Scotland, since the UK Government would lack control over its tax and spending policies. Crucially, we argued that this, along with the continued use of sterling by an independent Scotland in monetary union with the rest of the UK, could only come about, if at all, on terms agreed by the UK Government and that—a point to which I will return—arrangements should be clear before the referendum. We add that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

I note that in his letter to me, the Chief Secretary to the Treasury quotes the Chancellor of the Exchequer as saying that,

“it is highly unlikely that the rest of the UK would agree to enter into a formal sterling currency union with an independent Scotland”.

We entirely agree with that and believe that it should be confirmed before the referendum.

I turn now to the other paper that the UK Government have so far produced, published last month, on financial services and banking. Time prevents me from going into detail—others may wish to do so—but, again, we are in broad agreement. We agree on the significance of Scotland’s financial sector to its economy and the fact that 90% of its customers are located in the rest of the UK; on the need for a separate Scottish financial regulator for an independent Scotland, adding to compliance costs and complexity for Scottish financial institutions; and on the fact that the assets of the whole UK banking sector, including Scotland’s banks, are around 492% of total UK GDP whereas, by contrast, Scottish banks would have assets totalling around 1,254% of an independent Scotland’s GDP, with all the implications for financial shocks such as we have experienced in recent years.

All of these are key considerations for the Scottish electorate. As the Chief Secretary points out, that proportion of GDP is massively greater than was the case with Iceland, Ireland and Cyprus. The problems that would face Scottish banks, savers and depositors in the event of a financial crisis in an independent Scotland could be immense and need to be thought through in advance. We await government papers on assets and liabilities in defence, all of which are substantially covered in our report.

On North Sea oil and gas, there is a broad equivalence between Scotland’s gain on North Sea oil revenues and what it would lose from abolition of the Barnett formula. I notice that the noble Lord, Lord Barnett, is in his place, and this is interesting for many of us in your Lordships’ House who have been arguing, one way or another, that the Barnett formula needs to be resolved in the near future. An independent Scotland, curiously, would resolve the question, although we would still have to worry about it if the independent vote did not say yes. However, that is not an answer to the Scottish issues. One of our witnesses, Professor McCrone, said that, on the expected geographical division, which we in our committee accept, about 90% of revenues would accrue to an independent Scotland. On the other hand, there is substantial volatility in oil prices, uncertainty over future oil revenues and the need to deal with substantial North Sea oil decommissioning costs. It is no long-term panacea.

Division of assets and liabilities will be complex, including for PFI and public sector pensions. Indeed, the subject of pensions as a whole needs detailed consideration, including the need for a Scottish pension regulator for private sector pensions, a pension protection fund and a separate financial services compensation scheme for Scottish financial institutions. An independent Scotland will need to handle the difficult questions of the ensuing public sector debate as a consequence of looking at the division of assets and liabilities, with volatile tax revenue, the loss of risk-sharing with the rest of the UK and no record of issuing debt to global lenders. Those are all issues that the Scottish Government will need to spell out for the comfort of the Scottish electorate before the referendum.

I turn next to defence, which is an absolutely key issue, particularly for the rest of the UK. We were disappointed that Defence Ministers refused to give evidence to us and we had to rely on others. We are particularly grateful to the noble Lord, Lord West, who gave some very compelling evidence to our committee. The UK Government’s position is that it is for the Scottish Government to set out for the Scottish people how the defence of an independent Scotland would be arranged and, for the rest of the UK, the UK Government cannot prenegotiate the deals of independence ahead of the referendum. We certainly recognise the security aspects and are clear that any post-referendum negotiation would be huge, lengthy and complex on defence issues. We are also clear that the defence implications, not least cost, are immense for the rest of the UK, and we hope that substantial contingency planning is already under way in the Ministry of Defence. Others may wish to comment on defence in greater detail today. I certainly welcome the fact that the Government are planning a detailed paper on shared defence and security services, and I hope that it will cover the issues that we have raised, on which we have so far not had a proper government response.

This leads me to my final point. There is general agreement that this will be a momentous decision for the people of Scotland, but it is not so well recognised that this will also be a momentous decision for the rest of the UK. There are huge implications for the rest of the UK—over 90% of those affected.

Photo of Lord Steel of Aikwood Lord Steel of Aikwood Liberal Democrat

This excellent report is full of questions, some of which are directed to the UK Government—but mainly they are directed to the Scottish Government. As they have known for two years that they will have a referendum, does not the noble Lord find it extraordinary that these questions have not yet been approached?

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Chair, Audit Committee (Lords), Chair, Economic Affairs Committee

I cannot speak for my committee as a whole—although I suspect I am doing so—but that exact point occurred to us as we went through all the evidence. Many of the responses that we were getting, or not getting, did not deal with the points that I am raising now. I put my emphasis on the UK Government’s position today because we are in the UK Government’s Parliament, but I hope that many of the issues that we have raised—and, incidentally, that have been raised by Scottish business and some Scottish local authorities, such as the Glasgow City Council—will get a better answer than we have had so far.

As I was saying, we have spelt out many of the consequences of Scottish independence in our report. On defence in particular, there are potentially huge cost implications. Also included are such major issues as the division of assets and liabilities, negotiations on sterling and monetary policy, and so on. That is all very well. On the other hand, so much hinges on the subsequent negotiations. It is not enough, it seems to us, to leave it to those advocating independence to make the case, as the Chief Secretary to the Treasury has argued. He argued the case on our questions on the need to have the negotiations clarified as follows:

The UK Government believes that people in Scotland will vote to remain part of the United Kingdom and therefore is not making plans for Scottish separation from the UK. This is not complacency but rather based on a strong belief that the UK works, and works well. Scotland contributes to, and benefits from being part of the UK”.

He goes on to say:

“It is for those advocating independence to set out a clear and well evidenced case to people in Scotland about what the implications of leaving the UK would mean for them—including some of the unavoidable choices that will have to be made”.

We do not think that that is a sufficient response because, in fact, the implications for the rest of the UK are very substantial as well. That is why we have argued the particular point that I stress now. We have argued in our report that:

“Scotland needs and deserves a fully informed debate, based on fact and free from rancour, well before the referendum vote”.

It continues with the following key point:

“To help bring it about the Scottish and British Governments should be more open about how they see the outcome of negotiations after a ‘Yes’ vote; each should indicate the ‘red lines’ of its negotiating stance on such crucial issues as currency, defence, division of assets and debts and negotiations with the EU before the referendum so that voters can make an informed choice”.

I regard this as a critical point. The debate is becoming much clearer and better informed, particularly since we took evidence and completed our report. The UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. However, there is still this issue about not discussing the negotiations in advance of the referendum. One argument has been that that should wait until after the negotiations, but one problem is that could make it very easy for many of the people intending to vote in the referendum to vote “yes”, on the assumption that all the negotiations would take place afterwards and that there would then be a second vote afterwards, once they were completed. That is not satisfactory and it is not the way it should operate. That is why we have urged—

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I am most grateful to my noble friend. Does he not think that the Government are facing two ways on these issues of referenda? On the one hand, on Scotland they say that we should have the referendum and then look at the detail afterwards, whereas on Europe the argument is that we must have the negotiations first so people know what they are voting for.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Chair, Audit Committee (Lords), Chair, Economic Affairs Committee

Well, yes. That is exactly why we must be much clearer about the negotiations before the vote takes place. I have explained the UK Government’s position on this and we do not think that that is sufficient. That is why we made the recommendation for the red lines to be clearly established beforehand so that no one is in any doubt as to where both Governments, but particularly the UK Government, would stand firm on some key issues.

To conclude, since we took evidence and completed our report, the UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. But it is critical that they also address this issue of the red lines and they should undertake to do so well before the referendum. That is the upshot of our report. There is some very helpful analysis in it and it will continue to stand the test of time as we get towards the end of the negotiations. It is on the point of the red lines, which the Government in their response to our report have so far sidestepped, that I would particularly welcome the views of the noble and learned Lord on the Front Bench in the wind-up. I commend the report to the House.

Photo of Lord Kerr of Kinlochard Lord Kerr of Kinlochard Crossbench

Had I managed to ask the noble Lord before he sat down, I would have asked—

Photo of Lord McFall of Alcluith Lord McFall of Alcluith Labour 4:38 pm, 26th June 2013

My Lords, it is a pleasure to follow the noble Lord, Lord MacGregor, in this debate. I am open to intervention if need be on that issue. I thank him for his chairmanship. Allied to the question asked by the noble Lord, Lord Steel, the committee deliberately visited both Edinburgh and Glasgow, and spoke to the leaders of every party, including the former Chancellor, to the leader of Glasgow City Council and to business people. The only person missing was the First Minister. He would not come along to engage in the debate. That was an omission from the Scottish Government on this very important issue.

The debate in Scotland will centre around two themes: identity and economics. On the issue of identity, there is an assumption that if one feels intensely Scottish one will vote for independence. The paradox is that the debate in Scotland will not be about how Scottish one feels but how British the people of Scotland still regard themselves. That is according to the Scottish Social Attitudes survey. So it is about the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the United Kingdom. That will be central to the choice that is made. It is important that we highlight that in the debate in this Chamber today. It will come down to whether Scots feel that they can assert their Scottishness by parting with the unionist part of their soul.

Michael Ignatieff, the UK journalist and leader of the Liberal Party in Canada, has a number of cautionary words for us in that area, because he took part in a referendum in Quebec. He said:

“We learnt the strongest argument for leaving countries as they are turns out to be that most people don’t want to choose between different parts of their identity”.

