House of Commons Scottish Affairs Committee
The Referendum on Separation for Scotland, Session 2013–14
Oral and written evidence
Volume IV
Oral evidence ordered by the House of Commons to be printed 4 September, 23, and 29 October, 12 November and 10 December 2013, 8 15 and 29 January, 4, 5 and 26 February and 5 March 2014
Written evidence ordered by the House of Commons to be printed on 04 September 2013
HC 140-II Published on 24 March 2014 by authority of the House of Commons London: The Stationery Office Limited £23.00
The Scottish Affairs Committee The Scottish Affairs Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Scotland Office (including (i) relations with the Scottish Parliament and (ii) administration and expenditure of the offices of the Advocate General for Scotland (but excluding individual cases and advice given within government by the Advocate General)). Current membership Mr Ian Davidson MP (Labour/Co-op, Glasgow South West) (Chair) Mike Crockart MP (Liberal Democrat, Edinburgh West) Jim McGovern MP (Labour, Dundee West) Graeme Morrice MP (Labour, Livingston) Pamela Nash MP (Labour, Airdrie and Shotts) Sir Jim Paice MP (Conservative, South East Cambridgeshire) Simon Reevell MP (Conservative, Dewsbury) Mr Alan Reid MP (Liberal Democrat, Argyll and Bute) Lindsay Roy MP (Labour, Glenrothes) Dr Eilidh Whiteford MP (Scottish National Party, Banff and Buchan)
The following members were also members of the committee during the Parliament: Fiona Bruce MP (Conservative, Congleton) Mike Freer MP (Conservative, Finchley and Golders Green) Cathy Jamieson MP (Labour/Co-op, Kilmarnock and Loudoun) Mrs Eleanor Laing MP (Conservative, Epping Forest) Mark Menzies MP (Conservative, Fylde) Iain McKenzie MP (Labour, Inverclyde) David Mowat MP (Conservative, Warrington South) Fiona O’Donnell MP (Labour, East Lothian) Julian Smith MP (Conservative, Skipton and Ripon) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/scotaffcom. A list of Reports of the Committee in the present parliament is at the back of this volume. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Rebecca Davies (Clerk), Rhiannon Hollis (Clerk), Phil Jones (Committee Specialist), Elizabeth McEnhill (Assistant Policy Analyst), Gabrielle Hill (Senior Committee Assistant) and Rosie Tate (Committee Assistant). Contacts All correspondence should be addressed to the Clerk of the Scottish Affairs Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6123; the Committee’s email address is [email protected]
List of witnesses
Wednesday 4 September 2013 Page
Rt Hon Dr Vince Cable MP, Secretary of State, Department for Business, Innovation and Skills, and Rt Hon David Mundell MP, Parliamentary Under- Secretary of State for Scotland Ev 1
Wednesday 23 October 2013
Rt Hon Danny Alexander MP, Chief Secretary to the Treasury, Stephen Farrington, Deputy Director, Economics Group, HM Treasury, Rt Hon Alistair Carmichael MP, Secretary of State for Scotland, and Chris Flatt, Deputy Director, Constitution, Scotland Office Ev 12
Tuesday 29 October 2013
Dr Patrick Mileham, former British Army officer, Royal Tank Regiment, and writer on military history Ev25
Tuesday 12 November 2013
Rt Hon Alistair Carmichael MP, Secretary of State for Scotland, Dr Andrew Murrison MP, Parliamentary Under-Secretary of State for International Security Strategy, Ministry of Defence, and Margaret Porteous, Deputy Director (Policy) in the Scotland Office Ev 37
Tuesday 10 December 2013
Paul Johnson, Director, David Phillips, Senior Research Economist, and Gemma Tetlow, Programme Director, Institute for Fiscal Studies Ev 55
Wednesday 8 January 2014
James Brokenshire MP, Minister for Security, Home Office, and Rt Hon David Mundell MP, Parliamentary Under-Secretary of State for Scotland Ev 68
Wednesday 15 January 2014
Professor Iain McLean, Professor of Politics, Official Fellow, NuffieldCollege, University of Oxford, Professor Adam Tomkins, John Millar Chair of Public Law, University of Glasgow, and Professor Kenneth Armstrong, Professor of European Law, University of Cambridge Ev 80
Wednesday 29 January 2014
Professor Hugh Pennington CBE, Emeritus Professor of Bacteriology, University of Aberdeen, Alastair Sim, Director, Universities Scotland, and Professor David Raffe, Professor of Sociology and Education and Member of the Centre for Educational Sociology, University of Edinburgh Ev 105
Tuesday 4 February 2014
Rt Hon David Willetts MP, Minister for Universities and Science, Department for Business, Innovation and Skills, and Rt Hon David Mundell MP, Under-Secretary of State for Scotland Ev 124
Wednesday 5 February 2014
Dr Angus Armstrong, Head of Macroeconomics and Finance Group, National Institute of Economic and Social Research, Professor David Bell, Professor of Economics, University of Stirling, and Professor Ronald MacDonald, University of Glasgow Ev 136
Wednesday 26 February 2014
Owen Kelly, Chief Executive, Scottish Financial Enterprise, and Iain MacNeil, Alexander Stone Chair of Commercial Law, University of Glasgow Ev 159
Mark Neale, Chief Executive, Financial Services Compensation Scheme, and Sean Martin, General Counsel, Financial Conduct Authority Ev 173
Andrew Bailey, Chief Executive Officer, Prudential Regulation Authority Ev 181
Wednesday 5 March 2014
Professor Robert Wright, Professor of Economics, Strathclyde University, and Dr David Comerford, Professor of Economics, Stirling University Ev192
Martin Potter, Leader of the Scottish Board, Institute and Faculty of Actuaries; and David Wood, Christine Scott and David Davison, Institute of Chartered Accountants Scotland Ev 205
List of written evidence
1 Rt Hon Dr Vince Cable MP, Secretary of State for BIS Ev 222 2 Dr Patrick Mileham Ev 223 3 Ministry of Defence Ev 228 4 Rt Hon Alistair Carmichael MP, Secretary of State for Scotland Ev 232 5 Dr Andrew Murrison, Minister for International Security Strategy, MoD Ev 232 6 Professor Adam Tomkins, University of Glasgow Ev 234 7 Ian King, Chief Executive Officer, BAE Systems Ev 236 8 Alastair Sim Director Universities Scotland Ev 236 9 James Brokenshire MP, Security Minister Ev 237 10 Financial Conduct Authority Ev 239
cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 1
Oral evidence
Taken before the Scottish Affairs Committee on Wednesday 4 September 2013
Members present: Mr Ian Davidson (Chair)
Graeme Morrice Mr Alan Reid Pamela Nash Lindsay Roy ______
Examination of Witnesses
Witnesses: Rt Hon Dr Vince Cable MP, Secretary of State, Department for Business, Innovation and Skills, and Rt Hon David Mundell MP, Parliamentary Under-Secretary of State for Scotland, gave evidence.
Q3581 Chair: Gentlemen, I welcome you to this the single market within the UK. We have also meeting of the Scottish Affairs Select Committee. As described a lot of our common infrastructure, some of you know, in the run-up to the referendum we are very which I have ministerial responsibility for—the Post keen to try and make sure that we help to provide as Office, Royal Mail and so on. much clarity as possible to people in Scotland about In addition, there are a lot of common UK regulations, the decision that is going to face them in the everything from the minimum wage to insolvency law referendum choice. Therefore, we very much and the whole corporate governance framework, welcome the papers that this Government and the which is the wiring behind business. We all tend to Scottish Government are producing, and we will take it for granted. If Scotland were independent, there review all of those as they appear. is an issue about how much of this system would have David, you are a regular offender here. I see that you to be duplicated under a separate system of regulation. have brought a new assistant with you today. Maybe My basic argument is that, if Scotland were to opt I could ask you to indicate who you are for the record for independence, there would be economic costs to and speak to the paper and then give an indication of business but, in a way, probably more importantly, a its main findings. We are particularly keen in this lot of uncertainty. We simply do not know how an session to have not simply a regurgitation of the paper independent Scotland would treat the regulatory but an indication from you of how you respond to the framework that we currently have. Would they want responses that have been made by others. We want to to create something totally different? We do not know. try and move the debate forward rather than simply Equally, we do not know how the rest of the UK covering what is in the paper. We are conscious that would react to it. If you are in business, particularly any questions you raise will have been described as in the aftermath of this big crisis, uncertainty and its an element of Project Fear, talking Scotland down and effect on investment and jobs is a big weight hanging all the rest of it, but we want to move beyond that over us. so that we can get some clarification on the genuine When I have been to Scotland and presented this responses that there have been to the issues. paper, I have tried to do it in a dispassionate, rational Vince Cable: Thank you for giving us an opportunity way. I heard about Project Fear and tried to put things to speak to you. The paper for which I am responsible in a dispassionate and unemotional way, and I hope should best be seen as complementary to the paper that in our discourse today that will be the way we you have had from the Treasury. A lot of the analysis will approach it. overlaps. They have come up with their estimate of the cost to an individual Scottish family of having a Q3582 Chair: If the Scottish Government gave a separate country, but it derives from much of the work pledge that said, “Nothing will change,” apart from we have done on breaking up the single market within begging the question of why they want separation, the UK. “and we will not make any changes or alterations to My broad approach to this is simply to set out those anything,” is there any reason why things should not areas which affect my Department and this is about continue as they are? the impact on business. We currently have an Vince Cable: There are some things that would have integrated single market within the UK, and, if you to change. There would be different tax regimes, and break up that market, clearly there are costs in in the course of events these are bound to evolve in establishing separate tax and regulatory regimes. different directions. Different countries would have a There are very practical things. As a small business, different approach to, say, VAT exemptions or if you are travelling backwards and forwards between whatever, so you would get some divergence even if England and Scotland, you fill up with petrol on both you started out from a common standpoint. You would sides of the border at the moment and you have a have different tax administration systems and common VAT regime. Under an independent country, reporting requirements. Under the European Union, if you would have different VAT reclamation. These are you are trading within the UK, you do not need to very practical things that we have tried to identify. So report to them that you are exporting from Scotland there are the costs associated with the disruption of to England or Wales; you would do under an cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Ev 2 Scottish Affairs Committee: Evidence
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP independent regime. Different systems of car effect of being part of that single market in which insurance would emerge. I am quite sure that rational Scottish companies and exporters participate. and reasonable people would start off saying, “Let’s I would also argue that one of the reasons Scotland change as little as possible,” but in the course of time has done relatively well in attracting inward they would evolve. investment is the fact that firms that invest there know The figure quoted to you this morning from the that they are investing not just in Scotland but they Treasury of the cost per household of £2,000 over a can sell their products throughout the United Kingdom 30-year period comes from looking at what happens freely and, of course, within the European Union, but in countries that are very similar and naturally there are more barriers there than within the UK. co-operative, like Germany and Austria, and how they Essentially, it is a good framework for exporting to evolve different systems such that the level of trade other parts of the UK and attracting inward between them is much less than the amount of trade investment. within their separate countries. We are not assuming that everybody goes berserk and does stupid things. Q3585 Graeme Morrice: On the point of attracting We are assuming, as you do, that we are dealing with inward investment to Scotland because it is part of the fairly rational people, but it is a perfectly legitimate single market that is the UK, have any concerns been point that, over time, it is likely that systems of tax expressed to you personally or others in your and regulation would diverge. As I understand the Department by companies about the prospects of Scottish Government, they have said they want a separation and the impact it would have on their separate system of regulation anyway. business either because they are located in Scotland or they trade with Scotland? Q3583 Chair: Can I clarify whether or not there have Vince Cable: Yes, they have. Whenever I go to been any responses produced to the document that you Scotland, which I do quite frequently, I take time to consider have substantial merit and have raised issues meet chambers of commerce and bodies like the CBI that perhaps were not fully taken into account when and other organisations representing big and small the paper was drawn up? business. Concern is expressed. At this stage of the Vince Cable: Nothing major. There were one or two argument business people are not rushing out of the very specific things. On the day of the report we were trenches to engage in verbal warfare, but they are attacked—I suspect by people who had not read it— apprehensive. In the first instance they want to hear on the basis that we were making unreasonable claims all the arguments, but there is little doubt that it adds about the problem of picking up roaming charges if to their uncertainty and potentially their costs. you have a separate country. We were accused of not Certainly, I have been encouraged to believe that the having fully understood the fact that the European kinds of arguments we have been setting out at a UK Commission had indicated that they were going to get level are broadly accepted—as we know, there is a wide variety of views in Scotland—within the rid of these charges anyway. For clarification, the business community. report anticipated the Commission’s proposals. There was nothing new and shocking. In any event, we simply do not know what the Commission will do. Q3586 Graeme Morrice: Obviously, Scotland and That was one area of controversy. The main criticisms the UK are part of a bigger single market, and that is the European Union. How would you assess the views I faced in Scotland when launching the report were out there in relation to an independent Scotland not that we were scaremongering, but what I and this being part of that bigger single union that is the report tried to do was to be dispassionate, fair and European Union, on the basis of the assumption that objective. I do not think you will find any emotional an independent Scotland would not be part of the EU? language in here at all. It could apply to rejoin, but it would not automatically remain a member. As I understand it, the rest of the Q3584 Graeme Morrice: To an extent, in his UK would remain a member of the EU. introductory remarks the Secretary of State probably Vince Cable: There are two points. One is the answered the question I was going to ask. The paper uncertainty, and I think you have captured it in your makes reference to the UK being a single domestic question. The Scottish Government, as I understand it, market, and you alluded to that at the beginning. I was make it very clear that they would like to remain going to ask you to go into the detail of that. Perhaps within the European Union and the single market. I you could go into some detail about how Scotland am sure they are quite genuine about that, but we do links into that domestic market and the advantages to not know because the arrangements would have to be Scotland currently in being part of that UK single negotiated from scratch. The other point is that, market. although there is a single market in Europe and within Vince Cable: The fact that you have a single market Britain, the latter is much deeper. You can see this makes it much easier to trade because you have a from the trade between Northern Ireland and the common system of regulation and all the costs of Republic of Ireland. Northern Ireland exports compliance with regulation are not duplicated. As a considerably more to England, Wales and Scotland consequence, Scotland exports more to the rest of the than it does in its trade with southern Ireland. The UK, with all the jobs associated with that, than it does movement of people from Northern Ireland into the to the rest of the world. Indeed, the growth of trade rest of the UK is at much higher levels than across the within the last 10 years to England, Northern Ireland border with the south. Although there is a single and Wales has been quite rapid. This is a practical market between Northern Ireland and southern cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 3
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Ireland, it does not have the same significance as their understood. The feature of the corporation tax regime involvement in the rest of the UK. that I do not pick up in the Scottish debate is that its key attractions are things like the R and D tax credit Q3587 Graeme Morrice: I have a final question and and the patent box. It is not clear how an independent maybe I could ask the Under-Secretary of State also Scottish for his views on this issue. Like me, have you been Government offering more generous corporation tax approached by foreign firms currently located in would afford those specific concessions within the Scotland concerned about an independent Scotland corporation tax regime. not remaining part of the European Union? Vince Cable: When I am in Scotland I tend to meet Q3589 Mr Reid: If Scotland and the rest of the UK business groups and individual companies, many of were separate tax jurisdictions, do you see a problem which ultimately have foreign ownership. As you that both Scotland and the rest of the UK would lose know, we have a high level of foreign ownership of tax revenue from businesses by them taking advantage business in the UK. In the course of discussion some of the border to arrange their affairs in such a way as uncertainty emerges. Nobody is getting angry and to minimise the tax they would pay? panicky about it, but it is an underlying uncertainty Vince Cable: There is always the issue of tax that people worry about, in much the same way that arbitrage. This is an issue between the two halves of foreign investors in the UK worry about our future Ireland, and it would apply in Scotland too. In relations with the European Union. These just add to principle, having a degree of devolution of taxation is uncertainty in a world that is already uncertain and something you and I believe in, but, if you go the there are also economic difficulties. whole hog and have a fully independent system with David Mundell: More and more businesses and different tax regimes, you open up those problems on individuals are beginning to address these issues as a much bigger scale. we are getting closer to the referendum. An important part of what the Scotland analysis papers are about is Q3590 Mr Reid: You referred earlier to Austria. to set out issues that people might wish to address in Austria seems to be an economically successful terms of coming to their decision or coming to a view country. There are other small countries in Europe that as to how it would impact on their own business. The are successful. Why could Scotland not be equally first paper we issued, on which I and the Secretary of successful with a small domestic market? State for Scotland came before the Committee, set out Vince Cable: Small countries often are economically the legal status of Scotland and the issues around EU successful. There is no reason why a well-run membership and brought that issue to a head. We had Scotland should not do relatively well. The argument been previously told by the Scottish Government—in we make here is that there are additional advantages particular the Deputy First Minister—that Scotland’s to being part of the UK and there would be real costs membership of the EU would be automatic and there in departing from the UK, but clearly it would depend would be no change, and over a period of time, when on future Scottish Governments and how they behave. presented with these important facts and engagement Some small countries have been a complete and utter with the EU, it has become clear that Scotland’s disaster. Iceland, which I think Mr Salmond was membership of the EU is not automatic. Even the First admiring at one stage, collapsed in a terrible heap; Minister has had to concede that. others like Finland are great role models, but we do We have also found that, particularly in relation to the not know in what direction they would go. EU, many businesses were disconcerted by the fact that the First Minister stated on television that there Q3591 Lindsay Roy: Can you highlight some of the was legal advice on this issue, and it subsequently advantages of remaining within the UK that you unfolded that there was no such advice. For the mentioned? business community and wider public, that is very Vince Cable: We are talking here about business disconcerting and adds to uncertainty. rather than the general political arguments. There is the advantage of having a common system of law and Q3588 Mr Reid: Secretary of State, you referred regulation and making it easier for business to operate. earlier to different taxation regimes and how that There is freedom of movement. The movement of would be complicated for business. The Scottish people, as we know, over generations has been on a Government have said that if Scotland was very large scale. Something of the order of 90,000 to independent they would slash corporation tax in 95,000 people a year move freely between England Scotland. Would businesses not benefit from that if and Scotland. That becomes much more difficult when they were trading on both sides of the border and you have border limitations. There is all the freedom arranging to make all their profits in Scotland for tax of trade that I have described earlier, and there are purposes? all the advantages of having a common infrastructure Vince Cable: Superficially, they would, until you around transport systems and distribution. These are address the question: where does the revenue come all positives. from to replace the revenue that you got from Lindsay Roy: That is very helpful. corporation tax? Other things being equal, they would either have to cut spending or raise some other tax. It Q3592 Chair: Pursuing that point, would it be fair to is certainly true that the UK Government are trying to say that the question of the continuity of the single reduce corporation tax to 20% year by year, so the domestic market is not one of the strongest arguments aspiration of having lower corporation tax is well for retaining the union? Upon reflection or on balance cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Ev 4 Scottish Affairs Committee: Evidence
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
I am possibly inclined towards retaining the union, but Sweden, which were once part of the same country, this is not one of the arguments that is necessarily or Canada and the United States—once countries going to make a major decision. It seems to me that develop their own jurisdictions they start to diverge. essentially you are saying that, if things are kept pretty Even if there is goodwill, you get divergence and much the same and change is made incrementally over different systems. Trade and freedom of movement a period, it could be absorbed by the system. If we become more difficult and it is a gradual process, even are dealing with responsible people, when they do get if, as you said in your introduction, people are independence, in order to keep things the same, this perfectly reasonable and make pledges. You do drift is not really an area that will cause a tremendous apart. amount of difficulty, and it could easily be absorbed and any difference will be marginal. Q3594 Chair: I think we could possibly put out a Vince Cable: I think that is minimising it. There press release at the end of today saying that would be significant costs of disruption, and there is Armageddon was not predicted at this particular all the uncertainty. We do not know whether people meeting and that will relieve some people. on both sides of the border would be reasonable Vince Cable: No, that is right. subsequent to any separation. We do not know how David Mundell: Just to be clear on that, Armageddon far their regulatory systems would diverge, so that is has not been predicted at all in any of the papers, and the source of uncertainty. I understand your question. the UK Government have never said, and will not say, The really big issues are whether you have a separate that Scotland could not function as an independent currency, how you deal with the oil, the underlying country. Of course it could. The issue to which our politics, and the emotions around national identity. papers relate is whether it would be better. The key Those are the things that get people going of course. point we seek to make is that it would be better for For business, there are very real practical issues here Scotland to remain part of the United Kingdom. that are highly relevant. David Mundell: On that point, this is the fourth in a Q3595 Pamela Nash: Secretary of State, the report series of papers, of which there will be more to come, refers to 95,000 people within the UK moving either seeking to cover a whole range of issues. The in or out of Scotland over the last 10 years annually. Government have never set forward that one particular We have increasing numbers of Irish people and paper or matter within the paper was to be the people from all over the EU coming here to work, as definitive issue. For example, with reference to mobile we see in the Daily Mail every day. Why do you think roaming charges, no one—certainly not the UK the mobility and flexibility of the Scottish labour Government—has ever suggested that people would market would be reduced by separation? vote in the independence referendum and break-up of Vince Cable: At the moment we are part of the same Britain on the basis of how much their mobile phone country. There is no uncertainty around future border bill would be. It was simply pointing out one of a restrictions, and there are not currently within the whole range of issues that will be impacted upon European Union. As you know from what is going on should Scotland vote for independence. in British politics, there is constant argument about whether people from other European Union countries Q3593 Chair: There is one point on which I am still should be allowed access to benefits and other things slightly unclear. If the policies are kept in line and associated with the freedom of movement. Within the there will be, however, some inevitable disruption but UK there is no uncertainty whatever. You are part of it will be marginal and so on, I am not entirely clear the same country and you move freely backwards and what the logic is for assuming that trade between forwards. It is quite a balanced relationship. I do not Scotland and the rest of the UK will be less than have the exact figures, but there are roughly equal would otherwise be the case. Surely, as you discussed, numbers of Scots and other UK people moving the differences in some of these things will be backwards and forwards across the Scottish border, administrative but essentially marginal. Scotland will and there is not a big difference between the number not have another major market available to it and of people from the UK who are long-term resident in surely will have no choice but to continue to seek to Scotland and Scots resident in the UK. It is a balanced sell into England, Wales and Northern Ireland. labour market that benefits both sides. Therefore, things will behave pretty much as they did before and, essentially, if the SNP give a pledge that Q3596 Pamela Nash: For a business layperson like nothing will change in this area, we should not really me, can you explain a bit more about the benefits to spend any more time discussing it. business and employment opportunities in Scotland of Vince Cable: The pledge would have to be delivered retaining the flexibility of the labour market that we and reciprocated. We would hope that both those have at the moment? things were true, but they might not be. I understand Vince Cable: It is often said—a great many studies where you are driving. We are not forecasting have tended to confirm this—that the UK has one of Armageddon; this is clearly not what happens. As the most flexible labour markets in the world, David said, we are dealing with one aspect of a much probably after the US and maybe Canada, and that bigger argument about the merits of the union. All you accounts for the fact that, even after this horrible have to do is look at the experience of different crisis, we have relatively low unemployment by regions within a country, as opposed to different international standards. That is a product of the way countries. Even if those countries are very friendly we do things here. As the Chairman has said on and get on well—Germany and Austria, Norway and several occasions, we do not know how an cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 5
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP independent Scottish Government would change Q3600 Chair: It is reasonable for us to expect the things. They may choose not to change anything, but, Scottish Government, and similarly the UK as it stands at the moment, we have a lot of flexibility Government, to clarify their view on these matters within the different parts of the UK and across the before any decision is taken. border, and it is a considerable asset to our economy. Vince Cable: Exactly. David Mundell: On a factual basis, if we take the Q3597 Pamela Nash: Some may argue that the comparator of Northern Ireland and the Republic of flexibility of the work force might not be better for Ireland, in the year ending April 2012, 1,566 people workers whilst better for business. Is there not a moved from Northern Ireland to the Republic of possibility that, if that flexibility and mobility Ireland, whereas the latest available figures (year decreased, there would be more protection and ending 2011) show 11,121 people moved from stability for workers in Scotland? Northern Ireland to the rest of the United Kingdom. Vince Cable: Obviously, we have to strike a balance If people did not have those statistics, they might not between complete freedom within the labour market have thought there would be such a significant and labour protection. I have always recognised that, divergence in the sense of people moving within and I am certainly not in favour of a hire-and-fire Ireland and between Northern Ireland and the rest of culture. We have had political battles over that. My the United Kingdom. Department is currently looking, for example, at the whole issue of zero-hours contracts because there are Q3601 Chair: Surely, that is partly explained by the potential abuses in that area, but at the moment I do fact that London and the south-east of England not sense any great divergence between the way these economically are Nirvana compared with the issues are dealt with within Scotland and England. It condition of the Republic of Ireland. Leaving aside the is a generally flexible and sensible system; it helps “arc of prosperity” for a moment, people are migrating trade, and it is good for inward investment to all parts where they think the jobs are. Therefore, the link of the UK. Why would we want to change that? within the UK is simply people seeking employment and going to areas where there are job opportunities, Q3598 Chair: Leaving aside the question of rather than because of being within the one nation migration from outside the EU, within the EU there is state. free movement for everybody except Romanians and David Mundell: As Dr Cable and the report set out, Bulgarians until 1 January. If Scotland and the UK there is a lot of evidence to suggest that people are remain within the European Union, there will be no much more inclined and willing to make that move if change to the pattern of free movement as a result of it is within the one nation state. As we have alluded any decision on independence. Is this not another to, we have economic migration within Europe and issue where there will be no difference as a result of elsewhere, but the underlying statistical basis set out separation? in the report citing the examples of Austria and Vince Cable: I would hope so, but you cannot Germany and the United States and Canada suggests completely assume it. Let’s raise a possibility. that people are more likely to move within a unitary Suppose an independent Scottish Government decided state. to have an approach to immigration different from that of the current UK Government. They may well Q3602 Lindsay Roy: We had an excellent decide, because the demography of Scotland is presentation yesterday by Scottish universities about different, to have a much freer approach to migration their international standing and success. What are the that diverges from what the rest of the UK wants. You UK programmes that encourage business and would then have to have border checks within the universities to work together, and what effect have former UK in order to prevent the rest of the UK’s they had on jobs and growth in Scotland? immigration rules being undermined. You can see how Vince Cable: The current arrangements as regards an unintended consequence of an independent system research and research funding work extremely well. leads to restrictions on movement within the UK. It Both Scotland and the rest of the UK benefit from a would be an inevitable consequence. high level of Scottish research. The funding arrangements at the moment are that, on a per capita Q3599 Chair: I do understand that. That was why I basis, Scotland would probably get about 8.4% of prefaced my remarks by leaving aside the question of research funding through research councils. They movement external to the EU. We are going to have currently get about 13%, which obviously reflects papers on immigration and nationality at a later stage. their quality, but it is one advantage that Scotland gets Rather than getting into that just now and leaving from being part of a common research community. aside external migration, surely there will be no Professor Diamond made the comment that, were difference as a result of Scotland becoming separate Scotland to be independent, naturally they would wish on internal migration, unless conscious decisions are to continue to be part of that research community. As taken either by the UK or by Scotland. with so many of the other questions, we hope common Vince Cable: I think your last word “unless” is sense would prevail and that would obtain, but we do absolutely crucial. If everything was left otherwise not know. As it is at the moment, Scotland does unchanged, there is no reason to assume that there benefit disproportionately but fairly—it is not a would be any disruption within the UK. complaint—from research allocations. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Ev 6 Scottish Affairs Committee: Evidence
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Q3603 Lindsay Roy: Proportionately, it is Q3608 Chair: That sounds to me a bit like my policy significantly higher. on cake, which is to have it and eat it. Vince Cable: It is a significantly higher percentage, Vince Cable: Well, exactly. and that is a reflection of their quality; it is not a criticism. Q3609 Chair: How much money do the research councils spend in the Republic of Ireland, France or Q3604 Lindsay Roy: That relates to jobs and growth Germany? in Scotland. Vince Cable: Very little. Vince Cable: Yes, obviously. There is some very interesting work by a guy called Andrew Witty, CEO Q3610 Chair: But they do actually spend some of GlaxoSmithKline and lead non-executive director money in those countries, do they? of our departmental board, which has looked at the Vince Cable: You are completely logical, and I was impact of universities on research. It has established trying not to be provocative and drawn into saying that a lot of the research that goes on in universities that English and Welsh academics would simply cut now feeds through directly into growth. To take one off Scottish research funding, because I think or two examples, in Glasgow, two of the so-called academics are generally a bit more broad-minded than catapults established through my Department and the that, but, if one were being brutally frank about self- Technology Strategy Board—one relating to interest, that is what would happen. renewable energy technologies, which is now well established, and the other on advanced manufacturing, Q3611 Chair: That is what separation is all about, is both at Strathclyde university—are part of a UK it not? It is about being brutally honest about itself, network of research that is linked directly to and that is why it is being promoted. innovation and business in Scotland. Vince Cable: It is from the Scottish end, yes.
Q3605 Lindsay Roy: You also mention in your paper Q3612 Chair: That is right. Presumably, the money intellectual property and intellectual rights. What given by the UK Government to academics is not significance does that have in the debate about without any strings whatsoever. They are not free, are separation? they, to spend it in the United States, Japan, Russia, Vince Cable: As economies become more developed, China or anywhere else in the world, depending on as an advanced country, we get an increasing amount what takes their interest? Is there not at least an of our wealth from intellectual property, whether it is expectation that they are going to spend it to patents, copyrights, trade marks and so on. An encourage intellectual development within the United increasing amount of the value of companies is in the Kingdom? form of these intangibles—intellectual property. Vince Cable: It is not narrowly tied. We give money Having a good intellectual property regime is a key to the research councils and the Technology Strategy part of our success as a country. The advantage that Board, and they use their professional judgment. I do Scotland has from being part of a unified system is not interfere and attach political conditions to it, but that we can enforce these rules across the UK. For it is naturally the case that they are going to invest in their own research teams, though in some cases they example, in terms of dealing with piracy, which spread their money among international undermines copyright, it is easier to police these collaborations. things in a bigger nation state than as separate states. Lindsay Roy: That is very helpful. Q3613 Chair: International collaborations are not quite the same thing— Q3606 Chair: Can I come back to the question of Vince Cable:—as giving the money away; I know. research grants? I can understand why Professor Diamond would want to have research grants by the Q3614 Chair: That is right. Can you clarify for us at UK funding research in Scotland. It is not quite as some stage, maybe in a written note, how much of the obvious why British taxpayers after separation would research councils’ money is sent furth of the United want to fund research in Scotland, because Kingdom to be spent in other universities, leaving presumably the lobby in England, Wales and Northern aside the question of putting money into a pool that is Ireland would be to have research money spent in a joint collaboration? I ask that because, when we their own areas. were investigating defence procurement, we went to Vince Cable: Yes, it would. I was assuming in my see SELEX Galileo in Edinburgh, who were very answer that English, Welsh and Northern Irish much dependent upon university council funding for researchers were broad-minded people, who were the co-operation that they had with Manchester and, happy to support good academic quality wherever it if I remember correctly, Heriot-Watt. They expressed was, but you are right that, if people became parochial doubts about whether or not that would continue in and said they wanted their money spent here, that the event of separation, because obviously it would issue would be raised. have additional influence upon any decision they might make to relocate. Q3607 Lindsay Roy: In other words, vested interests Vince Cable: I am happy to give you a note on how might prevail. the research funding is allocated. The logic of your Vince Cable: They might. I like to share Professor arguments, Chair, is inescapable, but I was trying not Diamond’s optimism, but we don’t know, do we? to be alarmist about it. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 7
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Q3615 Chair: Why do you think this logic has I want to talk also about transport projects. It has been escaped Professor Diamond? said that, when the Government are looking at Vince Cable: He was expressing a hope. transport projects in the rest of the UK, the benefits to Scotland are taken into account, even if those projects Q3616 Chair: As a hope—sorry, I thought it was a are confined to England and Wales. Can you give judgment. It was a hope. recent examples of that? Vince Cable: As an excellent Scottish vice-chancellor, Vince Cable: It is inevitably the case. To take the I think he was expressing a hope that he would wish controversial issue around High Speed 2, to which the to remain part of the UK research community. I think Government are committed, the line will go to the that was what he was trying to say. north of England, but by reducing congestion and journey times it will indirectly improve Q3617 Chair: We can respect his hope but not communications with Scotland, and all the benefits are necessarily his judgment in those circumstances. factored into the calculations. So, yes, even on an Vince Cable: Yes. England project, which that is, Scotland benefits, and those benefits are currently necessarily counted into Q3618 Pamela Nash: Secretary of State, you refer to the calculations. The electrification of rail routes the UK’s shared communications network and how around the northern cities of England, by reducing that improves the possibilities for trade and promotes congestion and freeing up lines, improves cross-UK trade between Scotland and the rest of the UK. Can communications generally. you tell us a bit more about why that is the case? Vince Cable: On which aspect of communications do Q3623 Pamela Nash: There have been legitimate you want me to dwell? questions or assumptions that Scotland would not go for HS2 if it was separate from England and Wales Q3619 Pamela Nash: I think you had concentrated because it would not be able to afford it. Obviously, on broadband. That was one of your examples. the residual UK would not be contributing to a Vince Cable: Broadband is an area where I think it is competitor, but, if Scotland goes it alone, would that fair to say Scotland has benefited disproportionately, put HS2 at risk for England and Wales if the benefits again for good reasons. I think 20% of the funding of to Scotland had previously been included? the roll-out of high-speed broadband in rural areas is Vince Cable: If the cost benefits were on the margin, taking place in Scotland—particularly rural parts of it could be a decisive factor. Scotland. Scotland has benefited particularly from the broadband programme, and I think the figures are in Q3624 Pamela Nash: Are there any other transport the report. projects you can think of that are dependent on benefits to Scotland as well or include the benefits to Q3620 Pamela Nash: Could you envisage that level Scotland in the calculation? of investment being affordable if Scotland had left Vince Cable: There are a lot of complex issues around the UK? aviation and support for crucial lifeline services and Vince Cable: If Scotland was independent, the so on, which are part of our common UK regulatory Scottish Government would have to fund it framework for aviation. I guess my colleague Mr themselves, and quite substantial sums of money are McLoughlin is perhaps best placed to answer those, involved. but clearly that is another area where there is a lot of common interest too. Q3621 Pamela Nash: Broadband is what I am most familiar with as it has affected my constituency in Q3625 Mr Reid: Phase Two of HS2 goes as far as trying to get money out of the rural broadband Leeds and Manchester. The Government are looking programme. Is there any other aspect of shared at a third phase going to Glasgow and Edinburgh. If communication infrastructure throughout the UK that Scotland were an independent country, do you think benefits Scotland and trade between Scotland and the the population of Carlisle would have enough sway rest of the UK? with the UK Government to persuade them to extend Vince Cable: There is one aspect for which I have HS2 from Manchester to Carlisle? particular responsibility. It is controversial for other Vince Cable: You answer your own question: it is reasons. The whole postal system is a shared highly improbable. It would become much more infrastructure service. There is a very large subsidy difficult. involved in maintaining the universal service which Parliament has legislated will continue, whoever owns Q3626 Chair: To be clear about the whole exercise, the Royal Mail. It is about £7 billion across the UK. as I understand it, you are saying to us that the gains I do not have figures, and they are probably quite to Scotland are factored into the decision to run HS2 difficult to get, but, given that Scotland is as far as Leeds, which I can understand, but if the geographically very dispersed, I would be surprised if advantages to Scotland were not in that balance that it did not have substantially more of that cross-subsidy might change the decision on HS2, and certainly in per head than other bits of the UK. the extension beyond Preston, or the third phase, any advantage to Scotland would not be considered. I Q3622 Pamela Nash: I know that at least one of my would have thought it would make it virtually colleagues is anxious to question you more on that, so impossible to see an extension of HS2 to Glasgow or I will leave it and let them go back to it. Edinburgh as viable. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Ev 8 Scottish Affairs Committee: Evidence
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Vince Cable: The last point is clearly right. On the Q3633 Chair: We would press this a little further and first, the Government are totally committed to the ask you to go back and try to clarify the scale of cross- project, but if it were marginal that could be a factor. subsidy to the postal service in Scotland that comes I am not familiar with the details of how this is being from the rest of the United Kingdom. While we done, but at the moment nobody would seriously appreciate that it might be difficult to get it to the 12th separate out Scottish passengers to exclude them from decimal point, an indicative figure would be more the benefits of faster and less crowded trains. They are helpful than what we have at the moment—which is part of the British community, so they are included nothing at all. So next week then, that’s fine. even though currently the rail lines at the end of Phase Vince Cable: I will ask certainly. Two do not go to the Scottish border. Q3634 Chair: That is a euphemism for you will Q3627 Chair: We discussed earlier that some of the command and figures will be produced. That would impacts were marginal and were not Armageddon, and be very helpful. To come back to the question of it was difficult to distinguish exactly what difference expecting the Scottish Government to explain and separation might make except at the margins, but in justify their proposal, it is reasonable for us to expect relation to HS2 I think we are agreed— them to come out with an explanation of how they Vince Cable: As you say, it may be yes or no; it may would fund this additional cost of postal services in make a difference. Scotland when they produce their White Paper. This has to be part of an accounting process of how money Q3628 Chair: That is right. This is an area where I would be spent. Therefore, rather than just have it at think you are saying to us that, as far as you can see, some time in the future, we would want to have that. separation would make HS2 a non-runner beyond Vince Cable: I will try to get what you need. Manchester. Chair: We have faith in your abilities to get this figure Vince Cable: I would think that is a reasonable for us. conclusion. Q3635 Lindsay Roy: Would privatisation change Q3629 Chair: Yes, so do I, but you are saying it. You that cross-subsidy? are not a lawyer, are you, but you are beginning to Vince Cable: No, it would not. That is one thing that sound like one? I want to be clear that that is really would not change. It is very clear— what you are saying to us. Vince Cable: Yes, yes; I am sure that is right. Q3636 Lindsay Roy: That is guaranteed. Chair: That is helpful. Vince Cable: The universal service obligation, which is what determines the cross-subsidy, is written into Q3630 Lindsay Roy: You spoke earlier about the law. As you know, we have debated this in Parliament. impact of separation in relation to the postal services. Six-days-a- week delivery, five days for parcels and Could you amplify that? Could you give us details of the uniform price, whoever owns it, will still apply. the cross-subsidy, because we think that is important? You spoke earlier about an evidence base. What is the Q3637 Lindsay Roy: The figures you are about to cross-subsidy at the moment in relation to postal provide us with are all— services? Vince Cable: They would be robust regardless of Vince Cable: As I said, I do not have a number. I did ownership. ask because I know this is an important question. The Royal Mail do not calculate the numbers in a way that Q3638 Chair: If Scotland separates, some I can give you a direct answer. If it was proportionate arrangement would have to be made about who to the population of Scotland, we are talking of a total controlled the privatised Post Office. cross-subsidy of about £700 million a year, and Vince Cable: Correct. presumably an independent Government would have to fund that. I would guess that the figure is Q3639 Chair: While I appreciate the generosity of significantly higher precisely because of Scotland’s English, Welsh and Northern Ireland taxpayers and geography. I have asked if we can get an exact number their willingness to support the Barnett formula, I am and we have not got one. not sure they would for ever be willing to have a cross-subsidy of a Scottish Post Office. Surely, there Q3631 Lindsay Roy: Will we be able to get that would have to be some disengagement of a privatised prior to the referendum? Post Office. Vince Cable: It is an important question. I don’t have Vince Cable: It is the Royal Mail. Sorry, I am being the numbers. We could certainly ask for more research boring about labels. to be done. We could go back to the Royal Mail and ask them if they could give us a better geographical Q3640 Chair: Yes; okay, Royal Mail then. There breakdown, but I do not have it at the moment. would have to be some disengagement and, surely, if it was to be arranged as part of the negotiations post Q3632 Lindsay Roy: It is important because you any referendum, there would have to be a basis upon spoke about being dispassionate and evidence-based. which negotiations took place. Therefore, the The more accurate information we can have the better. Government would have to be drawing up these Vince Cable: I can see it is important to the argument. figures now in preparation. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 9
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Vince Cable: They would have to set up their own separate licensing regime, which would apply to this regulator. The regulator would have to set the Scottish company or whatever company the Scottish definition of a universal service, which might be more Government wanted to deal with. or less generous than it currently is. That would be up to them, but if it was as generous, or more generous, Q3645 Mr Reid: Should separation happen, if I it would have to be paid for, and the Scottish posted a letter in London to be delivered in Scotland, Government would have to find the money for it. presumably I could not just stick a UK second-class stamp on it; it would have to be the international Q3641 Chair: That is right, which means there postal rate. would have to be an end to cross-subsidy and the Vince Cable: You are raising a whole new possibility Scottish Government would have to pay a great deal that I had not thought of, but that is true. It would be more. like sending a letter to France. Vince Cable: Correct. Q3646 Mr Reid: There would be all these Q3642 Chair: We will have to have an indication of complications if separation happened. Can I also the scale of that figure. explore the Government’s intentions if the vote is no Vince Cable: That is correct. and the union continues? You referred to the universal Chair: We come back to the distinction between service obligation to deliver to every address every Armageddon-like figures—the abandonment of HS2 day and collect from every post box. Can the and the break-up of the Post Office—as distinct from Government give a guarantee that that will continue some of the things that are perhaps less significant. and they have no plans whatsoever to water that down That is helpful. in any way? Are you able to give that guarantee? Vince Cable: We have absolutely no intention of Q3643 Mr Reid: I want to explore that scenario changing it, and, under the law which you in further. Am I correct in saying that the Government Parliament passed in 2011, Parliament itself would plan to sell the Royal Mail to the private sector before have to authorise a change. I cannot do it unilaterally. the referendum? Vince Cable: The plans are to sell it within this Q3647 Mr Reid: The Government could not do it; financial year. Parliament would have to do it, so there is that guarantee. What guarantees do people have about Q3644 Mr Reid: That would be before the first-class mail? As I understand it, the universal referendum. If Scotland became a separate state, the service obligation could be met simply by second- Royal Mail and all its assets would be owned by one class mail. What guarantees do people have regarding private company but operating in two separate first-class mail? countries. How would it be regulated? UK law already Vince Cable: As you say, the universal service does says that the company must deliver to every address not cover the first-class mail service. There is a and collect from every post box every day. Clearly, requirement that prices should be reasonable, but it is the UK Government could not legislate for that to at that very general level. The requirement that a happen in Scotland and the Scottish Government certain percentage of mail is delivered the following could not legislate for that to happen in England, so day is subject to their licensing conditions. We are not how can you envisage this single company operating here arguing about the issue of independence. in two separate states but still delivering the USO? Vince Cable: As the Chairman said earlier, it is a Q3648 Mr Reid: Yes. Those who advocate challenge to the Scottish Government to explain how separation and the media tell us that we also have to they would manage this arrangement. They would explore what would happen if separation did not have to set up their own regulator to meet separate happen. Scottish objectives, whatever they may happen to be. Vince Cable: As I understand it, there are exemptions Mr Reid: They could not legislate for mail posted in, at the moment from the universal service for parts say, London to be sent up to Scotland within the target of Scotland where, because of ferry timetables, for times. I am not quite sure how it would operate. example, it is not possible to deliver the following Vince Cable: The issue about target times is a separate day— one. There are two issues here. The universal service is a vital protection, I would argue, particularly for Q3649 Mr Reid: CalMac give a poor service to Scotland, but it is couched in very broad terms: those islands. affordable uniform prices and the six and five-day Vince Cable:—to Orkney, Shetland and the Western delivery timetables for letters and parcels. The precise Isles, but I don’t think Argyll is affected. requirements to deliver so many, say, first-class letters the following day would be part of their licence Q3650 Mr Reid: Coll and Colonsay do not get a conditions, which would be overseen by the regulator, daily ferry service, but that is CalMac’s fault—not the as they are at the moment. So, in fact, the whole Royal Mail’s. What guarantee do people have about process of disentangling this, were Scotland to the first-class service? Is that down to the regulator become independent, would be very complicated. We through the licence conditions? would be talking about having to have a separate Vince Cable: It is. There would be specific licence Scottish system of universal service—all European conditions that operate at the moment—performance Union countries have to have one—and also a standards that they are required to meet—and the cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Ev 10 Scottish Affairs Committee: Evidence
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP general requirement of uniform price. It would remain this common regulatory framework. If they are talking uniform, whatever the charge was. about exporting to the European Union, we assume that all the uncertainties around Scottish membership Q3651 Chair: But all of that applies only while the of the European Union would be clarified. As the United Kingdom remains as is. Chairman keeps indicating, we do not know. Quite a Vince Cable: Correct. lot of the support for business operates through the Scottish Government and bodies such as Scottish Q3652 Chair: It is reasonable now for us to expect Enterprise. None the less, there is quite a lot of close the Scottish Government in their White Paper to collaboration with the UK body—UKTI. If you are a outline all of these things about how they would deal Scottish exporter wanting to export to China, you may with the postal service, unless they simply say that the well be getting direct help from Scottish Enterprise objective of independence is to keep everything the but you will be relying on the UK service as well. same, in which case issues would then arise about There is a slightly messy overlap between business cross-subsidy and costs. It is reasonable for us to support in export services but an important UK expect that we would have those costs spelled out and dimension to it. how they would be met. Vince Cable: There is an additional point. Like many Q3656 Pamela Nash: Why has some of that power people—it is not a criticism—you referred to the been retained by UKTI? Why do companies still Royal Mail as the Post Office. require that help from UKTI rather than just Scottish Chair: Sorry. Enterprise? Vince Cable: But it is quite a useful point to make Vince Cable: Because in many ways there is a lot of because there are separate issues to do with the Post common sense in having a UK role. If we are talking Office. The Post Office will remain a publicly owned about, let us say, Chinese companies thinking about entity, but the post office network at the moment is investments in the UK, the UKTI will try to make the quite heavily subsidised in order to keep open rural case to them for investing in the UK as a whole. The and sub-economic branches. The Government have Scottish Government may well come in and say, made the conscious decision to subsidise the post “Why don’t you come up here?”, and they have their office network. Given the geography of Scotland own promotional work, but the key part of the again, there is a genuine benefit that it derives from promotional effort is at a UK level, the UKTI the fact we are supporting the network of post offices, operating overseas and working with inward investors. quite apart from the mail. If Scotland were independent, they would lose that wider dimension. Q3653 Chair: Perhaps it would be helpful for you to David Mundell: We and Dr Cable’s Department give us, or obtain for us, figures about the post office encourage very close working between UKTI and network and the extent to which the subsidy provided SDI, and that has been very successful. It is an for the UK as a whole is disproportionately directed example of the “best of both worlds” argument of towards Scotland, which I think is the point you are Scotland remaining in the United Kingdom. SDI is making to us. Again, it is reasonable for us to expect able to provide a very distinctive Scottish service, but the Scottish Government in their White Paper, or UKTI has the global reach that SDI could not have on subsequently, to give us an indication of how these its own. Britain’s embassies and consuls around the extra costs would be met. world give us an enormous global reach. When the Vince Cable: I think that is a reasonable challenge. Foreign Secretary and I met businesses in Scotland recently, one of the points they made was that the Q3654 Chair: Since we have covered a couple of fact Britain was represented in all the major south- points on postal services, is there anything we have east Asian economies meant there were possibilities missed on which we should also be asking you to give for events and advice in all those locations, which is us information? something that simply would not be possible to Vince Cable: No; I think you have been pretty provide within a Scottish context alone. So I think the comprehensive. current arrangements are a really good example of Chair: Good. Just in case we have not been, could how Scotland in that environment gets the best of both we ask you to reflect on it and, when you write to worlds: a distinct Scottish element in SDI but the us about these other things, add anything else that is UK’s global reach through UKTI. germane to the question of what the costs would be after separation? Q3657 Pamela Nash: Do you feel that has a benefit both for foreign investment in Scottish companies and Q3655 Pamela Nash: I want to move on to also the opportunities to export products? something totally different about foreign direct Vince Cable: Yes. investment and the benefits that Scottish companies David Mundell: Absolutely. have in exporting their products overseas as part of the UK. Looking through the report, what do you Q3658 Pamela Nash: Do you think that could be think would be the impact on Scotland’s ability to diminished by Scotland being on its own? export its products and attract foreign direct David Mundell: Scotland would not have the consular investment in its companies? and embassy network that the UK currently has. It is Vince Cable: It goes back to what I said at the very as simple as that. beginning. Scottish companies benefit from having Vince Cable: It could have, but at considerable cost. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:57] Job: 038186 Unit: PG01 Source: /MILES/PKU/INPUT/038186/038186_o001_odeth_SAC 130904.xml
Scottish Affairs Committee: Evidence Ev 11
4 September 2013 Rt Hon Dr Vince Cable MP and Rt Hon David Mundell MP
Q3659 Chair: Could I finally draw things together Q3662 Chair: These are all on the lines of the British and seek to clarify how the paper you produced Cycling mantra of “the aggregation of marginal yesterday ties in with this—maybe we can stay off the gains”. question of oil, because that is another subject Vince Cable: That is exactly what it is. altogether—and in general terms the extent to which the two slot together? Perhaps you could also clarify Q3663 Chair: There is a series of marginal gains as whether or not there are any other papers you are distinct from, say, postal services and the possible working on that would impact upon the sort of things effect on HS2, which are major issues. That is the we have heard today. distinction we would draw. Vince Cable: I was asked by Lindsay Roy about Vince Cable: The phrase you use—the cumulative research funding. We are having a separate paper on effect of marginal changes—is exactly what we are that. Science and innovation research will be talking about. separately quantified, so you will get more information on that in any event. Q3664 Chair: At the end of our sessions we normally ask people—we will ask you—whether or Q3660 Chair: In terms of the other paper you not there are any answers prepared to questions that produced on macro-economics, is there anything in we have not asked. Is there anything that you want to there that you think impinges directly upon what we get off your chest and tell us that we have not already have been discussing today? given you an opportunity to raise with us? Vince Cable: The big area of overlap was the estimate Vince Cable: No. It is a fair range of questions and I made in the first paper about the long-term effects on would not tempt you to go into other fields I am not living standards in Scotland and the benefits of being prepared for. part of the UK single market. They came out with the cumulative figure of £2,000 per family after 30 years. Q3665 Chair: That was what I was worried about. It is really saying that, if Scotland had become The fact you are happy with this is an indication that independent 30 years ago, the standard of living of a maybe we have not given you as hard a time as we Scottish family might be £2,000 lower than it is today should have, and we will bear that in mind next time as a result of the benefits that we get from integration. Mr Mundell comes in front of us. That is not an Armageddon-type argument; it is about Vince Cable: I think it is fair questioning. all these small cumulative things gradually adding up David Mundell: I could have told you that the over time. Scottish Government have made up their figures on oil and gas, but obviously you want to hear that— Q3661 Chair: Surely, £2,000 over 30 years is not the Chair: We probably know that, but I don’t think we sort of thing that will get people out into the streets, want to get into a diversion. That is for another day, is it, marching or anything else? and we want to touch on that on another occasion. Vince Cable: No, it is not, but there are these surveys Thank you very much for coming along. This has that suggest that, for perfectly reasonable reasons, been a very interesting session. people in Scotland are being very hard-headed about this and not emotional, and are looking at how it will impact on their living standards. cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 12 Scottish Affairs Committee: Evidence
Wednesday 23 October 2013
Members present: Mr Ian Davidson (Chair)
Mike Crockart Simon Reevell Pamela Nash Mr Alan Reid Sir James Paice ______
Examination of Witnesses
Witnesses: Rt Hon Danny Alexander MP, Chief Secretary to the Treasury, Stephen Farrington, Deputy Director, Economics Group, HM Treasury, Rt Hon Alistair Carmichael MP, Secretary of State for Scotland, and Chris Flatt, Deputy Director, Constitution, Scotland Office, gave evidence.
Q3666 Chair: Ministers, welcome to this meeting of people. Businesses benefit from this through access to the Scottish Affairs Committee. It is perhaps a large domestic market; consumers benefit from a unfortunate that we are in this room with so far great number and variety of goods and services at between us, but I am sure the gap can easily be lower prices. bridged. I understand that both of you have to be The paper we are discussing today contains full away, so we will try to rattle through a number of analysis, available to anyone to scrutinise, of the issues. advantages for Scotland and the rest of the United One of the members of this Committee could not Kingdom of our fully integrated economy. If I may stand the pace and, therefore, we want formally to say so, I think this contrasts with the approach taken note that Eleanor Laing has gone off to be Deputy by the Scottish Government. While they have been Speaker, which is an indication of this Committee putting out their own papers, time and again we see being a stepping stone to lesser things. that their story changes. They are prepared to say one Could I start by asking both of you to introduce thing in public but something very different in private. yourselves and briefly outline the key themes and We have heard them talk of a new oil boom in public purpose of the paper? but subsequently found out all about John Swinney’s Mr Carmichael: I am grateful to you for the invitation secret paper that set out only for his Cabinet to be with you today. It is a happy coincidence of colleagues, not for the rest of the people of Scotland, diaries that it has come as early in my tenure as it has. the realities of the fiscal challenge that an independent Indeed, I regard myself as returning to the Scottish Scotland would face in future years. Indeed, it Affairs Committee, having served with you on and off required use of the Freedom of Information Act to for most of the first two Parliaments: 2001 to ’05 and reveal advice from Scottish Government officials to 2005 and ’10. I know that you took evidence regularly their Ministers—advice that agrees with our own from my predecessor, and this is an appropriate point analysis that to run an oil fund would require to pay tribute to Michael Moore for the tremendous substantial cuts to public spending in Scotland or rises contribution that he made in his time in the job. I very in taxation. It surprises me that they put out their much look forward to continuing to have as warm and paper without explaining exactly what this cost would productive a relationship with the Committee as I be to the people of Scotland. The United Kingdom know he had. Government will shortly be setting out detailed I am very pleased to be here to talk about the analysis of the costs of pensions in Scotland in the “Scotland analysis” programme. As Secretary of future. State, I am going to continue to review closely and It seems to me that the Scottish Government will say assess these papers and make sure that they provide anything if they think it assists in selling their cause people in Scotland with factual information based on of independence to the people of Scotland. I remind evidence and analysis. I see it as an important part of you that is why it is all the more important that we in my role over the next 11 months that I am able to the United Kingdom Government continue to set out promote this information right across Scotland, and I facts and information in which people can place their want to make sure that our detailed analysis is trust. accessible to all. The programme we have embarked on is very open. All the workings-out are presented so Q3667 Chair: Thank you for that statement. You that people can check and challenge them if they have just reminded me of the existence of secret choose to. We are building up a substantial body of papers from the Scottish Government. I am just information in which the people of Scotland can put checking with the Clerk whether or not we have had some trust. copies of those. If we have, it would be appropriate to Let me be quite clear. This programme is setting out put them on the Committee’s website to make sure the positive case for the continuation of the United that they are publicly available. If we have not had Kingdom, despite what others may claim to the them, we will ask the Scottish Government or contrary. We have had five papers to date which show yourselves for a copy thereof. Thanks very much for the benefits of economic integration across the United drawing that to our attention. Could you clarify first Kingdom. The UK’s true domestic market supports of all—[Interruption.] Sorry, I ought to find out who the free movement of goods, services, capital and the other person with you is. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 13
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Danny Alexander: My name is Danny Alexander, on from the fourth paper in the series, about business Chief Secretary to the Treasury and former Secretary and the microeconomic framework? of State for Scotland. Alistair has now been Secretary Danny Alexander: It follows on very naturally. That of State for almost as long as I was, so it is great to paper was very much looking at the issues from the be here with him today. I join Alistair in paying tribute perspective of the individual business—from a to the work that Michael Moore did as Secretary of microeconomic perspective. This steps back and looks State for Scotland; he did so much to prepare us for at some of the same features we talked about in that the historic year ahead of us with the referendum. paper but from a macroeconomic perspective, so it The paper is a very significant one because the central looks at trade and economic performance across the argument it makes is an extremely positive one. It is economy as a whole rather than at the firm level. about the strength of Scotland within the United I gave some of the facts in my opening statement, but Kingdom, and demonstrates in black and white that in the microeconomic paper we looked at what would Scotland is a highly successful small country because be the disruptions to an individual firm of having a it is part of the United Kingdom. It shows that border within the United Kingdom. One of the things Scotland’s economic output per head is 98% of the we have done in this paper is to take some of the UK average; we are the third richest part of the UK existing detailed academic analysis of the so-called after London and the south-east of England, but this border effects. We might come to this later in the strength is in part because of the strengths we get from questioning, but it is an important point of the paper, being part of the United Kingdom. It analyses and gives a detailed macroeconomic analysis of Scotland’s economic performance against other precisely what the impacts would be on the Scottish comparator countries in Europe. The Scottish economy as a whole simply from the fact of having a Government set out its own set of seven comparator new border introduced within these islands. countries. The paper shows that, for example, as part of the UK, Scotland has a higher level of economic Q3669 Pamela Nash: Gentlemen, you have both output per head than Denmark, Finland and Portugal; spoken already this morning about the integrated an employment rate of 71.1%, which is higher than economy, and that is very much the theme of the Finland, Ireland, Portugal and Luxembourg, on 2012 paper. Could you explain that a little more and how it figures; and the third highest growth rate since 1990, affects ordinary working people in Scotland? behind only Ireland and Luxembourg; and that the Mr Carmichael: There are any number of different recession following the financial crisis was less severe ways in which economies integrate. The paper before in Scotland than in all the Scottish Government’s us today has a very specific focus. It is looking at the comparator countries. degree of trade and the flow of capital and labour The paper analyses the economic strengths of that within the United Kingdom, particularly Scotland. integration with the UK—of being part of a The truth of the matter is that when you look at the completely integrated domestic market. It points out facts, there is a very high flow of trade, labour and that we benefit from risks shared across the UK; capital between Scotland and the rest of the United resources being transferred to where they are most Kingdom. About two thirds of all Scottish exports go needed; and no borders to inhibit trade or the to the rest of the United Kingdom, which is in the movement of capital or labour. Looking back over the region of four times what we export to the rest of the last 50 years, it shows that output per head in Scotland European Union. has been slightly stronger, at 2% per year over that There is also a particular benefit in the facility for 50-year period, than in the UK as a whole, at 1.9%. It people to move freely in the course of their business also looks beneath that at the performance of cities, life throughout the United Kingdom, and to operate which may be of interest to colleagues on the within the markets with which they are trading, Committee, particularly you, Mr Chairman, because because they are integrated; they are part of that. one of the arguments the nationalists make is that the About 33,000 people of working age moved from the UK economic model is all based on London. It shows, rest of the United Kingdom to Scotland, and 35,000 for example, that Edinburgh is a highly successful city moved in the opposite direction. As an integrated state with 95% of the economic output per head of London; there are real opportunities for us as businesses. and that Glasgow has achieved a higher growth rate Danny Alexander: To go to your point about working in economic output per head than London since 1995. people, all of that has a direct effect on jobs and Overall, the argument in the paper is that Scotland is employment in Scotland, because you are looking at a highly successful small country within the United stronger economic performance and more Kingdom and that independence would shatter one of opportunities for Scottish firms. I know that the the foundations of that success. Committee looked previously at the paper we did on financial services, which was one of the earlier parts Q3668 Chair: Maybe at this point I ought also to of the programme. In terms of the free movement of add the Committee’s appreciation of the work done capital within an integrated state with a single by Michael Moore. At a previous meeting we agreed, regulatory system, we have a very strong financial if I remember correctly, that he was not the worst of services sector in Scotland; it employs a very large the Ministers we have had in front of us. I think that number of people—over 100,000 people. To give you was agreed by three votes to two, with four some examples, within the United Kingdom 84% of abstentions and one truant. We also appreciated the mortgages, 91% of pensions and 89% of ISAs work Michael did. Can I ask how this report follows provided by firms based in Scotland are to cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 14 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt non-Scottish customers, mainly people elsewhere in of economic integration, if there was an independent the UK. A single regulatory jurisdiction enables those Scotland that either gained or regained EU jobs to be located in Scotland in a way that would be membership—we do not need to have that debate at much harder, as the financial services paper pointed the moment—do you see a conflict between some of out, if you had separate, differing regulatory systems. the advantages currently enjoyed by Scotland within the UK and some of the single market requirements Q3670 Pamela Nash: I am glad you are on to that, that would be imposed alongside EU membership? Chief Secretary, because while we as politicians can Danny Alexander: There is a very big difference see the bigger picture and that this is better for between the two things. It would be false Scotland, my constituents would say, “I don’t export economically to argue that somehow within a whisky and I don’t want to move to Manchester or European Union of different sovereign countries you London, so where is the benefit for me?” Can I ask it can regain the benefits you have lost from breaking in a different way? If Scotland did leave the UK, how up an integrated sovereign state. They are totally would this damage the prospects for people in different things. In the EU you have a single market Scotland? that is negotiated between different countries. To give Mr Carmichael: You have touched on one of the one example, I mentioned financial services earlier: challenges of this paper. It is something on which I the EU single market in financial services is nowhere will be focusing, and I hope that the Committee might near as complete as the single integrated market that also have a contribution to make. How do you make we have within one United Kingdom. The analysis this real to people in their everyday lives? You are that we did in the paper of the so-called border effect right. The challenge always with macroeconomics is suggests that, if Scotland were an independent country that you are talking of big figures and big pictures, and part of the EU, there would still be a significant but, bluntly put, being part of the United Kingdom cost in terms of lost trade and integration with the rest means that you have access to jobs and job security of the UK. Some of the studies—there is now a very that is greater than it would be if you were not part of rich literature about the border effect—have looked at the United Kingdom. You have to put it as starkly as countries within the EU and how much they trade with that. The question then for people is: why would you one another within the EU single market, as against want to give that up? how much different regions or provinces of those countries trade with one another, and all of that Q3671 Chair: Can I follow up a point you made, evidence suggests there would still be a considerable Danny? You mentioned the percentages of ISAs and loss, even if Scotland benefited from the single so on that were being operated by private firms in market. Scotland for customers in the rest of the UK. Private On the border effect, the academic literature has firms will presumably take their own decisions. Just developed quite substantially over time. There is a outside my constituency is the National Savings Bank, very detailed body of analysis. which is obviously a Government-owned enterprise. Chair: We are going to come to the border effect later. Approximately 95% of its business is with customers We have a specific section on that. in England and Wales. It would obviously be a Danny Alexander: Fine, I will hold my fire. decision for a future UK Government about whether that would remain in a foreign country—Scotland— or be relocated to where there is surplus capacity at Q3673 Simon Reevell: To be clear, what you are the existing National Savings facilities in Durham and saying is that there is potentially a conflict between a Blackpool. Has there been any discussion about separate Scotland’s EU obligations and the advantages possible relocation and any debate about how these it has in terms of trade and economics currently as questions might be tackled? part of the United Kingdom. Danny Alexander: No, there has not. As we have Danny Alexander: Not necessarily a conflict, but always said, we are not engaged in pre-negotiation; whatever gains you get from being part of an EU we are engaged in trying to make sure that Scotland single market do not outweigh the very considerable stays as a full member of the United Kingdom, so losses you incur from breaking up the United that is not an issue that has been subject to detailed Kingdom. discussion or negotiation. The point about regulatory jurisdictions would apply to those financial products Q3674 Simon Reevell: That does sound a bit like as much as to any others, but I am not in a position a conflict. to go further than that today. I will happily go away Danny Alexander: I suppose we can describe the and have a think about that particular issue. same set of facts in different ways. The single market Chair: It would be very helpful if you could write has common rules for all EU member states. In the back to us in due course about the process that might eventuality that Scotland became an EU member be involved in considering where the National Savings state—we have previously discussed that and the Bank jobs presently situated to the south of Glasgow difficulties associated with it, and no doubt we will are to be relocated in future. have an opportunity to do so again—those rules would apply to all the countries of the EU, but they do not Q3672 Simon Reevell: Following from something substitute for the losses you suffer from breaking up you said a moment ago about the advantages for and losing the benefits of being part of one Scotland being within the United Kingdom in terms integrated state. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 15
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Mr Carmichael: Before coming to this job, my spending in a very short, sharp way? Does it have to experience as a member of the Cabinet Sub- increase other taxes to fill gaps, for example, Committee on European Affairs was that Germany, in assuming you had a population share of oil revenues? seeking to shape the development and progress of the You could have gaps of multiple billion pounds single market, very much came to the United opening up from year to year. There has been quite a Kingdom as a country with which it saw it had a lot of independent analysis of this. It is likely that an common interest. It saw that there was an opportunity independent Scotland would face considerably higher to shape the single market, and indeed the future of borrowing costs, so the actual cost to an independent the European Union, by working between two big Scotland of dealing with that volatility would in itself countries within the European Union. It is significant be considerably higher. All those things have a knock- that they came to the United Kingdom and not to any on effect on the overall stability of the economy. The of the other smaller countries in northern Europe with stability of the economy and fiscal position is, as we which they might also have found a common cause. can see looking across the UK, one of the critical factors in enabling businesses to have the confidence Q3675 Mr Reid: The analysis paper considers fiscal to invest and grow. integration as well as economic integration. Could you Mr Carmichael: There is a lesson to be learned from explain to the Committee what you understand by the European experience. If we take fiscal integration fiscal integration and how that is connected with economic integration? and economic integration as a given, as you try to Danny Alexander: Simply put, within the United construct that within the European Union, it has Kingdom fiscal risks are shared and pooled, and that brought a degree of political integration. helps to smooth volatility that otherwise would be Independence is a process by which political experienced in a smaller country. For example, within integration is dismantled. You have to wonder what the UK, Scotland is able to exchange highly volatile would be the consequences for economic and fiscal revenue streams. One of the things we draw attention integration if you started to dismantle political to in the paper is the significant volatility that has integration. existed in oil revenues over time with a very stable level of public spending. North Sea oil revenues have Q3678 Mr Reid: As you know, if the Scottish fluctuated from less than £3 billion to almost £13 Government are successful in their referendum and billion in the period since devolution, while Scotland’s Scotland becomes a separate country, they want to spending has remained relatively stable and has negotiate a currency union with the remainder of the consistently been 10% above the UK average. That United Kingdom. Do you think it is possible to have is the benefit of being in a highly fiscally integrated a shared currency while losing the benefits of fiscal United Kingdom. integration and having all the volatility that you referred to in answer to the previous question? Q3676 Mr Reid: The Government are currently Danny Alexander: The two are very closely linked. I moving to a system where the Scottish Parliament will have said before that currency union is unlikely to be become much more dependent on Scottish tax in the interests of either an independent Scotland or receipts. What implications does that have for the the rest of the United Kingdom. Therefore, it is highly integrated fiscal system we have at the moment? unlikely that it could be made to work. The fiscal Danny Alexander: You are right that there will be issues are a big part of that. We see in the eurozone significant tax devolution. From April 2016 onwards, those countries having to have much tighter control of every citizen in Scotland will pay a Scottish rate of one another’s fiscal policies within a common income tax to the Scottish Government alongside the currency. That is one of the issues that over time has UK income tax they pay. That is a very significant undermined stability in the eurozone. If the argument change that perhaps has not been talked about enough. for a common currency means an independent The arrangements—we have debated them in this Scotland sacrificing a large chunk of the fiscal levers Committee before—are structured in such a way as to it might have to manage its economy, you have to ask try to smooth any volatility that emerges, and ensure that there are proper levers of fiscal accountability to the question: from the point of view of those arguing the Scottish people but also proper incentives through for independence, why do they think that will be in that system for the Scottish Government to benefit their interests? I note that quite a few of the people when, through their action, they grow the Scottish who advocate independence have been saying recently economy. that they do not want a currency union. The other day Angus Robertson explicitly implied that they would Q3677 Mr Reid: If Scotland became separate and the use the pound even if they could not have a currency benefits of fiscal integration were lost, what union, so if it is not the eurozone for the United implications would that have for economic Kingdom, it is Montenegro for Scotland. It seems like integration? an odd choice to me, but that is what he said: they Danny Alexander: It is a good question. It has very would seek to have the pound in circulation in significant implications. For a start, you would have Scotland even if there was not a currency union. If much greater volatility of revenues. It would mean you remember the analysis we made in the currency that Scotland would constantly be faced with the paper, so-called “sterlingisation” carries very severe challenge of how to respond to that. Does it cut public economic risks as well. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 16 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Q3679 Mr Reid: Can you give us an example of the Scotland compared with 1.9% for the UK as a whole. fiscal levers that would not be available to an It is fair to say that, as Danny told you earlier, our independent Scotland if it was using the pound either performance as part of the UK is comparable with, in a currency union or without any agreement? and in some cases better than, other small independent Danny Alexander: Using it without any agreement countries: Austria, Denmark, Finland, Ireland, does not involve a sacrifice of fiscal levers in terms of Luxembourg, Portugal and Sweden. taxation, spending and borrowing, but it includes many other substantial risks, for example not having Q3682 Simon Reevell: Just dealing with the point a lender of last resort in your economy, which we about the UK, when I asked whether you found it discussed at a previous Committee hearing. We see in surprising, I should have put that into context. I meant the eurozone that their currency union debates are do you find it surprising bearing in mind the evidence? about progressively having more and more central Mr Carmichael: No, I am afraid there is very little in surveillance and approval of budgetary policies, this debate that I find surprising any more; it is constraints on borrowing levels and so on. Those are consistent with their approach to other matters. I come the sorts of things that are being looked at in the back to my opening statement. It is about getting the eurozone. I am not going to speculate on what might facts out and destroying that impression people might happen in those circumstances, because I think it is have from a sense of grievance that is constantly being unlikely to be in the interests of either an independent nurtured. The facts show quite clearly that we are at Scotland or the rest of the UK to have a currency least as well off—if not occasionally slightly better union. Therefore, it is highly unlikely that it would be off—as the United Kingdom as a whole. made to work under those circumstances. Danny Alexander: The evidence is very clear and it is set out in detail in this paper. Scotland is a highly Q3680 Chair: Can I clarify two things arising from successful small country within the UK, because we that? You said that Angus Robertson had “explicitly are within the UK. You can analyse that by comparing implied”. I am not quite sure how those two words Scotland with countries of a similar population and work together. Can you clarify whether or not he said size. The Scottish Government have laid out their that Scotland would follow the Montenegrin route by comparator countries; I have given the comparisons. using sterling without agreement? Zimbabwe and You can also look at Scotland as compared with other Panama do that with the dollar, do they not? parts of the United Kingdom. Danny Alexander: I am not totally familiar with the Zimbabwean currency model, but in Montenegro the Q3683 Simon Reevell: You said earlier that it was euro circulates as the currency even though that the third richest part of the United Kingdom. What country is not part of the EU. criteria are you using? Chair: I am sure your staff will be able to bring you Mr Carmichael: I take you to the Office for National up to speed on Zimbabwe. Statistics figures, which are in the paper. Their GVA Danny Alexander: I am sure they will. On 18 October release shows that Scotland has the third highest he gave an interview to the BBC in which he said, output per head of all the UK’s countries and regions. “Firstly, it is not something that one cannot like and Danny gave us the figures earlier on. For example, say no. People can use whatever currency they want. Edinburgh’s economic output is 165% of the UK Point one.” Then he was asked, “You would be using average. Scotland and its constituent parts do well, sterling anyway. That’s one of Danny’s points.” I and it is not an accident. We are now seeing that assume the Danny referred to by the interviewer is Scotland does well as part of the United Kingdom me. “Yes, that is an alternative,” he said. The because we have put a structure of government in transcript is publicly available, and I will happily place with the creation of the Scottish Parliament in furnish it to the Committee. Edinburgh while remaining part of the umbrella of the Chair: I had missed that. That is interesting and United Kingdom, which serves Scotland exceptionally helpful. well. It allows us to have a Government in Edinburgh, which can look entirely at the Scottish picture for Q3681 Simon Reevell: The Scottish Government areas where there is a distinctively different Scottish have claimed that membership of the United Kingdom picture. It is not an accident that Scotland does well. holds Scotland back economically. Do you regard that as a surprising assertion? Q3684 Simon Reevell: When you talk about “third Mr Carmichael: Surprising, no. It is part of their richest”, you are referring to an average figure for the overall strategy that, in order to persuade people in whole of Scotland in relation to output. Scotland that they should remove themselves from the Mr Carmichael: Yes. family of the United Kingdom, they have to generate Simon Reevell: I do not criticise that. a sense of grievance. They do this every day in a Mr Carmichael: I think most people would say that is multitude of different ways. The message from the reasonable. Once you start using terms like “richest”, paper today is pretty clear. Growth rates in both which are not by any shape or means a term of art, Scotland and the rest of the United Kingdom are you are widening the debate. pretty similar. Danny gave you the figures earlier. The Simon Reevell: That was why I had to ask. economic growth per person in the Scottish onshore Danny Alexander: There are two ways to look at this. economy has averaged slightly above the UK onshore How does Scotland compare with the average of the economy over the last 50 years. That is 2% in UK? Scotland’s output is 98% of the UK average. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 17
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Where does Scotland stand in the pecking order of Mr Carmichael: Indeed, that is a shame, but they can all the different nations and regions within the United only answer for their actions, not mine. There is an Kingdom? We are third from the top of that list. emerging theme here. We saw it recently with their paper on the creation of an oil fund. Freedom of Q3685 Simon Reevell: One of the Scottish information disclosure showed that they were being Government’s stated aspirations is to increase growth told one thing in private by their own officials and to the UK average. My understanding of your position saying something quite different to the people of is that in fact that has already happened and that Scotland. We saw it on the question of EU aspiration is not only modest but irrelevant. membership and their legal advice. There were great Mr Carmichael: I could not really improve on that as assertions that of course it would not be a problem, a description. The Fiscal Commission Working Group and it turned out that no legal advice had been sought. use data that show the Scottish economy grew by We have seen it in other areas as well. The whole 2.3% between 1977 and 2007, compared with 2.8% paper John Swinney prepared for his Cabinet for the UK, but the Treasury find that growth per head colleagues, to which I referred, was probably one of was 2% and 1.9% in the last 50 years. the most egregious examples. The debate we have in Danny Alexander: The difference between the two Scotland for the next 11 months will be a once-in-a- sets of figures is in the words “per head”. Around the lifetime debate. If we are to take it seriously, we have world, countries are assessed on the question of GDP to approach it with total candour. That is why the way per head. The population of England has grown faster we have approached it—my predecessor, the than the population of Scotland. The Fiscal Chancellor, the Chief Secretary and myself—and will Commission’s numbers ignored the per capita part of continue to approach it, is to say, “Here is the the equation, whereas if you look at it on a per head information. Now, Scotland, make your decision.” basis over a long period of time—50 years is as far as the statistics go back in this area—as opposed to Q3689 Chair: Before we come to the border effect taking a particular selection of years, the figure is 2% and Sir James, can I go back to the question about for Scotland and 1.9% for the rest of the UK. What it your statistics and showing your working? Has shows is that Scotland is very similar to the anybody come forward with any convincing rebuttal performance of the UK as a whole. of the facts and evidence that you have produced so far? I presume that your conclusions have been Q3686 Simon Reevell: On the little bit of material rejected, but has anybody re-marked your sums and we have been looking at over the last few minutes, found any errors? we seem to have a situation where claims and Mr Carmichael: No. aspirations put forward by the Scottish Government are difficult to reconcile with the objective empirical Q3690 Chair: Presumably, the Scottish Government evidence. had the opportunity to comment on and observe your Mr Carmichael: Yes. This comes back to the point I workings on this paper. Have they given any response made in the opening statement, which is that people that would indicate they have any belief that the sums will engage in this debate if they feel there is and workings are wrong? information they can rely on. The significance of this Danny Alexander: There has been a public response, paper is that we put our analysis out there; as my which we have all seen, but there has been no detailed mathematics teacher used to tell me, we show our questioning of the methodology used or the statistics working. The contrast with the Scottish National party provided, by anybody. is that they do not show their working, so when other Mr Carmichael: The people of Scotland can see the people come along and try to make sense of their two contrasting approaches. They can see on the one conclusions, that is where the difficulties arise for hand that the United Kingdom has put out a them. substantial piece of work, which is well reasoned and Danny Alexander: You can get the right facts out of well substantiated; on the other hand you get the Scottish Government but they tend to be dismissive press comment. They can draw their own accessible only by using the Freedom of Information conclusions. Act. Danny Alexander: With all the economic analysis papers, we have also taken time to discuss and peer- Q3687 Simon Reevell: You and I would probably review the methodology used and the approach we are agree that in a debate on something as important as taking with academic experts in the sector before we next year’s referendum, transparency and honesty are publish the paper. We have taken it upon ourselves to fairly essential ingredients. do a lot of work to make sure that what we are putting Mr Carmichael: It is a matter of enormous regret to into the public domain is reliable and accurate, and is me that time and again the Scottish Government keeps not making outlandish claims but giving a realistic getting caught out in this. I think the people of assessment of the facts. Scotland deserve something better. Q3691 Chair: I understand that, but, as you would Q3688 Simon Reevell: It is probably quite good that anticipate, you have been met not only with they get caught out. What is a shame is that they get generalised abuse, but also no doubt with the themselves in a position to be caught out in the first accusation that your experts are trying to do Scotland place. down, and all the rest of it. Have you explicitly asked cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 18 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt the Scottish Government whether or not they have any circumstances, and that is what we tried to model in observations to make about the veracity of your this paper. There are lots of reasons why, let’s say, arithmetic, and whether or not there are any factual France and Germany would not want to be part of the errors that they can identify in your workings? same country. We are dealing with a different Mr Carmichael: I am into week three of this job, so question; we have an integrated state and are trying I cannot comment on everything that has been done to understand what would be the impact of breaking hitherto, but I have been around this debate since I it up. first became politically active at 14, so that is 34 years ago. I am fairly confident that if there were holes to Q3694 Sir James Paice: That brings me to another be blown in these papers, they would have been by question, which in some ways you have answered. now, but they have not been. Are we talking about something that is transitional, as a consequence of the break-up, or would it be Q3692 Chair: That is taking rather a lot for granted. permanent? It might be appropriate next time you meet the Mr Carmichael: Nothing is immutable, but you take Scottish Government to seek to clarify with them as your starting point that there will be a disruption. whether or not they have identified any factual errors. Sir James Paice: Of course. Mr Carmichael: If it puts your mind at rest, Mr Mr Carmichael: The question then is: what is the Chairman, I will happily pay for the stamp to send direction of travel? If what you are dealing with is an them a copy of the papers myself. exercise in political disintegration, you have to Chair: Very droll. assume that the gaps you produce at the point of Danny Alexander: There is regular exchange and disruption will increase as the countries diverge—that dialogue between Treasury officials and Scottish is to say, the border effect becomes greater. Otherwise, Government officials on a whole range of subjects what is the point of being an independent country? about how policies operate within the UK at the Danny Alexander: A border effect is a permanent moment. None of those channels has been used to feature of the relationships between independent come back and say, “Your assessment of the sovereign states. That is what all the evidence shows. heteroscedasticity of the residuals in these equations is wrong,” for example. Q3695 Sir James Paice: You contest that the border Chair: I did not understand the meaning of that effect is not simply a reflection of— phrase. I am not familiar with Serbo-Croat or Danny Alexander: Your question implied that it was whatever language it was in. However, I just wanted something that might occur at the beginning and then to be absolutely clear that they have not come back disappear over time. and identified any factual or material errors in the Sir James Paice: Yes. workings of the arithmetic, or anything else. Danny Alexander: You could argue that the reverse is true. Once you have a separation into two independent Q3693 Sir James Paice: I want to come back to the countries, over time it is likely that their tax and border effect issue, which the Chief Secretary raised regulatory regimes will diverge. Divergent regimes earlier. Can you clarify for us precisely what you add to the costs for business, as you know from your mean by the border effect and why, if it exists—or own experience. All of those things are features that would exist—it has not been a spur to other small disrupt trade. There is quite an interesting chart in the countries who have a border with a larger country to paper—I can’t find it now—which looks at what merge with them? happened to the share of trade in the Czech Republic Danny Alexander: The border effect refers to the and Slovakia from the time they separated, and then impact that a border has on trade and labour over time. It shows a steady fall. There were lots of migration, and the divergence between different other things going on in that part of the world at that countries of regulatory and tax systems, which makes time, but it is not an instant thing; it starts from day it harder to trade. By the way, it is an effect that occurs one but its effects mount up over time rather than even where there are no physical borders or passport dissipate. controls and there are trade agreements and structures, such as the European single market. It is an effect that Q3696 Sir James Paice: In your paper you estimate has been widely studied in the economics profession. that this could cost a typical Scottish household There is now a whole series of academic papers; they £2,000 per annum. How authoritative is that figure? are referred to in the annexes to the document. They Can you explain to us how you arrived at it? have looked around the world. I think the first study Danny Alexander: I will explain how we arrived at it looked at trade between different provinces in Canada and then Alistair will say something. There is now versus the trade those provinces had with the United rich academic literature on the subject, where a States. A whole range of other places have been number of different experts have created models. We studied and different evidence sets assumed. I think it took some of those models and applied data about the is now a well understood economic fact that a border United Kingdom. We presented the results in the effect exists. To try to claim that the border effect is a paper; they are at the lower end of the estimated myth and does not exist is the economic equivalent of effect. There is a lot of uncertainty here, so we thought climate change denial. it right to present conservative estimates so that we A whole bunch of work has been done to look at the are not overstating the case. Even then, over a 30-year scale of the border effect under different sets of period, a 4% of GDP effect is pretty substantial and, cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 19
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt depending on the course taken, it could end up being is true of every member of the European Union, but a great deal worse than that. those factors already exist for Scotland as part of the Mr Carmichael: I do not think there is an awful lot United Kingdom. Scotland is part of the United to add to that. Kingdom, which is part of the European single market. We have all those gains already. What we are Q3697 Chair: Can we come back to one particular talking about is introducing a new border, which, as element of the border effect, which is whether or not we can see from the academic evidence, would bring it is affected or impacted upon by the nature of the a significant economic cost in its wake. division? If the nature of the division is harmonious, you would imagine that the effect is likely to be less. Q3701 Sir James Paice: But my point is that, if one If on the other hand it is discordant, say as a result of or both of the two resulting countries, the UK and the expulsion of Trident and disputes in a whole Scotland, were outside the single market, the effect of number of areas, would it be greater, or does the the border would be enhanced rather than reduced. evidence indicate that the effect is the same Danny Alexander: If you were seeking to create an irrespective? independent Scotland—a eurosceptic haven from the Mr Carmichael: The point is about divergence of the world that was not part of the European Union or two economies. If the scenarios you outlined were to anything else—that would be— come to pass, there would be an accelerated and accentuated pattern of divergence, and that would Q3702 Sir James Paice: Or that they were not even have an economic impact. That is the whole point. admitted to the European Union. Danny Alexander: That would be even worse. Q3698 Chair: Not necessarily. The decisions being taken to diverge the economies are not quite the same Q3703 Sir James Paice: That is my point. Therefore, as people deciding that maybe they do not want to the £2,000 per family that we discussed a few minutes buy something from the Czech Republic or Slovakia. ago is based on the presumption that both states I am not clear about whether or not an element of the remain—or become—members of the EU. border effect is conscious consumer choice—deciding Danny Alexander: Yes, it is. not to buy, say, American, but to buy Canadian, or vice versa—or whether it is simply a question of the Q3704 Sir James Paice: Can I turn to the impact of economies diverging and the hidden hand of the all this, were it to happen, on the rest of the UK, and market. the particular point about the border effect? What Danny Alexander: The economic models do not would be the border effect on the economy of the include a factor about the nature of the split. What remainder—the new UK? they show is that a border having a negative effect on Danny Alexander: There is an estimate of this in the the economies is just a fact. It is an economic fact paper as well, but I cannot immediately find it. about the world. How quickly that arrives and its Because of the scale it is considerably smaller; it is precise magnitude depends on a whole range of more of the order of £100 per household as opposed different factors, which these quite highly stylised to £2,000 per household, but there is also an effect. models look at. We have deliberately chosen in what Because Scotland is a relatively smaller share of the we published here the low end of the range of trade of the rest of the UK the numbers are smaller, estimates, in order not to over-claim. Some of the but there is a negative effect on everybody. This is not factors you are referring to might be things that could something that is neutral for the rest of the UK and make matters worse, but the point for the people of bad for Scotland; creating an international border has Scotland is that, no matter how harmonious a break- a cost for everybody. up was, there is still a real economic impact on Scotland simply as a result of having a border. Q3705 Sir James Paice: That is a very important point to bring out. Can I raise an issue which is linked Q3699 Chair: If there is disagreement, things could to these two points? It comes back to the question of only get worse. membership of the EU. Have you tried, or do you Danny Alexander: The best way for things to get intend at any stage, to estimate the flow of money to better is for Scotland to stay within the United and from the EU from a separate Scotland? In other Kingdom. words, would Scotland become a net recipient? If so, how much might that replace any economic Q3700 Sir James Paice: To go back to a point that disadvantage with border separation or other matters? was touched on earlier, presumably the question of Danny Alexander: There will be a paper on European whether or not Scotland was a member of the EU, and issues. As to how far we are able to analyse that therefore of the single market, is a matter of the particular question, I do not know the answer right degree of the impact of the border rather than its fact now, but as and when we publish it, I am sure some altogether. Have I got that right? of us will come back and talk about those subjects in Danny Alexander: There is a lot of evidence that much more detail. shows that being part of the European single market is good for trade and good for jobs, and that British Q3706 Chair: Can I clarify the cost to each Scottish membership of the European Union helps to support household of £2,000 a year? What are you assuming jobs, growth and trade in the United Kingdom. That to be the size of an average Scottish household? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 20 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Danny Alexander: I am not sure of the answer to that other words, there could even be a net drain on question. What we have done is simply to take the resources. GDP effect and divide it by the number of households in Scotland, in the same way as you would calculate Q3709 Mike Crockart: The key recommendation is any other household average. that the oil fund would be a good way to deal with the volatility in oil and gas revenues. I presume you Q3707 Chair: There have been foul suggestions that agree with that key recommendation. It is just the people in Scotland can be bought by £500 a head one mechanism to put money into that oil fund that is the way or the other. Therefore, if this is a £2,000 deficit difficulty. per household, to raise it potentially to a £500 a head Danny Alexander: I think the best way to deal with surplus, you have to know how that £2,000 is fiscal volatility in Scotland is to remain part of the allocated, in order to identify whether or not the £500 United Kingdom. surplus can be achieved. Mr Carmichael: It highlights the danger of over- Danny Alexander: I am afraid we have not worked reliance on a single highly volatile commodity. When out how much of it will be paid by the Davidson I was first elected here, I remember being told as part household or others. of the all-party group on the offshore oil and gas Chair: That is an obvious cause for concern at the industry that oil at $11 a barrel was artificially low, moment. We are three adults at the moment. I am, and it would probably rise and settle at $17 or $18 a however, seeking to expel one of them. If I thought barrel. We were told, “Don’t think you will ever again that maybe he would have to bear a share of this see oil at $30 a barrel,” which turned out to be money, it would be a countervailing argument, which prophetic but not for the reasons the forecasters is why you can see that I have a personal interest. In thought would be the case. As part of a larger case you wonder, my son is aware that we are trying economy, you are able to absorb these shocks and to get him out, so don’t worry about that. changes. The whole point of an oil fund is to compensate for over-reliance on one sector. Q3708 Mike Crockart: We have already touched on the subject of an oil fund, but I want to deal with it a Q3710 Mike Crockart: You talked about the bit more fully. Earlier this month, the Fiscal revenues being highly volatile. It is worth getting on Commission Working Group came out with a paper the record the figures helpfully given to us by the on stabilisation and savings funds for Scotland. What Treasury, so thank you for those. Looking at the recent is your response to that paper? history, it is not as if there has been a smoothing of Danny Alexander: As we have seen from some of the that volatility. In the last few years, we have seen £12 private work that has been published by the Fiscal billion in 2008Ð09, down to £6 billion in 2009Ð10. Commission, the truth about any of these oil fund That is a significant level of volatility. Do you agree ideas is that they would have to be paid for by that for an oil fund to work, setting it up from where substantial extra cuts in public spending in Scotland, we are now, we have to be in a position where there substantial tax rises or substantial extra borrowing at was a significant number of years of surplus to get it higher costs in an independent Scotland. I do not think up and running, because we are starting from a any of these proposals bear the political weight put on position of deficit? Has the Treasury done any work them by the Scottish Government. on how many years it would take to get to a point Mr Carmichael: In a bygone age, we always used to where an oil fund would meet either of the aims of talk about borrowing to invest. It seems to me that we the recommendations in the report? are talking here about borrowing to save, and you end Danny Alexander: Managing volatility would have to up paying more on the cost of borrowing than you be done under those circumstances. There are a couple generate by either of the funds that they propose to set of key facts to understand. You are exactly right to up. As you said yourself, Mike, there is a divergence say that trying to build it up while running a deficit between the advice they have been given privately and means you have to run an even larger deficit. The what they have said publicly. Quite significantly, that estimates we have in the paper are that spending divergence has not yet been explained. would have to fall by 19% from current levels, or Danny Alexander: To give one example of that, the onshore tax rises would have to go up by 27% by official advice released under freedom of information 2016Ð17, for Scotland to run an oil fund from a stated: “Funding an oil fund through the government balanced budget. If you are running an oil fund from deficit”—which is what is being proposed; in other a deficit, and you potentially have to borrow on top words, having a larger deficit—“would therefore not of that, and if you are a new country recently floated necessarily provide a long term revenue stream to on the world’s financial markets, from whom you need fund public services.” They also looked at the returns to borrow large sums of money, trying to convince on the Norwegian oil fund and the yield on them that you are credible, and you are paying—one Government bonds over the same period of time. It suspects—increased costs for that position, you have says: “This implies that if the Scottish Government a serious set of fiscal challenges that would, to put it was able to borrow at the same rate as the UK mildly, hit you from day one of those calculations. Government”—one could question that assumption— In the paper we found that, if an independent Scotland “and adopted a similar investment strategy as the set up a Norwegian-style oil fund, after 20 years of Norwegian oil fund, the returns on its investment may contributions it would be less than a tenth of the not cover the interest payments on its borrowing.” In current size of the Norwegian fund. Those cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 21
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt contributions would be paid for with massive the future, particularly from the demographic spending cuts or tax rises, so there ain’t no easy way pressures that exist in Scotland—as we have discussed to do this. before, the demographic pressures and ageing population in Scotland are happening faster in Q3711 Mike Crockart: How does that square with Scotland than in the rest of the UK—what you see is the SNP’s view of oil revenues being a bonus, which a kind of fiscal rack pulling the tax revenues you are in my understanding of language implies that it is an basing your projections on over a period of decades. extra you can squirrel away for a rainy day? They are declining, as the OBR forecast showed, and Mr Carmichael: I guess they are hostages to their the demographic pressures are rising. You would own rhetoric. This is historic policy for the therefore face the need to have to run an incredibly nationalists, and it has never been properly tight fiscal policy for a very long period of time in substantiated. It would be politically much more order to do that. If you are seeking to pay for an oil difficult for them to walk away from it, so I think that fund on top of that, you would have to have further in terms of policy they are stuck with it. Their own spending cuts or tax rises to pay for it. It strikes me analysis shows that, when you do the serious work in that whoever was in my position, were Scotland ever government, the figures just do not stack up. to become independent, would face a very long period Danny Alexander: Our oil industry is an enormous of having to make some pretty painful choices. asset to the United Kingdom. It is a valuable resource; it is one where there is considerable employment, Q3713 Chair: To come back to the question of particularly in Scotland, but also in other parts of the whether or not the deficit for Scotland, as I understand UK. By being part of the United Kingdom, the much it, is pretty much equivalent to that of the UK as a broader tax base and deeper pockets of the United whole, with some degree of variation, and if we leave Kingdom enable that volatility to be smoothed over a aside for a moment the question of differential much wider range of other economic activities. In the population growth, the balance seems to be that, on meantime, Scotland sees public spending that is the one hand, Scotland has a volatile income from oil, consistently about 10% higher than the UK average. but on the other hand it is receiving a disproportionate That is an advantage to Scotland. If what you are subsidy from the rest of the UK in terms of the Barnett trying to do is to balance having this fantastic asset as formula. Is that an accurate position? a country with smoothing the volatility and making Danny Alexander: It is not language that I would use. sure that spending is apportioned in a reasonable way, The Barnett formula works well in terms of allocating the current arrangements are fair ones. funds across the United Kingdom. As Alan Reid observed earlier, there are changes to that fiscal Q3712 Chair: You seem to be almost suggesting that settlement—quite significant changes—with the on the one hand oil is an enormous resource for the devolution of certain tax revenues. I regard that as a United Kingdom, yet it seems to be almost detrimental strengthening of Scotland’s place financially within to the Scottish economy. On the figures you gave the United Kingdom. But it is certainly true that if earlier about percentage growth and the percentage you take the total amount of public spending in prosperity of Scotland, by and large Scotland is pretty Scotland, even when you add in a geographic share of much at the same level as the rest of the UK—better oil revenues—I am not saying that is their policy, but than some bits and so on. Surely, in these it is what the SNP have argued for—you still end up circumstances oil can be only an unalloyed bonus. It in a position where for every £100 raised and spent in might not necessarily allow the establishment of an the UK since devolution, if you include a geographical enormous fund, but surely it can only be a bonus to a share of North Sea oil and gas receipts, Scotland has Scottish economy that is roughly parallel with that of raised £111 and spent £112, so there is still a gap even the rest of the United Kingdom at the moment. when you take all of that into account. The idea that Mr Carmichael: You have to be careful to draw the this will enable things to be paid for way beyond what distinction between oil and gas as a whole, which is is paid for at the moment simply is not true. an enormously important part of Scotland’s economy. It is a tremendous contributor. Indeed, to go back to Q3714 Chair: I understand that you have to go off the discussion of the border effect, anyone who has to another commitment. As we always say at the end ever taken an East Coast Main Line train on a Sunday of these hearings, are there any answers that you or Monday night will know that there is an enormous prepared for questions we have not asked? Most of cross-border effect for that particular industry. There what you wanted to get off your chest you did at the is enormous cross-border traffic. The difficulties we beginning in your introductory statement, but are there are talking about are to do with setting up an oil fund, any other points you want to make? especially in a time of deficit. Danny Alexander: No; I would just emphasise to the Danny Alexander: I would add a further point that Committee that the opening point was a really we have talked about in previous hearings. I agree important one, which is Scotland’s economic with everything Alistair just said, but looking over the performance within the United Kingdom. We are a long term, as you have to if you are trying to embark successful small country within the United Kingdom, on the creation of a new nation state, basing your and the analysis in the paper shows that independence economic and fiscal modelling on what is both a would jeopardise one of the foundations of that highly volatile but also, over time, declining resource, success. There is a very positive argument about how when you are also facing building fiscal challenges in successful Scotland is economically within the United cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 22 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Kingdom compared with other places around the with Vince Cable when he was last here in relation world. That is the point I hope the Committee will to HS2. very much take on board. Mr Carmichael: I have not. Chair: Perhaps you could have a look at that. He Q3715 Chair: Thank you very much. We’ll say seemed very much to be saying that in the event of goodbye to you, and I congratulate Stephen Farrington separation, the benefits to Scotland would not be taken on not putting a foot wrong. Perhaps Alistair would into account in drawing up the financial modelling for like to stay for a moment. the viability of HS2. In particular, he thought it was Alistair, could I just follow up the question of INEOS? then much less likely that HS2 would proceed beyond I understand there is to be a briefing later on this Manchester. If you have not had the opportunity to afternoon. We have been asked whether or not we look at it, perhaps you could do so and come back would be willing to look at the INEOS question as a to us. Select Committee. Our view was that we were not Mr Carmichael: I can certainly see the logic of that convinced that there was any value we could add to reasoning. Without seeing the modelling and its the process at the moment. Is there anything that you underlying assumptions in terms of a bald political want to add about your own activities in relation to statement, I would hesitate to comment. this? Mr Carmichael: I was a member of this Committee Q3717 Chair: It seems to me that the questions of in 2008 when they last carried out an investigation of communications, travel and so on are an important it; it was a good piece of work, which might now bear area to be explored, including the future of HS2, revisiting by all of us. I do not know, Chairman, how unless a separate Scottish Government wanted to pay you do your business, but we had a practice at the for it, from Edinburgh and Glasgow to Manchester. time of taking single-issue sessions rather than doing Maybe that is one of the issues that will be addressed a full-blown investigation. It might well be that if you by the paper that is coming out on 26 November. It is are not minded to do an investigation, there would obviously something that we would want to have still be some profit from a single-issue session. I leave raised before that in order to clarify the position. that entirely to yourselves, but given my own Mr Carmichael: On matters like that, if it is of background on the Committee I thought I would share assistance, I am quite happy to enter into it with you. correspondence with members of the Committee, or, In terms of the position today, I am very disappointed if at any point you want to have an informal that the chemical plant is to be put into liquidation. discussion at Dover House, my door is always open. We have been told for weeks that this is a business that has a future. If it has a future and INEOS are not to be part of that future, it is now incumbent on all of Q3718 Chair: There is another issue that it is us to see if we can find anybody else to take it on. appropriate to raise with you as the new man with I have already spoken to Vince Cable at the his feet under the table: the future of shipbuilding in Department for Business, Innovation and Skills, in Scotland. As you will be aware— particular to engage his support with UKTI, which is Mr Carmichael: It has been a staple of the Committee the UK Government’s main arm for generating over the years. investment from overseas. It is very early days on that. Throughout the course of the last couple of weeks I Q3719 Chair: I am glad to see that you recognise its have been in regular contact with Michael Connarty; importance, not only to my constituency but to others I have spoken to union representatives and to in Scotland. Of course, we have already produced a members of the management at INEOS. In the course paper indicating that in our view separation would of any industrial dispute, there is a limit to what shut the shipyards, but clearly that is not the only Government Ministers can and should appropriately difficulty. There is the question of when the Royal do, but we have certainly kept well across what was Navy’s next order might be announced and whether happening. Along with the Scottish Government, we or not infill work will be found to keep the yards have looked at possible different scenarios in terms going until such time as that order is placed. I presume of contingency. you are not on top of that at the moment and that I come back to the point made by the Secretary of Mr Flatt has not quite had time to bring you up to State for Energy and Climate Change in his statement speed with that particular item. Perhaps you would in the Chamber, from which I came to this Committee. look at that as well, because obviously it is an The best interests of everybody are still served by enormously significant issue. management and unions going to the table and talking. Mr Carmichael: It is early days. There is a Whatever other avenues we now have to explore, combination of different challenges in taking on a job because we know what INEOS’s statement of intent like this. I am keen to get around to as wide a range is, my preference would still be that everybody gets of different communities in Scotland as possible, but back to the table and talks. at the same time I still have to stay in the office and do my homework, and it sounds as if you have just Q3716 Chair: One of the other points I wanted to added to that. I will expect something to come pick up with you relates to HS2. I do not know winging into my box in the next day or two, so I am whether or not you have seen the dialogue that we had very grateful to you for that. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Scottish Affairs Committee: Evidence Ev 23
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt
Chris Flatt: We are in regular contact with Ministry assume you are saying that your appointment does not of Defence officials on these issues, so we can bring fall into that category, and there was a real purpose to the Secretary of State up to speed. your being appointed, but that you would rather not Chair: He has not had a briefing from you yet. share it. Chris Flatt: Not yet. Mr Carmichael: If I could put it like this, I have heard that talk before, but having been the Government’s Q3720 Simon Reevell: Obviously, it is a significant Deputy Chief Whip since 2010, and Chief Whip of event when there is a change of personnel at the level my own party, I do not recognise that description as a at which you have arrived, and it is relatively close means by which people are put into Government jobs. to one of the most significant events, if not the most significant event, in Scotland for a very long time. Q3724 Simon Reevell: So it is fair to say that as far What do you feel you are expected to bring to the as you are concerned, without identifying it, for the process between now and then that, for whatever reasons you have said, there is a purpose to your reason, it was not thought would be brought prior to appointment. your appointment? Mr Carmichael: Of course there is a purpose to my Mr Carmichael: If you will forgive me, I am not appointment. going to answer that question directly, not least because the gentlemen to my right have spent three Q3725 Simon Reevell: But you won’t tell us what it weeks asking it. I have always declined to answer it is. I am happy to take at face value that there is one. because it invites comparison. Mr Carmichael: Both the Deputy Prime Minister and the Prime Minister when I was put in this job were at Q3721 Chair: For Hansard, we ought to indicate that pains to emphasise to me that they saw it as a job of by “the gentlemen to my right” you mean the hyenas exceptional importance for the duration of the of the capitalist press who are sitting on the bench of independence referendum. I do not believe that they the accused. would have put me into this job if they had any Mr Carmichael: I actually meant our esteemed concerns about my ability to do it. It is just too colleagues from the Westminster press lobby, whose important to let any other consideration enter into it. contribution to explaining the work of Parliament has always been valued enormously highly by me in my Q3726 Simon Reevell: Is the Deputy Prime Minister time as a Member of Parliament. based at Dover House at the moment? Chair: Indeed; and some people will believe that. Mr Carmichael: He is at the moment, yes. Mr Carmichael: I think it is now clear that there has been a phase in the discussion of Scotland’s national Q3727 Simon Reevell: But that is no reflection on— life which has been a debate about a debate. The Mr Carmichael: It is while refurbishment work is debate about the debate has now, please God, got to being done at 70 Whitehall. It allows me the be over, and we have to get on and have the debate. opportunity of regular, easy access. As somebody who passionately believes that Scotland’s best interests are in remaining part of the Q3728 Simon Reevell: It is just that there is a nice United Kingdom, we have to campaign and explain to office there; it wasn’t to keep an eye on the people why Scotland’s best interests lie in remaining Department, or anything like that. part of the Union. That is going to be the focus of my Mr Carmichael: I do not think he was there to keep work for the next 11 months. It is not my job alone. an eye on me, or indeed my predecessor. There is the Better Together campaign, which is headed up by Alistair Darling, and is the main focus Q3729 Chair: I would assume that as a former Chief of the campaign to keep Scotland as part of the United Whip, you were there to keep an eye on him, as a man Kingdom, but as the UK Government we have a who not only knows where the bodies are buried, but substantial role, just one part of which we have has buried a few. I presume you were there to observe discussed today. There will be other parts coming out the leader. in the future; there are other analysis papers still to Mr Carmichael: That is a dreadful distortion of the be had. truth. As well you know, the Whips are kindly To come back to the point I made earlier in answer to counsellors for their parliamentary colleagues. Pamela about the difficulty of taking something that is chunky and substantial like this and explaining it in Q3730 Chair: Enough of fantasy. terms that are real to the lives of the people of As we often do with people who are here speaking to Scotland, that is what my job is going to be. a report, could we just clarify whether or not anything has come out subsequent to the publication of the Q3722 Simon Reevell: I appreciate that you might report that you regard as a plausible rebuttal? Have be a little shy, modest or whatever. any observations been made that you think have some Mr Carmichael: I have to say they are not accusations merit and where maybe you should have given a little I often meet. more strength to a particular issue? If you knew then what you know now, would any amendments have Q3723 Simon Reevell: I speak as I find. There was been made to the report? talk at the time of jobs being allocated on a sort of Mr Carmichael: No. I applaud your determination “You have a go”, “Your turn”, or “You try it” basis. I and your striving for objectivity, and the canvass of cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG02 Source: /MILES/PKU/INPUT/038186/038186_o002_odeth_SAC 131023.xml
Ev 24 Scottish Affairs Committee: Evidence
23 October 2013 Rt Hon Danny Alexander MP, Stephen Farrington, Rt Hon Alistair Carmichael MP and Chris Flatt the widest possible range of options and opinions, but Mr Carmichael: No. In all seriousness, it has been an I am aware of nothing that would meet the description exceptionally useful session. There has been a you have just outlined. thorough explanation of some of the issues that are going to be of exceptionally high importance to Q3731 Chair: As we said to your colleague, are there Scotland over the next 12 months. I very much look any answers you had prepared or any additional points forward to its being the first of many. you want to make before we close? Chair: Thank you very much for coming along. cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 25
Tuesday 29 October 2013
Members present: Mr Ian Davidson (Chair)
Mike Crockart Sir James Paice Jim McGovern Mr Alan Reid Graeme Morrice Lindsay Roy Pamela Nash ______
Examination of Witness
Witness: Dr Patrick Mileham, former British Army officer, Royal Tank Regiment, and writer on military history, gave evidence.
