Brad MacKay discusses implications for business in the event of a no vote.
Over the past few months we have heard much about the possible consequences of a yes vote. From a commercial point of view, some business leaders, primarily from small and medium sized companies, and a few successful entrepreneurs, feel that having more control over the levers of economic power in Scotland will boost business growth. Other business leaders, particularly from larger companies, which account for the largest percentage of private sector jobs and income, worry that independence will disrupt the UK’s single market, increase costs and leave them cut off from the majority of their customers, who are frequently located in the rUK. But what about the implications of a no vote? What uncertainties do remaining part of the union present?
Five come to mind. First, a ‘no’ vote does not mean the status quo. Following the referendum vote in September, there will be two more elections in the UK – the general election in 2015 and the Scottish election in 2016, and while far from assured, the prospect of an in-out referendum on the UK’s continuing membership in 2017. Each of these political events brings with it the prospect of changes in policy, whether it’s around taxes or the regulation of industries, and by extension, possible risks and opportunities for business. Clearly the possibility of an in-out UK referendum poses the greatest risk to businesses in Scotland following a ‘no’ vote, although the independence vote is a much more imminent threat to Scotland’s continuing, and more criticaly, undisrupted EU membership and access to that market.
Second, and perhaps as importantly for businesses in Scotland, the powers devolved to Scotland in the 2012 Act will come into force. With the base rate of corporate tax at the relatively low level of 20 per cent, for many businesses, both large and small, control over a significant portion of personal tax is as, if not more important. If taxes are raised, or public spending is unsustainable, it reduces the competitiveness of the business environment in Scotland. If taxes are lowered and public spending is measured, the business environment in Scotland may become more competitive.
Third, with UKIP set to make gains in the European elections on May 22nd, and immigration policy in the UK becoming more restrictive, it threatens to undermine economic growth in the UK generally, and Scotland particularly. In a globalised world, immigration is seen as one of the key drivers of economic growth, entrepreneurship and innovation. Immigrants bring energy, ideas and found businesses. One only needs to take a trip to Silicon Valley in California to see the benefits of immigration. Moreover, with an aging population, and oil revenues set to begin declining in 2017/2018, both migration from the rUK and immigration from the rest of the world will be an important factor in Scotland’s economic health. As Professor Jonathan Levie of Strathclyde University points out in Global Entrepreneurship Monitor Scotland 2012, while working age non-migrant Scots intending on starting a business over the next three years is well below the UK average, both English migrants and migrants from other parts of the world are more entrepreneurial. So while immigration is clearly an important ingredient in the economic growth recipe, not just for Scotland, but for the UK more generally, Scotland also benefits from migration from other parts of the UK as well. Moreover, the former Fresh Talent Scotland Initiative programme, where students studying at Scottish hire educational institutions could apply for a two year work visa following their studies, is an example of where it is possible to have some tailored programmes to Scottish needs even in policy areas reserved by Westminster.
Fourth, there is the prospect of continuing uncertainty. Independence referendums in the Canadian province of Quebec in 1980 and 1995 are associated with the decline of Montreal as a leading business centre in Canada. For instance, the Fraser Institute, a Canadian think-tank, points out that between 1978 and 1981, 30 companies moved their corporate headquarters from Montreal to Toronto, including the Bank of Montreal. The number of Canada’s top 500 companies in Quebec has continued to decline, dropping by 22% between 1990 and 2011. Such a loss of decision-making functions has knock-on effects of also reducing demand for business services, be they in accountancy, consultancy, legal services etc. While in the Quebec case there are other contributing factors, such as language differences and government policy, the net result has been a chronically weak and, at times, stagnating economy. As Professor Colin Mason of the University of Glasgow pointed out in a recent Financial Times article (Scotland’s uncomfortable parallel with Quebec, 21 April 2014), the recent trouncing of the nationalist Parti Québécois, after raising the prospect of third independence referendum, is in part recognition by Quebecers, that as an influential part of a larger union, they have much more influence with multi-nationals, interest groups, international organisations, the mobility of capital and their economic prosperity than as a small, independent nation.
Fifth, a ‘no’ vote is boring. Why vote no, when either, as the mountain of evidence now suggests, the transition costs towards an independent country might be the equivalent of, as the economist and patron of entrepreneurs, Joseph Schumpeter, might have said, pressing the creative self-destruction button, with the hope that, as another economist John Maynard Keynes once suggested, the ‘animal spirits’ of entrepreneurial drive are released, and out of the transition something better emerges, or alternatively, somehow Scotland defies the current economic orthodoxy, and from independence day rockets ahead.
But this is precisely the point. For most businesses, boring is what they prefer. The stability to plan, invest, access markets and grow their business, and in the process create jobs, wealth and prosperity is their chief concern, and they will gravitate towards whatever environment gives them the relative certainty to further their commercial interests. Many of the economic levers for enabling businesses and improving prosperity already reside with Holyrood, and Scottish businesses also have access to considerable benefits, from diplomatic services to trade support from the wider UK, not to mention unimpeded access to one of the most integrated markets on the planet – the UK market – the best of both worlds some might argue.
And while London and the South East are frequently characterised as ‘sucking everything in’ within the UK in the debate (an argument that few would disagree with), recent surveys suggest that it is also a crucial source of financial capital for businesses in Scotland where the investment environment is much leaner, and particularly small entrepreneurial businesses, looking for the resources to grow. Independence wouldn’t mean that London goes away, but it might mean that its resources are harder to access. Whether there is a ‘no’ vote or a ‘yes’ vote in September, the challenge really is how Scotland and Scottish businesses can harness London’s resources for their economic benefit. London is a global city, and a force unto itself - to conflate it with ‘England’ is a mistake.
A ‘no’ vote, then, does not mean ‘status quo’. With the provisions made in the Scotland 2012 Act set to come into force, and considerable powers already devolved to Holyrood, the Scottish Government will have the ability to influence significant parts of the Scottish economy and society whether a ‘no’ or a ‘yes’ vote materialises in the September 18th referendum. The Scottish election in 2016, the UK general election in 2015 and the possibility of an ‘in-out’ referendum in the UK on the EU in 2017 may also bring different policy directions to the fore. For business, the ability of the Scottish Government to set income tax by 10 points (raising circa 40% of their own income tax revenue), as set out in the Scotland 2012 Act, is a major devolvement of fiscal power, and a crucial driver of business competitiveness. The ability to tackle areas of skills shortage in certain industries such as oil and gas, as with engineering, largely rests with existing powers currently devolved to Holyrood. In areas where the Scottish Government does not have jurisdiction, but where there are important stimulants for the economy, such as with immigration, the opportunity exists to negotiate with the UK Government to reintroduce something akin to the former ‘talent Scotland’ visa scheme that would allow students to stay and work in Scotland following their studies. A ‘no’ vote still means that there will be a step change for Scotland’s position in the UK, which carries with it both opportunities and risks and has important implications for the competitiveness of the business community, even if that change is not as profound as independence.