He added that post-referendum in Canada,

“Canadians were able to joke that what Quebeckers really wanted was an independent Quebec inside a united Canada. I suspect a majority of Scots want something similar”.

I was interested to see the Early Day Motion put down in the House of Commons on Dundee’s bid to become the UK City of Culture in 2017. It stated:

“That this House welcomes the decision of Dundee City Council to bid to become UK City of Culture in 2017… and wishes the city of Dundee every success in its bid to become UK City of Culture in 2017”.

It was signed by two prominent SNP Members of the House of Commons. Maybe there was an element of identity confusion there, along with the rest of the Scots.

The conclusion on identity is that both sides need to engage. If this is about a sense of Britishness, we cannot stand back; there has to be full engagement. The letter to which the noble Lord referred was from the Chief Secretary to the Treasury on 10 June. I commend every noble Lord to read paragraph 9 of that letter, because more pressure needs to be put on the British Government. Otherwise they will seem to be complacent, since the evidence shows that we must demonstrate that sense of Britishness.

What has characterised the debate in Scotland and elsewhere to date is the lack of good information. That is why it was wise of the Economic Affairs Committee, under the chairmanship of the noble Lord, Lord MacGregor, to start this debate. At the beginning, there was a sparsity of information, indeed a reluctance to talk, on the part of business. Rupert Soames, the chief executive of Aggreko, which was based in my former constituency and started life as a very small company—a two-man business—and is now a FTSE 100 company, built his new headquarters in Dumbarton. It was the last thing he did before I stood down from the House of Commons. He told the Committee that if business opens its mouth, “bile and ire” rains down on people, the language is intemperate and business people feel that there are better things to do than be hauled over the coals.

The situation is now changing, and one thing that we have to remember is that the tone of the debate will matter greatly. Michael Ignatieff said that the referendum in Quebec produced fracture and division. We want to minimise that, because we have to live with each other after this referendum. That tone is still very important, but the uncertainty remains and I am glad to see that the CBI, the Scottish Council for Development and Industry and universities have been participating in this debate in asking the question.

Along with lots of others, I have no doubt that if Scotland decides to become a politically independent nation, it can do that, but the crucial question is how much economic independence Scotland will achieve. Jim Sillars, a former leader of the SNP, says, “Not very much”. That is why he rejects the proposals by the present SNP Government. Professor Gavin McCrone, a most esteemed economist for the Scottish Government over the years, has said that currency choice is the most important economic decision that Scotland will make.

Over the past 25 years, the Scottish National Party has adopted the stance of supporting an independent Scottish pound, then the euro and now the pound sterling, but the First Minister is on record as saying that the pound is a millstone around the Scottish neck. That is a most inauspicious start to a monetary union between Scotland and the rest of the United Kingdom. If we go ahead with this, it will raise the most complex problems of cross-border monetary policy, taxpayer exposure and multiple financial regulators. We have only to remember the crisis in the financial services in Scotland in 2009, when both our major banks, RBS and the Bank of Scotland, were bailed out to the tune of 211% of the GDP of Scotland. That is the extent of the issue if problems arise as a result.

Any monetary union can come about only on terms agreed by the UK Government. The question then will be: who will provide the lender of last resort facilities to an independent country if there is little control over the tax and spending risk to which the larger entity is exposed? The committee put it in very straight language—language with which I agreed—when we said that,

“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.

We have to go back to square one in how we approach monetary union. It is for the Scottish Government to come up with proposals, vague as they are at the moment.

Another area that affects us is the issue of the single market in both domestic and European terms. If the integrity of the domestic single market has to be maintained, a lot of thought must go into the relationship between manufacturing and the financial sector on both sides of the border. I mentioned Aggreko. The chairman of Aggreko said that for his FTSE 100 company, it would impose a permanent layer of additional complexity, with headquarters and manufacturing in Scotland and listing elsewhere. We received a lot of evidence from the financial services community, particularly in Edinburgh, on that point, because 96% of its financial products are sold elsewhere in the United Kingdom, with 4% being sold in Scotland.

The issue of the single market in Europe will also matter. I know that the noble Lord, Lord Kerr, has written extensively on the subject and made very wise comments on it. We have to assume that there will be a smooth entry, but there are big question marks over whether there will be. That smooth entry might provide some reassurance, but it will not provide much if the EU imposes tougher membership conditions relative to those of the rest of the United Kingdom in, say, financial regulation and employment law. The question that that sparks is: will that weaken Scottish competitiveness with the rest of the United Kingdom?

One could say that that being the case, the Scottish Government might soft-pedal the negotiations on EU entry to delay such problems, but that would be a mistake. It would also be a mistake for the British Government not to come out with further information, as we have required. Professor John Kay, in giving evidence, said that post the referendum, that will entail years of complex negotiations. We must face up to that. We should not minimise the complexity of the negotiations but start to understand what the issues and problems are.

Is there a climate of fear and uncertainty in Scotland today? Yes, there is an element of that. That was articulated by the leader of Glasgow City Council. It is for us to reduce that climate of fear and uncertainty and speak to one another in a civilised tone in this debate.

Photo of Lord Kerr of Kinlochard Lord Kerr of Kinlochard Crossbench

I thank the noble Lord warmly for his reference to me. On the EU angle, does he agree that if an independent Scotland applies for membership of the European Union, the one thing that it cannot possibly obtain as an applicant from outside is a rebate on its budget contribution? Does he agree that if/when an independent Scotland becomes a full member of the European Union, all Scots will pay more into the budget than all English people?

Photo of Lord McFall of Alcluith Lord McFall of Alcluith Labour

Absolutely. Mention has been made of the letter that President Barroso sent to the committee on 10 December 2012. I will quote two parts of that. First:

“If part of the territory of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory”.

This means a renegotiation of all these treaties. The letter continued:

“In other words, a new independent state would, by the fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory”.

The notion of a rebate, on that point, is really out the window.

Secondly, speaking of Article 49, President Barroso went on to say:

“If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state”.

I ask noble Lords whether we will have unanimity on a rebate for an independent Scotland. That notion not only vanishes; it is non-existent. I agree with the noble Lord on that.

In my peroration I said that one of the chief executives said of the debate that nothing dispels a climate of fear and uncertainty better than the sunshine of information. I thank the noble Lord, Lord MacGregor, for providing that ray of sunshine in this debate on the economic implications of Scottish independence.

Photo of Lord Maclennan of Rogart Lord Maclennan of Rogart Liberal Democrat 4:51 pm, 26th June 2013

My Lords, I should like to thank the Economic Affairs Select Committee for having produced a report that raises many questions that need to be answered, some by the Scottish Government and some by the United Kingdom Government. However, some are not entirely answerable because they depend for their answers on global issues that are not necessarily predictable.

There seems to be an optimistic assumption in certain quarters of Scotland that North Sea oil will provide a base for macroeconomic management of the economy. That seems to me wishful thinking of a kind to which we should not give any sustenance. The global price of oil could fluctuate considerably. As the noble Lord, Lord McFall, remarked, the costs of decommissioning will also have to be borne in mind. It is not entirely clear how much oil there is.

There are many other uncertainties that need to be addressed. An overarching one must be the relationship between Scotland, if it becomes independent, and the European Union. The United Kingdom cannot resolve that of itself. It seems quite likely that, this being the first time that a member country has split up since the European Union was formed, there must be a certain amount of fear on the part of other countries, such as Spain, that we could be paving the way to a disintegration of the Union.

Other issues that raise problems that cannot be foreseen, although their outcome can be discussed, are the effect of independence on the financial services industry, which is of such importance to Scotland. Some 7% of employment in Scotland depends on those services. I cannot comfortably predict that companies such as Standard Life would necessarily remain in Scotland if Scotland were controlling the domestic economy when Standard Life’s services would mostly be provided outside Scotland.

That raises another issue that has been addressed by the committee, which is the attitude to currency. We have heard, even from those who are not necessarily favourably disposed towards the European Union, that the eurozone needs to have greater regulatory authority, fiscal uniformity and acceptance of centralisation of the management of the economy. That has some lessons for those who are thinking in terms of a separation of Scotland from the United Kingdom. I do not see how the First Minister can proclaim his desire to be part of the United Kingdom currency and have some kind of currency union without accepting that we will have to have monetary policy controlled by the Bank of England. The report raises the question of whether the Bank of England could readily accept that role or a regulatory role if it does not have control over the direction of the economy and taxation. Frankly, these questions are not answerable in terms of the prediction of policy, but they are important issues that ought to be discussed by those who are considering what the future might bring.

It is disturbing that yesterday, in its main front page article, the Scotsman revealed that 60% of the members of the Scottish Chambers of Commerce have no sense of how this would all come together. That opinion exists despite the fact that the Government have brought out some very useful papers. We have to consider carefully how to get these messages across so that opinion-formers in Scotland can influence the way the debate is concluded. We also have to consider the division of debt between the two successor nations. That would weigh heavily on the independent nation of Scotland if it were formulated.