Q3732 Chair: Welcome, Dr Mileham, to this were formed after that date. William Pitt was greatly meeting of the Scottish Affairs Committee. As you enthused by the quality of the new highland regiments know, we are investigating various aspects of that came into being in the latter part of the 18th separation, its impact on Scotland and the sorts of century, particularly at the time of the revolutionary issues that need to be taken into account by those who and Napoleonic wars, when they were very much have to make the decision. We have held a number of needed. sessions on defence, in which we have addressed Those were the original raised regiments—the issues to do with Trident, shipbuilding, equipment Scottish highland and lowland regiments. There was supply and so on. We wanted particularly to look at already a cavalry regiment called the Royal Scots the question of the regiments. We have had circulated Greys, which went back to the troubles in Scotland in to us an extract from the book “Bloodline” and wanted covenanting times. It has remained in being and has to have you in to give evidence. Indeed, you were been amalgamated just the once, in recent years. recommended by the author of the book, so you come There were also various territorial regiments—not to with enormous kudos. We are expecting you to be the be confused with the militia—which were part time. world expert on these matters. They were volunteer regiments and were raised at Dr Mileham: I hope so. various times according to the perceived threats from Chair: After that build-up, could you introduce Napoleonic France, and in 1859, when a lot of yourself and give us your background? volunteer regiments were formed throughout the Dr Mileham: I was commissioned into the British United Kingdom. They were really the staple of what Army in 1966 and spent 28 years in the Royal Tank became the Territorial Army or Territorial Force Regiment, which is a very neutral regiment compared volunteers; they are now being called reserves. with what we will talk about today. I left in ’92 and There were a number of regiments of militia. This is became a university lecturer at the university of all rather confusing, but they were for home defence Paisley, so for 14 years I learned at the coal face how on a county basis and were raised within counties over Scotland works and what Scots people think; the last three and half centuries or so. They became obviously I also lived in Scotland. I am of slightly mainstream in the reforms 100 years ago, at the time mixed parentage, with a Scots granny and an Irish of Haldane, when all three types of regiments came grandfather called Redmond, which may have together as part of the British Army, whether they reverberations. The rest of me is English. Twenty-five were regular or Territorial Force. years ago I seized the opportunity to write a book on By 1914 the structure had already been worked out in Scottish regiments, which is still in print—just. In a very sensible fashion, ready for anything to some respects, I stopped about 20 years ago. The happen—which, of course, it did. At that time, Scottish regiments get rather confused after that something like 700,000 troops were able to be period. mobilised instantly, which compared rather unfavourably with 8 million in Germany, 3.5 million Q3733 Chair: Can you clarify some of the in France, 3 million in Austria and so on. We always confusion for us? The SNP have said that it is their relied on our volunteer armies, some of which were intention in the event of separation for the regular largely for home defence and some of which were for Scottish Army “to include current Scottish raised and overseas service. When we were threatened in 1914 restored UK regiments”. What would you understand and it became a war of national survival, perhaps for the phrase “current Scottish raised and restored UK the first time we had a national Army that really regiments” to mean? impinged on every locality in these islands, including, Dr Mileham: I would say that it means going back to of course, Ireland as well as Scotland, Wales and the formation of regular units from Scotland, which England. That was the basis of the regular and part- goes back to the Restoration in 1660. Those time reserve armies in 1914. regiments, which were obviously royal regiments, Many of the regiments had fine, distinguished have continued in being right up until the present day. overseas service, which was written up in regimental New regiments were raised at various times, histories and became part of the folklore and legend particularly in the 1730s, starting with the Black of Scottish soldiers in other parts of the United Watch in the highlands. Various highland regiments Kingdom. That was really the basis of the regimental cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 26 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham system of 100 years ago. Its purpose was for us to be Lowland Volunteers, which may have included the ready to fight if our shores were invaded and to fight Tyneside Scottish at one stage. overseas if necessary in defence of colonies and in support of colonial troops. Another purpose of any Q3737 Lindsay Roy: If it were up to you, Dr institution is regeneration, which by then was being Mileham, how far back would you realistically go? done on a localised basis throughout the United Dr Mileham: If they mean positively to restore the Kingdom. The stronger links with localities were in old names? places such as Scotland, because you had recruiting Lindsay Roy: Yes. drives in regimental areas that were based on the old Dr Mileham: They could go back to 1958. More clan families. That is really how the regiments came realistically, they could go back to 1968, I think it about. was, when you had three lowland regiments and four highland regiments. By then the Queen’s Own Q3734 Chair: Given the complexity of the Cameron Highlanders had merged with the Seaforth background, if you were asked to define what the list Highlanders to form the Queen’s Own Highlanders. of “current Scottish raised and restored UK Gordon stood alone, and the Argyll and Sutherland regiments” would be, what would that list comprise? Highlanders remained as one regiment. Dr Mileham: I have listed in the paper a number of what were called lowland regiments—the Royal Q3738 Chair: To take this on, what are the intrinsic Scots, the King’s Own Scottish Borderers, the Royal characteristics of any regiment that you would Scots Fusiliers and the Highland Light Infantry, which describe as Scottish? How do you identify something became part of the Royal Scots Fusiliers. You also as being Scottish? Have these characteristics changed had the highland regiments, which were all infantry over time? regiments—the Black Watch, the Queen’s Own Dr Mileham: The localisation of all regiments goes Cameron Highlanders, the Gordon Highlanders, the back to 1881. Certain anomalies cropped up. For Seaforth Highlanders and the Argyll and Sutherland instance, the Argylls and the Sutherland Highlanders Highlanders. Those were the regular regiments. joined together, although the places they supposedly came from are not close. Having said that, there were Q3735 Chair: Would your interpretation of the various pragmatic views on what a locality should be phrase “current Scottish raised and restored UK and how many troops it could sustain. The Queen’s regiments” involve that list? Own Cameron Highlanders, being in the far north- west, had great difficulty in keeping two battalions, Dr Mileham: It could well do. I am little bit for instance. The Argylls were based partly in nonplussed by the word “restored”. Does that mean as Argyllshire and, originally, in Sutherland, but they lost they see it after any referendum? the Sutherland connection and recruited heavily from Glasgow, as did the Highland Light Infantry, which Q3736 Chair: We are a bit nonplussed as well, you had been drawn from many parts of Scotland. see. We invited you here because we assumed that you would know more about this than we did. We do not Q3739 Chair: So what makes them Scottish—is it have an SNP representative on the Committee today the recruiting grounds from which they draw? and have not had any further clarification from the Dr Mileham: Yes, over the last 150 years. It is about SNP about their proposal, but we want to try to put in where they feel their family roots are in local front of the Scottish public an understanding of what communities. this phrase “current Scottish raised and restored UK regiments” might mean. In a moment, we will go on Q3740 Jim McGovern: Thank you very much for to talk about numbers, but the issue is the list of coming along. I am an honorary member of the Black names. We were not clear about whether, for example, Watch Association. My grandfather served in the simply taking the individual battalions of the Royal Black Watch and many people in Tayside, Fife and Regiment of Scotland and calling them regiments Perthshire have a family link to it. I have been to see would satisfy that criterion. Do you think that it goes various parades where they are given the freedom of beyond that? the city and what have you, but it is obvious that many Dr Mileham: I am trying to double-guess what their of them are not Scots-born. In particular, when I read thoughts are. You still have the Royal Scots Dragoon about people gaining military honours, quite a lot of Guards and the Scots Guards, but in recent times the them seem to come from Fiji. Given what you have other infantry regiments were amalgamated or said about there being a recruitment ground, does that condensed—whatever word one would like to use— still apply? into the Royal Regiment of Scotland, consisting of Dr Mileham: Yes, it does in so far as the Royal seven battalions, which was reduced to six battalions. Regiment of Scotland is now one complete regiment, One of them, the Argyll and Sutherland Highlanders, with a number of battalions with what I have has now been downsized to a single company— described as the trace elements of the old regiments. Balaklava Company. The Territorial Army is One can say that one deplores the fact that what was somewhat different, because there have been a lot of the single regiment of the Black Watch became the name changes. Going back 40 years or so, you had 3rd Battalion (Black Watch). That was decided and the 51st Highland Volunteers, which had about eight agreed in 2006. One could say that that could be companies from Orkney to London, via Liverpool, turned around relatively quickly, but would the new and obviously in the highlands. You also had the 52nd Scots Army, if that is what it is going to be, think that cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 27
29 October 2013 Dr Patrick Mileham a good thing and would the soldiers who are currently understand it but we have come to understand it. serving happily transfer or decide to transfer to other Many people accept that there has been huge social regiments of the Army with English recruiting change and that nowadays Fijians can join. They are grounds or whatever? not just in the 3rd Battalion but throughout a number What is Scottish about them is obviously the of other British regiments. They are very good rugby recruiting area; I think they are still pretty strong players and bring a certain extra dimension. recruiting areas. It is a sense of identity—a sense of story. If one reads all the regimental histories, there is Q3742 Chair: Indeed. I remember seeing the Royal a great story behind each regiment, particularly the Regiment of Scotland sevens team play in Selkirk. I Scottish regiments, because they are colourful, fought think it was composed entirely of Fijians, apart from in many parts of the world and brought back honours. one substitute, who was there as a token non-Fijian. If you go back to 1914, when all the Scottish infantry They went on to win the tournament. I think that regiments expanded enormously—from four to 17 eventually they stopped invited them because they battalions in the case of the Seaforth Highlanders— were winning all the time, so I understand the point. there was very much a local identity, and probably The clarification that we were seeking relates to the stronger links than ever with the population of the area point that Jim made earlier about personnel. If in which they recruited. In some respects, you could location does not determine whether or not a regiment say that the apogee of the regimental system and the is Scottish, and if numbers do not necessarily regiments of the infantry was in 1914, when they determine whether or not it is Scottish, we will be in could expand very rapidly and at the end of the war some difficulty when we try to identify what we can reduce down to a small number of battalions without say to people about the phrase “current Scottish raised losing the sense of regiment and identity, which I and restored UK regiments” that the Scottish think is terribly important. Government have used. When Keith Brown, who is On the issue of Scottish and British identity, all these the relevant Minister in the Scottish Government, was regiments started off being very proprietorial. In some in front of the Defence Committee here, he referred respects—this is going back 200 or more years—they to “our commitment to reinstate Scottish regiments were in the ownership of those who were previously abolished”. Presumably that could go back commissioned to run them, from the colonel down to the 1660s, which you mentioned. When I was through the officers, who had to buy their way into looking at the book “Bloodline”, I presumed that he the various regiments. It is interesting to note that the did not mean that to be interpreted literally, because Duke of Wellington had his first commission in a otherwise you would have huge numbers of new units. highland regiment, although he is not known ever to We were just seeking to clarify what you thought have worn a kilt. That was the way things were. might be the position. I will pass you to Lindsay to Over the years, everybody who is a member of the pick up some other questions. regiment, down through the senior NCOs and the junior NCOs, has a sense of ownership. Almost Q3743 Lindsay Roy: Why 1968 and not 2006? whatever it is called—I am talking about current Dr Mileham: I would double-guess that they would serving people—they own whatever battalion they be looking for votes in their constituencies for the have been to Iraq and Afghanistan with in the last few restoration in full of a complete regiment. years. I think a lot of the sense of history has gone from society. One may be quite shocked about this, Q3744 Chair: Goodness me, this is a novel concept. but whereas 45 years ago you could turn out a million This had not previously occurred to us. Tell us more. people in Glasgow to support the “Save the Argylls” Dr Mileham: If you went back to 1968, you would campaign, I do not think that today the same number be talking about eight regiments, including the of people in Glasgow and that part of Scotland would Cameronians (Scottish Rifles). Like one other English necessarily know what the Argyll and Sutherland regiment, they refused to be amalgamated when they Highlanders are. Whether or not the population feels were told they might have to and said, “We will go that it owns its local regiment is perhaps a matter of out in full glory—and that’s the end.” One could go judgment; I do not have any statistics or figures. back to eight regiments in 1968. If one went back to only 2006, it would be six or seven regular regiments, Q3741 Chair: To what extent does being based in but they would be the former regiments that since Scotland make a regiment Scottish? I notice that the 2006 have been called Battalions 1, 2, 3 and so on of Royal Scots Dragoon Guards have not been based in the Royal Regiment of Scotland, with Battalion 1 Scotland for 40 years. To what extent are they still being the Scots Borderers and so on. Scottish? Dr Mileham: One would literally have to look at the Q3745 Lindsay Roy: Roughly how many personnel demography of the regiment and see which part of the would that involve? United Kingdom they come from and which part they Dr Mileham: I believe the current figure is about 600 feel is their home. At the current time British society per battalion. You are actually thinking of between is faced with the extension of human rights and two and three brigades. That is rather in excess of inclusiveness. What is very striking about all the what they have decided they need, which is a regular regiments of the British Army is that until 50 years and reserve brigade type of formation. ago, certainly, some of them were very exclusive regiments, whether it was for soldiers or for officers. Q3746 Lindsay Roy: Do you have a figure for a That is the way things were. A lot of nations do not regular and reserve brigade? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 28 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham
Dr Mileham: You have to add in other elements such saying, “You are enlisted or commissioned into a as engineers, gunners, service support and so on. A particular regiment—that’s it.” Nowadays cross- brigade probably runs at about 5,000. They are much postings throughout the British Army are at very high smaller than they used to be, but it is a fair number levels compared with even 20 years ago. You would of troops. probably find that maybe 20% or 30% end up in more than one during their service. Q3747 Lindsay Roy: We have heard the figure of If you are trying to re-raise regiments as stand-alone, 15,000. Does that seem reasonable, with the back-up? single-battalion regiments, you have to think about Dr Mileham: Reading the papers, that was a how much cross-posting there is. If there is massive maximum. I think it includes the Air Force and the cross-posting, why bother to re-raise the old Navy. If you went for 2,000 or 3,000—whatever it regiments? You would need to look at the was—in each of those, you would be down to 8,000 demography. I do not have figures; one would have to or 9,000 soldiers. You would then have to divide those get them out of the Ministry of Defence, which is up into what used to be called teeth arms but are now quite shy about providing figures. When I last knew combat arms, which are the fighting elements of and published figures that had been given to me infantry and armour. Some aviation is armed aviation, legitimately, typically officers were commissioned at of course, so it too could be part of that. You then the age of 23 and nine months. By their 33rd have combat support arms—engineers and artillery. birthday—that is, nine years later—50% had gone. The other elements are equipment support, transport, When I was last told, the average length of service of medical services and other personal services. You soldiers was nine years—the same—but for the would have to get that figure right within, shall we infantry it was seven years. say, 8,000, if that is what they reckon their Army One gets a feel that a soldier joins and, typically, does would be. all his training, bringing him up to a very high standard. He is in a small unit, which works very well. Q3748 Chair: That is why we were trying at the He goes to—now—Afghanistan once or twice. He very beginning to clarify the question of “Scottish may think, “I might go again if enough of my friends raised and restored UK regiments”, because, with a are going,” or “It is time for me to leave.” There is a few exceptions, they are almost all infantry. We were large number of people who go in for only a short trying to clarify what that might mean—how many episode in their lives. You cannot really say that the infantry you would have. We were going to come to Army is a career as it was, say, 50 years ago, when the question of how many support units you would typically people stayed for 22 years or until the age need to bolster that and then identify whether or not of 55. This is a very good thing in so far as we have that was within the constraint of some 15,000 a very young Army and do not have lots of old, personnel overall and £2.5 billion. In terms of passed-over people who are clogging the system and Lindsay’s points, you are really saying to us that all not doing very much. It is very much in and out. these things would have to be added on top. In some respects, people like and prefer that, because Dr Mileham: They seem to have put a ceiling of if you go and take part in intense operations— 15,000 on uniformed personnel. Going the other way, Afghanistan, Iraq before it and some of the Balkan you would probably end up with three regular and companies—you have had enough of fighting other three reserve battalions. people and doing unpleasant things that your Government have said are the right thing to do Q3749 Chair: Of infantry? internationally; it is time to move on. This is an Dr Mileham: Of infantry. The issue is whether or not episode in your life to which you look back. It may you would have armour. Armour is changing. It used be part of a regimental scene whereby you keep in to be tanks and armoured cars—it is now hybrid touch with people through a regimental membership vehicles. In fact, a lot of what one might say were and headquarters, but it is a very different sort of infantrymen on their feet are now transportable. There Army from what you had 50 or 100 years ago. has been a huge hybridisation, as well as a centralisation, of arms corps and regiments. Q3751 Jim McGovern: Our inquiry relates to the possible consequences of separation of Scotland from Q3750 Lindsay Roy: Would you include in raised the UK. As I said earlier, I am in regular contact with and restored regiments the King’s Own Scottish veterans who have served in the Black Watch. I am Borderers, which merged with the Royal Scots in also in contact with the Combined Ex-Services 2006? Association in Dundee. Obviously, they can speak Dr Mileham: If they wanted to go back to that and to quite freely and pass on opinions, whereas current separate the Royal Scots and the King’s Own Scottish serving personnel may be more reluctant to do so. The Borderers, they would have to have seven infantry overwhelming opinion I get is that battalions or regiments. They would end up with that sort of regiments—certainly battalions such as the Black number of regiments. Whether that is sustainable or Watch—will no longer exist in a post-referendum they say, “Actually, the sums don’t add up,” or we go independent Scotland. Do you have a view on that? for independent companies such as the current Dr Mileham: They will exist for a generation or two, Balaklava Company, in some respects that is more in so far as there is a regiment— easily done in a large regiment because of all the interconnecting postings that you can achieve in a Q3752 Jim McGovern: As part of the UK armed large regiment. The old exclusiveness was about forces? cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 29
29 October 2013 Dr Patrick Mileham
Dr Mileham: No. You will have to wait—as we all Dr Mileham: No; that low strength reflects the use of have to wait—until any referendum takes place, technology. If you go back to the battalions raised in because I am told that there are no contingency plans 1914, they were nearly 1,000 strong, but they would whatsoever and no discussion about what might have had bayonets, rifles and some machine guns. happen to currently serving British Army regiments in Nowadays, of course, you have the whole gamut of Scotland or wherever. They have a territorial link, the modern mechanised battle group; they tend to talk which in some respects is still very strong, and about battle groups rather than battalions. Those regimental headquarters and museums. There are local numbers reflect how they are used in modern warfare. parades, events and so on, and the old camaraderie is Does that answer your question? very much still there and will continue as long as people want it to. If under a new constitutional Q3755 Mike Crockart: As it stands, with the arrangement the regiment is actually disbanded from technology that is available at the moment, is 500 a the British Army, it does not mean that there will be good size for a battalion, because it gives it no contacts back with regimental headquarters. In fact, independence and the ability to operate as a fighting those people who transfer to other units because they unit? still have a few years to serve may well still feel an Dr Mileham: The basis is really how do you identity back with their previous regiment. command, control and manage units? If I can quote Edmund Burke, “To be attached to the subdivision, to Q3753 Jim McGovern: I imagine that you, like me, love the little platoon we belong to in society…is the must be in touch with ex-services associations and so first link in the series by which we proceed towards a on. Is your take similar to mine? love to our country, and to mankind.” So, small is Dr Mileham: In fact, a couple of months ago I was beautiful. Small is where people fight together, from talking at Comrie Fortnight in Perthshire to a fairly two or three people in a fire team, to a section, to strong Black Watch and Scottish Horse constituency. a platoon. There are these feelings and they will go on for The British Army still has an officer for every platoon. several generations, even if the Black Watch, the That is the establishment, although sometimes they Cameronians and the Royal Scots—whoever—are are commanded by warrant officers. It is an important completely removed from any order of battle or list criterion that differentiates the British Army from a of regiments. lot of other armies. A platoon is commanded by an If the new constitutional settlement happened, I think officer, who is, if you like, the commander-in-chief’s the Scots nationalists would probably want to re-raise direct representative down at platoon level. Platoons in a new Scots Army a regiment that had been are formed into companies, which are roughly 100 or existence in the British Army and had been reduced 110 strong. That is a much bigger unit and there are to a battalion—(Royal Scots Borderers) or whatever it perhaps three platoons as a smaller unit, so you are is. There would suddenly be a resurgence of the old getting greater cohesion, a higher level of command, name, but it would be a very different sort of the use of a larger force and so on. At battle group or regiment. For a few years it might have a few people battalion level, you have three or four companies to who had been in the previous regiment, if they make up an independent unit, although that is not decided they wanted to leave the British Army. That really the case nowadays. Modern operations are would not be the same as constant regeneration, which conducted in hybrid sorts of formations for specific is what the regiments have been for the last 200 or tasks, and mixing and matching of various different 300 years. There would be a hiatus and they would sorts of forces—integrated with artillery, aerial have to start all over again. support, aerial transport and every other kind of Scotland would have to decide what its defence stance modern way of configuring troops—but it does all go should be. I have read a lot of the papers. It says it back to the small stuff. wants to be part of NATO, to take part in UN operations and so on. How far would it rely on combat Q3756 Mike Crockart: I will come back to that in operations, rather than humanitarian operations and a minute, because that will be important. If we can providing elements for coalitions, such as a field work from the top down, there would be a Scottish hospital to be sent off as part of a NATO contingent defence force of 15,000. You said that an Army would or whatever? Scotland would have to decide whether need to be around 8,000 or 9,000 strong; we will be it wanted to fight on operations, as its troops are doing generous and say 9,000. What proportion of that 9,000 now as part of the British Army, in intense combat in would need to be in a combat-facing role? local wars for—dare one say it?—the good of Dr Mileham: Nowadays the numbers in combat humanity. support and combat service support are very much Chair: It is reasonable for us to expect that all these higher than they used to be—if you go back 100 years, questions will be answered by the Scottish the vast majority of troops in the British Army were Government’s paper on 26 November. All will be infantry. Probably about 60%, maybe 70%, are in clear then, we hope. service support and combat support. The actual fighting elements—those troops that can engage in Q3754 Mike Crockart: I have a few questions close-quarter combat—are relatively proportionately specifically about numbers. At the moment, the smaller. average battalion in the Royal Regiment of Scotland is around 500 to 550. Historically, has that always Q3757 Mike Crockart: So it is roughly two thirds been the size of a battalion? to a third. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 30 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham
Dr Mileham: Yes, possibly. volatile and is treated in a much more volatile fashion by the Ministry of Defence. In some respects, of Q3758 Mike Crockart: If we have an Army of course, part-time soldiers do not have the same sort 9,000, we are talking about 3,000 combat troops for of identity that they would have if they were regulars. close fighting—the infantry, of which the Scottish That is probably being unfair to them, but they do not battalions are predominantly made up. If we work commit in the same way as a regular does. back to figure out how those would be divided among the present battalions and reconstituted ones and we Q3761 Mike Crockart: But the bottom line is that, went back to 1968, we would be talking about the to get the eight historic Scottish regiments to be in a Royal Scots, the King’s Own Scottish Borderers, the Scottish defence force, they will have to be, Royal Scots Fusiliers, the Highland Light Infantry, the potentially, a company within another regiment, do a Black Watch, the Queen’s Own Highlanders, the different role or be reservists, because otherwise the Gordon Highlanders and the Argyll and Sutherland maths does not fit. Highlanders; we have eight there. Effectively, you Dr Mileham: I think you will have to wait and see would have to take the 3,000 you had left and divide how they actually configure their forces after any them among those eight. That leaves battalions quite referendum and then do the maths. There would be an significantly smaller than we have at present. Would that have a knock-on effect on what they are able to enormous number of anomalies. Would the Royal do? Scots Borderers split up? Most of the soldiers—and a Dr Mileham: For health and safety purposes, you lot of the officers—have known only that battalion. could not just say, “We want any number of named Would they end up with schizophrenia—being pulled regiments,” and squeeze— in two different ways—if it were decided politically that you wanted to restore names for whatever Q3759 Mike Crockart: I am not saying this is the purpose, which might have nothing to do with real way we should do it when we start, but this seems to soldiering but a lot to do with politicising? be the way in which the Scottish defence force has been built up. I am trying to understand it. Q3762 Chair: Earlier you spoke about whether the Dr Mileham: There is so much algebra involved Scottish forces would want to take on specialist roles nowadays, not just arithmetic. Would you have two and compared them to the Nordics and so on. Would artillery regiments or one, or two engineer regiments that not depend on the Scottish forces or Scotland or one, depending on the sorts of engagements you being part of NATO or some similar alliance so that were expecting to do the fighting? You would then you had that long-term agreement about specialised have to work out what transport troops you needed, roles? If Scotland were not in NATO, that sort of where the likely operations were going to take place arrangement would be much more difficult, if not and how they would fit in with other nations in a impossible. coalition. You could say, “We will have a larger Dr Mileham: Yes, that is true—as far as I know. element of medical troops, but somebody else has got to do all our carrying on trucks for us,” or “We can’t Q3763 Sir James Paice: I would like first to go back provide our own artillery support—somebody else to the issue we talked about earlier, which was the will have to do it.” There are nations—particularly identity of individual regiments, particularly the Scots the Nordic ones—that do specialise. This is probably Guards. One of our earlier witnesses, Stuart Crawford, unfair to them but they do not actually get involved said that he would not include the Scots Guards in fighting and that is the way they like it. Our Army because, basically, they are part of the Brigade of apparently does. Guards—they are Guards first and Scots second. Do you agree with that? Q3760 Mike Crockart: So you really need to Dr Mileham: I think that is a bit of a cop-out by Stuart understand what the stance of a Scottish defence force Crawford—too difficult. “Quis separabit?” is is first before you can allocate cap badges. Effectively, that is what we are left with here. If you boldly assert particularly strong in the Guards, which is why they that you need these eight cap badges, they could just still have the Irish Guards. A lot of them actually as easily be signals regiments, artillery or anything recruit in England, particularly in the northern else. You could end up with the Gordon highland counties, as in Carlisle, but they have their own signallers. That would be a way round it. identity, which is very strong compared with that of Dr Mileham: Yes. Funnily enough, these sorts of some other regiments. They like to think of arrangements have been made in the Territorial Army. themselves as elite and, in some respects, exclusive— There were a couple of transport regiments—the but in a nice sort of way, because they will include Lanarkshire and Glasgow Yeomanry—that had heavy everybody who wants very much to join them and so duties with, I think, tank transporters. In the ’90s there on. In many respects, those five regiments are single was a great resurgence, which is quite interesting, and regiments and are kept as single regiments, but really they formed a regiment of Scottish Yeomanry, with they are one complete whole as household troops. the Ayrshire Yeomanry and the Fife and Forfar They are a total anomaly, just as a lot of things in Yeomanry. Suddenly, a couple of transport regiments Britain are anomalous and very difficult to understand were told to smarten up as they were going to be from the outside, but it works. I think Stuart has cavalry, and this they did. That lasted for only a short probably distanced himself from that particular hot time. Maybe the Territorial Army is much more potato. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 31
29 October 2013 Dr Patrick Mileham
Q3764 Sir James Paice: But, unless I have “No, we want to stay with the British Army, which is misunderstood you, you seem to be agreeing with him something we know and love”—in other words, they that they are Guards first. They are part of that choose which country. That is particularly true, brigade. picking up an earlier point, of the large number of Dr Mileham: They will tell you, yes, they are. non-British nationals that are serving in them. Sir James Paice: That is the point that I think was In that case, how would a separate Scotland be able made. to transfer regiments where the majority of soldiers chose not to transfer with them, assuming that the Q3765 Chair: So they are Guards rather than a British Government agreed to the name of the Scottish regiment. Coldstream, obviously, is in regiment? What do you see as the recruitment issues Scotland, but so far nobody has suggested that the in Scotland to enable some of these so-called Scottish Coldstream Guards should be claimed as Scottish. regiments to continue, if they had a very large drop- What makes the Coldstream Guards not Scottish but out or transfer into the British Army? Would they be the Scots Guards Scottish? able to continue these regiments from recruitment Dr Mileham: The Coldstream Guards took their name within Scotland? from the village where they just happened to be Dr Mileham: I do not think there would be a neat billeted in 1660. They were originally Monck’s transfer of regiments. I do not think the 3rd Battalion Regiment. Monck was the man who tipped the of the Royal Regiment of Scotland would immediately military balance and came over to the Restoration. detach itself and form a new Black Watch. I suspect that a large number just would not want it and would Q3766 Jim McGovern: He sacked Dundee, didn’t rather go into the Mercian Regiment or the he? Lancastrian Regiment and serve out their time— Dr Mileham: Yes, that is right. maybe in groups. The MOD would not actually speak Mike Crockart: We won’t forget it either. with me, which is understandable. I would have liked Dr Mileham: I think that explains that particular to ask it questions about any contingency planning, matter. On the Scots Guards, it will be interesting to but I am told that it has none, which I accept. It does see whether in the White Paper they are producing not want to address— next month they actually name regiments. I suspect they will not. If they name them, I wouldn’t be Q3769 Sir James Paice: If what you have just said surprised if they left out the Scots Guards because it is right—I would probably surmise the same—would is just too difficult. it be fair to say that a separate Scotland would not create the Scottish defence force just by wholesale Q3767 Chair: From discussions we have had before, transfer of existing regiments but would actually have I think we would take the view that they ought to to recruit a new Army? I must not over-exaggerate, name them, on the basis that people going into the but would it largely have to recruit its own new Army, election have to know what they are being asked to provide new training and all that goes with that? vote for or against. The idea that, “We want to have Dr Mileham: I think that is what Mr Hammond said separation, but we will tell you later on whether or to this Committee. That is what one infers from how not the Scots Guards are being claimed by a separate he answered the question. The British Army could Scotland,” is not really adequate. That is why we are keep the Royal Regiment of Scotland on its books and pressing the point. Unless I am very much mistaken, do recruiting, as much as it could, from Scotland. It you seem to be saying that it would not be reasonable would probably get quite a lot of young bloods who for the Scottish Government to claim the Scots Guards did not want to be transport troops but wanted a more as a Scottish regiment. Is that correct? exciting time, who would stay in that regiment. It Dr Mileham: I would guess that is correct. The reason might remain in several battalions. is to do with the fact that the monarch will remain Quite frankly, we do not really know what will happen head of state of Scotland, as far as I understand it. after 2020 in British defence. Obviously, we will be They would not want to disturb those sorts of part of NATO and so on, as long as NATO goes on, constitutional arrangements that include household but we have spent all of my life reducing the British troops, which is what you have for a head of state. If Army. In some respects, that is why it is such a good you are a republic or whatever, you have presidential Army, because, if you reduce, you keep your troops. standards up. Without going too far into the future, one could almost say that the critical mass has been Q3768 Sir James Paice: I want to take this on a lost. Recruiting is not terribly good at the moment, stage and pick up virtually the last paragraph of your particularly with the uncertainty and the decisions that evidence, which is about the issue of what individuals have been made by the Ministry of Defence, spurred want. If Scotland becomes independent, who knows on by the Government cuts in spending. how things will have evolved 10 or 15 years out, but We have so much to offer from our military I am sure you are right to surmise that in the initial experience throughout the world. Two weeks ago I stages the Scottish Government would have to allow made my first visit to West Point in the States, where individual soldiers to choose whether they wanted to I was telling them about how we do things differently. transfer to the Scottish defence force or to stay within I was representing one of the two best-known military the British Army. You could be faced with some of academies. There was quite a lot of talk about the these regiments or battalions—maybe the Scots officer contingent. What do you need officers for? You Guards, for example—or the vast majority saying, need them to fill the regimental posts, as I have cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 32 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham described, down to platoon level. In the bigger picture, Q3772 Mr Reid: Earlier you talked about support you need them for command headquarters of units. You listed engineers, artillery, transport, medical multinational commands. If Scotland had to start all and armour. Are there any other categories of support over again, it would be very difficult for it to build up unit that you could add to that list? quickly an officer corps that would be as good as the Dr Mileham: Only small ones, mainly to do with others, unless a large number came across, which is personnel support, law, medical, dental and probably unlikely. educational support, small arms training and so on. Sir James Paice: I think I’ll quit on that point, which sounds a good one. Q3773 Mr Reid: When Mike was questioning you, we did some calculations and worked out that the Q3770 Mike Crockart: That is the point I really Scottish defence force would need about 6,000 people wanted to ask about. Although you say that you have in these various support units. Do you think it would not talked to the Ministry of Defence— be feasible for the Scottish defence force to train new Dr Mileham: It refused. personnel or would it be dependent on attracting Mike Crockart: Even so, you have been taking a line recruits from existing British Army units? very similar to that of Philip Hammond—that there Dr Mileham: It would not surprise me. Thinking of would be a reluctance to transfer across. We have what Stuart Crawford said, there could be already had your comment on one thing that Stuart inducements that would bring over a substantial Crawford has said, so let us get another one. He number of specialists to help form new units in the reacted to that thought quite vehemently, saying that, Scottish Army. while there might be an element of “better the devil you know” about it that would keep them in the UK Q3774 Mr Reid: Do these sorts of specialists have Army, what if conditions of service in the Scottish contracts with the British Army for a certain length of defence force were markedly better, with better service that they would find it difficult to break, or housing, better career prospects, better family life and would it be relatively straightforward for them to better pay? How likely do you think those things are resign and transfer? in a Scottish defence force? Dr Mileham: I forget the exact terms and conditions, Dr Mileham: I have described the high turnover that but after a certain period from initial training they can exists, particularly in the infantry. You could say, for give notice to leave. If they are warm to operations, want of answers, that most of those young people are there is a ban on that for six months so that people not interested in better housing, better careers and so can’t vote with their feet, but terminating a career in on because they know they will be in for only a short one Army is relatively easy. period of time. I do not think lots of lures of better terms and conditions of service would attract the sorts Q3775 Mr Reid: From your experience, do you of people who are currently attracted to the British think that enough numbers would be willing to Army, including the fighting Fijians, and that all of transfer to enable them to find these 6,000 personnel? them would necessarily want to transfer. Stuart Dr Mileham: I think a proportion would, but one has obviously has a political axe to grind in so far as he to question the quality. I do not want to be detrimental would want to see lots of people transfer. He was— to what Scotland might want in the future at all, but, if dare I say it—in an English regiment, the Royal Tank there are good terms and conditions of service, would Regiment, although 4th Royal Tank Regiment was people go for a comfortable option rather than recruited in Scotland and had a pipe band and so on. continue to want to do another tour in Afghanistan When I joined, there were five Royal Tank Regiments; with a different unit or whatever? there is now one. I think Stuart is being optimistic. Q3776 Mr Reid: When you say a comfortable Q3771 Chair: Before we move off this question, I option, is that because they would not be serving in would like to go back to the issue of the Guards. If wars abroad? the Scots Guards are more Guards than Scots, does Dr Mileham: Because they might want to sit back, as the same thing apply to the artillery? You have the a number of other European nations do, and not Scottish Gunners. Are they gunners rather than Scots? volunteer for active service. However, they are there The record does not record nodding, I am afraid. for a war of national survival if the Russians or Dr Mileham: Yes. The Scottish Gunners is a fairly Chinese come over or whatever. new nickname, if you like. A regiment—I forget which it is—was nominated to recruit from Scotland, Q3777 Mr Reid: Do you think that in the Scottish told to get on with it and informed, “You are now the defence force these specialist units would be more Scottish Gunners.” Unlike the Royal Horse Artillery likely to be reservists, rather than full time? or 102 Regiment, I do not think it is in their proper Dr Mileham: Yes, they could be. It has all been rather official title. It is a sobriquet or nickname—a clouded, in so far as the reserve element is being recruiting device. It does have some reverberations increased quite dramatically—or the reliance on and brings in recruits. Some Scots like to serve with reservists is going to be increased quite dramatically. other Scots in other units. By definition, reservists are the people who have a Chair: But, as you said earlier, the Scottish element home where they have a home, so those reservists is a trace element, rather than a real issue of substance. who come from Scotland, even specialists, would be Again, that has implications for whether or not people Scottish-based. You might find that those sorts of might want to transfer over as individuals. people would leave the British Army and join, and cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 33
29 October 2013 Dr Patrick Mileham may be a valuable contribution to start up the new honourably discharged from the British Army and Army. honourably taken on. It might be not just individuals but a group of people with an expertise who could Q3778 Mr Reid: Yes, but if they are going to be form the nucleus of a new gunner regiment in reservists that implies that they will have another job Scotland. That is possible. as well. Do you think that the Scottish defence force would be able to attract people who perhaps have a Q3780 Chair: If, for the sake of argument, nobody full-time job in the British Army and still several in the combat support arms or the combat service years of service that they could have if they wanted it? support arms wanted to transfer, you would be left Dr Mileham: As reservists? entirely with an infantry force that was good for the Mr Reid: Yes. Would it be able to attract them to tattoo and parades but would not be able to fight come to Scotland as reservists and find another job anybody because it would have no support—unless as well? it got all the support from somebody else in NATO. Dr Mileham: It might, but one has to look at the way However, since it is not guaranteed that they would in which the current move towards reliance on be in NATO, effectively they would be powerless. Is reservists actually happens and whether one reads— that a reasonable set of assumptions? shock, horror—that it is not working or whether one Dr Mileham: If there were a yes vote, I think the is pragmatic and calm about it, saying “Yes, it will.” negotiations with the Ministry of Defence in London We do not really know. Of course, the basis of all for all the three services would be on the basis that service in all British Armies, except for a couple of the 7,000 or 8,000 people recruited north of the border times in their history, has been volunteers. That is who are in Scottish regiments or other regiments and what makes the Army professional. corps of the British Army would be given the option On regeneration and mobilisation, could we mobilise individually. There would be no question of saying, the whole of the British population for a war of “Let’s transfer a platoon across, even if we have to national survival, as we did 100 years ago? Will that pack that platoon with applicants.” I think it would be face our children and grandchildren at some time? We on an individual basis. There are issues such as have been spared so far, but that is at the back of one’s whether or not pensions rights would be carried mind. If you have an existing Army, it can regenerate across, all of which would have to be negotiated. because it has that background, experience and so on. I guess that there would be a huge amount of I have been listening to the commander of Joint confusion within the ranks of the Army officers and Forces talking about the fact that we may have to soldiers. There would also be a lot of confusion in think about mobilisation for real for defence of the Scotland about what they were getting. Those who UK, with or without Scotland. We do not really know wanted it would see it coming, while for those who whether Scotland would contribute massively to the did not want it, it would be a fait accompli; they defence of our islands, seek neutrality or do something would have to accept whatever number of individuals quite different. came across the border. Yesterday I had a conversation on the telephone with Peter Snow, who is rather good Q3779 Chair: I want to follow up on one of the on voting traditions and so on. He said that he thought points you have just made. You mentioned as an aside there would be an enormous amount of confusion the possible Chinese invasion. I know that the Chinese within the Scottish electorate about what they were have a half-share in Grangemouth refinery, but I had getting from defence—quite apart from every other not thought about their possibly using it as a basis for Department, of which there are dozens—and sort of invasion. Maybe if we ever get Ineos in front of us inheriting by people coming across as individuals or we will seek clarification on that. what they were setting up anew. Despite any number I wanted to ask about the combat support arms and of papers, in theory, in the period after the referendum the combat service support arms. We have heard that, and before the actual schism, people just would not for the combat arms, there are units that the Scottish know what was going to happen. I suspect that would Government can lay claim to; we discussed the Scots go on for some months or maybe years afterwards. Guards. Unless I am mistaken, there are no combat support arms or combat service support arms that are Q3781 Chair: I want to pursue the question of terms in any way identifiably Scottish. If there were a and conditions, because service personnel will be negotiation between a separate Scottish Government entitled to vote. Is it reasonable for us and for the and the UK Government, there is no unit about which electors who will vote in the referendum to know what the Scottish Government could say, “We want that sorts of terms and conditions would be on offer from back because it has a Scottish flag on it.” Establishing separate Scottish armed services after separation in all of these—which is two thirds of the Army—would order that when they cast their votes—particularly the be entirely dependent on the transfer of individuals, service personnel—they are not simply getting a pig wouldn’t it? There is no guarantee that the individual in a poke? Is it realistic for us to ask the Scottish mix that came forward would be in the right Government to produce that before the referendum? proportions, with the right skill mix or anything at all? Dr Mileham: To be kind to individuals, yes, you Dr Mileham: I think that is right. As I said, the ought to press the Scottish Government on that. Scottish Gunners is a nickname, not an official name. Chair: Good. I forget which regiment it is, but you might find that Dr Mileham: How far they would negotiate with the quite a number decided to transfer across to a Scottish Ministry of Defence I would not be able to answer, Army and that some deal was done—they would be because the MOD will not speak to me. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 34 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham
Q3782 Chair: Can we just pursue that? I understand fighting spirit and, often, their lives or limbs. They are that there will be a negotiation with the Ministry of supported by the local population, which is a Defence on various things, but if they want to attract tremendous thing. You might say this is being a bit people and, therefore, want people to express a view cynical, but that is because—dare I say it—so many that they want to come to separate Scottish forces, of them are being killed and injured. In my service, surely they ought to spell out what their offer is. even in Northern Ireland and so on, it was not on the Presumably their offer would not be dependent on the same sort of scale at all. Ministry of Defence. The question of transfer of Can you imbue fighting spirit from a standing start? I pension rights might be dependent on the Ministry of am not sure you can in a liberal democracy; it is rather Defence, but I would have thought that lots of things difficult. The traditions of fighting spirit come from such as what the salary level and level of housing continuous operations. Since 1945 Britain has fought will be, and so on, could be spelled out quite easily in more wars and operations than any other nation— beforehand and would be relevant to Scottish or not necessarily in terms of scale, but in terms of the serving personnel who will have a vote in the number of operations. The British Army has fought in referendum. Thinking aloud, as it were, is it therefore more parts of the world than any other force in history. reasonable for us to ask the Scottish Government to Rightly or wrongly—dare one say rightly—that has clarify all these points before the referendum is held? given us a tremendous continuity up until now. The Dr Mileham: I think so. I think they would probably continuity was easily understood by individuals and do that anyway, otherwise they would lose any votes the population up until about 30 or 40 years ago. You they were expecting from serving Scottish personnel, had wars, neat campaigns and understandable attacks who would be confused about what on earth the offer and defences—things happening that you could was likely to be. describe easily. Nowadays if you go to Afghanistan, it is OP Telic 13 or 14. What is the difference between Q3783 Chair: So it would almost be a dereliction of 14 and 6? Is it a continuum? Is it a whole story, with duty for the Scottish Government if they did not a beginning, middle and end, or is it just a pull-out produce this in the run-up to the referendum. when we think we may have given the Afghan people Dr Mileham: It would be a risk that they would have their own fighting spirit of the right sort? It is all a to take. I do not know how far one can guess whether matter of this will-power to take risks. their defence White Paper will spell out these things. Chair: We will try to clarify what it is reasonable to Q3785 Pamela Nash: I want to go into a bit more expect in these circumstances. What you have said has detail. If Scotland were to leave the UK, that shared been very helpful in clarifying matters for us. history would still be there for those individuals, some might argue. Why don’t you think that fighting spirit Q3784 Pamela Nash: In the written evidence that would carry over? The shared history would still be you submitted, you drew the conclusion that reigniting there. Is it because the future would not be there for “a retrospective brand of ‘fighting spirit’…would them and there would be a big difference in the type be…hard to achieve.” My understanding of fighting of overseas deployment that those forces would see? spirit is that it is something born both of a shared Dr Mileham: I do not think the British Army has ever British history and tradition and of the links and been as unified in whole-Army corporate spirit as it is affinities with the Scottish regiments of which they now. It would have been easier to have taken the are a part. Could you expand a bit on your Argylls, the Black Watch and the Royal Scots into a understanding of fighting spirit and why you think that new Scottish nation 50 years ago than it would be might be difficult to achieve in a separate Scotland? now. I do not think the population are as fussed now Dr Mileham: Fighting spirit is all about will-power as they would have been 50 years ago. and whether or not you want to be brave and bold, do You ask about fighting spirit, but it is pretty your duty and carry out your function, whatever it is. specialised nowadays. You are not allowed to do much It is a variable. It draws strength from other people fighting. The constraints of the law of armed conflict within your unit. This is why we talk about sub- and military ethics—I do a lot of work on military units—that is where the fighting spirit really exists. ethics now—are such that it is quite difficult for a You can conduct various discussions with people who young person to go on to a battlefield and know have come back from Iraq and Afghanistan, asking exactly what he is and is not allowed to do. Whereas the question and thinking about wars that are legal, in the past a private soldier did not have any honourable, the right thing to do and so on. You do responsibilities other than to do what he was told to not go to war unless you expect to be successful; that do—if he did not do what he was told to do, he might is one of the criteria. If you ask young NCOs and get disciplined—that all changed at Nuremberg in officers, “What was the success of your last 1945, when accountability was put right down to the deployment?”, their answer invariably is, “To bring individual. We know that, and all our people are pretty everybody back.” They are fighting for each other. good and have a pretty well-tuned conscience. Every They do not necessarily understand—and I do not now and then things go wrong, as they will, but by think the British population really understand—what and large the soldiers know what they have to do. we are doing in Afghanistan, although the British Fighting spirit is one thing. Aristotle talked about the population seem fairly comfortable with it and they mean between extremes—deficiency and surplus. I support the troops. They know it is now going to end. can be told by a sergeant, “Sir, we have to use The local covenants are there, which is a way of courageous restraint in the fighting that we do against expressing support for people who have given their the Taliban.” In some respects, they are much more cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Scottish Affairs Committee: Evidence Ev 35
29 October 2013 Dr Patrick Mileham comfortable with that sort of war than they were with stay in some sort of armed forces, they will want the Iraq counter-insurgency, where you had areas clarity. The onus will be on the Scottish Parliament to where things were quiet and there was humanitarian make those arrangements clear before the referendum support and gentle policing, but the next moment there happens. If it does not, it will not get as many votes would be a hot firefight a block away. Switching the as it would have got if it had made them clear. rules of engagement from one to the other means that you have to understand what fighting spirit is, how far Q3789 Pamela Nash: I have one last question, that can go and how far it has to be restrained when which goes back to the issue of fighting spirit. Do you doing what current soldiers are expected to do. think that there is a contradiction between the SNP Can you transfer fighting spirit? You cannot be sure who are so adamant about rescuing and restoring our of that, as you might get so many people coming regiments, on the one hand, and saying that our armed across to the new Scots Army who just want comfort forces will not be engaged in overseas fighting, on the and all the benefits—and the parades, tattoos and so other? Is there any possible reason that they might do on. Incidentally, I took part in the tattoo in 1964, so I that other than just to win votes? know the exuberance of that— Dr Mileham: I guess that the SNP want to bring comfort and solace to people who might be worried Q3786 Chair: But it could not be described as by saying “We will have armed forces. In theory, they fighting spirit. will number so-and-so,” or whatever it will be in their Dr Mileham: Well, yes. White Paper. I suspect that implementing the White Graeme Morrice: After a few drinks, you never know. Paper will be enormously difficult or very difficult. Maybe after a few years they will bring up credible armed forces on their own and they will draw in some Q3787 Pamela Nash: In your answers to Mr Reid individuals, but I suspect that most of those and the Chair, you touched on terms and conditions in a new defence force in Scotland. What do you think individuals will have left by the time the armed forces those would have to be to attract some of our armed are usable and deployable. It might be two or three forces away from the remainder of the UK’s armed years, or it might be five or 10 years—I do not know. forces? There might be a change of plan. Who knows? Dr Mileham: “Many a mickle maks a muckle”—pay. The terms and conditions of the current military are Q3790 Graeme Morrice: You also said in your pretty advanced compared with those of all other evidence that you thought it was unlikely that the occupations. Having said that, there are the difficulties MOD would agree to the transfer of the three named about how far you can order people into danger and regiments—the Royal Regiment of Scotland, the what risks they will take when duty of care and health Royal Scots Dragoon Guards and the Scots Guards. and safety considerations abound. The abolition of the Why did you say that? Crown Protection Act about 20 years ago means that Dr Mileham: Because on current planning they are to now people can take the Ministry of Defence to court, remain on the ORBAT—the order of battle—up to which they could not do before. In some ways that is 2020. The MOD would not show any concession that a problem for the military, but it does keep modern anything might change. You would have to ask them people relatively content that they are being looked whether in the event—in two years’ time—it will. after. They will not be committed unless there is that They will not tell you at the moment. reciprocal commitment. Employment law is as strong Graeme Morrice: That is a very clear and as anywhere—probably stronger in some respects—in straightforward answer. the current British Army. I suspect that a new Scots Army would immediately transfer all those provisions Q3791 Chair: Can I clarify the point? If the Scottish across. The element of uncertainty about the new Government continue with their policy of expelling Scottish armed forces might be assuaged by higher wages and better pensions. Trident at the earliest possible opportunity, is that more or less likely to promote an amicable solution to the issue of the regiments? Q3788 Pamela Nash: Can I be clear? When I have thought about terms and conditions for the military, I Dr Mileham: I am sorry. If the Faslane base— have been thinking about how they decide whether to Chair: How do you think the dispute over Trident is stay with the British Army or come into a Scottish likely to impact on this? defence force. Do you think that the yes campaign has Dr Mileham: In so far as funding both north and south to make this clear beforehand to allow them to vote of the border is a factor, it could impinge. The cost of in the referendum in the right way, so that it is not moving Trident from Faslane would be enormous. just a choice they have to make about their Who would pay for it? Would there be contributions employment afterwards? from the joint pot that currently exists to help to move Dr Mileham: Going back to what Peter Snow said, in it? Whether there would be money in Scotland to raise order to avoid confusion both among current serving and fund these regiments is a major consideration. military people and the Scottish electorate, these You have asked me mainly to talk about the Scottish things will have to be made much clearer in the lead- regiments, but of course what happens with them has up to the referendum. In many respects, you are implications for other parts of the defence posture of asking 10,000 servicemen to vote for something carte Scotland, and vice versa. The naval questions would blanche. If they want to protect their position and to impinge on land and air forces as well. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG03 Source: /MILES/PKU/INPUT/038186/038186_o003_odeth_SAC 131029.xml
Ev 36 Scottish Affairs Committee: Evidence
29 October 2013 Dr Patrick Mileham
Q3792 Graeme Morrice: Getting back to the three there are any answers you had prepared to questions regiments, do you think the British Army would be that we have not asked. Are there any issues that you more likely to disband those regiments than to allow want to raise with us that we have not touched on so the serving personnel to choose? far and that you want to bring to our attention as part Dr Mileham: I do not think I can give an answer to of our discussion of these subjects? that because I do not think it has been thought Dr Mileham: The most important thing that might through. Every officer in uniform and every civil continue in your minds after this conversation is this servant has been told not to make contingency plans. business of identity. You could say that these I received a letter saying they were not going to talk regiments carry enormous identity—and very tangible to me, that they assumed there would be no change Scots identity, almost regardless of who is in them. It and that there was no planning. is the same in Scotland as in other parts of Great Britain. Identity, 50 or 100 years ago, was very Q3793 Graeme Morrice: I understand where you clear—national identity, regimental identity or identity are coming from on that and that is our understanding with a party, trade union or whatever. Nowadays as well. If it were to happen, what would disbandment people have multiple identities—occupational, social, or transfer mean for the legacy and traditions of the recreational, as consumers, as customers of the Scottish regiments? national health service or whatever. People feel they Dr Mileham: If the named Scottish regiments started have multiple identities, depending on what they are up phoenix-like, shall we say, north of the border and thinking about at the time. in Dundee, Glasgow or Edinburgh, and there was a I took my grandchildren to an outdoor exhibition just will within the population to re-raise them, would the the other day and felt very grandfatherly. I feel as an spirit of the regiments, if one dare use the word—yes, academic and as a former soldier. I feel English, with one dares—immediately, like a dove—I am sorry, I a bit of Scots and a bit of Irish. That is the difficulty am getting my metaphors mixed up. with identities. The Scottish referendum is probably Chair: Like an eagle, possibly, rather than a dove. all about trying to form some sort of identity for the Dr Mileham: Like an eagle. Eagles are symbols of existing Parliament and for the existing arrangements emperors. Unfortunately, we do not have any with the law and those things that are devolved. The emperors left, although, having said that, of course, identity of something as life and death, at bottom, as there are three eagle feathers for each chief. fighting troops—not just decorative troops—is Fighting spirit means fighting spirit; it is something perhaps slightly different. tangible or it is nothing. Would that transfer by will The whole exercise is to do with identity. We love our of Government, by will of a party, by will of the nation, our Army and our Parliament for what they populace or by will of the soldiers and officers—who are. They have identity and we are in accord with all knows? I would think that the soldiers might say, of these institutions—social, political, economic and “This is a bit of a laugh. Are you really expecting us defence. The armed forces have a very strong identity to buy this?” They are pretty wise, but they would and commitment. They are in a special category and be treated pretty circumspectly by everybody. It could are doubly trusted. You can read that from the work. You might suddenly find that the Black Watch commissioning document. Ten days ago I was at West lives again north of the border, totally Scottish, with Point, where there is a thing that says in stone, “I will no Fijians—unless, inclusively, Fijians have to be not lie, steal or cheat.” One wonders slightly whether there, with their male-voice choirs and rugby. they are above their Government in some of the things It is difficult to give you a straight and serious answer. that happen in international relations. I am sorry—I There is a narrow margin between deadly serious stuff should not have said that, but I have. and the symbols and traditions that are carried I think the identity is very strong. It is still strong, forward. Two weeks ago I was in the States at Notre maybe in trace elements, and still has resonance with Dame university, which says that they are Fighting localities. The Royal Regiment of Scotland may be Irish. It has a football team that is called Fighting not quite as some of us would wish, but it does seem Irish, which is something to do with the civil war and to work, and that is what has happened. Whether one an Irish brigade nearby. It has a pipe band with tartan, can go back sensibly I would doubt. The identities are kilts and so on—and rather strange hats, compared very different now from what they were. They are still with our strange hats. Notre Dame kilted, or whatever strong, but in different ways. they call themselves, are there. Does it mean Chair: That has been very helpful. Thank you very something? Yes, it does. Do people die for that sort of much for coming along. We will produce a report in thing? That is a slightly different matter. due course. I am sure you will be quoted therein.
Q3794 Chair: If there are no other questions, as I said to you earlier, at the end we always ask whether cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 37
Tuesday 12 November 2013
Members present: Mr Ian Davidson (Chair)
Graeme Morrice Mr Alan Reid Simon Reevell Lindsay Roy ______
Examination of Witnesses
Witnesses: Rt Hon Alistair Carmichael MP, Secretary of State for Scotland, Dr Andrew Murrison MP, Parliamentary Under-Secretary of State for International Security Strategy, Ministry of Defence, and Margaret Porteous, Deputy Director (Policy) in the Scotland Office, gave evidence.
Q3795 Chair: Welcome to this meeting of the One thing is for sure. We will need to address any Scottish Affairs Select Committee. As you know, we contingent defence issues that may arise. That is going have been conducting a series of hearings into various to require continued investment in high-tech, complex aspects of the vote on separation that is due next year. equipment to sustain our armed forces. I am afraid I In particular, we have been looking at the various am unable to add more than that since I do not have documents that HMG has produced in relation to a crystal ball. aspects of separation and today we want to look at the report on defence. Q3797 Chair: Is it reasonable for me to take that Before we do so, could I abuse my position as the answer as meaning yes, that the Royal Navy might Chair and say as the local Member covering the possibly have a need to build ships after you have Govan shipyards how much I welcome the completed the Type 26? announcement by the Government that they would Dr Murrison: This country has been building wish, if all goes well, to place the orders for the Type warships for centuries. I see nothing from where we 26 on Clydeside. I would particularly welcome the are at the moment to stop that continuum. We will new order that was placed for the OPVs in order to clearly have to continue building platforms of one sort provide a carry-over. or another depending upon the threat assessment that One of the things that I, again, particularly want to we make. It is worth while stating that the Type 26 is welcome—and in a sense I am surprised that this has a work in progress and it is going to sustain our frigate not received more attention in Scotland—is the fact needs for many years into the future. that the company, with the Government, have agreed Mr Carmichael: Perhaps I could take a slightly to move blocks of the aircraft carrier from different tack to your question. You and I were both Portsmouth, even at a time when they are facing some at the meeting with BAE Systems’ senior management job loss, to the Clyde in order to keep the Clyde fully last Thursday. No doubt you would have been as functioning as a shipyard. That is particularly pleased as I was that they were able to say that the recognised and welcomed by my constituents and announcement last week gives them a work stream others. We will come on to that in the questions. that takes them through to 2034. That is a substantial We are running a little late. I understand, Dr Murrison, period of time for a shipyard to have encompassed, that you did want to make an opening statement but you are happy to waive that. Perhaps you could let us and to be able to offer that sort of stability to your have it for the record and we will put it into the constituents and others employed in these shipyards is documents. Mr Carmichael, I understand that you no mean consideration and it is something on which have a brief statement that you want to make. we should put some quite positive emphasis. Mr Carmichael: There is nothing that would be in the Chair: That is very fair. I also recognise that the statement that will not be covered elsewhere in the convenors of the work force also indicated that they evidence. Given the pressures of time, we would be had had 14 good years with the union building ships as well to carry on. for the Royal Navy with the carriers, and before that the Type 45. We are now thinking ahead and Q3796 Chair: I would start off by seeking wondering what comes after the Type 26. clarification from Dr Murrison on a shipbuilding question. Do the UK Government have proposals for Q3798 Simon Reevell: In the event of a yes vote in a shipbuilding capital programme after the completion the Scottish referendum, where will the Royal Navy of the Type 26? build its warships? Dr Murrison: Clearly, we are going to have to Dr Murrison: That is a hypothetical because, of consider a succession of platforms well into the future. course, we are not planning for a yes vote next year. That is the nature of defence; nothing, I’m afraid, stays the same. Of course the Queen Elizabeth class Q3799 Simon Reevell: So 12 months or so from the is going to be with us for many decades to come and, possibility of a yes vote, for a country that has been ultimately, that capability is going to have to be building warships for hundreds and hundreds of years, replaced. Defence is changing very rapidly. If we are as you have just told us, no one has given any thought talking in the context of decades, it is very difficult to to where they might be built if the vote goes one of predict what defence will actually mean that far out. the only two ways that it can go. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 38 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Dr Murrison: The Government’s position is that we Q3807 Simon Reevell: What sort of warships would are not planning for a yes vote; that is the position. be able to be built? Dr Murrison: The straight answer to your question is Q3800 Simon Reevell: You are obviously quite that of course we could build complex platforms in determined then, if you have not given any thought to the residual UK. warship building, and you are definitely not planning at all. Q3808 Simon Reevell: Where would that happen? Dr Murrison: From a defence perspective, the Dr Murrison: Portsmouth is certainly possible. argument in favour of the Union is just overwhelming. If anybody was concerned about defence and security, Q3809 Simon Reevell: Wouldn’t that mean they would not go anywhere close to independence reversing the policy that has just been announced? for Scotland, since both for Scotland and for the Dr Murrison: I suspect you would have to invest residual UK it would have the most profound significantly in complex platform building in consequences. Portsmouth.
Q3801 Simon Reevell: What if you were English Q3810 Simon Reevell: To answer my question and you were wondering, in the event of a yes vote, directly, going back to it, the question was, if the where your warships would be built? What would be announcement that we have just had was carried the answer to that? through, in the event of a yes vote would there be Dr Murrison: Well, I am English and I am deeply anywhere in residual UK—in other words, would concerned by any suggestion that we might have a yes there be anywhere in England, Wales or Northern vote next year. I think it would be massively Ireland—where warship could be built? damaging for my security as an English Member of Dr Murrison: They could be built, yes, of course. Parliament representing an English constituency. Q3811 Simon Reevell: Where would it be? Q3802 Simon Reevell: Is that because there is not Dr Murrison: I am certainly not going to make any anywhere in England, Wales or Northern Ireland to suggestions, but Portsmouth has been used a lot. build warships? Dr Murrison: No; it is because Scotland makes a very Q3812 Simon Reevell: Is it a secret place? important contribution to collective defence. It always Dr Murrison: No; of course it is not secret. Warship has done and I hope very much that it will continue building is currently under way in Portsmouth. You to do so. could suppose that, in the event of a yes vote next year, the residual UK might wish to continue building warships in Portsmouth. Q3803 Simon Reevell: If the plans as announced go through, in the event of a yes vote, would there be anywhere in England, Wales or Northern Ireland to Q3813 Simon Reevell: So the way to continue build warships? building warships for the Royal Navy within England, Wales or Northern Ireland would be to reverse the Dr Murrison: We do build complex platforms in what announcement and to recommence building in would be the residual UK at the moment. Portsmouth. Dr Murrison: No; there is no intention of reversing Q3804 Simon Reevell: I was not asking about at the any announcement. moment but if the plans as announced went through. Dr Murrison: It is important to note that warships are Q3814 Simon Reevell: I am not suggesting there is. not built by the Government but by industry. Dr Murrison: The UK Government is planning for the continuation of the United Kingdom, and the Q3805 Simon Reevell: But they are built for the Clyde is the right place to build complex platforms of Government though, aren’t they? From the Royal this sort. Navy perspective, if there is a yes vote, is there Mr Carmichael: As long as it is part of the United somewhere in England, Wales or Northern Ireland that Kingdom. would have the capacity to build warships? Dr Murrison: The important thing is that article 346, Q3815 Simon Reevell: Without reversing what has which at the moment allows us to insist that complex been announced and reopening the facility at platforms are built in the UK, would no longer apply Portsmouth, is there anywhere else in England, Wales in the same way in relation to contracts placed in or Northern Ireland where we could build warships? Scotland. Dr Murrison: The facility in Portsmouth has not been closed, has it? Q3806 Simon Reevell: We will come on to article 346. I imagine that you know the answer to this. If Q3816 Simon Reevell: We have been talking as if it you do not wish to answer the question, do say so. Is had. Put Portsmouth to one side. Is there anywhere there anywhere in England, Wales or Northern Ireland else in England, Wales or Northern Ireland except that would have the capacity to build the warships that for Portsmouth? we are talking about? Dr Murrison: It depends very much upon what you Dr Murrison: It depends what sort of warship you want to construct. At the moment we are building want to build. complex platforms in Portsmouth. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 39
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3817 Simon Reevell: You understand what we Q3822 Simon Reevell: We have come full circle. If mean by a warship, don’t you? Perhaps you don’t. If there is a yes vote, where will that sovereign I say “a warship”, do you understand what I mean capability be? by that? Dr Murrison: Ah, well, it will be in the residual UK. Dr Murrison: I have served on quite a few warships in my time. Q3823 Simon Reevell: Yes, I guessed that bit, but Simon Reevell: Excellent. just being a bit more specific— Dr Murrison: If you are talking about a Type 26—a Dr Murrison: We are not planning for independence, complex platform of that sort—or a Queen Elizabeth so I cannot really answer your question. class warship, as you know, they are being built in a number of locations in modular form and assembled Q3824 Simon Reevell: How do you know you will in Scotland. That is how the Queen Elizabeth aircraft have the capacity if you do not know where it will be? carrier arrives, for example. Dr Murrison: Because we currently build complex platforms in what will be the residual UK. Q3818 Simon Reevell: Let us take the Type 26. In England, Wales and Northern Ireland, except Q3825 Simon Reevell: We are talking about Portsmouth, is there anywhere else we could build a Portsmouth then, aren’t we? Type 26 at the moment? Dr Murrison: That is where we are building complex Dr Murrison: You could probably build it at Barrow, platforms at the moment. I suspect. There is shipbuilding at Barrow, for example. It is not configured for that at the moment Q3826 Simon Reevell: It would just take a lot less and you would have to invest fairly heavily in any time—that’s all—if the answer is Portsmouth, the alternative site in order to build platforms of this sort. answer is Portsmouth. We have invested very heavily on the Clyde, Dr Murrison: That is where we are building complex obviously. British Aerospace and others have put a platforms at the moment. In the event that there was great deal of money into investing in complex independence, it is possible that industry might decide that they would be capable of building complex platform construction in Scotland. You cannot simply platforms or parts of those complex platforms decide you are going to build a warship, for example, elsewhere in the residual UK. in the port of London and crack on the next day. You would have to invest heavily in that. Q3827 Simon Reevell: But if you are confident of retaining a sovereign capability, either your Q3819 Simon Reevell: That was what I suspected confidence is based entirely on optimism, or you have to be the position. At the moment we have the facility calculated how to do it and hence you are optimistic in Portsmouth. The suggestion is that that facility will about the prospect. If you have calculated how you no longer be available. If, in the event of a yes vote, are going to retain sovereign capability, as opposed to the Royal Navy wished to build warships in England, just simply deciding that you will, you must have an Wales or Northern Ireland, it would necessitate a idea about the location and the nature of that reversal of that announcement in order to build in capability. If you do not want to share that with us Portsmouth. that is fine, but it would be easier just to tell us that. Dr Murrison: It is important to note, of course, that Dr Murrison: With respect, your question is these facilities are not owned by the Government.1 somewhat simplistic in that complex warships are the They are operated and run by industry. We do not do product of construction on a number of sites. That is state industry in the way that your question implies. the reality of it. Nothing exemplifies that better than the Queen Elizabeth class, which is being Q3820 Simon Reevell: So you would be happy to manufactured in a number of sites and assembled in place an order for a warship with a company and let Scotland. I would anticipate that some future them just build it wherever they want to. hypothetical class of warship might be constructed in Dr Murrison: No; that is not what I said, but it is for a similar sort of fashion. The important thing to note industry to own, operate and equip facilities according is that we have capability, or would have that to the contract that is placed. capability, in the residual UK and that in the event of a yes vote next year article 346 enables us to continue to build complex platforms in what would then be the Q3821 Simon Reevell: Is there no discussion at all residual UK. between Government and industry about where a Mr Carmichael: Perhaps I can assist the Committee warship might be built if the order is placed, or is the here. I fear we are taking something that is essentially order just placed and then it is up to the company? quite simple and making it unnecessarily complex. Dr Murrison: The important thing as far as we are Last week the Secretary of State for Defence made it concerned is that we retain a sovereign capability—in quite clear that the United Kingdom will build its other words, the ability to build complex platforms in warships within the boundaries of the United the UK. That will not change in the event that there Kingdom. We have done that with a few exceptions is a yes vote next year. since the beginning of the 20th century, and that will 1 BAES operates the shipbuilding facilities within Her remain the case. Those who wish Scotland to remove Majesty’s Naval Base Portsmouth under a 125 year lease herself from the United Kingdom have suggested that from the MOD which began in 2002. in fact there would be no option but to continue cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 40 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous building warships on the Clyde. In fact, what Dr fine vessels. That is where our capability lies. Murrison has explained today is that there would However, the original point remains and that is— remain capacity elsewhere within the rest of the United Kingdom. I think that really is as much as Q3831 Chair: Sorry, “the best place”—I understand Government planning ought to look at, at this stage. that, and I appreciate the compliments, as I am sure the work force do. However, we recognise a Q3828 Simon Reevell: Can I just disagree with you smokescreen when we see one. It was also said that it slightly? I understand that it is being said by some was the only place to build them. Is that correct? people that the only capacity is on the Clyde and, Dr Murrison: That is something that was said in the therefore, whatever the British Government might say, Scottish Parliament. the ships would have to be built on the Clyde, come Chair: Yes. what may. You are saying that that is not right and Dr Murrison: I would question that assertion because that we would retain a sovereign capability within the we are building warships in Portsmouth, and residual UK. Portsmouth has been mentioned. You could strengthen that argument by explaining clearly where that capability would be, because, Q3832 Chair: Is it true to say that the statement otherwise, people might say, “They are telling us there made in the Scottish Parliament about the Clyde being is a sovereign capability being retained, but they are the only place to build them is incorrect? very hazy about where it is going to be.” I am just Dr Murrison: No; it is not the only place you could giving you the opportunity to deal with the people build complex warships of this sort—of course not. who say that it has to be on the Clyde because there is no alternative by saying, “That is not right. We are committed to this policy and we could do it at Q3833 Chair: That is what we wanted to clarify. It location x.” would be much easier if you had just said that at the Mr Carmichael: With respect, we are in danger of beginning. Let me clarify another point. Can you tell coming round in full circle here. Dr Murrison has us your understanding of what article 346 means? given one very clear option, which is Portsmouth. Dr Murrison: Article 346 allows us to derogate from There are others within the rest of the United European Union law for national security reasons. It Kingdom, including Barrow, for example, where work means that, if we consider it to be necessary, we can could be carried out. Given that at the moment the place contracts where we want to place contracts Clyde remains within the United Kingdom, while it without going out to tender. In other words, it avoids does remain within the United Kingdom, that is the the need to put bids out to competitive tender across obvious place to build the warships. Europe.
