On 18 September the shape of the United Kingdom, will, one way or another, be altered forever. When Scotland votes whether or not to become an independent nation there will inevitably be profound economic consequences to their choices on either side of the border.
Depending on the last opinion poll you’ve read, Scotland is either ready to vote for or reject independence by narrow margins either way. The economic argument in favour of independence as far as the Scots go is as follows.
Scotland’s resources, oil, fisheries, tourism and a whisky industry, if spent exclusively on Scotland, would result in the highest per capita standard of living anywhere in Europe and possibly the world, according to a Scottish Government Report. Scots would be £5bn better off by 2030, though this has been disputed by the Institute for Fiscal Studies.
The benefits for England, argued Alex Salmond, in a recent speech, would also be considerable. An independent Edinburgh would act as a counterweight to the power of London and the South East of England; areas that inexorably suck up the nation’s resources, talent, jobs and inflate house prices endlessly.
Following that, he stated in his St Georges Day Speech the cause of further English regional devolution in deeply depressed areas like Cornwall and Tyneside would be enhanced; regional autonomy for the North East would result in investment and spending decisions that would directly benefit local people and not be guided by London-centric priorities.
The de-centralization of the British economy might possibly result in such things, but then again there’s just as much chance they won’t.
A recent article in the Guardian rather punctured this utopian view and cast a long shadow over Salmond’s economic plans for Scotland. It pointed out that nearly all of the biggest generators of GDP in Scotland are owned by foreign concerns.
Scottish salmon, for example, is almost exclusively owned by Norway and the only Scottish whisky business left in Scottish ownership is Grants; The Glenmorangie, Glenfiddich, Talisker brands etc are all owned by global food and drink brands. Scottish oil is almost exclusively extracted by foreign companies; of the million barrels per day only 6,000 are pumped by First Oil, Scotland’s only domestic oil firm.
This means that while the oil companies will have to pay to drill in Scottish oil fields and will continue to use Aberdeen as a base of their operations, there will be a net flow of oil wealth out of Scotland.
There are major questions hanging over the future revenues generated by the sale of oil and gas and its end products – everything from bitumen and kerosene to petrol and aviation fuel, will be banked in a centre of global finance, most likely the City of London (where it currently resides), where it will be taxed and spent – in England. that have been predicted by the Scottish Government. A recent Financial Times report suggested that projections made by Hollyrood may well have been too optimistic.
Unless Scotland can quickly set up a financial sector the size of London’s, with an attractive taxation and regulatory environment that is attractive to investors but polices their activities to prevent financial catastrophe, it is unlikely that their decisions about where to do their banking will change.
George Osborne has made it quite clear in recent months that there will be no shared currency between Scotland and the rest of the UK.
One only has to cast one’s mind back two or three years ago to recall the Euro crisis for an example of what happens when two or more very different economies, growing at different rates, requiring different rates of interest share a currency that has a uniform value.
There would be nothing to stop Scotland from using the pound or indeed buying and selling goods and services in dollars, euros or yen, but Scotland would have no control over the value of the currency.
On the subject of the Euro, despite Salmond’s statements to the contrary, it seems that Scotland’s entry into the EU as an independent member state would be a very long winded affair, with Jose Manuel Barrosso, the president of the European Commission describing it as ‘almost impossible’.
In the business of speculation all must be taken with a reasonable sized pinch of salt; events may unfold otherwise and Scotland may experience an economic and social renaissance if she becomes independent.
Scottish voters who believe they get precious little from Westminster may look at the potential pitfalls ahead and think that the risks are worth it; they may even think that potential short to medium and even long term economic pain is a price worth paying for self determination.
There is a final question mark hanging over the idea of independence, however, and it is one that is faced not just by Scotland, but by every sovereign state in the world. A country can only be as independent as the business and finance institutions that choose to operate within its borders feel comfortable with.
In the 21st Century, with the globalisation of labour markets and information technologies enabling firms to operate anywhere in the world, the perennial problem that any state, old or new faces is that of capital flight.
If an independent Scotland cannot convince the large multinationals who operate there currently that it offers a clement business environment, they will leave and relocate elsewhere. JK Rowling, the author of the Harry Potter books has staked £1 million on the No campaign citing this very reason as one of her prime concerns.
Where might they go? Into the nearest and most attractive member state in the Eurozone, or England, for short. Businesses tend to err on the side of caution and in the run up to September, some may already be calling in the removal men.
Of course if the Scots vote against independence, there will be a number of political and economic sweeteners offered to them by Westminster as well, including the power to vary taxation rates, allowing Hollyrood the opportunity to reduce the tax burden north of the border. Already both Westminster and Hollyrood have pledged to invest £1bn in Glasgow’s infrastructure.
So what might this mean to you, the investor? Firstly it depends what side of the border you live on and the current make up of your portfolio; any investments that you might have in Scotland, land, property staple industries etc. may exist in a very different taxation and regulatory environment after September if Scotland becomes an independent nation.
Any business in Scotland that you have an investment in might not have the luxury of being within the Eurozone after September either. It might pay to look at the actions of major investors and employers who have tens of millions at stake to see what they do.
Once Scotland is independent, it’s a done deal, there’s no going back and there situation will be permanent. If there is an exodus of capital from Scotland, there might well be a welcome investment boom not just in England, but in Northern Ireland and Wales too.
Therefore, if you are planning on making any UK investment or property decisions, it might be worth waiting until October.