The overarching question is whether Scotland, with a population of just over 5 million, would have any influence in global governance. I think it highly improbable. The fact that it would have very little say on trade matters, particularly if it were excluded from the European Union, would seem to bear down very heavily on Scotland’s prospects. The Government have to consider how best to get their messages across. Although I am very grateful for the three policy papers that have been analytically presented, they will not be given headlines in the organs of opinion or the media in Scotland. They will provide ammunition for individual speakers, but will not get through to the electorate. We need to have conferences in Scotland at which these issues are discussed. Such conferences would need to be directed towards those who will have some forward thinking about the prosperity of their own companies, and towards interest groups that will also be affected.

I take the point made by the noble Lord about identity being one of the issues, but hope and fear will play a major part in the debate. We have to project a sense of hope about the British part in the improvement of the condition of the people of Scotland. It is not too difficult—we have a remarkable record. We are not unique in having this national debate about how to manage the economy at the moment; it would exist in Scotland if it were seeking macroeconomically to manage itself. However, the prosperity of the country is at grave risk if we do not resist these arguments about identity. We can—and in the modern world we should—have multiple identities.

I was very surprised to read in the report produced by the Scottish Government’s Fiscal Commission Working Group, published in February of this year:

“Under independence, the Scottish Government would be responsible for the design and implementation of its own macroeconomic framework”.

That is an impossibilist view—for a small country such as Scotland to manage its macroeconomic future by itself without acknowledgement of the influence and importance of the integration of the domestic market in the United Kingdom, the possibility of greater integration in the European Union and the possibility of having more influence on the direction of the global economy.

I beg the Government to think about how they can get their very wise messages across to the people of Scotland. If we leave it too late, arguments from identity could prevail, which would be potentially disastrous.

Photo of Lord Rowe-Beddoe Lord Rowe-Beddoe Crossbench 5:03 pm, 26th June 2013

My Lords, as a Welshman I have more than a passing interest in matters devolutionary. I was therefore most pleased to learn of this inquiry, which was the first subject undertaken by your Lordships’ Economic Affairs Committee at the time of my appointment.

Unlike some of the headlines that greeted our report, which suggested criticism of the UK Government’s position, in reality we did not call for or indeed suggest detailed pre-referendum negotiations. We asked both the United Kingdom Government and the Scottish Government to define clearly their respective positions on the vital matters that we have raised. By so doing, it was our wish to inform the people of Scotland and provide for them proper understanding of both the probable and possible economic consequences resulting from a 2014 referendum. Whether plans are being made for an outcome for one side or the other is not the concern, though many of your Lordships, perhaps, may well say that they are.

The Government have helpfully grouped our conclusions and recommendations into 17 sections, in which the Chief Secretary to the Treasury, in his response, “notes” our findings in eight sections, while “agrees” with our findings in nine sections. That is a better batting average than previous committees on which I have had the privilege to serve. I recall a question that was raised during the Chancellor’s Statement on the Barnett formula. I sat on your Lordships’ Select Committee on the Barnett formula, chaired by the noble Lord, Lord Richard, who is not in his place. The noble Lord, Lord Lawson, was also a member of that committee. We made many recommendations, but to my recollection, not one of them was accepted by the Government at that time. Of course, your Lordships can understand why, and why now even more so the question of the Barnett formula is kicked into the 2016 grass.

However, as the noble Lord, Lord MacGregor, mentioned, the Government have started the publication of “Scotland analysis”—documents dealing with devolution and its implications; currency and monetary policy; and, in May, referred to by the noble Lord, Lord McFall, the financial services and banking. They are most helpful documents, but they will only serve the concerns that your Lordships’ committee has raised if they provide proper understanding of the issues and are given wider publicity, discourse and debate. More documents are promised—two or three, I believe—and that is to be welcomed. However, I remain deeply concerned that both Westminster and Edinburgh are not being as open as they should be to inform both peoples—each side of the border—in addressing our recommendations, very importantly, on “the red lines”.

I should like to focus for a minute or two on two topics: business and the economy, and defence-related jobs. As the noble Lord, Lord McFall, mentioned, CBI Scotland remains greatly concerned with matters that it brought forward just four weeks ago. Its questions concerned anything from the meaning of a hard border between the nations, to the overseas markets in which Scottish businesses will receive consular support and how; Royal Mail, or its Scottish successor, continuing to be subject to the universal service obligation; and the transitional arrangements that are envisaged for diplomatic representation at the European Union prior to entry, the World Bank, the World Trade Organisation and so on. Its last paper lists many issues which exercised the membership. I think some noble Lords said that 60% were very unsure. All of these are, of course, exacerbated in this rather infamous phrase now “the climate of fear” that is clearly engendered—a phrase used, as your Lordships know, by one of our witnesses. Also, with the impression that your Lordships’ committee gained of a conspiracy of silence, by our failure—really it was a big failure—to receive evidence from many Scottish companies which we had asked, with, thankfully, four most notable exceptions which helped to inform our discussions in this area. This is not acceptable to the people and to the business enterprise of Scotland. They need and we—the rest of the United Kingdom—need, good solid information. I say again in support of Westminster that this does not mean pre-referendum negotiations, but that is very different from the red lines.

In regard to defence and related employment, I am delighted that the noble Lord, Lord West, is in his place, for without him we would be most uninformed.

As the House has already heard from our chairman, the noble Lord, Lord MacGregor, no Ministry of Defence official or Minister was prepared to talk to us. Currently, as we were informed, there are 11,000 regular Armed Forces and 4,000 Ministry of Defence personnel at some 50 sites in Scotland. By 2020, the number of regular Armed Forces is planned to rise to 12,500. In addition, as was pointed out to us, there are thousands of skilled jobs in Scotland as a result of Ministry of Defence capital spending. How will a separated Government of Scotland address that?

I was rather taken this week with a paragraph in an editorial in the New Statesman, which said that, with Mr Salmond pledged to preserve so many features of the British state—the monarchy, the pound, the welfare system and NATO membership—independence looks increasingly like a solution in search of a problem. But—and it is a big “but”—the peoples of both Scotland and the rest of the United Kingdom must not allow complacency to influence our and their approach to this most historical and significant event. Whatever the polls may say now, I remind your Lordships that in 1995 Quebec voted “no” to separation from Canada by the slenderest of margins—50.58%—despite polls showing just 12 months earlier margins of 60:40 against.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative 5:12 pm, 26th June 2013

My Lords, it is a pleasure to follow the noble Lord, Lord Rowe-Beddoe. We have served together not only on this committee but on the Barnett committee. I also pay tribute to my noble friend Lord MacGregor, who chaired this committee absolutely brilliantly. I have never known so much work to go into producing the final draft report of any committee. I certainly enjoyed it, although I did find it a great discipline avoiding being too partisan on the committee. The report is not partisan—it sets out the issues fairly and objectively—and I hope that the House will indulge me now if I get just a little partisan, because I spent many weeks on good behaviour. My noble friend played an important part in bringing this document to bear.

I am certainly a nationalist in the sense that I give way to no one in my passion for Scotland, but if I were a Scottish nationalist, by which I mean a separatist, I would be absolutely horrified on reading this report. I would be saying, “What on earth are Mr Salmond and our leadership up to? They have had 50 years to think about the answers to some of these questions, but not only do they not appear to know the answers to the questions but it would appear that no thought whatever has been given to these issues. Yet here we are embarking headlong on a referendum, which will take place in 2014, and what are my people”—if I am a nationalist—“thinking of? How do they expect to go into a referendum for that?”. That is to show that I am fair and balanced, looking at the issue from their point of view.

The noble Lord, Lord Rowe-Beddoe, talked about the climate of fear, as did the noble Lord, Lord McFall, and my noble friend Lord MacGregor. Talking to businessmen and to the leader of the city council, we had evidence of that climate of fear. However, I do not need to tell my noble friend about it; he knows all about how Alex Salmond and the Scotland Office operate.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

As my noble and learned friend knows, I am still stuck in the past on some of these devolutionary aspects. He is absolutely right. I am referring to the Scottish Government—or the Scottish Executive as they were quite rightly called until he changed that in an Act that I spent quite a lot of time opposing in this House—and the way they behave. My noble and learned friend—I am sure he will not be embarrassed if I say this—was invited to speak at, I think, the 25th anniversary—

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

He was invited to speak at the 50th anniversary of Loganair. My noble and learned friend must have been a very good customer of Loganair when he represented his constituency so well. He was asked to do that but an official from the Scottish Government rang Loganair and said, “We understand that you have Lord Wallace speaking at this dinner; we think it should be a Scottish Minister”, and it withdrew the invitation. I have no doubt it was thinking about the financial support it receives for its airlines from the Scottish Government. This is the kind of brazen way in which the Scottish Government operate. Are we surprised that few businessmen were prepared to come to give evidence to the committee? The only great nationalist-supporting businessman with any credibility in Scotland who agreed to come and speak to the committee was Brian Souter, who has built a very successful business, but at the last moment—literally days beforehand—he cried off because he did not feel able to do so.

A climate of fear is operating in Scotland. It comes from having a single party dominating a Parliament, without an upper Chamber of this kind and without very much accountability from the Scottish media. Despite that, the First Minister has found it extremely difficult to get cheerleaders for his campaign. He started off with celebrities, all of whom seemed either to live abroad or pay no tax in this country. He has got so desperate to find celebrities for his cause that he is now having to recruit the dead. Only this week we heard from Alex Salmond that Robert Burns would vote yes in the referendum. He quoted these lines from Burns as conclusive proof:

“We’re bought and sold for English gold—Such a parcel of rogues in a nation!”.