Q3829 Chair: Let me clarify two things. We do not Q3834 Simon Reevell: Let me ask you about that in want to force the Minister to take too many evasive terms of the process. Do you seek an exemption in manoeuvres. We recognise that you do not want to relation to the specific subject of the tender and then outline everything that the Government might want to simply find someone to manufacture for you? In other do in the event of separation, but we need to have words, do you begin by seeking the derogation and some clarity. In particular, first, is it going to remain then you place the order so that you are completely the UK Government’s view that they want to retain free to place the order with whomsoever you choose? sovereign capability for building complex warships in Is it simply something that applies within the context the event of a decision for separation? of the EU, or is it something that, once it bites because Dr Murrison: The straight answer to that, of course, of the EU rules, applies to a tendering process that is yes. There is no evasion at all. I think the Secretary can extend beyond the EU? of State has made that very clear. Dr Murrison: You first have to work out what you want to achieve—in other words, the platform that Q3830 Chair: Just because he says it does not you want. That is a process that will be carried out necessarily mean to say that people hear it or believe within the UK Ministry of Defence. It is a it. We wanted to make sure on the record in this Government function. Having done that, you need to Committee, before we write our report, what the try to work out whether this is something that is position was as you understood it. It has been said in necessary in terms of maintaining our sovereign the Scottish Parliament—and I quote directly—“The capability—in other words, our ability to continue to reality that nobody can get away from—which I think manufacture platforms of one sort or another. we should use as a big advantage for the Clyde, not If it is felt that for UK defence we need to maintain as something to argue about—is that the Clyde is now that sovereign capability, then we will insist on article not only the best place to build the frigates, but is the 346. The ability to build warships organically will only place to build them.” In your view, is that certainly satisfy that requirement, which is why we correct? feel it is not contentious. It is necessary to maintain a Dr Murrison: It is certainly the best place to build drum beat of manufacture, hence the recent statement them, given that we confidently expect the United about OPVs and the moving of blocks from Kingdom to remain. The Clyde has been building Portsmouth. It is part of that need to ensure that we are warships, as you know far better than me, for ever in able to continue with those skills and that capability the context of this debate and they are extraordinarily somewhere within the United Kingdom. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 41
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3835 Simon Reevell: Let’s pick a neutral example. Dr Murrison: I suppose you could make a case Let’s imagine that there is in the port of London the around transferable skills. You could possibly make a ability to build a warship. Does it give you the ability case around a notion that SMEs and other to build within sovereign borders or an ability to consequential businesses in the supply chain might be simply choose who builds for you regardless of where within Great Britain, for example. It is all very they are located? hypothetical. Dr Murrison: The derogation is in order to ensure that you are ultimately able to continue defending the UK. It would mean that you would have to make a Q3842 Simon Reevell: Presumably, if the German case that is sustainable in law that the contract you yard said, “We’ll buy x% of the ships’ contents from placed could avoid normal competition law because it companies in England, Wales and Northern Ireland,” was necessary to maintain that capability in the UK. there would be no—What I am trying to understand is why a Scottish company would think it would be Q3836 Simon Reevell: If we had some dockyards better placed purely because Scotland had previously in the port of London that were the only dockyards to been in the UK. I cannot see why that would be, but build warships, we could seek to keep them going by you may tell me that there is a reason. using the process you have described to place the Dr Murrison: I have explained article 346 so far as I order within those dockyards. understand it, but, as Philip Hammond made clear, in Dr Murrison: If that is keeping the capability within the event that there was a yes vote, it is likely that we the UK, the answer would be yes. would want to maintain sovereign capability within the borders of the residual United Kingdom. Q3837 Simon Reevell: If there was a particular shipyard in Belgium that we happened to like, could we use the powers to keep that foreign shipyard Q3843 Chair: I understand that, but to some extent going? You can perhaps see where this question is that is a different issue. The issue has been raised leading. about whether or not article 346 would preclude my Dr Murrison: I can see where the question is going. constituents and others in Scotland receiving the I think the answer is technically yes if it was in our orders from the Royal Navy. It appears quite clear national interest to do so. from what you are saying that article 346 would not. It could allow the UK Government to determine that Q3838 Simon Reevell: Presumably, with the they want, for any reason they wish to put forward, to shipyard in Belgium, we would have to be able to give this order to the Clyde. The question of whether justify the difference between that and the shipyard in or not it would wish to do so and the impact upon Spain, Portugal or anywhere else. sovereignty capability is a different issue. The Dr Murrison: Yes, because the derogation is on the question of article 346 cannot be used, unless I am basis of maintaining our defence and security. mistaken, to argue that the order could not go to the Clyde. Q3839 Simon Reevell: If there were a number of yards that were capable of building the sort of warship Dr Murrison: No. If we thought it was in our national that the UK Government wanted, would they be able interest to do so in terms of defence and security, then, to use article 346 to favour one above the other if they hypothetically, that would be my understanding too. were all non-UK yards? Dr Murrison: Yes; I know where your question is Q3844 Chair: In relation to article 346 and defence going. The straight answer is probably yes, but you generally, if you give an order to a company—whether would need to make the case based upon UK it is BAE or anybody else—do you then lose all rights sovereign needs. to say to the company, “We want you to build it within our country or wherever you like”? It is how this Q3840 Simon Reevell: Let us use the example then meshes with the question of sovereign capability. of shipyards on the Clyde. On what basis would the Dr Murrison: No; you could write it into the contract residual UK be able to sustain what would by then be a foreign shipyard using article 346, bearing in mind that you wanted the work to be done in a particular EU competition rules? I can hear the German shipyard area for the reasons we have been discussing, namely, that could build the same ship saying, “Hang on, why the need to maintain sovereign capability within your are the English, Welsh and Northern Irish allowed to borders. place their orders in Scotland, which is now a separate country?” Q3845 Chair: It has also often been argued that, if Dr Murrison: You would have to make a case that an order was given to Thales or BAE Systems, as soon the residual UK’s defence is best secured by placing as you place the order the UK Government would then that contract in that particular yard. lose any power over where that order goes. Unless I am mistaken, you are saying that that is not the case Q3841 Simon Reevell: If the yards on the Clyde and it would be up to the UK Government if they were in Scotland post-yes vote as a foreign country, is there any reason why Royal Navy warships would wished to specify where that order was implemented. be better made on the Clyde than in any other Dr Murrison: Yes; that is correct, subject to contract foreign yard? law. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 42 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3846 Chair: Sorry—“subject to contract law.” Not Q3853 Chair: But we have just heard in relation to being a lawyer, I am not quite sure what that means. article 346 and the Clyde shipyards that there is no Dr Murrison: “Contract” is very straightforward. It reason why, with article 346, you cannot award them depends upon the nature of the contract that you sign the order. Presumably, exactly the same would apply with the participating parties. to Typhoon. Dr Murrison: Yes. Q3847 Chair: But if you put it into the contract then it applies. Q3854 Lindsay Roy: The most complex warships Dr Murrison: Yes; correct. that are being built and assembled at the moment are the carriers. Has any decision been made on where the Q3848 Chair: I just want to be absolutely clear. We QE aircraft carriers will be maintained and repaired? have clarified article 346, but am I right in saying that Dr Murrison: No. That is subject to work that is there is no way that any company, given a defence ongoing. You will appreciate, given the timelines, that order by the MOD, can then switch it around the we are talking about work well into the future. No world unless either (a) it has the MOD’s permission decisions have been made on that. Indeed, the case is to do so given as part of the contract, or (b)—in fact currently being worked up. there is not a (b), is there? It can only switch it around if it has the MOD’s permission to do so or it is not in the contract? Q3855 Lindsay Roy: Is there anywhere other than Dr Murrison: Yes, of course. The answer is yes. Rosyth at present that they could be maintained and repaired? Q3849 Chair: I want to clarify another point on this. Dr Murrison: Generally speaking, warships are How does EU legislation on article 346 and maintained in base ports. For the most part, wherever procurement legislation apply in the case of joint a ship is in terms of its base port is where routine procurement projects, say, like Typhoon, where maintenance and repairs will be carried out. different bits are done in different countries? How does that work and how is that applicable potentially Q3856 Lindsay Roy: But is there anywhere else it to a separate Scotland? could be carried out? Dr Murrison: Again, you would have to make a case Dr Murrison: We have just been discussing the range for sovereign capability being enhanced or protected of shipyards that exist within the United Kingdom. It by the contract arrangements that you have is simply not the case that you can tie a warship up established. alongside and carry on with its maintenance immediately. You usually have to reconfigure to a Q3850 Chair: What does that mean? certain extent. We have a number of shipyards in the Dr Murrison: It is exactly as I have explained it to UK, as you well know, that are capable of doing this you, Chair. You would have to make a determination sort of work. on where your sovereign capabilities need to be maintained and contract for that accordingly. Article 346 means that you do not simply have to throw it out Q3857 Lindsay Roy: Whereabouts? to general tender. The Typhoon contract, of course, is Dr Murrison: Where the warships are currently being a good case in point. There is a need to make sure manufactured, for example. that the systems we are talking about are capable of being produced here. Q3858 Lindsay Roy: That is not the evidence that we have had in the past. The evidence in the past has Q3851 Chair: This comes back to the question of been that Rosyth is uniquely placed because of its sovereign capability. The agreement for any deep-water berth to do that work. collaborative venture would depend upon the UK’s Dr Murrison: Okay. With the Queen Elizabeth class willingness to accept that some sovereign capabilities as opposed to the Type 26? were going to be held by other countries, some held Lindsay Roy: Yes. by you and that there would be a melding together of Dr Murrison: Different warships can be maintained what we believe was necessary to bring the project in different places. together. There would be some things that were essential, say, for Typhoon that we were prepared to see built abroad, but others which we were not. Q3859 Chair: My understanding was that some Dr Murrison: Yes; that would be a reasonable routine repairs and maintenance would be undertaken synopsis. at Portsmouth once the Queen Elizabeth class had berthed there, but for big refits and so on it would Q3852 Chair: That is presumably on the basis that have to go to Rosyth. Am I correct in thinking that everybody brings something to the party and, that is the Government position? therefore, they have to be able to contribute something Dr Murrison: I think that is the general sense. That that is unique. is usually what you would do with a warship Dr Murrison: Yes, but, as far as article 346 is throughout its life. In this case a warship is going to concerned, the whole point is that it is entirely based last for 50 years, so routine stuff is very much at base upon maintaining the level of sovereign capability that port, as I have said; fundamental refit work and major you feel is important for defence and security. work, possibly not. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 43
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3860 Chair: On previous occasions we discussed What British Aerospace do with their real estate is whether or not the UK Government would want to really a matter for British Aerospace. retain sovereign capability to do the refits of the carriers in the event of separation, which at the Q3867 Chair: I see. Can I clarify whether or not moment are scheduled to take place on a regular basis you have had any conversations with British in Rosyth. Where Rosyth would be in a foreign Aerospace about the desirability of not razing country, obviously that would raise difficulties. Can Portsmouth to the ground, filling in the berths and you clarify for us where the Ministry’s thinking is on creating a wasteland before 19 September 2014? that now? Dr Murrison: I have not had any such conversations Dr Murrison: It is embryonic, I have to say. We are and I am not aware of any such conversations. talking about years into the future. These ships have not yet been accepted by the Royal Navy and we are Q3868 Chair: It was not you personally; it was some way off that. The work to try and conceptualise “yous” collectively, in a sense. what the through-life maintenance means is being Dr Murrison: It also follows, from the assertion I undertaken at the moment. I am afraid I cannot give you any level of granularity. made very strongly in my opening response that the Government are not planning for independence for Scotland, that we would be most unlikely to have any Q3861 Simon Reevell: Could you help in terms of such conversations. the date by which Portsmouth would have lost its capacity to build warships following the announcement that we heard last week? Q3869 Simon Reevell: If the owners of that yard Dr Murrison: I really can’t. British Aerospace decided to chop down the cranes and fill in the berths Systems own and operate the facility. It is really for with cement, would you expect them to raise that with them to make that determination, but it is not going your Department before they began that work? to be immediate; that’s for sure. Dr Murrison: They might do.
Q3862 Simon Reevell: If you are sure it is not Q3870 Simon Reevell: I know they might do. Purely immediate, what do you mean by “immediate” in by definition, they might do, but would you expect terms of time scale? them to have discussions with your Department? Dr Murrison: Because of the work that is currently Dr Murrison: All I can say is that they might do that. under way. I am not aware of any discussions of that nature having been had. It would not surprise me in the Q3863 Simon Reevell: But what does “immediate” slightest bit if they contacted the Ministry of Defence mean? I know that you do not mean tomorrow and said, “Hey look, this is what we are going to do. afternoon. Can you respond?” Indeed, it would probably be in Dr Murrison: I don’t mean that. I probably do not their interests to do so. I have no expectation of them. mean next year either, but beyond that I am afraid I I have no demands upon them to do such a thing2. am unable to answer the question. Q3871 Simon Reevell: It would be inconceivable, Q3864 Simon Reevell: In terms of a capacity to would it not, for you to find out on the radio or build warships it is not beyond the end of 2014. through the newspapers that BAE had pulled down Dr Murrison: I think that would be reasonable, the cranes and filled in the berths, or that you got a although, of course, Portsmouth does not just phone call from Mr BAE saying, “Hey, you will never disappear. Its berths remain in place. I suspect its guess what we did last week,” and that is the first you infrastructure will remain in place too. It would be heard of it? This is inconceivable. perfectly possible hypothetically to re-grow Mr Carmichael: It is apparent that there is a very Portsmouth, as of course has happened in relation to close, strong and profitable working relationship the Queen Elizabeth class. between BAE Systems and the Ministry of Defence. While in this life everything is possible, you have Q3865 Simon Reevell: Presumably, if a shipyard is touched there on a hypothesis that takes you into the going to lose its capacity to build warships, if that is realms of virtual impossibility. going to change, it is easier to reverse the policy sooner rather than later. Dr Murrison: I am not a shipbuilder but I would say Q3872 Chair: That is helpful to clarify the situation. that that certainly makes sense. It supports our view that the yard in Portsmouth will still be in working order by 19 or, indeed, even 20 Q3866 Chair: Again, in the interests of absolute September next year in terms of reversals of decision. clarity, do I take it that Portsmouth will not be razed I mentioned earlier on how welcome it was that blocks to the ground, its berths filled in and a wasteland of the carrier were being transferred from Portsmouth created by 19 September of next year? to Scotland, particularly given that Portsmouth is due Dr Murrison: I think I know where your question is to have redundancies. Can you clarify for us the going, Chair. reasons behind that and the involvement of the Chair: I am glad to hear that. Ministry? Dr Murrison: I should just reiterate the point that the 2 MOD will hold discussions with BAE Systems about the Government are not planning for a yes vote next year. return of the site shortly. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 44 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Dr Murrison: As you know, Chair, we consider it Q3876 Chair: Is this something that you would see? important to maintain a capability in the UK around We do not want to find out later on that it is lying the delivery of complex platforms. The deal that has somewhere else in the Ministry of Defence. Would been struck is entirely in accordance with that. The this come to you? assembly and construction of the blocks and the Dr Murrison: Yes; I think I would see it. construction of the OPVs is all geared to maintaining the capability and the way that we think best fits our Q3877 Chair: I want to clarify whether or not the defence needs as the UK. I think it has proved positive Secretary of State would expect to see anything like in our confidence in the outcome of next year’s that and if he had seen anything. referendum and, indeed, underscores the point that the Mr Carmichael: I would expect a letter of that sort to Government are not planning for a yes vote next be brought to my attention in the normal course of September. things. I have certainly seen no such letter.
Q3873 Chair: I just want to be absolutely clear that Q3878 Chair: I want to come back to the question the transfer of work from Portsmouth to Glasgow— of the OPVs. My understanding is that the OPVs will which, as I said before, has not received much not have steel cut on them until the end of 2014. The attention in the Scottish press or media, and I can OPVs will not be worked on and help people keep imagine, as the Secretary of State can, what the employment until after the date of the referendum. reaction would have been had the decision been the Can you clarify if that is true? other way—is taking place in order to keep a core Dr Murrison: Yes, it is true, but I have to say it has work force working, employed in Govan, and to nothing to do with the date of the referendum apropos preserve skills, in order that the Type 26 order can, my earlier remarks. if granted, swing straight into operation without an enormous re-recruitment exercise. Q3879 Chair: Lots of these things, like the question Dr Murrison: In order to maintain the capability, yes. of the design maturity, happen to be beyond the date of the referendum, and there are cynics, I have to tell Q3874 Graeme Morrice: I want to pick up on the you, who believe that that is more than coincidence. central point, to which Dr Murrison has made Dr Murrison: How can you possibly have a tighter reference on numerous occasions, about the Ministry time frame than that? We have just recently made this announcement. It takes a while to do an investment of Defence clearly not planning on Scotland voting appraisal, as you well understand, and to place a for independence. Obviously the SNP Scottish contract before you even consider cutting steel. The Government is. What approaches have there been to time frame is pretty tight. Nobody can possibly argue the Ministry of Defence by the Scottish Government that we are in some way playing politics with this. to discuss some of these issues? Presumably, if we were in a position of an independent Scotland, then the SNP Scottish Government would like to see some Q3880 Chair: No, no, indeed, but other people are kind of naval shipbuilding capacity retained at the and it is worth noticing that the OPVs will not have Clyde. It is obviously down to the residual part of steel cut on them until the end of 2014. Is it the Department’s view that the transfer of work from the UK, in effect, to call the shots on that. You have Portsmouth and the OPVs will be sufficient to keep previously been very clear, as has the Secretary of the yards employed until the Type 26 starts and there State, about that. Have you been approached by the is not likely to be any further gap? Scottish Government about this issue? Dr Murrison: Yes. It will do a good job in terms of Dr Murrison: About maintaining a capability on the maintaining continuity and capability on the Clyde. Clyde? You have to understand that the Type 26s are a way Graeme Morrice: Post-independence. off, and trying to balance these sorts of programmes is Dr Murrison: No. I have read what the Scottish extremely difficult. It will mean that we can maintain Government are saying about this matter and I think critical skills and capability in Scotland, for sure. they make certain assumptions. Much of it is entirely hypothetical, both in terms of what happens in this Q3881 Chair: As you can appreciate, we have spent country and also, I have to say, in relation to quite a lot of time on this because this is obviously a supranational institutions. I have had no direct current issue of considerable importance. We will now correspondence with the Scottish Government on switch to broader topics. We want to ask you about maintaining a capability on the Clyde in the event that how important you believed it was to understand the Scotland decided to become independent. foreign policy of a separate Scotland before trying to understand their defence policies. Q3875 Graeme Morrice: To be clear, you have not Mr Carmichael: You cannot divorce one from the had a letter in the post from Edinburgh asking for a other, can you? In order to establish a defence policy, meeting, a conversation or a discussion on this issue. you first have to know what your foreign policy is They have not approached you to seek any kind of going to be because that is the context in which it discourse on this matter. is placed. Indeed, that is why in this House the two Dr Murrison: All I can say is that I have not seen any Departments have always very much sat in that such letter. relationship with each other. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 45
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3882 Chair: Do you see any reason why a separate Dr Murrison: You have to sign up to the strategic Scotland would not have the same friends and concept when you join NATO. That includes the possible enemies or threats as the UK at the moment? acceptance of nuclear weapons. My understanding of Mr Carmichael: You really are into the realms of the Scottish Government’s position is that it is supposition and hypothesis. Once an independent implacably opposed to nuclear weapons—to the point Scotland has her own foreign policy, then it is of that it has said that it would want to eject the facilities course up to her to make the decisions about those on the Clyde at Faslane and Coulport. It is quite countries with whom she chooses to build alliances difficult to see how that could easily be compatible and the terms on which alliances wish to be built. You with what I think it is assumed would be automatic would expect—indeed you would hope—that there and speedy membership of NATO. would be a community of interest with the rest of the United Kingdom, but in time it is quite possible to see Q3887 Graeme Morrice: What kind of factors that that would diverge. would other NATO members take into account when deciding if Scotland could join NATO? Dr Murrison: First, it is likely—of course it is a Q3883 Chair: Is there any particular threat matter for NATO, so I am hypothesising really—that assessment that you can make from your position that NATO would say, “There is a waiting list and your would identify Scotland’s position as being, in the application is going to have to be considered with short or even medium term, any different from that of others.” I simply do not know, as we do not know the UK? what attitude the European Union will take in a Mr Carmichael: No. similar way, how other nation states will behave. The matter would need to be determined by unanimity. Q3884 Graeme Morrice: I want to cover the issue of NATO. Our understanding is that, if Scotland did Q3888 Graeme Morrice: You say that currently become a separate country, then it would not there is a waiting list to join NATO with other automatically remain a member of NATO, but the countries. Can you indicate which those countries are? residual part of the UK would. If Scotland did not Dr Murrison: Georgia is quite keen on joining NATO, remain a member of NATO, then it would have to for example. It is seen as a fairly exclusive club, apply for membership. Could you confirm if that is obviously, because of article 5. It does offer a indeed the case? considerable amount of protection and the ability to Dr Murrison: Yes; that is our understanding. We have operate in a full and comprehensive capacity with facilitated the Scottish Government negotiation or other NATO members. discussions with NATO. Negotiations would probably be premature. Our understanding is that NATO Q3889 Graeme Morrice: Do you think it would be membership will continue to accrue to the residual in the interests of the residual part of the UK for an UK and that Scotland would then have to reapply if it independent Scotland to be in NATO, if indeed that wanted to. was the case? Dr Murrison: I am a great enthusiast for NATO. I Q3885 Graeme Morrice: You will be aware that think it has kept us safe all these years and is an the Scottish National Party recently changed its policy organisation that is very much a cornerstone of our position on that question. Having opposed NATO collective defence and security. I would be very sorry membership or an independent Scotland being a if a hypothetically independent Scotland was not part member of NATO for many decades, it said that an of NATO’s capability. That would be a loss to us all, I believe, as, indeed, it would be a loss to the defence independent Scotland under the SNP would apply for and security of the United Kingdom. membership. On the other hand, we are aware that the SNP is opposed to nuclear weapons, Trident and so Q3890 Graeme Morrice: You touched on NATO’s on. How does that circle get squared with the SNP article 5. You will be aware that SNP defence policy supporting a non-nuclear weapons position but now suggests that, if Scotland was unable to join NATO on wanting to join what is in effect a nuclear weapons its terms, it would be a member of Partnership for alliance? Peace, and this would fulfil many of its defence Dr Murrison: If you are going to join NATO, you requirements. What does being a member of have to sign up to what is called its strategic concept, Partnership for Peace mean for the protection which includes nuclear weapons. It is difficult to see provided under NATO article 5? how an independent Scotland would be able to easily Dr Murrison: Partnership for Peace is a sort of join NATO if it did not agree with the concepts and intermediate step in which one can participate in the doctrine that NATO abides by. It would then have exercises, for example, but it does not give the cover to join on a conditional basis, wouldn’t it? that article 5 gives. In other words, you are not a full member of the club, and in the event of a threat you Q3886 Graeme Morrice: I understand that there are could not rely upon other partner nations necessarily several members of NATO that do not host nuclear coming to your assistance. weapons and, indeed, may have clear non-nuclear weapons policies. How would Scotland be different Q3891 Graeme Morrice: The paper says that in that case in relation to applying for membership Scotland would be heavily reliant “for its defence and of NATO? security on the goodwill of its allies and partners” and cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 46 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous that “an independent Scottish state would have less the very least if Scotland tried to join NATO and said, rather than more choice in the conduct of its affairs.” “But we want to impose these particular caveats.” Obviously, the SNP suggests that a separate Scotland would have more freedom to determine its own Q3896 Chair: It could be fudged by a “Don’t ask, priorities. Again, how do you square that circle? don’t tell” policy. American nuclear armed ships could Dr Murrison: We await the SNP’s White Paper at the sail into Scottish waters or planes could fly above end of this month with a great deal of interest, which Scottish soil as long as they simply did not tell. Would I hope is going to give some clarity to its capability that be seen to be an acceptable fudge? It is dishonest that it anticipates and, importantly, how much money of the SNP to do that, but in terms of NATO’s position it is going to find to sustain that capability. Frankly, do you think that would be considered acceptable? without knowing that, it is very difficult to say. I just Dr Murrison: Again, I think you would have to put do not know. We might have a greater level of clarity that to NATO. It sounds rather bizarre. towards the end of this month. Chair: Indeed, but much does. Graeme Morrice: We all await that White Paper with bated breath. Q3897 Simon Reevell: From a strategic point of view, why would Scotland outside the UK have to Q3892 Chair: Let me come back on a couple of develop its own arrangements rather than just enter points there. You indicated that it was your view that into shared defence arrangements with what would the UK would remain the residual state and Scotland then be residual United Kingdom? would then be a separate state applying. Do you have Mr Carmichael: What is the point of being an legal advice to that effect? independent nation then? This is a suggestion that you Dr Murrison: Yes; that is our legal advice. walk away from the United Kingdom, and then you come back and renegotiate what you have just walked Q3893 Chair: Who, in addition to Georgia, is on the away from. waiting list? How long is it expected that a state such as Georgia would take to get in, if indeed they do? Q3898 Simon Reevell: That is certainly one Dr Murrison: Off the top of my head, I cannot give argument. In terms of actual policy, equipment and you a list of aspirant nations and all those who are hardware, are there any reasons why that could not partners for peace. Georgia is certainly pushing very happen? I take your point that it would be rather hard for membership. strange to strive for something and then, when you’ve got it, try to hand some of it back. In terms of the Q3894 Chair: What we are looking for is some sort arrangements themselves, is there any reason from a of time scale as to how this might be. UK perspective why a foreign country could not seek Dr Murrison: I cannot possibly give you that. Georgia to make arrangements with residual United Kingdom has been lobbying for full membership of NATO for for its defence needs? some considerable time, but it is reasonable to point Mr Carmichael: It is almost a matter of contract. Yes, out, of course, that each application is judged on its in strict theory, sovereign nations can enter into own merits. There may be particular circumstances agreements—and do so all the time—but for this sort preventing a country from joining NATO due to its of thing show me where that happens anywhere else geo-political situation, for example, its capability or in the world. From the point of view of Scotland and its willingness to take part. It is all of those things. the decision that Scotland has to take next year, if that You could perhaps make your own assumptions about is going to be the constant refrain—and it is an where Scotland may fall in that list. emerging pattern throughout the independence debate—you have to wonder just what sort of Q3895 Chair: The only difficulty I can see about a independence is going to be on offer. separate Scotland fitting in with NATO is on the question of nuclear weapons. You have already Q3899 Simon Reevell: Presumably, it would not just touched on the question of removal. To have no be a question of defence issues. That arrangement nuclear weapons on Scottish territory, air or sea, does would impose restrictions on foreign policy, because take things quite a bit further. It takes things further, an independent Scotland could not have foreign policy as I understand it, than does any other non-nuclear objectives that were at odds with its agreements with NATO state. If an independent Scotland said that they residual UK for defence. were not willing to have nuclear weapons on their Mr Carmichael: I do not think there was any dispute territory in any shape or form, would that be seen as when I said earlier that a defence policy has to sit a barrier to NATO membership? inside the context of a foreign policy. If you are to Dr Murrison: That is something you might want to buy in to somebody else’s defence’s policy, then put to the Secretary-General of NATO rather than to inevitably you buy in at the same time to the foreign me. I am obviously not the arbiter of that. policy. Chair: But you are here, to be fair. Dr Murrison: Yes, but I am not the right person to Q3900 Simon Reevell: Of course, you are also on fire the question at, with respect. I simply do not the coat tails of your defence provider’s foreign know. What I can tell you is that members are policy, because you may face the situation where you expected to endorse the strategic concept that I do not like their foreign policy but you want the referred to, which does contain as a fairly large part defence arrangements that you have with them and of it our nuclear deterrent. It would be interesting at you have to deal with that issue. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 47
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Mr Carmichael: When I am speaking to my children, deal more to the Royal Navy than frigates and I see it as wanting to have your cake and eat it. It is destroyers. something you do not often get in life. Q3906 Mr Reid: Would an independent Scottish Q3901 Chair: It does not stop you having the policy armed forces have difficulty in responding to such an of wanting to have your cake and eat it. That has incident? always been my policy. Dr Murrison: We do not know because we do not Mr Carmichael: Chair, the lesson of your own party know what an independent Scottish defence force and mine in Government is that you should not really would look like. It comes back to the point made proceed with policy that you are not going to get. earlier about watching and waiting for the Scottish Government’s iteration of its defence and security Q3902 Mr Reid: Your report describes the UK’s plans at the end of this month. What is clearly not role and relationship with Norway, Denmark and the sustainable is simply salami-slicing bits of the UK Arctic Council around security in the High North. armed forces and announcing that that is now the Critics have pointed out that there is no naval surface Scottish Navy, Army and Air Force. That is a risible vessel based in Scotland. What is your response to the suggestion. That is simply not possible. We wait with criticism that under the present circumstances the UK great interest to hear what the Scottish Government is not devoting resources to the security of the North? intend to do to face down any conceivable threat that Dr Murrison: We defend the UK. We do not defend they may foresee in the future. I simply do not know parts of the UK in isolation. You will be aware of the the answer because the Scottish Government have yet huge naval and military presence in Scotland. It will to say what they perceive as the credible threats to be our submarine base, period, within a very short them and how they are going to face those down. One space of time, for example. We have a large part of thing I can say to you quite clearly and categorically our front-line Air Force based in Scotland. We have a is that it simply will not work by chopping off bits of substantial part of the British Army based there. I do the UK armed forces and saying, “There you are—job not think there can be any question that Scotland does done; that’s the Scottish defence force.” not have, if you want to put it in these terms—which I certainly do not—its fair share of defence assets. It Q3907 Lindsay Roy: I want to turn to air defence. always has provided a large part of our armed forces The RAF has squadrons of Typhoon jets for a variety and has been home to a large part of those armed of purposes, including domestic, defence and forces. It would be perverse to suggest that, simply deployment overseas. I understand that plans are in because we do not have a destroyer or a frigate base- place for three squadrons of Typhoons to be placed in ported in Scotland, in some way we are neglecting Lossiemouth. When is that likely to take place? the High North. That would be an extraordinary thing Dr Murrison: It is happening over the course of this to suggest. coming year. Lossiemouth will be a main operating base for the Typhoon aircraft. Q3903 Mr Reid: What kind of contribution would Scotland have to make to replicate the commitment to Q3908 Lindsay Roy: When? the Arctic Council that the UK has already Dr Murrison: Over 2014. committed? Dr Murrison: We have observer status with the Arctic Council. I imagine that an independent Scotland Q3909 Lindsay Roy: How much of the upgrade has would apply for similar status. It does not fall within been carried out so far to cater for the Typhoons? I the Arctic Circle, but clearly the United Kingdom has understand it is several million pounds. considerable interests in the North and the High Dr Murrison: The whole project is £85 million. I North, which are evolving all the while. I simply do cannot give you a precise figure for how much has not know what an independent Scotland’s attitude been physically spent as of now. towards the Arctic Council would be, but who knows. Q3910 Lindsay Roy: But significant progress has Q3904 Mr Reid: If an incident arose in the North, been made. what sort of assets could the United Kingdom devote Dr Murrison: Yes. quickly to it, as its armed forces are presently configured? Q3911 Lindsay Roy: Have you any evidence that a Dr Murrison: Clearly it depends on the nature of the separate Scotland would have a purpose for such a incident. What sort of incident had you in mind? sophisticated aircraft? Dr Murrison: Again, we look forward to the Scottish Q3905 Mr Reid: Say a Russian ship entering National Party’s White Paper on this subject in a few territorial waters. days’ time. It is expensive to run these platforms, both Dr Murrison: We obviously have a range of maritime warships and aircraft. It is difficult to see how they and air assets that could be used to address such a are going to be able to sustain such a thing on a budget hypothetical threat. I do not know that, simply of between £2 billion and £2.5 billion a year, which because we do not have a destroyer or a frigate based is our best guess as to what a Scottish Government all the time in a Scottish naval port, it would in any would want to spend on defence and—let us way degrade our ability to respond. There is a great emphasise—security. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 48 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3912 Lindsay Roy: In the event of independence, spent twice and some laid aside for an oil fund. That do you see the rest of the UK trying to negotiate is why we particularly want to have some of the access to Lossiemouth for the Typhoons? figures in order that we can seek clarification Dr Murrison: We are not planning for a separate ourselves. Scotland. Lindsay Roy: I understand that. Q3919 Lindsay Roy: Can you tell us how the Dr Murrison: So, whilst I would hope that a Typhoons are refuelled when they are on a mission? hypothetical independent Scotland and residual UK Dr Murrison: There are a variety of ways of doing would work closely together where it is in our that—for example, air-to-air refuelling. What lies interests, I am really unable to conjecture as to what behind your question— that might look like in practice. Q3920 Lindsay Roy: Where are the tankers based? Q3913 Lindsay Roy: I understand it is around Dr Murrison: Typhoons are going to be based at £70,000 an hour to operate a Typhoon. There is a Lossiemouth or at RAF Marham. Quick Reaction Alert force at Leuchars. Do you have any idea how much that costs? If not, can you get that information to us? Q3921 Lindsay Roy: Where are the refuelling Dr Murrison: Do you mean the difference between tankers based? Are there any in Scotland? the cost of operating from Leuchars and Lossiemouth? Dr Murrison: They could be. They are not based in Lindsay Roy: No; I am talking about the Quick Scotland but they certainly could be. Reaction Alert force as it applies at the present time. It is 24-hour cover. Q3922 Chair: Am I right in thinking that the tankers Dr Murrison: I am not quite sure I fully understand that refuel the fast jets over the North sea are actually the question. Do you mean the cost of maintaining a based in Brize Norton and have to fly up from Brize Typhoon out of Lossiemouth and Leuchars? Norton to Scotland to undertake any refuelling? Lindsay Roy: This is purely the Quick Reaction Dr Murrison: Okay. Alert force. Q3923 Chair: Therefore, if you are going to have Q3914 Chair: It is not a comparative cost. We have an effective fighter jet force, you would have to add had various stipulations or indications from the SNP in refuelling facilities that are presently not in about what they intend to have. We just want to have Scotland. They would either have to be replicated or some sort of feel for what the cost of having a wing some sort of arrangement would have to be reached of fast fighters might be. with Brize Norton to provide those facilities. Dr Murrison: But you would then have to say how Dr Murrison: Yes. many aircraft you intended to have, for example. You could not simply have one or two. Q3924 Chair: Could you give a rough cost for that, if not at the moment, then in writing at a later stage? Q3915 Simon Reevell: What we are trying to do is Dr Murrison: Certainly. I think you make a good look at what is at Leuchars at the moment, look at point concerning the need to think about infrastructure what is planned for Lossiemouth, and then we can rather than simply jets in the air. Clearly, if you are work out whether it would be possible for an going to operate organically a Quick Reaction force— independent Scotland to afford what is currently at Leuchars, what is going to be at Lossiemouth, neither in other words, a force that is not going to be reliant or both. upon another country, be it the residual UK or Dr Murrison: I think I can probably give you a somebody else—then you are going to have to provide straight answer to that. It would be incredibly difficult things like air-to-air refuelling and the ground to see how such a capability could be maintained on infrastructure that goes with putting that sort of thing a budget of, optimistically, £2.5 billion. in the air. It is very complicated. When we get the figures at the end of this month, I very much hope Q3916 Simon Reevell: Leuchars as is or they include an allowance for all of that. It is simply Lossiemouth as will be. not right to say, “Look, it costs x to put two aircraft Dr Murrison: Both of those things. in the air,” because that would be a woeful underestimate of the true cost of such a capability. Q3917 Simon Reevell: Either. Dr Murrison: Yes. You could not operate the number Q3925 Chair: It would be helpful if you could of Typhoon aircraft. arrange for the Department to drop us a note giving us an indication of the other things like the air Q3918 Lindsay Roy: How many Typhoons would refuelling that ought to be taken into account, which you need for a realistic fleet? we as non-experts will probably have overlooked. Dr Murrison: I cannot give you a realistic figure for Every time we meet people from the services to that, but you would need several, given the downtime discuss this, we are constantly amazed at how many you would expect for these aircraft during their life other things have to be added in. and the need to have two operating at any one time. Dr Murrison: The issue of the Scottish Infantry Chair: I fear you have failed to understand Scottish regiments is a good case in point. Government economics, where oil money can be Chair: We are just coming to that. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 49
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Dr Murrison: Good; I am very pleased. Those of us with any sort of insight into how defence is structured in the UK and in all major advanced Q3926 Lindsay Roy: The Scottish Government militaries know full well that there is a huge tail that indicate that they have a strategy to procure maritime goes to support that front-line capability. What the patrol aircraft. What kind of planes would fit that Scottish Government have done in its naivety is to domestic role? suppose that all that is necessary is to take those Dr Murrison: I am very glad you have raised regiments they identify as Scottish—infantry maritime patrol aircraft. We often hear that they are regiments, by and large—and ignore the extraordinary almost an article of faith with the Scottish logistics chain that goes to support that. For example, Government. You will know that we have gapped this, there is the Royal Logistics Corps, the Technical although we will have to await the 2015 SDSR to Corps of one sort or another and the Royal determine whether that will continue to be the case. Engineers—all of that—which comprise the bulk of The question I would put to the Scottish Government the numerical strength of the British Army. is, if you are going to re-grow this capability—and It seems to me that the figures that the Scottish clearly there are cost implications with that—what on Government have produced up to this point for how earth are you going to do with the arisings from it? It much money they are willing to spend on defence is one thing putting this aircraft in the air. Its purpose completely ignores that. Until they factor that in obviously is to gather intelligence and tell you properly, I do not think they can be taken credibly on whether you are facing some sort of threat. You have this issue. to have the wherewithal to deal with that threat. That pretty well means complex and expensive platforms. Q3932 Chair: We await with interest the full You have to have the capability of dealing with the explanation of what they propose. I want now to ask intelligence that you gather. It is not clear to me that about comparable countries. Your paper discusses the an independent Scotland would have capability in defence forces of several European countries with a either of those two things. I would have to ask, similar population to Scotland. What lessons do you although this is an article of faith, what on earth is the think we can learn from those examples? I can see point of having such an aircraft if you cannot do that Norway spends much more and Ireland spends anything with what that aircraft gives you—in other much less than the SNP proposed figures. What is words, capability? there that you think we particularly ought to draw from that and look for in the Scottish Government’s Q3927 Lindsay Roy: So there needs to be a co- document? ordinated infrastructure. Dr Murrison: The first thing I am going to be looking Dr Murrison: Yes. There is simply no point in having for is what capabilities a Scottish Government believe this unless you are going to do something with what they are going to need to face down the defence and the aircraft is able to deliver to you—in other words, the intelligence and capability of dealing with any security threats they believe there will be to Scotland threat that the aircraft may reveal. and also do all the other things that they say they want to do by way of engagement with supranational organisations, peacekeeping and all the rest of it, and Q3928 Lindsay Roy: Have we any indication as to how the SNP plan to pursue that? also observe the commitments they have already given Dr Murrison: Once again, we will have to await this to maintaining certain capabilities and taking charge document at the end of the month. of units within the British Armed Forces that they have identified as being Scottish. Q3929 Lindsay Roy: Would you expect that In terms of their posture within the menu of information to be in there? comparable nation states, it is invidious to draw too Dr Murrison: I would certainly expect that many parallels, to be honest. The Republic of Ireland information, unless it is purely a totemic thing; in has a military that is small in scale. It does engage other words, it is there in order to try to convince in peacekeeping operations. It is engaged with us in people making their decision in September that European Union training missions, but it is very small. defence and security is safe in the SNP’s hands. It is modest in scope. Norway has a high-end armed forces. It is obviously Q3930 Lindsay Roy: So we should beware of a lot smaller than the UK’s, but it does, for example, assertion. operate fast jets and we co-operate very closely with Dr Murrison: You need to be prepared to ask very them. Within that mix, the Scottish Government are piercing questions on what function the Scottish going to have to decide what their vision is for National Party sees for maritime patrol aircraft. defence and security in an independent Scotland and, crucially, how they are going to pay for it. Q3931 Chair: I want to turn to the Scottish regiments. We have had quite a lot of evidence in the Q3933 Chair: On 26 November do you think it is past about the extent to which it is going to be reasonable for us to get a complete blueprint of what necessary to have quite considerable tail to the the Scottish defence forces are going to look like and regiments. Are there observations that you would what they are going to cost? Surely, would it not be want to make on that? much more reasonable for them to say, “You will just Dr Murrison: Yes. We are all guilty of supposing that have to wait and see until after we have negotiated the Army is simply a collection of infantry battalions. everything else with our NATO allies and the EU, and cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 50 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous it will all become clearer five or six years down the Dr Murrison: No. That is trying to use facts to road”? support a particular political narrative. Scotland has Dr Murrison: No, I do not, and I think that is a an integral role in the defence of this country and rhetorical question. The Scottish Government have obviously benefits from defence and security of the already said that they want to be a member of NATO UK armed forces. You cannot chop bits up in the way and CSDP, and do peacekeeping with the United that that suggests. Nations. They have satisfied those pre-conditions already. I do not think it is reasonable for the Scottish Q3936 Lindsay Roy: Into the bargain, in the £2.5 National Party to go before the people of Scotland in billion, we are told that resources for intelligence and less than a year’s time and say, in this crucial area of cyber-security will be involved. Is it normal practice defence and security, “You will have to wait and see.” to put that in a defence budget? Dr Murrison: Not really, no, it isn’t. Of course, It touches upon the point that was made by the security has been used in a fairly loose way by the Secretary of State. If you are not being clear with the Scottish Government without perhaps thinking Scottish people about this incredibly important entirely what security means. Security involves a great element of independence—this is independence and deal of Home Office responsible work, for example. not some sort of halfway house, whatever the SNP To deal with cyber security straight off, the UK is might pretend—independence does mean going to spend something in the region of £850 independence, and they need to be clear and honest million over the next five years in addressing this with the Scottish people that that is what they have in emerging threat. We have been assessed as being No. mind. Independence means sovereign control of your 1 in preparedness bar none in terms of cyber security. armed forces. You need to be clear with the Scottish We have been commended by the HCDC fairly people what the threats are and what you are doing in recently—a committee, I have to say, that is not order to prepare a response to those threats. That always particularly favourably inclined to make means being very specific about what your armed positive comments—as being extremely good in the forces are going to look like and their capability, and Government/industry relationship that is so crucial to how you are going to pay for it. addressing cyber threat. We are in a very good place in terms of cyber. I have not heard the Scottish Government talking very Q3934 Simon Reevell: I want to read you a much about cyber. Again, at the end of this month I quotation from the Scottish Government. It contains expect them to set out in fairly detailed terms how some figures. When I have read the quotation, I am they are going to replicate the kind of cover that going to ask you if you recognise the figures at all. people living in Scotland currently enjoy and will You may do or you may not. The quotation is this: enjoy from cyber threats. “An independent Scottish Government led by the SNP will commit to an annual defence and security budget Q3937 Lindsay Roy: How much of that cyber- of £2.5 billion, an annual increase of more than £500 security is under the MOD umbrella at the moment in million on recent UK levels of defence spending in terms of budget and how much is under the Home Scotland but nearly £1 billion less than Scottish Office? taxpayers currently contribute to UK defence Dr Murrison: I cannot give you a breakdown. I could spending.” Do those figures mean anything to you at probably try to find some figures. all? Dr Murrison: No, they do not—not in the context of Q3938 Lindsay Roy: Do you have a rough idea? providing the level of capability that the people of Dr Murrison: I really can’t. It is mainly a Home Scotland enjoy as integral parts of the United Office and Foreign Office lead. Kingdom. The Scottish Government could not possibly aspire to that level of cover. Furthermore, in Q3939 Lindsay Roy: That would put further terms of dealing with supranational organisations of pressure on— the sort that the Scottish Government have been Dr Murrison: It is obviously important to say that talking about, it would make an independent Scotland GCHQ, which is a Foreign Office responsibility, a far less attractive proposition and front-line partner. currently provides cover for the whole of the UK The Scottish Government have been talking about without distinction. It is difficult to see how that is submarines, complex warships, fast jets and—into the going to be replicated in the event that Scotland left bargain—the Scottish regiments, ignoring of course the United Kingdom. the logistics tail that we have been discussing. It is Q3940 Lindsay Roy: So, in essence, that would put impossible to have all of that with a budget of £2.5 further pressure on the £2.5 billion budget. billion. Dr Murrison: Yes. We have raised this in the past. The £2.5 billion that we have heard bandied about Q3935 Simon Reevell: They seem to be suggesting includes defence and security. We understand that that they can quantify UK levels of defence spending cyber-security is included within that figure. in Scotland at £2 billion and they can identify that Scottish taxpayers have contributed £3.5 billion to the Q3941 Lindsay Roy: In your view, the totality is defence budget. Are those figures that you recognise unrealistic within the £2.5 billion budget. or believe can be quantified in that way? Dr Murrison: Yes, absolutely; I agree with that. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 51
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous
Q3942 Chair: I want to follow that up by asking Q3947 Mr Reid: Would you accept that Scottish whether or not you are aware of any negotiations or taxpayers have contributed to the building up of the discussions that have taken place that would allow a UK defence assets over the years and, therefore, separate Scotland access to the Five Eyes network of Scotland would be entitled to a proportionate share of information produced by the UK, the US, Canada and these assets? so on. Dr Murrison: Yes; I think that concept probably is Dr Murrison: The Five Eyes community, of which generally accepted. the UK is an integral part, is a membership organisation based upon taking stuff out and putting Q3948 Mr Reid: The Scottish Government have things in. You cannot be a member if you are simply made it clear, for example, that they do not want taking. It touches upon the point that has already been anything to do with nuclear submarines—either the made in the question previously put. If you are not Hunter Killers or the Vanguard submarines. In that prepared to spend a lot of money, as we do, on case, would they then be entitled to a higher share of intelligence work, then you are not likely to be smaller assets by not taking a share of the larger welcomed by that particular organisation. assets? Dr Murrison: The difficulty is that you would then Q3943 Chair: Is there any reason why they should have to re-provision this particular capability not decide to give Scotland a free ride in these elsewhere. The removal of it from the Clyde is going circumstances if Scotland was seen to be a part of to be murderously expensive. That would have to be NATO, if it maybe reversed or fudged its policy on a factor in the negotiations. nuclear weapons, and was seen to be an ally? Surely, it would be in everybody’s interests for Scotland to Q3949 Mr Reid: Are you suggesting that the cost have more rather than less information in these of moving the nuclear deterrent to somewhere else circumstances. would be allocated against Scotland? Dr Murrison: As I say, it is an organisation that is Dr Murrison: based upon the sharing of information gathered Yes; that is exactly what I am expensively. I think it is unlikely that that tight-knit suggesting. community would be prepared to take on a country that is simply there in order to acquire information Q3950 Mr Reid: The paper goes on in great detail and not contribute to it. That would break up the about the integrated nature of UK defence and fundamental ethos of the Five Eyes community. It is security. If we are envisaging a situation where a matter for the Five Eyes community, not specifically Scotland was a separate country, do you think it would the United Kingdom. be in the UK’s interests to co-operate with an independent Scottish Government in defending these Q3944 Chair: Are you aware of any approach islands as a whole? having been made by the Scottish Government to Dr Murrison: We co-operate with a large number of either the UK Government or any other Government countries—of course we do—and will seek alliances that is part of the Five Eyes network to have access wherever it is expedient to do so and in the interests to that sort of information? of our citizens. If I can repeat what I have already Dr Murrison: I am not aware of any such approach. said, in my opinion, it would be a huge step backwards for both Scotland and the residual United Q3945 Chair: Again, you would expect to be, Kingdom in terms of our defence and security would you? capabilities were Scotland to leave the UK. What Dr Murrison: Yes, I would. happened thereafter would be a matter for the negotiations that I have already touched upon. Q3946 Mr Reid: The Defence paper does not provide much information about the division of assets Q3951 Mr Reid: The paper said that during the should there be a yes vote in the referendum. Dr transition period Scotland would be dependent upon Murrison, you earlier pointed out, quite rightly, that “the goodwill and protection of others” and that a division of assets would not simply be salami-slicing, separate Scottish state would “need to take this into and 40% of a Vanguard submarine would be of no use account in defining its defence policy and strategy.” to anybody. What principles would the UK What things would you look for in the Scottish Government adopt when they came to dividing up Government’s Independence White Paper to reassure assets? you and to help foster goodwill within residual UK? Dr Murrison: It is important to record that a yes vote Dr Murrison: We need to reiterate that independence next year would be the start of the process and not the is independence. I do not think it is honest to try to end of one. Hypothetically, we would then enter a fudge that in any way at all. There is no comfort period of protracted negotiation, which I think would blanket that can be assumed in all of this; it is just be extremely complicated and might take longer than misleading. We simply do not know and it is the many of us might anticipate, at which these issues subject of negotiation. You have mentioned what would be decided. You are right to say that you cannot would happen in terms of the dynamic between an simply divide complex platforms into bits and award independent Scotland and a residual UK. We have them to various parts of the United Kingdom. That talked already about NATO and, very briefly, the would be ridiculous. I have to say that the same is European Union and peacekeeping at a UN level. All also true of units of the British Army. of these things are conjectural. Those who are making cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 52 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous their decision in September cannot rely on any would be no barrier to any Scots in the Royal Marines, particular outcome because we simply do not know. the Army, the RAF or the Royal Navy, who wished In terms of the residual UK and its attitude, I think it then to leave and join the Scottish forces. Similarly, will be driven, hypothetically, by one of pragmatism there would be no move taken to throw anybody who and an acceptance that, whatever happens, we share wanted to remain in the British forces out in order to the same space and the threats that we have to face serve in a Scottish armed forces. into the future will in many respects be identical. You Dr Murrison: Yes; that is broadly correct. can, therefore, perhaps imagine what future Governments in these islands might do in order to Q3956 Chair: In terms of indications about what safeguard themselves against those threats, but it is people might want to do, have you had any indication purely conjectural. I would re-emphasise the point that from service personnel about whether or not they are I have made on a number of occasions this afternoon, likely to stay en masse, leave en masse, or have they and that is that our collective defence would not decided? undoubtedly be degraded by a yes vote next Dr Murrison: We have not conducted any survey September. canvassing to determine what people’s views are in this matter. Anecdotally, the strong sense I get is that Q3952 Chair: In relation to these negotiations, Scots who are members of the UK armed forces are which are likely to be quite complex, can I clarify overwhelmingly keen to remain within the United whether you believe that all the division of assets and Kingdom. There are a number of reasons for that. I so on can be achieved within 15 months, and in suppose some of them are to do with the ethos of the particular for Independence Day, which has been armed forces and some are far more practical scheduled by the Scottish Government as being April considerations about their careers and futures. Fool’s Day 2016? Dr Murrison: It would certainly be a challenge. The Q3957 Chair: The final point I want to raise relates complexity of this should not be underestimated at all. to voter registration of service personnel. We have had However, it depends very much upon the attitude a paper from you, which is very helpful. As you are taken by the Scottish Government in the event of such probably aware, we want to make sure that every a series of negotiations being necessary. person in the services, their eligible children and, indeed, their spouses have the opportunity to decide, Q3953 Chair: From your experience, is one side in if eligible, whether or not they want to vote in the a negotiation that sets a particular deadline for referendum. We are aiming for a 100% level of people resolution in a stronger or weaker position than a side being given the choice. That is not to say that we that has no such deadline? expect them all to vote in the referendum or register Dr Murrison: An agreement has to be agreed by both to vote in the referendum, but we do very much want parties. It is possibly making certain assumptions to make sure that 100% of those who might be entitled about the attitude that might be taken by the other to vote in the referendum are given the opportunity to party to these negotiations. In the event that the make a conscious choice as to whether or not to do so. Scottish people voice an intention to leave the United Can you give us an indication of how far that target is Kingdom, we would have to observe and honour being achieved? that—of course we would—and we would, therefore, Dr Murrison: The figure at the moment is 69% of have to proceed with these negotiations, which would people registered to vote, which is an improvement on not simply be matters to do with defence but I imagine last year. It is not much but an improvement would be across a whole range of issues, with the nevertheless. That is the figure we have, but that is goodwill that would satisfy both of us. based upon the Armed Forces Continuous Attitude Survey, which people do not have to fill out if they do Q3954 Chair: I want to come back to the question not want to. I suspect that is probably a conservative of valuing assets. Bases, and in particular Faslane and estimate. Coulport, would presumably be valued at replacement cost. Even if the Scottish Government did not want to Q3958 Chair: But 69% of those registered to vote keep it, the UK Government would presumably say, does not necessarily cover the point I am making. “But you have inherited it because it is physically on There will be those who can have two registrations. your territory and the value of that is the sunk cost or They can have a registration where they are in the replacement cost rather than, say, a nil cost.” England if they are in an English base at the moment, Dr Murrison: Yes; that would be the basis upon but if they chose to change their status they could which I think we would proceed. register in Scotland to vote in the referendum. Dr Murrison: If they are eligible to be— Q3955 Chair: I want to turn to the question of Chair: That is right. recruitment and careers. We are coming to the end Dr Murrison: Just because you are Scottish, or now. I am conscious that you have been here for a identify yourself as Scottish, does not mean to say you while and that we want to draw matters to a close. get a vote in this, as you will be very aware. This affects the question of servicemen and women and their ability to move between one and the other. I Q3959 Chair: No, that is correct. We can go into am right, am I, in thinking that it would be the the rules and they are quite complex. But there will intention of HMG to allow individuals to make a free be a variety of people who can be registered to vote choice as to which country’s service to be in? There somewhere else, somewhere other than Scotland but, cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Scottish Affairs Committee: Evidence Ev 53
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous if they either changed their category or made the opportunity to vote and we should have had it effort, would be eligible to vote in the Scottish properly explained to us.” referendum. We want to make sure that everybody is Since this is, unless I am mistaken, news to you, I am aware of the opportunity that is available to them and particularly concerned as I had been under the has the ability to make that choice should they desire impression that the MOD was aware of this to do so. That would be a different figure from the corporately. I would suggest that the Secretary of 69% figure, as I think you understand. It will require, State, whose office is certainly aware of this, deal with presumably, going back to some people who are in you on this and that we have a report from you early Scottish regiments and who have just come from in the beginning of the new year about how matters Scotland, and who have been recently been registered are progressing. We do not necessarily need it in at a base in England but who could change their person, but we should have something in front of us category back. We want to clarify what steps the showing how this is being pursued and how effective MOD is taking to make sure that they have a full it is. opportunity to vote in the referendum. Mr Carmichael: I would be more than happy to give Dr Murrison: As you know, the franchise is a matter that undertaking to the Committee. for the Scottish Government and the rules are set up Lindsay Roy: Chair, I have raised this question with by them, including, of course, the current measure the Deputy Prime Minister just recently. before the Scottish Parliament in relation to 16 and Mr Carmichael: I will take it to him as well. 17-year-olds. That will capture a small but significant number of people. Every year, through unit Q3962 Chair: When we come to the end of our registration officers, we do a campaign to ensure that sessions we always ask our guests whether or not servicemen and women, and their spouses, are aware there are any answers they had prepared to questions of their voting options. That is obviously going to that we have not asked or if there are any points they continue. Our emphasis is on people having a proxy feel we have overlooked. Margaret Porteous has not vote, which we think offers them the best opportunity put a foot wrong throughout this entire session. I do of being able to cast a ballot in any election, including not know whether or not she came prepared with 97 this one. different answers, but I suspect it would probably be better if she gave us those in writing. Is there anything Q3960 Chair: You say you make them aware of that the two Ministers want to raise that you feel we their voting options. In the past it has tended to be have overlooked? that you either vote or don’t vote. Here, where you Mr Carmichael: It is not germane to the report, but it are registered and in which category you are is worth the Committee reflecting that, right now, the United Kingdom’s armed forces personnel are making registered can determine whether or not you are able a very significant contribution to the humanitarian to vote in the Scottish referendum. I am seeking relief effort following on from the hitting of typhoon clarity from you on whether or not those in the MOD Haiyan in the Philippines. That is a significant role and in the units who are working on this are fully which is played by the United Kingdom, and Scottish aware of that and are making everyone in the services, armed forces personnel will be part of that. It is one and their respective spouses, aware of that particular of the much overlooked aspects of the United issue. I am getting the distinct impression that this is Kingdom and the role that is given to Scottish armed news to you. As you will understand, that causes me forces personnel as part of that to take part, not just a bit of alarm. Simply having people registered to vote in conflict but in a whole range of different activities is not sufficient for the purposes we have identified. which build for the United Kingdom a very positive Dr Murrison: The important thing that the MOD does profile in different parts of the world. It is part of is to ensure, so far as we possibly can, that people are the contribution that we make by being part of this registered to vote. That is what we do and we try to larger unit. get people to have proxies wherever they can. I do take your point. I think I understand your point in that, Q3963 Lindsay Roy: We did that recently in Syria. if you think people might be eligible to vote in two Mr Carmichael: Indeed. places, you are suggesting to the MOD that we should Dr Murrison: No, I do not have much to add. All I persuade people to register in one place rather than would say is that defence and security is not the other. something to be trifled with. In terms of debates around independence, you have to decide what more Q3961 Chair: No; I am certainly not suggesting that is independence going to bring. Things like defence we should seek to persuade them of anything. I am and security are an absolutely crucial part of that. saying that, if they are eligible to vote in the Scottish Although we all understand that defence and security referendum by doing it in one particular way, or they on a day-to-day basis do not tend to influence the are eligible to vote somewhere else by doing it in a thinking of our voters, our constituents, unless of different way, they should be made aware that they course their jobs depend upon it, nevertheless it is a have that choice and then be assisted to make that crucial part of this debate that will be running until choice. If people decide that they do not wish to vote September. In my view, the Scottish National Party in the Scottish referendum, that is entirely a decision are going to struggle big time to convince the people for them. What I want to avoid is having a position of Scotland that their security and defence is going to after the referendum where people in the armed forces be enhanced by an independent Scotland. This is a say, “We were not told that we would have had the major part of the argument for those of us who believe cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:58] Job: 038186 Unit: PG04 Source: /MILES/PKU/INPUT/038186/038186_o004_odeth_SAC 131112.xml
Ev 54 Scottish Affairs Committee: Evidence
12 November 2013 Rt Hon Alistair Carmichael MP, Dr Andrew Murrison MP and Margaret Porteous passionately in the Union and we should be pushing the work that has been transferred on the carriers. as much as we possibly can into the consciousness Even though there are some redundancies taking of people who will be making this crucial decision place, those were always anticipated. in September. Chair: Thank you for the indication that the orders might be placed on the Clyde, for the OPV work and cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 55
Tuesday 10 December 2013
Members present: Mr Ian Davidson (Chair)
Mike Crockart Pamela Nash Jim McGovern Lindsay Roy Graeme Morrice ______
Examination of Witnesses
Witnesses: Paul Johnson, Director, David Phillips, Senior Research Economist, and Gemma Tetlow, Programme Director, Institute for Fiscal Studies, gave evidence.
Q3964 Chair: Welcome to this meeting of the those who watch and read our deliberations to have it Scottish Affairs Committee. As you are probably drawn to our attention. aware, we are undertaking an investigation into You predicted that “a significant further fiscal various aspects of separation. Obviously your best- tightening would be required in Scotland, on top of selling report has been drawn to our attention, and we that already announced by the UK Government.” thought it was so significant that we would invite you Could you explain to us how you go about making along to speak to us. your projections and why you have come to that Would you start off by introducing yourselves and conclusion? giving us a brief background for the framework within Paul Johnson: I will start, and I am sure Gemma will which you have drawn up the report? fill in. What we did for this report was to try to look, Paul Johnson: I am Paul Johnson, director of the IFS. essentially, at the mechanical effects of changes over Gemma Tetlow: I am Gemma Tetlow, programme a long period in the demographics of Scotland, in the director for our work on pensions and public finances. same way, as I said, that the OBR does for the UK as David Phillips: I am David Phillips, a senior research a whole. economist at the IFS. I have looked at public spending Feeding into the beginning of that is obviously a set in Scotland as part of this work. of initial numbers about levels of spending and Paul Johnson: The background to this particular taxation per head in Scotland. Quite a lot of what piece of work is as part of a big ESRC funded follows all the way through, in terms of why Scotland programme of work on Scottish independence. We looks different from the rest of the UK, is that those were specifically looking at fiscal issues, building on initial numbers are different. Spending per head in a lot of work we have done in the UK on public Scotland is rather more than in the rest of the UK. At the moment it is pretty much balanced by additional spending, taxation and public finances. What was revenues from North sea oil. Our assumptions about published a couple of weeks ago was the last part of North sea oil in the short run make quite a big that. We published some work a year or so ago on the difference to the position of Scotland in the long run, immediate fiscal consequences. We then published a but essentially we have something which looks at the series of papers on welfare, taxation and spending in tax per head by age at the moment and the spending Scotland specifically. The most recent publication per head by age, for at least some kinds of spending, looked at long-run public finance consequences for an and projects that forward with a series of demographic independent Scotland, very much in the same kind of assumptions into the future. It looks at how much tax way that the OBR does its long-run projections for the is raised and how much spending will be spent on UK as a whole. current policy. It is mostly constant as a proportion of earnings or national income going forward. That Q3965 Chair: Before we get into the meat of it, leaves you with a gap at the end. you are obviously aware that you, like everybody who It is worth saying that there is a significant gap at the raises any questions about separation, are being end for the UK as a whole on these projections, accused of talking Scotland down and being anti- largely driven by demographic change. What we see Scottish. During the discussions we have about when we push this through for Scotland is a rather particular points, it would be helpful if you made us bigger gap at the end, largely driven by the bigger gap aware of any particular objections that have been at the beginning, because spending per head is higher, made to the points you raised and gave us your but taxes, other than North sea oil, are much the same. response. Clearly we are working off the report. We Gemma Tetlow: The only thing I would add is that have seen some of the press coverage and some of the this type of modelling is inherently dependent on the comment that has been made on your report. assumptions that you put into the beginning of it—for Presumably, being sensitive authors, you have paid example, as Paul alluded to, how quickly you assume more attention to the responses that have been made certain items of spending grow in the future. We than we have. If there is anything in particular where assume that public service spending grows in line with you think somebody has simply missed altogether the average earnings in the economy. We have made an track of what you have been saying, or where you assumption about the profile of migration into think upon reflection there may be a point that you Scotland and down into the rest of the UK in the omitted, it would be helpful for the Committee and for future. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 56 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow
We therefore made an effort in the report to present a understanding the consequences of inaction rather number of different scenarios to show the sensitivity than in any sense a projection of anything that is likely of the exact final results to those assumptions. The big to happen. What is really important here, as Gemma picture—that Scotland faces a more challenging fiscal said, is to look at what these numbers look like under challenge over the next 50 years compared with the different sets of assumptions. We have run through UK as a whole—was rather robust to a number of quite a lot of those different sets of assumptions in alternative sensible assumptions you could make the report. about some of those, including the medium-term The key message from the OBR report, for instance, outlook for revenues from the North sea and the is that, first of all, because the population is ageing, longer-term position for revenues from that source. there is a fiscal challenge that will have to be dealt David Phillips: I do not have much to add. I would with. It is certainly dealable with. What our report emphasise that the short-term picture is still quite shows is that qualitatively the same is also true in uncertain. As Gemma pointed out, the starting Scotland, but maybe it will be a bit bigger. position in 2016Ð17 is still quite uncertain because there is uncertainty about oil revenues in the short Q3968 Graeme Morrice: Would you suggest that term. In the longer term, under the various scenarios the comment from the Scottish Government is perhaps we look at, despite that uncertainty, they all point in a tad unfair? the same general direction qualitatively. The Paul Johnson: It appears to start from an assumption quantitative findings are quite different, depending on that we are trying to do something that we are not. As the different scenarios you choose, but the qualitative I say, if we were trying to make predictions, it would picture looks more difficult in Scotland and stands out be entirely fair to say that it is absurd to predict 50 in all the different scenarios. years forward, but what we are saying is that this is a tool for helping you to understand the scale of the Q3966 Graeme Morrice: You mentioned that you challenge. used as a comparison the projections for the UK from the Office for Budget Responsibility. Have you done Q3969 Graeme Morrice: How can you possibly that on the basis that you agree with those projections? make projections that far into the future with any kind Gemma Tetlow: We constructed our own model for of certainty at all? the UK as a whole. In order to focus on what the Paul Johnson: I do not think it is with any great difference is between the UK as a whole and Scotland certainty. As I said, this is an illustration of what specifically, we made the decision to try and replicate would happen under a reasonable set of assumptions, the OBR’s model as closely as possible. In doing so, and showing what that looks like under different we now understand much better what the OBR does. assumptions. It would be foolish to say that it It is not perfect, and going forward we think there encompasses any kind of certainty, but what it does are ways you could improve that model, but almost encompass is a sensible set of judgments about how deliberately we wanted to start from the position for the world is developing, how demography is changing the UK that was the familiar picture the OBR have set and what, with nothing else happening, that changing out for the last few years, and then talk about demography would do to the tax and spending differences for Scotland and the UK on that basis. situation. It is a tool for helping you realise that Our model for the UK is slightly different from the something will need to be done over the next, OBR’s, but we have a slightly more optimistic outlook relatively small number of years in order to stop for the UK in our model than the OBR does. To the something nasty happening in the long run. It is not extent that our picture is worse for Scotland, it is not intended as an idea that this is certainly what will because we are starting from a more pessimistic happen. outlook for the country as a whole. Q3970 Pamela Nash: I will not be the only person Q3967 Graeme Morrice: Apparently, one of the in this room who had a Yes Scotland campaign responses to the projections of spending and taxation newspaper put through their door in recent weeks. over so many decades is to brand them as largely Within that were lots of figures and information about fantasy. Indeed, the Scottish Government almost said revenue and how Scotland’s wealth compares with the as much about your report. How would you respond rest of the UK. Even if you have not seen it, I am to that? sure you are familiar with the figures that the Scottish Paul Johnson: If they were predictions, they would Government are using. Can I ask you about the be fantasy, but they are essentially a planning tool for accuracy of those compared with your findings? understanding what might happen if nothing is done. David Phillips: There are a number of different Nobody is suggesting that either the UK or Scotland statistics that the Scottish Government have been will end up in the position that these numbers look using. First, they have been using the GERS figures— like in the long run, but what it does tell you is that if Government expenditure and revenue in Scotland— you carry on with current policies under a certain set which cover the years 2011Ð12. Our own analysis of of assumptions, that is where you are in danger of the taxation and Government spending picture in ending up. Scotland also makes use of those data. On the whole, One of the things that you see in these figures is that we think the data are fairly reliable. In a number of relatively small changes to policy in the short run can areas you have to make certain assumptions about have quite a big effect on what the figures look like how to allocate certain taxes and spending to at the end. You should see it as a tool for Scotland. Corporation tax is an example. It is quite cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 57
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow hard to know how much of that comes from Scotland there are obviously ways that you could manage that and how much comes from the rest of the UK. They volatility by smoothing over time. One of the reasons, use one method; HMRC has put out different to answer the previous question, for taking a much statistics, which leads to a different method and comes longer-term view is that there is a huge amount of out with different numbers. Both are imperfect uncertainty about exactly how much revenue will be measures, but neither looks particularly silly to use. raised from oil and gas over even the next 10 or 20 The underlying figures used on GERS look reasonably years. Looking much further ahead, most projections credible about the situation in Scotland in 2011Ð12. would suggest that we will eventually deplete our oil The figures produced on Scotland’s national income and gas reserves; therefore, that is a longer-term and GDP look to be reasonable as well. They are challenge one needs to be prepared for, particularly in largely based on ONS data for the national accounts the context of an independent Scotland where that for the UK as a whole. would start off as a very large revenue stream—a very There have also been projections forward to 2016Ð17 large component of total revenues for Scotland. as part of the Scottish Government’s White Paper. David Phillips: The question is not about the accuracy Whilst they are more optimistic than our basic case, of the figures, but the potential relevance of the which is based on the OBR’s projections for oil figures. The figures for 2011Ð12 refer to the past, and revenues from the March Budget, they are within the already by 2012Ð13 there was a decline in oil range of sensitivities we look at for the short term. revenues, which the OBR thinks is going to continue. Gemma Tetlow: To add to what David said, we have The Scottish Government think it will rebound. The assumed that the numbers that the Scottish benefit of our work is that it is forward-looking rather Government are using for 2011–12—which suggest than looking at past figures on the fiscal position. that more tax was raised per head in Scotland than in Paul Johnson: The key point is that the fiscal policy the rest of the UK and that although spending was needs to be robust to different possible outcomes. An higher, it was more than offset by the higher level of independent Scotland might be lucky—they might get taxes that were raised—are the same numbers that we levels of oil revenues as they have been in the past, use in our long-run projections. The differences in the and that would be wonderful for them—but they messages are that 2011Ð12 was an unusually bumper might not. Fiscal policy needs to be robust to the year for revenues from oil and gas. “might not” bit.
Q3971 Pamela Nash: Could you explain why that Q3973 Pamela Nash: To sum up, would you say is the case? that the figures they are using would be an absolute Gemma Tetlow: It is a very volatile revenue source. best-case scenario for Scotland to calculate the If you look back over time, it goes up and down a revenue? huge amount. In 2012, there was a major shutdown at Paul Johnson: The White Paper figures are not quite one of the oil rigs, which substantially reduced as best-case as our best-case numbers, but they are production and therefore reduced the revenues that pretty positive. were raised. A very similar thing happened again in Gemma Tetlow: Certainly the OBR’s current central 2013, which led the OBR to revise their latest forecast for oil and gas revenues is well below the forecasts for oil revenues for this year down by £2 numbers that were used in the White Paper. Our best billion. It is just highlighting that this is quite a case in our reports uses the most optimistic scenario volatile revenue stream, which, at the UK level, is from the Scottish Government’s oil and gas bulletin relatively small. earlier this year. They did not choose to use that most optimistic case in their recent White Paper; they used Q3972 Pamela Nash: Perhaps I should have used one of their more central scenarios, but it is still above the word “appropriate” rather than “accurate”. I am the OBR’s estimate. not saying that the figures are false, but are they the best measure to allow people to make the decision? Q3974 Pamela Nash: Apart from differences in oil You mentioned the volatility of the oil market. Are prices, are there any differences at all between the figures being made available—or do you have fiscal projections produced by the Scottish figures—that a lay person could average over a period Government and your own? of time to make it a better comparison, rather than just Gemma Tetlow: We agreed entirely on most using the 2011Ð12 figures that have been used by the components, with the exception of debt interest Scottish Government? spending. The White Paper presented a scenario Gemma Tetlow: To do the full GERS analysis, which where Scotland got a population share of debt and the Scottish Government will be doing early next year, paid the same level of interest rate as the UK. They is a reasonably large exercise. In the specific case of also presented a lower scenario for debt interest oil and gas revenues, we obviously already know what spending, which involved an independent Scotland those generated last year. That is a known quantity. taking a less-than-population share of debt. In our Taking that into account, the numbers in our report report we looked at a couple of different scenarios. suggest that spending would have exceeded revenues Obviously that would be one area for negotiation in Scotland by a larger amount than in the rest of between an independent Scotland and the rest of the the UK in 2012Ð13, which does reverse the picture UK. in 2011Ð12. In terms of debt interest borrowing rates, in our report I think you are right: the much more important we only looked at scenarios involving either the same question is abstracting from that volatility, because level of interest rate as charged to the UK as a whole, cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 58 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow or higher levels of interest. That was on the basis of that source, which is where perhaps our bottom-line some work that the National Institute for Economic message sounds a bit different from what the Scottish and Social Research did, which suggested that a small Government would be saying when they are focusing independent country like Scotland would face some on the picture in 2016. Their view is much more premium on their borrowing rate over the UK’s. optimistic than the OBR’s view, for example, but there Chair: Could I stop you there? Unfortunately, we is inherent uncertainty about that. have a vote. Sitting suspended for a Division in the House. Q3977 Pamela Nash: Thank you for that answer. As On resuming— we look at these figures and the current situation and try to predict going forward, is there anything we have Q3975 Chair: We have a quorum so we can start not thought of yet that would impact on this again. Ms Tetlow, have you finished your points? significantly? Is there a factor that might be different Gemma Tetlow: I have one final thing to add. There if Scotland was a separate country from the United was a small difference between our forecasts for Kingdom, which would be different from just onshore revenues in 2016 and what was in the White comparing it with the figures as they stand today? Paper. Essentially, the White Paper assumed that Gemma Tetlow: There are certainly a number of Scotland would continue to generate the same share of factors. First, one of the sensitivities that we look at aggregate revenues in 2016 as it does now. We instead in our report is sensitivity to alternative scenarios for incorporated the demographic projections for Scotland migration. There have been some indications from the and the rest of the UK. Essentially, the Scottish Scottish Government— population is projected to grow less quickly over the Chair: Could we leave migration to one side? We next five years. Therefore, we projected slightly lower want to come back to it separately later on. revenues—£1 billion lower—generated by Scotland in Gemma Tetlow: Obviously, if you were to radically 2016 than the White Paper did. change the tax system in Scotland in response to independence—for example, cutting the rate of Q3976 Pamela Nash: You have already mentioned corporation tax—that could reduce overall corporate the fact that the forecasts you make are much longer tax revenues, unless it generates a sufficient term than those that have been created by the Scottish behavioural response with companies moving into Government. Could you tell us about the model you Scotland. Changes to economic policy could also use and what horizon scanning and forecasting you possibly affect productivity growth in Scotland. We use? It is obviously an art and not just a science. Can looked at a couple of different scenarios in our work you explain the process to us and to the lay people for average productivity growth in Scotland. who might be looking at this evidence later, and tell us the impact of the difference between that and what Q3978 Chair: Could I come back on a couple of the Scottish Government are saying at the moment points to seek clarification? I was slightly confused by and what their predictions might be? your reference to 2012. You were saying that the Gemma Tetlow: Our model involves a bottom-up Scottish Government had based their account on the projection of different tax streams and different financial year 2011Ð12, but you then went on to spending components year by year over the next 50 mention how figures had fallen in 2012 and in 2013 years. Our model produces a projection for all the because of a breakdown on a rig, and so on and so numbers that the Scottish Government talk about as forth. Do I take it that that part of 2012 was the part of well, but the main motivation for doing our model is 2012 that was not part of the financial year 2011Ð12? to understand where we will be in 50 years’ time Gemma Tetlow: Yes; that is correct. The numbers that rather than where we will be in 2016. the Scottish Government have used, which they To be honest, we have done a very similar exercise to formalised in their latest Government expenditure and the way the Scottish Government came up with their revenue in Scotland publication, were for the 2011Ð12 numbers for 2016Ð17. However, given what is driving financial year. In the 2012Ð13 financial year, revenues the pressures for Scotland—one is the long-run from oil and gas declined substantially. That is a year demographic pressures, which are quite similar in that has not yet gone into a formal GERS publication, Scotland to the rest of the UK—spending is going to but that will come out next year. An assessment of increase slightly more as a share of GDP according to that picture was included in our report. our projections for Scotland than for the rest of the UK, because the average age of the population is Q3979 Chair: How professionally reasonable, if that getting a little bit older. is the right term, is it to take a single year in these However, one of the major challenges over the next circumstances? Unless I am mistaken, you are telling 50 years, according to our model, is what happens to us that 2011Ð2012 was a particularly good year for oil revenues for Scotland from the North sea. If you look revenues. In professional statistical terms, is a simply over the next five to 10 years, as I said before, reasonable way to proceed to take the year that suits there is a great deal of uncertainty about exactly at you best, or is it better to take several? What would what level those revenues will be. You could have a be the norm in these circumstances? Would you long debate with different people who take different normally take an average of five or an average of 10? stances on the outlook for oil prices and for Is there something that would be accepted in the production in the North sea. Looking 50 years out, profession as good practice? there is less uncertainty about the fact that you Gemma Tetlow: The key question here is what you probably will not generate very much revenue from are using the number for. If you are using the number cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 59
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow to try and illustrate how the public finance position of the oil and gas receipts into that picture. To the extent Scotland compares with that for the UK as a whole, that the Scottish Government have presented the past using 2011Ð12 on its own presents a slightly as an indication of the viability of the future, yes, misleading picture, because it was an unusually using a different year of data is going to change that bumper year for oil and gas revenues. Drawing the presentation. conclusion that the higher level of spending in Paul Johnson: Presumably it will not change Scotland was more than matched by higher revenues anything in their White Paper numbers for 2016Ð17. in that year hides the fact that it would not be true Gemma Tetlow: I think there is a serious question. were you to use the data from one year later. We have an independent body that forecasts the UK’s The reason why that year has been used is that it is the public finances that clearly is taking a very different last year for which comprehensive data are available. view at the moment from what the Scottish Obviously the 2012Ð13 data will be available, in Government are suggesting will be the picture in probably March of next year. I would hope that they 2016Ð17. There is a very interesting question, to get will get incorporated into the public debate as well, to those two organisations to explain why they take quite take into account the fact that they highlight the such a different view, and why the Scottish volatility of that revenue stream. Government believe that their number is better than what is currently being projected by the OBR for the Q3980 Chair: It strikes me that you are a very UK. generous person. You are suggesting that they chose the 2011Ð12 year not because it was the year that Q3983 Chair: There is no evidence, is there, that suited their case best, but because it happened to be the OBR are fundamentally anti-Scottish and are the most recent year, even though to take that year in interested in talking Scotland down? That is the usual isolation was effectively to distort the pattern. accusation made to anybody that disagrees with the Paul Johnson: I do not think it would be right for us figures presented by the Scottish Government. Do to speculate why they chose it. It is the most recent they have a record in this matter of disagreeing with year and it is the year they chose. In their White Paper the Scottish Government? they are also using their predictions, which are Gemma Tetlow: I am not aware of them having relatively optimistic, for 2016Ð17. They are not just entered into this debate at all. Obviously their job is using that 2011Ð12 number, but the relatively to produce projections for the UK as a whole. If they optimistic numbers they are using are based on are talking down revenues for Scotland, they are projections. We will see. In a sense, the answer to talking them down for the UK as a whole as well, and your question will come in March, when the most I think that would be outside their remit. recent year changes, and it will look less positive from that point of view. Q3984 Chair: If we wanted to have you back Q3981 Chair: But am I right in thinking that the again—should this be such an enjoyable experience OBR produced more recent figures, which are not the for us all that we want to repeat it—when would you full-year figures, which indicate that oil income is be in a position to give us figures based on the latest falling? year’s figures? How long would that take you? Paul Johnson: Yes. Basically you said that a lot of this work has been done; it is just the detailing of it and the allocation Gemma Tetlow: We know the concrete outturn for oil and gas revenues in 2012Ð13. That is a published and so on. national statistic; a piece of data. The bit of the Gemma Tetlow: We have already done our own exercise that has not been done is the full exercise of estimate of that, which is included in our report. allocating revenue streams and spending items across Obviously it may differ slightly; we have not spent Scotland versus what happened in the rest of the UK. as long as the GERS publication will spend trying to That is what will be done in the GERS publication. allocate it all, but we have had our own best guess at However, already at this stage, given that you know that and those numbers are in our report. that most of those oil revenues accrued to Scotland, the picture that is going to come out is fairly obvious. Q3985 Chair: I wanted to clarify whether, once the The revenues per head from offshore receipts will be latest figures come out, you would revise what you substantially lower in 2012Ð13, once that exercise has said in this report, but I think you are saying that you been done. have already taken account of that. Paul Johnson: I do not think it will change our long- Q3982 Chair: If you were constructing the Scottish term figures in any significant way. Government’s predictions in April, based on what by David Phillips: I want to add two things. First, on the then would be the latest figure, would it be fair to say point about choosing 2011Ð12, in a lot of the analysis that they would give you a completely different they put forward they talked about averages over the version of the financial viability of a separate Scotland last five years of data, from 2007Ð08 to 2011Ð12 in from the figures that the Scottish Government have the Scottish Government’s case. Over that five-year actually produced? period, it looks to be in a slightly stronger position Gemma Tetlow: I am not sure they would give you a than the UK as a whole. That is one point in defence different version of future viability, in the sense that I of what they have been doing. If you chose five years think you would already want to incorporate the before that, though, they would have been in a worse importance, the volatility and the uncertainty about position than the UK, and five years after, from cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 60 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow
2012Ð13 to 2017Ð18, again, on the OBR’s forecast, Gemma Tetlow: Yes; a slightly worse picture for they would be in a worse position. Scotland. They are not always choosing just 2011Ð12; they have sometimes chosen a longer time period, perhaps in Q3991 Lindsay Roy: Are you aware of the NIESR order to deflect that criticism. They chose five pretty report? Do you have a view on what they said about good years for oil revenues in aggregate. The year demographic change in Scotland? It is different from 2008Ð09 was also a very good year for oil revenues, yours. and 2010Ð11 was not bad either. Gemma Tetlow: I think some of the press coverage was misleading on the extent to which we differed in Q3986 Chair: Remind me again. What do all these our projections from NIESR. As our report sets out, years that they have chosen have in common? there is not a very big difference between our David Phillips: They are the most recent five years projections for the demographic pressures in Scotland of data. and in the UK as a whole. That was broadly the conclusion of the NIESR report as well: demographics Q3987 Chair: And they are all years that show the do not drive the differences between Scotland and Scottish Government’s case to the best advantage. Is the UK. that a fair way of putting it? The conclusion in our report that Scotland faced a David Phillips: I would say that they are the most more challenging fiscal position over the next 50 years recent years of the data they have chosen. It was was largely as a result of what one assumes about revenues from the North sea, which the NIESR report designed to deflect criticism about choosing the one did not take into account at all—they did not make year that was most advantageous. Two of the other any assumption about North sea revenues. It is also years in that period also look pretty good, and two of dependent on the starting level of spending in the years don’t look so good. It is trying to average Scotland, which again was not a focus of the NIESR things out. report. I do not think we differed very much from NIESR in terms of the demographics. Q3988 Lindsay Roy: I think you said the demographic picture was broadly similar between Q3992 Lindsay Roy: The Scottish Government Scotland and the UK. Is that right? Are there any have said that Scotland’s demographic position is differences? If so, what are they and what implications more favourable than the UK’s. For example, Nicola are there for Scotland? Sturgeon described the idea that Scotland’s population Gemma Tetlow: In our report we use the 2010-based was ageing more than England’s as a “myth”. Was ONS projections for Scottish and UK population she right? growth. We have not incorporated the 2012-based Paul Johnson: It does not sound like it. estimates that were published only just before our Gemma Tetlow: Certainly on the basis of the ONS’s report came out. Our basic model looked at the ONS projections, the average age of the population in low-migration scenario for Scottish and UK Scotland is projected to increase by more over the population growth, which the OBR argues is most next 50 years than for the UK. To come back to the consistent with current UK Government policy on point that was raised earlier, that probably is migration. something that would be sensitive to an alternative set The picture from that is that the Scottish population of policies that could be pursued under independence. as a whole will grow less quickly than the UK The average age of the population is very heavily population. In particular, Scotland will see declines in dependent on the number of inward migrants you get the number of people at working ages and a growth and what age groups they are in. in the number of people over the age of 66, compared with a picture for the rest of the UK that is growth at Q3993 Lindsay Roy: But you are certain that your all ages, but particularly high growth amongst the evidence is secure. over-66 population. Gemma Tetlow: We have not devised our own projections for the population. However, we have used Q3989 Lindsay Roy: What are the implications, the officially recognised ONS demographic given that scenario? projections. Those central variants suggest that the Gemma Tetlow: The implications are that old-age- Scottish population will age more rapidly. related items of spending—particularly pensions, David Phillips: We have also tested the sensitivity of social care and health care—are projected to grow our results, including the high migration scenario, slightly more quickly as a share of national income which had migration of 26,000 per year instead of for Scotland than the rest of the UK. The major point 9,000 per year into Scotland. We tested it to a no net is that for both Scotland and the UK there is going to migration scenario as well, to see how sensitive the be a very large increase in those age-related items of results were. It obviously changed the quantitative spending over the next 50 years. The differences findings, but the qualitative finding of a more difficult between the UK and Scotland are rather small in the fiscal situation was robust with those differences in context of that much bigger picture, which both migration. nations face. Q3994 Jim McGovern: First of all, thank you for Q3990 Lindsay Roy: There will be a differential coming along. I want to explain why everybody negative impact. smiles every time you mention “GERS”. I realise it cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 61
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow is an acronym, but in Scotland it is very much an the fact that people in Scotland are dying sooner. Is abbreviation for Glasgow Rangers Football Club. that correct? On the subject of demographics, is it true to say that Gemma Tetlow: Possibly. On the numbers we have, it people in Scotland have a lower life expectancy than looks, in the scenarios we are using, like we are people in the rest of the UK? projecting higher percentage growth in the over-65 Gemma Tetlow: I think that is the case. I am afraid I population in Scotland than in the UK, but similar-ish, do not know quite what is assumed in the ONS or slightly higher— projections about the different life expectancies of people in Scotland and the rest of the UK. Q3998 Chair: The Deputy First Minister and you Jim McGovern: The chart we have here would seem cannot both be correct. You are saying different to suggest that. things. Gemma Tetlow: I think it is true at the moment. David Phillips: When did the Deputy First Minister David Phillips: At the moment, at least in the medium say this? We are using the 2010-based projections. term, it is predicted to persist. I am not sure about There have been some changes in the 2012-based the longer term, up to 2060. There is a substantial projections that came out—bad timing—about a week difference—about two years—at the moment, which I before our stuff came out. There could be a think in the medium term is forecast to persist. In the quantitative small change in the figures since our longer term, I am not sure. analysis was conducted. It would not change the core conclusions of our work, but it could be because she Q3995 Chair: I want to pursue the quote that is using slightly more up-to-date figures from the ONS Lindsay referred to. We had the Deputy First Minister than we used. saying that “the number of people at state pension age Chair: We will obviously try and clarify that. will increase by 28 per cent in the UK and 26 per cent in Scotland.” That seems to be contradicted by what Q3999 Lindsay Roy: Can you say more about you were saying. Can you clarify? migration and the projection period over which you David Phillips: I do not think that is necessarily made the estimate—just to fill the gap in terms of contradicting what we are saying. What matters for age dependency? our projections is not the absolute increase in the Gemma Tetlow: We have used the ONS projections number of old people; it is the increase relative to the up to 2062. As David said, our basic model uses the rest of the population. One of the reasons why the ONS’s low migration scenario, which involves net older population is going up more in the UK as a inward migration of 9,000 a year on average to whole—it is 28% rather than 26% in Scotland—is Scotland over that 50-year period. I am afraid I do because the population in the UK as a whole is going not know the exact profile, but on average it is 9,000 up rather faster than in Scotland. When we say that a year. Scotland is ageing more rapidly, it is not because the We also looked at the high migration variant, which number of older people is going up more in absolute involved 26,000 a year average net migration into terms; it is that they are going up more, relative to the Scotland. It is obviously quite a big difference, which size of the rest of the population. In the projections will change the demographic structure quite for the UK as a whole, the working-age population is substantially. also projected to increase over the next 50 years, whereas in Scotland it is predicted to decrease slightly, Q4000 Lindsay Roy: A minimum of 450,000 over under the ONS analysis. a 50-year period. Gemma Tetlow: Yes. Q3996 Chair: If the number of people over state pension age in the rest of the UK is rising more Q4001 Lindsay Roy: That is more than the quickly, other things being equal, that is because population of Fife. It seems quite a big number. people in Scotland are dying quicker, which should be David Phillips: The lower case projections by the a cause of concern for us. ONS will be a bit lower than has been the experience Paul Johnson: I do not think that is the main thing in Scotland over the last 10 years or so, but higher driving it. It is just that the population of the UK as a than the long-run average. whole is growing. They are getting older and getting Paul Johnson: One thing I would say about inward to state pension age, and there are more of them, but migration in Scotland at the moment from outside the the population of Scotland is not growing. UK is that it is remarkably low for a rich part of the UK with a series of top-class universities and so on. Q3997 Chair: I understand that these are in a sense It is much more like some of the much poorer parts two different things, but the point that Ms Sturgeon of the UK and much less like London, the south-east was making is not directly related to the question of and other of the rich parts of the UK. In a sense, there percentages and a comparison of those who are above is scope economically for more inward migration, but pension age and the ratio of those who are below— as you say, even 9,000 a year is nearly 500,000 extra that is a different issue altogether. Leaving aside people over 50 years. migration, if you have a population where the number of people at stage pension age is increasing by more Q4002 Lindsay Roy: And it could be higher. in the UK than in Scotland, it is presumably an Paul Johnson: The high migration scenario is almost indication of a bulge just below pension age and also three times the size of that, yes. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 62 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow
Q4003 Chair: Could I clarify that? In terms of Q4007 Jim McGovern: You have done various migration figures, you were talking about 500,000 and analyses. How significant are they? Without being in its being potentially triple that. That is three times the any way complacent, even your most optimistic size of Glasgow as inward migrants in order to findings suggest that Scotland would still be under balance the difference in ageing populations. Is that more fiscal pressure if it was separated from the UK. correct? Paul Johnson: That is correct. David Phillips: No. The high migration scenario is not one we have chosen to balance the difference in Q4008 Jim McGovern: Thanks for your brevity. We ageing populations or to remove the more difficult understand that the main factors driving this are the fiscal situation; it is a scenario that the ONS produces loss of oil revenue and the demographic changes. Is based on a high estimate. I am not sure we have that right, and could you explain the significance of looked at the extent to which that would address the each of them? I am sure that will elicit a longer differential ageing. It is not enough to fill the fiscal answer. hole; I know that. Paul Johnson: The main factor driving the difference Paul Johnson: It is worth saying that the high ONS is, in a sense, the starting point, which you can either migration projections for the UK as a whole are very say is the loss of oil revenue relative to where we substantial over long periods—I can’t remember the were at least in 2010Ð11 and 2011Ð12, or you could numbers—which would very substantially increase say—it is a very straightforward point—that onshore the size of the UK population and its composition. revenues per person are very similar in Scotland and The same is true of Scotland if you take the higher the rest of the UK and spending is 12% or so higher projection. per person in Scotland compared with the rest of the UK. That is a very significant difference. If it were Q4004 Chair: I want to be clear, inasmuch as we the case that that was simply covered, roughly can be. Given the impact of ageing, given the need to speaking, by oil revenues now and into the future, the have a larger number of younger workers to support difference between Scotland and the rest of the UK those who are ageing and given the fact that, as I would be relatively small. But because it does not understand it, the Scottish population is ageing faster, look like those oil revenues will be there, that will we are trying to get some feel for the numbers of widen into a bigger and bigger gap over time. inward migrants that might be necessary in these The fundamental difference is about that starting circumstances. We have heard the half a million point, in terms of revenues relative to spending. It is figure, which is greater than the population of Fife, made a bit worse by the fact that the demography is a or thrice that, which is three times the population of little less good for Scotland than the rest of the UK. Glasgow over a period. Can you give us any better It is the starting point that is driving most of this. comparison that we could use, or any better figure? Gemma Tetlow: It is worth saying that different Q4009 Chair: Would I be reasonable or fair in patterns of migration bring a different set of comparing you to Private Frazer, who says, “We are challenges. If you have a higher number of migrants all doomed”? This is not good news, is it, for those of working age, that means you will have more who are arguing for a separate Scotland. You are school-age children, for example, and that will push saying that under the most optimistic assumptions that up items of education spending. While it addresses you make, the fiscal position is worse for a separate one issue of increasing your GDP and giving scope Scotland than for the UK as a whole. for spending on older people, it introduces a different Paul Johnson: That is true. I do not think one should set of issues. necessarily conclude from that that we are all doomed. To give some sense of that, one way we tried to You could conclude that we are all doomed—the UK quantify the scale of the challenge in our report was and Scotland—because the scale of the changes is to quantify the fiscal gap. For example, say you want quite substantial, but I would not say that. to aim for a 40% debt-to-GDP ratio at the end of the Chair: But you’re an economist. 50-year horizon, what scale of fiscal tightening do you Paul Johnson: If you look at the scale of the fiscal need to do each year over that period to get you to that consolidational change that will be required, on our position? In our basic model, using the low migration central numbers, it is less than is happening over the scenario, we estimated that you would need to do a eight or 10-year period that we are going through at 4.1% of GDP fiscal tightening in Scotland. Using the the moment. We are doing that with some pain over high migration scenario—so the only change you an eight-year period, and we are looking over a much make is from low to high migration—reduces that longer period. There are clearly things that figure from 4.1% of GDP to 3% of GDP. In some Governments can do to change this, in terms of sense, it addresses a quarter of the problem. increasing taxes, reducing spending and changing the way that public services work. Q4005 Chair: To reduce it from 4% to 3%, what It is clearly the case that the UK as a whole, and an level of migration or immigration would be independent Scotland by itself, could deal with these necessary? pressures by changing the amount it raises in taxes or Gemma Tetlow: That is going from 9,000 a year net that it spends over a period of time, as we have in the migration to 26,000 a year net migration. UK adapted to an ageing population over the last 30 or 40 years or so. We are not all doomed, but we do Q4006 Chair: Is that 26,000 a year every year? have to make some serious choices. The choices that Paul Johnson: Yes. an independent Scotland would have to make would cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 63
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow be somewhat more substantial than the choices that Given the uncertainty around these numbers, is it wise the UK as a whole would need to make, largely to try and predict them? because it would be starting from a position of higher Paul Johnson: You need some kind of planning basis, spending in the first place. but that comes back to one of my earlier answers. These numbers are clearly uncertain, and it is Q4010 Chair: So Private Frazer might adapt his therefore clearly the case that if you were an position: it is not entirely doomed. A pattern of independent Scotland, where this is a significant and economic retrenchment is taking place at the moment. important part of your revenues, you would want your In the event of separation, there will require to be a fiscal situation to be somewhat invariant to what is combination of greater tax increases than the rest of going on with the oil revenue. You would not want the UK, bigger cuts in spending than the rest of the to base your planning on an assumption of buoyant UK or a combination of both. revenues. You would want your planning to be pretty Paul Johnson: Yes, though in part you could say it robust to the different levels of revenue. Yes, we was simply to take spending to the same kind of levels always need to have a best estimate of where we will as in the rest of the UK. But, yes; you would have to be in the future, but we also need to understand where do more on the tax and/or spending side than would important elements of this are very uncertain, and then be the case in the rest of the UK. we need our planning to be robust to that uncertainty.
