Brad McKay reflects on the implications of Scottish independence for three major industries, the energy, oil, and gas sector, financial services, and defence. In the third of four part series, Brad discusses implications of independence on the defence industry. Wrapping up the four part series, Brad offers a few final reflections on how businesses might fare in an independent Scotland.
For small, open, trading nations access to markets is critical. Indeed, some might argue that access to and integration with the wider UK market is one of the reasons that Scotland evolved from a small, poor, peripheral economy to a relatively innovative, productive and wealthy economy following the 1707 Act of Union. The white paper argues that Scotland, with some amendments to treaties signed by the UK, will continue with its membership in the EU (p. 33). If Scotland is to grow its small and medium sized businesses, this will be critical. Research suggests that the critical mass for a medium sized company to reach the sort of scale needed to be both competitive and efficient – to have critical mass – can be between 300 and 500 employees. Support for such small and medium sized businesses (SMEs) is important, which the white paper commits to, including reducing tax compliance costs (p. 122). But increasing exports will be critical. Access to a trading bloc of circa 400 million people, and export support, however, is critical for Scotland’s ambition to grow its medium-sized companies, following a German ‘McMittelstand’ model. Such an ambition is only viable with export-led business strategies. At present, some estimates suggest that only 6% to 8% of Scottish firms currently trade abroad. This has to change, whether Scotland chooses to continue to be part of the union, or independent. While there may arguably be few reasons why Scotland couldn’t meet the criteria for becoming a member state of the EU, questions remain about whether Scotland, upon independence, would continue as a member state or be forced to apply, which would take time and almost certainly impact on the growth of Scottish businesses and investment decisions. The recent announcement that Scotland would have to apply for EU membership if it becomes independent by the Spanish prime minister Mariano Rajoy, who is also facing independence movements in the Basque country and Catalonia, is important because it signals the position that some European countries may take on the question of whether nations succeeding from member states should automatically have the right to EU membership. Belgium, where Brussels is located, also faces an independence movement from Flanders.
The debate over EU membership is of crucial importance because the Scottish government white paper has banked on little resistance to Scotland’s continuing membership in the EU – a “smooth transition” – and on a particular interpretation of the flexibility of EU rules. Clearly this assumption is predicated on the quiet acquiescence of major EU countries, which is now much less clear-cut than portrayed in the white paper, if it ever were. A Scotland outside of the EU would have profound implications for both export-led companies in Scotland, and those outside of Scotland looking at where to invest in locating, expanding or moving business activity. Of course, a UK referendum on EU membership also raises implications for Scottish, and UK businesses.
There is much in the white paper that different business communities will be favourable to, such as up to a 3% reduction in corporate tax rates (see p. 398 – although income taxes are equally important for attracting top business, entrepreneurial and scientific talent to Scotland), more fiscal stability, reduction of compliance costs for small and medium-sized businesses, and a more sensible approach to both immigration and to skills development where there are shortages. Indeed, there are few who would argue that Scotland, who outside of London and the south-east is one of the wealthiest regions in the UK, could be a viable, even a prosperous independent nation. Examining what might change in an independent Scotland is one important dimension of the constitutional debate. But Scotland’s relative prosperity is linked to the historical development of the UK more widely, which is precisely why the white paper has made so much about what wouldn’t change. The short and medium-term prosperity of Scotland depends on whether the Scottish government can deliver on a smooth transition to EU membership, retaining the Sterling, closely coordinated or shared regulatory frameworks with the Sterling area, and either maintaining or reducing the tax burden.
The three industries considered in this blog – energy, defence and financial services – are all centres of world-leading excellence in Scotland, but they are also mobile industries. Business leaders will review their business strategies in light of the opportunities and risks that the prospect of independence poses for their businesses, particularly if the polls narrow over the next 9 months, or if the assumptions made in the white paper turn out to be less robust than the Scottish government might wish.