The “rogues in a nation” are not in this part of the United Kingdom; I think they may be north of the border. Of course, that is a reference to how the union came into being in the first place. We should remember how that happened. It came into being because of a financial crisis: something like a quarter of the money in circulation had been invested in the Darien scheme and the Scottish economy was no longer able to sustain that level of financial shock. The Scottish economy could not get access to the single market that was England and her Commonwealth. It was a trade deal. From the English point of view, it was a way of ensuring the succession of the Protestant monarchy, which was a matter of some controversy and of great national security because of the Jacobites.

This union came into being on the basis of maintaining financial security and defence. They are the two matters that come out of this report as being threatened absolutely by the break-up of the United Kingdom now—from Scotland’s point of view, not England’s. The size of the Scottish economy relative to the English one makes it less important for England. Why would Scotland want to give up access to a single market—the rest of the United Kingdom—where most of its goods and services are sold? Why would it, after what we have been through since 2008, wish to remove itself from the security of the Bank of England, the Treasury and a larger country? Why on earth would it want to become so dependent on the revenue from North Sea oil, which, as the report points out, is a very substantial part of the revenue for Scotland as an independent nation, whereas as part of the United Kingdom it is a smaller part and therefore less vulnerable to fluctuations in the oil price? If that sounds like an academic argument, the tax revenue in 2012, as set out in the report, was £6.5 billion. That is 40% less than the previous year. The lack of stability, which dependency on North Sea oil would bring, makes the economic consequences for people living in Scotland very uncertain indeed.

Then we have financial services—financial services that depend on the rest of the United Kingdom for most of their customers, and which also depend on having the security of the Bank of England and the whole apparatus that we have seen working so effectively. As my noble friend pointed out, the Royal Bank of Scotland and the HBOS part of Lloyds account for 1,254% of GDP for Scotland as an independent country. That makes Iceland look as if it was in a very secure position when the financial crisis came along.

When confronted with these issues, answers come there none. On the question of the security of the Bank of England, we are told that it will be fine because, “We will have a representative on the Bank of England and the Bank of England will still stand guarantee”. Why would any English taxpayer wish to put their money on the line for a foreign country called Scotland? This is Walter Mitty economics coming from the First Minister of Scotland, who refused to come to the committee to justify his view.

For those who think that there is some easy way out of this from North Sea oil, there is also the whole question of the decommissioning costs, estimated at some £30 billion and which have to be met by relief on the tax that would otherwise be levied on those oil revenues. Again, answer comes then none, except that the English should pay for the decommissioning because they had the benefit of the revenue in the early years. The lines that are being put are, “We can keep the monarchy and be independent, we can keep the welfare system and have the pensions and welfare administered by the English but be independent, and we can keep the security of the Bank of England”. They are nonsense lines and they are not being properly debated in Scotland as they should be. That is the danger, as the noble Lord, Lord Rowe-Beddoe, pointed out, when things happen on the basis of emotion.

For those who want to see the future, the Minister very unwisely championed the Scotland Act through this Parliament. We are already seeing the first effects of what will happen. The Scottish Government now have the power to set stamp duty. They have just issued a consultation document in Scotland. They are refusing to say what the levels of stamp duty will be until after the referendum—I cannot think why. Everyone in the House will know that stamp duty on houses up to a threshold of £250,000 is 1% in the United Kingdom. In the consultation paper, the Scottish Government propose, as an example, that stamp duty should increase to 7.5% on any amount over £180,000 and 9.5% on properties worth more than £250,000. That is the first effect of these tax-raising powers. To say that an independent Scotland, with the volatility of North Sea oil revenue and all the other matters that I have pointed to that would damage the economy, would be able to reduce tax and not add to it is extraordinary.

The Scottish Government are also, even now, setting up their own inland revenue called Revenue Scotland. We will have two sets of bodies collecting tax north of the border. It is being set up specifically to collect this new land and property tax—this mansion tax that is being imposed on the Scottish people.

I am conscious that time is moving on. I started with a quotation from Robert Burns, which Alex Salmond claimed as his own. I have my own quotation, which I will try to translate later for those who may find some of it a little obscure. It is from the address to the Dumfries volunteers:

“O let us not, like snarling curs,In wrangling be divided,Till, slap! come in an unco loun,And wi’ a rung decide it!Be Britain still to Britain true,Amang ourselves united;For never but by British handsMaun British wrangs be righted!”.

That echoes the sentiments that are included in this report and is a clear endorsement that Burns was on the side of the Unionists.

Photo of Lord Hollick Lord Hollick Labour 5:25 pm, 26th June 2013

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.

Photo of Lord Shipley Lord Shipley Liberal Democrat 5:35 pm, 26th June 2013

My Lords, I have spent much of my life as a firm advocate of increased devolution in the United Kingdom. I would have voted for a Scottish Parliament had I lived north of the border. I have watched with enthusiasm the devolutionary trend in Wales, Northern Ireland, Scotland and London, and now increasingly in England, through local enterprise partnerships and the single local growth fund announced today. This will require local authorities to work more closely together in much more strategic ways.

The debate today is about the extent of devolution and what responsibilities should follow from it. In recent years, the Calman report has made a number of important observations and recommendations about Scotland. In the north-east of England we had a referendum on whether to have a regional assembly, which would have introduced an elected regional dimension of a kind similar to Wales. As we know, in that referendum an assembly was rejected, but other solutions for joint working have had to be found. Coming from the north-east of England, I feel a very close association with Scotland. There is a lot of close working between Scottish and north-east institutions, which I want to see enhanced rather than being made more difficult.

The report of the Economic Affairs Committee on the economic implications for the UK of Scottish independence is therefore timely and important. As we have heard, it is the outcome of a lot of work. I, too, pay tribute to our chair, the noble Lord, Lord MacGregor of Pulham Market, for his leadership of our committee over many months. We concluded that the implications of Scottish independence are too important to be left unexplained, either for those in Scotland with a vote in the referendum, or those elsewhere in the UK with an interest in the outcome of that vote.

The title of our report is important. It addresses the economic implications because this can never be just a political debate, which takes me to the referendum. Like others, I have not understood why the referendum due next year will be a vote in principle. In the case of a yes vote, negotiation after that decision in principle will be undertaken in a very limited period of time, which is clearly too short. This does not seem to me to be the right way to run a referendum. As our report states:

“Voters in Scotland deserve the best evidence-based assessment of the likely economic consequences of independence”.

Because independence would have consequences for the whole of the UK, everyone living in the UK needs to understand what the economic consequences may be for them. It follows that voters who will make the decision in Scotland should not be expected to do so without a full explanation of the matters they should consider before casting their vote. For example, Scotland and the rest of the United Kingdom have benefitted from a single market which enables free trade and investment. Differences in currency, regulation and levels of taxation could all have a significant impact on both the United Kingdom and Scotland. Voters need clear information.

Paragraph 20 of our report makes the point that:

The United Kingdom single market has helped the Scottish financial services sector to grow”.

However, as we point out, on its own the Scottish economy is dwarfed by the balance sheets of Scottish banks, with the total assets of RBS and HBOS being over 15 times Scottish GDP. The Chief Secretary to the Treasury and the right honourable Alistair Darling were correct to remind us that UK government support for RBS amounted to more than 200% of Scotland’s GDP. As the Chief Secretary to the Treasury said in his reply to the Committee's report, if Scotland were to separate from the UK, this integrated domestic market would split into two separate markets, subject to separate legal and regulatory regimes. This could create additional difficulties for financial services firms and increase costs for households and businesses in areas such as pensions, ISAs and insurance. It could also mean that consumers living in different parts of the UK were offered different standards of protection when purchasing financial services. I am not sure that all these matters have been fully understood by consumers both sides of the border and they need to be so.

I shall not say much about defence or currency—the issues have been well explained in our report. However, on defence, I was interested in the report of the Scotland Institute, published on Monday this week, which said that independence would result in a “wholesale dismantling” of Scotland’s defence industry and that the process of separation from the UK would be “a monumental task”, with the consequences “deleterious” in which Scotland would have a defence force which,

“hardly constitutes an armed force in any meaningful sense”.

That report should be taken note of.

Public spending per head in Scotland is higher than in the UK overall. It is not clear why it should be, although one understandable factor is geographical size—and then, of course, there is the Barnett formula. In 2011-12, spending in Scotland was 11% higher than in the UK overall. If Scotland became independent, that level of public spending as a share of the UK’s budget would not continue. As we have heard, oil revenues might make up the difference, but they could be uncertain and would fluctuate. The best estimates are that the Scottish sector would receive net tax revenues from oil production of between £5 billion and

£10 billion a year. The difference in revenue between years could of course be substantial. If the division of the physical assets was on a geographical basis, 90% of oil reserves would be in Scotland and, broadly speaking, the tax gain would make up the loss of the Barnett formula, although people would need to be clear—again, as we have heard—about the consequences of decommissioning costs. Overall, it would seem that in the past five years the average annual tax revenue from oil and gas has been just over £9 billion, but that is one-fifth of onshore tax revenues for Scotland but less than 2% of the UK’s onshore tax revenues overall. I think that there would be a serious overdependency on oil if Scotland became independent.

The committee concluded that that a division of financial assets and liabilities should be on a population basis, but that the process would be complicated. We emphasise in paragraph 91 that the Scottish Government should explain to voters before the referendum exactly how they would plan to take over their share of public sector debt and liabilities.