Q4011 Mike Crockart: You have dealt with my Q4014 Graeme Morrice: Would you say that the point to a certain extent. The difference is not really OBR predictions and the Scottish Government figures the starting point. You were saying that it is all about are assertions? the starting point, and you have a different starting Paul Johnson: They are projections based on the point from the Scottish Government, but it is really information that they have. We have not looked in about the projections, isn’t it, and the statistical detail at why or how. We have looked at them to some assumptions you make that everything else remains extent, but we do not have a strong view about which the same. The argument therefore is that if the Scottish of them is the right number. Government chooses to do things differently, that can be dealt with in some other way. It is just being clear Q4015 Graeme Morrice: It has been suggested that about what that other way means. You have alluded to control the fiscal gap identified by the new to that, but have you made any calculation of what projections, taxpayers in Scotland would have to pay size of extra tax or spending changes would need to at least £1,000 a year more to plug that gap. Would happen to deal with the differences between what you you agree with that? and the Scottish Government are projecting? Gemma Tetlow: I will explain where the £1,000 Gemma Tetlow: To clarify what Paul was saying, it is number comes from and then describe whether I agree not that there is a difference in the starting point with it. The most optimistic scenario that we looked at between what we think and what the Scottish in our report—which involved assuming the Scottish Government thinks, but that there is a difference in the Government’s most optimistic case for oil revenues starting point between spending per head on people in over the next five years, but projecting a decline from Scotland compared with spending per head on people that point thereafter—assumed high migration and in the rest of the UK. The former is 12% higher than that Scotland would take a 40% debt-to-GDP ratio at the latter. That is what we mean by a difference in the the point of independence rather than taking a starting point. Therefore, once you project forward population share of debt, which would imply a higher and take into account that oil revenues, which are number. Under that most optimistic collection of currently higher per head in Scotland— assumptions, our estimate was that Scotland would face a fiscal gap of 1.9% of GDP—the fiscal gap being Q4012 Mike Crockart: But surely that figure is trying to get to 40% of GDP-debt ratio by 2060. That agreed upon—the level of spending? was higher than the 0.8% that we estimate as the gap Gemma Tetlow: Yes; that is agreed upon. But that is that the UK faces. what we mean by a difference in starting point. It is The £1,000 number comes from saying that if you already the case that we all agree that spending per want to do a fiscal tightening of 1.9% of GDP, to give head is higher in Scotland. Looking forward, either you a sense of what that means, you could raise that that number will have to come down to the level that sort of money by increasing the basic rate of income we currently see in the UK, or revenues would have tax in Scotland by 8p. That is just an illustration. They to be raised elsewhere to put Scotland in the same almost certainly would not want to make an position as the UK, which would still require a further adjustment just on that margin, but that is the fiscal tightening to deal with the long-run pressures illustration. that the UK has as a whole. What the Treasury did with that number was to estimate for the average basic rate taxpayer in Q4013 Graeme Morrice: We won’t go into what Scotland what it implied in terms of pounds per year Corporal Jones used to say on “Dad’s Army”. of extra income tax that they would pay. That is where The Scottish Government said that oil revenues will the £1,000 number comes from. It is what would be much more buoyant than the Office for Budget happen to the average basic rate income taxpayer in Responsibility predicts. Apparently last week the Scotland if you increased the basic rate from 20p to OBR forecasts showed a sharp drop on oil revenues. 28p. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 64 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow
It is a correct number in those terms. It relates to the it would be more challenging for Scotland to maintain entire fiscal tightening that an independent Scotland that same average rate of growth, because of one would have to do, as opposed to the amount by which sector of their economy declining at the same time. that would be bigger than the fiscal tightening the rest of the UK would have to make. For the UK as a Q4019 Graeme Morrice: Do you think it is whole, there is 0.8% of GDP fiscal gap compared with doubtful that year on year Scotland could double its 1.9% of GDP for Scotland. You would be talking economic growth, and that that would be sustainable about maybe £400 higher income tax for the UK on over a longer period? that same basis, compared with £1,000 for Scotland. Paul Johnson: There is a separate assumption It would be wrong to characterise the £1,000 as the underlying your question, which is about the impact extra that Scotland would have to pay compared with of growth on the fiscal numbers that we are looking at. the UK. The UK would have to pay something as Clearly, any additional growth would make Scotland well. better off, and public services and so on would be better. The way the model is constructed means that Q4016 Chair: I followed all that until you got to the additional economic growth does not help as much as end, when you said it would be unfair to characterise you would expect in terms of the fiscal numbers. One £1,000 as the extra figure, because the UK would have assumes, for example, that increasing spending on to pay a figure as well. I thought the whole point of health and so on increases in line with economic your explanation was that there were going to be cuts growth, so that health does not become a smaller and in the UK, but then there were going to be more cuts smaller part of the economy or doctors do not start in Scotland, which would then equate to the getting paid less and less relative to everybody else. equivalent of 8p in tax, which is the equivalent of The actual impact on these numbers, in a slightly odd £1,000 each. Where did I lose the thread? way, does not have that much effect. You would need Gemma Tetlow: Our most optimistic case suggests extraordinary amounts of growth to fix these numbers. that Scotland would face a fiscal gap of 1.9% of GDP. Obviously, Scotland would be a wonderful place if it Chair: I got that bit. did get that extraordinary amount of growth. Gemma Tetlow: That amounts to £1,000 per basic rate income taxpayer. The UK would face a fiscal gap of Q4020 Chair: The only comparable situation I can 0.8% of GDP, so perhaps more like £400 per basic think of is when the Czechs and the Slovaks split. Was rate income taxpayer. The extra challenge faced by there any evidence that there was a sudden boost in Scotland is the difference between those two numbers, productivity from either bit as a result of the division? not the whole £1,000 number on its own. Gemma Tetlow: That is not something we have looked at, I am afraid. Q4017 Chair: So it is only £600 extra. Paul Johnson: We don’t know. Gemma Tetlow: Something of that order, yes. Chair: That has the merit of clarity as well. Thank Chair: I am sure that Private Frazer and indeed you. Corporal Jones will be greatly relieved to hear that. Q4021 Mike Crockart: If I were the First Minister Q4018 Graeme Morrice: Thank you, Captain in an independent Scotland coming out of an Mainwaring. independence referendum, what would your You obviously make assumptions about greater recommendations be to me about what we would have economic growth. Indeed, the view of the Scottish to do to maintain long-term fiscal sustainability? Government is that the fiscal gap that you identify Paul Johnson: Repeating in a sense what I said could be filled by greater economic growth in before, the first thing I would do is make sure that my Scotland. It has been suggested that that would require fiscal stance was robust to the vagaries of what might Scotland to see economic growth that was double each happen to oil. Because I would be a new country in year. What is your response to that assertion? the international markets, I would want to have some Gemma Tetlow: In most of the scenarios we have very robust and independently adjudicated fiscal rules. presented, we assumed that Scotland would In order to achieve that, I would need a pretty clear experience 2.2% a year average labour productivity plan for how I was going to get from where I started— growth, which is the same assumption as the OBR which, more likely than not, would be a position of makes for the UK as a whole. However, at the significant deficit, particularly if this was in 2016, moment the offshore economy comprises a large because the UK as a whole would not have got fraction of the Scottish economy. Assuming that the through its deficit reduction programme. I would want whole Scottish economy grows at 2.2% a year— to look at an appropriate combination of spending cuts essentially, as the size of the offshore economy and tax rises over a reasonably significant period—it declines—you need to make that up in terms of the would not have to happen all in year one—in order to onshore economy. To that extent, assuming the same meet a very clearly defined set of rules aiming at some average growth rate for Scotland and the rest of the kind of current structural balance in the medium term. UK is a more optimistic assumption for Scotland, The initial position would probably be a little more because it requires that the onshore economy grows difficult than that for the rest of the UK and I certainly more quickly than that. None of the research that we would not suggest that we needed to do it the next have done really gives us much insight into what will year. It might be over a period of time, but it would happen to the Scottish economy as the offshore be a difficult thing to avoid. If it then turned out that economy depletes. It is clearly an open question, but growth took off, you could adjust what you wanted to cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 65
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow do in respect of the better position that that put you much closer to zero before you could credibly have in. The last thing you would want to do is pretend that an oil fund in any sense. that was not there. That would be storing up more difficulties going forward. Q4025 Mike Crockart: Is this when, in your words, it becomes a bonus? It is only when it actually is a Q4022 Mike Crockart: You led with that in some bonus, because you have the rest of the spending in of your report. You said it was all about establishing balance, that you can then create the oil fund. a reputation among creditors. You would have to put Gemma Tetlow: You could set up an oil fund even in place fiscal rules, but what would those fiscal rules without having a genuine surplus on your borrowing, look like? What would it need to establish a good but you would need to get close to zero for that to be sense of reputation amongst investors that would bring plausible; otherwise you are in a position where you down the borrowing costs? are obviously borrowing money on the market and Paul Johnson: Point one is that this is going to be then having a notional oil fund that earns a return. very, very dependent on the amount of debt that is inherited. A Scotland that is inheriting debt at 75% of Q4026 Mike Crockart: This is what has been national income is going to be in a very different characterised as borrowing money on your credit card position from a Scotland that inherits debt at 40% of to invest in your ISA. national income; 75% will look uncomfortable to start Gemma Tetlow: There might actually be good public with. The rules are, as I suggested, likely to look to management reasons to do that, in the sense that if be achieving current balance in the medium run, you set the money aside it perhaps binds politicians’ excluding oil revenues, or certainly including only a hands more than if you simply say, “For the next few very cautious estimate of oil revenues into the years we will pay down our debt and then we’ll start medium run; and a very clear view about the debt worrying about using these oil revenues for future level that is being targeted. You need both of those. funds.” There might be a justification for trying to do something like that, for those reasons. Whatever Q4023 Mike Crockart: In your evidence, you talked happened, you would want an independent body about potentially excluding oil revenues from the giving its judgment on what is a credible, possibly fiscal rules. You would put the fiscal rules in place cautious, forecast for oil revenues over the next few around borrowing, but in order to deal with the huge years, on which to make any judgment about the amount of changeability in oil revenues, they should amount of spending that you can be funding from oil probably be excluded from those rules. revenues, just to improve the credibility of your Gemma Tetlow: There are two issues about the fiscal plans. treatment of oil within the fiscal rules. First, you would want to aim for a target level of borrowing Q4027 Mike Crockart: When you say that you that excluded the revenues entirely, largely because an would need to have spending revenue broadly in independent Scottish Government would have a fair balance before you could start to build up an oil fund, amount of control over how much it raises in other what does that mean? How different is that from the types of taxes and how much it spends. It would be situation where we are at the moment? very open to the vagaries of oil production, oil prices Gemma Tetlow: Our projections suggested that an and exactly how much revenue came from oil. An independent Scotland, at the point of independence, independent Scottish Government would want to be would still have quite a high level of borrowing. Our judged on the basis of a measure of the balance on its basic model suggested borrowing 5.1% of national books that it has some control over, rather than being income. It needs to be closer to zero than that number. susceptible to the level of oil revenues. Exactly what Mike Crockart: Five? target would you want to set for that level of Gemma Tetlow: We are probably being deliberately borrowing? Do you want to aim for zero on that vague. measure of borrowing and therefore take all the oil Mike Crockart: I did notice. revenues as a sort of bonus on the side, or do you Gemma Tetlow: It would almost certainly depend on want to aim for some sort of deficit? That size of a number of factors where we do not yet know the deficit may be the average amount of oil revenues you answer. For example, were Scotland in a currency expect to receive over a long period of time. That union with the UK, that would limit their scope to use would be a debate you would need to have. Exactly monetary policy to stabilise the economy, and would how tight a fiscal stance do you need to persuade be another reason why they would want to be in a creditors? You would want a measure that you would much stronger fiscal position so that they could deal be judged on that excluded the revenues altogether. with any shocks to their economy.
Q4024 Mike Crockart: Allied to that is the debate Q4028 Mike Crockart: Are you saying that the around whether an oil fund would be something that reduction in the borrowing would have to be greater? would do the smoothing. If you had an oil fund, that Gemma Tetlow: Yes. would be the thing that equalised the volatility of oil prices over a longer period of time. How realistic is it Q4029 Chair: Are you saying that if Scotland was that a newly independent Scottish Government would in a monetary union with the United Kingdom, as the be able to start to put together an oil fund? Scottish Government are suggesting, that would Gemma Tetlow: You would certainly have to get to a require them to make bigger cuts in their budget than position where you had got non-oil borrowing down would otherwise be the case? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Ev 66 Scottish Affairs Committee: Evidence
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow
Gemma Tetlow: I think there is probably a missing then you are very likely to want to have fiscal control, “all other things being equal” here. Being in a for exactly those reasons. monetary union with the UK may make people more confident about other aspects of the Scottish economy. Q4033 Mike Crockart: You are likely to want fiscal For example, if they took on a load of sterling- controls, but those fiscal controls are likely to be denominated debt, it would be easier for them to common or very similar across the different parts of service if they also had their economy denominated in the monetary union. sterling. That would be a positive benefit. David Phillips: You might still want different fiscal However, all other things being equal, if you are in a rules for Scotland because of the nature of the oil currency union, with the Bank of England determining revenues. That is why you might still want to have monetary policy on the basis of what makes sense for some element of fiscal control at the UK level in such the UK, any idiosyncratic shocks that hit Scotland that a circumstance, but Scotland might still have some don’t hit the rest of the UK would need to be discretion over the exact fiscal rules it has, because of accommodated through fiscal policy rather than the unique circumstances of the oil revenues. As monetary policy. For that reason, you would want to Gemma was saying, you might want to target a give yourself more scope on the fiscal side to deal measure of debt so that it excludes oil for Scotland, with those shocks as they come along. whereas it is a targeted measure of the total deficit for the rest of the UK. It is not inconsistent to have Q4030 Chair: I was under the impression from what different rules for Scotland and the UK as a whole, you said earlier that in terms of wanting fiscal rules, and for the UK still to have some control over an independent fiscal council and so on, in the event Scotland’s fiscal position. of monetary union with the UK, the Bank of England Paul Johnson: It is worth saying in all of this that and the UK Government would do all that for them. experience suggests it is very hard to enforce these In a sense, who then determines the fiscal rules is kinds of rules, however you might draw them up. presumably the Bank of England and the UK Government, and that is part of the price of Q4034 Chair: If it is very hard to enforce these monetary union. kinds of rules, that’s an argument for not entering into Gemma Tetlow: Yes, I guess we don’t know what the that sort of arrangement, isn’t it? answer to that question would be. The eurozone is Paul Johnson: I think that is the argument that the an example of a currency union that was set up with British Government are making. monetary co-ordination but not fiscal co-ordination. Chair: I just wanted to hear you say it, to make sure That is perhaps starting to change now, but clearly a that my understanding was also yours. very important question in negotiating monetary union would be what constraints, if any, you impose on Q4035 Mike Crockart: There are a lot of fiscal policy, for exactly that reason. hypotheticals in there, depending on monetary union and fiscal rules and everything else. Generally, what Q4031 Chair: I was under the impression that it was is this likely to mean for borrowing costs for an being made clear that, in the event of monetary union, independent Scotland? the Bank of England would want control of monetary Gemma Tetlow: We have not really done our own policy and the UK Government would want control analysis of that. As I said earlier, the National Institute over both monetary and fiscal policy. There would for Economic and Social Research have done some obviously be flexibility within that. work on this. Their approach was to look at other Paul Johnson: I do not know whether the UK examples of small countries that looked a bit like Government have said that or not, but I would Scotland, to try and get some sense of what the certainly strongly presume that if there were to be any premium that might be charged on Government kind of formal monetary union, the UK Government borrowing would be. They make the point that it would want a say over the fiscal policy of an would depend on the currency that Scotland adopted. independent Scotland, just as the EU wants a say over As I said, their estimates are that the premium would the fiscal policy of the members of the eurozone. be between 0.72 and 1.65 percentage points above the There are very good economic reasons for wanting rate charged to the UK Government. that. If you have a monetary union with no fiscal control over one part of that union, you have a recipe Q4036 Mike Crockart: The lower end being if it for a number of problems. In this very hypothetical retains a sterling monetary union. world, given what the UK Government have said, you Gemma Tetlow: I think they simply have a range of would clearly be looking for additional fiscal controls. historical international experience, and therefore they have come up with a range of estimates. There is a Q4032 Chair: But am I not right in thinking that it statistical uncertainty in that. would not be rational for the UK to agree to monetary union with a separate Scotland unless it had monetary Q4037 Mike Crockart: I am trying to get the union across the whole of the UK and also had fiscal individual components that make up that calculation. control? It would not be in the interests of the rest of Gemma Tetlow: I do not think it was explicitly the UK to make an agreement to support a separate around sterling. Scotland financially without having fiscal controls? Paul Johnson: You are probably best asking them. I Paul Johnson: I think you are saying very much the do not think that they did this in a bottom-up kind of same as we are. If you are to have a monetary union, way; I think they did it in an “estimating the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG05 Source: /MILES/PKU/INPUT/038186/038186_o005_odeth_SAC 131210.xml
Scottish Affairs Committee: Evidence Ev 67
10 December 2013 Paul Johnson, David Phillips and Gemma Tetlow differences between different nations with different costs will be under separation than they are at the characteristics” kind of way. moment. David Phillips: It is all in the context of a single currency. The EU has variations across Europe. In the Q4040 Mike Crockart: I have a final question. You eurozone, there can be different interest rates paid by are sitting there as the Institute of Fiscal Studies different countries. It is all in the context of keeping saying, “Well, we’re not the experts on monetary the pound, effectively, but I would double-check that policy.” This all gets very detailed and very niche. with Angus Armstrong at NIESR. Many of the people who have to make the decision need this distilled into two or three sentences. There Q4038 Chair: If you did not keep the pound and is the challenge for you. What is your report, distilled you had your own currency, presumably the variation into two or three sentences? in the figures would be much higher. Paul Johnson: In the end, I think it says something Paul Johnson: You are best asking NIESR about that, really rather straightforward. Under the current quite honestly. settlement, Scottish people are paying much the same Chair: But you happen to be here, you see. That is in taxes as people in the rest of the UK, but rather why there is a great temptation to ask you in these more is being spent per head in Scotland than in the circumstances. rest of the UK. If Scotland is independent, that clearly Paul Johnson: I do not think we know the answer can’t keep going. There will need to be some to that. rebalancing in order to pay for it. There is a lot of stuff around that, in terms of thinking about the long Q4039 Chair: Normal—real—people in my run, the demographics and the oil, but if it is distilled constituency are not necessarily obsessed by levels of that is the very straightforward point. Government borrowing, or interest rates. They would ask whether or not there was any read-across into their Q4041 Chair: We have covered all the points that mortgage rates. Are these completely divorced one we want to raise. As I said before you came in, are from the other, or does it have a read-across? there any answers you had prepared to questions that Paul Johnson: If this were part of the Bank of we have not asked? Is there anything that you feel you England with interest rates set in the Bank of England, want to get off your chests or that you feel we have there would not be that read-across, because that is not given you the opportunity to explain to us? where the interest rates would be set. Monetary policy Paul Johnson: I don’t think so. We feel unburdened is not our strong point. of everything that we wanted to be unburdened of. Chair: There is another man or woman we should be Chair: That is not necessarily our purpose. If speaking to about this then. anything occurs to you that you feel we have not David Phillips: I think there could be a read-across adequately covered, or points of clarification that upon on to public finances. A higher interest rate on debt reflection you wish you had given us, perhaps you would mean higher debt interest experienced by could get in touch. Similarly, if our staff or advisers Government, which would mean higher borrowing, want you to come back here, I hope you will feel able lower spending or higher taxes to pay for it. So there to respond. could be a read-across on that part, even if there is Thank you very much for coming along to what has not a read-across in terms of higher mortgage rates. been an interesting, if complex, session. Chair: These are the sorts of things that people will want to know—how much greater their mortgage cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 68 Scottish Affairs Committee: Evidence
Wednesday 8 January 2014
Members present: Mr Ian Davidson (Chair)
Jim McGovern Mr Alan Reid Graeme Morrice Lindsay Roy Pamela Nash ______
Examination of Witnesses
Witnesses: James Brokenshire MP, Minister for Security, Home Office, and Rt Hon David Mundell MP, Parliamentary Under-Secretary of State for Scotland, gave evidence.
Q4042 Chair: Can I welcome the witnesses and not actually assessed against those risks. I think they others to this meeting of the Scottish Affairs would need to do that to analyse what capabilities they Committee? As you will be aware, we have been would require and what capacity would be needed. conducting a series of inquiries into the referendum That is certainly not evident from the White Paper that on separation. We have been particularly interested in we have seen. the various “Scotland Analysis” papers produced by the Government. Today, we are looking at the question Q4044 Chair: How are these threats relevant to of security. Scotland? Surely a separate Scotland, being a small David, you are a weel-kent face here, but would you place, inoffensive and wanting to be friends with like to introduce yourself and your special friend for everybody, would not face any of these threats? the record? James Brokenshire: Some people might like to think David Mundell: I am David Mundell. I am the that that is the case but that is not the reality. If I Scotland Office Minister. This is my colleague from can take for example international terrorism, the threat the Home Office, James Brokenshire, who is the from al-Qaeda and Islamist-related terrorist groups Minister who has specific responsibility for security remains relevant to all parts of the UK. Some perhaps issues within the Government. have sought to characterise it by saying that, if Scotland was not part of the UK, that might in some Q4043 Chair: James, would you clarify for us what way diminish the risk. I certainly cannot say that at you mean by Tier One and Tier Two threats? How are all to the Committee. these threats relevant to Scotland and what might be When we look at some of the other European the impact of separation? countries that the Scottish Government have sought to James Brokenshire: The National Security Strategy examine such as Denmark and Sweden, they have analysed the most significant threats to the UK, with seen terrorist activity in their countries. Equally, when the most significant being Tier One, then ranking to I look at the discussions that I have at EU level with Tier Two and below that Tier Three. other European countries and the risk that is faced Just to give the Committee some examples of what with people travelling to Syria to become involved we mean by Tier One, that is international terrorism; potentially in terrorist activity, there is a risk that that hostile attacks upon UK cyber space by other states may pose back in this country. One of the countries and large-scale cyber crime; a major natural hazard; or that is most focused on this at the moment is Belgium, it could be some international military crisis between which is facilitating and discussing this very states. That is the first and highest tier that has been relevantly at EU level. analysed and ranked. It would not be right to present and say that, because Below that is Tier Two. That is where we have attacks there is separation, these risks diminish. Indeed, that on the UK or its overseas territories by another state is without even touching on organised crime, which using chemical, biological, radiological or nuclear certainly does not recognise any boundaries at all. weapons; risk of major instability, insurgency or civil Therefore, the risk will very much remain in respect war overseas which could threaten the UK; a of that. significant increase in the level of organised crime affecting the UK; and severe disruption to information Q4045 Chair: Is it your view that there would be no received, transmitted or collected by satellites. diminution of the risk faced by a separate Scotland It is quite a broad range of risks and threats, but it as distinct from Scotland at the moment as part of gives us an analysis against which the UK the UK? Government prepare how their intelligence and James Brokenshire: My assessment is that there security agencies are able to prioritise their work. It is would be no diminution in that risk. against this mature structure that, for example, because cyber has been prioritised as a Tier One risk, Q4046 Pamela Nash: In the security paper each of we have invested more heavily in cyber capabilities the agencies within the UK that deal with national to ensure that we are better protected against those security is described. Could you explain a bit more to elements. It gives that integrity and structure. us how they specifically deal with Scottish interests? However, I would say that in the White Paper that has James Brokenshire: It is worth highlighting the been published by the Scottish Government they have different agencies. There is the Security Service— cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 69
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
MI5—which is responsible for protecting the UK Q4049 Pamela Nash: I understand, but, just to be against threats to national security. There is the Secret clear, there is not a geographical section of MI5 or any Intelligence Service, which operates overseas to of the other agencies that could easily be broken off? collect secret foreign intelligence on issues concerning James Brokenshire: No; it is simply not like that. It the UK’s vital interests, as well as GCHQ, which has is integrated. The way that intelligence and security as its two main missions gathering intelligence works is that you may receive one piece of through the monitoring of communications and information that may have relevance to a particular information assurance. An integrated approach is plot or investigation. That may have read-across in taken in respect of that. You could say that, for every different parts of the country. To put in place some £1 spent in relation to the security intelligence sort of artificial separation, or indeed to suggest that agencies, that covers the whole of the UK; it is not with GCHQ there is a separation in the cables between seeking to distinguish between one part of the UK one part of the country and another, it just does not versus another. work in that way in terms of the capabilities that are That, for me, is another factor that comes through there. from the White Paper. Somehow it is seeking to characterise it as being distinguished—that there is Q4050 Pamela Nash: Finally on that section, are somehow a sharing of intelligence in the UK. It does there any significant differences between how the not work like that. It is an integrated whole; it is not agencies work with Police Scotland compared with a separation between the nations of the UK. For how they work with the police throughout the rest of example, the intelligence received may have relevance the UK? to different parts of the UK. Therefore, I do not think James Brokenshire: Clearly, Police Scotland works you can separate it out in the way that some have with the Security Service. They are recipients, for sought to. example, of the analysis that JTAC—the Joint Terrorism Analysis Centre—produces. It is difficult to Q4047 Pamela Nash: If Scotland does leave the characterise that there would be a difference in UK, how would that be separated and how would that approach. The strong point I would like to make is affect the security of Scotland in your view? that this is not about co-operation; this is about an James Brokenshire: It is interesting to note the integrated whole. Police Scotland is part of the comments in the White Paper. The Scottish national counter-terrorism policing framework. They Government appear to be saying that if there was a work together. It is not somehow that it is a co- positive vote—which is not what we are operative through separation; it is rather that it is an contemplating—they would have to create a separate integrated part of the architecture. intelligence agency and that, equally, this would be led by the police. What is confused in it for me is that, Q4051 Pamela Nash: I understand that. What I am on the one hand, they appear to want to take a trying to ascertain is whether, because of devolution chocolate bar approach. They want to take one chunk to Scotland, there is any specific difference between from this agency, another chunk from here and Police Scotland’s role in that and even in the another chunk from here, and put it together. They relationship between JTAC and the Scottish suggest that this creates some sort of integrated Government. intelligence agency. It simply does not work like that. James Brokenshire: National security is a reserved On the other hand, they appear to be saying that they matter. That makes it clear that it is reserved for the will need to rely on existing arrangements as well. UK Government. I might point in addition to the Again, a security union is absolutely part and parcel National Crime Agency, because I have touched on of a political and legal union. Therefore, to suggest organised crime. The National Crime Agency has a that things could simply carry on in the way that they slightly different relationship with Police Scotland have done thus far I think is simply flawed. respecting devolution and the lead that Police It is interesting that the Scottish Government have, for Scotland has in policing matters. It does not mean that example, pointed to the case of the Glasgow airport the NCA does not contribute effectively through the bombing and the relationship between Police Scotland specialist capabilities that it is able to offer to Police and the Metropolitan Police as a good example of how Scotland through the National Cyber Crime Unit, this works well. If anything, that is an argument for CEOP and other specific capabilities respecting maintaining the status quo—not separating it and devolution. In many ways it gives it the best of both breaking it up. worlds. You have that national capability but respecting the devolved settlement. Q4048 Pamela Nash: Do any of the agencies have a regional presence in Scotland? Q4052 Pamela Nash: Even though devolution plays James Brokenshire: It is difficult for me to comment a part in that, do you think that would be damaged if specifically on the nature of the intelligence agencies Scotland was a separate country because it would not in this forum. I can certainly say in relation to the have the benefit of the NCA? Security Service that it has its focus and presence James Brokenshire: It is notable that the White Paper throughout the UK. Its mission is protecting the does not really comment on that relationship with the security of the UK and it is that integrated whole that National Crime Agency. It almost appears to suggest obviously is its work and focus. Beyond that, that this would simply remain in place. I am sure that unfortunately, in this environment I am constrained as we will get on to the legal differences. For example, to what I am able to say. we have an integrated approach at the moment. Police cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 70 Scottish Affairs Committee: Evidence
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
Scotland can work very closely with police forces that would need to respond in that type of throughout the UK to see that people are arrested in environment. It would be this type of capability that a fast-moving, dynamic situation, ensuring that other Scotland would have to create for itself as a self- police forces throughout the UK are properly tasked standing nation. and able to support that. If we had a separate country, I would point to some of these issues that are not you simply would not be able to do things in the way really addressed in the White Paper. When you look that we do at the moment. I think that would make at the arrangements that are contemplated, the White the job of Police Scotland that much harder in fighting Paper talks about a budget of £206 million. First, we organised crime in not being able to pursue crime do not know what that is. I know the Deputy First throughout the rest of the UK in the way that they do Minister said 12 months ago that there was detailed at the moment. work being conducted to set out what investment Therefore, I think it would make the work of would be required to be able to have an ongoing protecting Scotland against crime that much more annual budget in relation to this. We see none of that difficult and, effectively, put bureaucracy in the place in the White Paper. of where we currently have an effective, fast-moving It is also the fact that the threat assessment analysis— and potentially dynamic arrangement to ensure that i.e. looking at those threats that we touched upon at criminals are pursued and prosecuted. the outset—only starts following independence. You are making decisions even before you have done the Q4053 Pamela Nash: Thank you, Minister; that is threat assessment and the threat analysis as to what extremely helpful. capabilities you would require. I would say from my I would like to move on to the more specific threat of reading of the White Paper that it feels quite thin in cyber crime, which is increasingly infiltrating people’s not responding in that way. personal lives and also that of businesses throughout the United Kingdom. Can you tell the lay people here Q4054 Pamela Nash: How much does all this cost? more about the cyber security strategy of the UK and How much resource is the UK Government currently if there is anything specifically we should be aware of dedicating to the cyber security of our country? for Scotland, or is it the same as the rest of the James Brokenshire: The overall five-year plan is for strategy—completely integrated? £860 million over the five-year spending review James Brokenshire: Again, the work to combat cyber period. If it would be helpful to the Committee, I can crime is an integrated approach through the National provide information on how the first two years of the Cyber Security Programme. It looks at, yes, funding period have been spent. For example, to give combating cyber crime but also issues around cyber a breakdown, over the last two years, the programme security. We have criminality and that can take two has spent £260 million, and £157 million of that has forms. You can have things like the distributed denial gone to the security and intelligence agencies to of service attacks, where people seek to flood a develop national capabilities to detect and defeat high- website in order to disable it, and all the challenges end threats. There are then different spending parts of posed by that. I know, for example, that the Royal this. We have received, for example, £28 million to Bank of Scotland itself had a significant challenge support law enforcement to combat cyber crime and with a DDoS attack, as they are referred to, in seeking the build around the National Cyber Crime Unit. If it to disrupt some of its accounts and the ability for would be helpful for me to write to the Committee to people to access their accounts. So you have these give the full detail of that, rather than spending time specific attacks. in this session, I would be very happy to do so. You then have what I might describe as cyber-enabled crime. These are things like fraud, where an existing Q4055 Pamela Nash: I think that would be helpful, crime is effectively multiplied or harnessed using but, from what you have said so far, it seems clear technology. What we have done is built up capabilities that it would be more than a Barnett consequential through the National Cyber Crime Unit, for example, equivalent that would need to be spent in Scotland to to ensure that we have a strong national-level law try and reach the level of security that we have at enforcement capability, to be able to respond to those the moment. most significant threats, working with policing James Brokenshire: There was research that was throughout the UK. It would be that type of capability conducted by the Economist Intelligence Unit that that Police Scotland currently relies upon or currently effectively said that the UK was No. 1 around all this can draw upon to be able to support it around this fast-moving, quite dynamic issue and we are seeking type of fast-moving and dynamic criminality. I have to play a leadership role. Scotland would need to put certainly been very clear that the NCCU should be a its own capabilities in place. It would need to really centre of excellence that can be drawn upon by think through how it could deal with some security policing throughout the UK. It has that relationship, issues as well as cyber crime issues, given the fact for example, with GCHQ over technical capabilities. that we have all had those e-mails in our accounts On the other side is what I might describe as the inviting us to click on a link to go and get some computer emergency response type of situation—we reward from HMRC, and clearly it is always highly saw it in Estonia, for example, where it came under a dubious when those come through. But it is that sort cyber attack—and the resilience of a country to be of thing, which is real for the individual, and part of able to respond to that. We have the Computer the work we are doing is launching an awareness Emergency Response Team—CERT UK—which, in campaign throughout the UK to highlight the essence, draws together each of the different agencies challenges and to build e-confidence. Ultimately, so cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 71
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP much of our economy now is moving online and it is for that? You have said in all your answers so far that important that we have that confidence in our use of this would not be a change in the level of co- the internet and all the technology that lies behind it operation. Co-operation does not exist at the moment so that our economy continues to grow, and that we because we are one country and it is not required. make it that much harder—we are seen as a hard James Brokenshire: I would not want to give the target—for the organised criminals who may seek to impression that it is not possible to set up a separate use this as a potential advantage and carry out online intelligence agency. The point I am making is that it criminality. will be difficult. It requires a real focus on legal David Mundell: Just to add a point, James is structures as well as simply the different intelligence obviously talking about ongoing cost. There is no agencies or the facets within that. It also relies on mention in the White Paper of set-up costs in relation the ability to work with other nations on intelligence to these organisations. As I read the White Paper, sharing and being able to build that trust with other these organisations are to be set up in just under two nations as well as the relationship that you would have years’ time from scratch. There is absolutely no with them on an intelligence-sharing basis. That does reference at all to those set-up costs or how people take time. The point I would make is that the existing would be recruited into Scotland, specifically in the arrangements that we have are mature; they are area of cyber crime, where there is a really serious established and have been worked through with other issue in relation to recruitment of people of the right nations over many, many years, and that is not skill level. something that could easily be replicated.
Q4056 Lindsay Roy: James, is a year and a half Q4059 Chair: You must accept that you do sound a realistic in terms of the set-up and establishment of a bit like Sir Humphrey saying things like “in the best security system? of all possible worlds,” “any change is difficult,” and James Brokenshire: Even the White Paper itself “it is all really, really complex.” We appreciate that acknowledges that the sort of arrangements that would separation is likely to have some difficulties and it is need to be put in place to create a security and going to result in change. As I understand it from the intelligence architecture could not be capable of being SNP, that is the point of the exercise. Therefore, done in 18 months. The White Paper refers to the simply to say that there are going to be some continuation of existing arrangements and, in essence, difficulties in the transition is not sufficient, with some sort of transition beyond independence. It is respect. difficult to see how, in an 18-month period, you could I want to clarify the question of set-up costs. I am not create that sort of completely self-standing clear about the balance in set-up costs between what arrangement. Therefore, it does imply that there would you need as a core to cover a population of, say, 5 have to be some form of transition, which feels million and what you would also need as a core to extremely difficult, recognising the fact that you have cover a population of 50 million. What then is the separate countries and therefore the need to have that proportion that expands according to your population? separate structure. I am not clear, for example, whether 90% of what the UK spends on security would be required for a Q4057 Lindsay Roy: So we do not know the extent population of 5 million or whether it is only 1%. of the deficit at any time? When we talk about start-up costs, I am also not clear James Brokenshire: At this stage it is for the Scottish how much of that is for machinery—bits of physical Government to set out in detail what their proposition kit—and how much is personnel that you require to is. I just do not get the sense from the current White recruit. I am not genuinely certain whether the start- Paper that we have that level of detail. We are not up exercise is several bright people in a room and contemplating or in any way preparing for an the capital cost is the kettle, or whether you require independent Scotland. I do not think it would be right enormous computers and a couple of apprentices to for us to do so unless and until the people of Scotland operate them. Can you give us some sort of feel for have made their decision in respect of this. From the that, because that would affect our view of what the paper that I have seen, at the moment, it does not give start-up costs were for a separate Scotland? that level of detail; it does not articulate against the James Brokenshire: Clearly, it is for the Scottish risks. We do not get the sense, despite what the Government to set out their analysis on this. As my Deputy First Minister said to the Foreign Affairs responses have indicated, the figure of £206 million Committee 12 months ago, that there was a detailed that has been put into the White Paper has simply and substantial piece of work that was being been an attribution based on population. It does not undertaken that would give a sense of those set-up take account of economies of scale, for example. costs. We simply do not see that. The capabilities that we are talking about here are, in David Mundell: Indeed, during her evidence session essence, information such as intelligence reporting, with the Foreign Affairs Committee, Ms Sturgeon raw data and records. Yes, there is technology and the indicated that that information would be published in things that you would need to put in place to have the the White Paper. You will have seen the sum total of right analytical systems, databases, IT and what is in the White Paper for yourselves; it is just a communications infrastructure. You rely on trade craft series of bland statements. as well—the analytical techniques—and obviously people. It is looking at each of these different Q4058 Pamela Nash: You mentioned a transitional elements, and also the partnership issues, against your period. Am I right in saying that there is no precedent analysis and assessment of the individual risks. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 72 Scottish Affairs Committee: Evidence
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
Clearly, that is not what we have seen in the White million would be a reasonable sum for Scotland, or Paper and what we have received from the Scottish this amount would be a reasonable sum for Wales or Government to date. Northern Ireland. It simply is not done on that basis. It is very difficult for me to give you that sense of What I can say very directly is that overall security what those costs are. It is for the Scottish Government relies on systems, processes and, yes, people. It would to make their case as to what they think is required. I be hard to say how you get to that irreducible suppose what I am trying to get a sense of is the minimum, because we simply do not do it in that way. different elements that might sit within that. We simply spend £2 billion on the overall pot that goes into our security and intelligence agencies and Q4060 Chair: I can spot waffle when I hear it. The that supports the whole of the United Kingdom. I just Scottish Government are not here and you are, so we do not think you can say, “Because we have this level are entitled to ask you some of the questions at the of population, that would mean a sum of £x to be able moment. What I am not clear on, for example, is to provide that security assurance to your country.” It whether the core costs of having an intelligence is certainly very hard for me to try and break it down service, looking at the international comparisons of in that way. Norway, Sweden, Denmark and Belgium, which was mentioned earlier, would be wildly above £200 Q4063 Chair: If you have no idea what the figure million and, therefore, a starting cost would be £500 might be for Scotland, how can you say that the made- million, or whether a figure of £200 million is realistic up SNP figure is unrealistic? as being £100 million start-up and £100 million James Brokenshire: I suppose because of the way in running costs. which I look at the Tier One, the Tier Two and the We assume that you and those who have briefed you Tier Three risks, and the capabilities that we have put know slightly more about this than we do. I would in place for the whole of the UK. All I am saying is find it somewhat upsetting if we thought that was not that the analysis is based on population breakdown, the case. Therefore, we are entitled to ask for some whereas I would argue very strongly that your analysis clarification from you. needs to be based on the risks that you see and the James Brokenshire: If you look at the comparisons capabilities that are required. The number does not that you draw with some of the Nordic countries, they appear to take account of economies of scale and the have a system where, effectively, the security aspects need to effectively replicate what we already enjoy as of this are led by their police service, but a lot of the UK. Therefore, it feels to me that that number the intelligence work is, in essence, conducted by the does not properly represent the overall cost that would military. It is a very different model from the model be appropriate. that we currently have in the UK, with some of that latter work conducted by GCHQ and the Secret Q4064 Chair: So what number properly would? Intelligence Service. James Brokenshire: I honestly could not give you It is quite hard to give some sense of hard numbers. that number, Mr Davidson. It is for the Scottish The point that I make is that the £206 million, from Government to make their case on this. my reading, does not take account of those set-up costs at all. It appears to be an attribution of the Q4065 Chair: No, no; I do not understand why you ongoing, continuing costs rather than reflecting any cannot give me a better figure. You have all these establishment costs. bright people helping you. If this is a secret and you cannot tell us, then tell us that, but you are bound to Q4061 Chair: Is it a reasonable figure as a running have some estimate about what the necessary amount costs figure? I completely understand the point about would be to have an intelligence service for a country the set-up costs. We have been looking at the question of 5 million. I just simply do not believe that you have of defence and the armed forces, and we understand not given that any thought at all. the distinction. Does it have any relationship to reality James Brokenshire: We have genuinely not done the as an ongoing running costs figure? work on analysing what a settlement or a negotiation James Brokenshire: I can perhaps answer in this way. would look like in that way. We have been very clear The basis upon which it has been drawn up, on an in saying that that— attribution of the population, is answering the wrong question. That is why I come back to looking at your Q4066 Chair: I am not asking you about a risks as a country and how do you— settlement or a negotiation either. I am asking you about what sort of sum would be necessary to have an Q4062 Chair: Answer the question I did ask then. intelligence service for a country of 5 million. Is the £200 million reasonable as an ongoing cost? It James Brokenshire: I could not give you that detail, is coming back to this question of whether there is a and that work has not been undertaken because of the minimum cost that would be necessary almost different approach that I would take as the starting irrespective of size, and then you would add stuff on point on this. I am sorry not to be helpful on this relating to population. because I would like to be, but that work has not been James Brokenshire: I cannot give you a straight done in that way. answer to that question. That is not because I do not want to but because the way in which we structure our Q4067 Graeme Morrice: Obviously we are aware security and intelligence agencies covers the whole of that the UK has a long-established and highly the UK. You cannot break it down and say that £200 developed security and intelligence services network. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 73
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
In the answers you have given to previous questions, James Brokenshire: When we look, for example, at you have said that, in the event of an independent organised crime, we have the National Crime Agency Scotland, an independent Scottish Government would that has been established, which will have an be looking at transitional arrangements working intelligence hub within it and no doubt would look at towards setting up some kind of Scotland security and the potential cross-border criminality in the way that intelligence services network. we work through on a crime that operates, say, in the What would that relationship be with the intelligence north-west of England as well as Scotland in the and security services of the rest of the UK? Would it organised crime groups that operate there. become unplugged from the rest of the UK, or would The point I would make is that at the moment there is there be an integral relationship? How do you see that a structure and integrated arrangement to deal with developing in reality? that. What we would be looking at is effectively a James Brokenshire: If that eventuality were to occur, separation. You would be sharing some information in as we do with other neighbouring countries, we have relation to criminal intelligence, but it is the response intelligence relationships that we establish and we that you get from that. At the moment we have, for seek to co-operate, but that is a very different example, Police Scotland, who will be able to work relationship from the integrated one we clearly have very closely on arrests, on things like hot pursuit and at the moment. So there would be a fundamental the way in which we do work as an integrated whole change in the relationship that is there. in the UK. That would not be possible. While you can Part of our work around intelligence and security look at co-operation, good will gets you only so far. It relies on intelligence sharing with other countries. It is that question of how a unified legal and operational is important to state that there is the control principle structure adds enormous value in dealing with what at that is adhered to and maintained. In other words, if times are fast-moving, complex and dynamic another nation passes you sensitive intelligence, then investigations, which would be made harder if there they retain control of that and you will not pass that was additional bureaucracy that got in the way of that. on to any other nation without their permission. It may be that that nation would be prepared to allow Q4070 Graeme Morrice: Do you think it would be that to be provided to an independent Scottish state, easier or harder to protect the British Isles if Scotland but it may not be. Therefore, it is important to became independent? understand that there is a fundamentally different James Brokenshire: It would be more challenging. relationship that would be struck here. The reason I say that is because good will and co- operation will get you so far. The fact that, for Q4068 Graeme Morrice: That is interesting. In example, we have legal structures that are in place to respect of the relationship that the UK has with other enable Scottish police officers to make arrests in the countries in terms of sharing security and intelligence rest of the UK and vice versa really does add huge information—we know that is a very, very important benefit. It simply would not be possible to aspect of the work undertaken, and obviously that contemplate that a police officer from another country relationship is a very good relationship with many could arrest someone in a second country. It just does countries throughout the world—do you think an not work in that fashion. independent Scotland would also be able to inherit If you look, for example, at the relationship between those good working relationships? Northern Ireland and the Republic of Ireland, there is James Brokenshire: Obviously a lot of our no hot pursuit. We rely on things like the European relationships rely on, yes, that sense of co-operation arrest warrant. There is, therefore, time that is built and good will, but it is also about a two-way into that. For example, where someone is contesting a relationship in terms of what you, as a country, European arrest warrant, in 2010, on average, it took contribute in the other direction in that relationship 93 days to see someone sent out from this country to and, therefore, the maturity that you see there. I am another country. sure that over time an independent Scotland and an What I am characterising is that a political and legal independent Scottish intelligence or security agency structure that fits around this in a unified fashion aids could establish international relations and the investigation and pursuit of criminals. If you had connections, but it would be challenging and would that separation, you could not continue in the way that take time. There are no automatic arrangements that we have done to date and that would make the job would operate. I think it could happen, but it would that much more difficult. take time and it would need to show through that Scottish agency the contribution they would make to Q4071 Graeme Morrice: What is the Scotland the intelligence-sharing arrangement. Office view upon that? David Mundell: The Scotland Office view is that co- Q4069 Graeme Morrice: The current situation is operation is not the same as integration. That is a flaw that within the UK there is intelligence and security that underlies the White Paper on many areas by information sharing with Scottish authorities, whether indicating that there would be partnership and it is with the devolved Scottish Government, Police working together. Of course it is likely that different Scotland or other bodies and agencies. How do you interests across the British Isles would want to work think that kind of internal UK sharing of information together, but that is not the same as integration. It is would work in the situation of an independent the integration that we have within our security Scotland? services and in our currency that is the benefit of cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 74 Scottish Affairs Committee: Evidence
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP having a United Kingdom. Co-operation and The issue is that the National Crime Agency will also partnership are not the same as integration. be there at that same campus to ensure, for example, that Scotland has the benefit of the intelligence hub Q4072 Chair: I understand that clearly things would that is being established within the National Crime be less effective and efficient where you have Agency as well as the rest of the UK. It is looking at separation and there are two countries rather than one. the capabilities that are available to you, which you Unless I am mistaken, none of this is of a scale to be may need to replicate and put in place, to ensure that a game changer, is it? It is a loss of efficiency and from that end-to-end approach you have that effectiveness. It depends on whether you take the view capability. I certainly would not want to give the that it is a price worth paying. It is a bit like the impression that Police Scotland is not very good at closure of the shipyards. If you take the view that dealing with organised crime. It is, but it is what the closing the shipyards is a price worth paying, then you NCA gives it on top of that in terms of specialist will be privy to carry on with independence. There is capability. nothing here that is so much of a major factor, is there, that would put somebody off separation in itself? Q4074 Chair: But why should it not continue to do James Brokenshire: When you look at organised it in the future? This is the issue of noses and faces crime, we have put in our paper the cost of organised and cutting off. Presumably, in the event of separation, crime to the UK and, equally, what that means to it would not be in the United Kingdom’s interest to Scotland in terms of the organised crime groups and have a crime-ridden Scotland and a sanctuary for the economic cost to Scotland of, for example, drug crime lords, or indeed for terrorists and al-Qaeda, misuse. Organised crime groups respect no borders or sitting up in Hawick or anything like that in order to boundaries. If we have the cocaine trade that starts off be able to attack south of the border. in Latin America and works through from there, it James Brokenshire: No, of course not. crosses borders and ends up on our streets. You need an end-to-end approach to confront and combat that Q4075 Chair: Therefore, presumably there would effectively. That is precisely what the National Crime be a degree of co-operation which was maximised. As Agency provides, with its 120 overseas officers far as I can see, there are a lot of stronger arguments working with law enforcement overseas to harness against separation than this one. I am just trying to that upstream activity as well as providing specialist clarify what degree of deterioration there would be in capability and support within the UK. the existing service as a result of separation, while accepting that it does not sound as if this in itself The point that I make is that, if you changed the would be a game changer. arrangement and you have a separate Scotland, it James Brokenshire: It is right to say, of course, that, would no doubt have to create its own capabilities and if there were a separate Scotland, it would be in the an international network in its own right. It would also interests of the remainder of the UK to work very have to look at the specialist capabilities that the closely in co-operation with Scotland to mitigate the National Crime Agency itself already provides. The risks that attach to organised crime groups that will be point is that it does make it that much harder. If you operating throughout Scotland and the UK in those have organised crime groups that look at ways in circumstances. They are not discriminating in terms which they can exploit differences between legal of border and will continue to operate in the way that systems, they will seek to do that. That is the point I they seek to do today. am trying to make. It is getting more challenging and The point that I make is that it is a different system. more dynamic. Organised crime groups become more We would not have the same powers of arrest on both sophisticated. Therefore, the response that you require sides of the border, with the same rights to be able to needs to keep pace with that. That is precisely why search and see people returned to face justice. Where we have been creating the National Crime Agency in you have bureaucracy and those elements in place, it that way. makes it that much harder to combat quite sophisticated organised crime groups. Q4073 Chair: If you are saying that independence would damage the fight against organised crime and Q4076 Chair: A final point in this section is the would undermine the fight against cocaine and other question of international co-operation and in particular drug dealing, can you give us an indication of what the “Five Eyes” arrangement. I understand the point sort of percentage deterioration there would be? Again you made about this being an agreement whereby it comes down to the question of whether it is a price people put in as well as take out. I concede that it is worth paying. difficult to see what a separate Scotland would be James Brokenshire: As I have indicated, we know putting in. Again coming back to the noses and faces the overall cost in terms of the drugs trade to Scotland. argument, would it not then be in the interests of the I would not want to give the impression to this other partners to provide full information to Scotland, Committee that it is not possible to create structures even a Scotland that had released al-Megrahi and a for Scotland to be able to do this. Indeed, Police Scotland that was trying to get rid of Trident? Scotland is very capable in its own right of James Brokenshire: When you look at the sorts of confronting and combating organised crime groups. It plots that we have seen in the past that cross borders, does tremendous work, and the Gartcosh campus, I we have clearly seen intelligence sharing between know, will be a really effective way of drawing different nations in our mutual interest. The question together a lot of the strands. is the uncertainty that would potentially be posed by cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 75
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP the creation of a new Scottish intelligence agency— The point is that it would be a very separate the time that would be taken to get arrangements put arrangement. The Scottish Government have very in place and for it to get to that level of maturity and clear views, as they would be entitled to, on what they trust with other nations around the globe so that require to provide the security for an independent secrets would be held secret and the control principle Scotland. I think that does require a great deal of very would be adhered to. Yes, of course, there is always careful thought, which does not appear at the moment interest to ensure that security is maintained. to be provided by the White Paper that we have seen. The point I am trying to make is that there is nothing automatic to say that you would gain the benefit of Q4079 Mr Reid: But the White Paper makes the that relationship. You could do but there is a question point that, in the past, the UK gave a great deal of mark; it is an uncertainty. help to friendly countries like Canada and Australia to set up their intelligence services because that was Q4077 Mr Reid: Thank you very much for coming in the UK’s interests. The Scottish Government are along this afternoon. Quoting from the Scottish clearly assuming that Scotland and the UK will Government’s White Paper, it says: “Scotland, of remain on friendly terms and, therefore, it would be course, already has a substantial existing capital stake, in the UK’s interest to help Scotland set up its from our investment in UK intelligence infrastructure. intelligence services. Is that a reasonable assumption? We will expect investment to be recognised in the James Brokenshire: Ensuring there is good arrangements that are agreed with the UK as part of collaboration and co-operation is important in the the independence settlement.” interests of both; I absolutely acknowledge that point. Are their expectations correct that, because Scottish That is as distinct and different from the integrated taxpayers have contributed to the UK intelligence approach that we have now and the differences that infrastructure, an independent Scotland could expect we have obviously discussed in this session already. some of that infrastructure to help itself set up its own services? Q4080 Mr Reid: In their White Paper, the Scottish James Brokenshire: Again, I go back to the point that Government outline plans for creating a single that is not something that we have contemplated or intelligence and security agency. Do you see any done any work on, as you would perhaps expect me advantages in having a single intelligence and security to say, Mr Reid. At the same time it is this chocolate agency as opposed to the multi-layered approach that bar type of approach that I have alluded to—“We will the UK adopts at the moment? have a chunk of this, a chunk of that and a chunk of James Brokenshire: The difference that I see is that the other”—and that that gives you an integrated type each of our agencies has quite a distinct role. The of security and intelligence apparatus. I just differ on focus of GCHQ and SIS is largely external, looking that approach and the starting point from this to get to outside the UK, whereas the Security Service is more that type of figure or arrangement that is contemplated domestic-facing. It is using intelligence, yes, but as a in the White Paper. security service its task is in delivering that security, Clearly, the Scottish Government will set out how whereas the other agencies—GCHQ and the Security they see things. If there were a positive vote, then all Intelligence Service—are intelligence agencies. That of this would be subject, no doubt, to detailed and is about garnering intelligence. lengthy negotiations. There is a distinction between those two roles. All three work extremely closely together, but there are Q4078 Mr Reid: Scotland’s population is roughly advantages in having that separation given the about 10% of the UK’s, so it would be reasonable to external versus internal, and intelligence versus expect Scotland to acquire 10% of the UK’s assets. In security focus. That is not to say that you could not the area of computer software you cannot have 10% do it in a different way. Indeed, we know that other of a computer programme; you either get the software European countries, as I have highlighted, have or you don’t. In the negotiations would you expect perhaps a police service looking at domestic security that Scotland would get copies of UK intelligence and relying on their military for the external software, or is that something that just would not be arrangements. It is a different arrangement. It is not contemplated? the approach that we, as the UK, have sought to take, James Brokenshire: It is very difficult to discuss the but it would be open to an independent Scotland to hypotheticals around this. I am clear, should that take that different approach. hypothetical situation arise, that there would need to be a great deal of detailed negotiation and discussion Q4081 Mr Reid: Are you aware of any other that would take place on a number of different levels, comparable countries to Scotland that have adopted not simply looking at budgets but on capabilities and the same approach of a single agency? various other issues. You are right to highlight the fact James Brokenshire: We have identified in our paper that Scotland itself would need to deliver a number of some comparisons in one of the annexes on different capabilities itself, whether that is intercept or international comparative data. When I look at that, a whole host of very technical capabilities that it you have countries like Norway, Denmark and would require and it would need to own. As part of Sweden where there is a distinction that they seek to any negotiations, I am sure there would be a great draw between each of the different responsibilities on deal of discussion and focus around a range of domestic threat and overseas threat. Indeed, some then technical issues as well as budgetary issues. have a separate agency relating to cyber. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 76 Scottish Affairs Committee: Evidence
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
It is certainly possible to do it in this way. You may very practically in seeking to work with Police point to a country like Finland that has a counter- Scotland is to assist in co-ordinating support from terrorism and counter-espionage agency. It is certainly other police forces around the rest of the UK in what, possible to construct an agency in that way, and it at times, can be very fast and dynamic investigations, would be open to an independent Scotland to conduct as well as the link into Europol on criminality that its affairs in that way if that is what it has chosen may cross borders through Europe. to do. Q4084 Jim McGovern: In your opinion, do you Q4082 Jim McGovern: Thanks for coming along think that, if Scotland were to separate, the ability to today. I participated in the Police Parliamentary fight organised crime would be lessened or Scheme. That involved working with what was then compromised? Tayside police but which is now the Tayside division James Brokenshire: I think it would be made harder of Police Scotland. I was also working a couple of because of the bureaucracy issues that I have already days with SOCA, so it is possible that I know the highlighted in respect of the need to move to a answers to some of the questions I am going to put to situation where you are relying on the European arrest you, but for the purpose of the report and the record— warrant, rather than the ability that policing has at the Chair: What would be the point of asking the moment to be able to seek arrest through arrest questions then? warrants across the UK and on search warrants as Jim McGovern: To have them recorded. In the paper well. The flexibility provided there would change you define organised crime as a security threat. How because of the need, in essence, to rely upon more do you arrive at that position? EU-based approaches. James Brokenshire: Organised crime is characterised There is also the collection of fines and enforcement as what we describe as a Tier Two risk. It is a aspects of that. It seems to me that there would be significant increase in organised crime that is framed additional bureaucracy and burdens that would be put in that way. We have done that because, as you will in place that would make that fight that much harder, be aware, Mr McGovern, of the impact organised knowing that organised crime groups are sophisticated crime can have. It is also the destabilising effect that across borders and will look to exploit any issues it can have through corruption and fraud if not where they can to advance their pernicious trade. checked. As some other countries around the world have seen, it can really erode some of the Q4085 Jim McGovern: You seem to be saying that fundamentals of government. That is why at its the main difference or the main obstacle would be extremis organised crime can be so serious. It is the increased bureaucracy. Over time could that be harm and risk to the population, whether that is overcome? through the impact of the drugs trade or cyber-related James Brokenshire: It is the practicalities of the legal frauds and scams that are perpetrated on the public, system that we have put in place. I highlighted the and why the fight to combat organised crime really European arrest warrant. The Scottish White Paper does matter. It is why we as a Government have given draws upon this and says that it contemplates that we additional focus through the creation of the National would use the European arrest warrant if there were Crime Agency to up our response to this because of separated countries. We see today, for example, the the direct impact it has in communities. It is not some relationship between Northern Ireland and the theoretical issue at a higher level. Yes, it is very Republic of Ireland. That is time-consuming. sophisticated at times. I am sure you have seen that in Therefore, there is that bureaucracy and I cannot see your experience at SOCA, which was the previous how you would overcome that. agency responsible for national-level approaches to More fundamentally, it is also the ability for police combating organised criminality. That is why I think officers in Scotland to be able to conduct operations it does matter at so many different levels. within the rest of the UK with other UK police forces. Again, I am sure that in your experience as well you Q4083 Jim McGovern: Is dealing with organised have seen that. Again using the example of Northern crime in Scotland dealt with and fought against Ireland and the Republic of Ireland, there is no hot specifically by Police Scotland or is it national—UK- pursuit. It is worth understanding this. A separate wide? border would mean that policing one country does not James Brokenshire: Police Scotland does have therefore flow across into another country. So it is the responsibility for combating organised crime. As I law and the operational issues. have already indicated, it does some tremendous For example, if you had a separate police force in a work, but in doing so it is able to draw upon the different country operating in a second country, what capabilities of the National Crime Agency. That deals happens on complaints about the way that police with a number of different issues. It could be the UK service was operating? If you were contemplating the Human Trafficking Centre to ensure that cases where very fluid model that seems to be being articulated, I people are being trafficked across borders into just don’t see how on earth that could work. What Scotland are properly recognised through the national about accountability on sovereignty and law? referral mechanism and can receive appropriate support. Q4086 Jim McGovern: But, of course, you take There are a number of different facets that Police into account that there are already different legal Scotland is able to draw upon and rely upon. Indeed, systems for Scotland, England, Wales and Northern the work that the National Crime Agency also does Ireland. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 77
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
James Brokenshire: There are, but we have created Chair: If you have had evidence about that, it would and structured our UK-wide law in a way that is able be helpful if you wrote to us clarifying what is meant to address that as one country. It is difficult to by that. Then, if we have further queries, we will contemplate how you could do that with a completely maybe come back to you. This does seem to be quite separate country. That is not what we see in the island an important area that we would want to pursue. of Ireland. Q4089 Jim McGovern: Could you clarify the role Q4087 Chair: I want to clarify one point on the of the UK National Crime Agency and what sort of question of hot pursuit. How much actual hot pursuit relationship it has with Police Scotland? What is there at the moment? I am not aware of the bridge difference, if any, would separation make to that at Coldstream being a constant procession of cars relationship? screaming, one after the other. Would we have a James Brokenshire: At the moment Scotland has the situation where a drunk driver, as long as he got over benefit of devolution and the devolved arrangements the bridge at Coldstream one way or the other, would in respect of crime, but it is also able to harness the then escape pursuit by the police force chasing him? benefits of the capabilities of the National Crime How would that work? I am not quite sure how much Agency. That means it is able to draw upon the hot pursuit there actually is at the moment. Maybe National Cyber Crime Unit’s expertise and you could just clarify what you mean by that before specialisation in respect of combating online we move on. criminality. It has the Child Exploitation Online James Brokenshire: What that is saying, clearly, is Protection Centre’s specialisation around online child that, if someone is travelling from Scotland to the rest abuse. There is the UK Human Trafficking Centre. of the UK, the police service would be able to There are a number of these capabilities that we have continue that. They would be able to liaise with the set out in the security paper that demonstrate the police service in the residual part of the UK, but they enhanced reach of the 120 liaison officers that the would not be able to arrest, whereas they can under NCA has around the world to be able to support our existing legislative structure. That is the operations. Therefore, it is that complementary additionality that the NCA is able to provide to the distinction that I draw. investigation of organised criminality in Scotland. Some countries that are within Schengen—and the UK is not part of Schengen—have the ability to allow police officers to pursue across a border, but that then Q4090 Jim McGovern: In the event of separation how would that be affected? does not give them the right of arrest. They would James Brokenshire: have to see the arrest by the host country. It is all of It would be for the Scottish Government to assess how they would want to these issues that then arise that we just don’t have as replicate or create their own capabilities. Clearly, the a unified, united and integrated country. We respect Scottish police would not be able simply to continue devolution and differences with Scots law, but our to draw upon the NCA in the way that they do at the overall UK-wide law when put together allows that. moment. The NCA’s focus would be the residual part of the UK. Of course it would co-operate and support, Q4088 Chair: It would be helpful if you could let but it would be a different relationship. The us have something about hot pursuit—in particular Government of Scotland would need to put in place a how it applies, say, between the Irish Republic and number of its own capabilities to further strengthen Northern Ireland, and how that might be replayed in the work of Police Scotland, given the recognised— the context of Scotland and England. That would be helpful and we might want to return to that because Q4091 Chair: Again, it would be helpful if you that is something that is identifiable. would give us a note of the capabilities that you James Brokenshire: I can certainly point to some of believe would be lost or would have to be replicated the statements that we have already made in this in order that we can seek clarification on some of document. There is certainly a section that highlights these points from the Scottish Government. this, but I am very happy to— James Brokenshire: Okay, I will certainly take that Chair: But there are no figures and so on. away, Mr Davidson. Again, we can demonstrate the James Brokenshire: Perhaps I can take that away and sorts of support that the NCA provides to Police see what information we are able to provide to assist Scotland and therefore give that indication of the type the Committee around that. of additional capabilities perhaps that Police David Mundell: I have a small point on that. When I Scotland might— was in Aberdeen recently meeting with representatives of the voluntary sector, the rape and Q4092 Chair: It is those capabilities that as part of domestic abuse support group that were present at that the UK are accessed as of right and which, under meeting raised very serious concerns to them about separation, might be accessed as a favour. what would happen with people moving about the Alternatively, the Scottish Government might want to United Kingdom in response to the sorts of incidents replicate those themselves. I am not entirely clear as that they look to support people on. There is no doubt we sit here what list of capabilities those would be and that it would be much more difficult than it is therefore how much it might cost to replicate them, currently to deal with these incidents if the perpetrator notwithstanding the fact that we had a discussion is in Scotland or another part of the United Kingdom earlier about the costs of replication. It would be and the victim is in another part of it. helpful if you pointed us in that direction. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Ev 78 Scottish Affairs Committee: Evidence
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP
James Brokenshire: I am happy to write to the at passenger name records to seek to identify Committee to provide the full list of details of the individuals who may be a threat and risk. We have a additional and specialist services that the NCA new arrangement that has been established under the provides. I would draw your attention to annex B of pre-departure check scheme to prevent people from the paper, which sets out a number of the specialist boarding aircraft in the first place. capabilities that the NCA provides to UK policing. It is an array of different responsibilities that you That will give you a flavour of the specialist work would potentially be looking at in respect of the and additional support that the NCA does give. I am establishment of separate border security certainly very happy to reflect further if that would arrangements. The National Crime Agency has its be helpful. own borders command that looks at co-ordinating steps to combat organised criminality at the border, as Q4093 Chair: Believe it or not, I have actually read well as the normal aspects that you would have on this. I am one of the few people possibly in the whole immigration control. It is something that we are country who has read this, but there is no indication examining in further detail in respect of borders, but in here of the scale of either set-up costs or running that gives an idea of the sorts of challenges that would costs for these elements. Some help and guidance on be involved. these elements of it might be helpful. James Brokenshire: I can tell you that for the Q4096 Lindsay Roy: So they are complex National Crime Agency, for example, its budget for challenges? 2013–14—its spending power—is in the order of £494 James Brokenshire: Yes. million. That is the macro figure, of which £463 million is resource and £31 million is capital spend. Q4097 Lindsay Roy: How is it influenced by That is the macro overall figure for the National Crime whether or not Scotland is a member of the EU or Agency, which perhaps will give you a sense of the signs up to Schengen? scale and nature of the activities of the NCA. James Brokenshire: As I say, I have indicated this Chair: When we have that, we can then feed it into one point on EU and lists of individuals of concern. what we get from the Home Office in looking at your That is something that, yes, may be informed by UN provision for crime. I am conscious that there is going or EU travel bans and responsibilities that you hold as to be a vote at four o’clock. I know that there are a a country, but that is more of a domestic and national couple of questions at the end that we did want to deal security responsibility that you would hold working with. Jim, if you wouldn’t mind, could we move to with your intelligence and security agencies. On that Lindsay to ask about borders, and, if we have time, level, it is difficult to see the distinction between EU we will come back to yours before the vote? and non-EU in those circumstances. Jim McGovern: If I can say in defence of my Clearly, the UK is not a member of Schengen and Committee colleagues, I am sure that each and every has no intention of becoming a member of Schengen. one of us has read the paper in full. Therefore, it is difficult to discern the distinction that Chair: I understand that some can recite substantial that draws, and it would be for the Scottish sections of it from memory, like Tam o’ Shanter and Government to seek application to join the EU. It is so on. At the moment we will not do that; we will just obviously for a Scottish state to determine ask Lindsay to do a couple of questions. independently its border policies. That would be affected by, for example, consideration of issues of Q4094 Lindsay Roy: In terms of border security, borderless travel areas it may adjoin. There are what new responsibilities would fall to a separate implications that it would need to factor in, depending Scotland? on whether it was a Schengen or non-Schengen James Brokenshire: Clearly, as a separate country, if member. that were to hypothetically occur, a Scottish Government would need to take responsibility as an Q4098 Lindsay Roy: To what extent do you see independent state and would be required to take issues around immigration? control of their borders and establish the necessary James Brokenshire: There is separate consideration systems and processes for managing these. The that we are giving to the borders issue more generally Government of the continuing UK and its institutions in our “Scotland Analysis”. Therefore, my focus is on would no longer have responsibility or powers to security rather than the immigration aspect, but it is manage Scotland’s borders. something that I can say to this Committee we are examining and giving further consideration to in terms Q4095 Lindsay Roy: What would that involve? of the immigration implications for an independent James Brokenshire: Obviously you have the direct Scotland. points of entry and, as you arrive in the airport, all the front-end border force arrangements that you see Q4099 Lindsay Roy: What are these implications? there. It is also the issue on targeting against threat, James Brokenshire: That is probably an evidence which is where my focus lies from a security session in its own right in terms of some of the standpoint. For example, the White Paper talks about statements that are contained in the White Paper as to hot lists and being able to screen against that. It how the Scottish Government would seek to take a references the EU. The EU has information on travel different immigration policy from the UK bans, but that is a distinct and separate process. We Government on flows of workers into the country and have the National Border Targeting Centre that looks all the potential issues that may lead into on public cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 15:59] Job: 038186 Unit: PG06 Source: /MILES/PKU/INPUT/038186/038186_o006_odeth_SAC 140108.xml
Scottish Affairs Committee: Evidence Ev 79
8 January 2014 James Brokenshire MP and Rt Hon David Mundell MP services, welfare and all the issues on immigration James Brokenshire: The trained police officers will that we are familiar with in some of the recent be pan-UK. It is drawing upon a wide UK resource debates. It is for that reason that we are analysing that is there. In the same way as breaking off a chunk, this issue in further detail in respect of the broader it would be very difficult to attribute a particular immigration issues. aspect to Scotland. That is not the way in which the preparations are being constructed. It is providing that Q4100 Chair: I want to clarify whether or not there national capability. are specialist resources in Scotland at the moment for dealing with chemical, biological, radiological and Q4103 Chair: But some of the officers will be in nuclear threats. If they are not held in Scotland, would Scotland, for example. They will be Scotland police they then require to be created by a separate Scottish officers and, therefore, it is just a question of setting state? up a new hierarchy and superstructure, since the main James Brokenshire: I think you are right to fasten assets—the people involved—are already there. upon this point because CBRN—the ability to respond James Brokenshire: There will be some personnel but to chemical, biological, radiological or nuclear it is a question of capabilities and surge capacity, terrorist attack or incident—is one that the UK has potentially, and how you manage that and deal with given a great deal of focus and attention to over a that. number of years. Through the Model Response, as it is termed, which is a classified document, that work Q4104 Chair: Surge capacity takes us back to the has resulted in a programme which has application question of mutual support, does it not? Those are the across the UK. For example, it has as part of that same sorts of issues. 10,000 police officers trained to respond to a CBRN James Brokenshire: Yes. incident by 2010. It was one of the deliverables that was put in place around that. We have a national Q4105 Chair: We are coming to a close. We CBRN centre that offers a 24/7 operational approach normally ask the victims—the witnesses—at the end to support the police with any incidents or queries of the session whether there are any answers they had where specialist advice is required. Again, that is prepared to questions that we have not asked or something that would need to be addressed by an anything they wish to unburden themselves of before independent Scotland as to how it would need to leaving. I would extend that to you. Are there any respond to a CBRN incident. points that you want to raise with us that you think Of course, as a separate neighbouring state, the we have omitted? remainder of the UK would have a direct interest in James Brokenshire: I think we have covered the providing support, but it is something that an broad range of issues and some of the complexities independent country would need to contemplate very that are involved in this. In a concluding remark, there clearly on the methods and the way in which it should is this distinction between an integrated approach and respond to that. a separated approach—the latter relies on good will, but that will only take you so far—and the benefits Q4101 Chair: Could this not be something like the that we see of having that integration. You cannot NATO nuclear umbrella? A separate Scotland could separate a security union from a political union—a expel Trident but none the less remain in NATO and legal construct that allows and supports that. It is remain sheltered by the nuclear umbrella, and in the important to understand that a separate Scotland same way just look to the UK to provide free gratis would lead to those very separated arrangements that chemical, biological and radiological assistance. clearly provide a level of assurance, but our judgment James Brokenshire: I am sure that assistance could is that the existing arrangements work well and there be provided, but that is distinct from having an is a recognition of that integrated approach that is incident in your country and how you deal with that currently operated. It is not about co-operating; it is practically on the ground, the advice that you provide about that sense of integration. and the response that you give. Some of that may of course involve specialist equipment, but it is about Q4106 Chair: Do I take it that GCHQ are of course personnel who are trained and are on the ground and listening to the conversations of the Scottish ready to respond and deal with issues. Therefore, leadership and that, therefore, you are well aware of having a capability to address an incident of this kind their negotiating position on all questions, and, would be important for an independent country. indeed, a couple of members of the Scottish Cabinet are MI5 officers in disguise—or can you not tell me? Q4102 Chair: Could I clarify whether or not the James Brokenshire: Mr Davidson, as the customary personnel to deal with chemical or biological threats line has been of Governments over many years, we are present, spread throughout the entire United do not comment on intelligence matters. Kingdom with, say, an element in each police force Chair: Okay, we will take it as true then. Thank you and, in the event of a division, Scotland would have very much. those resources, or are they all in a box somewhere waiting for an incident and, therefore, not presently in Scotland? cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 80 Scottish Affairs Committee: Evidence
Wednesday 15 January 2014
Members present: Mr Ian Davidson (Chair)
Mike Crockart Sir James Paice Graeme Morrice Mr Alan Reid Pamela Nash Lindsay Roy ______
Examination of Witnesses
Witnesses: Professor Iain McLean, Professor of Politics, Official Fellow, Nuffield College, University of Oxford, Professor Adam Tomkins, John Millar Chair of Public Law, University of Glasgow, and Professor Kenneth Armstrong, Professor of European Law, University of Cambridge, gave evidence.
Q4107 Chair: Gentlemen, welcome to this meeting the United Kingdom, presumably, but perhaps not— of the Scottish Affairs Committee. As you will be this might be something you want to talk about in a aware, we have been conducting a number of inquiries few moments—led by the United Kingdom into the referendum on separation for Scotland. We Government. have been concentrating recently on a number of In between referendum day in September 2014 and issues relating to practical subjects, but today we are proposed independence day in March 2016, we have coming back to issues of process. We had a lot of the small matter of the United Kingdom general process at the time of the debate about how the election. Even without that general election, the SNP’s referendum was to be conducted, but we are now back proposed timetable would be ludicrous; with it, it just to the question of process for what might happen in becomes—what is more ludicrous than ludicrous?— the unlikely event of a yes vote. I start off by asking preposterous. It is completely unrealistic. It seems to you to introduce yourselves for the record and tell us me to have been set for purely party political reasons. a little bit about your background. The reason why the SNP want independence day to Professor McLean: I am Iain McLean, professor of occur in March 2016 is that they want it to occur politics at Oxford university, and I am one of three while they still have a majority in Holyrood, and the authors of a book called Scotland’s Choices, which next scheduled elections for the Holyrood Parliament aims to be a neutral explainer of the issues for voters. are, as you know, in May 2016. Even if the SNP were Professor Armstrong: I am Kenneth Armstrong. I to win those elections, it might be thought unrealistic hold the chair in European law at Cambridge. I am to suppose that they might win them with an overall director of the Centre for European Legal Studies at majority. It seems to me to be unrealistic, risible and Cambridge and a fellow of Sidney Sussex college. partisan. Apart from that, I am quite comfortable Professor Tomkins: I am Adam Tomkins. I am the with it. John Millar professor of public law at the University of Glasgow, and I am also one of the legal advisers to Q4109 Chair: I hope the other witnesses will get off the House of Lords Constitution Committee, but it is the fence and make their views absolutely clear on very important that I get on the record that I am here these sorts of matters. today purely in my personal capacity, and nothing that Professor Armstrong: Purely from the perspective of I say to you is meant to indicate the views of any synchronicity between independence and the EU Member, official or Committee of the House of Lords. membership side of things, the period that has been set is not wholly implausible. Negotiations could Q4108 Chair: That is a great reassurance to us all. occur on Scottish membership of the EU within that Could I ask, first, about the timetable that has been period. The White Paper itself is clear that the proposed by the Scottish Government? The suggestion negotiations will take that full run. That would lead to is that an 18-month timetable between the referendum a situation where those negotiations would be and the declaration and implementation of concluded, and a treaty would be agreed, which would independence is realistic. Do you have a view on this? require ratification thereafter. Even if the timetable Professor Tomkins: I have a published view on it. was met, it would imply a gap between the point at The Scottish Government first proposed this timetable which Scotland had become independent and the point in the spring of 2013, I think. The precise date was at which accession would come into force. A gap given for the first time in the White Paper, but we would occur, so the idea that all of this could be already knew that they were thinking about March completed within that period is wishful thinking. I do 2016. In the piece that I wrote, which was published not know of any example where an entity seeking to in The Scotsman—you can read it on their website, if become a member state of the European Union had you want—I said that the proposal to move as quickly itself set the date on which that would occur. as that was risible, and I stand by that. I think it is a Professor McLean: I do not have much to add to what preposterous timetable. Unpicking a 307 year-old Adam said, except to add a further complication to the Union will be a mighty, difficult task. Almost all of it UK general election situation. Suppose the UK will be done, if we ever get there—I hope we will general election of 2015 produces a majority Labour, not—by political negotiation. The principal or Labour-led, Government but one which depends on counterparty to those negotiations will be the rest of its Scottish seats. In that event, since the Scottish cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 81
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Government at least thinks that the Scottish MPs will it. I cannot think of any other negotiating strategy. I leave on independence day, and that surely has to be just cannot see how that mechanism can work prior to the case, that Government has every incentive, acting the UK general election, for the reasons Adam has just on its own, to make the negotiations last as long as said. Therefore, I would envisage it restarting from possible. Furthermore, if there is a change of UK baseline on the day after the UK general election, on Government, any incoming Government are going to the rest of the UK side. use the claim of parliamentary sovereignty to deny anything that may have been said by negotiators on Q4111 Chair: If anything, it would be worse than behalf of the present coalition Government, and start baseline in a sense, because presumably people from from scratch, so I agree with my two colleagues. the UK Government would be going into negotiations after an election, having made commitments as part Q4110 Chair: Can I leave aside for a moment the of that election campaign about how they would question of the EU? We have another section on the propose to protect their areas in the event of EU that I want to touch on. First, I want to explore separation and any possible detriment. If anything, the dynamics of the period between any yes vote and positions would have hardened. Is that a fair way of the general election in the UK itself. Professor looking at it? McLean, you suggested that any agreement reached Professor McLean: Certainly. On the other hand, the during that period could potentially be rejected by the Scottish Government itself, and also presumably the next Government. Professor Tomkins, I think you UK Government, are clear that Scottish MPs will be were suggesting that there would not be a willingness elected to the 2015 UK Parliament, and therefore they by any present UK Government to make concessions, will be part of the bargaining within the UK given that they are facing a general election in a short Parliament that you have just mentioned. period of time. As the Member representing Govan shipyards, I am particularly concerned about the Q4112 Lindsay Roy: Gentlemen, in effect you are circumstances around the yards and what saying there is no incentive for the political parties in commitments might then be made. My anxiety is that the UK to enter into detailed negotiations prior to the there would be an incentive for all parties standing in general election, and therefore we have a nine-month and around Portsmouth to make clear commitments slot for detailed negotiations. Would that be a fair that, in the event of a decision on separation, they assessment? would keep shipbuilding in Portsmouth rather than Professor Tomkins: I don’t know that it would be give orders to the Clyde, and that pattern would politically feasible for the UK simply to refuse to go happen all across the remainder of the UK in every to the negotiating table at all for nine full months particular location. Have I correctly understood the between a yes vote in September and the UK general dynamics of that, or would some other factors come election nine months thereafter. It would be politically into play that would allow things to be dealt with unwise if the UK were to do that, because it would differently? look as if the commitment given in paragraph 30 of Professor Tomkins: It is enormously complex, and the Edinburgh agreement was being reneged upon. It your understanding of the situation is a credible and is very important that we understand the nature of that plausible one. It is complex because, in this curious period between a yes vote in the referendum and commitment. It is not what the SNP has said it is. independence coming into legal effect, the United That commitment is simply a commitment on the part Kingdom Government would be simultaneously the of both Governments to respect the outcome of the Government of the whole of the United Kingdom, referendum—yes or no. It is not a commitment on the including the Govan shipyards, and negotiating pretty UK part to respect anything in that White Paper as to damn hard, one would have thought and hoped, in the the terms of independence, the meaning of best interests of the rest of the United Kingdom to independence or, as I like to put it, the meaning of secure for the rest of the United Kingdom as good a dependence, which that White Paper advocates. None deal in the separation negotiations as could possibly the less, the UK is committed to respect the outcome be secured, which might include saying to the of the referendum. shipbuilders in Portsmouth that British business with We do not know very much about what that means, Govan will come south. No one really understands but in law I think it means that there is an obligation how that tension will be resolved—the tension on the UK to come to the negotiating table. That between being simultaneously a representative would be consistent with what the Canadian Supreme Government for the whole of the United Kingdom but Court said in its famous Quebec secession reference also, presumably, the lead partner, or a lead partner, decision in, I think, 1998. A yes vote in a secession in negotiations on behalf purely of the rest of the referendum or an independence referendum triggers United Kingdom. not very much, but what it does trigger is a Professor McLean: I keep recurring to the Anglo- requirement, probably legally enforceable at some Irish discussions of 1921 when I try to focus on level, to come to the negotiating table. If the UK were questions like this. We may come to that later in any just to say, “We’ll start negotiations in the middle of case. In that event, plenipotentiaries were appointed May 2015 after we’ve had our little local matter of a by both Governments to negotiate. They had to report general election,” that would be both politically back to their principals and both Parliaments had to unwise and contrary to the Edinburgh agreement, and vote on the treaty they agreed. Indeed, both contrary to what little international or constitutional Parliaments did in 1922, and both Parliaments carried law might say about it. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 82 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
However, having said all of that, I agree with what Lindsay Roy: It is a pie in the sky. Professor McLean has suggested by way of how little could be resolved in those negotiations until the Q4115 Chair: Possibly, it is a pig in the sky. I want outcome of the UK general election was known, to pick up the question of flippancy. This was not unless the way in which the UK decided to approach raised by just any old SNP MP; it was Angus those negotiations was on a cross-party basis. In my Robertson, who we are told is the election remarks this afternoon I have been quite careful to say mastermind. Therefore, we have to assume that it was that I am merely supposing that the UK Government a serious proposal by the SNP. Surely from its would be the lead player in the negotiations. They perspective it makes sense, because it would would not necessarily have to be the lead player, and overcome the difficulties you raised earlier about they certainly would not have to be the only player. It parties in the UK bidding against each other for the might be, for example, that on areas where there was position after the general election. It would free that no party political disagreement between the up. I would obviously be hostile to it, because I would Conservative party and the Labour party in the rest of not want to see Scotland suffer another year of the UK, negotiations on those issues could go ahead coalition Government, but, from the SNP’s point of and perhaps even be resolved by the time of the next general election. For example, both Mr Osborne and view, surely it is an entirely sensible and rational view Mr Balls might be of the view that a currency union to put forward. with Scotland would be highly unlikely, to use the Professor Tomkins: Perhaps—perhaps not. Even if it current Chancellor’s language, to be in the rest of the were the case, it would not be the first time that UK’s national interest. If Mr Balls were to agree with something the SNP took seriously was something I that, the issue might perhaps be negotiable in advance was unable to take seriously. I do not take this of the UK general election. seriously as a proposition of British constitutional But one of the things we could expect to see the politics or British constitutional law for the reasons I parties talking about in their manifestos for the UK have already articulated, which are that, in order to do general election in 2015, and indeed in the campaign this lawfully, it would require the Fixed-term for that election, is what their negotiating positions Parliaments Act to be amended. That would require would be with regard to the separation agreement that an Act of Parliament. Both Houses of Parliament would have to be negotiated with Scotland in the would have to agree to it, and I do not see the prospect event of a yes vote in September. Some of those of that happening as being even remotely likely. manifesto commitments and campaign lines might be quite different from one another. In those areas it is Q4116 Chair: I take it that silence is assent. very difficult to see where we go, beyond coming to Professor McLean: I have nothing to add to that. the negotiating table in good faith and saying, “Well, we’d like to start talking to you about this, but we Q4117 Chair: I want to clarify two other points on really haven’t got much of a mandate to do it, and the timing. One is the question of whether things we’re going to ask our people first.” That is probably could be agreed and applied individually or whether how I would see the situation. nothing would be agreed until everything was agreed. I can appreciate that there are some minor details Q4113 Lindsay Roy: Is there a case, as the SNP about the implementation of social security, which are suggests, for delaying the general election for another of no political consequence and could quite easily be year and having another year of Conservative-Lib delayed—later, there will be the DVLA and so on— Dem coalition Government? but for major issues like the question of the currency, Professor Tomkins: Are you serious? Absolutely not; which was mentioned, or the support or otherwise for of course there is no case for that. European negotiations and a whole number of other things, would it be the case in your view that they Q4114 Lindsay Roy: I take it the SNP claims to be would all have to be a complete package, or could a serious party. individual items be settled, resolved and implemented Professor Tomkins: As I understand it, one MP in the absence of an overall agreement? representing the SNP suggested that the UK general election be postponed by a year. I have not heard the Professor McLean: My view is the former. If you Scottish Government say that—although perhaps I think of things that everybody round the table knows haven’t been listening. I do not think that is a serious are predictably going to be sticking points—whatever proposition, or that it is put seriously by the SNP. It the composition of the next UK Government— would require legislation in both Houses of this including currency, the EU, Faslane and Coulport, Parliament to amend the Fixed-term Parliaments Act. these are obviously controversial within the UK. They When I last looked, the SNP did not have a majority are controversial between the UK Government and the in either House of Parliament, and I think that, if the Scottish Government, and they are controversial current Government were to propose that the general between the UK political parties. I do not see how any election be delayed for a year in order to enable these of those could be signed off as an interim measure, separation negotiations to be completed, while Mr because I believe that both parties—the UK Miliband was still Leader of the Opposition neither Government and the Scottish Government—would House of Parliament would have very much difficulty want to reopen issue A if the discussions on issue B in turning down that legislation, so it is not a serious were not going the way they wanted, so it has to be proposition. all or nothing on the big issues. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 83
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Q4118 Chair: Is that a consensus view? We quite act on behalf of the UK as a whole. These are the enjoy it if people argue among themselves, because it kinds of things we can expect to see. Some of the makes for a more interesting hearing. negotiations could be very short indeed. Other matters Professor Tomkins: There is another view. I do not would require genuine agreement. For example, as I know that I subscribe to it, but it is possible to imagine understand it, neither side would be able to impose on another view, which is that there are some big issues the other what an equitable share of the national debt that could be taken off the table quite quickly. It might would be. I could say more about that if you want. be that the UK Treasury would come to the negotiating table and say, “Well, we said before the Q4120 Chair: Let’s come to the detail of that. I referendum that a currency union was highly unlikely. understand the point that some things would require a During the referendum campaign we had a look at it. process of haggling, and you are saying that for others Having had a look at it, we’ve concluded that it’s not it could very well be the imposition of the dominant in our national interest, and we’re not going to do it. side’s view of the matter, and there is simply no Now what shall we talk about?” That could happen. movement. Is that a view with which the two other It is not completely inconceivable that that could witnesses concur? happen, and then the issue of shared ownership of the Professor Armstrong: I will focus only on the Bank of England and all of that stuff is completely European side of things. Obviously it slightly depends otiose; it is out the window, because all of a sudden, on which way the Scottish Government want to go. If an independent Scotland will just have to shadow— they want to go down their preferred route, which is use the pound in the way Panama uses the US dollar not to go down the accession process, at the end they as a foreign currency—or it will have to take steps to get bogged down with what the UK Government are enter the euro, or it will have to use Bitcoin or some prepared to facilitate by way of negotiations at other indigenous Scottish currency. But it will not be European level, and particularly what the UK able to enter into a currency union, because on day Government might want out of a treaty revision one, hour one, minute one, the Chancellor—whoever process, as well as what the Scottish Government he is—is sitting there saying, “I’m not doing it. End might want. If the Scottish Government were in fact of. Let’s move on.” And that’s the end of that. This is to go down the route they do not want to go down, not exactly an agreement being concluded, but it is a which is the accession route, they would largely be in position that would not be reversed later in the control of that process. The specific dossiers on the negotiations. If there were to be further negotiations, euro, justice and home affairs, and so on would just they would necessarily have to be about something be negotiated on a chapter by chapter basis, as else. happens with accession negotiations, and will just be signed off as and when agreement is reached. They Q4119 Chair: That suggests that some of the would be far more in control of the process that they issues—it could be the removal of Trident—could be do not want to go down, and less in control if they go unilaterally imposed by one side or the other. That down the process they have said they want to go would not be a negotiated settlement; it would just be down. a unilateral imposition by one side of some questions. Professor McLean: Adam’s alternative scenario—in Professor Tomkins: That is right. If there is a yes which the UK Treasury says on day one, hour one, vote, the obligation, as I understand it, is to come to minute one, “You cannae have the pound; that’s the the negotiating table in good faith, but then to end of the issue,” and that is settled—I do not see as negotiate hard in the interests of those people whom plausible, because it is very easy indeed to envisage you represent. At the moment, we are assuming that that on day one, minute two, the Scottish negotiators the UK Government are simply representing the rest will say, “In that case, what happens to Trident is what of the UK. They might have concluded, from 200 or it says in our White Paper: they are out by 2020, no 200,000 pages of detailed Treasury analysis, that there argument.” I see the two sides looking at each other was no conceivable way in which a currency union and saying, “That’s a bit silly. We’ve got to keep on with an independent Scotland would be in the national talking.” The issues would inextricably be linked. interest of the rest of the UK. I am not saying that will be the Treasury position; I am certainly not saying Q4121 Chair: On the question of the negotiating that it is the Treasury position, because it is not. The timetable, I want your observations on what has been Treasury position at the moment is that it is merely suggested to us is an imbalance that will affect the highly unlikely. That line might harden in the turnout of those negotiations, which is that one side immediate aftermath of a referendum. has a deadline and the other does not. It has been I think what we can expect to hear between now and suggested that the side with the deadline—the Scottish the referendum—and, if there is a yes vote, Government—thereby finds their negotiating position immediately thereafter—is that a yes vote means you considerably undercut, because the only way in which have elected to leave the UK. You have elected to they could meet their deadline in the event of walk away. It is the UK’s pound. If you leave the UK, disagreement would be to concede. Presumably, the you are leaving the UK’s pound. The Bank of England UK Government would know that all they needed to is misnamed. It is not the Bank of England; it is a UK do would simply be to keep talking or decline to make institution which acts in the interests of the United concessions. Is that a reasonable assessment of the Kingdom as a whole. If you vote to leave the UK, you position? are walking away from the services, protection and Professor Tomkins: It seems to me that each side obligations that are undertaken by institutions which would, in the wholly unattractive event of any of this cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 84 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong ever happening, have some good cards and some less off the table. That is not what we are talking about good cards. Professor McLean has just referred to one here. of the best cards that the Scottish Government would have: clearing Trident from Faslane and Coulport. Q4125 Sir James Paice: You are saying that the Irrespective of the deadline, there is no way that Edinburgh agreement is permanently binding on both Scotland can demand the Treasury’s acceptance of a Governments, whoever those Governments are, currency union if the Treasury has concluded that it is bearing in mind that by May 2016 it is not impossible not in its interest to do so. Likewise, it is very difficult that both Governments will have changed. You are for the UK to demand that Faslane is the indefinite saying they will both be bound by their predecessors. home of Britain’s nuclear deterrent, in the event of Professor Tomkins: I think I am saying that, because Scotland’s continuing desire to see those weapons the entire basis on which this Parliament voted for the moved. I do not think the clock makes much section 30 agreement that gave Holyrood the difference to the strength of the cards that are in necessary legislative power to hold the referendum in different players’ hands. the first place was explicitly that this referendum Professor McLean: But in so far as it does, the key would be legal, fair and decisive. This is not an date is not March 2016 but the next Holyrood election advisory opinion poll; it is not a “suck it and see” in May 2016. referendum. This referendum determines the question.