Then there is Scotland’s credit rating. It will almost certainly have to pay a premium on its debt because of its small size. It is important that the Scottish Government should be clear to voters what level of debt Scotland will carry and how that debt will be serviced.

On tax revenues, the Institute of Chartered Accountants of Scotland reminded us that there are no official statistics for tax raised in Scotland; in other words, we do not know what the gap is between tax revenue raised and the spending of block grant. It seems pretty fundamental to the referendum that people should understand the current tax yield for Scotland. I understand that Oxford Economics has done an exercise which has shown that there could be a fiscal deficit even if we counted all oil and gas as Scottish, which is unlikely to be the case. Official statistics are needed nevertheless, otherwise how do Scottish voters make an informed decision? We should note that the Institute of Chartered Accountants of Scotland also said that to design a new tax system for Scotland could take a decade.

There is a whole set of assumptions about how independence would be progressed in the event of a yes vote, but the issues are not as straightforward as some would wish them to be: on currency, on credit rating, on tax, on assets and liabilities, on loss of the Barnett formula, on oil and gas reserves, on EU membership, on pensions, on regulation and on defence. All need to be clearer before people are asked to make an irrevocable decision. The Chief Secretary to the Treasury, in his reply to the report, agreed that:

“It is crucial that the referendum debate is properly informed”.

As we have heard, papers are now being published and we should welcome that.

However, we also need to identify the cost of independence—of the process and the need to create a separate system of government. The issue cannot simply be: “Should Scotland be independent?”. Rather, it is whether Scotland—or any other part of the United Kingdom for that matter—can be independent in economic as well as political terms. Our report shows that Scotland would face similar constraints to now should it become independent. Indeed, it shows that those constraints may well prove to be even greater than they are now.

Photo of The Earl of Caithness The Earl of Caithness Conservative 5:45 pm, 26th June 2013

My Lords, I was not fortunate enough to be a member of the committee chaired by my noble friend Lord MacGregor, but I thank it very much for its work and its very readable report.

I will follow on from what the noble Lord, Lord Shipley, said, right at the end. Independence is a misnomer for what is proposed. There is no way that Scotland is going to become an independent country. It could become a separate country and exist as one— although to what extent that is possible and how successful it would be is not yet known—but it would certainly not become an independent country. If it wants a sterling area, it will be subject to the Bank of England, and if it is to have its own currency—which I will come on to—and wants to join Europe, it will be subject to all the rules and regulations of Europe. Even if it stays out of Europe, it will be in the same position as Norway, with most of its laws having to abide by those decided in Europe, over which it would have no input.

With the situation as it is at the moment, I believe that we are in potential danger of sleepwalking into a disaster, because there is a stand-off between Edinburgh and Westminster. Mr Salmond has set out his stall very clearly, saying:

“The plan is to do what is appropriate and in the best interests of Scotland”.

He wants to negotiate on a number of issues and the UK Government have said that they will not. That worries me, because we do not have the information to make a decision, and the longer that goes on, the more chance there is of a yes vote. In the event of a yes vote, it will certainly be no velvet divorce—it will be a very nasty situation. I do not think that a no vote is by any means certain, given the latest opinion polls. I have detected a feeling that separation is better than the status quo, but they do not know what separation is. At a time when the SNP has made a number of changes of position on fundamental issues as it struggles to find a coherent set of positions prior to the vote, the opinion polls are not really moving to reflect that. There has certainly been little change in people’s perception about the economy but Mr Salmond’s plans for corporation tax have been condemned as,

“an excruciatingly awful piece of work”.

Perhaps that is not surprising since Mr Salmond not only signed a letter in support of Mr Goodwin when he was RBS chief executive and bidding for ABN AMRO, but signed it, “Yours, Scotland”.

Let us please have some answers from the Government. What will be the position with regard to the Scottish banks—RBS and HBOS—considering that they were bailed out by the UK taxpayer? Can my noble and learned friend give a definitive statement that there will be no formal sterling area? The Chancellor, my right honourable friend Mr Osborne, has hinted that he does not think it is in the interests of either Scotland or the UK, but there needs to be a stronger statement than that. Mr Salmond has, on a number of occasions, made his demand for a sterling area a prerequisite for a settlement on the disposition of assets and liabilities. We need to be absolutely clear whether the Government will negotiate on a sterling area or not. Of course, if there is no formal sterling area, Scotland could retain sterling, but all analysis has shown that this would be bad for the country and it would probably be better for it to opt for its own currency. If it does so—indeed, it might be sensible to do so—it will have to have all the necessary financial institutions, including its own central bank. If it wants to join the EU, it will have to have its own currency up and working for at least two years to meet the requirements imposed for new EU membership.

It is well known that a separate Scotland would want to join the EU. Can my noble friend say whether it will be a net contributor or beneficiary of the EU budget, and, if so, by how much? Can my noble friend confirm that the UK’s abatement will stay with the rest of the UK and not with Scotland? These are some of the fundamental questions.

To me, the most critical question is how one settles the matter of assets and liabilities. Will the assets—in particular, oil and gas—be apportioned on a geographical basis, as recommended in the report? What would be the situation should Orkney and Shetland decisively vote no to a separate Scotland and negotiate with the Scottish Government to have a separation? How would that affect the geographical assets?

As for liabilities, it is crucial that we know what the plans are for the public sector debt. Will it be apportioned on a population basis, as suggested in paragraphs 86 to 89 of the report? Paragraph 87 states that by 2016 the public sector debt would go up to £185 billion, based on current figures, if you add pensions and other such costs. Indeed, the public sector debt will increase, so the figure will be somewhere between £185 billion and £213 billion, in round figures. Whatever the figure, it is a colossal sum of money, and Scotland does not have that amount of money.

How will it be financed? Will the Government accept an IOU, and, if so, on what terms? If there are no appropriate guarantees and securities, it would be similar to losing 10% of your economy while retaining all your debt. That is a hugely worrying situation. Not only do we, who are going to vote on separation in September next year, need to know that information; more importantly, the markets need to know it. If the markets do not know it and begin to sense that there might be a yes vote, I fear very much that speculators will cause havoc in the markets with the pound sterling. The Government will then be in an infinitely more difficult situation in which to negotiate any deal with the Scottish Government. That scenario is extremely worrying and can be avoided.

I thought that the letter accompanying the Government’s reply to the report was contradictory. On the one hand, the Chief Secretary says that he wants as much information as possible and that all of us in Scotland who are going to vote should know all the facts. He then goes on to say that he is not making any plans for Scottish separation in the UK and is not going to negotiate. That is a totally contradictory position and, I say to my noble friend on the Front Bench, a very unhelpful one.

Photo of Lord Lipsey Lord Lipsey Labour 5:54 pm, 26th June 2013

My Lords, I join in thanking the noble Lord, Lord MacGregor, for his brilliant chairmanship of this committee. It was a bit like climbing Ben Nevis in slippers while hoping that the view from the summit repays the labours that have gone before. Indeed, the response to the report has been fair and favourable. I think the reason is that we were very objective in our approach. Some on the committee have, you might say, form on this issue—the noble Lord, Lord Forsyth, will not mind me mentioning him in this context. However, others—and I count myself—have no form on it at all. I had not thought about the issues since I was one of those advising the Callaghan Government on their rather ill-fated attempt at devolution. From that position, we as a committee took evidence, learnt, pondered and, unanimously, concluded.

As an Englishman who lives in Wales, I do not have a vote in the referendum in 2014, and if I did I would have mixed feelings about how I would cast it. On the one hand, I am very aware of how much Scotland, over three centuries, has brought to the national table culturally, intellectually and economically. I am also aware, as a loyal member of the Labour Party, how much it has brought to my party. It has been traditionally strong in Scotland, and Scotland has given it some of its greatest leaders, from Keir Hardie on. However, wearing another hat, as a taxpayer, I feel very differently. I hate paying for the extravagances of the Scottish Government. It weighs particularly heavily on me that the Scottish people have free care for the elderly, which was a recommendation of a UK royal commission chaired by a distinguished Scot, the noble Lord, Lord Sutherland, to which I appended a note of dissent on this point. I do not mind them doing that if that is what they want to do—although I think it is daft—but I object to my pocket being tapped to pay for it. As I said, I do not have a vote, but if I were a Scot, and if I had read, marked and inwardly digested the report in front of us, what then? I would pay a piper to escort me to the polls to the ancient Scottish reel, “Will ye no, no, no to independence”.

I will not go over in detail all the arguments in our report and which the noble Lord, Lord MacGregor, and other noble Lords have so eloquently laid before the House this afternoon. However, as we took evidence, it struck me that there is a very strong asymmetry between the economic arguments for independence and those against independence. One of the arguments for independence is that it will of itself set loose Scottish entrepreneurial spirits and result in a huge economic boom. These arguments are nebulous and theoretical. They are hopes and dreams and have no substance, and no economist will tell you that these things will happen. In contrast, the arguments against independence are concrete and powerful, and, if I were a Scot, they would frighten me half to death.

I will cite some examples. As regards North Sea oil, if the price of oil goes up, the Scottish people will get a wee bit more revenue. However, if it goes down, they will not get a wee bit less revenue because, quite close to the present price, you get to a stage where it is not worth getting the damn stuff out of the ground, so they get no revenues. Furthermore, that loss of revenue will not be shared over an entire United Kingdom, with many taxpayers taking the burden. It will fall entirely on the Scottish taxpayer.