Q4122 Chair: Can you expand on that? Q4126 Mr Reid: Let’s say that negotiations have not Professor McLean: Since the composition of the been completed by the 2016 Scottish election and that, Scottish Government might change, the present for example, the Labour party, which is not a party to Scottish Government have every reason to try to the Edinburgh agreement, publishes a manifesto for conclude negotiations before the next Scottish that election which says, “If we win the election, we Parliament election. will call off the negotiations and stay in the UK,” and on that manifesto the Labour party gets an overall Q4123 Sir James Paice: In the event that the majority in that election. Surely, it then would have timetable was not quite achieved and there was a the mandate, and in fact the duty, to implement its change in the Scottish Government to one manifesto and call everything off. representing one or more of the other Unionist parties, Professor Tomkins: It is because of complications are they under any obligation to continue the like these that the SNP is saying that the thing needs negotiations at all? to be concluded before the Scots get a chance to Professor McLean: That is a tricky one. They are change their minds. under an obligation to continue the negotiations, probably under the terms of the Edinburgh agreement, Q4127 Mr Reid: That is right. But say agreement but they are under no obligation to conclude them in has not been reached, and the UK Government are not a way which would satisfy what by construction is no happy with the state of negotiations or SNP demands longer the Scottish Government, i.e. the Scottish as of March 2016, and the UK Government refuse to Government. put legislation through the UK Parliament and refuse to sign an agreement. What do the Scottish Q4124 Chair: Effectively, the Scottish election could Government do in that scenario in March 2016? be a second referendum, depending on the positions Professor Armstrong: If the Scottish electorate, in a that the parties going into that election take. very short space of time, come up with two Professor Tomkins: The very considerable counter to completely contradictory views, you have to resolve that is that both sides are very firmly agreed, as I them somehow. The answer might have to be that you understand it, that this referendum in September is would have to hold another referendum on the legal, fair and decisive. This referendum decides it. It constitutional question, if they decided to change their is not a “suck it and see” referendum; it is no good mind in the election. the Scottish Government saying, “Vote for independence and we’ll give it a go. We’ll see how Q4128 Mr Reid: Let’s take this forward to 24 March the negotiations go. If they go well, that’s great, but, 2016, which the SNP have said is independence day. if they don’t go very well, you’ve always got a chance As of that date, the UK Government have not signed to get out of it, either in a subsequent referendum or an agreement and have not put legislation through the in a subsequent parliamentary election which looks UK Parliament. What are the options open to the very much like a referendum.” That is not what is on Scottish Government on 24 March 2016? the table. That is not the process. It is emphatically Professor Tomkins: I do not know the answer to that not what is happening. This is a decisive referendum, question. Perhaps I can go back to the previous one. and that is the key ingredient of the Edinburgh Chair: Because you like that one much better. agreement. Both sides agreed that they would respect the outcome of this referendum. If it is yes, Scotland Q4129 Mr Reid: What would you say to a student goes; it is independence around the corner. If it is no, who gave you an answer like that? Scotland stays. It is as simple as that. Any attempt to Professor Tomkins: I am not going to answer that make the May 2016 Scottish parliamentary elections question either. How this pans out will depend very into a sort of check on the referendum, a second much on what the public mood is in 2016. If the referendum, or a way of opting back into the UK if public mood in Scotland is, “Oh, my God, we’ve Scotland has voted to leave it in 2014, is absolutely made a terrible mistake; it must be reversed,” of cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 85
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong course political parties will react to that, so in that Chair: That is assuming we have not already sense if, for example, a May 2016 incoming Labour- abolished it by then, but leave that aside for the led Administration in Holyrood had been elected moment. overtly on that commitment and in that sort of mood, that would be one thing. If, however, the reaction in Q4135 Mr Reid: Is Professor Tomkins’s answer of Scotland after the referendum, yes or no, is, as I chaos the general view? suspect it will be, “Thank God that’s over. We can Professor McLean: It is not necessarily my view. now get on with some proper politics,” either as an There would be huge pressure on both Governments, independent state or as a continuing part of the United because chaos means chaos in the financial markets, Kingdom, the constitutional question has been put to and that really matters to both Governments. bed. So far as I can detect it at the moment, the mood in Scotland is that, come September, this will all be Q4136 Chair: Why should there be chaos in the UK over: “We can get on with some proper left-right financial market if these issues are not resolved in politics rather than this endless constitutional debate.” Scotland? The UK will continue with sterling and the I think that the question you are trying to get to will Bank of England irrespective of whether there has depend on what the public mood is after the been an agreement. The question will be whether or referendum. not a separate Scotland continues with sterling and the Bank of England, either on the Panamanian model or Q4130 Mr Reid: I think your assessment of the as a joint currency area. It is an imbalanced potential public mood in Scotland is correct. People want the for chaos, surely. referendum to settle the matter one way or another Professor McLean: Maybe so, but I can still see once and for all, but the question none of you seems chaos on the UK side. Consider, as Members might able to answer is what options are open to the Scottish have in mind anyway, yesterday’s announcement from Government if they are sitting on midnight on the Treasury about how current UK debt would be 24 March 2016 and no agreement has been reached. handled in the event of a yes. The shadow would still What options are available? be there; you will all have seen the plan for the UK Professor Tomkins: I do not know why Iain cannot to remain the counterparty of all current debt and then answer that question. The reason why I cannot answer go to Scotland to get back Scotland’s share of it. that question, and I suspect the reason why Kenneth Market participants can think two moves ahead. They can’t answer it, is that there is no legal answer to it. could think, “But what if no agreement is reached We are in extra-constitutional or non-constitutional, or about the terms on which Scotland pays its share?” extra-legal, territory. Then, in spite of the pre-emptive strike by HM Treasury yesterday or the day before, that raises Q4131 Mr Reid: I am not asking you what happens; potential chaos over the UK’s existing stock of debt, I am asking you what options are available. so chaos for both sides would be in prospect. Professor Tomkins: Unilateral declaration of independence. Q4137 Mike Crockart: I am going to take advantage of the fact that, as we have at least two professors of Q4132 Mr Reid: What does that mean in practice? law, we can ask a basic, and hopefully Professor Tomkins: I don’t know. Chaos. straightforward, legal question, although it is one politicians have had some debate on. The question is Q4133 Chair: It might not be as good as that. about whether or not the UK is a continuing state. In Professor McLean: I am struggling too, because all I the event of separation, would Scotland be a can see is that in the scenario Mr Reid is putting completely new country, and the rest of the UK a forward the Scottish Government have a very weak continuing state with no need to renegotiate any hand. They have only got two months left before the international obligations or memberships? election. This then goes into the possibility Adam Professor Tomkins: That is absolutely right. If there mentioned. It could be that there would be a tide of is a yes vote in the referendum in September, in outrage in Scotland that the UK Government were international law terms it means that Scotland will behaving like this, which could boost the current become a new state and the rest of the UK will be governing party in Scotland. If that becomes common what international lawyers call the continuator state, knowledge, it bounces back to pressure on the UK or continuing state—rest of UK. That is what Government not to be as hard line as, by construction, happened in 1922 when the Irish Free State came into the hypothesis you are asking us to comment on has it. being. The United Kingdom of Great Britain and Ireland continued as the United Kingdom of Great Q4134 Mr Reid: I stress this is only a hypothesis. Britain and Northern Ireland. We might need to Say we have a UK Labour Government elected in change the name of our state. We might need to 2015 who depend on Scottish MPs for their majority. change the flag. There may be minor consequential Surely it is in their best interests to block every effort amendments to be made to some treaties in terms of to negotiate. Remember that they were not a party to how much representation we would have in the the Edinburgh agreement. European Parliament, or what our voting rights would Professor McLean: Which they might do in a more be in the Council of Ministers, but the treaty or less diplomatic way. They might call on the House obligations that the United Kingdom currently has of Lords to help, for instance. would become the treaty obligations of the rest of the Sir James Paice: That would stick in the craw. United Kingdom. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 86 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
That is the easy bit. It gets more difficult quite quickly, accept the result of the referendum. If it were any however. It follows from that that the institutions of other way, the rest of the United Kingdom would be the UK become the institutions of the rest of the UK, fully entitled to hold a referendum itself on what as I mentioned a few minutes ago. This Parliament is would be the legal consequences for it, were the rest currently the UK Parliament; it becomes the of the UK not to have continuity in its legal Parliament of the rest of the UK. The Bank of England obligations. The nature of the constitutional process is a UK institution which becomes an institution of itself—the nature of the independence referendum the rest of the UK. Even though the NHS is devolved solely in Scotland, with the rest of the UK acquiescing in Scotland, the internal organisation of UK in it—is one which argues very strongly in favour. institutions does not matter as far as international law is concerned, so the NHS, which is a UK institution, Q4139 Mike Crockart: Effectively, this becomes an institution of the rest of the UK. The same distinguishes what is happening in the UK from what goes for the Royal Mail, the BBC, the security and happened in the break-up of Czechoslovakia, for secret intelligence services and Her Majesty’s armed example. forces. These are all institutions of the UK, and each Professor Armstrong: Yes. of them, upon independence, would become an institution of the rest of the UK. Scotland would have Q4140 Mike Crockart: Professor McLean, do you to create institutions such as these for herself, either have a comment? from scratch or by inheriting whatever they were able Professor McLean: It is not really a question for me. to negotiate in the separation negotiations. I was just checking on what the White Paper says The third element—progressively these become about Scottish forces, to pick up a small theme. If slightly more difficult—is the apportionment of assets Members want me to comment on that point I can, and liabilities. Here, all that international law will tell but maybe that is a different question. you is that the assets and liabilities need to be apportioned equitably, but what equitable Q4141 Mike Crockart: We probably have enough apportionment actually means is to be determined things that we want to get through. We may return to through political negotiations. that at a later stage. These principles are relatively easy to state, but they We have comprehensively dealt with the continuing would be enormously difficult to apply in some state side of things, but what about the other side of contexts—for example, in figuring out what to do with the equation? Are there any obligations or treaties the armed forces. You could take the view that armed with other countries that Scotland would inherit, or is forces personnel based in Scotland are integral to the it a completely blank sheet and you start from scratch? defence of the United Kingdom as a whole and, Professor Armstrong: One of the issues depends on therefore, upon Scottish independence they become whether the entity is going to become a member of an part of the institution of Her Majesty’s armed forces international organisation, in which case, as with the for the rest of the UK, because they are integral to the EU example, you are looking at new obligations being defence of the UK as a whole at the moment. In that taken on by a new entity. case, Scotland would have to do rather more in terms of developing its own armed forces than it would if Q4142 Mike Crockart: My question does not you were to take a different view, which is that armed necessarily relate to that, because then there is a forces personnel based in Scotland become the armed negotiation to join that international organisation, forces personnel of Scotland. I think that is implied in which then gives them obligations, but is there the White Paper, although I have not checked that. anything inherited as part of the accession process that There are different views one can reasonably take remains, despite that process? about how apportionment might be negotiated Professor Tomkins: My expertise is not in public equitably, but, on your core question, it is absolutely international law but in constitutional law, but my right that the position of the UK Government in its understanding is that the answer to that question is no. first Scotland analysis paper, reached on the basis of The principle is that, if Scotland votes to leave, that published legal advice obtained from Professors is exactly what happens. Scotland leaves and it James Crawford and Alan Boyle, is, as far as I becomes a new state. That is one of the themes of the understand it, the correct position. campaign that is going to become increasingly prominent. What is at stake here? This is exactly what Q4138 Mike Crockart: I am going to return to the is at stake here. Scotland is currently part of the UK, negotiations. There is a lot of talk about negotiations and a yes vote means it leaves the UK. It goes off on to sort out the equitable balance. We have two lawyers its own as a new state in a brave new world. in the room, which usually means we have two opinions. Let’s see whether that is the case here. Q4143 Mike Crockart: I am fairly clearly getting Professor Armstrong: One can imagine that it does not retain anything; it is a blank sheet, so circumstances in which a multinational state dissolves lots of negotiations would happen. I would like to and each constituent element succeeds to the move on to who then carries out those negotiations, obligations of the entire entity, but one needs to look because an awful lot needs to be done there. The at the exact constitutional process at play. The White Paper does have something to say about this. It constitutional process at play here is clearly designed says that those negotiations between Scotland and to be one in which Scotland secedes from the rest of RUK would be “led by the First Minister, and the the UK. The UK Government have said they will process will include figures from across Scottish cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 87
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong public life and Scotland’s other political parties.” That requirements in terms of negotiations at EU level? Is seems quite vague. Can you shed any light on that, or anything laid down as to who is allowed to conduct does a set of negotiations have to happen first to sort those negotiations? out who the negotiating team is? Professor Armstrong: Again, it depends largely on Professor Tomkins: If I may be partisan about this for which routes they decide to go down. If they go down a second, the SNP does not have a very good track the accession route, where it would be a candidate record when it comes to this kind of thing, does it? It state, the Scottish Government would be in control of set up Yes Scotland as a cross-party, non party-funded that, but, if they go down their preferred route of campaign group in favour of independence, and it seeking a revision to the treaties, they are entirely turned out to be almost entirely run by the SNP. The reliant on the UK Government handling it. We know distinction between the Scottish Government, SNP already from the White Paper that the Scottish and Yes Scotland is shrinking all the time. I do not Government do not like the process by which know whether they would be any more successful post European business is negotiated via Westminster and a yes vote in setting up a cross-party and genuinely the UK Government. Paradoxically, they would find national campaign. That is what it says it wants to do. themselves, on the most crucial constitutional How hard would it really try? I do not know. Would questions, having to embrace the very process that the those who have just lost a long and bitter fight to keep White Paper rejects. We have concordats, Scotland in the United Kingdom be in the mood, memorandums and so on that deal with how European ready and willing to serve in campaign teams led by business is handled under the devolved arrangements. the First Minister they have just been battling for the We do not have, as far as I am aware, any parallel last however many years? I don’t think any of us documents that would say how that constitutional knows. Certainly, the answer to the question is that negotiation would run, and the White Paper rejects the there is no law in any of this. A lot will depend on whole idea of that sort of mediated relationship in the the party mood. If there is a yes vote in the first place. referendum and everybody says, “Right, that’s fine. We’ve voted for independence. Now let’s all get on Q4146 Mike Crockart: How would that with it,” and there is a coming together and a very renegotiation work, with UK Government quick healing process, so be it. We will all get on with representation arguing Scotland’s case? Would you it and that is what we will do. But the divisions in have to have a Scottish representative sitting behind Scottish politics, especially the tribal divisions them telling them what they wanted them to say? I between the SNP and some of the others, run deep, cannot understand how that would work, given that and it might be quite difficult to get to that place on you would be expecting representatives to argue 19 September, if on 18 September we have got the somebody else’s case when they do not support it or answer to the question wrong. agree with it. Professor Armstrong: You may well take that view, Q4144 Mike Crockart: Can I confirm that there is and it may be one of the problems of the route that nothing in the Edinburgh agreement that specifies who the White Paper prefers. should be carrying out these negotiations? Professor Tomkins: No. Q4147 Mike Crockart: Professor McLean, do you Professor Armstrong: When you look at the have anything to add on the particular things to do experience of accession negotiations for candidate with the two levels of negotiations? countries, they set up very specific teams, usually Professor McLean: The only thing I would put on the quite big teams, to manage the complex dossiers that table in relation to the last several questions is again will have to be negotiated. It strikes me as implausible to reflect on what happened in 1921Ð22. Éamon de that you could just have an all-purpose negotiation Valera chose his plenipotentiaries with full negotiating team that is going to be negotiating everything powers. He chose a delegation which he believed was internally and everything externally. You would need split three-two in favour of his party, as the Irish party a very experienced team of experts, particularly civil system was then emerging. He then, as he saw it, servants with expertise in the areas, who could stiffened the delegation to make it three-three by conduct those negotiations. In some of those areas it appointing Erskine Childers as the non-voting is clear that, given Scotland’s experience in Europe secretary to the delegation. The way it panned out was already, those people would be there, but for some of not the way President de Valera had expected, and I the reserved powers that would become part of the think that is all we can say about any parallel here. Scottish Government’s portfolios they would not The First Minister can appoint his negotiating team, necessarily have the relevant European experience to and I would like to think that, in the event of a yes, conduct those negotiations. There may be a certain and in the event of the First Minister approaching expertise gap on certain areas, and that would need to people from other parties, they would agree to serve, be plugged. but it seems to me that what happens thereafter—on the 1921Ð22 precedent—is not in the hands of the Q4145 Mike Crockart: The question I asked was First Minister. more about the negotiations between the UK Government and Scottish Government, in which case Q4148 Mike Crockart: What do you see as the role it is up to the Scottish Government, in association of Scottish MPs in any negotiations which happen with others, to construct that negotiating team in thereafter? There is an argument that, given the whatever way they see fit. Are there any more legal relative turnouts in elections for the Scottish cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 88 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Parliament and for Westminster, many of the Scottish will shape their proposals in the knowledge of that, MPs and the parties they represent have a larger but it is terribly unclear. mandate, and therefore more of a claim to be the voice of the people of Scotland in those negotiations? Q4150 Mike Crockart: You would end up with Professor Tomkins: That is a small part of a bigger Scottish MPs voting on whether the deal was question: what is the role of Parliament in the acceptable to the remainder of the UK. negotiation? Professor McLean has just talked about Professor McLean: They have to, because they are how the negotiating teams might be appointed, based still Members of Parliament and Parliament has to on 1921Ð22, but, when they are doing their sign off the treaty. negotiations, to whom do they report, and to whom Mike Crockart: The ultimate West Lothian question. are they accountable? Presumably, if they are appointed by the First Minister, they report to the First Q4151 Chair: Unless I am mistaken, you seem to be Minister. Does the First Minister then report to the suggesting that, in the event of a yes vote, ownership Scottish Parliament in respect of what the negotiating of the negotiations on behalf of Scotland lies with the teams are doing? What if the negotiations take a turn First Minister and the Scottish Parliament. Surely that that is not supported by a majority of MSPs in is not the case, because I and Scottish MPs have a Holyrood? We are talking at the moment about the mandate, if I remember correctly, from just under 2.5 Scottish negotiating team. What is the role of a million people who voted for Scottish MPs, whereas Parliament in holding a negotiating team such as this MSPs have a mandate from under 2 million people. to account? I pose this as a question; I have no answer The principle of the Edinburgh agreement is about for you. acceptance of the result. Therefore, if people like Equally, in London, if the mirror image is applied and myself are democrats and accept the result, we have a the Prime Minister appoints an all-party team to role to play in the formulation of the Scottish negotiate on behalf of the rest of the United Kingdom, negotiating position. To whom the delegation what is the role of the United Kingdom Parliament in responds should surely be a body that includes people holding either the Prime Minister or that negotiating like myself. For example, I want to defend Govan team to account for the way in which the negotiations shipbuilders after the result of the referendum. If it is work? There are no clear constitutional or legal yes, I want to be in a position to defend Govan from answers to these questions. How much of the the Scottish end, as it were, to make sure it is not sold negotiation will take place behind closed doors? How off or given away as a concession. Surely there has much of the negotiation will take place in a way that to be some role in defending Scotland’s interests and is subject to media scrutiny and the scrutiny of arguing Scotland’s case after a yes vote for Scotland’s MPs. parliamentarians? There are no clear answers to these Professor McLean: All I can say is that at this point things. People say that it is normally much more the Irish analogy breaks down, because, apart from difficult to negotiate with all of your cards on the table Ulster Unionists, Irish MPs, although elected to the than without them all being on the table, so Westminster Parliament, were not taking part in it, so presumably there will have to be a degree of secrecy that particular dilemma did not come up in 1921Ð22. or privacy, but how you square that off against the All I can do beyond that is go to one of Adam’s earlier constitutional fundamental of democratic and answers and say that the referendum is decisive per accountable government, I do not know. the Edinburgh agreement. It seems to me that the Scottish Government negotiate on behalf of Scotland Q4149 Mike Crockart: Professor McLean, could I and the UK Government negotiate on behalf of the add another question? You could take the last one as rest of the UK, and it is for the respective First well. Another complication that shows itself is the role Minister and Prime Minister to choose their of Scottish MPs who are part of the UK Cabinet, negotiating teams for deals which will be put to the which surely would be a major part of the two Parliaments. negotiations. Is it effectively the case that, post a yes vote, Scottish MPs could not serve within a residual Q4152 Chair: I understand right up to the point UK Parliament, because they would be compromised when you referred to the two Parliaments. Political in some way? opinion in Scotland is not represented solely by the Professor McLean: In so far as this is a question Scottish Parliament. The single party that has an about how the Prime Minister chooses his team, he overall majority in the Scottish Parliament is would be entirely free to choose Scottish MPs as part representative of only, if I remember correctly, 23% of his negotiating team. We then hit the problem that of the Scottish electorate. Labour MPs got a higher came up at the beginning of this discussion, which is percentage of the Scottish electorate, and, therefore, if that in May 2015 we may get a new Prime Minister there is to be any reporting back, it has to be to a and a new team. We know we will have Scottish MPs forum that goes beyond the Scottish Parliament. elected, and the new Prime Minister faces the same Obviously, they have to play a role in it, but surely it question. To reprise what Adam said a moment ago, cannot solely be the Scottish Parliament that is the the terms will have to be put before this Parliament, sounding board for these things. so at an absolute minimum Scottish MPs who were Professor Tomkins: I absolutely see the force of your still serving in this Parliament get to vote on the terms, argument, but I am afraid I just do not think it will and, as it is common knowledge that this is part of work that way. It would work in the way Professor what happens, I can only guess that negotiating teams McLean has outlined, which is to say that the Prime cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 89
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Minister of the United Kingdom and the First Minister currency union with the rest of the United Kingdom, of Scotland would establish their negotiating teams. the UK is morally obliged, or obliged, not to get in This would be done as an ordinary part of the way of such a currency union. That is absolute Government business, in respect of which those two nonsense. I do not know whether it is a deliberate or Governments would be accountable to their respective inadvertent misreading of the Edinburgh agreement. Parliaments. It would be the Scottish Parliament You can be the judge of that, but it is certainly a holding the First Minister to account for what his misreading of the Edinburgh agreement. negotiating team is doing, and it would be the UK I have already said this afternoon that the only thing Parliament holding the Prime Minister to account for the Edinburgh agreement obliges the UK Government what his negotiating team is doing. I am afraid I think to respect is the outcome of the referendum, yes or no. that is how it would work. On the terms of independence, or even the meaning of independence, which is contested, there is no Q4153 Chair: In those circumstances, coming back obligation to accept a currency union on the basis of to a point Alan made earlier, you can understand why, the Edinburgh agreement at all. running into the Scottish Parliament elections after a negotiated settlement, those not in the majority in the Q4155 Pamela Nash: You said that it does not have Scottish Parliament would not necessarily have any to according to the Edinburgh agreement, but, beyond allegiance to the agreement that was struck or the Edinburgh agreement, is there any other precedent proposed, and could very well run forward with a or reason why the UK Government should enter into manifesto which said, “We reject entirely this a monetary union if Scotland should secede? Even if proposed settlement,” and, if elected, would they do not have to, is there any benefit to the rest of presumably then proceed to unscramble it and start the UK to do so, or would they only be doing it if negotiating a completely different set of agreements. their arm was up their back? Unfortunately, nodding does not get registered by the Professor Tomkins: I think I should hand over to the Hansard lady, so if you have a view, rather than economist to answer this question. nodding enthusiastically or not, you have to express Professor McLean: I am not an economist; I am a an opinion. political scientist, but I will have a go. The Scottish Professor Tomkins: Let the record state that we Government have used, as I identify them, at least nodded. three arguments. One is that it is an implication of the Professor McLean: I think that analysis is correct, Edinburgh agreement that Scotland continues to use Chair. We have been here earlier in the discussion. If sterling. I agree with Adam that that is incorrect. The the composition of the Scottish Parliament changes in second is that sterling is an asset to be shared, to May 2016, the consequences which you just set out which the Treasury has just, unusually, flatly said that seem to me to follow. sterling is not an asset but an institution. Therefore, that Scottish Government argument fails for the Q4154 Pamela Nash: Salmond’s mantra over the reason Adam also gave. The third argument, which is currency in recent months has been that sterling is in the White Paper and in a lot of things that are said Scotland’s currency too. How much truth is there in by the Scottish Government, is that it is in the interests that, and does it provide the UK with any obligation of the rest of the UK to stay in a currency union with to enter into a monetary union with Scotland? Scotland and any reasonable person, say the Scottish Professor Tomkins: It is absolutely true that sterling Government, will see that, on behalf of the rest of the is Scotland’s currency too now, because Scotland is UK. I am not taking sides here, but I think that it is currently part of the United Kingdom. Sterling is the for the Government of the rest of the UK to decide UK’s currency, ergo it is currently also Scotland’s what is in the interests of the UK. The present currency now, but, if Scotland votes to leave the UK, Government of the UK are stating very firmly, as we Scotland might very well find that it has also voted to all know, that it is not in the interests of the rest of leave the UK pound, as I explained a few moments the UK to be in a currency union with Scotland, and ago. The consequence of a yes vote in a referendum I do not see any lever that the Scottish Government is that Scotland becomes a new state; the rest of the have to shift that. UK is the continuator state, and UK institutions Furthermore, even were both parties to agree that a automatically become institutions of the rest of the currency union is in the interests of both, that does UK. The statement in the White Paper that it is not necessarily mean that it happens. As members will Scotland’s pound too is technically correct, but it is be aware, the currency union between the Czech technically correct only because Scotland is currently Republic and Slovakia was created on 1 January 1993 part of the United Kingdom, and sterling is the UK’s and was dead by 5 January 1993. currency. On currency union, the Cabinet Secretary for Finance Q4156 Pamela Nash: You said you could not think got this very badly wrong in the middle of November, of a reason. Am I not right in saying that this could just before the White Paper was published, when he be a negotiating lever? intimated, on a BBC television news interview I think, Professor McLean: If everything is with everything that because the UK Government have agreed to else. The sort of negotiation I can envisage is the respect the outcome of the independence referendum rather brutal one I envisaged earlier in which the UK and because the Scottish Government have made it Government say, “You cannae have sterling, end of plain that it was their ambition in the event of argument,” to which the Scottish Government say, independence that Scotland would enter into a formal “The boats have got to be out by 2020, end of cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 90 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong argument.” The argument cannot stop there, so think there is any great political interest in Europe everything is on the table. to force states to adopt it. Certainly, in terms of the Professor Tomkins: To take that a little further, I may convergence criteria that would have to be fulfilled, have misunderstood or misremembered, but I do not one of them is membership of the ERM for two years, think the Treasury has ruled out a currency union. I but membership of the ERM is voluntary, so it would think they said it is highly unlikely that they would be about forcing an independent Scotland into the enter into a currency union on terms that would be ERM in the first place, which might be the kind of satisfactory to the Scottish Government. What the thing Adam has in mind. Treasury means by that is that any currency union— surely this is the lesson of the eurozone—would have Q4159 Pamela Nash: I understand that. The example to be accompanied by a fiscal stability pact. I do not of Sweden is that it is retaining its own currency and speak for Mr Swinney, but, speaking for myself, I do is taking baby steps, as it were, to stave off the euro, not think Mr Swinney would accept that, upon but Scotland would be entering an alternative independence, he should enter into a fiscal stability monetary zone if it got what is proposed in the White pact with the Treasury, because that would make Paper. Would that not be frowned upon in an Scotland’s finances not more independent of London application to join the EU? but more dependent on London, which is a curious Professor Armstrong: I cannot see why, and I cannot definition. The SNP has lots of curious definitions of see why there would be any particular desire to push independence, but that was a really curious one. an independent Scotland into it.
Q4157 Pamela Nash: Surely this is something he Q4160 Pamela Nash: I am surprised you say that, must have considered before coming up with this because, if I was another EU country who had been policy, or am I being too kind? under these obligations to join, I would be wondering Professor Tomkins: I cannot remember the page why Scotland was getting away with this and being reference and I did not bring my copy, but there is a allowed to enter into an alternative zone. I am not curious and slightly off-piste reference to fiscal disagreeing with you. stability agreements in the White Paper, and it is then Professor Armstrong: I understand the point. There dropped when you get to the conclusions. I do not are two different dynamics in play here. One is to do know. Speaking for myself, it is wholly conceivable with the eurozone itself. The desire is that it is open to imagine that an independent Scotland and the rest to as many member states as want to join, but it is of the UK would enter into a currency agreement if seen as voluntary rather than, in street jargon, “You’ve there was an accompanying fiscal stability pact. gotta be in it.” The other side is that Europe is One other issue, which reinforces the answer becoming more differentiated anyway. It has to accept Professor McLean gave some time ago that these that, for 28 or 29 member states to work together, various elements of the negotiation would have to be there has to be a degree of flexibility. The idea of related to one another, is Scotland’s negotiation in one size having to fit all, which might have been the terms of its membership of the European Union. If intellectual force of it some time ago, is not current the European Union were to say to an independent in Brussels at the moment. There has been political Scotland, “One condition of your membership as the recognition of that. 29th member state is that you take steps to adopt in due course the euro as your currency,” the markets would immediately understand that the currency union Q4161 Chair: You are saying that it may be that between the rest of the UK and an independent Scotland would have to give a binding commitment Scotland was for the short term only, and was to join the euro in due course, but the EU would therefore lacking in stability and was vulnerable to accept that that was being done in bad faith. market pressures, which is another reason why the Professor Armstrong: I would not put it like that. Treasury, in my judgment, is very wise indeed to say that it is highly unlikely that it would ever be in the Q4162 Chair: What is wrong with the way I put it? UK’s national interest. These are all “ifs”, but even if It is an accurate description, though not necessarily we can say that Scotland would not immediately be the way you would put it. That is what you are really required to adopt the euro, we cannot say that the saying, isn’t it? They would have to join, and, if they European Union would not say to Scotland, “You have were joining, they would have to make a commitment to take steps to adopt the euro as your currency to join the euro, but they wouldn’t actually intend to somewhere down the track.” do it, and everybody would know. It is a bit like making a promise with your fingers crossed, isn’t it— Q4158 Pamela Nash: Professor Armstrong, can you allegedly—not that I or any MP ever does it? It is a envisage a situation where an independent Scotland bit like saying something and having absolutely no would not be told that eventually it would have to intention of doing it. adopt the euro? Professor Armstrong: You would have to apply the Professor Armstrong: The euro is the currency of the same analysis to a country like Sweden, which has in EU. For states who join, the assumption is that they principle the obligation to join the euro but has not would at some stage adopt the euro as currency. If you voluntarily made the decision to take the steps that take the Swedish example, Sweden has been a would lead to that happening. I do not think that is member state of the European Union for nearly necessarily being in bad faith. It recognises the 20 years and still has not adopted the euro. I do not political realities. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 91
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Q4163 Chair: On good or bad faith, the commitment Professor McLean: If it was a single currency area. that the EU seeks, as I understand it, is that people That is in the event that the UK Treasury did not agree in principle that in the fullness of time they will sustain the stance it currently says it is minded to take. join the euro. That is not ifs or buts: in the fullness of If, on the other hand, it was the other option that time, they will aspire to join the euro. I would have Scottish Ministers have occasionally spoken of, which thought that is an indication of faith and intention, but is Scotland using sterling without asking anybody’s what you are telling us is that they would accept, and leave, it is somewhat closer to the Czech-Slovak Scotland would agree, that actually it wasn’t intending situation. It is not identical. If members want to look to abide by that at all. at this in more detail, they had better call monetary Professor Armstrong: In due course, an independent economists rather than any of the three of us to give Scotland could decide to leave an alternative currency evidence. union and join the euro. Chair: But you are the ones who are here, and you made the mistake of mentioning it, if I may say so. Q4164 Lindsay Roy: Professor McLean, could you elaborate on the failure after five days? What were the Q4168 Pamela Nash: If this is not a question for reasons for it? you, please tell me. Professor McLean: The analogy is far from perfect, To avoid that situation, the Yes campaign has now because the former Czechoslovak crown was not an focused on arguing that the Bank of England would internationally convertible currency. Nevertheless, be able to set monetary policy across what it calls the before the break-up everybody who thought about it new sterling area—the existing UK. Would there be anticipated that the Czech economy would be stronger any benefit to the residual UK to do that and put that than the Slovak economy. Therefore, small firms and power into Scotland’s hands, or the Bank of England, private households moved all they could of their and would that require significant legislative change? deposits into banks in what became the Czech Professor Tomkins: As I understand it, the Scottish Republic. The old Czechoslovak crowns were Government’s proposals on Bank of England stamped for use in the Czech Republic or in Slovakia. governance are those which have been derived by the Even though these were at the time very newly Fiscal Commission established by the Scottish emerging market economies, the market instantly Government. As I understand the Fiscal determined a rate, which was about 10 to eight Czech Commission’s proposals, they are that there would be to Slovak. As soon as there was a market rate, it was a 10% Scottish share of the Bank of England a mug’s game to attempt to defend the Slovak somehow, and distinct Scottish representation on the currency at par. That was recognised by central key boards and committees of the Bank of England, bankers and politicians on both sides. From the including the Monetary Policy Committee. Members evidence we have had, in this case “we” being a of the Monetary Policy Committee currently come British Academy working group, which asked Czech from all over the United Kingdom, but do not sit on and Slovak experts to report on this—I can give the that committee in their capacity as representatives of Clerks the details—we found that, although the particular regions within the British economy. This is currency nominally lasted five weeks, four weeks of not a trivial thing; it would be a very significant that was devoted to an orderly dismantling of it behind change to the way the MPC works. the scenes. The most in-depth inquiry into these proposals was undertaken last year by the House of Lords Economic Q4165 Chair: Surely that was not a currency union Affairs Committee. It produced a report in April or in the sense of a single currency. It was actually two May last year on the basis of quite a prolonged inquiry currencies with a fixed exchange rate, was it not? in which a lot of evidence had been taken. Its Professor McLean: Czechoslovak crowns were unanimous conclusion was that what the Fiscal denominated on 1 January as either Czech crowns or Commission proposed was “devoid of precedent and Slovak crowns and stamped accordingly. That was the entirely fanciful.” I agree. physical currency. It was the intention of the joint I was a bit distressed when I read the White Paper to institutions and both member states that that should be find that all you have in it is a meagre restatement of held at par, but very quickly that proved impossible. these proposals, which are devoid of precedent and entirely fanciful, without even an attempt to explain Q4166 Chair: That is right. I am just trying to clarify why they are not entirely fanciful or might not be whether or not this is a parallel. If you have two devoid of precedent. The thing is simply restated. That currencies with a fixed exchange rate, it is different is where the matter rests. The most recent word on presumably from what the Scottish Government are this is the word that was given by the House of Lords suggesting, which is simply a single currency—a Economic Affairs Committee, and it said it was sterling zone. It is not a question of having a UK fanciful. There has been no attempt by the Scottish pound and a Scottish pound stamped and an exchange Government, as far as I can see—certainly, there is rate of one to one; it is a unitary currency, and no attempt in the White Paper—to explain why that therefore the parallel is not exact. conclusion is wrong or mistaken. Professor McLean: It is not exact. Q4169 Pamela Nash: The impression I’ve got from Q4167 Chair: In a single currency area, there would all of you is that this is not a realistic proposition for not be a possibility of speculating against Scottish an independent Scotland. We are going to have a very pounds because there would be no such thing. short negotiating period of 18 months post the cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 92 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong referendum, if Scotland decides to vote for Q4174 Mr Reid: For example, would mortgages be independence. What effect do you think that will have likely to be at higher interest rates as a result? on those negotiations? Is there an adequate Professor McLean: It is impossible for any of us to alternative? No? That’s fine. say. Despite the chiding I had from the Chairman Professor Tomkins: Those of us who have studied this recently, I would rather not go any further. and have read things like reports of House of Lords Select Committees are familiar with the detail of the Q4175 Chair: Feel free. You just have to expect us argument and also the politics of this, but most voters to respond to these sorts of points. in the referendum are not. If and in so far as they Professor Tomkins: The political and constitutional think about the currency issue at all, most voters in point would be that, whether mortgage rates are higher the referendum probably just think that some games or lower, they would be set by a foreign power over are being played between politicians called George whom you would have no control. The voters in an and John, and it will all be all right on the night. independent Scotland would have no means of Between now and the referendum, I would like to see holding their Government to account in respect of a much greater degree of clarity and certainty about interest rates or mortgage rates because the setting of exactly how unlikely, and exactly why it is so those rates would have been surrendered to a foreign unlikely, it is that there would be a currency union in power. I go back to the point that this is a very curious the event of independence, and that, if Scotland wants definition of independence. It is not a definition of to keep the pound as an independent country, it will independence; it is a definition of dependence. It be doing so in the manner that Panama uses the dollar, would make Scotland more dependent on the not in the manner envisaged in the work of fiction that decisions of what would have become a foreign Professor McLean has in front of him. power.
Q4170 Pamela Nash: Do you have anything to add, Q4176 Chair: How would it make Scotland more Professor McLean? dependent, because presumably the argument would Professor McLean: Apart from wincing slightly at the be that it retains what it has at the moment, with description of the White Paper as a work of fiction, I interest rates being set in London? cannot disagree with anything that Professor Tomkins Professor Tomkins: Because at the moment, when has just said. interest rates are set by the Monetary Policy Committee, they are set with the whole of the UK economy taken into account as the relevant Q4171 Chair: I think you mentioned that the Scottish consideration, but they wouldn’t be upon Scottish Government sought a 10% involvement in the Bank independence. They would be set taking into account of England. Is that seen to be the standard Scottish the considerations relevant to the economy of the rest share of things—10% of the national debt, 10% of this of the UK, leaving Scotland to one side because it was and 10% of that—or is it just a number plucked out an independent state. of the air on the basis that it is round, rather than Sir James Paice: May I point out that for a woeful being 9.81 or any other figure? Should we attach any 13 years we had a Scottish Chancellor? significance to the 10% figure? Chair: No, I do not think you need to point that out. Professor Tomkins: It is either a rounded-up share of Sir James Paice: We are up against time, but I just population—the Scottish share of population is want to ask about the issue of assets and liabilities. something like 8.5%—or a share of GDP. This week it is particularly pertinent because of the Treasury’s announcement about UK debt. Can you Q4172 Mr Reid: Professor Tomkins referred to explain to us precisely what you think the Scotland using the pound in the same way that UK Government have announced, and how that Panama uses the dollar. For lay people, would you affects the debate about whether Scotland would take give a brief description of what the defects are of on a share of that debt? using the dollar the way Panama does? Chair: I have just noticed that a vote has been called Professor Tomkins: You have absolutely no control in the Chamber. Given that the question has been over your monetary policy. A foreign power sets your asked, maybe you can talk quietly among yourselves interest rates and determines your monetary policy, and consider your answer while we go to vote. We and you have no influence over it. will be back as quickly as we can. Sitting suspended for a Division in the House. Q4173 Mr Reid: Are you able to borrow money? On resuming— Professor Tomkins: Now you have lost me. I do not know. Q4177 Chair: We are quorate again. You have had Professor McLean: It is possible for an economy to time to consider your responses and co-ordinate your function in that way. Another example is Ecuador. replies. There have been times when Argentina was an Professor McLean: Can I clarify that Sir Jim’s example, though not a very happy one. There is the question largely refers to the document UK Debt and example of Montenegro adopting the euro, but none the Scotland Independence Referendum, issued by of these is a major financial services country in its HM Treasury at the start of the week? own right, which makes extrapolating from those Sir James Paice: Yes. experiences to Scotland under that condition very Professor McLean: My answer is that this document perilous. is addressed to the money markets rather than to cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 93
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong domestic UK politics, and it is designed to give an not much, if any, of it is supported on the Scottish assurance to the money markets that UK debt will be Government side by legal analysis or opinion. honoured on the existing terms by the existing counterparty. I said in evidence a little while ago that Q4181 Chair: Would you mind dropping us a paper I am not sure they are able to make that assurance indicating where you believe there is evidence in the watertight, because people will be going behind the document that no legal advice has been taken because assurances in this little document to say, “Is that it is contrary to what would be normally accepted credible?”, but I do not think it has any direct bearing legal principle? None of us here is a lawyer. on potential negotiations with Scotland in the event of Therefore, we would not necessarily spot that. It a yes. In particular, I do not think it makes the Scottish would be helpful if it was drawn to our attention. Government’s bargaining position either stronger or Professor Tomkins: I can do that. One example is that weaker. I am tempted to tell a story about Victorian the Fiscal Commission says that ownership and politics—no, I won’t, because it would not be very governance of the Bank of England could be helpful. undertaken on an agreed shared basis reflecting Scotland’s current implicit and historical share of the Q4178 Sir James Paice: As I understand it, the existing Bank’s assets as a UK institution. Legally, Government have said they will guarantee payments that is nonsense. It does not make any sense at all, on the debt up until the date of the referendum, but because it blurs the distinction between institutions they will still expect Scotland to pay the Government and assets. I think that both the Fiscal Commission its share—the Scottish share. and the Scottish Government are proceeding on the Professor McLean: Yes. basis that there is no distinction between institutions and assets, when international law shows you that, in Q4179 Sir James Paice: Having made the the context of a state succession of this nature, there guarantees, is there not an argument that, where it is every difference between institutions and assets. does not affect the Scottish position, plus or minus, Institutions of the UK become institutions of the rest the UK Government are giving something away to the of the UK, but assets of those institutions fall to be Scots? The Scots could now argue, if they wish to, apportioned equitably. I am not sure that the Scottish “We will not take the debt because you have Government are aware of that. I am not sure that the guaranteed you will underwrite it anyway. You’ve Scottish Government were aware of that when they made that guarantee, so, if it means anything, drafted their White Paper. regardless of what we in Scotland do, why should we then take the debt?” Q4182 Chair: If you let us have a paper, we would Professor McLean: People in the press and so on be willing to draw their errors to their attention. have said that. The reason why I do not think it is Professor Tomkins: It will be very short. credible is that an independent Scotland has to start issuing its debt on independence day, and any such threats from the Scottish Government directed at the Q4183 Sir James Paice: That would be helpful. Government of the rest of the UK would be noticed Let’s take this much wider than just the issue of by people who might, or might not, want to buy national debt to the whole division of assets and Scottish debt. I do not think it would be at all wise liabilities. Is there any legal basis—established for Scottish negotiators to say that. international law, constitutional law, or any other Professor Tomkins: It would also, arguably, be law—on which all the assets and liabilities of the UK contrary to international law. As I said quite a while would be divided up, whether it is based on location, ago, international law does not take you very far in population share or whatever? Are there any criteria? terms of how assets and liabilities should be Professor Tomkins: I have looked into this. My view, apportioned, but it does say that they should be which would be part of any paper that I send you, is equitably apportioned. For an independent Scotland to that what “equitable apportionment”, which is the turn round to the rest of the UK and say, “We’re not phrase I have been using, would mean in practice is a going to pay off our portion of the debt,” would be matter determined principally by political negotiation, contrary to those principles of international law. but a number of legal presumptions may apply. The nature of legal presumptions is that they may be Q4180 Chair: The Scottish Government have said rebutted, but they would perhaps be among the default they will not pay or take on any share of the debt positions from which the negotiators might start. First, liability if they do not get the share of the asset which fixed property in Scotland, such as Government is sterling. You are saying that that would be illegal buildings, would become the property of the new under international law. Scottish state. Secondly, movable property and other Professor Tomkins: I am saying that would be assets in Scotland that are specifically for local use contrary to principles of international law, yes. My would likewise become the property of the new reading of the White Paper strongly encourages me to Scottish state: for example a fleet of ambulances that suspect that the Scottish Government do not have is there to serve a hospital in Glasgow. Even though legal advice on the question of institutions’ assets and those ambulances could be driven over the border, it liabilities. If they had legal advice on that question, wouldn’t be contrary to that legal presumption. numerous of the legal mistakes made in the White Paper would not have been made. I think there Q4184 Sir James Paice: But not a warship because is a lot of gamesmanship and rhetoric about this, but it is not for local use. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 94 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Professor Tomkins: That is right. Other assets and a long document—is that Scotland would have a right liabilities would fall to be divided between the rest of to a share of UK embassies. I am not sure whether in the UK and the new Scottish state. The default international law that is correct. I need to study this, position on that division would appear to be that this but it may be that there are specific provisions of would be calculated primarily by reference to international law that deal with the question of population share, so Scotland would acquire about embassies. I think that the diplomatic corps of the 8.5% of the UK’s assets and liabilities. United Kingdom is an institution of the United It further appears from my legal research into this that Kingdom and, in the event of Scottish independence, the origin or initial financing of state assets and it would become an institution of the rest of the United liabilities is irrelevant, so the UK could not say, “UK Kingdom. It would then be a question of negotiation taxpayers paid for that hospital or fleet of ambulances; as to whether, as it were, the rest of the United therefore it is ours.” The question of historical share Kingdom wanted to rent space to a newly established and financial input seems to be irrelevant. Again, independent Scottish diplomatic corps. these are all rebuttable presumptions of international law, as far as I understand them. Q4187 Chair: That is certainly one of the areas Also irrelevant as a matter of international law, where no legal advice seems to have been taken. The although perhaps not as a matter of practical politics, constant assertions seem to be at variance with what is how the institution was organised before would seem to be established legal practice, do they independence. Whether or not the institution is not? devolved, as a matter of international law, if it is a Professor Tomkins: Yes. I stress that there is very UK institution, it becomes an RUK institution. As far little legal practice on this; the principles of as I can see, that is about as far as the law will take international law are general and are best expressed as you. rebuttable presumptions. Law will only take you so far. The core of this will have to be resolved through Q4185 Sir James Paice: Does that lead you to see political negotiations, but political negotiations that, any particular asset class or liability that would be hopefully, take place within the framework of more intractable than others to resolve? international law. That framework of international law Professor Tomkins: Apart from the national debt and is no more than that—it is just a framework. currency, one that would be very difficult is defence. On this, the Scotland analysis paper on defence, Q4188 Sir James Paice: As the Chairman said, I do published in October, is quite useful. One of the not think any of us on this Committee are lawyers. claims made in that paper—it is probably right as a When international law of this type is challenged, matter of law—is that defence assets physically where is the remediation? Where can you go for it to located in Scotland would not necessarily become be resolved? Scottish upon independence, even though they are Professor Tomkins: It may be that there are specific physically located in Scotland, if it could be shown international tribunals on this question. It may also be that they were not specifically for local use. If they that those tribunals would be accessible only by states were integral to the defence or security of the United parties to the relevant treaties. My understanding—I Kingdom as a whole, it could be argued that they are am very happy to be corrected if I am wrong—is that part of a UK institution that would become an the default position, absent a specific treaty resolution institution of the rest of the UK and would not become procedure, would be that these would fall within the Scottish, even if they were physically located in jurisdiction of the International Court of Justice. Scotland. I am not talking about bases and immovable real property, but movable property that is based in Q4189 Mr Reid: What about intangible assets? I am Scotland at the moment. That is without getting into thinking, for example, of computer software that is the issue of personnel and the contracts of owned by HMRC or the DWP. We know from the employment of civil servants and members of Her Government’s attempts to bring in universal credit Majesty’s armed forces, which are contracts of how complicated it is and how long it takes to rewrite employment with the Crown in right of the United computer software. Does Scotland have any rights to Kingdom, not the Crown in right of Scotland. Even that computer software? without the personnel issues, we have some quite Professor Tomkins: Intellectual property is an asset. difficult negotiations to undertake. Therefore, it would fall to be equitably apportioned, but I am not quite sure how you can apportion Q4186 Sir James Paice: You will not be surprised copyright or a patent. It is hard to imagine how that that that fits with what we were told when we looked would work. We fall back on the mantra that these into specific defence issues. What about the other side questions would have to be politically negotiated of this? Would Scotland have any claim on any assets between the parties, but, to go back to what we started outside Scotland, either within the UK or talking about at the beginning of the session, all of internationally, that belonged to the UK? these are illustrations of just how complicated this Professor Tomkins: I will have to go away to check thing would be. They are reasons why even with the that and write to you. I think there are specific rules best political will in the world—and we have talked in international law with regard to embassies. One of about how there might not be the best political will in the claims made in the White Paper repeatedly—every the world—it is unrealistic to expect that all of these claim in the White Paper is made repeatedly, which is matters could be concluded within an 18-month one of the reasons why they managed to make it such window. We have only been talking about this for two cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 95
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong hours and already we are at this level of detail, UK leverage within the negotiations, but I will see if sophistication and difficulty. It is an extraordinarily that is right and come back to you. complex task. Q4193 Lindsay Roy: Professor Tomkins, in effect Q4190 Mr Reid: Say the main principles have been we are not really talking about one negotiating team agreed, and Scotland becomes an independent state in but a plethora of negotiating teams. You mentioned March 2016. Would it be possible for Scotland and earlier the Royal Mail and the BBC. What are the the rest of the UK to continue sharing some services, principal UK organisations outside government that such as HMRC or Jobcentres, for a limited period? Is would need to be involved in negotiations? that a feasible solution? Professor Tomkins: That is a good question. I am sure Professor Tomkins: Yes, but subject to two difficult there are a number of other public bodies established issues, both of which would have to be negotiated. by statute or royal charter, as in the case of the BBC. The first is costs, and the second is to whom are these That would need to be considered. I do not have an organisations accountable? You can see that it would exhaustive list. I suspect that the list is longer rather be very difficult to share some organisations. It would than shorter. In one of the Scotland analysis papers, be very difficult to share the Security Service, and as the UK Government said that there are about 200 far as I understand it, the Scottish Government are not public bodies working in Scotland on behalf of the suggesting that we do share the Security Service. Even UK as a whole. Royal Mail, the Post Office and the for those institutions the Scottish Government are BBC are examples of public bodies that would have suggesting we should share in the event of to be involved at some level in the negotiations. It is independence, these questions about cost and unlikely to be an exhaustive list. accountability arise. This is another area where the White Paper is rather blasé. The White Paper talks as Q4194 Graeme Morrice: I want to touch on if the distribution of welfare benefits and social membership of the European Union. I think we are security payments can be shared, at least in a saying that if an independent Scotland secedes from transitional period. Indeed, there are already civil the rest of the UK it would cease to be a member of servants working in offices in Motherwell, Hamilton the EU, and, as a new state, it would need to apply. or somewhere in Scotland who could do that task, but We are obviously aware of what is in the White Paper they could do that task only if the benefits they had to in terms of the aspirations of a future SNP distribute were exactly the same as the benefits independent Scottish Government. What would be the distributed by the UK, because of the limitations of process and timeline for an independent Scotland the software. We know that the Scottish Government joining the EU, or at least applying and attempting to want to have a welfare policy which is substantively join the EU? I think that is for you, Professor different from that pursued by the rest of the UK. As Armstrong. soon as those differences emerge, the possibility of Professor Armstrong: That’s definitely for me. The shared services becomes much more difficult because White Paper sets out two potential routes, one of of the limitations of the infrastructure. which it favours and one of which it disfavours. The route it disfavours is the article 49 accession route; the route it favours is the article 48 treaty revision Q4191 Mr Reid: Effectively, you are saying that, route. Very different procedures are involved in both unless Scotland was able completely to rewrite the of them, and therefore that may have an impact on the DWP benefits software by independence day, in nature and length of the negotiation process. practice they would not be able to abolish the bedroom tax, for example. Q4195 Graeme Morrice: I was going to ask about Professor Tomkins: I am going to leave questions article 48, but for the record can you explain a little about the details of particular welfare benefits to those about what articles 48 and 49 are and what they mean? who understand much more about them than I do. My Professor Armstrong: The normal process for understanding of the position is that it is plausible to accession is governed by article 49. That is the key think about shared services in the context of social provision of the treaty. Essentially, its function is to security payments only if three conditions are met: allow other member states and EU institutions to first, that there is agreement about costs, and that is a verify that an applicant state can politically and matter of politics; secondly, that there is agreement legally undertake its obligations under the treaties. about accountability, if and in so far as that arises in That is its function. The candidate state applies; the a context such as this, and that is a matter of politics; Commission reviews the application and enters into and, thirdly, that the payments to be administered by negotiations; and then an agreement is concluded, the shared services are identical north and south of the which would then be ratified. border, which again is a curious definition of The article 48 process regulates the operation of the independence. treaties as between existing member states. The process is instigated by a member state itself or one Q4192 Mr Reid: Does the fact that at present it is of the institutions. That leads to a treaty amendment, the UK Government who hold the HMRC and DWP which again would require ratification. The key software give the UK Government leverage within procedural difference, which is really crucial, is that the negotiations? under article 49 it would be an independent Scotland Professor Tomkins: I have not thought about that that would be the state making the request and in that question. My instinct is that, yes, it would give the sense opening the negotiations and conducting them. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 96 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
If the attempt is made—I don’t think it can be made— agreement, which might take several months, if not to use article 48— longer, to do.
Q4196 Graeme Morrice: The SNP’s preferred Q4199 Sir James Paice: To take that point option. forward—this is a crucial issue—you seem to be Professor Armstrong: Yes. If that is used, in effect implying that there is every likelihood that in the Scotland would be dependent upon probably the event of a yes vote, and in the event that they met United Kingdom opening up the treaty revision their timetable as far as independence from the UK process and, to that extent, the negotiations—at least was concerned, there would be a period of at least at the beginning—would be in the hands of the UK some months when Scotland was independent but Government, not directly in control of the Scottish outside the EU. Government. It is paradoxical that the process Professor Armstrong: Under either route, whether the favoured in the White Paper is the one that seems to article 48 or article 49 route is used, I think there is a give the Scottish Government the least control, at least risk of that hiatus—a gap—emerging, and the at the level of initiating it. White Paper does not address what would happen.
Q4197 Graeme Morrice: Is that not a more Q4200 Sir James Paice: Would you go as far as to dangerous road to go down if, as you have described, give us the odds on that happening and the period? under article 48 an independent Scottish Government Are we talking about a small number of months or would be very reliant on the machinations of the years? Would there be a transition period? That is a Government of the remainder of the UK? secondary question. Professor Armstrong: One of the deep problems of Professor Armstrong: If you go down the article 49 the White Paper is the lack of candour about the risks route, it is clear that there will be a gap—that’s for involved in the use of the article 48 process. sure—because an independent Scotland could only Straightforwardly and legally, I do not think it is formally make the request to accede once it was plausible. It is a mechanism by which existing independent. It could carry out all the background member states regulate their relationships. There is a negotiations and all the rest of it beforehand; it could huge difference between that and article 49 and other substantively have done the deal, but it could only provisions of the treaty by which existing member formally trigger the article 49 process once it was an states organise their relationships with non-member independent state, at which point the treaty could be states or international organisations, so negotiated relatively quickly, but there would then be straightforwardly and legally it is implausible to use a ratification process among all the other member article 48. states. More specifically in terms of the risks, the most If you look at the last accession, which was Croatia, obvious risk is the idea that it would be the UK the ratification process took 18 months. If you go back Government who would be initiating and managing to the accession of Austria, Sweden and Finland, it the process. From what we know about current was done more rapidly; it was done in six months. It politics, it is hardly conceivable that a UK could well be that an accession treaty would, for Government would seek to open a treaty revision example, set a six-month deadline for ratification, but process solely to provide for Scotland’s membership there would be a gap. That seems to me to be why the of the EU without dealing with the issues that have Scottish Government want to go down the article 48 arisen from the Conservative party about wholesale route; they think they can sign, seal and deliver renegotiation of the treaties. The danger of issue everything within the 18-month period, but they linkage between Scottish membership of the EU and would have had to conclude all the negotiations. the UK’s relationship with the EU is massive, and not Those negotiations could not have bled into any other evident in the White Paper itself. issue that came up when a treaty revision process was initiated, and the ratification process would also have Q4198 Sir James Paice: Can you answer the point to be conducted within that period. I think that is about the time scale for the two different routes? highly implausible. Under either route, you are Professor Armstrong: There is a particular risk with looking at the risk of a gap, which could be as little the article 48 process. If that issue linkage happens, as six months. so that the issue of Scottish membership of the EU plus all the other things that a UK Government might Q4201 Sir James Paice: Can we define precisely want to get out of any renegotiation become linked, what the implications for an independent Scotland that is likely to create a drag on the process. I imagine would be during that gap? I assume—please correct that other member states would be reluctant actively me if I am wrong—it means that they would not be to engage in a process of negotiation, if they felt this in receipt of any EU funding; they would not be was the UK’s opportunity to reopen a whole series of required or obliged to meet any EU regulations; and, agendas that they would not want to see opened. The on specific issues that I am interested in, they would danger is that the process becomes lengthened rather not be in receipt of any common agricultural policy than shortened. If it was a normal accession process money for their farmers. On the common fisheries under article 49, there is every reason to believe it policy, presumably they would be outside it and possible that the negotiation element could be therefore they would have control of their own waters, conducted by the preferred date for independence. but part of these negotiations would be to renegotiate That would still leave open the ratification of that their entry into the common fisheries policy, with all cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 97
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong the implications for the Spaniards and others who with the rest of the UK but obviously within the EU. might have different views. I also recognise that there would be a whole range of Professor Armstrong: The treaties would cease to funding issues, which Jim touched on, not least the apply to the territory that would form part of an selective funding that comes to Scotland through parts independent Scotland. If the article 49 accession route of Scotland being assisted area status zones. It will be was being pursued, and let’s imagine that the interesting to see what would happen there. You are accession treaty had been agreed but was not yet in saying that all treaties would come to an end and there force because it was pending ratification, it is not may be transitional or provisional arrangements put in inconceivable that that treaty could provide for the place. Professor Armstrong, you are the expert in this provisional application of certain aspects of the treaty, area, but I was wondering what Professor Tomkins pending ratification. Precisely what those would be is and Professor McLean think about the different routes a matter for negotiation. It might be that they would of pursuing accession in terms of articles 48 and 49. deal largely with ensuring the continuity of free Professor Tomkins: I know that the Chairman wants movement within the single market, but when it came the witnesses to disagree with one another, but I am to more difficult issues of receipt of funds, or going to disappoint him again. I strongly agree with participation in institutions, that would not be everything that Kenneth has just explained to the possible. I think that under the accession route there Committee, but I want to throw a spanner into the is potential for some degree of managing what might works. What we have been talking about is the easy be a short hiatus. If you go down the article 48 route, bit. The easy bit is whether Scotland would become a the treaty amendment process, it is much less clear member state of the European Union and how how you would manage the hiatus than it would be if Scotland might become a member state of the you used the article 49 route, because you might build European Union. The difficult bit is what would be it into the treaty of accession itself. the terms of its membership? As we all know, the UK has over the course of the last four decades negotiated Q4202 Sir James Paice: I do not want to put words terms of membership for itself which are different into your mouth, but would managing the hiatus, to from those of several other member states. We have use your words, include the fact that, because it is the rebate, the euro opt-out and the protocols with outside the treaty, they could be not in receipt of regard to the charter of fundamental rights, and we funds—let’s not be specific—that they are currently in are also not part of Schengen. Even if Scotland were receipt of by virtue of being part of the UK? smoothly, expeditiously and seamlessly—the word Professor Armstrong: In the absence of any other used in the White Paper—to negotiate its way into the arrangement, whether it was politically agreed or in European Union as a member state, that says nothing an accession treaty that was in force, an independent about the terms of that entry. We have already talked Scotland would simply be outside the EU at that point a bit this afternoon about the euro, but we have not and not in receipt of any of those funds. mentioned Schengen. Graeme Morrice: I was going to mention that in due Q4203 Sir James Paice: Forgetting agriculture and course, but that is helpful. fisheries, how would that affect general trade? Professor Tomkins: I am sorry if I pre-empted you. I Presumably, it would mean that Scotland would not think that Schengen is the really important one. have tariff-free entry into the rest of the European Schengen is a bit of jargon. What does it mean? It market. means that those member states of the European Professor Armstrong: It would then be open to set Union that are part of the Schengen area—Kenneth, up an international agreement between the EU and please correct me where I go wrong—are part of a an independent Scotland. Perhaps that could be done free movement area within which there are no border relatively quickly, but it would be as a non-member checks on passports and the like. The United Kingdom state—an entity outside the EU at that point—which is part of a common travel area, but a different is clearly not what would be desired. There would be common travel area from Schengen. It is part of a ways of negotiating that, but that would be the case common travel area with Ireland, and it is the policy with any other state within the European of the Scottish Government that, upon independence, neighbourhood more generally. Scotland would continue to be part of the common travel area with the rest of the United Kingdom and Q4204 Graeme Morrice: That has been very with Ireland and would not join Schengen. But that is helpful. I was going to touch on the initial question not within its gift; that requires to be negotiated with about what happens if there is a gap between two sets of parties. First, it requires to be negotiated independence day and Scotland not being a full with the rest of the United Kingdom and with Ireland. member of the EU. I think we all accept that the I do not think that will be very difficult. But it would likelihood of there being a substantial gap is a relevant also require to be negotiated with Scotland’s new issue of concern. This creates a whole range of European partners, the other member states of the uncertainties. We know that a number of businesses European Union, and why should the rest of the located in Scotland, which are not necessarily European Union readily and without any kind of quid indigenous, have expressed both public and private pro quo agree to Scotland, as a new member state, concern. If Scotland became independent and, more being exempt from Schengen? importantly to them, ceased to be in the single market, Membership of Schengen is incompatible with that would be a real concern, because there would be membership of the common travel area between barriers to their trading not just south of the border Britain and Ireland. You cannot be a member of both. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 98 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
What guarantees are there? I very strongly echo what Q4208 Graeme Morrice: But the implications Professor Armstrong said a few moments ago about would involve things like border controls between the silences in the White Paper—the things that are Scotland and England and myriad other issues. Are not said in the White Paper. This is a risk of Scotland’s there any other high-profile issues you could give accession to the European Union. Irrespective of examples of? I am keen to get this on the record. whether it goes down the 48 or 49 route, this is a risk Professor Armstrong: Not off the top of my head. of Scotland’s membership of the European Union that Professor Tomkins: One closely related issue is that is just brushed away in the pages of the White Paper the Scottish Government have said in a series of as if it does not even exist. publications, including the White Paper, that they Professor Armstrong: There is the more specific want to pursue an independent immigration policy. hurdle in article 7 of protocol 19 on Schengen which Pursuing an independent immigration policy is makes membership of Schengen obligatory for new incompatible with being a member of either Schengen states. It is not just that there would have to be or the common travel area. Ireland does not pursue a negotiation on not joining; there would have be wholly independent immigration policy. It is not as if negotiation away of a very specific legal provision Ireland’s immigration policy is set by London, but which obliged new member states to join. there are agreements, as part of the operation of the common travel area between London and Dublin, Q4205 Chair: Is the obligation to join Schengen about immigration. The Scottish Government have different from the obligation about the euro? Is it said, “We don’t want to pursue the same immigration much tougher? We discussed earlier whether or not it policy as is pursued in London. We want our own was possible to make a commitment to the euro and independent and substantively different immigration not really do it. policy,” and that is incompatible with membership of Professor Armstrong: It is much more explicit, in the the common travel area, at least as it currently sense that what the treaty recognises, in a world where operates. These are blithe assertions that you find in there is more differentiated integration and certain the White Paper that are incompatible with a proper things apply to some member states and not others, is understanding of the obligations that come with that it has to be clear for states joining the EU what membership of these organisations or arrangements, things they really are obliged to sign up to and what whatever they are. they are not. On a case-by-case basis, if member states agree, there is what is called enhanced co-operation Q4209 Pamela Nash: On Schengen, would Scotland on things like a financial transaction tax and so on. be fully obliged to fund the border controls between That is not viewed as part of the corpus of EU law Scotland and the rest of the UK, or would that be split which an accession state would need to sign up to. between the two countries? That is why this protocol is clarifying, saying that in Professor Tomkins: As I understand it, imposing this area where there is co-operation among a group border controls on the land frontier between England of member states, but not all, that is part of the corpus of European law that a new member state is expected and Scotland would be remarkably easy. A very small to sign up to. It is to give specific legal clarification number of roads cross that border. Imposing border that in this area of co-operation, among a large group controls between England and Wales, or between of member states, but only a group, it is understood Northern Ireland and Ireland, would be much more that that forms part of the corpus of European law that difficult than imposing border controls on road and a new state has to sign up to. rail links between England and Scotland. Only about 18 major roads go across the two. Q4206 Chair: Presumably, Scotland could negotiate its way out of that. Q4210 Pamela Nash: Yes, but there are lots of flights Professor Armstrong: It would have to. Things would between Scotland and England so that would incur have to be negotiated, but I was trying to illustrate, as increased border controls at airports. You also referred Professor Tomkins was saying, that this is not just a to rail. Would there not have to be people looking out negotiation in the absence of something; it is a for those running over the hills in Cumbria? negotiation in the presence of something—a legal Chair: No walkers on the Cheviots. provision that says you would be obliged to sign up Professor Tomkins: If Scotland cannot negotiate its to it. way out of Schengen, or finds that membership of the common travel area is incompatible with what it Q4207 Graeme Morrice: Before I bring Professor wants to do with its own immigration policy, I do not McLean back in on the general point, as Schengen has think the UK Government will have any hesitation in been raised, maybe Professor Armstrong could saying that the consequence of these things would be explain the practical difficulties or the practical issues that we would have no option but to impose controls of an independent Scotland being in Schengen, on the on the border and at airports. If the RUK chose to do basis that it has not negotiated an opt-out. that, I think the RUK would be paying for it. Professor Armstrong: Clearly, it is not necessarily wholly desirable for an independent Scotland to be in Q4211 Pamela Nash: Earlier you said that a country Schengen. Would you really want to see border could not be a member of both, so would it not be controls between Scotland and the rest of the UK? I Scotland’s fault, for want of a better word, that this do not think anybody necessarily thinks it is a good situation was in place? It would have to implement thing that Scotland should be in Schengen. the border controls, rather than the UK. The UK cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 99
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong would not have a choice in it. Would Scotland not Q4214 Chair: Let me clarify. It would make logical have to do that if it was part of Schengen? sense, would it not, for somebody in a camp in Calais Professor Tomkins: I have not thought about that. who was trying to get into the UK to travel to This is a scenario where the rest of the UK and Ireland Scotland, on the basis that the Scotland-England say, “Come and be part of the common travel area. border was a less protected one than the UK-France Stay in the common travel area,” and Scotland says, border is at the moment? “Yes, great, and by the way, this is what we are Professor Armstrong: You are envisaging that people proposing to do with regard to non-EU immigration.” inside the Schengen area at the moment would travel London and Dublin say, “You can’t do that because to Scotland and then seek to enter the UK. it’s incompatible with the agreements we have reached under the common travel area, so you have to choose. Q4215 Chair: If they were wishing to get to London. Either you pursue your independent immigration That is the point. Those illegals are trying to jump on policy, which is incompatible with ours, or you can to lorries in France and Belgium to get across the be in the common travel area. It’s your choice, but, if channel to get into the UK, and to London and the you aren’t in the common travel area, the consequence midlands. Having paid smugglers to get them into Europe, rather than them being dumped in France and is that we, the rest of the UK, will have no choice but, being left to find their own way across, or paying very reluctantly, to impose border controls.” That is smugglers for that, presumably it would be entirely ultimately the choice that the RUK would take on the open to them to pay a legitimate ferry to get to basis of a decision taken in Edinburgh not to Scotland, and then cross at Coldstream, the Cheviots, participate in the common travel area, so it would be Gretna Green or somewhere similar. difficult for the rest of the UK to bill Scotland for that, Professor Armstrong: That is conceivable, but you attractive as that proposition might otherwise be. can imagine that, within the Schengen area, there are obligations on individual states as part of the Q4212 Chair: I was under the impression that part responsibility not to create incentives for that kind of of the commitment you entered into when signing up displacement of people to create pressures at to Schengen was that you had to be responsible for particular borders. external border controls. Therefore, there would be an obligation upon Scotland as part of Schengen to have Q4216 Chair: What does “not to create incentives” external border controls. In addition to what the UK mean? might wish to put in at the English border, the Professor Armstrong: Not to facilitate that process. commitment from the EU, in being part of Schengen, is that the member state has to have border controls; Q4217 Chair: But Scotland would not necessarily otherwise why would Greece bother, or the Italians? facilitate it. France could be said to facilitate it at the Anybody could just decide not to have border controls moment by allowing the camps to exist, but they find and be part of a common travel area, which would themselves the prisoner of circumstance. These people then allow people to come in from outside. My turn up and wait to try to get across. Instead of coming understanding is that the obligation would be on to France to try to cross into the UK, they could Scotland. Am I right in thinking that for those queued simply get themselves to Scotland. There would be no up at Calais and elsewhere seeking to enter the United legal barriers to stop them travelling from France or Kingdom illegally at the moment by climbing on to Belgium to Scotland and then coming over the Eurostar, lorries and so on, all they would need to do border there. is get on a boat in France, Belgium or anywhere that Professor Tomkins: Hypothetically, all of that is true, would take them to Leith, Rosyth or anywhere but, with respect, it seems to me that the greater similar? There would be no restrictions on them. They problem, if our focus is on the White Paper, is an would be able to travel quite freely to Scotland, and internal inconsistency within the White Paper. It is then it would be simply an issue of walking across the there in black and white. In the White Paper, the Cheviots under this scenario. The only barrier would Scottish Government say that they do not want to be part of Schengen and they do want to be part of the be the Cheviots, because if they want to get to London common travel area; and they say, “And, by the way, that is the way round. There are no restrictions under we want to pursue our own independent immigration Schengen on moving between France or Belgium and policy, which is substantively different from yours.” Scotland. If they wanted to get to London, the barrier Those two statements are mutually incompatible. You would then be the Scotland-England border. Is that cannot be in the common travel area with the rest of correct? I am afraid that nodding does not cut it. the UK and Ireland and, at the same time, pursue an Professor Armstrong: The Scottish border at that immigration policy that is aggressively and point is part of the external border of the Schengen substantively different from the immigration policies frontier, so Scotland would be responsible for pursued in London and Dublin. That is a much more policing it. immediate, real and less speculative problem.
Q4213 Chair: All the camps we see built up outside Q4218 Chair: I had understood that. I just wanted to Calais could quite easily be transferred to Coldstream. explore a point that I thought we had not adequately Is that correct? covered. Professor Armstrong: That is not something I would Can I come back to the 48 and 49 question? I want to speculate on. be absolutely clear about the position. On article 49, cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 100 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong you are saying that, if the referendum decides yes, Q4223 Chair: One might imagine efforts would be there will be a system whereby there is an opportunity made to say to the Spanish, “Be more reasonable in for negotiations to take place with the European these circumstances.” One might also imagine that Union structures in parallel with any negotiations with that would not be successful, since Spain has a direct the United Kingdom structures. How do you know vested interest in not making breakaways easy. that is the case? It has never happened before. Would Professor Armstrong: That is absolutely correct. there be international recognition for a devolved Parliament conducting international negotiations? Is Q4224 Chair: In these circumstances, it is not there a precedent for this? unreasonable to expect that there will be no parallel Professor Armstrong: You are absolutely right, in that negotiations. there is no way of directly knowing that this would Professor Armstrong: I think the argument would be, happen, but there is no particular reason why EU “If that is your view, none the less the treaty institutions would not seek to facilitate a process by empowers you as a member state, who does not view which the EU would enlarge to include another this as being in your own national interest, to veto member state as part of its ethos and ambitions. formally any treaty amendment or accession treaty.” In the final analysis, it is always for any member state Q4219 Chair: I understand. If a member state was to exercise its veto, but until that occurs, the not happy with negotiations taking place before negotiations should none the less be allowed to be independence had been achieved, surely that would conducted in good faith, at which point the member act as an inhibitor, a brake or indeed a veto upon the state involved will have its say and can veto the Commission or its institutions having those arrangement, if it so chooses. negotiations with part of a member state. Professor Armstrong: That is absolutely right, and Q4225 Chair: That seems to be contradictory to what that risk is all the greater were the article 48 route to you were saying earlier, when I thought you indicated be used. that, if at least one state, and possibly more, objected to these negotiations beginning and being pursued Q4220 Chair: I will come to 48 in a moment. I want vigorously, there was likely to be at the very least a to pursue 49 first. For the sake of argument, let us brake put on them, and possibly no negotiations at all. take Spain. Given what they have been saying already, Professor Armstrong: I am saying there is a range of surely the Spanish would object to the European options for what might happen, and a range of institutions conducting negotiations with part of a scenarios. One scenario is that those member states member state with a view to joining the EU before are powerful enough simply to stymie the whole idea independence had been achieved. of opening negotiations. The second argument is that they are not powerful enough to do that; they are Professor Armstrong: That is probably correct. responsive to the argument, “Ultimately, you can exercise your veto but, pending that decision, we Q4221 Chair: In those circumstances, surely the should in all good faith begin to enter into odds are that those negotiations would not take place negotiations, because that is part of the spirit and in parallel, before independence had been achieved. ethos of an ever-closer union in Europe.” These are Professor Armstrong: If one member state or more different potential scenarios. than one member state wished to put that pressure on the EU institutions, it may well be the case that that is Q4226 Chair: But we do not know which one is correct; the negotiations would not get off the ground. going to apply. Professor Armstrong: Correct. Q4222 Chair: Given that the Spanish, Belgians and, from discussions I have had elsewhere, at least one Q4227 Chair: This is a great unknown. other state are saying that they would object to that, Professor Armstrong: It is a failure in the is it fair to say that it is more likely than not that White Paper that it does not canvas inconvenient negotiations with the European Commission and its political and legal truths. institutions would not take place until independence for Scotland had been achieved? Q4228 Lindsay Roy: To what extent would a Professor Armstrong: An argument has been decision by the UK Government to seek an in/out presented—Sir David Edward has presented it in his referendum have an influence on the negotiations? writings on this—that there is an obligation on the Professor Armstrong: That is particularly difficult other parties to sincerely co-operate, which is the were it the case that the article 48 route was being phrase used, to facilitate the negotiation process. It is used, precisely because the in/out referendum, as it a bit like the parallel Adam was talking about has been set up at the moment, is premised upon a earlier—the way that moments of secession require prior renegotiation of the treaties. That was why I said some kind of constitutional response that allows in response to an earlier question that, if you go down negotiations in good faith to occur. One might imagine the article 48 route, there is a very significant risk that, that under the article 49 route that spirit of with the UK piloting the treaty amendment, it would co-operation would be used to try to prevail upon simultaneously be trying to seek amendments for its states like Spain that, for example, might have own purposes, which would then lead to the in/out reasons— referendum. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 101
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Q4229 Chair: To return to 49, we have discussed the multiply the potential for risks that would delay the question of negotiations. In the event that the process. negotiations do not start until independence is achieved, and if we have the timetable that the SNP Q4236 Chair: Is it correct that in these circumstances has agreed, even if the negotiations took an afternoon, any one country, to take Spain for the sake of I am not clear how long ratification could take at a argument, would be able to veto it? minimum. Can you give us some guidance? Professor Armstrong: It could fail to ratify. Professor Armstrong: It is extremely hard to give you any clear guidance. With respect to the most recent Q4237 Chair: That means there is no joining. accession, of Croatia, it took 18 months. Professor Armstrong: Correct. Q4230 Chair: Eighteen months from what to what? From application? Q4238 Chair: Can I now come back to 48? I am not Professor Armstrong: No, from the conclusion of the clear whether the involvement of the UK is restricted accession treaty. in these circumstances to firing the starting gun, as it were, making the application for ratification, and then Q4231 Chair: Say it was done in an afternoon. Scotland takes all of it on itself, so they only agree Professor Armstrong: If it was done in an afternoon, once and the process just goes forward, or whether the process thereafter was 18 months. However, if you they remain in control of the process, able to turn the go back to the Austria, Sweden and Finland example, tap on and off as they wish, depending on how which may be more relevant given that those countries negotiations are going in other areas. had intense familiarity with European integration Professor Armstrong: The article 48 process post- through their membership of EFTA and, through that, Lisbon is now much more complicated. The European the European Economic Area, you would say that Council would have to make a decision to open up Scotland has had the vast experience of being part of the treaty renegotiation process, at which point a a member state of the European Union and therefore convention would be convened, which would not just the process might be faster. It was six months in the include member states. It is not just a case of whether case of Austria, Sweden and Finland between the UK would be involved; all the member states conclusion of the accession agreement and entry into would be involved. The European Parliament would force of that agreement. be involved, and representatives of national Parliaments would be represented in the convention. Q4232 Chair: Was that in the days when France, for All the parties would be involved in the negotiation example, had to have a referendum? Were the rules of the treaty amendment at that stage. the same then as now? Professor Armstrong: The really crucial difference is Q4239 Chair: On the question of ratification, you that that was an enlargement from an EU 12 to an EU said there was a difference under 48 compared with 15. Now you are talking about ratification in 28 or, as 49. it might then be, 29 member states. Professor Armstrong: The difference might be substantive, in the sense of what they are ratifying. If Q4233 Chair: What is the answer? it is a single issue question of Scottish membership, it Professor Armstrong: The answer is that you would will probably look identical to accession, but the point imagine the treaty ratification process will be longer I was trying to make is that it is going to be very the more member states there are who have to ratify it. difficult to keep this as a single issue, because the UK Government will want to open up the treaty Q4234 Chair: Not necessarily. If everybody adopted renegotiation process for all sorts of reasons, and other the pattern of doing it at the speed of the fastest, it member states may want to put in something else that would not make any difference. I am not clear about they want to see in the treaty, at which point you start whether things like the French having a referendum triggering substantive issues that may require on it, or the Irish propensity to have referendums, referendums. were in operation at the time of the Swedish joining, and whether these changes make things much longer and more drawn out. Q4240 Chair: Even if the UK Government did this Professor Armstrong: That is particularly important in absolute good faith and said, “We will on this if the article 48 route is used rather than the article occasion restrict it entirely to the question of Scottish 49 one. accession,” they have absolutely no control over what anybody else among the 28 might want to do, and Q4235 Chair: Let me come back to that in a minute. they would then be able to add amendments that had I am trying to deal first with article 49. absolutely nothing to do with the question of Professor Armstrong: All I would say is that the more Scottish accession. member states you have, the more you have political Professor Armstrong: Absolutely. risks—domestic political crises, for example, holding up the ratification process. You are absolutely right; if Q4241 Chair: And that would have to be dealt with they can all move as fast as the fastest, maybe you as part of that convention mechanism. can get it done in six months. All I am saying is that Professor Armstrong: It would potentially become the more member states you have, the more you pork barrel treaty revision change at that point. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 102 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Q4242 Chair: In that case, why do you think that Professor Tomkins: How long does legislation take to the Scottish Government have chosen route 48 rather pass through these Houses? That is not a question for than route 49? me but for the Members of these Houses. Professor Armstrong: The logic seems to be the setting of the deadline. There is the erroneous belief Q4246 Chair: Dangerous dogs did it in a day, that this would somehow be quicker. I do not think it didn’t it? would be. I think it was as simple as that. The Professor Tomkins: This is no Dangerous Dogs Act. deadline was set—“This is when we want independence, and we want synchronicity between Q4247 Chair: No, but, if good will is there, it can independence and EU membership”—and the belief be done. was that maybe through article 48 they could do a Professor Tomkins: If good will is there. bit of movement around. They took Greenland as an example of revision of the treaties to change the Q4248 Chair: The SNP has set a date for territorial scope of application of the treaties in the independence. I am assuming that legislation will belief that that would be done quickly, but it is not have to take place before that, which presumably just about territorial scope; it is about creating a new reduces the amount of time available for negotiation. member state, and that is why I think it is wrong. That is what I am trying to clarify. Professor Tomkins: Yes. It is even more complicated Q4243 Chair: Is there anything in relation to the EU and time-consuming than that. The Scottish and EU negotiations that we have not touched on? I Government have proposed that independence will be said to you informally before you came in that at the achieved in two stages. First, there will be what they end we always ask whether or not there are answers call a constitutional platform, which will be a you have prepared to questions we have not asked. transition that will, among other things, grant to Given that we are coming to the end of the Europe Scottish Ministers and the Scottish Parliament all the section, it may be appropriate to ask you now. powers they need to negotiate and deliver Professor Armstrong: This Committee will probably independence. That can be done only while Scotland go into the issue of tuition fees at a later date. is still part of the UK and it can only be done by Chair: Yes. Act of the United Kingdom Parliament. I do not know Professor Armstrong: But it is worth pointing out whether that legislation has even been drafted, but it that, if the purpose of the article 49 process is to verify certainly has not been published. It certainly has not that an applicant state would be willing to abide by its been subject to any pre-legislative scrutiny, and it obligations under the treaties, one of the areas where certainly has not been debated in either House of the European Commission might want to look very Parliament. I would have thought that certain closely is the attempt to impose tuition fees only on Members of both Houses of Parliament are likely to students coming from one particular member state, have interesting things to say about that legislation. and the discriminatory nature of that. You might You are right that legislation can pass through the imagine that significant pressure would then be put on United Kingdom Parliament incredibly quickly, with the Scottish negotiators to drop that. fast-track procedure and all of that, but only if the Government are fully behind it and there are sufficient Q4244 Chair: It would not be unreasonable to expect numbers in both Houses to acquiesce. that the United Kingdom would seek to clarify that After the constitutional platform has been legislated point with Scotland before proceeding down any for and delivered, as I understand it—all of this is article 48 route. They themselves would look after pretty foggy—there would be a requirement for a that, but the Commission might very well pick it up second round of legislation that would bring into as well. That is helpful. We are coming to the last legislative effect that which had been negotiated in three hours of this, and we only have a couple more order to deliver independence. It seems to me that that questions. Are changes to UK legislation required for second round of legislation is likely to be easier to Scotland to become a separate nation, or could deliver than the first, because it will be said, “This Scotland just declare independence unilaterally? Am I is what has been negotiated and agreed between the right in thinking that something has to go through the Governments. All we now need is legislation to bring House of Commons and the House of Lords and be it all into effect.” There would not be very much signed into law saying that there are all these changes? opportunity to amend anything in either House. It Professor McLean: That is really one for the lawyers. would be a very simple piece of legislation bringing It seems to me that a repeal of the Act of Union is into effect, in essence, a treaty. required, which is primary legislation. The difficulty is with the first step of this. There has Professor Tomkins: Legislation in the United been very little independent legal or constitutional Kingdom Parliament is clearly required in order for analysis of this idea of the constitutional platform and Scotland to become independent in a manner that is what would be required of the UK Parliament in compatible with constitutional law. delivering it. What are all these powers that Scottish Ministers and the Scottish Parliament would need to Q4245 Chair: How long would that take, and where negotiate independence? As far as I know, that does that come in the process? legislation has not even been drafted. It has certainly Professor Tomkins: I do not know. not been subject to any pre-legislative scrutiny, and it Chair: Okay. That has the benefit of clarity. certainly has not been introduced or published. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Scottish Affairs Committee: Evidence Ev 103
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
Q4249 Chair: Are you not being unduly difficult? Q4251 Chair: Given that we have already agreed Presumably, if there was a yes vote in the referendum that there will not be any meaningful negotiation until and therefore an understanding that, in line with the the general election, we have a fair amount of time to Edinburgh agreement, there would be discussions in play with, don’t we? good faith, even though they would perhaps be hard, Professor Tomkins: If you think about the allowing the Scottish First Minister the power to have parliamentary timetable, first somebody has to draft those negotiations, while it might be technically this legislation. complex, in principle would be relatively Chair: I am sure there are little men in a cupboard straightforward. Even while the legislation was being somewhere at this very moment who have standard progressed, the negotiations could effectively begin. phrases they can just trot out. Professor Tomkins: The Scottish Parliament is a Professor Armstrong: I just want to pick up Adam’s Parliament of limited legislative competence. Scottish point about the role of Parliament. There is a Ministers have limited executive competencies, and particular role for Parliament when it comes to they are limited by the relevant provisions of the Scotland’s membership of the EU, in the sense that Scotland Act 1998, as amended. As soon as the the UK will have to ratify an accession treaty or an Scottish Parliament or Scottish Ministers purport to amendment to the treaties, because the European exercise powers beyond those limited competencies, Union Act now requires an Act of Parliament for that they are acting unlawfully, and anybody could go to to occur. You may imagine circumstances in which court to say, “This is unlawful.” It is not beyond the the UK Government decide that they will only open a realms of possibility that somebody might take a look treaty revision process on a single issue of Scottish at this and think, “I didn’t vote for independence, but, membership of the EU, but other parliamentarians now that it is going to happen, I would like it to might feel aggrieved that the UK Government did not happen in an orderly, peaceful and lawful manner that include other issues, and when it came to ratifying that amendment, which is within the power of complies not only with international legal norms but Parliament, they might choose to become problematic also constitutional legal norms.” For the time being, during the ratification process. even though independence is going to come, it remains a matter of legal fact that the Scottish Q4252 Chair: Apart from that, everything should Parliament and Scottish Ministers have limited proceed okay. Is that a reasonable way of putting it? I legislative and executive competencies. In order to do am a bit worried for the three of you, because I that which they have a political mandate to do, there suspect that you will be denounced as scaremongers, needs to be a change in the law. The only place that adherents of Project Fear and anti-Scottish. If you can change that law is this place. have not had tides of abuse from Cybernats, I suspect you are likely to in the near future. None the less, can Q4250 Chair: You mentioned the exercise of powers. I clarify one final point? What happens if the Maybe this is again a matter of legal terminology that negotiations between Scotland and the UK reach an I do not quite understand. They would not actually be impasse, say on the question of currency and Trident, doing anything; they would just be talking about it. and no agreement is reached? What happens? Is there Therefore, they would just be conducting negotiations somebody to whom things can be appealed? Who that need not, for the sake of argument, be finalised. resolves this? They could just agree that, when they did get the Professor Tomkins: Were there to be an impasse in powers to conduct negotiations, this would be what separation negotiations, I suspect there would be an they would agree. Therefore, this need not be a legal impasse about specific issues, and they could be obstruction. I am looking for clarification as to handed either to an ad hoc body of lawyers or jurists, whether the legal issues in the parliamentary or to an established court of international justice. It is permission element at the beginning and the legal the role of international law to resolve disputes issues in the parliamentary permission at the end between states. would mean in real terms that there was less time available for negotiations, or whether with good will Q4253 Chair: This would not be between states; the this is just crossing the t’s and dotting the i’s—it is state would not have been created yet. just a formality and with good will it can be expedited. Professor Tomkins: It might be. This could get very Professor Tomkins: I am sure there will be good will complicated, but my answer to your question is that on the part of both Governments, but Governments that is when you call in the lawyers. are accountable to Parliaments, not the other way round. The Government will introduce legislation, Q4254 Chair: Would it require the agreement of the presumably into the Commons and then it will come states to take that route? If there was a disagreement, to the Lords, in the ordinary way with good will, but say, on the use of sterling and there was no meeting Parliament is not bound by the Edinburgh agreement, of minds and both sides were absolutely resolute, and Parliament is sovereign. Parliament will take its would it have to be agreed? I can see why each would time, do its job and hold the Government to account refuse to take it to international arbitration or anything for the way they are transferring powers to the else. How would it be resolved in these Scottish Ministers to negotiate the separation of the circumstances? United Kingdom into two sovereign states. As a good Professor McLean: May I come in with a more Parliament man, I could not possibly say anything political answer? I have been thinking for quite some else. That is the job of Parliament. time that we may be making a mountain out of this. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG07 Source: /MILES/PKU/INPUT/038186/038186_o007_odeth_SAC 140115.xml
Ev 104 Scottish Affairs Committee: Evidence
15 January 2014 Professor Iain McLean, Professor Adam Tomkins and Professor Kenneth Armstrong
It is not a mole hill, but it may not be as much of a Professor Armstrong: Bearing in mind the external mountain as some of the questions have supposed. If dimension, and that an independent Scotland might and in so far as the analogy with Ireland in 1921Ð22 want membership of the EU, how the Scottish holds, in that case those countries had been at war and Government had conducted their internal negotiations the differences were far greater. Within the island of might well form part of how their application would Ireland, between a third and a quarter were bitterly be viewed. Therefore, more direct pressure could opposed to the settlement, yet the Irish Free State Act probably be placed by EU institutions and personnel was enacted without difficulty by the British on the Scottish Government to avoid the creation of Parliament in 1922. The difficulties were mostly in an impasse, precisely because it is holding out the the Irish Parliament. It was ratified there. offer of membership. What is it about the present situation that makes it On your other point about what we are doing here, more difficult than negotiating a peace treaty and hopefully we are simply putting a range of questions subsequent Acts between two nations that have been that are simply not answered in the White Paper. It is in a guerrilla war? My answer is that, in the Irish case, not my intention to make the case against the British civil government in most of Ireland had White Paper, but simply to ask the questions that do collapsed. Therefore, the trickiest situations, which not appear to have been asked or canvassed in it. Adam has been mentioning, where a private litigant might say Scottish Ministers are acting ultra vires, did Q4256 Chair: Our role is to ask you to raise not arise because British justice had already collapsed questions that we then ask them so that the Scottish in Ireland before December 1921 when the treaty was people can be fully aware of the options that face signed. That leads me to the paradoxical conclusion them. Can I ask the two witnesses we have not already that an act of separation between nations which have asked whether they have any answers prepared for been at war is easier than an act of separation between questions we have not asked, or whether there are any nations whose Governments are bound by the final points they want to leave with us that we have Edinburgh agreement. not adequately covered so far? Professor Tomkins: No. Q4255 Chair: That is very droll, but there was some Professor McLean: No. My final point is essentially disruption afterwards. If I remember correctly, the same as Kenneth’s. I am not taking sides on Michael Collins, who was one of the negotiators, was Scottish independence, but there are questions for killed. It was not quite the case that the agreement Scottish Ministers to which the citizens of Scotland settled everything; there was still substantial internal deserve an answer. If this Committee is one of those difficulty. in a position to pose them, I am all in favour of that. Professor McLean: There was severe disruption in Chair: On that consensual note, I thank you very Ireland, but remarkably there was no disruption in the much for coming along this afternoon. United Kingdom. cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 105
Wednesday 29 January 2014
Members present: Mr Alan Reid (Chair)
Mike Crockart Sir James Paice Graeme Morrice Lindsay Roy ______
In the absence of the Chairman, Mr Alan Reid was called to the Chair
Examination of Witnesses
Witnesses: Professor Hugh Pennington CBE, Emeritus Professor of Bacteriology, University of Aberdeen, Alastair Sim, Director, Universities Scotland, and Professor David Raffe, Professor of Sociology and Education and Member of the Centre for Educational Sociology, University of Edinburgh, gave evidence.