As for national debt, Scotland cannot simply take over a share of Britain's national debt, as that debt has been legally incurred by Britain as a whole. It would have to fund its share by issuing its own bonds. It is by no means obvious that international markets will be racing to buy them, from an untested Government in a brand-new country, whose economic viability has yet to be proven.

A related issue is monetary policy. None of Scotland’s choices of currency is very attractive, is it? SNP policy used to favour the euro but recent events have led it to drop that. There is the pound sterling but the dangers are palpable for an independent Scotland in having a currency run by the Bank of England whose duty is to run it in the interests of England. There is the groat but will investors want a groat-denominated Scotland bond? I do not think the queues will be very long down the streets of Glasgow and Edinburgh.

Then there is European Union membership. If Scotland goes independent it will, ipso facto, not be a member of the EU—despite the protestations of John Swinney, among others. The rules are perfectly clear and have been clarified by the British Government as well as by the president of the Commission. Scotland can apply for membership and no doubt it will, but many existing members will be very pleased to block it, if only to scare their own local separatist movements. As the noble Lord, Lord Kerr, made clear, the chances of Scotland getting a rebate would make a snowball’s lifetime in hell seem, in comparison, a long one. Then, is a county the size of Scotland outside the EU likely to remain, as Scotland has hitherto been, a first choice of headquarters for major companies and financial institutions? I doubt it.

In my heart, I have some sympathy with those Scots who want independence. I love the country very much. I was up there only recently and its beauty and the character of its people commend it to us all. I can quite see that if I were a Scot, I would find it a bit much to be part of a larger country that still hankers after great power status when I want it to be a decent little social democracy going about its business. Those things will weigh but the Scots are a canny people. When the referendum comes, they will weigh the arguments and come to understand that they are faced, in independence, with a huge threat that could ruin the remaining prosperity that exists with them. I cannot help but believe—and from their viewpoint, hope—that they will stick with auld acquaintances for the sake of auld lang syne.

Photo of The Earl of Mar and Kellie The Earl of Mar and Kellie Liberal Democrat 6:02 pm, 26th June 2013

My Lords, the noble Lord, Lord Lipsey, was very lucky that he still had his slippers on when climbing the Ben, because for me this is an even grimmer debate. I read this report with interest and found it helpful. The committee and the United Kingdom Government presume a victory for the “no” campaign. The committee has considered its angle on possible economic implications which, while significant, are of course not the central point of the referendum. I will talk more about constitution than economics.

The committee did not consider the central issue, that of Scottish democracy and self-government. In a sentence: with political independence the people of Scotland always get the Government of their choice. The “no” campaign has not brought forward enough about Scotland’s possible future within the United Kingdom. The “no” parties have probably not finalised their positions. The presumption is of greater powers for Scotland, though I wonder whether there is much more that could be devolved if the four pillars of reservation are to be retained: defence, foreign affairs, macroeconomics and welfare. I hope that my Liberal Democrat noble friends will develop and promote their federal proposal, similar in many ways to that successfully established in Germany after 1945. This federal solution would at least secure a limited sovereign status for the powers of the Scottish Parliament and also define and limit the powers of the United Kingdom Parliament as the federal Parliament.

King James VI was, I believe, keen to become the emperor of Britain in 1603, arguing that he presided over three sovereign states thereby creating an empire. He failed to win his argument. Unfortunately, he also failed to secure sufficient entrenchment for his Scottish kingdom. That made possible the disappointing development of the incorporating union agreed in 1706, led and driven by the Earl of Godolphin.

Heading back to the report, the committee produced a list of the risks of leaving. I ask that the risks of staying be considered. Some of these are as follows. First, as the noble Lord, Lord Lipsey, mentioned, there is involvement in wars which more meet England’s need to be a major power. Secondly, there is the risk of being removed from the European Union because people in south-east England think they will be better off outwith it. Thirdly, the United Kingdom Government might continue to act without consent from Scotland, as happened over the development of the Clyde naval base. Fourthly, consider this: if the people of Scotland wished to develop into a Scandinavian-style social democracy, they would not be allowed to do so. I am sure there are many more risks.

I turn to the use of campaign metaphors. The “no” campaign would have us use the divorce analogy while “yes” campaigners use the metaphor of the family growing up and going their own ways. Noble Lords will generally be familiar with the risks of entering into a marriage and of selecting a career. Neither can political independence be risk free. There seems to be a presumption in the report that the SNP will form the Scottish Government in 2016. I suspect that Labour may well form the Scottish Government, somewhat perversely, after a “yes” vote. In that case, today’s Scottish Government can hardly make hard and fast predictions about what will be negotiated.

It concerns me that the committee seemed to approve of the idea that after a “yes” vote the remainder of the United Kingdom Government should act in a generally hostile fashion towards Scotland, despite the continuation of the regnal union. I know there is the precedent of the trade war with Ireland, which has at least been worked through. That is curious behaviour for the mother of Parliaments. It smacks of “Leave me and I’ll make your life miserable”—surely a relationship with a poor foundation.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I am most grateful to the noble Earl for giving way. Where in the report is there any suggestion that there would be hostility towards an independent Scotland? The report goes out of its way to avoid any language of that kind. Surely the noble Earl is not suggesting that it is hostile to say that if Scotland became independent it could not expect the Bank of England to look after its interests. That is a matter of fact, not of hostility or gentility.

Photo of The Earl of Mar and Kellie The Earl of Mar and Kellie Liberal Democrat

My noble friend is probably right but I read the report and that is what I felt.

Finally, Scotland needs to emerge from its 300-year constitutional sleep. Clearly, the limited powers granted in 1998 were the early stages of that awakening. Our neighbour and comparator country, Norway, emerged in 1905 from a 400-year constitutional sleep. After becoming one of the poorest countries in western Europe, look at it now. The key is that it achieved democracy before it obtained wealth. It decided in 1990 to set up a sovereign wealth fund. The United Kingdom decided not to do so, thereby depriving Scotland of any choice in the matter. I am confident that there will be more constitutional developments in favour of Scottish autonomy irrespective of the actual referendum result. After all, the status quo is not on offer as the Scotland Act 2012 will be implemented between now and 2016. There must be more such developments because a sustainable, permanent settlement is needed. Economics, though significant, must follow the new settlement.

Photo of Lord Lyell Lord Lyell Conservative 6:09 pm, 26th June 2013

My Lords, I shall not attempt to follow the noble Earl, whose family goes right back into Scottish history, even to the death of James I in Perth in 1437. We Lyells are mere pawns on this massive chessboard of Scottish history. I am a resident of Angus and declare such interests as are in the register. I have one other particular interest to declare and I was thrilled and happy to hear the wonderful comments and support of the noble Lord, Lord Shipley. I am a member of the Institute of Chartered Accountants of Scotland. I am proud of this and declare that interest. That is why I thank my noble friend Lord MacGregor. If I may take 10 seconds of your Lordships’ time I will say that his is an outstanding report, quite one of the best that I have had the pleasure of reading—and even understanding—in all my years in your Lordships’ House, because it sets out a number of problems and queries.

Originally in 1962 I thought the symbol of the Institute of Chartered Accountants of Scotland was a vulture with the word “vigilance” underneath. That cost me three extra weeks of working on a Saturday. In fact, the motto is “seek the truth”, which is exactly what my noble friend and his committee have done, and I as a Back-Bencher and possible Scottish taxpayer thank them very much for their work. With the amount of material it contains, the report is almost indigestible, but where it goes into detail it is perfectly relevant, enormously helpful and very clear.

With your Lordships’ permission, I shall concentrate on chapter 7, dealing with fiscal aspects and tax. I ducked low when I heard the comments of my noble friend Lord Forsyth about stamp duty and landfill, and this happy new institution known as Revenue Scotland. It sounds friendly, but I wonder how it will develop and grow. I was rather cynical and thought that I would add the comments of the famed Frenchman Jean-Baptiste Colbert, who said that the art of taxation was to pluck the feathers from the goose until it either does not squeal or you get away with it. Colbert, who lived from 1619 to 1683, was chief minister of Louis XIV. He finished that aspect of his life and, indeed, died in 1683. I hope it was not plucking geese that hammered him, but you never know.

Discussing personal tax in Scotland has been like a shuttlecock going between my noble and learned friend on the Front Bench and my noble friend Lord Forsyth. Who will and who will not be a Scottish taxpayer? My noble friend Lord Forsyth, my noble friend Lord Courtown, who, alas, is not here, and I have an annual ski race in Switzerland. Once a year we head down the ski run, terrified. There are 46 gates and an icy slope and I wonder what will be new this time. Will I survive or will I fall? It is exactly the same with the definitions of who will and who will not be a Scottish taxpayer. Perhaps my noble and learned friend will write to me in the course of the next week or two about any developments or any new concepts of the Scottish back-tax payer since his last comments when he spoke in a debate with my noble friend Lord Forsyth.

I refer your Lordships to paragraph 180 of the excellent report of my noble friend’s committee. It looks at the lack of data about who would be an identifiable Scottish taxpayer for the purpose of income tax and the Scottish variable rate. Paragraph 94 refers to the Institute of Chartered Accountants of Scotland which stated:

“Let no-one be misled, there are no official statistics for tax paid by those in Scotland”.

That was referred to by the noble Lord, Lord Shipley. It seems there is even now no definite basis on which to decide who is or is not a Scottish taxpayer and we have only two years to go before we have to start thinking about what to do.