Q4259 Chair: Thank you all very much for coming I am only a Scot by domicile but I have lived more along this afternoon to help us with our inquiry. I than half my life in Scotland, and I have had lots of should explain that I am Alan Reid, the vice-Chair of dealings with the Medical Research Council and with the Committee. I am in the Chair this afternoon research bodies in Scotland itself. I have been on a because our Chairman, Ian Davidson, is ill today; he research assessment exercise panel and so on. I think sends his apologies. Perhaps you could start off by I am fairly familiar with all the background to all the introducing yourselves. issues pertinent to the debate. Professor Raffe: I am David Raffe. I am a professor at the University of Edinburgh. I have been engaged Q4260 Chair: Thank you. I would like to start off in educational research on a variety of topics, with a with a brief overview of how research council funding particular interest in the impact of devolution on both is allocated at the moment. Whoever wants to answer how policy is developed and how the system has can just volunteer. Professor Sim, do you want to developed within Scotland and, indeed, across the lead off? UK. Alastair Sim: I can’t claim professorial status, I am A particular reason for my being here is that I am a afraid. Very briefly, we have a situation at the moment member of the team working on one of the projects within which Scotland is a successful contributor to that is part of the ESRC programme on the future of an overall UK research eco-system where a great deal the UK in Scotland. The title of our project—I have of research is done across boundaries by collaborative it here but I always have to look it up—is “Higher groups and where we believe that whatever happens— Education in Scotland, the Devolution Settlement and whatever constitutional settlement is ultimately the Referendum on Independence”. As part of that reached after the referendum—maintaining that cross- project, as you might have noticed if you read today’s border flow and eco-system will be in the best Scottish press, we are trying to provide a neutral interests of the entirety of what is currently the UK. ground in which the debates can be conducted. We have also been interviewing stakeholders and key Q4261 Chair: Is funding at the moment purely people around the system to get their views on allocated by open competition and peer review, or is devolution, not just on independence, and wider location a factor? issues. We have been looking at cross-border flows Alastair Sim: As far as we see it, it is on the basis of of students between the countries. We are working in straight quality-based competition. That is one within particular with young people and how to engage them which Scottish institutions tend to do well on the basis in the debate, so it is a wide-ranging project that is set of the quality of the research that they are able to in the context of some of this. carry out. Alastair Sim: I am Alastair Sim, executive head of Universities Scotland, the representative organisation Q4262 Chair: Professor Pennington, you wanted to for Scotland’s university and higher education come in. institution principals. We are obviously an interested Professor Pennington: Yes. If I could expand a little party, but also a politically neutral party in this debate. bit on how the money is given out as far as I see it Professor Pennington: I am Hugh Pennington. I am from my personal experience, clearly, there are long- not a neutral party. I think my position is fairly well term commitments that the Medical Research Council known on the Better Together side. I trained in makes to its research units and so on, such as the one I medicine across the river at St. Thomas’s, then I went worked at in Glasgow, which are reviewed on a fairly to America and then I applied for a job with a medical regular basis. Then there are the individual research research council in the tropics. They said that there grants, which can be long term or shorter term, and was not one in the tropics but there was one in are extremely competitive. Glasgow, so I went to Glasgow and had—I would On the criteria used to award funding, in the first say—a productive time there during 10 years in the place, there has to be the money available to the grant Medical Research Council institute at the University committee to give out the appropriate number of of Glasgow. Then I got the chair in Aberdeen, from grants. Twenty-five per cent of the applications will which I retired in 2003. be successful; it is in that kind of order. They take into cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 106 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe account the nature of the research, the background of would be that on balance they do pretty well in a the researcher, whether they are likely to deliver and situation where those tensions are inevitable. also the institution in which they work—whether that Alastair Sim: Could I add a comment? It is going is going to give them the appropriate support, the right slightly beyond the research councils towards the milieu for research and so on. It will depend on the overall research effort that has been targeted not just nature of the project how much weight you put on through Government investment in the research those, but the quality of the research itself is the councils but also through the Technology Strategy overriding factor. Board. It is fair and correct to say that the UK Professor Raffe: I would like to qualify that in a Government have been exemplary in making sure that couple of ways. There have been cases where, for investment in research in Scotland has continued. example, devolved Administrations or funding There have been plenty of new initiatives coming on councils have co-funded activities with the research stream in the past year. We have succeeded very councils. That will be a slight qualification to the much, for instance, through the Research Partnership principle of being, as it were, geography free, Investment Fund. The UK Government have been geography blind. Again, one or two of the capacity- exemplary in making sure that even in uncertain building investments that research councils have made constitutional times they are still expressing have at least taken account of the spread across the confidence in the Scottish research sector. UK. Often it is to avoid having a concentration, for example, in the south-east of England. Q4265 Lindsay Roy: Alastair, can you imagine, if There is a smaller point, but it is worth mentioning. there is separation, a rest-of-the-UK Minister saying, As a policy researcher, if I wanted to ask for funding “We are allocating from x million pounds of research for a project looking at an issue that made sense in funding 13% to a foreign country—Scotland”? terms of a Scottish policy agenda but might not be of Alastair Sim: I would like to start by reflecting on the particular interest elsewhere in the UK, there is always positions that both the Scottish Government and the the concern of how you get that argument past a panel UK Government have taken in their respective of referees, most of whom will be drawn from outwith publications: first of all, the Scottish Government’s Scotland. There is always that tension. I am most “Scotland’s Future” White Paper and, secondly, the familiar with the ESRC, and to be fair, it has been “Scotland analysis” paper on research and innovation. very good procedurally at handling those issues. It has What is interesting in both of those papers and from different political perspectives is that they have left a been very fair and objective, but there is always that space which, in a sense, is common between the two tension and concern. Are we actually being given less Governments for potential negotiation of favourable treatment because we are from this more arrangements to maintain a shared research peripheral part of the policy community? infrastructure. The UK Government paper is expressed quite Q4263 Chair: How do those tensions tend to get carefully—obviously not pre-negotiating—in terms of resolved in practice? saying that, if this were to happen, it is something that Professor Raffe: In two ways. One is by having would have to be negotiated between the two procedural correctness, as it were, at all stages of the Governments. The Scottish Government’s White process, trying very hard to make sure that the actual Paper is also quite clear that, if there were to be that processes do, as far as possible, take account, by negotiation, it would also include a negotiation looking at the way in which committees are between the Governments about a fair price for established and the way in which selection panels are Scottish participation in a continued common research established to make sure that you have that infrastructure. You cannot answer what is going to geographical representation. I have been on happen unless and until there are post-referendum committees where, at least tacitly, part of my role has negotiations, but there is at least a common space been to argue the Scottish case, or to make sure that open for potential negotiation of arrangements that the Scottish case, and indeed the Welsh and Northern keep the UK-wide research system working for the Irish case, does not go by default. It is also by benefit of each part of the UK. awareness among academics. Certainly in my area, there is a desire to be fair, and a desire for it to be Q4266 Lindsay Roy: Would you accept that it recognised that research is inherently a pluralist depends very much on good will? exercise, and that there are different perspectives and Alastair Sim: Yes. It would have to be the outcome interests even in policy-related research. of negotiation. I don’t think that any of us are in a position to anticipate what the outcome would be. Q4264 Chair: In your view, how successful have the research councils been at recognising the geographic Q4267 Lindsay Roy: We will come on to this later, issues? but, if it transpires that the Scottish Government tried Professor Raffe: I stress that I am talking very much to ensure that the English population pay fees and the about research where there is a clear geographical rest of the EU do not, is that good will likely to reference. On balance, they have been successful. If continue? you ask any of my colleagues, they will probably Alastair Sim: I am sorry, do you want to come on to point to examples where the feeling was that an the fees issue in detail now? English or, possibly, a metropolitan London agenda Lindsay Roy: I just want a response from you. Is that had tended to dominate, but I think the majority view good will likely to continue? cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 107
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe
Alastair Sim: You mean the fees arrangement? infrastructure in the next year or two to move the Lindsay Roy: Aye. focus of that institute. When I was there it was human Alastair Sim: The Scottish Government has published virology; now it has moved over to animal virology. its position. If they are to rest on a basis of objectively It is a changing situation and a complex one, and there justifying differential treatment, a lot of thought and is no simple straightforward formula that one can empirical work needs to be done to work out how you apply to this, except to say that Scotland gets more would do that. We, from the university sector, will be than its population share of funding through whatever looking very closely at that to see whether there is, at route the MRC, for example, or the other research the end of it, a robust defensible position. councils use to allocate it.
Q4268 Lindsay Roy: If there is discriminatory Q4271 Chair: Mr Sim, earlier you referred to the treatment, is it likely that the good will will continue? hope that a cross-border system could be maintained. Alastair Sim: The negotiations between the UK Are you in agreement with the proposals in the Government and the Scottish Government, if there Scottish Government’s White Paper? were to be a yes vote, are going to be complicated in Alastair Sim: The Scottish Government’s White Paper all sorts of ways, but I am not in a position to sets out the right aspiration, and that is an aspiration anticipate what the ultimate outcome of those might that is also left space for in the UK Government’s be. paper on research and innovation. Certainly from our Lindsay Roy: That is question avoidance. point of view, we are a set of institutions who are deeply involved in cross-border relationships, and Q4269 Chair: Professor Raffe, are you wanting to cross-border relations that actually benefit the rest of come in here? the UK as well as benefiting Scotland, because so Professor Raffe: I don’t know whether you want to much of the best research—for instance, in stay on the fees issue or to go back to— biomedicine—is done in Scotland. We see it to be in Chair: We will come to the fees issue later. I think the common interests of all of what is currently the Lindsay was jumping the gun a wee bit. UK for that eco-system to be sustained. Professor Raffe: I want to raise a point about the 13%, which is that it actually refers to competitive Q4272 Chair: We have heard that more of the funding in responsive mode. If you take account of money comes to Scotland than Scotland’s population infrastructure funding and research centre units, the share. Why do you think it would be in the rest of the figure is somewhere between 10% and 11%, which UK’s interest for that to continue? Would they not be actually makes the negotiations rather more realistic. wanting to attract some of that work to the rest of Chair: Between 10% or 11% of? the UK? Professor Raffe: Ten per cent of research council Alastair Sim: As David said, if you take the UK funding which comes to Scotland—to Scottish Government’s own figure, which is that 10.7% of institutions. research council expenditure is in Scotland, you are not in a vastly disproportionate area. You are in an Q4270 Chair: That is more than Scotland’s area where you may have a marginal difference population share. between what you might formulaically consider to be Professor Raffe: Yes. There is a question that will Scotland’s share and what actually comes to Scotland. be part of the negotiations, which is whether the 8% It is an area where you are in negotiable territory if population share is actually the appropriate figure. If both parties wish to negotiate a settlement. we measure Scotland’s share of the science base— From our point of view, from the point of view of some of the clients for the research councils—it could people who are leading universities that are involved be something like 10% or 11%. You can calculate the in massive cross-border collaborations—for instance, figures in all sorts of ways, and I am sure that people Dundee’s drug discovery unit is working very closely will if the negotiations ever happen, but, nevertheless, with Imperial College, London, and Cambridge— it is probably larger than the population share, that is Cambridge and London would be diminished by not to say Scotland’s share of the science base—the having access in a seamless way to the expertise that clients for the research councils. Therefore, I can see scientists in Dundee are bringing to those problems. a situation where you could have a negotiation that There are all sorts of relationships where the work that led to a situation where, at least in terms of current has been done in universities south of the border is spending, the money that was paid in, roughly substantially strengthened by their ability to have speaking, matched the money that was coming back seamless collaboration with their peers at top-class to Scotland. Scottish universities. Professor Pennington: I emphasise how complicated the situation is. For example, I think the institution Q4273 Chair: But how much research council where I worked in Glasgow is not owned by the funding at the moment goes to universities outwith the Medical Research Council, but the salaries of the staff United Kingdom? in that place are paid by the Medical Research Alastair Sim: I could not give you a figure on that. Council. There are all sorts of issues there. If you have What we have been saying to both Governments and a negotiation about who owns the building, for their political parties, very clearly, is in our paper example, it will be different from the negotiations published in 2012: “Universities in a dynamic about who continues the research project, although I constitutional environment.” We have had these understand that the MRC is putting in money for conversations with both Governments and political cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 108 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe parties; what we have been saying equally to in the world that does not have its own research everybody is that there is a common value to all parts infrastructure and funding for its own ends, as it were. of the UK eco-system in actually having an Professor Raffe: I said that we had been talking to a environment that enables these research collaborations number of people around the Scottish system, to continue in as seamless a way as possible. including principals of universities, but other key stakeholders as well. The one bottom line they would Q4274 Chair: I do not expect you to give me the all stress with respect to any constitutional change exact amount of UK research council funding that is would be preserving this research—not just research spent outside the UK, but can you give me a rough but the academic eco-system and a lot of the joint and percentage? collaborative activities that take place. I am Alastair Sim: I wouldn’t be able to give you a figure particularly referring to the UK research councils but on that. I am sorry. to a lot of other things, such as joint bodies, and the Professor Pennington: The MRC has a unit in more qualitative and less formal aspects of Gambia, which it has had for many, many years. That, collaboration as well. obviously, brings benefits to Gambia because they The other thing that does come across is that a provide part of the Gambian health service in a way, majority of the views that we have been hearing although it is there for pure research; if you want to suggest that it is feasible. do research on malaria, you have to go to a country like that in the tropics and so on. The research Q4275 Chair: By “feasible,” do you mean a formal councils have extensive links with, for example, pooling of resources or co-operation without a European funding agencies and so on. The UK formal pooling? Government put a lot of money into Europe for Professor Raffe: There is a view that the eco-system research purposes. can be maintained, in the case of the research There is an enormous amount of effort at the moment councils, with a formal pooling of resources. Professor in terms of collaboration outside the UK. I cannot give Sir Ian Diamond, who is a former chair of Research you a precise sum, but it is reckoned that about 40% Councils UK, is on public record as saying that he of much of the research is done on a collaborative does not see any great practical difficulties. Obviously, basis, either within Scotland or within the UK or there are going to be negotiations over the amount of between researchers in the UK and researchers in money that each party pays. To answer your earlier Europe. That is done for a variety of reasons. question, there would be a perceived mutual Sometimes you need access to a facility that is not in advantage in doing that. the UK, so you enter into a collaborative arrangement I would like to make one final point, although you to use it. I could quote the example of the European may be coming on to this. Although funding is part Molecular Biology Laboratory, which is part-funded of that eco-system, it is not the most important part. by the UK Government, which puts in about 20% of The most important part is opportunities—the facility the funding of that organisation. One of its out- of collaboration, access to shared facilities and the stations is in Cambridge where they do DNA various quality assurance and assessment systems that sequencing, but there are also out-stations in operate across the various borders. There is also what Heidelberg and Grenoble, which provide radiation you might call the more informal infrastructure of the facilities and so on. That is the kind of international learned societies and so forth, which exist UK-wide, collaboration that has been going on for many years. although they are often much wider than that. It would The issue, as I see it, within Research Councils UK, be as important, if not more important, to maintain is the amount of money that comes to Scotland, which that eco-system in this rather broader and more is very substantial, out of that UK pot at the moment. qualitative sense than to worry about relatively small There is also the issue of scale. If you are competing margins of funding. on a bigger scale, you are going to be more competitive than if you are competing on a small Q4276 Lindsay Roy: The White Paper is an scale. Those are issues that have to be considered in immense tome of 670 pages. As far as I can gather, terms of the advantages of keeping the system that we about three and a half pages of non-repetitive have at the moment. consideration are given to science and research. Does The disadvantage I see in terms of negotiating that is that not imply that at the moment a lot more needs to that it would be totally novel. I don’t know of any be done to clarify the position? For example, there is other pair of countries in the world that agree to share no mention of a Cabinet Minister or a junior their research, researching funding and research policy Minister post. in the same way. Every country has its own research Professor Raffe: I did not author the White Paper. I infrastructure. It may well share with other countries, do not claim any responsibility for it, so I cannot and it does; the Nordic countries have a small pot of answer for the authors. It is fair to say that it does money that is used for collaborative work between cover enormous territory even in those 600-odd pages. people in different Nordic countries. It is not that a Norwegian can apply for Swedish research funds, but Q4277 Graeme Morrice: I was going to ask a a Norwegian and a Swede working together on a joint supplementary question similar to the one just asked project can apply for a relatively small sum—tens of by Lindsay, which is with regard to the comment that millions of pounds. There are plenty of international Alastair made earlier about the White Paper. He said examples of co-operation between nations, scientists that, in respect of cross-boundary working, the White and research groups, but I don’t know of any country Paper had the right aspiration. Is there much in it by cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 109
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe way of detail to achieve that? It seems from what are very individualistic, because they are competing Lindsay was saying a few moments ago that there is with their peers and so on. That has to be taken into not much in it by way of detail. What is in it in terms account as well. If you have a joint system, you have of the detail—the means towards the end, rather than to be very careful that, however the funding is set up, just the end itself? There is lots of aspiration within it has to be seen as giving equal opportunity to all the the White Paper, but it may perhaps be just a wee bit applicants in terms of where they are coming from— short on detail. in terms of their nations. I would see that as a major Alastair Sim: As I said, it is communicating the difficulty in any negotiations—how to square that aspiration that the sector has set out itself for particular issue. maintenance of a common research eco-system. I honestly don’t know how much more one could say Q4279 Chair: On the negotiations, the Scottish in advance of negotiations. If there were to be a yes Government’s timetable is referendum September vote, there would be tough negotiations and I am not 2014 and independence March 2016. In terms of how quite sure how far the parties to those negotiations far ahead you have to look in applying for research would want to set out their hand in detail in advance grants, are 18 months long enough for these of starting them. negotiations to reach a successful conclusion? Do you have any views? Q4278 Graeme Morrice: As we say in Scotland, Alastair Sim: I honestly don’t know. people don’t want to be buying a pig in a poke. They Chair: Professor Pennington is shaking his head. want to know beforehand—before they vote—what Professor Pennington: I hope that the system would they are going to get at the end of the day. I don’t roll on as it is now until resolution was obtained. It think that anyone in this room or many people in may take many years to get resolution, because the Scotland have all the answers, and that may be part devil is going to be in the detail as to how you get a of the problem. Would you, maybe, agree with that? system that does not disadvantage one side or the Alastair Sim: Essentially, a lot of the answers would other. I would hope that, whatever happens, the only emerge from the process of negotiation. current system continues. Clearly I have the view that Professor Raffe: Also, a lot of the answers will only I hope the current system continues because the whole emerge from engaging with the organisations system continues. concerned, although I can only give anecdotal My worry, if I can put it as a rider to my answer, is evidence of what I sometimes hear in the wind, which that over time, the two nations, if they separated, is that a lot of them are rather slow or certainly slow would diverge in policy. That would put pressure on to engage publicly on these issues, often for good and a joint system in terms of keeping it going. That is understandable reasons. They don’t want to appear to my concern about the future. The immediate future be exposing themselves. Sometimes I get a sense that would not be too bad for the scientists, because they are hoping that the problem will go away or will neither side would want to disadvantage the scientists. somehow solve itself. In the fullness of time, the negotiators will have to Professor Pennington: I waited for the White Paper take into account that policies might diverge on all with anticipation to see what it was going to say about sorts of issues affecting research. these very issues. As somebody who has been on MRC committees, I know the dynamic of those Q4280 Graeme Morrice: It seems from what committees. If you have earmarked money, for Professor Pennington is saying that, with regard to example, sometimes that does not do too well in the research collaboration, there is certainty if the UK review, because researchers will look at it with a continues as it is, but, if we have separation, the slightly jaundiced eye. collaboration becomes uncertain. Would you agree The committee that I was on had earmarked funding with that? for overseas research. It seemed that the Professor Pennington: It depends on which route you parasitologists and the malariologists did extremely are getting your funding from for your collaborative well because a lump of money was set aside for their projects. There have been an enormous number of projects, although there was a rather small number of supranational organisations available from which you applications. I would not see it as a way forward for can get funding anyway. Within the current UK, I Scottish research funding to be earmarked in a don’t think it would enhance it, although I can quote committee, but those are the sort of things that would the example of a research institute that I know well have to be addressed. Do you put a lump of money where two Hungarian staff were kept on because it in, and then research in Scotland is funded out of a was an advantage when applying for European money lump of money that is agreed already between the two to have somebody from new European countries. You treasuries, or is it paid in arrears? Those are the sorts could work a system a bit like that, but that is not of issues that one would have to address very early on really a very sensible way of having a research policy in any negotiations if you have a joint system. There initiative. I cannot see it enhancing collaboration, is no precedent that I know of to set it up, because all except perhaps through these rather peculiar the collaboration work we have been talking about is multinational organisations. collaboration between scientists. Here 50% to 60% of that work is by individual scientists. Q4281 Graeme Morrice: Do Professor Raffe and I would like to make not the counter-argument but the Mr Sim agree with that? argument that whenever a Nobel prize is given there Professor Raffe: We have talked about the short-term/ is always dispute about priority and so on; scientists long-term issues. In the short term, the biggest danger cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 110 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe is a massive diversion of effort and resources, which research council, through peer review, allocates its obviously will affect the people organising research funding. You seem to be saying that Scotland did all primarily, but would also, to some extent, affect the right, that it did not have problems in getting funding people who actually should be doing the science and for projects that are Scotland specific, but that is not driving things forward. Whether collaboration is a universally shared opinion. For example, Professor affected in the somewhat longer term will depend, Salter, I know, feels that the type of research that he essentially, on the success of any negotiations in was looking to do and the peer-review process that it maintaining the eco-system that we have been talking went through effectively stifled that innovation going about. If that was maintained, if there really was a UK ahead in Scotland. Are there issues like that? research area, I would be reasonably confident that we Professor Raffe: I think Professor Salter and I were would see existing levels of collaboration persisting. talking about two slightly different levels of the An additional point is that we are in any case seeing process. I was talking very much about how a an increasingly global reach for research. The latest selection panel, a body of referees or an assessment figure I have seen, which is a few years old, was that board would review a particular proposal. I was 48% of Scottish research papers are co-authored with saying that in any policy-related area there is always someone from outside the UK, not just from outside a concern, but usually the councils manage. Scotland. We are seeing, for example, a slowly growing source of funding in Europe and in other Q4283 Mike Crockart: At the project level is bodies. This European and global dimension of there ownership? research—research funding and research Professor Raffe: I think Professor Salter’s concern is organisation—will continue to be more important. much more about the overall national distribution of Alastair Sim: I think David is right. Researchers are resources. Obviously, he is concerned about the share just by nature collaborative. They will burrow through that energy receives—renewable energy, in and make collaborations wherever collaborations can particular—relative to some of the other broad areas be made to their advantage. If you look at the UK of research. There is an issue as to whether Scottish Government’s “Scotland analysis” paper, it points out interests have as much weight in a research council that 46% of published or cited papers are that is still, essentially, framed by the UK in the way it internationally co-authored, so people find a way makes policy, or whether a buy-in arrangement, which through the system. nevertheless had pooled funding but allowed the To pick up on both Hugh’s and David’s points, what Scottish Government a more explicit role in shaping would be essential, if there were to be a vote for that policy agenda, would or would not increase its separation and if there were to be a period of influence. I have no idea what the outcome of that negotiation, is that there is some way of keeping would be, but there is an issue. things going that parallels what is happening at the Professor Pennington: Professor Salter raised an moment, through that period of negotiation, so that issue I was familiar with when I was dean of a you don’t end up with the accidental creation of a medical school, because people used to come to me period of planning blight. That would take hard work and say, “We are not doing enough research on and good will from both Governments. osteoarthritis,” or whatever it was, and my response Professor Pennington: Could I make the point about was always, “What do you propose that we do?” You the research councils being very successful, which I do not do research just because a problem is do not think we have dwelt on? The advantage of important, although that is one of the drivers; you do keeping the system as it is at the moment is that the research because you are likely to come up with an research councils, in terms of the money they spend, answer that is going to help patients with deliver extremely good results. If you compare, for osteoarthritis, for example. People have been example, our research system with European research struggling with it for 100 years and not come up with systems, it is more successful in terms of the money the magic bullet, as it were. Professor Salter was spent and the outcomes in terms of peer-reviewed obviously concerned about prioritisation in that sense. papers, discoveries, Nobel prizes and so on. I was slightly sceptical. My concern, obviously, is that any break-up of that The other issue he raised was the way in which system would diminish the likelihood of that success research councils and other research organisations continuing. That is an important factor that has to be deal with unsuccessful applications. I think he was taken into account; the system we have at the moment complaining that you could not reapply and so on. I is extremely successful by world standards, but would just point out that the European research changes to it would have to be looked at extremely organisation is tightening up its rules on that, and carefully if we do not want to jeopardise a system that making it much more difficult for you to reapply, has evolved since the 1920s. The policies have because that is part of the game that researchers play. changed quite substantially over that time, but they Clearly, you want as many chances as you can have have changed in an evolutionary fashion rather than a of getting your project looked at if you are revolutionary fashion. unsuccessful. You can only have one or two goes at Chair: That is a good point. the cherry before you have to go away and redesign your thoughts. Q4282 Mike Crockart: That leads quite nicely to the subject that I was going to raise anyway, and it Q4284 Mike Crockart: I think his reaction to that harks back to something that Professor Raffe said would be that it penalises those who are ahead of the earlier on. It is to do with the process by which the curve, and perhaps thinking ahead. If your application cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 111
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe is not understood, it takes a while for the peer-review common research infrastructure were to be system to catch up, by which time you have had your unsuccessful, which is not our preferred outcome, the bite of the cherry. important thing is that the Scottish Government put Professor Pennington: Yes. It comes back to what I adequate resource into maintaining Scottish research. was saying about how a research council committee Other small countries have been able to do that. We works. You look at the project itself and see whether would urge very strongly that the Scottish it is a feasible project. You also look at the quality of Government, for the interests and the good of the researcher’s research in the past, which gives you Scotland as an ideas-driven, outward-looking an indication as to whether they are likely to succeed. economy, put enough money into research through You also look at the institution where they are whatever mechanism it is, whether it is called the working to see whether that is going to be an Scottish research council or whatever, to make sure appropriate place for that research. You would also that we can continue to be a nation that is absolutely look at the collaborators they may have on board as at the forefront of the generation of ideas. well. You look at that as a whole picture. It is down Professor Raffe: The pros and cons? The advantages to the people on the committee. are clearly that it would make it easier for Scotland— The way the committees work is that there will be a I say “Scotland” rather than the Scottish lead person who will look at the project in detail, Government—to set Scottish-specific priorities for supported by somebody else, and then the whole funding. There are some who have argued—I am not committee will discuss their opinion of that, and also sure that I am really in a position to judge—that some whether it fits with the overall policy of the research of the smaller research councils have been more council. It may decide that it wants to have an nimble and more able to respond quickly to new initiative in a particular area. Those are often not opportunities. successful, because they are having an initiative in an There are a number of disadvantages, some of which area which has not attracted much research because have been suggested. Clearly, there is an economy of there aren’t many researchers in the field, so you may scale issue; it would be harder to run such an try to go out and stimulate some new research. organisation in as efficient a way as UK Research It is quite difficult to give support to somebody who Councils is funded. There would be issues with is coming with a totally novel idea without any track respect to what we do about some of the large record, but there are starter schemes, both in the facilities that would be needed to support research. I research councils and in the European funding system, don’t think that finding referees would be an issue. In to enable that to happen, to get people going from a the last few years, I have spent more of my time base when they really haven’t got much of a track refereeing for other foundations or research councils record. That is taken account of. The research for small European countries than I have done for UK councils, I think, are quite good at that; they fund research councils. Refereeing is already an studentships and so on, which enable people to get international process. into the research system, although mentors are I want to put an item on the agenda because it relates important as well. to wider things, and particularly this: if Scotland were removed from the present eco-system and research Q4285 Mike Crockart: Accepting that all three of councils in particular, it would make the position of you want to see the current situation, where there is a Northern Ireland and Wales quite critical. We have UK-wide research council giving grants across the heard quite a lot of concern from people in Northern whole of the UK, by whatever means we get to that Ireland and Wales about the implications of Scotland final resolution, that might not necessarily be the end leaving for the critical mass that they would then be result. If we did end up with a Scottish research confronted with in England. That would affect the council, what would be the benefits, advantages and deliberations of research councils. It would affect disadvantages of that? deliberations at other levels of the policy system. Alastair Sim: Could I tackle that in two ways? First of all, even if there were to be successful negotiation, Q4286 Mike Crockart: Effectively, they would feel in the event of a vote for separation, of a common slightly sidelined as a very small part of a large set-up. research framework, there may still be something that Professor Raffe: They would feel sidelined. Can I be could usefully be done about a supplementary Scottish a little bit anecdotal? I am a member of one of the research council. At the moment, the Scottish panels concerned with our research excellence Government has various pots of research funding, framework. The education panel has quite a good whether it is for health or, particularly, for some representation; we have five or six people from agricultural science. Arguably, those could be better Scotland, two from Wales and one who has just brought together in a single research organisation that rejoined from Northern Ireland. Education is a classic would be able to take a less siloised view about how case of the area we were discussing before, where you you deploy the resources available to the Scottish could have English agendas or you could have Government. Scottish agendas and they do not always overlap, or Mike Crockart: A less what view? I am sorry. at least do not always completely match each other. Alastair Sim: Siloised. There is a very good understanding around that panel Mike Crockart: Thank you. I didn’t know that word that we are not going to be Anglo-centric in the way existed. we judge. We are going to be very sensitive to the Alastair Sim: There may be merit there. If there were differences across the UK. If there were only a couple to be a yes vote, and if negotiations on maintaining a of Welsh members, as opposed to the large critical cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 112 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe mass of members from the other devolved countries, That might encourage people to do that kind of I am not sure that it would be as easy to get that clear collaborative research, but it would not necessarily be agreement. The lack of critical mass of Wales and in the interests of science, because collaborative Northern Ireland in this wider UK context would be research in itself is not good; it depends on the topic rather tricky. that you are studying. Professor Pennington: Could I come in on that with an actual example of how Scotland, Wales and Q4288 Mike Crockart: What would be the Northern Ireland join together to, in a sense, not difference, for example, for the collaborative projects neutralise but affect an English view? The Food at the moment across the European Union? Is there a Standards Agency was set up on a UK basis, although different level of difficulty in managing to get it is not reserved, and there were Scottish, Welsh and collaborative projects up and running? Northern Ireland advisory committees but not one for Professor Pennington: No. There are quite a few England. I am not quite sure why that was done, but schemes available where negotiations have led to one that was the way it turned out. The problems in country providing the main assessment of a research Scotland, Wales and Northern Ireland are slightly project. As long as the first country’s assessment different in terms of food because we have slightly project is okay, the other country will then agree to different microbes and so on, but essentially there is fund its share of the collaborative work. You have to not very much difference. The big problems are the set up a mechanism to do that. For example, the same. The small problems may vary. research councils have agreements with Brazil; if a We felt in Scotland, Wales and Northern Ireland that Brazilian researcher wants to collaborate with a UK we were not being quite heeded enough in Aviation researcher, the UK will assess the research and then House, in Holborn, so we formed our own SWANI the Brazilians will put in whatever share of the group—Scotland, Wales and Northern Ireland—and funding it is for that project to fund that Brazilian went to see Lord Krebs when he was the head of the researcher. Food Standards Agency. I think the combined weight of those three nations did have an effect. We did not Q4289 Mike Crockart: How key is collaboration get what we wanted, which was changes in the policy across the UK to the success of higher education on pasteurisation of milk, but that is another issue. science and research? The joint approach of those three nations did have a Alastair Sim: Genuinely, I think it is extremely mitigating effect against an Anglo-centric important. The dense networks of collaboration that organisation, although of course Scotland is planning have been built up between researchers across the UK to move out of the UK Food Standards Agency and are part of our genuine collective strength. We would set up its own. want them to be supported through some form of common research infrastructure. Given the density of Q4287 Mike Crockart: Turning to the subject of the collaborations and also given the density of collaboration, because you have all mentioned the collaborations that researchers have with their peers importance of collaboration, especially cross-border, overseas, I suspect that, whatever happens, there is Professor Pennington, you have expressed some going to be a collaborative way of doing research. As concerns about whether that collaboration would be I said before, it is just in the nature of the exercise able to continue quite as easily post-independence. Is that people will find the best people and the best there more that you can say on what your concerns facilities they can access. There may be boundaries are about that? that you have to cross to do that, but, in general, Professor Pennington: Because it would be people will cross a boundary if it is going to get them international collaboration, it would depend on how the right result. the research was funded. If Scotland could not keep part of the common research area, you would have to have mechanisms set up to ensure that collaboration Q4290 Mike Crockart: Apart from the fact that if was funded across the border, as it were. There is they cross the boundary it may affect their funding. nothing difficult about doing that, but you would have When you get to the nub of the problem, if crossing to set it up. It might even encourage collaboration in a boundary causes issues about where your funding is certain areas, because there might be a pot of money going to come from, surely it causes some sort of for you to do collaborative research, but I do not issue about the collaboration. believe that collaborative research is necessarily better Alastair Sim: Which is why the optimum way than individuals doing research. Sometimes it is forward, if there were to be a vote for separation, is necessary because you need to get access to another to negotiate a common structure. population, for example, to do population studies and Professor Raffe: There are issues about whether you that kind of thing. At the moment, you don’t have to are going to get the funding. There are also issues raise that as an issue within the UK. about whether or not it is going to get administratively If I want to collaborate with somebody in London or a lot more complex to cross the boundaries. As my Belfast, you just do it and you put in your joint colleague has been saying, in some contexts that application. If you have to do it across a boundary, might not be the case, whereas in some contexts it that would be a different kind of dynamic and extra might be. I would want to use the term “collaboration” work for the scientists. Having said that, there might to refer to a rather wider range of activities than be a pot of money for that particular kind of research, simply working together on a particular funded which does exist, for example, in the Nordic countries. project. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 113
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe
Collaboration, very importantly, is being part of a As to the reputation of Scottish research, it is worth single academic community, which exchanges papers, referring to a recent British Council study, which which discusses, which referees, which assesses and made the point that Scotland, Scottish research and so forth jointly, and which visits and all of that. There Scottish higher education is not as internationally is a much wider social network of science research, visible as you might expect it to be, that there is a much of which does not depend quite so directly on fudge in people’s perceptions. One way of putting it Government. There is always a danger that we are would be to say that the UK brand is rather stronger focusing on the role of Governments and than the Scottish brand. That is, obviously, with constitutional arrangements in shaping research and in respect to international students, but it is also with shaping the university system; actually, the main respect to how the research is perceived. You could things that shape university systems are not argue, although I wouldn’t want to press this one too Governments but academics, and the ideas that drive hard, that Scotland on its own might have slightly them and the social context in which they work. We more of a reputation because it would be more visible must always bear that in mind. as an entity. Professor Pennington: Could I raise the Edinburgh Q4291 Graeme Morrice: As we know, the UK has issue? Of all the universities in Scotland, Edinburgh a reputation as a world-class research environment. stands head and shoulders above the others. I am sorry Indeed, the UK punches well above its weight within to say that, because I worked at Glasgow for 10 years. the world, and is second only to the United States. Glasgow is very good. From what we have discussed, it seems that Scotland Mike Crockart: It’s okay. I was born in Edinburgh. punches well above its weight within the United Professor Pennington: Edinburgh would be the big Kingdom. What do you think would be the risk, if loser. If research council funding disappeared, any, to Scotland’s reputation for research if Scotland Edinburgh would have a very, very hard time because leaves the United Kingdom and also the research it gets more money for research and a larger chunk of excellence framework? that comes from the research councils than it does Alastair Sim: I think the reputation of our research from the Scottish Government. There is an issue there. will be as good as our research is. If by whatever As to the Scottish reputation, it is more a reputation mechanism we are funded to continue to produce built on individual institutions, which have their world-leading research, we will be known for strengths. Edinburgh, clearly, has great strengths producing world-leading research. I am sorry, what across the piece, with Higgs putting the ultimate was the second part of your question? accolade on top of that. Other universities are stronger in fewer areas. Q4292 Graeme Morrice: In terms of Scotland’s Aberdeen sees its medical school as being a particular reputation, if we become separate from the UK, we strength and so on. To say that there is a Scottish would also be separate from the research excellence reputation is perhaps slightly unfair to some of the framework. institutions within Scotland where they have very Alastair Sim: The view that we set out when we strong international reputations, and go out of their published our position on the policy issues associated with potential constitutional change was that there way to sell themselves internationally, to get would be advantage to the UK as a whole if international students and so on, and also, of course, maintaining the research excellence framework, or to sell their research strengths to attract graduate maintaining at least some form of internationally students from overseas in particular areas. To look at recognised review of the excellence of Scottish it as purely Scottish is always a bit dangerous because research, were part of a settlement in the event of it is built up of individual components. independence. The fact that we can actually say that As far as the research excellence framework is there is a mechanism that is well regarded concerned, there is a problem if you do not have it, in internationally that says, by objective criteria, that our the sense that how are you going to allocate funds for research is world-leading, has some strength to it. overheads? The research councils and bodies like the Professor Raffe: I don’t think our reputation depends Wellcome Trust, which have an enormous amount of on the fact that we have done well or badly in the money to spend each year on research, generally do research excellence framework itself. The issue not support the overheads and the infrastructure of underlying your question is whether being part of universities. That comes from Government. That is those processes actually does maintain and sustain the determined, essentially, by the scores you get in the quality of Scottish research. research excellence framework, or the RAE, as it used Graeme Morrice: Exactly. to be called. It is quite a good system. If you look at Professor Raffe: That would be my first point. With what happens in the United States, where individual respect to things like the REF, you will find quite a institutions negotiate their overheads with national lot of different views within the academic community. institutes of health and research bodies, they run into There are some people who believe that it has outlived very serious difficulties, with over-egging some of the its usefulness. It certainly is a costly exercise. I am expenses and so on. There have been scandals and so not sure whether it is always justified in all the things on, which we have not had in the UK at all, because it is trying to do. Some of those inputs to the quality we have had a much more rational system for of the system could be substituted or done in different delivering the money that has to come along with the ways, either within a UK framework or just within a research to support the buildings, the libraries, the HR Scottish framework. departments and so on. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 114 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe
If we do not have the REF, we will have to have universities in terms of funding and so on is not at all something else. Although people are critical of it, clear from the White Paper, so I will rest on that. because sometimes they do not do as well in it as they would like, my own view—coming from a university, Q4295 Graeme Morrice: There are lots of things when I was at Aberdeen, which did not do terribly that are unclear in the White Paper. Mr Sim, you want well in the first research assessment exercise—is that to make a point. overall the stimulus of improving itself in subsequent Alastair Sim: Taking up the point about the promotion years has been enormously valuable in terms of of Scotland overseas, it could cut either way. At the driving the university up in the quality of its research. moment, we have benefits, for instance, through It is not teaching but research that is measured by access to the British Council network throughout the the REF. world, which gives you very good local intelligence and the ability to set up visits, arrangements and Q4293 Graeme Morrice: We are aware that in bilateral relationships. That is a real strength, and that certain small countries like Switzerland and Holland strength at the moment is complemented by having there is strong scientific performance. Does that a strong British Council Scotland, a strong Scottish suggest that research could prosper in a separate Development International, which works very well Scotland, it also being a small nation? with its UK Government counterpart, and a strong Professor Pennington: Yes. There is an issue about Scottish brand proposition that really sits within an size. Switzerland has twice the population of Scotland. overall UK brand proposition. That is a positive of the The one country that has a rather similar system is the current situation. A negative of the current situation is Netherlands, whose population, again, is about twice that the overseas reception of the UK brand has been as big as Scotland’s and they went down a similar a bit tarnished by the arguments we are all familiar route of having a research assessment exercise driving with about whether we have the right regime to funding to institutions. support the migration of high-talent people, including You will find that in the smaller European countries scholars and students. like Norway and Denmark they do not have that Could Scotland create its own strong brand? Well, yes. system, and they still give very large sums of money As Professor Pennington said, it would take money to to their top universities—the University of Oslo and do it. Intrinsically, we have a really excellent the University of Copenhagen—but I think it is on an proposition, because we have the highest satisfaction individual negotiation between the university and their rate anywhere, I believe, for international student Governments. Those two universities both get a lot satisfaction. We have an extraordinarily high-quality more money from the Government than, say, sector. We find that students and scholars like being Edinburgh gets from Government sources. It has not here. actually shown itself in terms of their research excellence. Money is not the only thing, but they Q4296 Graeme Morrice: You already have a strong cannot complain about the money they get compared brand. Is that what you are saying? with the money we get in the UK and in Scotland. Alastair Sim: Yes, but not as strong a brand at the They have other problems as well. moment, and which, as David said, has the degree of The systems are quite difficult to compare, international recognition that you might expect when particularly from the undergraduate point of view, you sit in Scotland and think what a great sector it is. because they have very, very high drop-out rates in There might be challenges in establishing that separate those European countries. The best university in brand, given the extent to which we have been Switzerland, the ETH, fails about 50% of students at perceived as being part of the overall UK brand. You the end of the first year. Their own published figures would have to be imaginative and put the money in. are a little vague about what happens to that 50%. In Professor Pennington: When you look at university Copenhagen, which is the top Danish university, there brochures, they sell themselves as an individual is a 25% drop-out rate. Oslo has a drop-out rate in the institution, generally speaking. They do not push same region, although it may be a bit higher. It is quite where they are, except that they are close to the difficult to compare European universities with the mountains, sea or whatever, but they don’t push UK. We have a much more formal assessment whisky and bagpipes. structure and a much more competitive way of Graeme Morrice: It is like Edinburgh council looking at funding between institutions than promoting Hopetoun House when Hopetoun House is European universities. in West Lothian. Mike Crockart: By 100 yards. Q4294 Graeme Morrice: Taking up that point about Professor Raffe: I share what my colleagues were higher education, the Scottish Government say that, saying about the distinction between individual post-independence, we will be in a stronger position institutions having a brand, and sometimes individual to promote Scottish higher education overseas. Would programmes. Sometimes you could say that Scotland you agree with that? sells itself because of networks—for example, where Professor Pennington: If they increased their budget a number of students come from particular countries, threefold, we might be going somewhere. I will come they tend to spread the message by word of mouth. I back to the original point I made. The system we have want to come back to the point that, as a country, at the moment delivers very well and is very effective Scotland does not have a particularly high visibility in terms of the money we spend. How the Scottish as far as higher education is concerned. Then the Government, if there was a yes vote, would deal with question is, does that or doesn’t that matter? At the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 115
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe moment, anecdotally, a large number of students, have universities that are being funded to be especially from countries like China, come for masters internationally competitive, and are being driven with courses. In my own school at Edinburgh university, the sense of ambition and the sense of international they tend to say that they come to the UK, and to connectedness that marks you out as a university that Edinburgh as a city and Edinburgh as a university. someone from across the world would want to come Some of them are more aware than others of the to, as long as we can sustain that through whatever difference between Scotland and the rest of the UK, way, Scotland will continue to be a magnet for but some aren’t very aware. international talent. Professor Raffe: I agree. At the moment, it is the Q4297 Lindsay Roy: Are you saying that the university, it is the institution and it is the particular devolved Administration has not promoted opportunity that will attract the staff. There is a universities as strongly as it might? separate issue to do with immigration and visas but, Professor Raffe: I am saying that, as a brand, that apart, I do not see any immediate effect. Scotland, as an entity, does not have the visibility that it might achieve if it were to be heavily promoted. Q4301 Sir James Paice: Can I turn to the issue of Would that be the priority? Would you want to immigration and visas because it is, as you rightly say, promote Scotland as such as an entity? Would you important? Mr Sim, your organisation has called for want to promote individual institutions or aspects of relaxation of the visa regime. Do you believe that the the Scottish higher education system? White Paper has addressed your concerns in what the Scottish Government are proposing or, if not, what Q4298 Lindsay Roy: It begs the question of why it more would you want? has not been done under a devolved Administration. Alastair Sim: Its intentions are certainly in the right Professor Raffe: Yes, it does beg that question. To be place about making sure that we are as open as we fair, a lot of effort goes in through bodies like British can be to the migration of international talent at Council Scotland and others that have been student and scholar level. Where are we in relation to mentioned. It is still the case that a possible inference UK Government policy? Over the past years, we have is that those efforts have not been 100% successful. had quite a lot of discussion with the UK border Lindsay Roy: Thank you. authorities, for instance, and I think that the UK regime is evolving. Q4299 Graeme Morrice: Would a separate Scotland There was a lot of consultation and conversation, for find it more difficult to attract leading academics from instance, about the length of time that students were across the world? If so, why, and what would be the able to study. We had to make the case that when we consequences? take, typically, the longer length of a Scottish degree, Professor Pennington: It really will depend on the the initial UKBA proposals had to be relaxed, and that reputation of individual institutions, as we have been happened. There has been a bit of movement, but saying. At the moment, I don’t think Edinburgh has there is still a problem for the UK in that we are not any problem in attracting people to come and work as competitive as we could be in relation, for instance, there from anywhere in the world because it has an to the United States, Canada or Australia in international reputation. It will depend on how entitlements such as being able to stay on post-study institutions develop in the future—whether they will for a work period or bringing your spouse with you if continue to be attractive places to pull people in from you are doing a one-year masters, which, typically, anywhere in the world, essentially. Some things will people would quite often be doing at a fairly mature depend on a little bit more than just the reputation of stage of life. There are things that can be done, the institution, although that is the overriding thing. whether within the framework of the current UK Terms and conditions play a part and so on. It also Government or in a different constitutional settlement, depends on what happens in the rest of the world. to look harder at whether our regime for student I remember that, when the US turned down its funding migration and high-talent migration is as competitive very substantially about 20 years ago, there was a as it needs to be in relation to our international peers. surge of American academics coming to the UK Also, we need to keep an eye on whether problems because they could see that, although they might not are emerging in terms of recruitment and retention of be as well paid as in the US, there were tenured international scholars. There was some concern about positions that they could apply for and get, because that during the past couple of years, particularly with they had good academic track records. It depends on the limited number of sponsor licences that other factors, but I think the primary one is the institutions have for staff from outside the EU. A reputation of the institution as seen in your particular careful eye needs to be kept on that to make sure that field of interest. we are keeping our doors visibly open to high-talent Alastair Sim: Over 10% of academic staff in Scotland migration. Frankly, the migration of people and the are from outside the UK. On the basis of what is migration of ideas is the lifeblood of the university. It happening in our universities, we are extraordinarily is what keeps us vibrant and internationally successful in attracting international talent. connected. We need to be careful that we are not stifling that. Q4300 Graeme Morrice: How does that compare with south of the border? Q4302 Sir James Paice: I happen to agree with you Alastair Sim: It is pretty much typical of the research- on that. Is it feasible, if we were to have an intensive sector south of the border. As long as we independent Scotland after a yes vote, that you could cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 116 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe have a different system, a different regime—not just If I can come back to your opening question, I for visas but, as you say, for sponsorship and all the mentioned that we had been talking to various other things, in Scotland as opposed to what would stakeholders and key figures around the system. When then be the rest of the UK? There would be two asked about independence or the prospect of separate countries sharing a common border, independence, one main reservation or condition they assuming that there is no border control or barriers. would insist on, which we have already discussed, Alastair Sim: I am not going to pretend to be an was concerned with the eco-system for research, in expert, but within the common travel area there are particular, and the various collective relationships. differences between the Republic of Ireland’s One opportunity, which I think a number of people in approach and the UK’s approach. For reasons of that the system will recognise, is having looser controls on free exchange of talent, maintaining a common travel immigration. There is a perception at the moment, area throughout what is currently the UK is very both with respect to staff and students, but especially important. I am not in a position to make a judgment students, that existing controls are seen to be as to the extent it reflects the ability that one might inhibiting and cramping Scotland’s ability to compete, have within that common travel area to reach the not so much south of the border but with institutions solutions that would be most appropriate. elsewhere in the globe where overseas numbers are increasing much faster. Q4303 Sir James Paice: If you were very successful with a more relaxed regime attracting a lot more Q4305 Sir James Paice: Okay. Can I change the international students, what impact would that have subject and go back slightly to the whole issue of co- on the availability of places for Scottish students? operation—not about funding, but about facilities? In Alastair Sim: Absolutely none. Essentially, the event of a yes vote, are there facilities in what universities are funded to take in a certain number of would then be the UK which you would be concerned Scottish students. We have target figures for that. If that Scottish institutions would not have access to? we undershoot them, universities lose money. If we Would there be any implications for that? overshoot them, universities lose money. Nobody else Alastair Sim: It comes back to maintaining that eco- can displace those places. Essentially, given that system. There are important facilities in both countries international students, as well as bringing an for scientists across the whole UK. If you look, for intellectual contribution, are bringing a financial instance, at facilities at places like Harwell, contribution, it enables universities to put in place a Rutherford Appleton, or Daresbury, there are really degree of additional capacity that enables them to take important facilities in England for researchers across in a margin of international students, which, from the the UK. If you look at the super-computer at universities’ point of view, is all part of creating both Edinburgh, or the Astronomy Technology Centre in a vibrant intellectual and cultural mix and a financially Edinburgh, or if you look around Scotland at Medical sustainable model for keeping the university going. Research Council centres in all sorts of areas, like epidemiology, genetics and reproductive health, there Q4304 Sir James Paice: Does that explain why, if are really major facilities of common UK benefit in my information is right, last year when there were a Scotland. What we have said consistently is that you lot of clearing places available—I should say “open need to maintain the eco-system. You need to maintain places”—Scottish students were not able to apply for access for researchers to cross boundaries to facilities, them through the clearing process? whether they are in Scotland or elsewhere in the UK, Alastair Sim: That was not related to international that are currently working strongly for the benefit of students. It was related to the capped number that we researchers throughout the current UK. have of places for Scottish-domiciled students in relation to the uncapped number of places for students Q4306 Sir James Paice: I confess I have never from the rest of the UK. It was a slightly different heard your phrase “eco-system” applied in this picture from how it looked in the press, because context, but never mind. In the event that the eco- clearing opened earlier for Scottish students. By the system was not maintained, does it follow, therefore, time English students had their exam results, most of that Scottish researchers could well suffer from lack the Scottish students who were looking for a clearing of access—you would probably say the same for the place had already got one. rest of the UK? Universities were trying to fill up any available Alastair Sim: I would say it is also the same for the capacity they had with rest of UK students as a rest of the UK. There is a common interest in making supplement, having already filled the maximum sure that wherever the facility is, either side of the number of Scottish students they could take on. So border, it is something that can benefit the people who there was a slightly different picture from what you use it. might have received in the press; it was one where the number of Scottish students who got in through Q4307 Sir James Paice: What about international clearing was in the thousands and the number of facilities where there is some form of treaty English students or rest of UK students who got in arrangement, like CERN, to which, obviously, the UK through clearing to Scottish universities was in the is party? Do you know what the arrangements would hundreds. be for an independent Scotland? Would they have to Professor Raffe: I endorse that. With respect to what renegotiate entry to such a treaty? happened last year, there was no direct displacement, Alastair Sim: There are two models—take CERN, because the cap had already been applied. take the European Southern Observatory—where that cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 117
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe could work. One, which is probably the optimum Alastair Sim: We are at a fairly early stage. The White model, is that, if you are buying into a shared Paper is only just out. continuing supranational infrastructure, that becomes a model by which a subscription is paid to CERN Q4311 Chair: Can I just clarify here? As to the or to the European Southern Observatory. Research question that you asked to which you got the answer, Councils UK pays the subscriptions at the moment. If “It may be a possibility,” is that a different proposal our optimal solution were obtained, that would be part from what is in the White Paper or is that the same of that negotiation. The alternative is that you just proposal? have to stump up the money directly. When the Czech Alastair Sim: It is not identical. Republic and the Slovak Republic separated, Slovakia quite quickly bought back into CERN, for instance, Q4312 Chair: Would you perhaps explain the and the European Space Agency, if I remember difference? rightly. It is just the case that you have to make the Alastair Sim: The advice that we obtained from individual arrangement and pay the sub. Anderson Strathern dealt with the situation where you are treating people differently on the basis of whether Q4308 Sir James Paice: But it is only a matter of their normal residency is in Scotland or elsewhere in stumping up. There are not any other obligations that the EU, assuming that Scotland and the rest of the UK you would have to enter into. That is why I used the remain in the EU. We published that and we word “treaty.” contributed to the Scottish Government as a catalyst Alastair Sim: I would not pretend to know the full to making sure that they came up with a policy details of the contractual arrangement. Nothing position. They are the ones who are responsible for appears to have been an impediment to people joining, having a policy position. The subtle distinction in the whether they were in the EU or not. Scottish Government’s position is that they appear to treat three categories of students, which are students Q4309 Lindsay Roy: Alastair, can you briefly set normally domiciled in Scotland, students normally out the conclusions of the legal advice that you have domiciled in what would become the rest of the UK received on tuition fees? and students normally domiciled in the rest of the EU. Alastair Sim: You have probably seen it. It is up to the Scottish Government to work through, Lindsay Roy: I think we just want it on the record share and subject to test how they would set out the here. rationale of that, and how they would empirically Alastair Sim: We have published openly the legal evidence that objective justification. It is their advice that we sought, which suggested that there may responsibility now to evolve that further. be a possibility of maintaining an objective justification for differential treatment of students who are normally domiciled in Scotland and students who Q4313 Chair: But you did not ask for legal advice are normally domiciled elsewhere within the EU. on their proposal. You asked for legal advice on your Having obtained that advice, we shared it openly with own situation. the Scottish Government as a catalyst to their own Alastair Sim: Our legal advice is antecedent to the thinking pre-White Paper about what the solution publication of the White Paper. We obtained our might be for having a sustainable management of advice much earlier in the process, in the spring of cross-border flow. It is a tricky issue, but it is one that last year, really, as a catalyst to making sure that ideas both in the interests of Scotland and the rest of the were going into the melting pot for how one might UK needs an answer, because, on the one hand, we deal with the significant issue of dealing with need to be able to manage the cross-border flow. sustainable levels of cross-border flow. Having handed It is a good thing to have cross-border flow, but if it that over, it then became the Scottish Government’s became unsustainable in the sense that people in the responsibility to come up with their proposal for how rest of the UK, who are facing potentially £9,000 fees, they would intend to deal with that. were overwhelmingly making the economically rational choice to come to Scotland and not pay a fee, Q4314 Lindsay Roy: Is that legal advice universally that would overwhelm Scottish universities. Equally, agreed then? Is that a legal opinion? I don’t think it is in the interests of the rest of the UK Alastair Sim: It is, obviously, an area of contest and to lose those students. So a solution needs to be found. debate. As I said, the onus will lie on the Scottish The Scottish Government have published their Government now to develop their case for what that proposal in the “Scotland’s Future” White Paper. I full objective justification might be so that that can be would hope that, having set out fairly briefly what that tested and the parties can make an evidence judgment position is in the White Paper, the Scottish about it. Government, who clearly have the responsibility for the policy solution, set out in due course what their Q4315 Lindsay Roy: So you are saying that it may overall rationale of objective justification would be so be legal to discriminate against students from England that that can be tested and one can take a view on in terms of fees but not with the rest of the EU. whether that is something that will be reversed. Alastair Sim: I am making no judgment on that. We contributed a paper to start the debate. The Scottish Q4310 Lindsay Roy: It may be a possibility, but it Government, having set out their position in outline is hardly secure information. Would you agree? It is in the White Paper, now need to take time to work hardly giving a high degree of confidence. through that objective justification and show whether cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 118 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe it is something that we can have absolute confidence cases, the court took the view that, well, it is a high in. test, but there is a test that can be conceived where you could make an objective justification for Q4316 Lindsay Roy: I am sure you are willing to differential treatment of citizens based on normal make a comment, given that you have had legal residency. advice, that it may be possible to discriminate against students from England and charge them fees and not Q4321 Chair: Did the court say that the Belgium to do the same with the rest of the EU, as happens at university was entitled to refuse the French students? the moment. Alastair Sim: No. They held that the objective Alastair Sim: No, I am not going to comment on that justification in that case had not been made. because I don’t have any more legal advice than what we have openly published, and that does not deal with Q4322 Chair: It hadn’t been made? that specific issue. The ball is in the Scottish Alastair Sim: Yes. Government’s court to evolve their objective justification of their own position. Q4323 Chair: And in the German/Austrian case? Alastair Sim: When you are looking at both of those Q4317 Lindsay Roy: Are you aware of the EU cases, essentially the court said that there is a high test position on this? that you have to meet. In both cases they felt that the Alastair Sim: I am not aware that the EU has evidence that had been presented to them was skimpy. communicated a formal position. So that is why, coming back to what I said at the beginning of this section, it is important to us that Q4318 Chair: You said that there may be a the Scottish Government work through in full their possibility. Did the legal advice go into more details proposed objective justification so that one can take a about clarifying under which circumstances it might view on whether that will be reversed. be a possibility? Alastair Sim: To summarise it—obviously, it is Q4324 Chair: Are there any cases where the court openly available—it takes the European Court of has found that a university was entitled to refuse Justice case law. There are three cases it works students from another EU country? through that were about the differential treatment of Alastair Sim: I am not aware of a case. Having said students, and from that case law it reaches the that, I don’t want to go any further than the paper that inference, from looking at the ECJ judgments, that we published, but it is clear from the actual explicit there may be a case for constructing objective reading of the words of the European Court of justification for differential treatment of students Justice’s judgments that they have held open the based on their normal domicile. I am not going to possibility that there may be an objective justification extrapolate beyond that because that is the extent of of differential treatment; but I am not going to pretend the legal advice I have seen. it is not a high test.
Q4319 Chair: Does it give any clue as to what the Q4325 Chair: But there is no clue as to what that objective justifications could be? high test might be. Alastair Sim: Yes. Looking at the cases regarding the Alastair Sim: Essentially, it is whether there is a risk objective justifications, it mentions the homogeneity to your education system and to its ability to meet its of an education system. I am not sure how one would core purposes. That is rather a paraphrase. If you want interpret that. This is from the Bressol case. Is there a the words of the legal advice, I will refer you to a risk to the existence of the national education system website. and the fundamental delivery of its purposes? Does that create an objective justification? The court’s view Q4326 Chair: But no other country in the EU has in that case was that it may be possible to construct been able to demonstrate that its education system is an objective justification for differential treatment of at risk from foreign students. students based on their normal residency, if you can Alastair Sim: As I said, it is now up to the Scottish meet that test. Government to support their position. Universities Scotland has contributed, but the responsibility for Q4320 Chair: Would you tell us the background to demonstrating the robustness of the proposed solution the European Court’s judgment? Presumably, an EU rests with the Scottish Government. country was involved that was trying to secure a particular objective. Would you tell us the background Q4327 Lindsay Roy: Just to clarify, do you agree to the particular case? that the legal advice does not say that the position in Alastair Sim: To give a couple of brief bits of the White Paper is objectively justified? background, one case involved people coming from Alastair Sim: It makes no comment on the position in France to Belgium and then back to France with their the White Paper. professional skills, being educated at Belgium’s Lindsay Roy: That is helpful. expense, and in another case medical students were Alastair Sim: Sorry, can I clarify that, as I am aware coming from Germany to Austria and then going back that this is a matter of permanent record? What is in to Germany. There were difficult issues there about common between the positions—and I think this is whether the education system was doing what it was important—is the possibility of making an objective meant to be doing for the right citizens. In both those justification for differential treatment based on cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 119
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe residency. What is not in common between the paper Q4335 Lindsay Roy: That is very helpful. Is that that we put in and the Scottish Government’s position the case, Mr Sim? is how you are defining the different communities. I Alastair Sim: I cannot think of a situation where the am not saying that the Scottish Government’s position fee regime applying to a student has been radically is right or wrong; I am just saying that it is different. changed during the period of their studies. I think that would be an extraordinarily problematic proposition. Q4328 Lindsay Roy: That is helpful. If Scotland found itself having to charge tuition fees to all Q4336 Lindsay Roy: If the Scottish Government students from other EU member states, what impact chose to scrap tuition fees and they did not have the would that have on Scottish universities? income from the rest of the UK, what would be the Alastair Sim: The estimate that we put in our paper options to replace the lost income? in November 2012 of the current cost to the Scottish Alastair Sim: Basically, they would just have to look budget of educating EU students from outside the UK to their budget. The problem is not simply the was £75 million. replacement of lost income. The problem is that, if there is such a steep fees differential between Scotland Q4329 Lindsay Roy: Is it possible that students and the rest of the UK in the event of a yes vote, the from other EU countries midway through their studies essence is how you manage to maintain some at the moment of separation could suddenly find sustainable level of flow. How do you stop that level themselves facing large fees? of flow from becoming completely unsustainable with Alastair Sim: I don’t think so. I am sorry, but I don’t its inevitable displacement effects on Scottish- follow the logic. domiciled students and, equally, with its effects on English universities, as they would be losing a lot of Q4330 Lindsay Roy: If we become a separate the people on whom they are relying? country and they are midway through a course, could they be paying fees to complete the course? Q4337 Chair: So by “unsustainable,” in plain terms, Alastair Sim: I can’t foresee a situation in which that you mean that there would be so many students would be likely. In relation to EU citizens from coming to Scotland from the rest of the UK that there continental Europe, I really cannot foresee that would not be enough places for all the Scottish situation happening. We have to treat people without students who had qualified. detriment to how they are currently being treated. Alastair Sim: That is the essential risk if there is not a regime in place that enables the flow to be maintained at a level that is sustainable. Q4331 Chair: But you just asked for legal advice to see if you could treat them with detriment. Q4338 Lindsay Roy: We all want a very strong Alastair Sim: No. I am just struggling to foresee a Scottish academic tradition to continue and have situation in which, suddenly, halfway through a highly regarded universities, and make sure that course, students from continental Europe suddenly are Scottish students can access the courses. Has there getting a charge imposed on them. I struggle to see been any decrease in the number of Scottish students how that situation could arise. over the last two or three years? Alastair Sim: No. The number is going up. Q4332 Graeme Morrice: Because Scotland would cease to be in the EU on day one of independence. Q4339 Lindsay Roy: It is going up. And the number Professor Raffe: With respect to Scottish students, the of students overall? assumption would be that, if fees were introduced, Alastair Sim: The number of students overall is also they would be introduced for those joining in a going up. Overall, we have had healthy recruitment particular year and then they would continue to pay. figures from overseas—although it was down slightly Those currently on the course would not be expected last year—and from the rest of the UK. The global to pay fees. That is the way that the increases have picture at the moment is extremely healthy. worked in the past and I assume it will be the same for EU students. Q4340 Lindsay Roy: So the funding from the Professor Pennington: It is a contractual thing. You Scottish Government has been very strong and very come in on a certain basis and you will finish on that healthy. basis, but the new entrants would come in on Alastair Sim: The 2011 spending review and its whatever the new contract says. subsequent roll-forward into the 2013 spending review has been a settlement that has enabled us to be Q4333 Lindsay Roy: So there is a contractual basis both accessible and competitive. for this. Professor Pennington: For any student coming in— Q4341 Lindsay Roy: Are you aware that that contrasts quite markedly with the further education Q4334 Lindsay Roy: On a four-year honours sector, where they have experienced quite a severe degree, for example, there is a contractual basis when range of cuts? you start the course that these are the conditions under Alastair Sim: They are our closest neighbours, friends which you will continue. and collaborators. My direct interest has been in Professor Pennington: That is the way that I have making sure that we are able to offer as wide an always seen it—yes. opportunity and as high a quality an opportunity as cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 120 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe we can. The Scottish Government have to answer for onwards we are seeing changes in aspiration and their own budgetary decisions. attainment.
Q4342 Lindsay Roy: I understand that fully. Is it Q4346 Lindsay Roy: So it is not a marked increase. likely to be detrimental on the 2+2 route, HNC/HND, If at all, it is a marginal increase. going into university? Alastair Sim: It is an incremental increase. Alastair Sim: No, because as part of the current funding settlement there are additional funded places Q4347 Lindsay Roy: Are we talking about 1% a going in specifically for 2+2. There are 1,000 year? additional places that have enabled universities to Alastair Sim: Yes. It is around that area. David, make or increase their franchising arrangements with probably, has figures which are more accurate than colleges so that students doing HN-level study at mine. colleges are able to have associate-student status with Professor Raffe: On the point about children from the university, and that the university is actually poor backgrounds, by and large, progress has been flowing money through from university-funded very limited in the past few years. There has been a settlements to the colleges to pay for those students very slow rate of progress. In fact, the more recent who are doing their first two years of study at HN figures suggest that, yes, there has been some level and college. On that specific issue, the interests improvement with respect to adults but not with of students who want to use HN as an instrument for respect to young people with multiple deprivations. progression to university have been protected. Q4348 Lindsay Roy: So overall it is a neutral Q4343 Lindsay Roy: Finally, what is the potential position. impact of separation and access to Scottish school Professor Raffe: If you take a long enough time children to Scottish universities? Is there no impact? frame, yes, there is improvement, but it is working Alastair Sim: David will want to comment on this, quite slowly. Often you can see small improvements probably. In a sense, it is a neutral issue for in particular areas or projects that don’t show up when universities, except that, if there is not a sustainable you are looking at national figures. It is not quite flat arrangement in place for the management of cross- but it is not that much better than flat. border flow, the displacement effect that would occur If I can just come back to your previous point about on Scottish-domiciled students would have an impact what the opportunities for Scottish pupils would be, on widening access to students as it would have on this is one of these questions where a lot will depend everyone else. on what the policy decisions of the Scottish In terms of what policy solutions one might have in Government will be; so one can only speculate. I will general to encourage wider access to university, I make a couple of observations. One, which comes through from what I have observed as an academic don’t think the solutions that you would come up with over the years but also what some of our interviewees would be radically different either side of a have been telling us, is that there is a strong sense that constitutional choice. They really depend, partly, on higher education would get quite high priority from having a sustainably funded system that enables you a Scottish Government, as indeed it has done under to have the places and the initiatives that sustain and devolution to a greater extent than it would have done develop wide access, and also on continuing simply as part of the UK. Also, although Alastair may initiatives and the refinement of initiatives at not want to comment on this, the higher education universities to make sure that we are working with the system or the university system in Scotland is pretty education system as successfully as possible to well organised and it pulls a fairly effective punch, promote aspiration, entertainment and inclusion. which has not been the same in the past for colleges, which underlies your other question. The other side to Q4344 Lindsay Roy: To what extent has there been this is what the impact would be on the flow of an increase in the number of youngsters from poor students from the rest of the UK, which, inevitably, backgrounds going to Scottish universities? would directly or indirectly, in the long term, displace Alastair Sim: David, probably, has a greater insight Scottish students. into this from a professional point of view, but it is an If you look at some of the evidence on this, there is incremental progress. evidence that students do react rationally to changes in fee differentials, but the effects in the past—this is Q4345 Lindsay Roy: Can you quantify it? based on looking at flows within the UK, between Alastair Sim: At the moment, if my figures are the UK and Ireland—have not been particularly large, correct, about 15% of students come from the most partly because there are a whole lot of other reasons deprived 20% of communities. Those may not be the why people might choose to study in particular places. right figures. It is just off the top of my head. It is You can point to examples that, when Scotland was somewhere between the 11% to 15% range. It has charging lower fees than the rest of the UK, rUK been progressively but incrementally improving over student numbers actually fell. So, in a sense, the recent years. The universities are working extremely reverse happened there. hard. Essentially, until there is a real step change in You can, similarly, say that there has not been the attainment levels of the schools that we are trying to flood of students from the Republic of Ireland that one reach into—and that is no fault of the schools—it is might have expected had fees been the sole driving difficult to see a step change unless from early years factor. Compared with a country like Wales, where cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 121
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe there are massively porous borders between Wales and Q4355 Chair: But if Scotland was a member of the England, so you have got half of students in Wales EU, there is, clearly, a risk that the courts could strike actually coming from across the border and a rather down that piece of Scottish legislation if it conflicted smaller proportion going back again, the Scottish with EU legislation. Did your legal advice give you system has less porous borders than the other parts of any guidance as to what would happen if that the UK. happened? My guess is that there would be an increase in Alastair Sim: No, it is not in that legal advice. What students from the rest of the UK. In the short term it I am saying is— wouldn’t be that dramatic. It might accelerate in the longer term, depending a bit on what direction the Q4356 Chair: I can understand that you want clarity. systems took, partly because all the evidence suggests The point I am trying to make is that even an that student flows tend to follow well-trodden paths, independent Scottish Parliament could not necessarily to use one of the phrases. As some students go, they give you that clarity because, if Scotland was a will pass the word, the word of mouth comes back, member of the EU, all the legislation of that and so others will follow in their footsteps. In the independent Scottish Parliament would have to be in longer term, I would expect to see a growth in conformity with EU law. numbers from elsewhere in the UK. In the short term, Alastair Sim: Yes. I wouldn’t expect to see a massive impact. Q4357 Chair: So we do see a situation where Q4349 Lindsay Roy: So fees would be critical to an universities could be faced with being sued by large access policy. numbers of students. Professor Raffe: Fees would be critical or important Alastair Sim: If there were to be a post-independence for a policy of maintaining opportunities for Scottish regime, before that post-independence regime comes students overall. If by “access” you mean widening into place, the important thing is that the Scottish access, that is a slightly different issue. Parliament—bearing in mind that it will continue, one would expect, to have an obligation to act within the Q4350 Lindsay Roy: We don’t have any clarity on terms of EU law—has actually made specific fees at the present time. legislation that gives universities the confidence that Professor Raffe: Do you mean what the policy there is a defensible regime. intentions are? Lindsay Roy: Yes. Q4358 Chair: But your legal advice has not given Professor Raffe: The White Paper says that the you— Scottish Government will maintain free tuition. Alastair Sim: It says what it says. Chair: —any clue whatever as to whether the Scottish Q4351 Lindsay Roy: But in terms of the rest of the Parliament would have that power. UK, it is not clear what will happen. Alastair Sim: The Scottish Parliament has to act Alastair Sim: Again, the White Paper indicates that within the scope of European law, so the Scottish the intention would be to maintain the status quo and Parliament has to make a judgment. A Scottish to continue to charge students from the rest of the UK. Government, as now and as in the future, has to act within the scope of European law. That is one of the Q4352 Lindsay Roy: But that is strongly contested. things that is tested when legislation comes before a Alastair Sim: That is strongly contested. Scottish Parliament. What we need, within that competence of the Scottish Parliament to make things Q4353 Chair: Yes, but who will be doing the that are intra vires within European law, is for them charging? Will the university be levying the charge? to make intra vires regulations under European law to Alastair Sim: Yes. provide for a cross-border regime.
Q4354 Chair: Did your legal advice give you any Q4359 Chair: But they may not. In fact, judging by guidance on what would happen if a student from what the Scottish Government have said, they have England, say, after separation, applied to a Scottish made an assertion and there does not appear to be any university, was accepted and was then sent a bill—or legal advice whatsoever as to whether that assertion is hundreds of them—then sued that university? Did valid or not. Are you telling us today that you have your legal advice give you any indication of whether not received any legal advice to justify the assertion you would be successful in defending that civil case? made by the Scottish Government in the White Paper? Alastair Sim: What is crucial to us, so that a Alastair Sim: We have a responsibility for developing university can have confidence, is that, whatever that, but the case of objective justification rests with regime is put in place, a Scottish Government, if there the Scottish Government. I don’t think that we will, were to be a yes vote, specifically legislates for that in essence, have anything to test until we have regime so that we can have the confidence that there actually seen them work through what their full is legislation that has already been tested before a rationale is for objective justification. We have seen university takes forward a charging regime for an that, in a sense, at headline level in the White Paper, English student. That makes sure that there is a secure but there is a lot of work to do between that headline legal framework for the university to work within level and actually saying, “Look, here is our full case regulations that have been tested. for objective justification.” I do not think that we have cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Ev 122 Scottish Affairs Committee: Evidence
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe something that is susceptible to that further study, in detriment of Scottish students, but a cap could be a sense, until we see the full objective justification. applied to any of these students. Government policy could say that you can only take so many and so on. Q4360 Chair: To summarise what you are saying, My own view, for what it is worth, is that money plays is it correct to say that what the Scottish Government an enormous part in this. The income that is generated have asserted in the White Paper has not been tested from students coming to Scotland from England, in law? Is that correct? Wales and Northern Ireland is quite substantial—it is Alastair Sim: They will, obviously, have taken the 10% of the income of the University of Edinburgh. view that it is compliant with their understanding of One has to bear in mind that there is a powerful European law, but it is the start of a process of income source here. building an objective justification. We can’t take a Clearly, from the overseas student point of view, non- view on that full objective justification until it is EU, it is very substantial indeed. Of course, we talk worked out. about getting these people here, but we are getting Professor Raffe: I will try and let Alastair off the these people here because we like them to go away hook. I think it is a bit tough on Alastair to have to with a good view of what has happened to them in answer for the legal uncertainties. I have read two bits Scotland in education, but we also like to have their of legal advice. One is the Anderson Strathern report money as well. that Alistair was mentioning. The other is a blog—it is certainly in the public domain—by the professor of public European law at Edinburgh university, Niamh Q4363 Lindsay Roy: The First Minister says that, Nic Shuibhne. in the event of separation, England will be our best friends. If they continue with discriminatory fees, is Q4361 Chair: Sorry, at what university? that good will not likely to be damaged? Professor Raffe: At Edinburgh university. She is Alastair Sim: In a sense that seems a rather rhetorical professor of European policy law or, anyway, a point. Quite apart from the arguments that we have professor of European law or some such title. This already discussed about the necessity of having an was actually published after the White Paper, I arrangement to ensure sustainable levels of cross- believe, and does question a number of the border flow, equally, students in England are, in their assumptions made in the White Paper. My reading of home jurisdiction, facing fees that are normally in the the two bits of evidence is that it would be quite region of £9,000. One could take the view that difficult to make the case that the Government would actually it is not discriminatory if they are being like to make. treated no worse than they are being treated in their own jurisdiction. Q4362 Chair: Could you, perhaps, send us a copy of that blog? Q4364 Chair: Have you had legal advice to that Professor Raffe: Yes. I can certainly forward you the effect? link or something. It might be worth mentioning that, Alastair Sim: No. I think I am making a rhetorical because of the way in which the Scottish Government point in response to a rhetorical point. are making their case, they appear to be rejecting one Professor Raffe: If I could make another rhetorical of the opportunities which was opened up in the point in response to that, if we are talking about good Anderson Strathern paper, which said that, although a will, one way in which the existing devolution residence could not easily be made the justification for settlement is not working effectively is in terms of discriminating in terms of tuition fees, it might be policy, collaboration and communication at the made the justification for discriminating in terms of national level. It was not showing a lot of good will maintenance costs. when England introduced these huge increases in fees, One possible option for a future Government, were with minimal consultation or even warning, to the Scotland to be independent, would be to accept that other countries, which had massive implications for fees are inevitable but that maybe we pile in the support heavily in support of maintenance, where their policy making. currently Scotland does rather less well than other If you look at all the various documents—the Browne parts of the UK. report and the documents that followed it in Professor Pennington: At the end of the day, it seems England—there is hardly a mention of the other to me that it will be in the hands of judges. I do a lot countries of the UK. If you look at all the documents of medico-legal work and you try not to get into the that have been published in Northern Ireland, Scotland hands of judges because you don’t know what they and Wales since then, they are massively about the are going to do at the end of the day. Their decision consequences in England. The rest of the UK is is, maybe, not final, but it is quite strong. There is an massively affected by England in a way that is not issue here that this will go on until it is resolved, reflected in the current policy arrangements, the co- although it may have to be resolved by a court and ordination and planning of these things. If we actually there are many uncertainties as to how a court will had a partnership in higher education, one aspect of handle it. From what we have heard so far, two that partnership ought to be that, before any part of precedents do not favour what the White Paper the United Kingdom makes major decisions that affect asserts. the others, it consults and finds out a good way of We have heard a lot about Scottish universities being trying to get a mutually satisfactory arrangement, and swamped by English students and so on to the that has not happened. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG08 Source: /MILES/PKU/INPUT/038186/038186_o008_odeth_SAC 140129.xml
Scottish Affairs Committee: Evidence Ev 123
29 January 2014 Professor Hugh Pennington CBE, Alastair Sim and Professor David Raffe
Q4365 Lindsay Roy: That is a good example of Q4368 Mike Crockart: Was that the first “No” or what would have been best practice. the answer, before you move on? Professor Raffe: Absolutely. We are talking here Alastair Sim: I have not written any letter to the about separation, but, equally, one might want to look Scottish Government saying, “Please can we see your at whether or not the existing arrangements could objective justification.” have been improved. Professor Pennington: From a personal point of view, Q4369 Mike Crockart: Okay. Have you any plans this does not surprise me at all. I was involved in to do that? some food safety, which turned into legislation, before Alastair Sim: I think that will be a key element of our parliamentary devolution, when Scotland had its own conversations with the Scottish Government. agriculture departments and so on. The battles that went on between north of the border and south of the Q4370 Mike Crockart: A key element of your border at that time had to be seen to be believed in conversations? the sense that the English did not like being told what Alastair Sim: Yes. to do by the Scots. At the end of the day a truce was agreed and the legislation in England was slightly Q4371 Mike Crockart: So you will be asking them different from Scotland, but it had the same effect. for their justification as to how they think that this Mike Crockart: I am going to have one last go at will work. trying to get to the bottom of the legal advice Alastair Sim: Yes. As I say, it is obvious from what situation. is in the White Paper that what you have got there, in Lindsay Roy: Best of luck. a sense, is an outline of how you might frame an objective justification. It is not a full objective Q4366 Mike Crockart: As I understand it, you have justification. So I think it flows from that, that that had legal advice. That legal advice says that it might work needs to be done and it needs to be done in a be possible. The Scottish Government are now relying way that gives confidence. on that legal advice to say, “We’ll be able to do it.” You are saying that the ball is in their court to form Q4372 Mike Crockart: So you have not asked for further advice to show how that might be possible. it but you do have plans to. Alastair Sim: Yes. Alastair Sim: Yes. Mike Crockart: Thank you. Q4367 Mike Crockart: Have you put them on the Chair: Are there any other questions? Just before we spot and actually said, “When are you going to give end, is there anything else that any of the three us your plan about how this is going to make it witnesses want to add, that you have prepared, for through the European Court?” As you say, we are questions that we did not ask? No. waiting to comment to see whether it is going to be Thank you all very much for coming. I have found it possible or not. Have you asked them for that? a very useful session towards compiling our report. Alastair Sim: No. I mean that— cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 124 Scottish Affairs Committee: Evidence
Tuesday 4 February 2014
Members present: Mr Ian Davidson (Chair)
Mike Crockart Mr Alan Reid Jim McGovern Lindsay Roy Sir James Paice ______
Examination of Witnesses
Witnesses: Rt Hon David Willetts MP, Minister for Universities and Science, Department for Business, Innovation and Skills, and Rt Hon David Mundell MP, Under-Secretary of State for Scotland, gave evidence.