The report states that in 2009-10 the top 1% of Scottish taxpayers paid £2.1 billion. Whether the individuals total 4,000 or 2,500 I could not be sure—it depends on the definition by Professor Bell—but the amount of income tax they paid was £2.1 billion. That seems a fair amount. Simple arithmetic shows what is being paid by these individuals. The Scottish variable rate has been mentioned and is part of the calculations referred to by my noble friend Lord Mar and Kellie. If this system is put into effect it will mean that each and every taxpayer in Scotland may well have to fill in not one, but two tax returns. The Scottish variable rate, as presented now, will have differing rates and allowances.

This takes me back to my early studies of tax law in Scotland in 1962 and earned and unearned income. Earned income is spelled out in the Scottish variable rate in the Scotland Act and unearned income will be pensions and rents. I hope that I am not being unjust to my noble friend Lord Forsyth, but he indicated that one of the many thoughts he had was that every pensioner south of the border would scuttle north of the border because their pensions and other non-earned income would not be subject to the Scottish variable rate. I hope I am not maligning him. He may take it up later if I am.

Some chartered accountants sent me a wonderful briefing saying that they were not aware that the question of finance and tax was of paramount importance to all Scots. Indeed, they referred to the three “f”s of football, fishing and fashion as being of much more interest. I was not necessarily aware of that—certainly not looking at the fashion in Kirriemuir on a winter day. However, I am immensely grateful to my noble and learned friend, who has given so much help so far. Will he now confirm to me that pensions will be part of the Scottish variable rate? I glanced at an instructive programme over the weekend which said that 90% of the mortgage and pension products of the Scottish financial industry go to customers and clients with a non-Scottish postcode—I assume that is across the border in what might well be a separate country.

That is quite enough about the Scottish taxpayer, fiscal matters and chapter 7. However, I thank my noble friend for his excellent report. Even I can understand it and I hope that if these comments are reported in Scotland, chartered accountants will not kick my shins too hard because I hope that I have got it right.

Photo of Lord West of Spithead Lord West of Spithead Labour 6:18 pm, 26th June 2013

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.

Photo of Lord Davies of Oldham Lord Davies of Oldham Shadow Spokesperson (Transport), Shadow Spokesperson (Treasury), Shadow Spokesperson (Wales) 6:22 pm, 26th June 2013

My Lords, the House owes a debt of gratitude to the Select Committee and to its chairman, the noble Lord, Lord MacGregor, who introduced this debate. It has clarified issues that we all know need clarifying. I hope that the Minister will aid in that clarification. I hope that he is able to give forthright answers to certain questions addressed directly to him.

I shall keep my contribution short, in keeping with the declining length of the contributions as the debate has gone on. It is quite clear that there is broad unanimity in the House about these issues and the necessity of getting out the arguments behind them. What worries me is the obvious point that we have been debating this issue in a vacuum today because there is no member of the Scottish nationalist party to represent a different perspective. The noble Earl, Lord Mar and Kellie, did a little to introduce a discordant element, and even provoked the noble Lord, Lord Forsyth, although provocation is unnecessary for the noble Lord, who was able to bring the Scottish First Minister among us without any difficulty and argue with him forcefully, to such an extent that I found myself nodding in agreement with almost every word that the noble Lord expressed.

That is the nature of the problem. I went to a meeting of the Economic and Social Research Council the other day, which it held in Portcullis House. It indicated the significant areas in which it intended to carry out research to clarify fundamental issues. I was delighted by that, because, apart from the work of the Select Committee, very little seems to be going on on the issues. What worried me about the Economic and Social Research Council’s approach is that it seemed to have that slightly leisurely quality that academics tend to bring to the necessary research proposals that they are to follow through. The issue is urgent. When we have clarified the issues, the question is: can we communicate effectively to people on the other side of the debate who at present have expressed a great weight of opinion, often in extremely emotive terms, which we need to confront?

I think that in this debate we have clarified all the key issues that ought to exercise people in their concern about the future of an independent Scotland and the risks involved. I hope that we can present those issues in the context that we are all part of the United Kingdom, with excellent relationships among all its parts, and that in no way, shape or form should we let there be any suggestion of punitive action by the Bank of England or anyone else if the vote went the way of independence. I hope that the result of the work of the Select Committee and all the expressions of opinion in the House today, perhaps with the exception of the noble Earl, will be concern about how the issues are to be presented to the Scottish people and how the cases are to be presented effectively.

The Minister can aid us a great deal by indicating how the Government are going to play their part in that. However, this is an issue not for the Government but for effective campaigning to win the hearts and minds of the Scots for the continuation of the union.

Photo of Lord Wallace of Tankerness Lord Wallace of Tankerness Lords Spokesperson (Attorney General's Office), The Advocate-General for Scotland, Lords Spokesperson (Scotland Office) 6:26 pm, 26th June 2013

My Lords, first, I welcome today’s debate discussing the important report from your Lordships’ Economic Affairs Committee. I thank all committee members, but I thank in particular the committee chairman, my noble friend Lord MacGregor of Pulham Market, who introduced the debate. Although I pay tribute to all who have contributed to the debate, perhaps I may pick out the noble Lords, Lord Rowe-Beddoe, Lord Hollick, Lord Lipsey, Lord West and Lord Davies of Oldham, on the basis that they are non-Scots. In making the case of the United Kingdom, I think it is very important that we hear voices from outwith Scotland saying how important the union is for all of us.

We have heard valuable contributions. I share the view of the noble Lord, Lord Davies, that it is perhaps unfortunate that there is no representative of the Scottish National Party in this House. That is the party’s choice and a matter for it, but it would have been useful, not least to answer some of the legitimate questions put. My noble friend Lord Steel of Aikwood interrupted my noble friend Lord MacGregor to say that it was odd that, having had two years since we knew that this referendum was coming, the Scottish Government had not come up with the answers. My noble friend Lord Forsyth hit the nail on the head when he said that it has been Scottish National Party policy for more than 50 years. One might have expected that, as it has been its policy, it might have had some answers, rather than either the deafening silence or the change of position which we sometimes get.

Perhaps I may say something about the tone of the debate that we expect in Scotland. It is important that we have a rational and well reasoned debate. I have heard the concerns expressed by a number of your Lordships from all parts of the House about the fears expressed to the committee. I will not comment further, but I can confirm the withdrawal of my invitation to a 50th anniversary dinner referred to by my noble friend Lord Forsyth.

It is healthy when we get contributions from people who do not necessarily have any axe to grind. My noble friend Lord Lyell declared his interest as a member of the Institute of Chartered Accountants of Scotland. That institute, with its distinguished history, has indicated that it will not come out on one side or the other but has already shown its willingness to ask pertinent questions, not least with regard to pensions. It is important that bodies such as that, which have a track record and can be seen as having professional status in Scotland but are not backing one side or the other, make such a contribution.

As we approach the referendum in September next year, it is important that both sides of the debate are robust in their arguments but conduct them with respect and, echoing what has been said, with information. I welcome the fact that a number of your Lordships who have contributed to the debate have commented on the Scotland analysis papers. The three that have been published so far are fairly heavy tomes. I can confirm that another will be published in the next few weeks. To inform the debate, we as a Government have undertaken that programme. There will be further papers on the United Kingdom’s position in the world, the protection of our citizens and defence, the economic benefits of the United Kingdom, and as my right honourable friend the Chief Secretary said in replying to the committee, on issues such as energy and welfare, as well as the important issue of pensions, mentioned by my noble friend Lord Lyell.

In addition, I have heard the disappointment expressed about the Ministry of Defence, but it has contributed to a number of other Select Committees. My right honourable friend the Secretary of State for Defence is to give evidence to the Defence Select Committee next week. There have been reports by the Scottish Affairs Committee, to which evidence has been given. The noble Lord, Lord Rowe-Beddoe, mentioned postal services. I understand that the Business, Innovation and Skills Select Committee in the other place is conducting an inquiry into the implications of Scottish independence for business, higher education, research and postal services. Undoubtedly the Government will give evidence to that committee.

With the possible exception of the constitutional issues raised in the comments of my noble friend Lord Mar and Kellie, there was general unanimity across the Chamber about the importance of Scotland as part of the United Kingdom. Also mentioned in one or two contributions was that it is important that we are not complacent. I assure your Lordships that the Government are not complacent. Earlier today I heard my right honourable friend the Secretary of State for Scotland refer to the referendum in Quebec. It is difficult to draw too many parallels, but he reflected on the fact that the federalists thought that it was in the bag and won by 1% only. We had the benefit of a lecture in Dover House last month by Monsieur Jean Chrétien, who was Prime Minister of Canada, and we certainly got the message from him. That will keep us on our toes. We know that this is a battle that we must win with both head and heart.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

Does my noble and learned friend not think that it is a trifle complacent of the Ministry of Defence, taking up the point made by the noble Lord, Lord West, to say that it is not looking at any contingency plans for the future of Trident, because it takes the view that Scotland is going to remain part of the United Kingdom?

Photo of Lord Wallace of Tankerness Lord Wallace of Tankerness Lords Spokesperson (Attorney General's Office), The Advocate-General for Scotland, Lords Spokesperson (Scotland Office)

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.

Photo of Lord Forsyth of Drumlean Lord Forsyth of Drumlean Conservative

I apologise for interrupting my noble and learned friend again, but is it not a matter of choice because the decommissioning costs are given by tax relief on the tax revenues? If the oil becomes part of Scotland’s assets, it is not a matter of choice whether it meets the decommissioning costs; they would have to be met because they would be part of the tax regime. Otherwise, it would be too expensive to take the oil out of the ground, in which case the revenue would be zero.

Photo of Lord Wallace of Tankerness Lord Wallace of Tankerness Lords Spokesperson (Attorney General's Office), The Advocate-General for Scotland, Lords Spokesperson (Scotland Office)

My noble friend makes an important point. I am simply pointing out that the Scottish Government do not seem to have worked out which way it is. I am not trying to offload a moral or legal obligation on to the United Kingdom.

A number of noble Lords, including my noble friend Lord Caithness and the noble Lord, Lord Hollick, mentioned the assets and liabilities. Clearly the division of liabilities and assets would be a significant part of any negotiations to create a new state. In the case of Scotland and the rest of the United Kingdom, it would have to be settled by negotiation. Unpicking the

United Kingdom’s institutional and governmental infrastructure framework would be a huge task, and it is impossible to say with confidence what the outcome would be. Although there are some general principles of international law that could impact upon this matter, there is no clear set of rules in international practice about the precise allocation of national debt in these circumstances, but there would be an expectation that an independent Scottish state would take on an equitable share of the UK’s national debt. How an equitable share would be calculated is open to question, although I think the Finance Secretary Mr John Swinney accepted that there would be that obligation when he gave evidence to your Lordships’ committee.

Europe and Scotland’s place in Europe also featured in the report and in our debate. Again, we know that if Scotland leaves this union, the rest of the United Kingdom would be a continuator state. That was set out very clearly in the first Scotland analysis paper that we produced. The United Kingdom as a continuing state would maintain the same set of terms and conditions, rights and responsibilities that we enjoy today in Europe, NATO and the G8. Scotland would be a new state and would have to seek to join all those international bodies. That is a fact that the Scottish Government initially sought to deny. With regard to Europe, they said it would be seamless, automatic membership. Now, in the face of the evidence, they publicly accept that they would have to negotiate their way in. We could debate this. There are differing views about how that negotiation would take place, but there can be no doubt that it would be a very difficult negotiation. As the noble Lord, Lord McFall, pointed out, there would be no guarantee of an exemption from euro membership, or from Schengen, as the noble Lord, Lord Kerr of Kinlochard, stated. My noble friend Lord Caithness asked about the share of the rebate. It is impossible to say what the share of the rebate would be or whether the European Union would even grant any rebate to the Scottish Government. It would be a matter of negotiation not with the United Kingdom Government, although as a member state we would have a part to play in it but, after the accession of Croatia next week, with 27 other Governments, and there is no guarantee about the outcome of such negotiations.

Defence was quite properly raised by a number of noble Lords. In our responses to other Select Committees we have sought to give some indication of the number of defence-related jobs in Scotland. How many would be lost would to some extent depend on the configuration of Scottish defence. My noble friend Lord Shipley mentioned the report this week from the Scotland Institute which did not really offer much about what the profile of Scottish Armed Forces would be. As at 1 April 2103, there were more than 11,000 Regular Armed Forces and 4,000 Ministry of Defence civilian personnel in around 50 sites throughout the country. Following the Defence Secretary’s announcement on 5 March about the Army basing plan, by 2020, there will be some 12,500 Regular Armed Forces based here and Scotland will be home to all the Royal Navy’s submarines, one of the Army’s seven adaptable force brigades and one of the three RAF fast jet main operating bases.

With regard to civilian defence jobs, the Scottish Government’s agency Scottish Development International estimates that the defence sector in Scotland employs more than 12,600 people. The building of the Queen Elizabeth class carriers, initially on the Clyde and with further construction in Rosyth, underlines the commitment to defence jobs in Scotland. We can confidently say that that could not by any stretch of the imagination be maintained at that level in an independent Scotland.

I recognise that calls for more information have come in this debate. We are committed to setting out facts and evidence to ensure that people take an informed decision. I take the point that we, not just as a Government, but all of us who support the union, have an obligation to go out and sell the message. It may be that these weighty tomes are a bit weighty for leaflets or for a snappy column in some of our newspapers. Certainly, that has been represented to us, and the tenor of some of the contributions to this debate was that we should think of ways in which we can put out a more popular version. We are aware that these requests have been made, and we will give consideration to that.

Ministers have a particular responsibility, but others can get out and talk. On Friday, I will be speaking to the Scottish Council for Development and Industry in Aberdeen on constitutional issues. I know when my right honourable friend the Secretary of State for Scotland saw the report about the Scottish Chambers of Commerce and those who did not think that they were informed enough, he said—he will probably not like me for this—that he would be happy to go to talk to some of the chambers of commerce up and down Scotland. If anyone is listening from the various component parts of what I think is a federation of SCCs, there is an opportunity there to invite the Secretary of State for Scotland, but others of us would be willing to do so.

I heard the request that we should engage in pre-negotiation. I am not going to side-step it, and I know it will be a disappointment to my noble friend Lord MacGregor, but the United Kingdom Government have made it clear that we are not going to enter into pre-negotiations. My noble friend Lord Caithness said that the First Minister had said that we should. In fact, in a letter to my right honourable friend the Deputy Prime Minister, the Deputy First Minister said:

The Scottish Government has not asked you to pre-empt the referendum vote in that way. Indeed, I was clear in my speech at Strathclyde University on 3 December that ‘independence negotiations [... ] will follow a yes vote’”.

There are a number of reasons for this. Many people in your Lordships’ House are involved in business, and I do not know how many of them would go into a negotiation showing their negotiating hand and their red lines. Perhaps more fundamentally than that, I belong to a Government who represent the whole of the United Kingdom. If we were to have that kind of pre-negotiation, I suspect it would not be possible for my right honourable friend the Chief Secretary to be part of it because, in the event of independence, he would have a different standpoint. He is a Scot. You would then have part of the United Kingdom Government perhaps debating against another part. My noble friend Lord Caithness might expect me, as someone who is resident in Orkney, to have an interest in that too, and I might not be able to take part either. I cannot think of anything that would better suit the argument of those who want to break up the United Kingdom than that those who want to maintain the United Kingdom spend the next 15 months arguing with each other about what the negotiating position would be. This Government believe in a United Kingdom. If there are negotiations post a referendum, someone will need to represent the interests of England, Wales and Northern Ireland, but that cannot happen before the referendum. We believe in the integrity of the United Kingdom, and once you start unstitching the threads of the United Kingdom by that kind of approach, I fear that we would be in a very difficult position indeed.

When my noble friend Lord Forsyth was quoting the First Minister quoting Robert Burns, I sent a note to the Box asking for the words of a poem that starts:

“Does Haughty Gaul Invasion Threat”.

The Box came back with the verse:

“Be Britain still to Britain true,

Amang ourselves united;

For never but by British hands

Maun British wrangs be righted!”.

I got the words from the Box, but my noble friend quoted the poem by himself. There is so much truth in it. If we want to put out a very clear position, there is a way in which people in Scotland can have the same currency as people in the rest of the United Kingdom, the same financial regulations, the same passports, the Bank of England as lender of last resort, the same welfare provisions and the BBC. It is called the United Kingdom, and I hope people will vote for the United Kingdom on 18 September next year.

Photo of Lord MacGregor of Pulham Market Lord MacGregor of Pulham Market Chair, Audit Committee (Lords), Chair, Economic Affairs Committee 6:49 pm, 26th June 2013

My Lords, I was very grateful to my noble and learned friend for not including me among the English when he made his opening remarks. I was born, brought up and educated in Scotland, but I have spent nearly all my political life in England and have been proud to represent an English constituency, so I hope I can see both sides of the argument.

As we were debating this issue today, I was reflecting on the fact that we set up our committee in February 2012. We are now halfway towards the vote, and so many of the issues that we debated today are clearly not understood by the electorate outside in either Scotland or England in the way that we have understood them today. I take comfort from the fact that our report has identified very nearly all the key economic issues on which Scottish voters will have to make up their minds before—or when—they vote. I do not yet take comfort from the fact that, certainly among English voters, they still do not realise that there are many issues that will have great implications for them in terms of a Scottish vote. I will come back to that in a moment. I also do not take comfort in the fact that so much more effort still needs to be made to make the voters of Scotland aware of the many implications there will be for them when they vote.

I take comfort from the very robust reply that my noble and learned friend has made. It is quite clear on where he stands on most of these issues, and clearly he will put that case across. I also welcome the fact that we will have more of these lengthy but very helpful analyses from the UK Government. These are all good issues. I slightly differ from him in that I think that English electors need to be made much more aware of the implications for them, and ensure that the UK Government protect them from the serious consequences in relation to defence, currency and the many other issues that we have identified today. That awareness does not yet exist among people in the rest of the UK. I understand his point about not entering into pre-negotiations, but there is a difference between that and identifying the issues that will be crucial for the rest of the UK if the Scots vote for independence. That is what I and my committee are calling for. That is what we meant by the red lines—they are the key issues that affect the rest of the UK.

I welcome the extra papers. This has been a most helpful debate. There has been a large measure of agreement among all of us, who are from all parts of the UK, on the issues that are so important and need to be resolved, and on the need for awareness in Scotland of these issues before they vote. As I said, my noble friend’s wind-up speech has been very helpful in relation to that. I thank all Members who have taken part, in particular the members of my committee for the huge amount of work that they did on this issue. We will continue to take an interest.

Motion agreed.