Q4373 Chair: Can I welcome you both to this funding it out of the UK tax base on a higher level meeting of the Scottish Affairs Committee? As you than I think would be possible for Scotland on its own. are aware, we are conducting an inquiry into the various impacts of separation, and today we are Q4376 Chair: How do you deal with the issue of looking at the question of science and research. I think Scotland getting more than its fair share? If Scotland it would be helpful if the two Ministers introduced got less than what could be described as its fair share, themselves for the record, and then we will go on there would be very strong arguments that Scotland with questions. was being deprived and done down and the share Mr Willetts: I am David Willetts, Minister for should be moved up to share of the population. Are Universities and Science. these sorts of issues taken into account at all? How do David Mundell: I am David Mundell, Scotland you respond to that sort of argument? Office Minister. Mr Willetts: The individual allocations of funding are determined by the science and research community as Q4374 Chair: Under the Scotland Act 1998, research a whole, and people based in Scottish institutions are was reserved and universities devolved to the Scottish an important part of that. The criterion is excellence. Government. How is the relationship and overlap The reason why British science is so good is that it is between the two currently managed in practice? simply allocated on the basis of excellence. You are Mr Willetts: I think we have been able to make it absolutely right. Scotland does very well out of it, not work. The research remains a UK-wide responsibility. simply in the sense of a net financial transfer, though I described my post a moment ago, and my science we think there is such a transfer; it gains from being responsibilities are UK-wide. Scotland has an part of a single integrated system where you can have excellent research capability, as a result of which it specialist institutions dotted across the whole of the UK financed out of the UK tax base. As a medium- does very well from the UK-wide allocation of size economy with 60 million people, we have a very funding simply on the basis of excellence. When it high number of world-class centres, because we can comes to teaching and teaching arrangements, my specialise. The Roslin Institute is where we do a lot responsibilities are only for England. There is a of our animal genetics; Edinburgh is where we have a different way of delivering higher education teaching lot of our computing and IT skills for the UK as a in Scotland, so we have a very clear sense of where whole. If the UK broke up, it would be very hard to there is a shared UK responsibility and where there is maintain those arrangements. a devolved issue. Chair: We have to vote now. With that answer to Q4377 Mike Crockart: Can I turn to the subject of ponder, we will go off and vote and come back in a the common research area? The White Paper little while. published last year makes it quite clear that the Sitting suspended for Divisions in the House. Scottish Government would wish to remain part of On resuming— a UK common research area, ensuring no barriers to collaborative research, access to facilities and peer Q4375 Chair: Following that up, could you clarify review for researchers throughout the UK, which is for us what powers the Scottish Government have that exactly the argument you have been making for why now affect the research sector in Scotland, and what it is such a good system at the moment. What would further powers they would get in the event of be the advantages and disadvantages of such a separation? common research area to a separate Scotland and the Mr Willetts: Research is a UK-wide responsibility, rest of the UK? and we allocate funding according to the principle of Mr Willetts: I would make two points. It is very odd excellence. As we set out in our “Scotland analysis: that people say the great case for independence is, on science and research,” which came out last autumn, “Don’t worry. Things will carry on exactly as if because there is excellent science and research in nothing had happened.” The fact is that, if Scotland Scotland, although it has about 8% of UK GDP, it gets separated, there would be big changes. Across Europe about 13% of research council funding. That is a good there is a common research area, so we have cross- example of how the UK is better as a whole than border co-operation on science projects in France, apart. Scotland has excellent research, and we are Germany or whatever, but it is not the same as the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 125
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP integrated UK research system. We have bilateral adviser and the French or the Italian Science Minister, arrangements with other countries, and because they I am speaking on behalf of the UK; I am making the have different accounting arrangements and ways of case for science across the UK. It is very hard to doing things, by and large the way the system works imagine how Scotland on its own would have a place is that, if, say, we have co-operation with the French, at that table. I have literally just come from a lunch we pay for the costs of a shared project within the UK with members of the Saudi Government. One of the and the French pay for the costs within France, and things we have been talking about is research we have an Anglo-French co-operation agreement on co-operation between the UK and Saudi Arabia. They top of that. It is not a basis for large-scale budget have interests in areas such as agri-science; we were transfers. We are not actually paying for research in discussing whether we could do more co-operation on French universities; we are getting French researchers agri-science. There I am speaking for the UK. I and British university researchers working together. remember talking to them specifically about the The common research area is nothing like the level of expertise of the Roslin Institute and the work it was integration you have in the UK, where there is doing on breeding chickens. I was there on behalf of genuinely a single integrated research and science the UK talking to them about UK scientific system. excellence. That is the kind of extra influence Scotland gets as part of the UK. Q4378 Mike Crockart: With an independent Scotland, if the negotiations were to arrange a Q4380 Mike Crockart: Could I turn to the other common research area, what would be the differences streams of funding? Up to now we have been between the situation as it is now and the situation concentrating on the funding council research grants post-independence? and the research councils research grants, which are Mr Willetts: I am sure that over time the systems 30% and 26% respectively. That comes to only 56%. would diverge. There would be different policies on A huge proportion of research funding comes from pay rates or pension arrangements, and, as they charities, businesses and other sources. What impact diverged, any co-operation—I hope there would be do you think separation would have on levels of co-operation—would be like Anglo-French funding coming from those sources? co-operation. It would be two different systems that Mr Willetts: That is a very fair question. To some agreed to do a project jointly, with each paying their extent, the charities would want to speak for own costs. At the moment, you have a genuinely themselves. These are charities that raise funds within integrated system where there are UK-wide the UK. Obviously, the bulk of it comes from outside specialisms located in Scotland. I do not sit in BIS Scotland. I think you would find that organisations calculating how much of the money is being spent in like Cancer Research UK, or whatever, and the Newcastle and how much in Glasgow; it is a medical research charities would tend to focus on the completely integrated system from which all parts of remaining UK. Again, there would be an issue about the UK benefit, but especially Scotland, because—let how we could do as well apart as we can together. me quote the figures—we reckon it gets about 13% of Together we have a system that is world-class. To be all the research council grants that are issued. honest, without being complacent, it is hard to see how you could have a science output much better, Q4379 Mike Crockart: There is a feeling in some of given the input, than the UK achieves. The UK as a the evidence we have taken already that perhaps whole is the world’s most productive science nation research councils are not as tuned to specific Scottish in terms of taking the input and the amount of high- problems as they might be. Do you think that a quality science you get. This really is something that separate Scotland would be able to exert more policy works for everyone, and it is an environment in which influence in this shared research council structure, Scottish science has flourished. It is hard to see how given that it would then be paying in a proportion, any other model, certainly a more fragmented one, whether by head of population or whatever? Would could do as well. the direct paying in give it a greater policy influence? Mr Willetts: I think it would go the other way, again for two reasons. First, the Scottish Government are Q4381 Mike Crockart: Do you have any statistics already able to spend extra money on top of what they on the proportion of charity funding of research that get out of UK science, if they wish. If there were, for goes outwith the UK at the moment? example, a special medical condition that particularly Mr Willetts: I do not have that to hand, but perhaps I affected people living in Scotland, I am confident that can send the Committee a note if we have anything. it would be researched on a UK-wide basis, but if the Of course, we are not directly responsible for Scottish Government wanted to spend extra on top to charities, but if we have any figures I will send them. research it, nothing stops them doing that at the moment. Q4382 Mike Crockart: It is indicative, and the point In addition, along with my earlier point about you are making is that it would be likely to stay within specialisation, the international pressure—the the UK. international role—that comes from the UK being in Mr Willetts: I have now found a figure. Let me read the world premier league for science helps Scotland. this out to you. It is rather similar to public funding. There is a Carnegie Group of G8 plus 5 for Science Approximately 13% of funding raised by members of Ministers. We met just outside Washington last year. the Association of Medical Research Charities in 2011 When I am there talking to the American science was spent on research in Scotland. That is the one cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 126 Scottish Affairs Committee: Evidence
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP
figure I have. If we have other figures, I will send other countries and organisations seem to increase them to the Committee. their spending, while ours has always been behind and has remained pretty much static as a percentage of Q4383 Mike Crockart: It is still significantly higher GDP. I know it is not a race. than a per head population share. Mr Willetts: We have been able, even in tough times Mr Willetts: Yes. when we are trying to reduce the budget deficit, to protect the science budget with ring-fenced Q4384 Mike Crockart: If such funding were more expenditure of £4.6 billion, and we have been able to difficult to come by for Scottish universities, are there add to the Technology Strategy Board’s spending. We other sources that they could turn to—for example, have created a new network of Catapult centres, which further European funding? We are always hearing that are modelled roughly on German Fraunhofer we need to be more like the Nordic states. Are there institutes. Some of them are located in Scotland, such other sorts of collaboration that Scotland and Scottish as the offshore renewables Catapult centre, so when universities could do? there are increases in expenditure Scotland benefits Mr Willetts: There are some very small-scale from them. collaborations. There is a very small amount of Czech-Slovak co-operation, but I think we are talking Q4388 Jim McGovern: So falling behind other about less than £10 million; there is some Nordic countries and even being below the EU average, and collaboration, but not on a large scale—perhaps a bit other countries increasing while we stay the same, is above £10 million. But those two small-scale projects nothing to be concerned about. are nothing like the scale of the single integrated UK Mr Willetts: There are always arguments to be made science base that we have at the moment. The for more spending. It is just possible that behind evidence is that, by and large, if separation occurs, as closed doors I might even make some of those one would expect, there are natural processes that pull arguments, but the fact is that for the Government as systems apart. As they diverge more and more, so you a whole, given the fiscal challenge we faced, lose the integrated shared single scientific endeavour. protecting the science budget in cash terms and increasing the budget for the Technology Strategy Q4385 Mike Crockart: To give it some scale, if Board shows a pretty serious commitment to R and D those sorts of schemes are £10 million, we are talking in tough times. about total research income for Scottish institutions of £861 million in 2011Ð12, so that would be just over Q4389 Jim McGovern: Can I clarify one point? 1%. When you say it is ring-fenced, does that mean it does Mr Willetts: Yes. As an example, in 2012Ð13, not go up but just stays the same in cash terms, which Scotland got research council current spending grants means a reduction in real terms? of £257 million, which is 13% of the total of research Mr Willetts: For the lifetime of this Parliament, we council grants. I am very happy about that; it is have fixed it at £4.6 billion a year, year after year because Scottish science is excellent, but that is the from 2010Ð11 through to 2015Ð16. You are right that scale of the funding that would be at risk if this world- you have to recognise there is inflation. On the other class integrated system was fragmented. hand, the advantage of the ring fence is what I say to the science community: “Every pound you can save Q4386 Jim McGovern: The stats suggest that the by improving efficiency is a pound you can spend on amount spent on R and D in the UK has gradually science. You know there is £4.6 billion, so if, for fallen behind other European countries. Do you example”—this is relevant to our inquiry today—“you believe that this puts the UK’s research sector at risk get better at sharing equipment so that two different of falling behind its competitors? universities, or a network of universities, share one Mr Willetts: We have a very productive R and D expensive bit of kit, and you save some money that system. While some countries devote a higher way, the £4.6 billion is intact and you get to spend percentage of GDP to R and D, there is general more money on new science.” recognition that we get a lot out for what we put in. We score very highly for rates of innovation, and we Q4390 Mr Reid: Thank you for coming along this score particularly highly for attracting internationally afternoon. Professor Stephen Salter, emeritus mobile R and D. We have one of the most global R professor of engineering design at Edinburgh and D systems; about 20% of all the R and D in the university, suggests there is insufficient knowledge of UK comes from internationally mobile businesses. Scotland within the UK research councils. What is Part of my job—I am very happy to do it—is your response to that? attracting internationally mobile companies from Mr Willetts: I am surprised by that. We genuinely around the world and saying, “If you really want to work on a UK-wide basis, and the fact that Scotland do high-quality R and D, think of doing it in the UK.” does so well out of this UK funding is evidence that That could be anywhere in the UK. I am happy to we are very well aware of Scottish research attract them to Scotland, but it is part of the effort that excellence. When I think of some of the specific the UK Government make. decisions we have taken recently, the great moment for us in the UK as a whole was when Professor Peter Q4387 Jim McGovern: We are already behind other Higgs, who had been based at Edinburgh for some countries—for example, Germany and the United time, got his Nobel prize. We announced that we States—and also below the average for the EU. These would be funding out of a UK resource a Higgs cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 127
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP institute in Edinburgh to honour him and carry table; there aren’t 25 or 30 seats round the table. For forward his work. We are very well aware of the example, the smaller European states might be strength of the Scottish research base. represented via the European Commission, so if Scotland entered the EU, it might have the Q4391 Mr Reid: What do you see as the advantages Commissioner representing it, but I would say that and disadvantages of an independent Scotland setting being represented by a Brussels Commissioner is up its own research council? rather less effective than being represented by a UK Mr Willetts: It would obviously be for Scotland to Minister who is absolutely aware directly of our decide how to do it. The dilemma it would face is that responsibilities to Scotland. across the UK we have a broad science base. We have Chair: I am not sure I am aware of any advantages humanities; social sciences; strength in life sciences; to Scotland of being represented by an EU and strength in nuclear and physical sciences. If you Commissioner, but that is perhaps an issue for a are a small country, you have to specialise. I think it different day. would have to take some very tough decisions about what it would specialise in and how to access Q4394 Mr Reid: What barriers do you think would worldwide scientific research. One of the advantages be erected in the event of separation, as far as of having a broad base is not simply that you do it all collaboration and research are concerned? in your own country; it means that you have sufficient Mr Willetts: I am sure that nobody would want expertise so that you can also understand what is deliberately to set up barriers. It is just a matter of happening around the world. You have some domestic growing apart. There would be different pension expert who can appreciate the significance of arrangements. What would happen to your career something they have just done at Stanford. prospects if you moved between work in different institutions? Would your pension rights be affected? Q4392 Mr Reid: The “Scotland analysis” paper says Given that it looks as though it would be very hard that collaboration between the rest of the UK and a for Scotland to keep the pound, would there be a separate Scotland would be “associated with levels of currency risk in collaborative arrangements? Would risk not present” in the current collaborative there be the same health and safety rules for the labs? arrangements. Could you set out what those risks are? Would there be the same attitude to the use of animals Mr Willetts: As I said, you would lose participation in experiments? On all these things, a Scottish in an integrated UK system. This is not because Government, day by day and week by week, would somehow we want to see Scotland go; it is absolutely be taking rather different decisions from the rest of the opposite. I think Scotland does fantastically well the UK, so the two systems would be diverging. That out of and is a fantastic part of the UK-wide science is why you would end up with something much more base, but if you have a separate Government you end like the international collaboration between us and up having a separate system. When you have a France, rather than the integrated system of the UK. separate system and go your own way, collaboration gets harder. You lose that arrangement from which Q4395 Sir James Paice: you clearly do very well financially. You also lose the There is one very obvious international stuff. Science is now so international that example where there is already a difference in policy, one of the advantages of the UK being taken very which is of course GM. Scotland has vowed to be seriously as a science power is that we have a seat at GM-free. That would be a challenge in that sector. the table. At virtually every major science conference, Can I push you a little more on the issue of science policy discussion and science grouping, the international involvement? Accepting entirely what UK Science Minister is one of the people in the top you say about the number of seats available, what gets group expected to be invited and to be able to join in. the UK to the top table? Is it a function of spend on We are in a very small group. We are up there; after research or reputational criteria on research, or is it the US, we are probably next in many areas. Then simply that the scale of the British economy puts us there is Germany, and China is coming along. You there? In other words, is there an inbuilt factor that would lose that ability to be part of the global debate will prevent a small country like Scotland from being shaping research priorities through groups like the G8 there if they were to do everything else right? Science Ministers’ summit, which we hosted last year. Mr Willetts: It is a combination. It is partly just being You can put Alzheimer’s, antibiotic resistance or a medium-size country and being big enough to count. climate change on the agenda; you help to shape it. It is partly the quality, but also the volume, of our Despite everyone’s best efforts, Scotland would scientific work. We produce in the UK—it is an inevitably have less ability to shape that global extraordinary achievement—16% of the world’s most agenda. highly cited scientific research. If you are doing a conference on almost any subject, you tend to want Q4393 Mr Reid: In situations like this, the Scottish some British representation on science policy, which Government always argue that in international forums is obviously what I tend to see. Equally, if you are Scotland would do better by having a seat at the table. doing a discussion on synthetic biology or cosmology, Why do you think Scotland is best represented by a you will want the Brits there. You know the other UK seat at the table rather than by a separate countries. It is a small group. There is obviously the Scottish seat? US. There is Germany and France. There is China. Mr Willetts: Because at the kind of events I am Then there are emerging big science powers, like describing there are eight, 10 or 12 seats round the India and Brazil, but round those tables you tend not cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 128 Scottish Affairs Committee: Evidence
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP to see the smaller European states, even if individually scientists get to use them automatically, in a way a they are doing some excellent science. French scientist does not. A Scottish scientist, as part of the UK-funded science community, has right of Q4396 Sir James Paice: To give some examples, access to all the world-class science facilities around Holland or Denmark, or indeed Switzerland, which is the UK, in a way that a French or German does not. outside the EU, do not appear at these levels, even You would lose the ability to participate though their individual reputations as centres of straightforwardly, with no barriers and no questions excellence are good. asked, in these world-class science facilities, and that Mr Willetts: If they have a particular specialism, yes, would make life tougher. of course they would. If you were arranging a scientific conference on an area where there was real Q4399 Chair: Surely, separatists would say, “We are expertise in Switzerland or wherever, I am sure the so good, as shown by the fact that we get more than scientific community would want Switzerland to be our population share of awards at the moment, that represented. My point is that when it comes to the the world would beat a path to our door. It is not quite big decisions on, say, global science policy or global that the world could not survive without us, but we science infrastructure—the big projects that no one do such excellent work, and we are so bright, and we country can do and we want to do globally—those are about to win the world cup”—possibly, we will are the kinds of discussions you have at G8 Science not do that—“and have achieved so much, that people Ministers’ meetings. It is at G8, or G8 plus 5, where will want us at these top tables.” It is almost, “The these types of discussions happen, where you say, world will not be able to survive without us.” How do “Antibiotic resistance is a big thing, and we need to you respond to that argument, which is usually put do something about it.” It tends to be the nations that forward with an air of complete conviction? have a big enough science spend and a big enough Mr Willetts: I fully understand that is what a Scottish science presence to make a difference by the decisions Government would want to do, but it is very hard; they take. doing that outside a world-class, large-scale integrated science system is much tougher. At the moment, Q4397 Sir James Paice: Would that have knock-on Scotland gets the ability to be distinctive while having consequences for the ability of the countries excluded all the benefits of membership of the single UK from that forum to have scientific excellence? Do they science club, and access to all those other science lose by not being represented at it, or, for that matter, facilities and complete mobility of people, with do we gain by being represented? How can you nobody fussing about whether the research is being balance that? done in Edinburgh, Oxford, Strathclyde or wherever. Mr Willetts: I understand what you are saying. You That goes. have the ability to shape the agenda. You can be a niche player, but the concentration of high-class Q4400 Chair: In that case, does it necessarily go? It science facilities in Scotland is partly because it is would be argued, “We are so good that they would part of a wider system. It does have a very unusual want to keep Scotland as part of an integrated UK concentration for its size, and that is because it whole in order that we can continue to sustain the benefits not just from the funding that comes from the rest of you. Therefore, people would make strenuous rest of the UK but from being part of a very effective efforts to collaborate and co-operate,” to quote the integrated system, and you would lose that. Edinburgh agreement, “and it is in the interests of England, Wales and Northern Ireland to keep things as Q4398 Sir James Paice: Without wishing to put much as possible exactly as they are at the moment.” words into your mouth, your view is that Scotland on Mr Willetts: Of course, people want to co-operate, but its own could not really have access to international just look at the evidence. What happened after the forums and would suffer in terms of its overall ability break-up of Czechoslovakia, for example? You see to deliver global science. that they diverge because the underlying forces are Mr Willetts: I would almost put it the other way pulling them apart. Every week a decision would be round. Scotland does incredibly well at the moment. taken by a Scottish Government, not even necessarily It is not just that British science is a success; Scottish a science decision, that pulled the system apart. science is a success. We all take great pride in that, Earlier, I gave some practical examples. As soon as and I am very aware of it. The best you can say is you have a different regime for cage sizes, animal that we would hope to carry on the current protections in a lab, a different pension regime for a arrangements. That brings out the scale of the risk if researcher, a slightly different rule on what you you break them up. In reality, despite everyone’s best publish, or a different test of the industrial efforts, it would not be possible to maintain the old implications of your research and research priorities, arrangements—I will not repeat myself—because they all that type of stuff pulls them apart, so it ceases to would just grow apart. Scotland can specialise in some be fully integrated. You have international things where it has world-class centres—renewable co-operation, but that is not the same as a single energy or agricultural science, as you very well integrated system. know—but at the same time it is not cutting itself off; it is completely integrated with other centres. The Q4401 Jim McGovern: On the subject of attracting diamond light source, the synchrotron at Harwell and academics to the UK as things stand, and possibly the high-performance computing in Daresbury are in with a separate Scotland and RUK, what are the key many ways Scottish facilities as well. Scottish factors that would influence where leading researchers cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 129
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP based themselves, and how successful is the UK examples of how in reality the systems would diverge. currently in attracting leading academics? Here is another example from the life sciences. Part Mr Willetts: We are very successful in attracting of what you do when abroad is to pitch to life science internationally mobile academics—academics move companies, which are very international, to do their R to the UK and make their careers outside the UK. and D in the UK. The chief executive of the They move around. The quality of the UK science Association of Medical Research Charities made a base is one of the things that attracts them to the UK. point about multi-site trials—life sciences research Part of what I try to negotiate on behalf of the UK as a where you do clinical trials at multiple sites. Multi- whole when I am on international missions is breaking site trials are set up across tens of hospitals across the down those barriers—for example, negotiating mutual UK, and at present they do not have to worry about recognition of qualifications and structures of different regimes. If Scotland was to be independent co-operation on science and research projects. We and that consistency was lost, the multi-site trial have excellent arrangements historically with India. becomes much more difficult. If I am saying to an With our new emerging powers fund, we are putting international life sciences company, “Come and do in funding to research co-operation between us and your clinical trials here,” I am no longer saying, the emerging science powers—China, Mexico, Brazil “Come and do your clinical trials in a UK life sciences and South Africa. When I travel the world with others environment.” For all I know, perfectly legitimately, a of the delegation, I take with me Scottish professors, Scottish Government would have decided on a vice-chancellors of Scottish universities and leaders of different set of rules—a different rule on patient Scottish research institutes because I help make the confidentiality or a different model—which means case for investment in them. that it is hard to make an integrated offer.
Q4402 Jim McGovern: That is in the UK. Q4405 Chair: Are you ruling out the possibility of Mr Willetts: Yes, because they are part of a UK the existing UK research councils continuing to have delegation. When I go to Canada and the US next Scottish involvement in membership after separation? week, when it is the US Association for the Mr Willetts: I find it hard to see how we could Advancement of Science annual conference, there will maintain the—well, we would carry on— be a senior representative from the University of Edinburgh in my delegation. We will be talking to the Q4406 Chair: I understand that. You are verging on Canadian Science Minister and presenting at Chicago. Sir Humphrey here. I want to be clear. Are you ruling She will be part of the delegation and will be making it out—yes or no—because that is basically what you a pitch for the University of Edinburgh, and good for are building up to? I think people in Scotland deserve her. that degree of clarity. Mr Willetts: Right. Research councils fund UK-based Q4403 Jim McGovern: Is it fair to say that senior activities. Rest of the UK research councils, in the students and leading academics would prefer to move event of a split, would finance research activities in to larger educational communities than to smaller the rest of the UK. That is how it would work. We do ones? not, by and large, finance research activities in France Mr Willetts: I am sure that in the event of a separation or Germany. We would of course collaborate on an the Scottish Government would do their best, but on international basis wherever possible, but it is hard to the ability to present and influence, I suspect—I do see how the rest of the UK taxpayers and research not know—that invitations to speak at the American councils would just say, “This is research we will pay Association for the Advancement of Science do not for to be done somewhere else.” That is not how come easy. You do not have rows of Science Ministers international collaboration works, and it is turning up from all around the world; they tend to international collaboration we would be talking about. look to what they see as the major science players to attend and participate. That is how you get a global Q4407 Chair: I understand the point about having position from sharing in a UK-wide reputation and caveats—“hard to see why,” and so on—but I want to research base. be absolutely clear. As the relevant Minister, are you saying that, in the event of separation, the existing Q4404 Chair: But surely a person from Edinburgh arrangements of UK research councils would be university is there on merit, and Scottish scientists, it changed to reflect the new constitutional structure, and would be argued, are so good that it is for your own that the UK research councils would no longer include good to have them as part of your delegation. representatives from Scotland and Scottish Therefore, even in the event of separation, you would universities? There might be collaboration and want to have the strongest collaboration you possibly co-operation with them, sharing of things and all the could, which would involve continuing to have people rest of it, but they would not be part of that structure. from the University of Edinburgh on delegations. Mr Willetts: The rest of the UK would carry on with Mr Willetts: I have great respect for French and its research councils and Scotland would not be part German academics, but by and large I do not take of that structure. them on delegations that I am bringing to pitch for Chair: Fine. That is very helpful. UK science. It would be a different arrangement. It is not that we would feel in any way anti-Scottish; it Q4408 Mike Crockart: We have touched on the would just be a different proposition. Let me give excellent world-class infrastructure that we have in the another practical example. I have given some UK as a whole, and a certain proportion of that is cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 130 Scottish Affairs Committee: Evidence
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP based in Scotland. To maintain those facilities is not it more difficult to get access to these institutions? a cheap option. When we look at the vast array that Take, for example, the Scottish Centre for we have in Scotland, such as the Roslin Institute— Regenerative Medicine, which is an excellent new you mentioned the transgenic chicken facility, which facility in Edinburgh. If the burgeoning life sciences I know a little bit about, because Aviagen, the sector were to lose easy access to that, surely that company that benefits from that, is based in the would damage RUK’s research capability. constituency. These are world-class but also massively Mr Willetts: Yes; it would be a lose-lose situation. At expensive institutions. Is any research being done to the moment, we are in a win-win situation. It is not estimate what the cost would be of maintaining the something I would relish from the point of view of Scottish part of the research infrastructure that exists the rest of the UK. We all gain from this arrangement; in the UK at present? we all gain from being part of a big integrated system Mr Willetts: We have not done those types of where funding is allocated by merit, not geography. calculations, because we hope and expect that the UK That is what we have at the moment; that is why we carries on and that what you describe will not happen. are world-class in science, and both the remaining UK Certainly, those types of calculations could and should and Scotland would lose from that separation when it be done by someone, and I think they would find a comes to science. large bill for Scotland, and again a strategic decision as to which of these you maintain. Q4412 Mike Crockart: My final question is about access to Europe-wide institutions, the perfect Q4409 Mike Crockart: Effectively, Scotland would example being CERN. Is it your understanding that have to pick winners and the areas it wanted to the continuing UK’s membership and access to that specialise in. would continue, but it would be something that would Mr Willetts: It would. Given that it would have to be negotiated for a separate Scottish state? immediately face a significant loss of revenue, Mr Willetts: Yes. Our legal advice on this has always because it does so well at the moment out of the UK- been clear that the remaining UK takes on the legal wide science budget, it would face a double hit. It responsibilities. There is a network of international would lose that extra transfer from which it benefits science institutions, and we pay our subscriptions to at the moment and would face the challenge of what them. There would be a decision for a future Scotland it was going to specialise in with its smaller budget. about which ones it wanted to negotiate to enter, and on what terms. Q4410 Mike Crockart: You talk about a significant loss of income. Would there necessarily have to be Q4413 Chair: Can I clarify the point you mentioned that significant loss of income? These are world-class about the lose-lose position? The response from those infrastructure research facilities that the rest of the UK in favour of separation would be that the way to avoid would have had free access to, and it would want to lose-lose is to keep things exactly as they are, and continue that access. Surely, there would be a then you have win-win; otherwise, you are cutting off legitimate call for that access to continue to the benefit your nose to spite your face. Therefore, that runs of both countries. contrary to the point you made earlier about breaking Mr Willetts: Yes. I want to make it clear again that I up the research councils. How do you respond to that? am not seeking a division; I am not saying that it is Mr Willetts: I am not actively seeking this something anyone would deliberately aim for. I would disengagement, but when I look at it, it is clear to me regard it as an inevitable consequence, if there were that, as soon as you have two different countries and to be a separation, that a Scottish Government would two different systems, the integrated science base become responsible for the Roslin Institute and would fractures. It is not because anybody wants it to decide their rules on what they wanted the Roslin happen. I am sure that best efforts would be made to Institute to do: the regulations for the condition of the avoid it happening, but it seems to be inevitable, for chickens in the institute; the pension arrangements for all the reasons why we spend our research budget in the people working there; and the currency in which our country—because taxpayers say, “Why should we it operated, which might well not be sterling. In pay for them when they’ve got better pensions, or a reality, the integrated system would have gone; it different set of rules on animals? Why should we pay would be located over a border. All the evidence, from for somebody at that facility to earn a higher pay rate science as from everywhere else, is that there is a than we have here? Why should we cover their border effect. A border is a barrier. You would be currency risk when they are not part of our currency?” putting up a new barrier. Borders are not trivial things. There is a limit to it. That was what happened in You would soon find people saying, “Why are we Czechoslovakia. By and large, they diverge much paying for these things to be done in the way they more rapidly than people expect, not as a result of a want them to be done in Scotland? We’ve got a massive decision to split but as a result of the different way of doing things south of the border; aggregating effect week by week of lots of little we’ve got a different set of regulations. Doing things decisions pulling them apart. our way is what we’re going to fund.” Q4414 Jim McGovern: The proposed structure of a Q4411 Mike Crockart: Do you accept that post-separation Scottish Government does not include separation would not damage just Scotland’s research a Minister with a specific portfolio for higher capability but would damage the rest of the UK’s education and research. This is in the White Paper, continuing research capability, because it would find incidentally, which is fairly clear on that. What benefit cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 131
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP does having a Minister like yourself with these the level of academic qualification properly to benefit responsibilities bring to the sector? This allows you to from going to university. Maybe they did not have blow your own trumpet. good enough English, for example. We have tightened Mr Willetts: Exactly. I can make the case for my own the criteria for people to come to study, but there is job. These are the kinds of things that Prime Ministers no cap on the number of legitimate students. One of change, and have the right to change, but a feature of the points I try to communicate when I am abroad is the UK system is that a lot of our research happens in that it is not fair to an overseas student if, for example, universities, which is not the case to the same extent they find themselves in a class with fellow students elsewhere. In Germany, universities tend to be less who do not speak English well enough to keep up, or research intensive and they have a bigger network of endlessly having to pause to explain something. non-university labs. They have Max Planck institutes Requiring a higher standard of English before you and Fraunhofer institutes. Britain—both Scotland and participate in a university education in the UK is part England—has tended to have research-intensive of our being a quality offering, but we do not limit universities, so the university agenda and the science the total numbers. The good news—thank heavens— and research agenda overlap a lot, and I find that being is that numbers of applications from students outside able to bring that together in a single coherent view the EU for UK universities continue to rise. works well for that reason. The French have a very David Mundell: There are some specifics. The similar system. They have a Minister for universities number of students studying in Scotland from China, and research. Obviously, it would be up to a Scottish the US, Malaysia, Canada, Norway, Saudi Arabia, Government to decide, but it is all part of the Hong Kong and Thailand all rose in 2012Ð13, which integration, efficiency and performance of our people might not necessarily have gauged from recent science base. remarks by Mr Mike Russell. Sir James Paice: Thank you. Noted. Q4415 Jim McGovern: The disadvantage of not having a Minister with those specific responsibilities Q4417 Chair: It might be helpful if you gave details would be almost a direct negative. If there was not of that in writing, because, as you say, that is not the such a Minister, there would be a gap there. impression that is being created. I was slightly Mr Willetts: If you think of the science ring fence surprised, Mr Willetts, when you seemed to be saying that you asked about before, that £4.6 billion reaches that there were no limits on the numbers of students scientists by two main routes: one is through the coming into the UK with the requisite qualifications. research councils, and the other is through the higher Is that correct? education funding councils—we have different ones Mr Willetts: That is correct. There is no cap on the in England and Scotland. If you do not have integrated number of legitimate students. We have set rather universities and science, those might be budgets higher standards for their basic English, for example; coming in from two different Departments, and we are much more actively checking up on the alignment would be very complicated. academic qualifications they say they have, to be sure they really have them and that they are not making Q4416 Sir James Paice: Can we turn to something misleading claims about prior academic attainment, completely different: students in higher education? I but after that there is not a cap on the number. appreciate from your earlier comments that it is not really your responsibility. We are going to come to tuition fees, which is a serious point. Before we do Q4418 Jim McGovern: Is there some sort of plan to that, could we look at visas? The SNP Government— deal with what are known as bogus universities, never the Scottish Government—has opposed curbs on mind bogus students or bogus qualifications? student migration, and its White Paper commits it to Somebody just gets an address and says it is the restoring the post-study work visa, which we university of such and such. abolished two years ago. Now Universities Scotland Mr Willetts: Yes. I did myself see what I think was is calling for relaxation of the visa and of eligibility called the Oxbridge College of Business Management restrictions for international students. Do you think above a fish and chip shop in a town somewhere in there has been any impact of those restrictions? Do the north-west of England. I suspect that anybody who you think that within a common travel area, which had applied to it from India might have been in for a Scotland says it would want to be part of with the rest sad disappointment when they arrived. We have had a of the UK, it is feasible to have different visa crackdown on bogus colleges. It is part of maintaining requirements? the reputation of the UK higher education brand. We Mr Willetts: In answer to your second point, you are do not want anybody to be caught out by a bogus quite right. It would be very odd to have a common college. It is hard to know what is worse: being travel area so that a Scottish visa decision essentially complicit in turning up there when actually you are entitled people to live or work in the rest of the UK trying to get a job in a taxi firm and claim you are as well. That does not seem to add up. coming as a student, which is completely wrong; or On your earlier point, this is a concern raised with me being an innocent victim and turning up thinking you by universities across the UK. It is not a distinctive are going to do business studies at Oxford or Scottish issue; it is raised by English universities as Cambridge and finding you are not. Either way, it is well. We did tighten up the regime to tackle abuse, bad and it is something we have cracked down on by and there was abuse under the old arrangements: for much tougher rules implemented by BIS and the UK example, people coming to study who did not have Border Agency. If it is a legitimate student at a cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 132 Scottish Affairs Committee: Evidence
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP legitimate university or education institution, there is “By the way, you professors, there’s going to be a no cap on the numbers. discriminatory fee that is only paid by students from England and is not paid by students from France or Q4419 Chair: In those circumstances, it is very Germany, despite the fact that they are all member difficult to see what Universities Scotland would be states,” it does not bode well for maintaining a fully complaining about, or am I missing a point here? Are integrated academic base, because these are the same they arguing that the standard of English and the institutions; we are talking about the University of standard of qualifications necessary to come here are Strathclyde, the University of Edinburgh and the being set too high? What is the nature of the University of Glasgow. If one of your first acts would difficulty? be not just illegal but incredibly unfriendly towards a Mr Willetts: There are endless comparisons. I am very fellow member state of the EU, it is not a good basis aware of this. It is a competitive market. Our main for maintaining integrated research activity, is it? competition is the US, Australia and to some extent Canada. There is a whole host of factors in the Q4422 Lindsay Roy: And it is not compatible with assessment of the competitiveness of your regime. the First Minister’s assertion that the rest of the UK There is debate about issues like healthcare costs. It would be our best friends. so happens that, if you go to the US, you have to pay Mr Willetts: No. You would be picking out one a large amount of money for health care; Australians specific fellow member state and saying that, contrary already impose a charge for Australian health care. to all EU law, you are going to have a measure that We are always aware that we are in a competitive discriminates against that member state in a way that market, and we have to make sure that the UK offer is differentiated from France or Germany. It seems is not falling behind. The universities are sometimes contrary to EU law and contrary to the kind of spirit anxious that the offer could be falling behind, but in that, as you say, people claim they want to see. the international education strategy that we released last summer, which is a cross-Government agreed Q4423 Chair: But surely you would understand that. document, we are aiming to encourage more overseas In the spirit of the Edinburgh agreement, surely you students to Britain, with the aim, as an absolute would understand, forgive and just accept that it was minimum, of maintaining our market share in a meant with the best of possible intentions. growing market. We hope we can do better than that. Mr Willetts: We believe in the principle of students That strategy was signed up to by all the Departments from different EU member states being treated across Government before we released it. equally. It would be very hard to understand how, within the framework of EU law, you could Q4420 Lindsay Roy: The Scottish Government, in discriminate against students coming from one EU the event of separation, propose to continue charging member state. English students and rest of UK students fees. If they David Mundell: It is not just a matter for people in are a member of the EU, would it be possible for them the continuing United Kingdom; it would be a matter to do that? for the other 27 member states of the EU. Mr Willetts: I do not see how that is consistent with EU law. It states that students from other member Q4424 Chair: Why would it be a matter for them states must be treated the same as local students in if they are not the ones being discriminated against? relation to tuition fees. It is absolutely clear. To quote Presumably, they would not mind. a spokesman for the European Commissioner for David Mundell: I think they would. The former Education: “Unequal treatment based on nationality… European Commissioner for Education, Jan Figel, has is regarded as discrimination which is prohibited by said this would be illegal and a breach of the treaty, Article 18 of the Treaty on the Functioning of the and the other member states are interested in treaty EU.” breaches within the EU. It is not for the rest of the UK just to nod through a breach. This is one of what Q4421 Lindsay Roy: How would this attempt at seems to be an increasingly long list of exemptions or discrimination be perceived by the rest of the UK opt-outs which the Scottish Government claim can be Government? negotiated for Scotland. Mr Willetts: If Scotland joined the EU and tried to say that French students could come to Scotland without Q4425 Lindsay Roy: So there is no objective paying fees but English students coming to Scotland justification for this. would pay fees, despite the fact that legally for their David Mundell: The only justification for it is purposes we would be identical—we are both other concerns raised by parents and students in Scotland EU member states—I simply cannot see how that that the current finance regime for higher education in would be legal. Scotland would not be sustainable if those domiciled Going beyond that, what we have been discussing for in England attending Scottish universities had free the first hour are claims by the advocates of tuition fees. independence that they could maintain an integrated research system. I am saying that, sadly, I think they Q4426 Lindsay Roy: Can you tell us how much is would grow apart, and I gave some examples of how contributed by the rest of the UK students to the they would grow apart. If one of the first acts of the Scottish Government purse for university education? Scottish Government, at the same time as trying to Mr Willetts: We have the estimates here. We reckon say that we have an integrated research base, is to say, that there are about 20,000 students from the rest of cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 133
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP the UK studying in Scotland per year, bringing about sense. You cannot put up a new barrier aimed £150 million into Scottish higher education, so you specifically at keeping out students from Manchester, would lose £150 million of revenues before you at the same time as saying that your aim is to be a started. single integrated research area with Manchester.
Q4427 Lindsay Roy: There would be a black hole. Q4431 Lindsay Roy: What other clarification would Mr Willetts: Correct. It would be a black hole. you have expected in the White Paper? Currently, you would lose about £150 million. Mr Willetts: As well as all the other benefits, clearly this is an area where Scotland has a direct financial Q4428 Chair: But you would only lose £150 million benefit. It has a direct financial benefit from the fees if you stopped treating English, Welsh and Northern totalling about £150 million collected from students Ireland students differently. If you keep the existing from the rest of the UK. It has a direct financial benefit system, you do not lose that money at all. from the research funding going into Scotland. That Mr Willetts: Correct. At the moment, those fees are is all accepted. A serious document would have paid. That ability to charge is permitted within EU engaged with how they would tackle the black hole in law, because within the EU a single member state can the finances of a Scottish Government if those sources run different rules for one part of the single member of revenue were lost. state as against the other. But EU law is clear: once Lindsay Roy: Okay. Finally— they are different member states, you cannot do that, so Scotland would lose the ability to charge fees to Q4432 Chair: Sorry, before you move on to your students from the rest of the UK and that would cost finally, can I continue to pursue that? it £150 million. You were arguing, Minister, that it is difficult to David Mundell: There has been a significant increase imagine, if you had Scottish universities or a Scottish in the number of students from the Republic of Ireland Government discriminating directly against English within Scotland since the Scottish Government have students, that you would still have collaboration had the policy of no tuition fees. It is anticipated that between universities and research, but surely that is there would be an increasing number of students exactly what we have at the moment. You have a applying from England, Wales and Northern Ireland system of collaboration on research across universities should that policy apply. throughout the UK, yet essentially you have an anti- English discriminatory policy on fees. If it works fine Q4429 Chair: You might say that this policy is at the moment, why should it not work fine after illegal, but it is in the Scottish Government’s White separation? Paper, so presumably they have had legal advice on Mr Willetts: Because at the moment we operate within it. Can I clarify whether or not there has there been a legal UK framework and we accept that English any communication between the UK Government and students in Scotland would pay those fees. That is not the Scottish Government as to the legality of this the situation in the event of Scottish independence. At proposal? that point, their legal position changes dramatically; David Mundell: My understanding is that there has they cannot do that any more. not. The legal basis from which the Scottish Government have quoted is selective quoting from an Q4433 Chair: The Committee finds itself in a bit of opinion, which I think was obtained by Universities a difficulty here. We have representatives of the UK Scotland. As in the case of a number of legal opinions, Government saying it would be illegal to charge anti- it could be interpreted in a number of ways. English fees, but we have representatives of the Scottish Government saying, no, it would be legal. Q4430 Lindsay Roy: I am assuming, rightly I think, Lindsay Roy: It might be. that you have read at least some of the 670 pages of Chair: How would this be resolved? Can I clarify the White Paper. Scottish universities have asked for whether or not the UK Government is seeking to clarity in the event of a separate Scotland. Does the obtain evidence of the Scottish Government’s legal White Paper provide that clarity? advice, or is it putting the two sets of lawyers in a Mr Willetts: I do not believe it does, because on room to try to clarify it? It seems to me absolutely several of these crucial issues, such as fees, it does essential that people in Scotland are given some not seem to engage with the reality of EU law; and it guidance by the time of the referendum about what does not engage either with the other point I was the truth is. trying to make a moment ago. We are talking about Mr Willetts: There have been unequivocal statements real life institutions. To pick at random the University from the European Commission. of Manchester and the University of Edinburgh, on David Mundell: There are very clear statements—Mr one side, we are being told, “We want to regard them Willetts gave one of them—which the European as integrated, shared partners in a continuing single Commission has confirmed. Unequal treatment based research exercise, working together. No gaps. No on nationality is regarded as discrimination and is differences,” but we are also being told that, for prohibited. It is very difficult to see a way in which a example, a student being subsidised at the University statement of that intensity could be challenged, but, of Manchester who went to study at Edinburgh for a Mr Davidson, you are aware that the Scottish year or two years, would have fees imposed on him Government repeatedly proceed on the basis of or her that would not be imposed on them if they came assertion to the contrary of other statements. As far as from the Sorbonne or from Bologna. It does not make I am aware, they have not provided any evidence to cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Ev 134 Scottish Affairs Committee: Evidence
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP back up their assertions on this matter, and ultimately long time, but it does not seem to me to be a definitive it is for them to do that. statement that Scotland would be able to opt out of established European Union law. Q4434 Chair: But, to be fair, neither have you. The Committee finds that representatives of the UK Q4437 Lindsay Roy: Indeed, if I take you aright, it Government are asserting various things based on is a very weak argument in your opinion. statements from the European Commission and other David Mundell: On the basis of this legal opinion, I things, and the Scottish Government are equally would not be anticipating that Scotland would be able asserting something completely different. to opt out of this very clear provision in EU treaties. Understandably, people in Scotland are not quite sure which of these allegators, as it were, are to be believed Q4438 Chair: However, it has been suggested that, in these circumstances. You can understand the in the event of separation, there would be an interim dilemma. Since this is such a clear example of period during which Scotland was out of the European disagreement, I want to try to seek a way forward as Union. There would be independence and then a to how to get it resolved. Is it possible for the UK period during which negotiations were conducted. Government to produce a legal opinion to this During that period outside the European Union, I am Committee, or one that they pass to the Scottish presuming that it would be entirely legal for Scotland Government to seek a legal opinion from them? It to discriminate against English students in the way seems obvious that there is a whole string of issues that has been suggested. Is that correct? on which the Scottish Government are proceeding on David Mundell: I think it is clear from evidence the basis of assertion. This seems to me to be one of presented to the Committee, or certainly produced the weakest and clearest, but it is essential that we elsewhere, that the period between Scotland being a nail it down. How can we get clarity for the voters? member as part of the United Kingdom and being a David Mundell: I’m afraid I do not agree with the member as a separate country is unprecedented. premise of your argument. I believe that it is for those Therefore, there is extreme uncertainty over what the who are proposing separation and the break-up of the arrangements would be in that period. Clearly, the United Kingdom to validate their claims. Our position length of that period is going to be affected by the is that we wish to retain the United Kingdom, and number of opt-outs that Scotland is going to seek, and retain Scotland within the United Kingdom. We are the length of negotiations it will take to become a full not making contingency arrangements for Scotland leaving the United Kingdom. On this matter, we have member of the EU. very clear statements which have been made on behalf of the EU, or by people who have previously held the Q4439 Chair: Presumably, Scotland could seek an office of European Commissioner for Education, as opt-out on the question of being able to discriminate external evidence in that regard. against English, Welsh and Northern Ireland students, if the negotiating skills of Scotland’s representatives Q4435 Chair: But those are opinions. are such that it is possible to reach an agreement on David Mundell: It is for the people who are proposing this matter. that there be this significant change, and that they can David Mundell: As I understand it, on the basis of the opt out of what is clearly stated European law, to White Paper, Scotland is seeking a whole range of demonstrate that that is the case. opt-outs and variances in arrangements between Scotland and the rest of the EU. Q4436 Lindsay Roy: Mr Mundell, are you aware that Universities Scotland claim they have sought Q4440 Jim McGovern: David, if in the period legal advice, and they say it is possible that they could following the referendum Scotland separated from the charge fees for students from the rest of the UK, based UK and used that as a loophole to discriminate against on some kind of objective justification? When we students from other countries, it would not exactly asked them about it, they could not give us an help its application to get back into the EU, would it? example from any country where this had been David Mundell: As Mr Willetts has said, the confirmed, but my understanding is that they have behaviour of Scotland in the post-referendum period sought legal advice. is very likely to influence how other parties, whether David Mundell: I have a copy of the advice they it is the continuing United Kingdom or other countries sought, and it contains the statement: “Whether it in the EU, respond to Scotland’s requests and claims would be possible to advance an argument that was to be a partner and a good neighbour. In particular, focused on the potential cultural impact in the severe Mr Russell’s claim that there was xenophobia in the reduction in opportunity for Scots-domiciled learners rest of the UK did not seem to me to be a particularly if RUK students were entitled to ‘free’ HE in Scotland good-neighbourly comment; it did not seem to be a could only be established after careful analysis and comment that would induce partnership, but it was research of the sort that would meet the scrutiny of particularly outrageous since his first proposed act as the European Court and which Belgium failed to an independent Scotland Education Minister would be present in Bressol”—the case. That is about the to discriminate against people from England, Wales strength of the argument on which this is based. I am and Northern Ireland. sure that, if the Committee does not have it, this legal opinion could be made available to you. I am by Q4441 Lindsay Roy: Conversely, if the rest of the profession a lawyer and have not practised for a very UK were to withdraw from the European Union, what cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:00] Job: 038186 Unit: PG09 Source: /MILES/PKU/INPUT/038186/038186_o009_odeth_SAC 140204.xml
Scottish Affairs Committee: Evidence Ev 135
4 February 2014 Rt Hon David Willetts MP and Rt Hon David Mundell MP impact would it have on higher education both in this on defence-related matters, where there are issues of country and in a separate Scotland? sovereign capability, raises any different matters in Mr Willetts: From the rest of the UK? terms of co-operation and collaboration across Lindsay Roy: If the rest of the UK withdrew from boundaries, and whether or not there are any the EU. implications in all of that for separation? Mr Willetts: I think we are getting down into the Mr Willetts: That is a very interesting angle. You realms of wildest speculation here. We are robust would imagine that highly sensitive defence-related R members of the EU. and D would be even harder to do outside your Chair: So that’s a “Don’t know.” That is two levels national boundaries than the rest of science. I think it of not taking advice, is it? is a very relevant question. Lindsay Roy: We’ll let your colleagues know. Jim McGovern: It’s called “whatiffery.” Q4445 Chair: I am thinking in particular of Selex Galileo in Edinburgh, which has defence collaboration Q4442 Lindsay Roy: Mr Mundell, from your with a number of universities, some in what would be knowledge of the Scottish education system, to what the remaining UK and others in Scotland, where the extent do you think academia is being favourably intellectual property is, as I understand it, owned by funded compared with higher education and the Ministry of Defence. Are there precedents from vocational education, given the reduced numbers in existing practice in terms of intellectual property further education and vocational skills? owned by the MOD being shared with what would David Mundell: As a constituency MP in Scotland, then be a foreign state to allow international personally I am appalled at the way in which the collaboration? Scottish Government have treated further education Mr Willetts: There is international collaboration, in Scotland. notably with the US, other members of NATO and Lindsay Roy: So am I. France, but it is just the most vivid example of my David Mundell: It is quite clear that, in order to fund earlier argument. We tend to know the IP we have what they regard as a flagship policy of free higher generated in our country from our spending. We may education, they have discriminated against the further share it with someone else; there may be some trading education sector in a disgraceful way, which has had back and forth in return for some IP they have an adverse effect on thousands of young people generated, but we are very aware of where the IP has throughout Scotland, and certainly has had a come from and who the ultimate owner is, and you detrimental effect on both Dumfries and Galloway tend to do that sensitive research in your own country. College and Scottish Borders College in my own constituency. Q4446 Chair: I think those are all the questions we have. Normally, at the end of all these events we ask Q4443 Lindsay Roy: Can you comment further on our witnesses whether or not they have any answers the impact on manufacturing, business and prepared to questions we have not asked, or whether commerce? there is anything in particular they want to get off David Mundell: Only from my own perspective, their chests. Is there anything that you feel we have because obviously further education remains a not touched on that would help illuminate this area? devolved matter. I think it is extremely short-sighted, Mr Willetts: I think we have covered the key points. and is a complete contradiction to the approach that David Mundell: As ever, it has been a pleasure to has been pursued in England where there has been, as appear before the Committee, and I look forward to I understand it, much greater recognition of the role an imminent return. that further education has to play, but we are not tied Chair: I look forward to seeing you again, Mr to the Scottish Government’s funding requirements in Mundell. Can I just remind you at this point that you relation to higher education. still owe me the £2 that you borrowed from me on the Lindsay Roy: That is very helpful. train down from Scotland?
Q4444 Chair: Can I ask about one final point, which is whether or not collaboration between universities cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 136 Scottish Affairs Committee: Evidence
Wednesday 5 February 2014
Members present: Ian Davidson (Chair)
Mike Crockart Sir James Paice Jim McGovern Mr Alan Reid Graeme Morrice Lindsay Roy ______
Examination of Witnesses
Witnesses: Dr Angus Armstrong, Head of Macroeconomics and Finance Group, National Institute of Economic and Social Research, Professor David Bell, Professor of Economics, University of Stirling, and Professor Ronald MacDonald, University of Glasgow, gave evidence.
Q4447 Chair: Gentlemen, could I welcome you to goods and services we trade and import and export this meeting of the Scottish Affairs Select Committee? with the rest of the world—or so-called non-traded As you are aware, we have been conducting a number goods, the service sector, which is usually sheltered of hearings into the possible impact of separation in from the trading sector. All of these sectors are, none Scotland. Of course, for this particular issue, we also the less, affected by movements in a country’s want to raise with you the question of what the impact exchange rate. It is a very central macroeconomic would be on the rest of the United Kingdom of variable. It is the key variable, in my view. Scotland breaking away, because that is one of the Professor Bell: I agree. issues that has not perhaps been covered as adequately Chair: That is excellent. If people agree completely, as it might. Could you introduce yourselves and tell there is no need to repeat it. So that is fine. us the relevance of your background to the particular Dr Armstrong: The choice of currency also issues about the currency? Let’s start in alphabetical determines whether you have an exchange rate policy, order. and also monetary policy, whether it is going to be Dr Armstrong: My name is Angus Armstrong. I am determined within your own country or elsewhere, Director of Macroeconomics at the National Institute and to an extent it has a bearing on fiscal policy. It of Economic and Social Research, a research member also impacts on the other areas of macroeconomic of the Centre for Macroeconomics and an Economic policymaking. and Social Research Council fellow, looking into issues around the Scottish referendum—in particular, Q4449 Chair: How does the currency relate to currency and debt issues. issues of monetary policy and interest rates? Professor Bell: I am Professor David Bell. I am Professor MacDonald: Say, for example, that we Professor of Economics at the University of Stirling. thought of an independent Scotland with a new Like Angus, I am one of the ESRC fellows looking currency. What would it have to do with that into the future of the UK and Scotland. I focus mainly currency? Would it fix it to another currency, as is on the fiscal side but interact with Angus over currently being proposed, or would that currency be currency. flexible? If the currency is fixed to another country, Professor MacDonald: My name is Ronald you are relinquishing any control over your monetary MacDonald and I am Professor of Economics at policy—that is, your interest rates and the control of Glasgow university. One of my main areas of interest the money supply. If you decide to have a flexible has always been exchange rates and currencies. I have exchange rate, it gives you control over your money advised various Governments on exchange rate supply, and particularly your interest rates. Those matters, exchange rate regime issues, and I am really are the polar positions. If you are fixing your currently a monetary adviser to the International exchange rate, especially if you are engaging in a Monetary Fund. monetary or currency union, you are relinquishing any monetary control that you are likely to have as a Q4448 Chair: We all understand that this is an sovereign state, and you have no control over interest enormously complex area. It would be helpful if, as rates, nor indeed your exchange rate, of course, by much as possible, you could give us answers in words definition. of one syllable so that we and those who are watching Professor Bell: It is worth thinking of the interest rate this can understand. I understand it is not always as the price of money, and the central bank controls possible, but, if you could simplify things as much as the supply. The economy determines the demand and, possible, it would be desirable. effectively, the interest rate is the outcome of the Could I start off by asking a general question? It is supply and demand side in the money markets. often said that the choice of currency would be the Dr Armstrong: I would emphasise that having the most important economic decision that an independent same interest rate is, of course, the same policy for Scotland would take. Why is that? overnight or short-term interest rate. The interest rates Professor MacDonald: As a currency man, I would that Governments borrow at—the 10-year interest rate have to agree with that, because the exchange rate of or even the 20 or 30-year interest rate, if you have the currency is the price that affects all prices within long-term bond markets—depend not only on the a country, whether they are traded prices—that is the short-term interest rate, but other factors such as the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 137
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald credit risk of Governments, the potential currency risk money if you don’t need it, but if you do need it they and so on. When we say that the monetary policy is are not nearly as willing to lend you the money. the same, we mean the short-term interest rates are the Dr Armstrong: That is right. What we see, which is same, with either a tied or a single currency across quite interesting, is that countries that have two countries. successfully tied themselves to other currencies—for Professor Bell: It is important to realise that there are example, Hong Kong has done it very well for 30 a variety of interest rates. There is one that the central years, since the mid-’80s—do it by not having debt. bank controls and then there is a spread of interest When the Asia crisis came along in ’97 and ’98, what rates depending on how long the loans are for. A lot did they do? They had plenty of capacity because they of this discussion, in terms of the eurozone, for have lots of assets. You can do it there; it is, example, has centred on 10-year interest rates, which effectively, self-insuring. But if you have lots of debt Governments cannot control directly. It is mainly the and you get this nasty shock, you have to think about market that controls those 10-year rates. the adjustment path that you would make. How would you respond? That is where it starts getting difficult. Q4450 Chair: Could I ask, just for clarification, how That is why the amount of debt matters when deciding the currency question relates to fiscal policy—tax, what the optimal currency policy is. spending and borrowing? Professor Bell: The adjustment path has to be Dr Armstrong: At the very simplest level, credible, too. There are countries that have less debt Government borrowing is about issuing Government than the UK but they have not had very credible debt, which is bits of paper with a promise to pay and adjustment paths, like Greece, for example. That is which earn an interest rate for the holder. A large part where suddenly the cost to them of selling bonds of the money supply in the UK is reserves of banks increased quite dramatically, because they did not held at the central bank, the Bank of England; they have a credible way out. As well as the stock of debt are called bank reserves. They are liabilities of the mattering, the credibility of the path out matters, too. Bank of England, which actually earn an interest rate, which starts to sound remarkably like other Q4453 Sir James Paice: Can I pick you up on this? Government instruments. There are differences, which Obviously, we are looking at the issue of Scotland. A mean that you cannot see them as one to one, but we lot of people were slightly puzzled about why Greece, can see that, when there are difficult times, it is quite Italy, Spain and so on had the problems they did often convenient that you can issue your own within what appeared to be a single currency. You are currency. That is where the link between Government saying, quite clearly, that it is because in some cases borrowing and monetary authorities starts to be made. they already had a massive national debt themselves, That is just one area of the links. There are many but also that, if you like, their creditworthiness—their others, but maybe we will keep that simple bit first. ability to pay—and their recovery plans were weak, so that was why their interest rates were rising Q4451 Chair: Can I seek clarification on how the sometimes day on day, despite being within a single question of currency is related to the national debt? currency. Am I right to say that the read-across to a Scottish situation would be that, even if they were in Dr Armstrong: What is important is that Governments a currency zone—whether it is sterling or the have enough capacity to respond to their economy as eurozone is immaterial—unless Scotland was it may need it. Bad things happen to all countries at managing its finances properly and had a national debt some times, and so, of course, do good things. For that was within sensible bounds, there could be risks example, in the 1970s we had the energy crisis, in the that, if they wanted to borrow money, they would have early ’80s we had very high unemployment, and in to pay very high interest rates on it? Have I read that the noughties—I don’t need to tell you this—we had right? the financial crisis. Things happen. The question is, Professor Bell: I think that is right. We saw in the how does a Government respond to help its citizens? eurozone prior to 2007, effectively, that the costs of It can use monetary policy and fiscal policy when it all Government borrowing were the same. Then in has its own currency. If you have somebody else’s 2008, 2009 and so on they suddenly spread wide currency, you cannot use monetary policy, because apart. That was to do a lot with their credibility in that depends on somebody else. So now you are down terms of how the markets assessed their to fiscal policy. Your capacity to use fiscal policy creditworthiness. In a sense, it is all about whether depends on the amount of debt you have. You can they have a plan: if I am lending you money, give me imagine that, if your income goes down and you have assurance that I will get that money back. lots and lots of debt, perhaps your credit card Dr Armstrong: To try and extend the analogy of the company or your bank does not feel quite so keen Chair a little bit further, suppose you have a large about lending you any more money, but, if you don’t credit card debt. The nice thing is that, when you have have lots of debt, you have plenty of potential to use your own currency, you can actually influence the your credit card or to go to the bank and borrow interest rate that you pay on the credit card. When money. That is why the existing stock of debt matters times are difficult, do you know what? You can reduce very much for the sort of policy capacity that your interest rates. But if you don’t have that option, countries have to respond to shocks. it depends on whether the credit card company is going to give you some more money. If you don’t Q4452 Chair: In this context, it is a bit like the have any debt, they would be more than happy to do position of an individual: the banks will lend you that, I presume, but, if you have a lot of debt, cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 138 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald presumably they will start asking for some repayments Q4457 Chair: Poor, in a sense, is a judgment. When quite early or charging you more money for it. This is you say that it is not credible, do you mean that it what economists describe—I am wary of the Chair’s could not be done or that it could be done but there suggestion to keep to words of one syllable, but I will would be consequences? And what would the deviate, if I may, just for one second—as the “off consequences be? equilibrium path.” You have to ask what happens on Professor MacDonald: Of course it could be done. the rainy day. It is no good saying, “We want to talk The consequences would be that we would be paying about currencies on the good days.” You have to ask an even bigger premium on our debt than we would what happens on the rainy day. To not ask that be if we were financing, or prepared to accept, the question is not to give a service to this issue. debt levels that most people agree would be Professor MacDonald: I would like to respond on a Scotland’s share. different tack, given that we have introduced some of the Mediterranean countries in the eurozone. This is Q4458 Chair: Presumably, if a separate Scotland pertinent for the Scottish-RUK case, and presumably repudiated the debt, it wouldn’t have any, and we will come back to this later. People tend to forget therefore wouldn’t have any interest to pay on it? that a lot of the problems in the euro area are balance Professor MacDonald: No indeed, but it is going to of payments problems. There are balance of payments have to borrow in the future. If I am an international imbalances between, particularly, peripheral countries bank and the Scottish Government come to me and and Germany. One of the key ways that an say, “Do you want to buy some of our bonds?”, I independent sovereign state can adjust a balance of would say, “You’ve got a very poor credit rating. I’ll payments deficit is to alter its currency—to alter its buy your bonds if you pay me a 100% interest rate” exchange rate. That is the key thing, of course, that or some ridiculous number. They may not even be these guys have not been able to do. I don’t think that able to finance their debt in the future, because interest we should forget that when thinking about Scotland rates could be so penal. and the rest of the UK in its choice of currency. Professor Bell: To amplify that a little—I am sure that Angus will develop one part of this answer—if you Q4454 Mike Crockart: Effectively, this is about a want to join various international bodies, like the EU, basic financial product. It is about the pricing of risk. how would they regard that kind of behaviour? If the financial markets regard your plan, your level Picking up Ronnie’s point, Scotland will have to issue of debt or your over-reliance on resources, as a small debt pretty quickly. The reason has to do with the economy, as being risky, they will price that into the statement by the UK Government a couple of weeks cost of borrowing. Is it just as simple as that? back about its standing behind UK debt, and that there Chair: One thing that Hansard does not record is will be some kind of agreement that an independent nodding. Therefore, regrettably, you actually have to Scotland would, somehow or other, service that debt, say something. so it would pay the interest on its share of the interest Dr Armstrong: Sorry. It is the level of debt. It is credit on UK Government debt. But some of that debt will risk factors together with the currency arrangement. be maturing, so Scotland will have to start selling its The UK is hardly a stand-out example of fiscal own bonds in order to cover the payments. Suppose sobriety or a low-debt country, but the fact is that it that £100 million— has its own currency. As Professor MacDonald pointed out, when difficult things happen, the currency Q4459 Chair: No, surely not, because Scotland tends to depreciate and you make an adjustment. It is would not face any difficulty in repaying its share of the credit factors, as you quite rightly pointed out, the UK’s debt if it had already repudiated that debt. together with the currency arrangement, which are the Professor Bell: I am saying that, if it repudiates the important bits. Credit risk factors, when you are using debt, almost immediately it has to float new debt. Oh, somebody else’s currency, are a wholly different game I see. In terms of the servicing costs—if it refuses the from credit risk factors when you have your own servicing costs as well, yes. currency. They are different games. Q4460 Chair: How sensible an idea is that, and is it Q4455 Chair: Could I come back to the question of credible and is it likely to happen? It has been floated debt? It has been suggested that, if Scotland does not by the First Minister that a separate Scotland would get its way on getting the pound, they would repudiate simply repudiate its share of the UK debt. We want to any share of the national debt. Is that a realistic be clear as to whether that is a viable option, and what possibility? would the consequences be of that option? Professor MacDonald: Personally, I do not think it is Dr Armstrong: In my opinion, as an economist, it is a very good starting point for an independent country. not a viable option. I say that for two reasons. One is It gives a very poor signal to financial markets which, the precedent that it would set to the rest of the world ultimately, will determine the success or failure of about part of a sovereign state, rightly, having a macroeconomic policies. I do not think it is a very referendum and being free to choose, but also then credible statement. I think it is a very poor statement unilaterally deciding that it no longer has any for a policymaker to be making. obligations, which would have been by most people’s assessment, on both sides of the debate, fair Q4456 Chair: I am sorry, but there is a difference obligations. In other words, if you were other between credible and poor. countries around the world that had a lot of debt, Professor MacDonald: Yes. perhaps you might start thinking, “Maybe I want to cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 139
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald be independent as well and walk away from that independent, and because Scotland does not have debt.” The precedent that this would set around the £135 billion in its back pocket—whatever the share world would make it difficult. You have to think about of the debt would be; for the sake of argument, let us other agreements that would have to be settled in the say it would be £135 billion, although people differ interim period after a yes vote and before on that view and it would have to be negotiated— independence took effect. There are a lot of there would have to be a bilateral agreement, over agreements that have to be struck between Scotland a certain repayment period, where you discount the and the rest of the UK Government. Those would payments and so on. The UK’s initial debt position— clearly be affected if you started off the negotiation either gross debt or public sector net debt, which is process with, “We don’t have any of this debt.” the one used in the Budgets—is that the debt ratio or Finally, even if you repudiate the debt—this is a bit the debt burden, which is debt divided by income, like the history of what has happened in some would rise by about 10 percentage points, almost countries around the world—it does not mean that the irrespective of whether they repudiate or not. What debt has gone. You still owe it. You can repudiate it you would end up giving me is an agreement—an if you want, but you still owe it, so when you issue IOU—from the new independent Scottish your first pound of new bond—suppose the debt share Government to the UK Government. My debt was, as people have discussed, between £120 billion and £150 billion, or whatever the number is; let’s take obligation, as confirmed three weeks ago, is to back the mid-point of £135 billion as the amount it will 100%, as always, as for the last 450 years, all the be—it is not £1 but £135 billion plus one, because, outstanding UK debt. The rest of the UK’s debt even though you have repudiated the debt, that burden, the debt over GDP ratio, will rise by 10 obligation still stands in the eyes of the other person. percentage points, which is considerable, so it is a If you owe me money and you decide not to pay me, mistake to think that the rest of the UK can shrug its it doesn’t mean that I don’t think that you still owe shoulders here. me money. Sir James Paice: Thank you. That is what I wanted to know. Q4461 Chair: No, but if I was borrowing any more money I wouldn’t try and borrow it off you; I’d try Q4465 Mike Crockart: I want to explore this and borrow it off him. example of making it personal rather than talking Dr Armstrong: Absolutely. The “we” here is the about large numbers for countries. You said that if the international financial markets, which the UK borrows Chair owed you money and did not pay it back, then from; presumably, the UK will be big investors in it would still, effectively, be counted as the Chair anybody’s bonds, pensions and so on. I don’t think it owing you money, but it is not quite as simple as that, is quite as easy as saying, “I will borrow it from is it? It is more as if I joined with the Chair, however Professor Bell rather than borrowing it from me,” unlikely that may seem, and we jointly borrowed because it is a global market. Professor Bell will have money from you, but then I said that I am not paying an interest in looking at how you treated me and will back, but the Chair has already said, “Don’t worry, behave accordingly. It would be quite strange if he I’m going to pay it back anyway.” How does that then thought, “I will ignore Dr Armstrong’s obligation and leave me still owing you money? A lot of people in lend you the money at the same price.” Scotland have been absolutely cock-a-hoop about the announcement that the UK Government made three Q4462 Sir James Paice: What about the impact on weeks ago that they will stand behind the debt. They the rest of the UK if this was to happen? If Scotland read this as being, “Yahoo, we won’t owe any money were to repudiate the debt, even within the context at all.” that Dr Armstrong describes, what would be the Dr Armstrong: impact on the economy of the rest of the UK? I understand that some people read it Professor Bell: The UK has never reneged on any that way. I read the statement a few times. The debt. statement came about because the gilt-edged market Sir James Paice: No. makers had an annual meeting, and some people were Professor Bell: So it would end up paying that debt, saying, “What do you mean by ‘dividing up the debt’? which would mean some fiscal adjustment. We have heard this term and nobody clarifies what on earth it means.” The aim was to try and provide some Q4463 Sir James Paice: Because a smaller country clarity—that in no way this means going out. would be carrying the same big debt. Mike Crockart: Absolutely. Professor Bell: Yes. Dr Armstrong: The UK merely reaffirmed what was an absolute obvious position since Charles II that it Q4464 Sir James Paice: But if Dr Armstrong is has not defaulted and does not intend to default on right—that Scotland could not actually repudiate it in any debt. The rest of the UK Government might have terms of the perception in the wider global a side agreement with another Government, which marketplace—would the rest of the UK still be may or may not come to fruition, but all the people obliged to service the full debt? who hold the existing gilts will be paid in full by the Dr Armstrong: Yes. The UK statement three weeks UK Government, whatever direction the negotiations ago made it clear that, in any circumstances, it will with the third party—the other country which will service in full all the outstanding debt of the United become a new country—take. That is what the Kingdom Government. If Scotland becomes Government said. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 140 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Q4466 Mike Crockart: I understand that, but how Q4469 Mr Reid: How does that £3 billion relate to does that read across when Ian is going to pay you the percentage deficit? back the £1,000 that we jointly borrowed, but my Professor Bell: The deficit is round about 7. That share is £135? makes certain assumptions about the way Scotland Dr Armstrong: Then my share has just gone up. If the would spend its money, such as that it would spend UK Government borrow £1.5 trillion and we say that £3 billion on defence. I think that the Scottish £135 billion of that is somebody else’s debt, and we Government position seems to be that it would spend have jointly borrowed it, as you say, but you do not less on defence. pay me, it means that the money that the rest of the UK Government owe has, effectively, gone up for the Q4470 Mr Reid: The deficit would be, what, about rest of their people. This is what the debt burden rising 2.5%? If I understand you correctly, you said that half means. It means that for the rest of the UK people— of the deficit would be the debt. the citizens in the rest of the UK—the amount of debt Professor Bell: The debt interest payments; yes. faced by each man, woman and child is higher. That Mike Crockart: You would still have to borrow. is the debt burden. It definitely does go up. Of course, presumably in this side agreement, if Q4471 Mr Reid: That would be about 2.5%. Scotland honours it and repays in full, once it has got Effectively, if they were not going to borrow, they repayment in full, it is washed. It doesn’t make any would either have to increase taxes by 2.5% or cut difference. But in the interim, in those years when public spending by 2.5%. Is that correct? Scotland has to raise money to pay it back, it is not Dr Armstrong: Mr Reid, can I suggest that this is a cash; it is a bilateral agreement. Sometimes bilateral hypothetical question? It is an extraordinary scenario agreements work and sometimes they do not. I where one country has turned round and said that they presume, for all the reasons we stated, that, if a are not going to honour the debt. This is not normal. country is to have a low borrowing cost in As I mentioned, there are lots of bilateral agreements international capital markets, you want to be seen as that have to be agreed. Scotland does not have a tax never questioning this issue, which is exactly why the office at the moment—a tax revenue collection office. UK, and presumably the Scottish Government in the That comes under HMRC. These deficit numbers are event of independence, would like still to be able to predicated on the basis that the money moves from issue sterling. Sterling is perceived as a very credible HMRC seamlessly. There are a lot of agreements here asset where, on the instruments that have been that would have to be honoured. I have no idea how denominating this, there has been this remarkable this would work, but it is not very credible to turn record—yes, a remarkable record. round and say, “We can do this and we don’t expect Professor Bell: One way of putting it is to say that, you to respond in any way at all.” That does not strike unfortunately, you and the Chair do not have a me as a particularly credible scenario. credible pre-nuptial agreement. Chair: That is taking things too far. Enough. I am Q4472 Chair: The idea that repudiating the debt is trying to get that picture out of my head. not credible is sufficient for us at the moment. Can I, in the final part of the introductory questions, set things in context? I want you to clarify how the Q4467 Mr Reid: In the scenario that we have been choice of currency is connected to the regulation and exploring of the Scottish Government having this debt the management of the banking and financial system. to the rest of the UK Government but the Scottish Professor MacDonald: In broad-brush terms, Government saying, “We’re not paying,” would it be obviously, it is going to change in the UK context possible for the Scottish economy to survive without with the new Financial Services Bill, but traditionally having to borrow any money from any other source? financial supervision and regulation are often Professor Bell: At the moment the fiscal position of conducted by the central bank. If you give up the right Scotland is that it has about a 5% deficit, and that to issue your own currency and stay in a sterling zone, deficit is coming down. It is slightly less than the UK as the SNP are proposing, presumably you are leaving deficit. Think of that as needing to borrow 5% of the the regulation of your financial system to the equivalent of GDP. regulatory mechanisms in the rest of the UK—the Bank of England and the Treasury—in future. Q4468 Mr Reid: If you then take into account the fact that it is not having to pay this debt to the rest of Q4473 Chair: Do you have to do that? the UK, does that make any difference to that Professor MacDonald: You don’t have to. Indeed, the scenario? EU is keen for sovereign states to have their own Professor Bell: Debt interest. That would take it down regulatory mechanisms, but they would be incredibly by £3 billion or thereabouts. The Scottish deficit is costly and take a huge amount of time to put in place. lower at the moment than the UK deficit. That There would be anomalies, given the way in which depends very much on North sea oil. I suspect, for the Scottish banks work. They have a lot of cross-border latest year, which will be 2012–2013, that when the trade, of course, with the rest of the UK, which figures are announced in a month’s time, they will introduces a huge amount of complexity into the show that the revenues for the last fiscal year have regulation of our banks. fallen somewhat, which will be adverse in relation to Scotland’s fiscal position. If you don’t pay the debt Q4474 Chair: Am I correct in thinking that, if a interest, you are saving around £3 billion and a bit. separate Scotland remains under the supervision of the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 141
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Bank of England for financial matters, effectively, the there any implications if a country uses somebody Scottish Government will have no control over how else’s currency and cedes all monetary policy in that the banks and financial houses are regulated at all, way, as you describe? Could it still have its own because it is ceding all control over that to the Bank financial institutions in its own country, operating of England? under its own rules? Professor MacDonald: If you look at the Fiscal Dr Armstrong: Yes. Commission document it is, effectively, ceding the majority of control. It says that it may set up some of Q4478 Sir James Paice: It could still have control its own supervisory operations, but they are very over their regulation. vague on that point. As things stand at the moment, Dr Armstrong: There are different types of currency the broad-brush answer is, yes, they are effectively union. One extreme version would be some sort of ceding control over the banks to the rest of the UK. dollarised arrangement, where Scotland would have to Dr Armstrong: The way I characterise this is that, if develop new types of financial institutions. The UK an independent Scotland decided to introduce its own would want to ring-fence its own institutions, as far currency, it could also have its own banking system, as possible, which would mean adding lots of things; banking regulator, central bank and everything. It for example, you could only operate subsidiaries in would be starting from new. If you want to use the foreign country, which would mean that they sterling in something like the formal monetary union would have to have their own balance sheet in a that the White Paper points out, then Governor different country and so on. You could get a currency Carney’s point of last week was that you would need union where the Scottish banking system would be to have a banking union. Why would you need to have very different from what it looks like today. It would a banking union? It would be for factors such as that be an entirely different system from what it is today. you would like to have the same deposit insurance On the other hand, you could have a currency union operating both sides of the border. Otherwise, where the banking system looks like it is today and presumably, you would say, “I am not so sure about that would require a banking union. The thing about deposit insurance from this Government. I would the banking union is that at some point you also need rather have it from that Government, so I will move to have some sort of fiscal agreement, and that is some money.” That is why it becomes important that where the nub is on the banking union. By the way, if you have a banking union, if you want to have a you are going to have a banking union, you would monetary union like that. probably want to have some sort of federal union in How do you have a banking union? You need to have terms of tax and spend policy, because there are other some fiscal arrangements so that if there is another things that can go wrong in an economy. It is not just financial crisis—let’s hope there is not another the banking system. financial crisis one day but they do tend to reoccur— there is a mechanism by which one state could have a Q4479 Chair: But it would be a federal union that claim on the other state, which makes it very difficult starts very much resembling the United Kingdom to repudiate, by the way, where they say, “Actually, again, wouldn’t it—or would it? you have to pay us back the money that we spent.” Dr Armstrong: The United Kingdom is a very There would have to be some sort of resolution centralised collection of nations, so it is not the only mechanism, perhaps paying out your depositors and model out there. There are plenty of other models. so on. If you want to have the currency union that is There are different federal models. The question here pointed out in the White Paper, it implies that you is whether you can cross independent states. In Europe need to have some sort of banking union, which this is exactly the experiment they are trying at the implies that you need to have some sort of fiscal moment. Can you have independent sovereign states arrangement between the two sovereign states. but where you can cede some of the sovereignty and You can also go for a different type of currency union pool the sovereignty? That is the experiment we have where you can use the currency of another country in Europe at the moment and whether they can make and say, “I am willing to cede all control of my any progress on doing that; this will be the example. financial system, and I will have my own financial system,” which becomes this dollarisation process, but Q4480 Sir James Paice: And that is picking up the that is a very different animal from the one that is much lamented convergence criteria with the pointed out in the White Paper. constraints that you talked about. Dr Armstrong: No. It will be more than the Q4475 Sir James Paice: Can you clarify what you convergence criteria. This would be a banking union mean by dollarisation? where you have pooled money being used for future Dr Armstrong: Dollarisation is where you use the banking crises, but also a certain degree of tax and currency of another country but you have no access spend distribution. to the monetary authority of that other country. Q4481 Sir James Paice: That is what I was referring Q4476 Sir James Paice: As in Panama. to by convergence. A lot of the convergence criteria Dr Armstrong: As in Panama. were about— Dr Armstrong: Getting to the right position to start Q4477 Sir James Paice: We will come back to lots with. There are a few things. First of all, you have to of other issues, I know, but on this narrow issue of get to the right position to start with. Secondly, you regulation and management of the banking system, are have limits on the amount of debt you can get. The cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 142 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald trouble with limits is that you want to break the limits, Dr Armstrong: To answer your first question, under because it almost makes sense for you to break the a currency union, is it necessary to have one single limits when it really is the rainy day, because then you regulator? We have pointed out the example that there just get really badly imposed fiscal tightening. Then are countries around the world which are dollarised you want to have a way of clawing the money back and which do not share the regulator with the country in the good days, and that is when you have the risk that they are dollarised to, so the answer to that sharing. So you say, “Mr Davidson, yes, we question is that it is not a necessary condition. understand that you are having a bad day at the If you want to have a monetary union of the sort that moment, but we are going to let you spend some more is pointed out in the White Paper, then you need to money because we know we can get it back from you have a banking union. As Governor Carney pointed in the future.” That is what Europe is trying to out, banking unions need certain criteria, one of which construct, this level of federal government, while is a single form of regulation. having sovereign states. The question becomes whether that would even be possible. These Q4485 Graeme Morrice: Can I go back a moment institutions have never been fleshed out, and we are to the issue of the debt? We know, obviously, that an looking at Europe thinking, “Could you do it?”, and aspiration of an independent Scottish Government is that is the interesting question here. to be in a currency union. Presumably, we are talking Sir James Paice: Indeed. about the sterling zone. If that is the case, there would be negotiations between Scotland and the rest of the Q4482 Chair: Can I just be clear on this question of UK with regard to what Scotland’s debt would be, a shared currency and what scope there is for separate and, obviously, looking at carving up UK assets. As control and regulation of the banking system? With a we discussed earlier, we are aware that, if we don’t shared currency, is it inevitable that there has to be a see agreement among the two parties on having a single authority that controls the whole thing, or is currency union, Scotland would repudiate its debt. there scope for variations, say, on a Scottish basis in Who would determine what Scotland’s debt would be these circumstances? at that point in time for us to know the amount that Dr Armstrong: Okay. In words of one syllable, if you has been repudiated? want a banking system that looks like this, you are Professor Bell: There is no terribly clear precedent on going to have to have one banking regulator. If you this. There are no international laws that you can want a totally different banking system—under appeal to around the allocation of debt. A common dollarisation you can imagine a very different banking approach is to do it just on a per capita basis. There system—then you can have your own regulator. are more sophisticated ways of dealing with how much public spending per head there has been over a Q4483 Chair: The SNP proposal is to have a shared period of time, and then there is the method favoured currency. Does that automatically or necessarily mean by the Scottish Government, which is to go back to that you have a single financial controller, as it were, 1980 and aggregate all the fiscal deficits since 1980. setting policy for control of the banks right across the When you do that, you come to a much lower figure UK and there is, therefore, no flexibility for a separate than Angus has quoted for Scottish debt, largely Scottish regime? because, during the 1980s, if Scotland had been Dr Armstrong: No, it does not imply that. One of the attributed 90% of the oil revenues, it would have been difficulties with Governor Carney’s speech last week running a very substantial surplus. I don’t think there is that we use the term “currency union” without is an answer to your question. It is part of the saying what it actually is and it covers a multitude of negotiation. The simplest rule, of course, is just to do sins. What do you mean by “currency union”? It can it on a population basis. cover the European Union. He used the example of Then there is a debate about assets as well as debts. Canada—most people think of that as a single Of course, there are also the contingent liabilities, country—or the United States, but you can use it there things like public sector pensions, PFI agreements and as well. Does it include currency boards, like Hong so on, which do not form part of the net debt that is Kong? Does it include dollarisation countries? These quoted in the Budget, but which are liabilities, are completely different monetary arrangements. effectively, over the future on either the UK or the There is a world of difference between the Scottish Government. dollarisation that Panama and Montenegro run—but it is a currency union—and the monetary system that the Q4486 Graeme Morrice: Presumably, there would United States runs, which he has called also a not be any negotiations if the rest of the UK agreed currency union. We have to be very careful about what that Scotland was going to be part of the sterling zone, type of monetary arrangement we are talking about because the Scottish Government said that they would within the umbrella term “currency union.” repudiate the debts. Presumably there would be no discourse on that whole issue. A ball would be taken Q4484 Chair: So it is possible, under a currency away on that. union as proposed by the Scottish Government, to Professor Bell: As Angus said, there are lots of other have a degree of control over the banking system from agreements and contractual arrangements with the UK Scotland and in Scotland. Government which the Scottish Government would Dr Armstrong: Okay. That is a slightly different want to take over itself. The UK Government are not question. in an impossible position when it comes to the Chair: I understand that. negotiations, it seems to me. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 143
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Dr Armstrong: Whenever we at the National Institute Q4487 Chair: But all of that is doable. It is big sums look at this issue, we break it down to three things. but it is all doable. What debt are we talking about, so what amount? Dr Armstrong: Yes. All that can be done. First, we have to get agreement on that. After you have agreed the amount, you have to have a fight over Q4488 Graeme Morrice: You certainly make it what is the share. How much is yours; how much is sound simple. We know that the Scottish Government mine? Then, after that, it is how is one side going to seem to be very confident that a currency union will repay the other? There are three bits that have to be continue post-independence. Do you think that, taken into consideration. gentlemen? On the question of what debt, in my view, the best Professor MacDonald: From my perspective, I would account is the whole Government accounts which are ask the question: is that the most appropriate regime produced, unfortunately, with a bit of a lag. The last for an independent country? As a guy who looks at ones are for the financial year 2011–2012, so ending currencies, that would be my starting point, and I March 2012. They have all the assets of Government. would say no. One of the key reasons is that, as we All Government Departments are consolidated, have said, post-independence, Scotland would be including the Bank of England, including all the allocated, presumably, the share of oil that it is so quantitative easing assets. All of them are in there, keen to get its hands on, as it were. As soon as you including infrastructure—roads, everything. It is an do that, you open the country to what we call “asymmetric shocks,” because the rest of the UK is incredible set of accounts. Against that, you have all not going to be an oil producer. As soon as Scotland the liabilities, so you have market-issued debt, which becomes a sovereign state, were it to happen, it is is some, but you also have debt which has not been open to these so-called asymmetric shocks. You need market- issued—things that David was pointing out some way of adjusting to these shocks. One way is like teachers’ pensions, where they have done the through a transfer mechanism, which works very well work but they have not got their pension yet. That is at the moment in the UK because the shocks are clearly a debt. For that year, we are given the net internalised within the whole country, but with a liability, which the report states is the closest separate Scotland it would need some mechanism to equivalent to what the public debt would be—this is adjust that. One of the key measures is that the debt after taking the assets, which is the point I am nominal exchange rate would adjust. If you had a getting at. You can’t say that there are assets against separate currency, your exchange rate would take up it; this is after the assets. That is why the analogy has the adjustment, but, of course, if you are part of a to be against a credit card and not a mortgage, because monetary union, you won’t have that. a mortgage has a house. A credit card is used for a Graeme Morrice: That is an interesting point. reason. So the net liability, after assets—once again, Professor MacDonald: That, for me, is one of the key according to, I think, the 2011–2012 accounts; I could deciding issues as to why, whatever we want to call it, be wrong on the year but it is the 2011–2012 accounts, a currency union or a monetary union would not work. I’m nearly sure—is £1.35 trillion, which is remarkably Professor Bell: The other mechanism, which is often close to the gross debt figure, which is £1.3-something described as an “internal devaluation,” is around trillion. They are measuring different things, so that is movements in wages. If you can’t adjust your more coincidental than anything else, but in terms of exchange rate, you have to make an adjustment if you what is the debt number to use, that is, at least are going to remain competitive on your costs. That, conceptually, probably the cleanest measure out there principally, would be through wages. One of the to use. difficulties around the Mediterranean countries has Who pays what share? It could be per capita. You been that their labour markets have been pretty could also say that it should be on ability to pay. inflexible in terms of responding to the lack of Ability to pay would be GDP. Is it yesterday’s GDP competitiveness that Ronnie was talking about earlier. or GDP the day after independence, in which case Actually, the UK and Scottish labour markets are GDP per head in Scotland is higher than the rest of reasonably flexible, but only up to a point. If there is a massive asymmetric shock, you would expect that the UK, because the oil goes that way, so Scotland the first mechanism of response would be an would end up taking more? It could be that we are adjustment of the exchange rate. going to start the clock running from 1980, so you get Dr Armstrong: Just to follow that and picking up on the argument on how you divide up this debt after you both Professor MacDonald and Professor Bell, when have agreed the amount. As I say, whole Government talking about the asymmetries which emerge, accounts are probably the cleanest amount. I think the Professor Bell said that you don’t have a perfectly White Paper, for its measure of assets, uses the whole flexible system of wages and prices. People don’t assets in the whole Government account, so it is accept large reductions in wages where there is a large obviously consistent. Then you have to have the shock. If I may, I just happen to have in front of me argument about how much is whose. That depends. a quote from Robert Mundell in “A Theory of Optimal Then we come to the issue we discussed earlier of Currency Areas.” People always go back to this. This how the payment is going to be made and over what is what Governor Carney’s speech was about and so term. Is it over 10 years, two years or what? These on. It says: “It is patently obvious that periodic are negotiations to be part of the broader negotiations balance-of-payments crises will remain an integral and, as has already been said, there are a lot of feature of the international economic system as long contracts to be agreed. as fixed exchange rates and rigid wage and price cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 144 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald levels prevent the international price system from not adversely affected. That almost inevitably means fulfilling a natural role…” This is not rewriting that in some way or other they share risk. economic textbooks. This is the one that most people Dr Armstrong: Mr Morrice asked, if there is a yes actually go back to when you have those rigidities and vote, does that mean that you can’t have a currency asymmetric shocks that arise. union? I think that was your question. Professor MacDonald answered and gave what the answer Q4489 Sir James Paice: Professor MacDonald, am would be in his view. I think the technical answer, I right to conclude from what you have just said that though, again going back to what you really mean by that applies to any currency union, not just a sterling a currency union, is, could you dollarise? Yes, you union, and that therefore, in your view, the most could. It might not be a good idea. It might lead to a sensible way forward would be for an independent very different financial system, and so on and so forth Scotland to have its own independent currency? from what you are expecting, but some sort of absurd Professor MacDonald: If you look at a profile of a logical answer to that question is, yes, you could have post-independent Scottish economy, the answer would a form of currency union. It might not be good for have to be yes. The reason why Norway is not part of you, but is it at least technically viable? I think the the eurozone, for example, is that the exchange rate answer would be yes. I am not, for one moment, implications of joining a monetary union can be advocating it. I am just pointing out that, technically, absolutely disastrous. As we have all said, if you look the answer to that question could be yes. at how the southern Mediterranean countries have In terms of the rest of the UK, one of the peculiarities suffered, neither the exchange rate nor wages adjusted of this is that monetary union sounds like a coming in the appropriate way, so quantities adjust, and you together of several nations, but because of the have massive unemployment. That is the consequence asymmetry in size—one is 10 times bigger than the of getting it wrong, basically. other—only one country is really in the monetary union here, and that would be the independent Q4490 Chair: Could I just seek clarification on one Scotland. The UK has nine out of 10 votes, point? As I understood it, you said that, if there was presumably, on the MPC. It is not bound by anybody a shared currency, there would be a divergence, and else’s interest rates. It will still set them however it the pressure on Scotland would be to split away and wants. have its own currency. Where does England stand in all of that? What would the impact of divergence be Q4492 Graeme Morrice: I understand all that. upon the rest of the UK? Is there an argument why There is an absolute logic in what you say, so why are they shouldn’t sign up to that in the first place? the Scottish Government so adamant in saying—it is Professor MacDonald: As we know, Scotland is a in the White Paper—that it is in Scotland’s best relatively small portion of the UK. This is my view: interest to be in a currency union with the rest of the if they were to get the currency arrangements wrong, UK: in other words, to keep the pound? Business as it could have very significant effects for the rest of the usual, in effect. UK. It could lead to a currency crisis. We saw that in Professor Bell: Partly it is to do with the optimal the context of the ERM crisis when we were ejected currency area arguments. On the basis of trade, and spectacularly from the ERM. Of course, that was a when everything is going swimmingly, you can see fixed exchange rate system. At the moment, we are on that case. The issue is what happens if it doesn’t go a managed floor. The exchange rate is flexible. None swimmingly, if there are imbalances or shocks to one the less, if there was great international unease—shall side or the other. I say?—about the currency arrangements within the UK, speculators and international investors would be Q4493 Graeme Morrice: We could argue that. You inclined to move assets out of sterling, out of the UK have argued it well, and there is a logic to that. Is it basically, which could lead to a very precipitous fall because it may be seen as the safe option for political in sterling, with all the consequences that could have reasons, so that they are not frightening the children? for the rest of the economy. Professor MacDonald: Yes; I think it essentially is. What would the alternatives be? One would be to have Q4491 Sir James Paice: That could happen because a flexible exchange rate, to have an independent of something that was happening in the Scottish currency and for it to be determined in the market. If economy. I just want to get this clear. you don’t have a well thought-through policy as to Professor MacDonald: Yes. If the currency how you are going to manage your exchange rate, and arrangement is seen by international markets to be ill- you don’t have much in the way of foreign exchange founded—it won’t last—that could have serious reserves, the exchange rate would probably move repercussions for the rest of the UK, because they are around a lot. As David was saying, that would have a going to have to sustain the currency union and make nasty effect on trade with the rest of the UK. They it credible, basically; yes. are trying to take away this uncertainty from people’s Professor Bell: There are lots of arguments in terms minds, but I feel that they are trying to trick people, of the extent of trade between Scotland and the rest essentially, in what they are doing. David mentioned of the UK—in favour—but that is not the only the optimal currency area idea, but asymmetric shocks criterion on which you base a currency union or a are an important element of that, and they do not monetary union. It is rather that arrangements should address that anywhere that I have seen, yet it is be in place, such that, if things go wrong, parties are absolutely fundamental in the economics literature. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 145
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
The other interesting issue is that, when they talk Dr Armstrong: In a paper that we produced in about optimal currency areas, they talk about October at the National Institute, we made an estimate productivity levels in Scotland being similar to the of what we thought independence borrowing costs rest of the UK—at the moment. But in their response would be relative to the rest of the UK. These were to the IFS document about potential fiscal deficits that 10-year borrowing costs. To do this is quite awkward Scotland would have, they said that they were wanting because you have to find another monetary union in to improve productivity. This was one of the big issues order to compare what it would be like in a monetary that they were going to do when they had economic union. We used all the European countries between levers. There, immediately, is an important anomaly. 2000 and 2012 to estimate it. Without going into the Once you start the independence clock ticking, and, if details—unless you would like to, which would be they are correct, your productivity is going to diverge, great—we came out with a number between 0.7% and that is another reason why a currency union would 1.7% higher than the rest of the UK. unravel. As I pointed out before, financial markets are pretty smart. They know that these issues are Q4496 Mr Reid: Is that when it is within a pertinent. They know that these are the relevant issues currency union? for countries. So I don’t think the currency union Dr Armstrong: That is within a currency union. I have would last long, however well it is designed. Currency to make a major proviso. This is based on the idea markets are going to know that these shocks are going that you go into a currency union that looks like the to hit Scotland; there will be downward sticky wages. European one, where you have a high degree of Is a Scottish Government going to say, “We are going political convergence and no currency risk, because to have large levels of unemployment”? No. “We are everybody who is in the eurozone believes in a single going to adjust the exchange rate.” currency. Despite all the upheavals, nobody has voted to get out of it. The tricky bit is that, if you are a Q4494 Graeme Morrice: Having a currency union sovereign state, you quite correctly have the right one with the rest of the UK does not sound like day to decide to leave it. That is what sovereignty independence to me, but maybe that is another issue. means. It means that you make the rules up for your The Scottish Government’s Fiscal Commission set out people. Our basis of calculation, assuming you are some plans for a currency union. Do you regard them going to be in this union which has a great deal of as realistic? political convergence and agreements at a federal Professor MacDonald: Given what I have said, no. level, is saying, “Let’s pretend that is what it would Graeme Morrice: I like simple answers. look like post-independence.” The difficulty, as we Dr Armstrong: They spoke about a shareholding now know, is that Scotland has said, on page 111 of arrangement. I think there were two arrangements the White Paper, that in future years it would be up to they suggested with the central bank. One would be a the Scottish people to decide whether that remains the share, 50–50. Frankly, it is quite hard to see why the best currency arrangement; in other words, they could rest of the UK would agree to give a country a tenth vote to get out of it. Well, hang on. If one side can of your size half the vote. I think they will leave that vote to get out of it, I presume the other one can as aside. It may even be in a footnote; I am not quite well. Now it is not quite the same comparison, sure. The main thing they suggested is a shareholder because you don’t just have credit risk, which is what arrangement in proportion to population size, I the original work was based on, but you have the believe, which gets you one vote out of 10. I don’t possibility that you might vote to get out of it one know how many votes you are hoping to win with one day. I would suggest, looking at the numbers that we vote out of 10. This again gets to the point that you estimated, which again were 0.7 to 1.7 percentage would not have control over monetary policy. Then it points above the UK on 10-year Government gets to the question that you are going to start off life borrowing costs, that they are probably on the low with a reasonably high level of debt. Then you get side if you start introducing the possibility that you exactly the points that we have been talking about. could leave this thing. What happens on the rainy day? What happens when things don’t go well? That is where it gets interesting. Q4497 Mr Reid: That was your calculation for It is that question that needs to be answered, not Scotland within a currency union. Did you do a “What happens if everything goes swimmingly for a comparable calculation for Scotland having its own couple of months?” It is what happens on the rainy currency? day. Dr Armstrong: It is very difficult because it depends If I may, on Friday, we are about to produce our where the currency is. At what level is the currency? review, which has six papers about Scottish Is it par with the UK? Is it below by 10% or is it independence in it, one of which looks at these issues above by 10%? It depends, because—shall I just leave of equilibrium paths on currencies. it that it depends? Chair: You managed to work in an advert. That was Mr Reid: I think we get the message. part of the script when you came. Dr Armstrong: It is not simple. The methodology does not carry over if you have your own currency, Q4495 Mr Reid: We heard earlier that an because you have currency risk to take into independent Scotland would be starting off with a consideration as well as credit risk to take into deficit of about 5% of GDP. Clearly, borrowing costs consideration. In other words, when you hold an asset are important. Would a currency union help or hinder in a foreign country, you have, first of all, credit risk, borrowing costs? but you also have the possibility that the currency cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 146 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald might be higher or lower on the day that you get the Q4501 Mr Reid: If you have a banking union, does money back from your investment. That is where it that mean there has to be a common set of rules down becomes different. to a very detailed level? Would there have to be a common set of rules for bank bonuses, for example? Q4498 Chair: Before Alan carries on, can I follow Professor Bell: The financial services industry in up one point about borrowing? When you referred to Scotland would wish to be under a pretty much borrowing, most people, either watching or reading identical set of rules, because that gives customers any note of this hearing, will relate to borrowing for assurance. Of course, they deal on both sides of the their mortgage. Do mortgage borrowing rates bear any border quite extensively. I don’t know if it would go relationship to the figures that you are talking about in as far as bonuses, but in terms of things like liquidity terms of borrowing by Governments? Is my mortgage and how liquidity is managed, absolutely, they would likely to be affected by any of this? have to be the same. Dr Armstrong: I said that these are 10-year Government bond yields. Most mortgages are not Q4502 Mr Reid: Looking at a currency union from priced off 10-year Government bond yields, because the UK point of view, are there circumstances where they depend on base rates, for example. In fact, most the outcome of the negotiations would be such that of them depend on something like the two-year swap it would be in the UK’s best interests? If you were rates, plus a bit of credit risk for the institution. It negotiating on behalf of the UK, what would your depends on the bank funding costs. It is not a simple negotiating objectives be? question to go from one to another. Dr Armstrong: One of the advantages to the rest of the UK of being in a currency union is that you have Q4499 Chair: So that is a no then, in the sense of a fixed exchange rate for doing cross-border trade, and my constituents being worried about whether any of so on and so forth. That is a plus. That is definitely in this is affecting their mortgage rates. the plus side of the accounts. The problem with that, Dr Armstrong: No. Again, the answer—I will try and as we have suggested, is that there are disturbances be monosyllabic—is that the yields the Government that hit. Ronnie has pointed out some, David has borrow at are relevant to other borrowing costs in that pointed out others and I have pointed out what country. Is it a one-to-one transfer from 10-year bond happens on the rainy day. So you would have to have yields to mortgage rates? No, it is not, because they mechanisms around that to have this pro, on one side tend to depend much more on short-term interest rates. of the accounts, and then you would have those I said at the beginning that there are lots of different negatives, but the person you have the union with is interest rates. But would it be fair to say that it has going to have difficulties in adjusting. It is not often nothing at all to do with the costs that the Government that you really want to have a union with somebody are borrowing at? No, that would not be fair. They who you know could have difficulties in adjusting. will have some impact but the impact is not a one-to- The question is, can you create the institutions in one at all. order to circumvent those factors? The sort of institutions that we are dealing with here are transfer Q4500 Chair: Again, coming back to this, I payments, which would have to be fiscal transfer appreciate that it is not one-to-one, but is it likely, payments, presumably, to make these things happen, under the proposed currency union, that borrowing which of course currently happen. rates for mortgages in Scotland, first, would simply remain the same as in the rest of the United Kingdom, Q4503 Mr Reid: Would you explain fiscal transfer and, if not, secondly, would they go up, because that payments for a lay person? is what real people are interested in? Dr Armstrong: Yes. It is where in one area the real Dr Armstrong: If you manage to get a banking union, exchange rate becomes out of line with the rest of it is difficult to see why there would be a significant the currency union. Whereas you can have things like difference in, say, mortgage rates, although I will nominal wages and do the adjustments, it is very point out that in the eurozone, borrowing costs were uncomfortable for people to have these sorts of different. They were very small but they were adjustments. So to ease that burden of adjustment, different; they were nothing like the 10-year bond there is a financial payment, like unemployment yields sought by Governments, but there were insurance, paid to the other person to tide them over differences. those difficult times. That is the fiscal transfer. You If you don’t have a banking union, household would presumably require fiscal transfers, plus a borrowing costs basically depend on banks’ funding banking union, and then you would say, “Okay, this costs, and these would be the funding costs of banks works.” Funnily enough, this looks remarkably like in Scotland, not in a banking union. The critical what you have at the moment. Just as the Governor question is, can you create a banking union? If the was at liberty to use the United States and say that answer to that question is yes, the funding costs that is a currency union, we can also say that the should be the same or very similar for both banks and United Kingdom is a currency union today. there should not be that much difference for people’s borrowing costs north and south of the border. If you Q4504 Mr Reid: I am sorry; I am still not quite can’t have a banking union, the funding costs north following the fiscal transfer part. The United and south of the border of these institutions will be Kingdom, like the United States, is all one country. different, so the borrowing costs for households will If unemployment is higher in one part of the United also be different. Kingdom, obviously more unemployment benefit is cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 147
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald paid out in that part. In this independent Scotland, They were not completely voluntary. The ECB did not independent of the UK, if unemployment was higher really have a great deal of choice in the end, and in Scotland, I can’t see the rest of the UK passing over Draghi had to say that they would do whatever was more money for unemployment benefit. necessary. Repayment and all of that still has to be Dr Armstrong: So you do get the issue. agreed; it has not been sorted out. Whether they can Mr Reid: Yes, but I was not quite sure what you were actually get to these institutions is still the question of meaning by fiscal transfer. the European project. Can it have a full banking union Dr Armstrong: Fiscal transfer would be the way of in the future? We don’t know the answer to that getting something that shadows the first one that you question yet. discussed, which is through the unemployment In some ways, that is a forerunner or an example to insurance. You make a fiscal transfer—in this case a see if this is possible across sovereign states. So far, spending transfer—from one part of the union to there are very few, if any, examples. Actually, I don’t another part of the union. That is the fiscal transfer. think there any examples where this has been As you quite rightly pointed out, when you have achieved. The question is, is it achievable? We know sovereign states, you don’t have that same level of already that Europe is finding difficulties in getting fiscal transfer. So what we are saying is that to there, but that does not mean to say that it cannot get compensate for these misalignments and shocks, you there. The UK is not Europe, but the UK would have would have to create institutions which would enable to have arrangements. If you had a banking union, that but allow you to feel confident that, whatever you would have to have some sort of fiscal transfers, transfers go that way, one day they also come back because the day one country’s banking system goes the other way. down is usually the day that they can least afford to Professor Bell: One analogy is with the US and the pay it back. It is not much of an agreement if you eurozone. Both currency unions experienced massive can’t pay me back, and, by the way, you can leave as shocks in 2007 and 2008. Actually, the one in the US well. That is not an agreement I would really want to was quite specific in certain parts of the US, like be in unless I have some control over it. Florida, Colorado and California. The fiscal transfers, Professor Bell: If Europe cannot get the fiscal transfer in the form of unemployment insurance and various mechanism in place, what it is trying to do at the other mechanisms, enabled those parts of the States to minute is ensure that there is little likelihood of the recover and move on, and the US economy starts to types of shocks that we have been discussing do reasonably well again. Of course, that is exactly occurring. There is this stabilisation pact, which is what did not happen in the eurozone, because the currently under negotiation. Effectively, that says that northern European states were not really willing to deficits should never exceed 2% of GDP, and the effect fiscal transfers to the Mediterranean states cyclically adjusted deficit should not exceed 1% of without big strings attached, which they are still GDP. It is trying to force states into a position where negotiating over. they are pretty close to balanced budgets, which means that they are less susceptible to external shocks. Q4505 Sir James Paice: Is that partly because the US is also a political union, whereas the EU is not? Q4507 Mr Reid: Are you suggesting that, if the rest Professor Bell: Yes. of the UK was negotiating a currency union with an Sir James Paice: And the scenario with Scotland and independent Scotland, it would be inserting clauses the UK would not be. such as that into the agreement—that would put a limit on annual budget deficits and structural deficits? Q4506 Mr Reid: I follow that. I am sorry, but what Professor MacDonald: I think that is what Mark I still cannot grasp is how you have a currency union Carney was getting at last week, particularly when he where these fiscal transfers take place. One of you referred to 25% of GDP, which has important said that money would come back at some later date. implications, of course, for how much you can spend. Are you saying that there would have to be something Your point is a very good one. Why would the rest of in the treaty setting up the currency union, that if there the UK make these transfers because, presumably, the was a shock to one part but not to the other money transfers would be, maybe, going in one direction, and would be transferred to the country that had some of there would be an incentive for a Scottish the shock, but at a later stage they would have to pay Government, perhaps, to renege on its duty to repay that back? Is that what you are saying? the transfers at a later date? Obviously, there has to Dr Armstrong: Yes. Europe was basically a monetary be a tie-down clause, and the tie-down clause seems union but without having fiscal transfers. I thought to be quite draconian if you are locked into ruling out David made a very nice analogy about the United 50% of your public spending. States. Nobody questioned will that state leave the US dollar. It just was not a question, because it is Q4508 Chair: Can I clarify one point? I am completely federal. Period. Even though the states assuming that the establishment of a bail-out fund— have a lot of fiscal autonomy, that arrangement is Scotland—would be the UK position. It is federal. There are transfers and it is done at a federal- inconceivable—or is it?—that Scotland, to be board level. realistic, would be in a position to bail out the United In Europe, there were not these federal transfers for Kingdom should the United Kingdom be in financial things like unemployment insurance and so on, and difficulties, so we are presumably talking about a one- that is where some countries got themselves into a way street. I am not clear, entirely, what is in it for mess. In the end, they did have to have these transfers. the rest of the UK. Is it not better in these cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 148 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald circumstances to say, “Look, off you go. This is the Q4512 Sir James Paice: Can we leave behind now time to have your own currency”? the issue of any formal currency union with the rest Dr Armstrong: The question from yourself and Mr of the UK and move to what we talked about earlier— Reid is what are the obstacles to getting to a fiscal the possible dollarisation or sterlingisation that people transfer mechanism that could possibly work. have talked about? We keep hearing from Scottish Ministers that the rest of the UK could not stop Q4509 Mr Reid: Yes. The clear advantage to the Scotland from using sterling if it wanted to do so, by UK is that there are no transaction costs for switching which, I assume, they mean outside any formal currency. That would be an advantage, but we are currency union. Is that correct? Is there any way that the rest of the UK could stop that happening? trying to find out whether the disadvantages outweigh Professor MacDonald: I don’t think so, no. the advantages by so much that the UK just would not entertain them. Q4513 Sir James Paice: We have already this Dr Armstrong: That is for the UK Government. Let afternoon talked about Panama and Montenegro as me point out that there are two fundamental problems two countries that follow that sort of route. Are there with negotiating this agreement, one of which the any others of any significance whatsoever? Chair has pointed out. One country is 10 times the Presumably, there is the odd island here and there. size of the other. You can’t really get round this thing; Professor MacDonald: Not really, no. it is just a fact. It is conceivable—let’s hope it never has to happen—that Scotland could need some Q4514 Sir James Paice: So it would really be a support from the rest of the UK one day, but it is remarkable action for Scotland to take. pretty inconceivable that Scotland could give support Professor MacDonald: It would be. For a country at for the rest of the UK. It is just too small. That is one Scotland’s level of development, it would certainly be problem. This game is pretty asymmetric. very unusual, yes. The second problem is that, because, after a yes vote, there would be two independent sovereign states, it Q4515 Sir James Paice: Am I right in assuming, if means you can pull out at any time. Forming it was to follow that route, that there would be no international agreements for countries that can always central bank and it would have no control over it, as have a vote and decide the will of the people becomes I think you said? I am really seeking confirmation that very difficult. That is why in international law it is so it would have no control over interest rates or hard to make binding agreements. These are the two monetary policy at all. big issues that would have to be overcome to make Professor MacDonald: That is correct. some sort of pact—I should say ground pact, because as the Government pointed out, we are not dealing Q4516 Sir James Paice: How would that read with 2% or 3% of GDP here. We are dealing with a across to that independent Scotland’s tax and spending quarter of federal budgets. It would be a ground pact, policies? It is an open question. How would it affect but you would have to overcome those two rather them? immutable issues. Professor MacDonald: Clearly, an independent Scotland would still be able to tax, spend and borrow. Q4510 Sir James Paice: From the perspective of the Going back to the arguments that we gave earlier, it rest of the UK, there seems to me, from what you is unlikely that financial markets would view that as are all saying, to be little advantage in maintaining or a terribly credible regime for an independent Scotland. creating this sort of agreement with Scotland. Presumably, there would be a premium on the debt, a Professor Bell: It is a costs and benefits argument. credit risk premium and perhaps a sovereign risk premium as well. Certainly the Government could tax, spend and, presumably, borrow, but, given its far from Q4511 Sir James Paice: It seems to be heavily ideal regime, there would be the kind of problems that costs. we mentioned earlier. Professor Bell: It depends on how the UK Government assess the chances of Scotland having Q4517 Chair: Can I clarify the point about difficulties, and their credibility in relation to borrowing? Panama can borrow, can it, even though whatever agreement they might put in place. If you it does not have its own currency and just uses the were sceptical, you might say, as Angus has said, that dollar? agreements are always subject to electoral variation. Professor MacDonald: I am not entirely sure about Chair: I have been told that a Division is coming up. Panama in terms of borrowing. Since we have come to a nice end point, shall we just break where we are as the Bell will sound at any Q4518 Chair: What about Montenegro or Kosovo? moment? This is the advantage of having a television Professor MacDonald: Montenegro can borrow, yes. that you can see. We will break for 15 minutes. We Dr Armstrong: Governments borrow in foreign will be back as quickly as we can. Perhaps you could currency, often. It tends to be developing countries, talk among yourselves. but they do it. Argentina borrows in dollars. Sitting suspended for Divisions in the House. On resuming— Q4519 Sir James Paice: I see. An independent Scotland using sterling could still borrow in dollars Chair: Apologies for that break due to the vote. Jim. or, indeed, in any other eurozone currency. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 149
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Dr Armstrong: Yes. and I want to hold in terms of cash balances, say, in our bank accounts—is affected by the behaviour of Q4520 Chair: It would be a question of interest the economy. If the economy changes quite rates, wouldn’t it? fundamentally, we may change our preferences for Sir James Paice: Exactly, yes. The interest rate would money. The literature shows that that can have a reflect the risk involved in that. highly destabilising effect on a country’s ability to Dr Armstrong: Yes. We tend to think that these things borrow and, indeed, to operate in any credible and are quite smooth, that you pay higher risk premiums, systematic way. but of course you have higher interest rates. This is where we keep coming back to the debt. Paying Q4523 Sir James Paice: If I understand aright, there higher interest rates when you don’t have much debt are a number of African countries where a lot of means that you can borrow some more. But if you people would prefer to be handling dollars than the already have so much debt that the debt interest actual currency of that country. payments start to matter as the debt rolls over, it starts Professor MacDonald: Sure. meaning that your debts get into a worse position with higher interest rates. So higher interest rates are the Q4524 Sir James Paice: Is that the sort of thing that last thing you need. You get into, again as Governor you are talking about—that you have two currencies, Carney mentioned, self-fulfilling or destabilising fiscal or maybe more, running as almost alternative situations, which was a point we made in our October economies? paper about disequilibria and what happens when Professor MacDonald: Yes. It is referred to as things go wrong. It is not necessarily a smooth issue. currency substitution; you substitute your local These ideas about dollarisation on their own, when currency for another currency because you are not you have a lot of debt, put you in a difficult corner. It very happy with the local currency. That is usually does not mean to say that you necessarily can’t do it, because these kinds of countries have run high but it could well be far from optimal. inflation regimes, so they don’t want the domestic currency. What we are talking about here is a Q4521 Sir James Paice: To challenge you on that formalisation of currency substitution, where the point, notwithstanding earlier discussions, if Scotland Government say that it is legal tender, but of course it took its share of the UK debt, which you said would is for the people in the country to say, “Do we really be £135 billion, roughly, would that be considered a want this as our legal tender?” lot of debt, to use your expression? Dr Armstrong: To comment on a couple of those Dr Armstrong: For a small country with a small open issues, you asked what the banking system would look economy—I don’t use “small” at all in a pejorative like in a dollarised system. I think that was the way; it is an economic term; the UK is a small country question. In a dollarised system, you would have relative to the global economy—with no track record either new Scottish banks created, and other financial of issuing debt, whose main assets are very institutions, or subsidiaries of foreign banks. The rest importantly the skills of its people, and its other main of the UK banks would form subsidiaries in Scotland, asset being this thing called oil, which is volatile, it which would have to have their own balance sheets. would, in my view, be considered, even at that level, The difficulty is that, if people think that the deposit which is lower than the debt burden for the rest of the guarantee from the Scottish Government is not worth UK, a high debt burden. the same amount as the rest of the UK, presumably people would rather have their money in rest of the Q4522 Sir James Paice: Thank you. Following this UK bank accounts. That means that Scottish path of a dollarised or sterlingised situation in depositors would have to be paid more to compensate, Scotland, what would be the impact of that and the which means that the bank funding costs would be likely reaction of the financial sector in Scotland, higher, which goes straight into higher borrowing which, as we know, is quite strong, quite major? costs. So you have a very different financial system, Professor MacDonald: Connected to that, I would which becomes much more of an own banking have to say that the whole aspect of this focuses on system, ring-fenced away from the rest of the UK the supply of money. In the context of dollarisation or banking system where you have subsidiaries. They sterlingisation, one has also to think of the demand have to have their own balance sheets and would for money. If Scotland became a sovereign state, the probably have higher borrowing and lending costs demand for money would actually change because the than the rest of the UK. economy would become more divergent, as we were As a final point on what Ronnie was saying about saying earlier. It may be that people in Scotland do dual currency systems, it does not have to be African not want to hold sterling and they may want to hold countries. In, I think, 1998, in Hong Kong, when the other currencies rather than the one that their Asia crisis was going on, people started using US Government want to hold because they don’t have dollars alongside Hong Kong dollars. It never got up confidence in this system being maintained in the to equal shares, but the share of US dollars in the future. The demand for money could create a huge domestic money supply rose, as it does in periods of asymmetric shock, and it could shift the whole uncertainty. It is not only African states. balance about whether that system would be Sir James Paice: No. I was not being exclusive. successful to any degree. I think that point has been Dr Armstrong: No problem. overlooked when people talk about dollarisation or Sir James Paice: I think that fairly knocks on the sterlingisation. The demand for money—what you head the issue of sterlingisation. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 150 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Q4525 Chair: I want to be absolutely clear on this. Dr Armstrong: Interestingly, what is in the rest of the You made a point about interest rates; in the event of UK’s interests here? The rest of the UK’s interests sterlingisation, does that read directly across to after a vote for independence are to see Scotland as mortgage rates? stable. If one was to take a view that the Dr Armstrong: Yes. What matters is bank funding sterlingisation system is not particularly stable, this is costs—what it costs a bank to raise money. Within difficult for the UK as well, which is exactly why the a monetary union or banking union—one with fiscal rest of the UK would say that the UK banking system sharing because you need to have that to have the is now going to be ring-fenced. banking union—the cost to banks in the United Kingdom of raising money is the same, because you Q4529 Chair: In those circumstances, is it more raise it out of London’s capital markets and the banks advantageous to the United Kingdom to avoid use it within the same group. If you now have sterlingisation and accept a sterling currency zone? subsidiaries where you need your own balance sheets, Dr Armstrong: I am sorry, what was the last bit of the cost of funds for these banks in a foreign country the question? reflects conditions in the foreign country. There I Chair: Rather than have Scotland going towards would expect you to have higher funding costs for sterlingisation, is there not then a strong pressure, to banks, and that would translate into higher go to the point that we were discussing previously, to borrowing costs. incorporate Scotland and accept a sterling zone? Professor MacDonald: Before you could answer that, Q4526 Chair: So my constituents would have to pay you would need to know the costs and the benefits of more for their mortgage. each of the two regimes you are referring to. It is very Dr Armstrong: In that scenario, to be very clear, difficult to get an off-the-cuff answer to that. We are where we are talking about sterlingisation—to not really comparing like with like. For example, just bastardise the term—yes. following up your last question, which was, “Would Professor Bell: That is partly driven by both of these the rest of the UK like this?”, I suspect they would effects. One is that people may prefer to hold their not, because it is going to make RUK monetary money in rest of UK banks but also, if they want to control harder if people, as Angus was saying, hold their money in another currency, it becomes more consider RUK bank deposits differently from Scottish difficult for the subsidiary banks now operating in bank deposits—Scottish bank deposits being inferior, Scotland to raise cash, increasing their costs, which in shall we say, to the RUK ones. That is going to create turn affects your mortgage. cross-border flows, which is going to make the control of the RUK money supply difficult. From that Q4527 Chair: Can I be clear on this reference to perspective, they would not like a dollarisation subsidiary banks and so on? Would the Royal Bank of system. That is another cost, but I think it is very Scotland and the Bank of Scotland become subsidiary difficult to compare that cost to the other costs of the banks, or would they be Scottish banks? What would full-blown currency union. happen to those banks under sterlingisation? Dr Armstrong: I would imagine that they would Q4530 Sir James Paice: I think the point the Chair become RUK banks, which then have a choice about is making is that those negatives of sterlingisation what they do about the offices that are run in Scotland. from the rest of the UK would be an element of Do they become branches? If they are branches, they pressure on the rest of the UK to be more sympathetic are under UK deposit insurance. It is not quite obvious towards the possibility of a proper currency union. to me why you would like to have that in a foreign Professor MacDonald: Perhaps, yes. country. Most of the time in international cross-border Dr Armstrong: I guess that this goes back to the regulation, the direction of travel is towards what is question that we had earlier, where I tried to point out called “subsidiarisation” or creating subsidiaries, that the problem with the term “currency union” is which means that they are regulated by the people in that it includes different arrangements. Sterlingisation that country, and deposit insurance and so on is is a type of currency union, as is monetary union a provided by people in that country. They are type of currency union, so we have to be absolutely subsidiaries of this now RUK bank, called Royal Bank clear which one we are talking about. of Scotland or something. The Royal Bank of Sir James Paice: I was talking about a monetary Scotland becomes based and headquartered in union. London, which to all effects it is already, because 83% Dr Armstrong: In relation to the monetary union that of the shareholders are here in that building. RBS’s we were talking about earlier on—it is much easier if operations in Scotland under a sterlingised system we use these terms—we were pointing out that the would, if they chose to, be subsidiaries, just like they agreements that would have to be made to make this would be subsidiaries in other countries. work, just reiterating what the Governor said last Chair: I understand that. week, are a banking union and a fiscal union, but my overlay on top of that is that you have two immutable Q4528 Sir James Paice: I omitted to ask this, and I problems. One is that one party is a tenth of the size, should have done, but it is because I think I probably and the other is that you can always vote to get out of know the answer. In the event of sterlingisation, it, which makes it very difficult to see how you strike would there be any consequences, positive or that agreement. That specific type of currency union, negative, for the rest of the UK if Scotland adopted which is the one in the White Paper, becomes very that route? difficult. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 151
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Where we are talking about dollarisation or Q4533 Jim McGovern: Is it right that a country has “sterlingisation” to use the term, the question is, is to have its own currency for so long to prove its this at least feasible? The answer is that it is probably stability with other currencies before it can join? feasible. Is it optimal from the rest of the UK’s point Professor MacDonald: Yes. of view? Of course it is not optimal, but that doesn’t Dr Armstrong: Yes. You have to be a member of mean to say that it would give you any incentive to ERM2 for a period of time, which means that you go to the other one, because the other one would mean have to have your own currency and prove that it can that you were in for a lot of money. This one just be kept stable for a period of time before you are means that your neighbour is in a difficult situation, allowed to join the euro area. but you have to remember that it is one tenth the size. It does not change the calculus to say that all of a Q4534 Jim McGovern: The euro is a currency that sudden a monetary union becomes feasible. I don’t seems to serve many different countries with very think that changes the calculus. different economies. Why couldn’t it work for Scotland, or why shouldn’t it? Or could it? Professor MacDonald: If you look at the eurozone, Q4531 Chair: That’s the point. The UK would not there certainly aren’t any net oil exporters within the feel obliged to accept a complete union, because the eurozone. I think I am correct in saying that. The only prospects of sterlingisation were so bad and the UK one that comes close, which has decided to stay could just ride that over. outside, is Norway. For me, that would be another Dr Armstrong: Correct. The UK would ring-fence its reason why you wouldn’t want to join the eurozone; banking system and say that it would help to the an independent Scotland would face these asymmetric extent that it could. I think that the rest of the UK shocks which would be very uncomfortable in a one- would try to help because it is interested in getting size-fits-all monetary union of that nature. Scotland stable, but that is not the same thing as Dr Armstrong: I have a slightly different take on this, saying, “Therefore, we are going to create these which is simply that we don’t know what the euro is unions”—unless there can be an agreement. Again, going to be. The euro is in transition. It nearly broke there are two immutable problems. How do you make apart. It has been put together with some emergency an agreement across sovereign states, when one is help from the central bank. They are under negotiation smaller compared with you and they can both pull out as to whether they can do a banking union. If the of it? We discussed things like the debt-for-oil swap a answer is no, the euro is going to have trouble again. long time ago, but it just does not want to get any If the answer is yes, we are dealing with a whole traction. If we can’t get those sorts of agreements, that different beast. When we look at currency unions does not mean to say that you start accepting things again, and the different things underneath, that gives such as sterlingisation. That means it is not you another type of arrangement. These are particularly good for the rest of the UK, but that is fundamentally different arrangements. What the euro not a reason why, therefore, you would accept the area will be in the future could look very different other thing at all. from what it has been in the last 15 years, and, in that, there would be fiscal adjustments. Some of these problems of misalignment get dealt with; they are Q4532 Jim McGovern: Until recently SNP policy trying to go to this federal system. We don’t know if was that a separate Scotland should keep the pound they will get there yet, but if they did one day get until it was time to join the euro. Why do you think there—it is not necessarily optimal because most of that the SNP changed that policy? John Swinney is the trade is with the UK—maybe you would lose quoted as saying that he cannot foresee circumstances some of that gain from being with sterling, but you in which an independent Scotland would want to join get a lot of other advantages. You would become an the euro, which is a U-turn from an earlier position. equal member in a big club and you are no longer Why do you think they changed their position? next to a guy who is 10 times bigger than you. You Professor MacDonald: First of all, there was are next to 19 other guys all with an equal vote. That uncertainty; originally, they thought that they would is a different structure. Where we are today is a stab automatically become full EU members almost in the dark because we don’t know what Europe is immediately, and we now know that there is going to going to look like. be an adjustment period for that. We also know that there are certain criteria that countries have to meet Q4535 Jim McGovern: Given your answer, I think before they can enter the eurozone, and Scotland you have answered the next question along with it. would pretty much fail on the majority of these in Would it be easier for Scotland to borrow money if it terms of the fiscal deficit. Okay, we have had a big was part of the eurozone? discussion about what the debt would actually be, but, Dr Armstrong: It depends what the eurozone is going if it was a fair division of debt, it would probably be to look like outwith the so-called Maastricht guidelines as well. The other reason is that the majority of Scotland’s Q4536 Jim McGovern: I expected that. I saw that trade is with RUK rather than with Europe. In terms coming. I walked on to a punch. What would the of the argument that I think David particularly implications be of joining the euro for Scotland’s trade emphasised, if you are trying to remove the and industry? uncertainty of the effects of exchange rates on trade, Dr Armstrong: This is the point that Ronnie was you are probably better to do it in terms of RUK. making. Because most of Scotland’s trade, by far, is cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 152 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald with the rest of the UK, the best arrangement is that, member state. On the basis of what you said—that it if Scotland continued to use sterling, it would not have would probably fail most of the tests of joining the to go through these transaction costs. You wouldn’t eurozone—would that make it much more difficult for have to change money every time you wanted to go Scotland to join the EU on the basis that a new south of the border or do a transaction with somebody member state would have to join the eurozone, or south of the border. That is why it would beneficial, there is an assumption that eventually new member but the first best is probably not attainable in any of states would have to join the eurozone? these options, so it might be what the next best one Professor MacDonald: I am not an expert in EU would be, depending on what Europe looked like in issues, but I suspect it would not make their joining the future. the EU any more difficult. These tests relate to joining Professor Bell: To some extent the trade-off follows the euro per se, so obviously, joining the EU— the choice of currency rather than necessarily the other way round. We have seen Ireland quite Q4540 Graeme Morrice: Is it not chicken and substantially expand its trade with Europe, when egg, though? previously the vast bulk of its trade was probably with Professor MacDonald: Presumably, as Dr Armstrong the UK, but it has taken a very long time for that said, you would be given a transition period. You have to happen. to join ERM2 and there has to be a convergence, and I think that is a period of two years. Presumably, if Q4537 Jim McGovern: It has been suggested that you do not get it right in that period, they may allow the eurozone is having structural problems, which you you a longer period—I am sure they would—but there have just referred to, Dr Armstrong, because it is not would be an expectation that during that two-year a fiscal union, a banking union or a political union. period you would meet the criteria. Could you explain the significance of each of these Professor Bell: I think you would have to commit to ideas? joining the euro. Dr Armstrong: Yes. We have discussed a banking Professor MacDonald: You would have to commit, union, which means that you have a single financial yes. That is right. system where everybody pays very similar borrowing Professor Bell: But what that exactly means is costs. Let us call it the same borrowing costs. We have difficult. a single financial system. In order to have a banking union, you need also to have some form of fiscal Q4541 Chair: They would commit to joining the union. You can’t have it without the fiscal union, euro like what Sweden has. Sorry, nodding is not because what do you do when something goes wrong recorded. on the other side? You need to have some way of Professor Bell: I am sorry. Yes. paying me back. Banking union requires fiscal union, Chair: An extremely sceptical nod is fair. and what does fiscal union require? Some sort of political agreement, which is some form of political Q4542 Lindsay Roy: I was going to say good union. It does not have to be the centralist political evening, gentlemen, because it is almost good union that we have in this country at the moment. It evening. It is late in the afternoon. I want to turn now might be a federal union, as they have in the United to a separate currency. What would be the States. It might also be a federal union among implications of creating a new Scottish currency as independent states, as Europe one day is striving to suggested by the chairman of the Yes Scotland be. We don’t know whether that can be achieved yet. campaign and the former depute leader of the SNP? To have a banking union, you need to have some sort Professor MacDonald: The implications in terms of of fiscal union, and to have some sort of fiscal union, the practicalities? you need to have some sort of political union. Lindsay Roy: Yes. Professor MacDonald: In terms of our discussion Q4538 Jim McGovern: Does anyone else have today, we would need to set up a whole new anything to add to that? As the Chair said at the start, infrastructure, a central bank and supervisory and there is no need to repeat anything. Has that covered regulatory mechanisms for the financial sector. We that answer? would need to introduce a currency, clearly, and we Professor Bell: It seems to me it has, yes. would need to have an arrangement whereby that Chair: We always quite like it if people disagree, so, currency related to other sovereign state currencies. if there is any disagreement, by all means make it Would it be fixed against other currencies, which clear. Graeme, you wanted to come in on this section. would have implications for monetary policy and, presumably, fiscal policy, or would it be allowed to Q4539 Graeme Morrice: Yes. I wanted to pick up float freely or in a managed way? These are all the big on the answer that Professor MacDonald gave earlier issues that would arise if Scotland were on its own. with regard to an independent Scotland applying to enter the eurozone. He suggested that it would Q4543 Lindsay Roy: Have you any indication at all probably fail most tests. Of course, to enter the as to how long it would take to set up a new central eurozone you would need to be a member of the EU, bank and create a new currency? Have you any and on day one of independence Scotland would case examples? to be a member of the EU, because that would fall Professor MacDonald: I think it would take longer upon the rest of the United Kingdom, and an than the 18-month period that the SNP are allowing independent Scotland would have to apply as a new for. Scotland is a very highly developed country, cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 153
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald obviously. It is one of the richest countries in the that. There was a very fulsome discussion about own world, so the exchange rate policy would need to be currency in the Fiscal Commission Working Group a very sophisticated policy, in my view. It would entail paper, where I think they said that this gives a higher having sufficient foreign exchange reserves, for one degree of economic sovereignty to an independent thing. We may start off with our share of the foreign country. There has been discussion about it, clearly. exchange assets of the Bank of England, but they are unlikely, in my view, to be enough to sustain an Q4545 Lindsay Roy: Do you think, given the independent exchange rate, so where would the evidence that has been presented today, that it would reserves come from during the transition period? All be wise for the Scottish Government to start of that would lead me to believe that it would be a considering this matter, which is very complex much longer process to set up than the SNP are indeed? allowing for. Professor MacDonald: I certainly do. I honestly think Professor Bell: Another thing that you would have to they are doing the people of Scotland a disservice by think about is how assets that are currently not considering other options to the proposed sterling denominated in sterling would be legally valued in the zone, yes. It could be extremely damaging to the new currency. Some mechanisms would have to be Scottish economy and perhaps, as we were saying put in place for the millions and millions of pounds- earlier, to RUK as well. worth of assets that are currently denominated in sterling to somehow or other be converted to the Q4546 Lindsay Roy: Could you give us a new currency. conservative estimate, or indeed a liberal estimate, as Dr Armstrong: Outwith, of course, the liabilities. to how long it might take to set up this new currency? Everybody’s mortgages, which are currently in Professor MacDonald: There is really no precedent sterling pounds, would be in I don’t know what for a country like Scotland, no. pounds—local Scottish currency pounds, Dr Armstrong: The difficulty is the level of presumably—otherwise households would be taking a sophistication. It is quite interesting as to what would huge exchange rate risk. They would have to be be the interests of the rest of the UK at this point. converted as well. There is a list of institutions that Suppose that the referendum was—obviously—about you would need to create. It is not impossible. I independence, plus Scotland having its own currency, completely accept Ronnie’s point that, because and the answer was yes. There could be no gripes at Scotland is such a sophisticated financial system and all, because that does not involve the rest of the UK. rich country, this is not like introducing a new The UK’s job is how to make the transition as smooth currency in an eastern bloc country—a former Soviet as possible and to be as supportive as possible Union country—where they have lots of experience throughout the transition. Quite clearly, it is not in its and you can put capital controls on and do it fairly interest to have disruption, so a lot of assistance could smoothly because you don’t have a sophisticated be given. The difficulty is the level of sophistication international banking system. In Scotland’s case, you of financial markets. At the moment, there are no new would have to have a list of institutions, which would Scottish currencies existing, but financial markets take time to do. The one institution that was not create what are called “synthetic instruments,” which mentioned, which is kind of big, is that you would means that you do not need to have the underlying. have to do a currency conversion law. This gets into You start guessing what it is. They are called “non- the very question of what you do about existing deliverable forwards,” where you just start thinking, contracts. Whose law are they written in and what do “Suppose there was a currency; what would the right you do about these laws? There is, I think, a precedent—not a precedent; there is a general price be?” These derivative trades make the transition assumption that, if the activity takes place in this process very difficult. That is not to say it is not geographic zone, you can convert it into the currency possible, but it becomes difficult. of that geographic zone. What households would like to do is a different thing. All this is to say that, yes, it Q4547 Lindsay Roy: Any transition would depend can be done. There is an enormous list of institutions, on the good will of the rest of the UK. and it would be very difficult, because of the Dr Armstrong: Absolutely. sophistication of Scotland. What you don’t want to be doing is springing this on people the day after the Q4548 Lindsay Roy: And it would be a fairly referendum, saying, “This is what we always meant. prolonged process, from what you are saying. Let’s start now.” That is not a good idea. Dr Armstrong: Yes. But one would also say that it would be in the rest of the UK’s interest to make this Q4544 Lindsay Roy: What level of information a successful process, to the extent that it can. have you gleaned from the White Paper about a separate Scottish currency? Q4549 Lindsay Roy: Even with the best will in the Dr Armstrong: I gleaned from the White Paper that world, it would be more than one and a half years. the only proposal was a formal monetary union. Dr Armstrong: Yes. It would be very difficult but that Professor Bell: Although they did say that they does not mean that it can’t be done. reserved the right. Dr Armstrong: I beg your pardon. I am sorry. You are Q4550 Lindsay Roy: What would any Scottish quite right. Thank you. They did say, as is mentioned Government have to do to establish trust and on page 111, that they reserved the right to change confidence in the new currency? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 154 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Dr Armstrong: It would have to operate a sound fiscal Around the rest of the world, there are a couple of policy. It would probably have to maintain balance of countries worth thinking about, where they have hard payment surpluses for a number of years to make sure pegs. Hong Kong, obviously, has a very sophisticated that there is more demand for the Scottish currency financial system. A common feature of the than for the supply of the Scottish currency going out. Scandinavian countries and Hong Kong, or Singapore, You would have to operate balance of payment which has more mobility in its exchange range, is, surpluses, I would imagine, for at least the early years. guess what? They all have low levels of debt. You would have to run strong fiscal positions, so you would have to start building up your credibility to Q4554 Lindsay Roy: And none of these has a model make it easier and easier to borrow. These are the sorts of being co-ordinated within an economy for 300 of things that would be required, which are possible. years. Professor Bell: You would have to have a well- Dr Armstrong: No. regulated banking system. Ireland pretty much did Lindsay Roy: Thanks. what Angus has just said, but it did not have a well- regulated banking system and that was what caused Q4555 Mike Crockart: Hopefully, we are on the the crisis in Ireland in 2007–08. All of these things home straight. We have covered a lot of ground and a have to be in place. lot of different options. It would seem that most have advantages and disadvantages, but I am not hearing Q4551 Lindsay Roy: What vulnerabilities would that many advantages. If we were looking at all the there be around this new currency for a Scottish options for an independent Scotland, so we are ruling Government? out the status quo as it stands, what is the best Professor MacDonald: It would depend on the approach for a separate Scotland, or is there not a best particular regime they chose. If it was a fixed-rate approach? Is it a sliding scale where some have high regime, if they did not get the kind of mix that we costs, some have low costs, but others give better have been talking about correct, and if credibility was advantages for those costs? not given to financial markets, they would tend to say, “This isn’t a credible fixed rate,” so they would tend Professor MacDonald: In terms of the exchange rate to undermine the rate. That could be very damaging regimes, specifically, from my own perspective, as I to the economy. The alternative would be to have a indicated earlier, the crucial thing to recognise would floating rate, and if the elements that we have talked be that, if Scotland became independent, it would be about—fiscal discipline, and I would add monetary a net exporter of hydrocarbons, and this would have a discipline and inflation control—were in place, and fundamental effect on its exchange rate. Angus the markets believed that these were credible, then the mentioned the concept of a real exchange rate earlier. system may well function in a well-behaved manner, Irrespective of what the regime is, this will have which would not undermine the economy. It is getting profound effects on Scotland’s real exchange rate. these things right, basically, and saying to markets, That, basically, means its inflation rate relative to its “We are committed to this.” Making statements that neighbours’ inflation—the rest of the UK. That is a you are going to join a sterling zone, but on day one measure of a country’s competitiveness. If you have of independence you are going to do something else, no means of controlling that by adjusting the is a very bad mistake, in my view. It sends out exactly exchange rate, you can get into the situation that we the wrong signal. discussed earlier, where you could have unemployment if you had an adverse shock to the Q4552 Lindsay Roy: It would diminish any trust or price of oil, say. confidence there might be. My own view is that you have to have some Professor MacDonald: Yes. flexibility, some shock absorber, in the normal exchange rate. So I would advocate, if I was starting Q4553 Lindsay Roy: There are a number of small from first principles, that you would have to have your countries that have their own currency. What own currency and you would have to have an strategies do they follow to manage their economy exchange rate regime which recognised the well, and how do they manage risk? significance of oil on the exchange rate, on Scotland’s Dr Armstrong: There are a couple. Obviously, you competitiveness, and that would mean some have the Scandinavian countries that often have their flexibility. I don’t think a purely flexible system would own currency, some tied to the euro, but it gives it a be a good one, but one with some flexibility where degree of flexibility to make adjustments periodically. you maybe fix your currency around a basket of your When Europe was going through the worst of its trading partners but allow that to adjust in the light of times, there was some flexibility. Others have used adverse shocks to, for example, oil. Of course, as we this latitude quite generously, although they keep it have been saying, there could be other shocks which fairly pegged. It is the sort of menu that Professor are external financial shocks. We have to recognise MacDonald was talking about; you can go from a very the importance of these shocks, certainly. hard fix to a float—they are the extremes—and then you have a whole range in the middle, which allows Q4556 Mike Crockart: So that is one vote for your some degree of flexibility. own currency. The small European countries that have the same sort Professor MacDonald: I think that is inevitable. of per capita GDP and the same sort of population as Scotland, on the whole, have their own currencies. Q4557 Mike Crockart: Are there other views? cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 155
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald
Professor Bell: I share a lot of Ronnie’s sentiments. Professor Bell: A lot of this has been about adjusting It is important to distinguish between the short, the fiscal balance, which sounds very abstract and medium and long term here; a lot of the costs may esoteric, but what that means is either more taxes or occur during the period of adjustment or transition. less spending on public services. Eventually, you get things more or less right. In the very long term, you end up adjusting to whatever set Q4565 Mike Crockart: I am still not entirely sure of natural resources, the skills of the work force and what you are voting for in what’s best for Scotland. so on can command in international markets, it seems Professor Bell: I think the issues around the setting to me. But you do not want huge costs either on up of the common monetary arrangement are such, Scotland or incurred on the rest of the UK during a probably, that the best arrangement is likely to be a period that may extend over a considerable period of separate currency. time. Q4566 Mike Crockart: But you are not saying that Q4558 Chair: What is a considerable period of with any great relish. time? Does long term mean when we are all dead, Professor Bell: No, because there are costs associated especially those of us here, or a shorter term, which with both courses of action. means, possibly, the staff? I am not quite clear what sort of a transition period you are indicating. Q4567 Chair: Does it make it easier, rather than Professor MacDonald: I personally think it would be asking for the best, to ask what the least bad is? Is a generation. that a better way of putting it? What is the least bad option for Scotland, Dr Armstrong? Q4559 Chair: And by “generation,” you are Dr Armstrong: I was trying to answer the other way. meaning what—25 years? I’ve got a page of notes. I am going to try it your way, Professor MacDonald: Roughly speaking, yes. which is the least bad. What you want to avoid is a non-credible currency proposal. So you don’t want to Q4560 Chair: So it will be 25 years of misery. go into September with a currency proposal that Professor MacDonald: Possibly, yes. nobody thinks is actually going to happen. That is a recipe for capital flight and for all sorts of difficulties. Q4561 Chair: Do you agree with that, Professor On the basis of that, from what we have discussed Bell? today, one type of currency union is the formal Professor Bell: There would be a lot of adjustment monetary union that we have been talking about. necessary. It would be compressed at the start, but it There are two problems. One is that you can’t tie a could take a very long time to work it all through. country down, and the other is that one is so much bigger than the other it means that it is very difficult Q4562 Chair: “Adjustment” is one of these to negotiate. My view is that, because Scotland would euphemisms. What does “adjustment” mean to people start off with that level of debt, I doubt that that in my constituency? Does it mean unemployment, monetary union can be negotiated. their mortgages going up or prices going up? What Then you start by asking what the other options are. does it actually mean? So you get to another type of currency union, which Professor Bell: It is risks of these things happening is the dollarisation or sterlingisation, which we have to them, such as adverse shocks causing talked about, or your own currency. Between those unemployment, high inflation, dislocation of trade, two, it depends on what could be negotiated around that sort of issue, if you don’t get the right monetary this sterlingisation system to make a hard choice, and fiscal arrangements in place. because you have your own currency, which gives you a lot of economic sovereignty, but, as we have Q4563 Chair: The Scottish Government would, discussed, you have this very difficult transition presumably, say that they would get the right period; or you have this sterlingisation, which gives monetary and fiscal arrangements in place. Does that you very little economic sovereignty, but you could mean then it wouldn’t be 25 years of misery? manage to put some adjustment factors in to make this Professor MacDonald: No. If you take the example easier. It then becomes a choice between those two. of the oil shock that I mentioned, obviously, oil prices My view is that it is no surprise, when you look can go up and they can go down. Say there is a around the world and see countries the same size of dramatic fall in oil prices. That has severe budgetary Scotland, with the same sort of wealth as Scotland, implications for an independent Scotland. If they were that they have their own currency. part of the sterling zone, they would then have to rely on a downward wage adjustment. That is not going to Q4568 Mike Crockart: Unfortunately, that is not happen. So the consequence, as we have seen in the plan. The plan is that we have a monetary union. southern Europe, is unemployment. That is what your If that is the overriding aim, what has to happen in constituents would have to bear. those negotiations to ensure that that is achieved? Dr Armstrong: The first thing to say is that the Q4564 Chair: It would be entirely unemployment, monetary union requires two to agree. The Scottish would it, or would it be higher taxes as well? Government have given their desire. The rest of the Professor MacDonald: It could well be higher taxes, UK has messed around from unlikely to highly yes. If they want to maintain a certain level of public unlikely. I don’t know what adjectives they are going spend, obviously, it could well mean higher taxes, yes. to use next time. They are suggesting that pretty cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 156 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald clearly from its perspective. One could argue that that Dr Armstrong: Or they would. The uncertainty is not is just positioning. When you look at the economics helpful here. around how this would have to be, maybe you have to forget the positioning and ask what the economics Q4571 Chair: On this question of ending the look like. uncertainty, we discussed what is the least bad or the That is why what the Governor said last week was best for Scotland. In the event that there is a yes vote, important. As to the economics, as he pointed out, what is the least bad for the rest of the UK in these he said that you have to have contingencies for what circumstances? Is it best for the rest of the UK that happens on the rainy days. If you have no debt, you Scotland moves to have a separate currency? can have your own contingencies because you have Professor MacDonald: I would think it probably is, your own money. You can spend it on your citizens yes. If the currency can move, it will help to insulate when there are difficult times, but you are not going the rest of the UK from bad shocks hitting Scotland. to be in that position. You are going to be in a position Professor Bell: Effectively, it is taking on transaction with quite a high debt burden. Under that scenario, the costs, the cost of changing money, but it is unlikely question becomes, can you envisage how you could that it is taking on additional risks. negotiate these sorts of fiscal arrangements to allow Dr Armstrong: Yes; I think I would agree with that. the banking union and the fiscal arrangements? You can never say never, but, if you look at what is in the Q4572 Chair: If we assume that the rest of the interests of the rest of the UK and the fact that one is United Kingdom acts rationally and what is in its best 10 times the size of the other and that you can both interests, am I hearing that all three of you are saying pull out when you want, it is very difficult to see how that it would be in the United Kingdom’s interest to those agreements could be made. That is why we have say to Scotland, which had just voted for come to the view that the monetary union is probably independence, “No, you should have your own not the likely outcome and that we would have to go currency,” which means, then, that they would say, for a different system. It is imperative to have a “No, we are not agreeing to this concept of a shared discussion as to what a different system would be currency”? Am I right in thinking that that is the logic before the referendum and not afterwards. You don’t of it? Why I ask that question is that, yesterday, for the want to be having this the day afterwards. first time, when we had David Willetts, the Minister of State for Universities and Science, in front of us, he Q4569 Mike Crockart: Are we in danger of ending said that, in the event of separation, the research up with the worst option, because you have all said councils would be redrawn so that Scotland would not that, on balance, having our own currency would be within them. That is the first time, to my probably be the best option for a small country with a knowledge, we’ve actually had a Minister saying what risk of shocks and to be able to deal with those? If the contingency plan is. This is in the same context. we are ploughing everything into creating a monetary Just to be absolutely clear, if you were Chancellor, or union, and that is not going to happen, then what is in a position to make that decision, your view would the next most likely, surely, is sterlingisation, which be that the most sensible thing for the UK would be to say that what Scotland should do is abandon this none of you seem to be saying is a worthy option. Are idea of a shared currency and move to going into we in danger of backing ourselves into that corner— independence with their own currency. of that being the only port left to us at the end? Dr Armstrong: In relation to the last bit, I don’t think Dr Armstrong: The worst option is where people are it would be for a rest of the UK Chancellor to decide. just left with complete uncertainty. Economists use A rest of the UK Chancellor may come to the this term and people say, “What does that mean?” conclusion that, in their judgment, a formal monetary Basically, it means that, if one side says, “We want a union is not in the interests of the rest of the UK. full monetary union and we are going to deliver this What an independent Scotland would decide to do to our people,” and the other side says, “You’re not after that is up to the independent Scotland. It is not getting it,” now what do you do? That sort of for the UK Chancellor to say, “By the way, if you uncertainty is not a very sensible situation between want my advice, I’d do this, that and the other.” An two Governments and what will become two independent Scotland would then have to say, “What independent sovereign states. You, as Scottish are the pros and cons of something like a currency citizens, no longer know what the monetary area which looks like sterlingisation or arrangements are going to be, and that is not a good dollarisation?”, which is very, very different from situation to be in. That is why these so-called “plan what is in the White Paper. Let me emphasise that that Bs” would be much better put out and represented is extremely different from what is in the White Paper. ahead of the referendum rather than afterwards. It But that is one possibility that the rest of the UK might win you the election by not talking about it, but would not be able to say no to. That would be in the that is not what we are after here. We are after what Scottish Government’s gift. Creating their own is the optimum thing for Scottish citizens. currency would also be in the Scottish Government’s gift. It would be for them to decide that second leg of Q4570 Sir James Paice: It sounds to me that you the answer. are saying that it would be more helpful, setting aside In relation to the first leg of the answer, clearly, you the possibility of just positioning, if the current UK would need to have both parties playing. One of those Government were to say, clearly, that they would not parties would be the Chancellor of the Exchequer. enter into a monetary union. From the statements that we have given, with that sort cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Scottish Affairs Committee: Evidence Ev 157
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald of level of debt, it is difficult to see how that could be Q4576 Chair: I am sorry but I am not clear. To be in the interests of the rest of the UK, as it has been laid clear about this, the fiscal pact either includes the out in the White Paper, i.e. a formal monetary union. overall level and it is very strict, or it includes the overall level and the detail. The assumption that has Q4573 Chair: Can I ask the other two witnesses always been articulated is that the nature of the fiscal whether you concur with that view? Again, nodding pact would simply be covering, as it were, the high- or shaking your heads is not recorded. level overall figure. Are you saying that, in your view, Professor Bell: Yes, I concur. it would cover the detail of the tax levels as well? Professor MacDonald: As do I, yes. Professor MacDonald: No, I don’t think it would. Given the fiscal deficit that Scotland is likely to have, given its indebtedness, they would have few degrees Q4574 Chair: I think we are just about closed. Can of freedom in practice to alter rates very much, but I just pick up a couple of smaller points that we maybe they would, in principle, be able to do that. There is have not touched on adequately? One of the issues nothing in a stability pact that would stop them from that I do not think we have touched on is, in the event altering the rates. of a sterling zone and controls over fiscal policy, the question of the extent to which a separate Scotland Q4577 Chair: Even though you are saying it is a would have control over its fiscal policy even if you very tight fiscal pact, the Basques do actually have the had a complete monetary union. My understanding is flexibility at the moment to cut their corporation tax that fiscal limits would be set in terms of overall to next to nil, if they wished. borrowing and spending. However, within that limit Professor MacDonald: That is really what I am there would be complete flexibility. Again, nodding getting at. You can’t cut taxes to nil given the stability doesn’t cut it. pact. It is very unlikely that you could do that, but you Professor Bell: It would be, I think, in the interests of can tax at the margin. You can change at the margin. A the rest of the UK to consider very carefully if there few per cent is what the Basques have been able to was tax competition resulting. So you can have the do. They have had some success in using taxes in that overall fiscal balance, and maybe that is satisfactory, way. I think the stability pact is going to limit big tax but then you might have, say, a very low income tax movements. That is what I am saying. In principle, if rate in Scotland and use that as a mechanism to shift your budgetary position was very favourable, then you resources towards Scotland and have a very high could, perhaps, have these large tax changes. council tax, which you can’t shift. Q4578 Sir James Paice: For clarity, bearing in mind Q4575 Chair: The one that has been quoted as a the overall tax burden or the share of GDP, whichever possible example is corporation tax. The Scottish way you want to describe it, as opposed to individual Government have argued that, yes, there will be a taxes, I would presume that the stability pact would say that basically you’ve got to raise x amount in fiscal framework, but they would have complete, total taxes, in simple layman’s language, and, as you say, and absolute flexibility within that. Now, unless I am it would not lay down individual taxes. So they would mistaken, you are saying that that is not the case. have quite a lot of flex within the overall tax burden, What would be the mechanism by which that would would they not? come to pass—that the UK Government said, no, that Professor MacDonald: It would be my assumption is not acceptable? If you had a macroeconomic that they could. framework with fiscal rules set and so on, there is no provision within a general fiscal rule that says, Q4579 Sir James Paice: So they could cut “However, you can’t do such and such.” Would that corporation tax significantly, as long as they be a side agreement? What is the mechanism of this? compensated for it by increasing alternative taxes so Again, people in Scotland need to be clear about that the yield was the same. whether or not this proposal to have ultra-competitive Professor MacDonald: Yes; that, in principle, is right. corporation tax rates would be permissible or Dr Armstrong: We have discussed what would be in conceivable under this arrangement that the Scottish the RUK’s interest to go into this form of monetary Government are proposing. union. Changing corporation taxes between two Professor MacDonald: For me, it is the difference different locations, while it sounds like a good idea between what is available in principle and what is for the one that reduces the corporation tax, is available in practice. If you look at the Basque economically quite inefficient. In economics terms, country, for example, they are obviously part of Spain you want to have resources allocated on where they and part of the monetary union, but, in principle, they are best used, not where the tax rate is cheapest, have complete control over taxes. In practice, can they because, if they go to one part because the tax regime use them very much? No, they can’t, because they are has been altered, guess who loses? It’s the other party. constrained heavily by the fiscal pacts that they have agreed to. In principle, yes, the Scottish Government Q4580 Sir James Paice: I am not advocating it. I could cut corporation tax; they could cut income tax; am simply trying to establish the flexibility. and they could vary VAT subject to agreement with Dr Armstrong: No, no, I know you are not. What I the EU. But I doubt that they could do it very much am trying to say is that, from an RUK negotiating if there were very strict pacts in place, which it looks position, are you going to allow somebody, where you like there would have to be. are encompassing quite a lot to create this formal cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:01] Job: 038186 Unit: PG10 Source: /MILES/PKU/INPUT/038186/038186_o010_odeth_SAC 140205.xml
Ev 158 Scottish Affairs Committee: Evidence
5 February 2014 Dr Angus Armstrong, Professor David Bell and Professor Ronald MacDonald monetary union, to carry out policies that are going to any points that you feel you want to leave us with that hurt yourself? I find that difficult to understand. You we have not touched on already? It does feel as if we might allow a marginal amount, but I find it hard to have covered the whole world, but just in case there believe that you would allow that as part of this formal is anything we have not covered. Dr Armstrong has monetary union. If it is not a formal monetary union, managed to work in his advert for his publications the game has changed, and, clearly, you can do what later on. That was well done. I thought you might you like. When I say you can do what you like, that have left that to the end, but no. Are there any other is a sterlingisation issue, which is a different thing. points that you would wish to raise with us? Professor Bell: The general language of fiscal pacts Professor MacDonald: No, I do not have any. has been around the deficit that you run, but issues like tax competition via corporation tax have come Q4582 Chair: Does that apply to your colleagues? much more on to the agenda in the last five or 10 Professor Bell: Yes. years. It would be very surprising to me if RUK, in Dr Armstrong: Yes. its negotiating stance, did not have some way of Chair: Could I thank you very much for coming dealing with that issue. along? This has been a very interesting session. We will, obviously, have some difficulty in writing it all Q4581 Chair: I said before we started that, at the up and making a report. My head is hurting, but that very finish, we would give you the opportunity to is the job of the staff. So thank you very much. answer any questions that we had not asked. Are there cobber Pack: U PL: COE1 [SO] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 159
Wednesday 26 February 2014
Members present: Mr Ian Davidson (Chair)
Mike Crockart Sir James Paice Jim McGovern Mr Alan Reid Graeme Morrice Lindsay Roy Pamela Nash ______
Examination of Witnesses
Witnesses: Owen Kelly, Chief Executive, Scottish Financial Enterprise, and Iain MacNeil, Alexander Stone Chair of Commercial Law, University of Glasgow, gave evidence.
Q4583 Chair: Gentlemen, could I welcome you to employer. That is a quick overview from an industry this meeting of the Scottish Affairs Committee? As perspective. you know, we are conducting a series of inquiries into Iain MacNeil: I have perhaps only one point to add the potential impacts of separation on Scotland. from a consumer perspective. The majority of the Today, we are looking at the impact on Scottish consumers would be outside Scotland, predominantly financial services. Perhaps we can start off by asking in England. Some are in Europe, but we have not had you to introduce yourselves and, for the record, as much branching and passporting business as was indicate your background. originally envisaged in the European model, so there Owen Kelly: I am Owen Kelly, chief executive of is a big focus on exporting into the English market. Scottish Financial Enterprise. We are the membership representative body for financial services in Scotland. Q4585 Chair: Could you give an indication of what Our member companies come from all sectors of the you believe are the reasons for Scotland’s success in industry and also from industries that support the the financial sector? Why are we so good? Is it to do financial services industry. with location, and what in particular about location? Iain MacNeil: I am Iain MacNeil. I am professor of What are the relative strengths of the Scottish end of commercial law at the University of Glasgow. Before this industry? I became an academic, I worked for about 10 years in Owen Kelly: Scotland has been a successful the banking and investment sector. international financial services centre for about 300 years, so the pedigree, or history, of the industry in Q4584 Chair: To set the context, perhaps you could Scotland is certainly an attractive factor for a lot of tell us very briefly how significant the financial international investors. In the modern world, perhaps putting the history to one side, what we hear from our services sector is in the Scottish economy, and also members in terms of the attractiveness of Scotland as what are the main components of that sector. a place to do business is that it is the skills, the legal Owen Kelly: In terms of employment, we as an and regulatory frameworks—of course, these are UK industry employ roughly 100,000 people in Scotland. frameworks—and equally being in the same There are roughly another 100,000 whose jobs depend regulatory and legal frameworks as the largest on the financial services industry, so we are a big financial centre in the world, which is London. employer. We contribute between 7% and 8% of GDP, Clearly, that is a good thing and a good situation to which is quite a big slice, and we are the fourth largest be in. Many international investors and other centre for investment management in the EU after the businesses can operate from Scotland, and yet UK, France and Germany. Scotland is fourth. That participate fully in the jurisdiction that contains the reflects the strength of our asset management sector, largest financial centre in the world. which is very, very successful, and internationally The other important factor for those investing in recognised. Scotland and setting up new businesses in financial The other important sectors for our industry are life services in Scotland is the supply of talent we get and pensions. Roughly, one in four jobs in the UK through the universities, and having professional pensions industry is in Scotland, so we are a big part bodies like the Institute of Chartered Accountants in of the UK pensions industry. Asset servicing, which Scotland and the Chartered Institute of Bankers in is predominantly done by large international financial Scotland, both of which, incidentally, are the oldest of institutions, is a big slice of the industry, and a big their kind in the world. We have an infrastructure of success in recent years. Scotland is the UK’s centre knowledge and a history of having that infrastructure for asset servicing, so again it is a big and important that is very attractive to new investors, and a very part of the overall UK financial services industry. Our good reason for companies operating in Scotland to professional services—accountancy, banking and so succeed. on—are also a key part of the overall ecology, if you Iain MacNeil: I do not have much to add to that. like, of the industry, and serve clients throughout the UK and internationally. I am summarising quite a lot Q4586 Mike Crockart: Is it as simple as the fact that here. Of course, there is then banking. Of all the there is a symbiotic relationship between Scotland’s sectors of our industry, banking is the largest financial services sector and London’s? Is it the cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 160 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil regulatory framework that overpoweringly makes rules and compliance with those rules. Over time— Scotland successful in this? this is looking back 20 years—we have not had the Iain MacNeil: I would be careful about attributing growth that was envisaged in that segment. That has Scotland’s success to regulation in a general sense, meant that the business that is done has tended to be because I do not think regulation is necessarily what on more of a local subsidiary basis—locally drives success. Regulation can hold back the success established companies. of a particular country, but I am not sure that Owen Kelly: From a company or provider perspective, regulation in itself makes for international success. one of the big drivers is also the tax environment of Specifically in the UK context, it has been important the jurisdiction into which you are selling. For for Scotland to be integrated into the UK framework example, if one is purchasing a long-term savings and, probably more significantly in recent times, into product or pension in the UK, one probably would the European framework, because so much of the not purchase it from a company regulated in Ireland, entire UK framework is coming down from Europe. because the tax system is different and the product Owen Kelly: I agree with that, but would add only will not be correct. The products tend to be that, although what Professor MacNeil said about the determined by the tax environment. This is still at customer base being mainly in the rest of the UK is member state level across the whole of the EU. The entirely true, for a good number of our members EU single market is still very much a patchwork, and almost all of their clients are overseas in some cases. it is not routinely the case that people buy products, They are serving clients in markets all around the particularly at retail level, from outside their own world, not through London, so many of the jurisdiction. For example, one of our members has a relationships are direct, but the jurisdiction that the UK and Ireland business unit, but of course it has foreign entity is dealing with in regulatory terms is to provide separate products for Ireland and comply the UK jurisdiction. One aspect of that is the UK’s separately with Irish regulation. It has to recognise the network of double taxation treaties. Double taxation distinct nature of the market it is operating in, and that treaties for companies running operations anywhere in market is constructed largely around tax and the UK are important, because that affects how their regulation. profits are taxed. I think it is generally accepted that the UK has arguably one of the best networks of Q4589 Mike Crockart: On that point, can we international double taxation treaties in the world. assume that regulation and tax more widely are pretty That is one of the aspects of the tax and regulatory much the same across Scotland’s financial services structures that support international business. The UK and the rest of the UK’s financial services, as it stands is widely perceived to be one of the best. at the moment? Owen Kelly: As it stands, we are one jurisdiction, so Q4587 Mike Crockart: Can I probe you a little it is the same tax code. All of that is reserved to further on that? You seem to be suggesting that the Westminster anyway, and financial regulation is a UK- European dimension in regulation is potentially more wide thing, so it is a wholly single market. You can important than the UK dimension. Equally, earlier you sell exactly the same product in Penzance as you can said that we have a single market across the European in John O’Groats. Union, yet the trade in financial services products between the UK and Europe does not seem to have Q4590 Mike Crockart: That is really what gives it followed that. the success it has in the UK. Iain MacNeil: I may need to clarify. I think you can Owen Kelly: From a provider perspective, that is a analyse the European influence in two aspects. One is market of 70 million-odd people, and it is one market. what you might call the trade flows in terms of Iain MacNeil: It avoids the complications that arise business being done. It is true to say that the cross- with the example of, say, selling into Ireland or border trade flows have not been as great as was another European country. originally envisaged when the single market was established. The second aspect is: where do the rules Q4591 Mike Crockart: It is the only true single come from? Predominantly, nowadays, the rules come market in the European Union. from Europe. That is why I think there is a slightly Iain MacNeil: The single market is a misnomer as far different picture depending on how you look at as financial services are concerned. It has not really Europe as between flow of business and source of happened. rules. Q4592 Graeme Morrice: Good afternoon, Q4588 Chair: Why do you believe that the trade gentlemen. We are looking into the whole issue of flows are not as big as was originally anticipated? Is financial services in Scotland, if indeed Scotland was this just the EU being oversold, or are there other to vote for independence. What would you see as the reasons? advantages and disadvantages to the Scottish financial Iain MacNeil: The EU set up what it referred to as a sector if Scotland went independent? passporting system, which would enable firms Owen Kelly: It seems fairly clear that, if Scotland authorised in one member state to do business in becomes a separate country and a separate jurisdiction another without setting up a local subsidiary. The for tax and regulatory purposes, the current market experience over time has been that it was more we have just been discussing, effectively, for financial difficult to do that than was originally envisaged, for services purposes, becomes two markets. That then a range of reasons, for example, related to conduct introduces a requirement to have a new regulator—a cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 161
26 February 2014 Owen Kelly and Iain MacNeil
Scottish regulator. We do not think that is optional. I Having said all that, you would have to think everybody would agree that that is part and counterbalance it against the fact that some of the jobs parcel of fulfilling your obligations as an EU member in our industry are serving UK customers. It is an state and in many other contexts. You have to have a open question whether you could continue to do that new regulator, and that will be so for most but not all from a separate jurisdiction. There are so many cases. If you run a business where you do not have unknowns, but at the moment it is difficult to see, any UK clients or customers, you might see that as simply in terms of the institutional changes that replacing one regulator with another, but I venture to become necessary, anything other than more cost and suggest that probably all of our members will have complexity. customers in England, and in the rest of the UK. They will still need to be regulated in the rest of the UK Q4593 Graeme Morrice: That is very useful. One of by the Financial Conduct Authority and the Bank of the fundamental issues would be whether there would England in order to continue to serve those customers. be a currency union, and whether Scottish-registered In addition, they will need to deal with the new banks would be able to depend on the Bank of regulator in Scotland. It is hard to see that that is going England as lender of last resort and so on. We will to be anything other than a straight additional cost and probably come to those issues in due course. Iain, complexity. That is one change that seems to be a would you like to respond to my substantive question? necessary and inescapable consequence of Iain MacNeil: Owen has covered a lot of the issues. independence, which is going to be paid for ultimately Perhaps one thing to pick up and comment on a little by customers and by the companies in the financial more is the cost of regulation and the double services industry. We have already discussed regulation system as between Scotland and England. separation of the two markets and the complications While the most likely outcome would be double and costs that brings. regulation, one can envisage models which would The other factor we are very conscious of is that the avoid that, such as passporting from Scotland into nature of the debate is such that none of the questions England, or vice versa. The double regulation business would really like to know the answers to can outcome is not necessarily set in stone. Coming back be answered until after a yes vote, if there is one. If to the point I made earlier that consumers generally there is a yes vote, we then begin a period of time. The do not like the passporting model because of the duration is uncertain, although I respect the Scottish uncertainties it raises with regard to regulation and Government’s statement that it would all be done and tax, and more general reputational issues about the dusted quite quickly, or certainly within an 18-month provider being in another state, those consumer doubts period. There are other views on that, but, even if about the passporting model would probably drive us you accept that 18-month period, it is a period when ultimately back to a double regulation model where questions such as what currency we will use and many firms are being regulated in England and in Scotland. other things will still not be resolved, so, following a One of the major concerns of financial services yes vote, inevitably we seem to have to deal with a providers generally right now is the increasing cost of period of transition and uncertainty. Some of that, regulation. It has gone up since the financial crisis, for which we may or may not come on to, will relate to various reasons. The prospect of another major membership of the European Union and all sorts of recalibration in a few years’ time, when firms are in other things. These are some of the inevitable the process of going through the very recent consequences of a yes vote. recalibration, would be a very unattractive proposition In terms of independence, if one looks ahead a few for many firms. years beyond the transition period to some steady state where everything has been negotiated and Scotland is Q4594 Graeme Morrice: In the event of separation, a separate country, I think the predominant change— Scotland’s financial services industry would be very I guess that by then the industry would have had to large indeed in relation to GDP. In Scotland, I think it reconfigure—would be the market. You would then be would be over 1,000%. Do you think that increases a separate, smaller jurisdiction and that would put you risks—having lots of eggs in one basket? in a different place from what we are used to. That is Owen Kelly: I absolutely get the question, but it is an inevitable consequence of becoming a separate difficult to separate it from the currency question. If country. you posit a currency union, as some do—although it In terms of opportunities, it is not easy to see that any has been as much ruled out as I think it is possible opportunities arise simply by dint of becoming that for the UK Government to rule anything out at the separate country. It is possible to hypothesise—some moment—that necessarily has to have some element people do—that you might in that steady state future of shared regulation and responsibility for acting as have a more effective regulator. Perhaps it could be a lender of last resort to the banking system. If you do better regulator than we have. It might be that you not contemplate a currency union and you look at could have a better tax environment. It is possible to other currency options, it all becomes quite imagine a world where the tax environment is better; complicated. If you use the pound sterling outside the perhaps one could invoke comparisons with sterling currency area, as has been floated, and you Luxembourg, Switzerland or whatever, but all of that are using it on the same basis that Montenegro uses has to remain in the future. We cannot know if any of the euro, it is difficult to see how you can provide it would materialise, and it would probably take a liquidity to the banking sector, and lender of last resort while to establish, and for reputation to grow and so facilities. That is a bit of a problem with that on, to reap the benefits. particular proposal. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 162 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil
If you think of introducing a new currency, it would a position where it had a viable regulatory framework be a complex and difficult process, but it is at least in place. I do not see any reason to doubt that. The possible to theorise that you could support a banking problem is that we have become so integrated into the sector using a lender of last resort, but a lot would EU and UK systems that it has become increasingly then depend on the strength of the currency in difficult to withdraw. We are not in the position international markets and the overall strength of the Ireland was in 20 or 25 years ago, where it built up a economy. That would be the bigger determinant, relatively good financial sector. It is much more rather than anything structural, because by then you difficult from the starting points that we are now at. would have your own currency and central bank. Q4598 Graeme Morrice: Owen, would you like to Q4595 Graeme Morrice: Iain, would you like to add comment on that? to that? Owen Kelly: Only to say—this is probably not going Iain MacNeil: If you envisage a scenario in which, as to be that helpful—that it is difficult to predict at the I think we are suggesting, some of the bigger players moment, because there are so many uncertainties. were moving to an English base as a result of Scottish Even the currency is something we are not yet clear independence and becoming subsidiaries, they would on, and probably will not be until after a yes vote. I by definition, being within the rest of the UK system, agree entirely with what Iain has been saying. It will have access to the money market operations of the be for boards and shareholders to examine the risks Bank of England. In that sense, there are elements of and make a judgment, but at this stage, given the support available. Once we get into lender of last extent of the unknowable, it is very difficult to resort territory and its sister, which is bail-out, we are generalise. into political territory. We need to be careful about how we frame the lender of last resort debate, because Q4599 Chair: You mentioned unknowables. Surely, to me it becomes a political question. It is not the unknowns are known; these are not unknown necessarily a question of having institutions and unknowns. I am not clear whether or not it is frameworks that are already in place, because clearly reasonable for people in Scotland to expect that some the experience of the financial crisis has been that of the present unknowns should be known before the political will is essential when substantial lender of referendum, in the way that three main UK parties last resort facilities are going to be made available and have all said they will not enter into a currency union. bail-outs are going to take place. The political nature As you yourself said, they could not have been any of intervention needs to be borne in mind, and the fact clearer. To some extent, that is now a known as is that ultimately we can be talking about taxpayers’ distinct from an unknown. I am not clear about the money if it comes to bail-out; we are not talking about other unknowns, and whether or not it is reasonable just the balance sheet of a central bank. to expect them to become known through a similar Graeme Morrice: I was going to raise the point about statement between now and the time of the companies currently based in Scotland in a post- referendum, so that people in your industry would independence situation, who wished to migrate risk, then have a clear idea of what the UK Government’s relocating. [Interruption.] Is it something I said? position was going to be in the event that a Scottish Chair: I think I’m losing the will to live after the Government which had achieved a vote for separation discussion of that last question. came with a shopping list. What we are trying to do in this whole series of hearings is clarify for people in Q4596 Graeme Morrice: I know the feeling. In Scotland what the consequence of a yes and no vote terms of migrating risk for companies currently based might be. We are loth to accept that many of the in Scotland in a post-independence situation, we have unknowns are unknowable. It just strikes me that a lot heard press reports that a number of Scottish of the unknowns are people not wanting to tell, or institutions would do exactly that. Is this plausible? Is who tell and then are not believed and it is a question this a possibility, a probability or a likelihood? of, “He says, she says. No, you didn’t; yes, you did.” Iain MacNeil: Moving is not really difficult. The It is a bit like a pantomime: “Yes, we will; no, you process of transferring legal entities is not won’t.” It is very difficult to get an agreement in those problematic. The process of transferring people is sorts of circumstances. Does that seem fair? more problematic, and whether in fact there could be Owen Kelly: I share a lot of the observations you agreement for that to take place. My take on it is that make. It seems to us that we are in a very unusual I do not think there are major barriers to prevent firms situation, where we have a Government in Scotland, from moving, assuming of course that their who for reasons that are entirely legitimate—of course shareholders consent, which I think they would if they they are; they have been elected—are clearly pursuing perceived it to be in their best interests. I do not see the idea of independence. All of the materials they are movement as something that would be difficult. producing support the idea of independence, so they are to be seen as more akin to campaigning literature Q4597 Graeme Morrice: I think you are right; it than literature that would give you an overview of would not be difficult to do, but do you think it is what is really going on. likely to happen? I suppose that is the point I am You can make the same claim about the papers and making. contributions coming from the UK Government. You Iain MacNeil: This issue comes back to perceptions can say that, fair enough, this is a democracy and there of risk in the transitional period. I do not think is a Government in the UK that is opposed to anybody doubts that ultimately Scotland could get to independence, so it is only right that the civil service cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 163
26 February 2014 Owen Kelly and Iain MacNeil and others support them in making the case against. Q4603 Chair: Before we move on to Pamela’s However, that means that it is extremely difficult to points, can I clarify one other point? You mentioned get to what you might call objective views, and we Scottish institutions relocating to England. I am not have spent a lot of time trying to do that. The other clear whether or not that just means moving the thing it leaves you with is a state where nobody can plaque from the front door and saying, “We are now get into the business of negotiation. I think that the in England,” in which case presumably virtually statement on the currency by the Chancellor, everybody in the Scottish financial industry could do supported by the other parties, is the only example I that overnight, and effectively it would mean that their am aware of where the UK Government have said, domicile legally had changed and they were then “This is a view we currently hold, and expect to hold presumably liable to be protected by the Bank of even after a yes vote.” They have not sought to get England, but in effect there would be no change in into negotiation, for reasons, I think, connected with real terms. Is that correct, or is it more complex than the fact that they do not feel able to represent the that? In order to change your domicile, do you have interests of one part of the UK against the interests of to move a certain proportion of your work, your staff another part of the UK, all of which I understand. or anything else? There are, however, some facts that we could get our Iain MacNeil: You would have to move your hands on. We have already touched on dollarisation. registered office, which would usually be your head It seems to us that, if you have a dollarised currency, office as well; it would move from somewhere in it is not compatible with the terms of EU membership. Scotland to England. In doing that, if you were It would be reasonably straightforward to check that already regulated by the UK authorities, you would out. If you asked the Commission whether that is the continue to be so. Trying to answer your question case—and it seems to be, because that is the case with more directly, is there any substantial change? In Montenegro—that is the sort of fact we could get our terms of the business model, not really. One thing we hands on. If we knew that, we would then know that need to bear in mind here is that the way these dollarisation, or sterlingisation as the jargon now has financial institutions are managed does not necessarily it, is actually only an option if you do not want to be map on to the legal entities they comprise. You can in the EU. That would help us to know what the real say there is a business management model and a legal options are. However, I do not think we are in a entity model that do not necessarily run in tandem. position before the referendum to know conclusively which option would or could be chosen. Q4604 Chair: Am I right in thinking that it would be entirely possible, if people felt that moving away Q4600 Lindsay Roy: We have had a definitive from the regulation and jurisdiction of UK law was a statement from Mr Willetts about the UK research major difficulty, that they would switch their plaque, councils in relation to the universities. and the legal entity and everything else remains the Owen Kelly: I am sorry, I was not aware of that. same? Iain MacNeil: The danger is to say that everything Q4601 Chair: It is not reasonable for us to expect else remains the same. To move the legal entity and you to follow every announcement by Mr Willetts. registered office to England would imply that the Owen Kelly: I had read that that was unique, but if it management functions go with it. That is not to say is not I stand corrected. that some other functions could not, for example, be contracted back to Scotland. That occurs commonly Q4602 Jim McGovern: Regarding the currency, is it in any case with certain functions being contracted out not the case that, if Scotland separates from the UK, to other countries, but the central issue is where the they would have to have their own currency for a head office and management are located. In other number of years to qualify to apply to become part of words, where is the main centre of the group for the the EU? My understanding is that any country that purposes of regulation? applies to join the EU has to prove their currency is stable for a number of years before they join. Q4605 Chair: Surely, the main centre of the group Owen Kelly: I think you are right in principle. This is could remain in Edinburgh, and the legal entity and certainly the Montenegro dilemma. They are using the the plaque get moved to London in order to get euro on a dollarised basis and they do not have a protection there. currency. There is a discussion going on about how Iain MacNeil: Not really. That would be problematic they could demonstrate that they meet the terms of from the regulator’s perspective. The regulators and EU membership. You are right. There is stuff in the the regulatory rules cover the senior management treaties that requires certain things. You have to function, so that has to go with the legal entity and demonstrate you have the institutional capacity to the head office. comply with various requirements. The short answer is that I do not know, but I think you are right; there Q4606 Chair: Owen, you are nodding would need to be a period of transition. I do not know enthusiastically. Unfortunately, Hansard does not whether that could be negotiated away; maybe it record it, so you have to say something. could. Owen Kelly: The idea that you can just unscrew your Lindsay Roy: Expert witnesses previously said it brass plaque and move it is not quite correct. There would take about five years to set up a central bank are regulatory requirements, certainly in the UK, and and a Scottish currency. It was David Bell and I am sure in other jurisdictions. The term that is used Professor MacDonald. in the jargony world is “mind and management.” cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 164 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil
There are certain roles and levels of seniority that the they needed to continue to be regulated in the rest of FCA require to be in the jurisdiction that is the UK. the UK, and what was being regulated in the rest of It is not the case that you can simply do something as the UK. If it was a subsidiary, for example, that had simple as move a brass plaque. You would have to been set up to continue to serve English or rest of UK move a certain amount of decision making and a customers, that would be one way of doing it; or as certain amount of mind and management of the Iain said, you could be passporting in certain types of company to show that you were in a position to be investment products; funds and so on can be subject to the regulation of the UK authorities. passported. It would depend on the nature of the business, but in general terms you would have to fund Q4607 Mike Crockart: Discussions I have had in and respond to another regulator, and for most the last couple of weeks with one of the big companies purposes that would be doing twice what you in Scotland—I will not go any further than that— currently have to do once. covered this exact subject. The view was that for one Over time, one would have to expect that there would of the big companies about 50 staff would have to start to be deviation between the two regulatory move. It would be the board and the support staff. frameworks, maybe not enormously, because they all They would have to move to London. The big effect come under the EU umbrella, but it is for each would not be staffing; it would be the taxation member state to implement EU regulation. That can treatment of that company because of the move of the take place on different timetables. That is one of the headquarters. Is that a fair representation? issues we see across the EU: different regulators Iain MacNeil: I am guessing, but if I were thinking implementing on different timetables. That causes about mapping the regulatory functions on to a companies problems, because they have to bring in a particular organisation, those kinds of numbers would new regulation in one state and then in another state make sense. on a different timetable. Approaches to regulation are Owen Kelly: You are also right to highlight the tax different; for example, there are different requirements aspect. I am not at all expert on them, so I will not be in Luxembourg over certain things, as to the UK. able to go into them, but there are also tax-related Those differences would be there. factors which affect this. You have to have a certain If you become a separate jurisdiction for tax and amount of things going on within the jurisdiction to regulatory purposes, the regulator will have to be comply with tax requirements. accountable to the Scottish Parliament. The Scottish Parliament will have views, rightly so. Financial Q4608 Pamela Nash: Mr Kelly, please correct me if regulation is a political issue. You would expect my paraphrasing is not correct. From what you said different views to emerge. For what it is worth, in the earlier, I understand that a new regulator would be document “Scotland’s Future” the Scottish unquestionable; it would be absolutely required if Government float the idea of a different approach to Scotland was on its own. From my perspective, you regulation in a couple of areas. You would have to would have to presume that a natural extension of this expect divergence. It is very difficult to say how long is that the regulatory framework would differentiate at it would take to manifest itself, but the more there was some point, with a different framework. Could each would only make the business of complying of you say a bit more about what difficulties that separately a little more complicated. I think the would present to Scottish financial services companies business of complying separately is a day one seeking to continue to operate in the rest of the United requirement. Kingdom, and possibly the benefits, if any exist? Owen Kelly: If one thinks beyond the transition Q4610 Pamela Nash: Professor MacNeil, you spoke period—so we are now in a steady state with some about the difficulties countries have at the moment in sort of legal cut-over, independence day has been the European framework. You might be about to be declared and there is a new regulator—it seems quite saved by the bell. Can you think of examples of a likely, for all sorts of reasons, that, in the early years successful relationship? We would like to know a bit of that, regulation would stay broadly the same. You more about how UK financial services operate in would, however, still need to comply separately. The Ireland, and if there are any other examples. new Scottish regulator, in order for Scotland to fulfil Chair: Perhaps I can interrupt and ask you to think its obligations as an EU member state, would have to about that. We are being called to a vote. We will start show that it was independent of Government, and it as soon as we can get back again. We will adjourn for would have to have a certain enforcement capacity five minutes. and so on. You would have to do something even if Sitting suspended for a Division in the House. the rules were identical. It would not be the case that On resuming— you just do not have to do anything—just be a kind Chair: Apologies for that break. You have had time of postbox—because I do not think that would really to think about your answer, so it should be good. fit with the EU framework. Pamela Nash: No pressure. Iain MacNeil: We are coming back to the advantages Q4609 Pamela Nash: The cost to the company of and drawbacks of having an additional Scottish enforcement and compliance would be doubled; it regulatory system. would be replicated. Owen Kelly: Whether it would be double would Q4611 Pamela Nash: Yes. It would be helpful to probably be going too far. It would all depend on how have examples of why it is difficult. You touched their business was configured and the extent to which earlier on why it is difficult in Europe just now, with cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 165
26 February 2014 Owen Kelly and Iain MacNeil the framework that is there. Is that a viable example especially to be sold across Europe. Some of that of what it would look like for Scotland’s partnership relates to the advantageous taxation treatment with the remainder of the UK? available for companies that set up there. Iain MacNeil: Maybe one way to focus on it is to come back to the point I made about passporting and Q4613 Pamela Nash: That would not be comparable try to explain why that has not worked very well. The with the situation we would find ourselves in if idea with passporting was that, if you had what the Scotland separated. EU referred to as minimum harmonisation, or at least Iain MacNeil: That remains to be seen, because one some form of harmonisation, of the regulatory of the issues for companies in Scotland would be that, frameworks in every member state, in theory, if you while there might be increased regulatory cost, you were licensed in one member state you should be able have a trade-off against the promise of a reduced to go to another, and the regulatory framework would corporation tax rate. Whether the reduction in the be sufficiently similar that you would not really notice corporation tax rate will or can be delivered remains any difference in terms of supplying products to open to doubt, but companies looking to relocate customers. In reality, that premise did not hold good— would have to weigh up potential corporate tax in other words, the idea that there would be a savings against increased compliance costs. sufficiently harmonised framework in place. Owen mentioned one factor, which was tax. Each Q4614 Chair: You have used the Irish example, country remains responsible for its own taxation saying that the Irish have managed quite successfully framework, so things like pension products have to sell into Europe. Surely, the Scottish financial different tax bases. But even for products where tax is network, because we are so good, would be able to not a major issue, the fact remains that particularly do that into England, Wales, Northern Ireland and the the marketing process is subject to differing rules in whole of Europe as well. Therefore, a change of different member states. As time has gone on, there nationality, as it were, would not make any difference. has been increasing harmonisation of marketing Iain MacNeil: You need to be careful when you are rules—for example with respect to investment-type talking about different sectors. Things like investment products. Nevertheless, as a provider based in one funds, which are often sold through local advisers, are country and licensed in that country, you still face a slightly different from trying to sell products directly, slightly different regime going to another country to like banking products, on a passporting basis. Where sell. That is not just a case of language. It is a case of you have got local advice being delivered, say to sell rules relating to how you interact with customers: the a retail fund that is based in Dublin being sold by information you give them; how you treat them; and a German investment adviser, it becomes a different how you deal with complaints. There is a range of proposition for the consumer, because there is a local issues. That is looking at it from the firm’s side. dimension to the selling process. In the retail Flipping over and looking at it from the consumer’s investment fund sector, yes, you could envisage side, the issue that the consumer faces is: do they want Scotland making a success similar to Ireland, but that to do business with a firm that is based in another is only part of the story; it is only one segment of a member state and is not substantively regulated, or not much bigger financial sector. regulated in the main in the state where the service is being provided? That may raise issues with regard to Q4615 Chair: It would be ironic in a sense if what the compensation arrangements would be, Scotland sought independence in order to keep things because, for example, the compensation system runs exactly the same. If a Scottish Government under on a home state basis. It is the home state of the separation decided to keep everything exactly the licence which controls the compensation same, or followed all decisions made by the then rest arrangements. For things like insurance products, it of the UK, presumably all these fictional difficulties may also relate to the legal framework that controls would be overcome. your capacity to claim under the insurance policy you Iain MacNeil: In theory, but you are then talking have been sold. Therefore, from the consumer’s about a kind of shadow regulatory system existing in perspective, we find over time that the preference has Scotland. Purely from a legal perspective, that is been to do business with a local supplier rather than a probably permissible, because the European Union passporting firm. The local supplier could be a directives require a clear legal framework. Given that subsidiary of a firm from Scotland or England. many of the rules are sent down from the European Union, one could envisage that taking place, but I Q4612 Pamela Nash: I have two questions on that. would revert to the point Owen made. I would not see In terms of UK companies operating in Ireland, is that that as a realistic option in the longer term; in the largely through passporting, or is it through local short term, perhaps. But in the longer term I think you subsidiaries? would have divergence in the regulatory framework, Iain MacNeil: Mostly my impression of the not least because part of the proposition of expansion that has taken place in Ireland has been that independence is that you adapt legal and regulatory this is subsidiary; Ireland is being used as a base for frameworks to what is suitable to the particular state. selling particularly investment products into other If you do not do that, you begin to ask what is the member states. I think that is mainly where its success point of independence. has been. This is not a case of people selling into the Irish market; it is the Dublin financial centre Q4616 Chair: To be fair, the point of independence effectively being used as a base for investment funds is not being driven by the needs of the financial sector cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 166 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil alone. It may very well be that other issues drive it about that, and there would have to be some and this is something where you are just making good clarification of that aspect. any difficulties that have been caused by separation. The drive for independence is not nullified by the Q4619 Pamela Nash: My final question is slightly points you are making, surely. off topic. Professor MacNeil, you have mentioned a Iain MacNeil: I accept that. I think that in a general few times the effect this would have on consumers of sense your point is ultimately correct. You could have Scottish products outside Scotland, and how it might a shadow system, but whether that can be maintained affect the decision to use those products and for the long term, I doubt. companies in future. Would it have a similar impact on Scottish consumers in terms of their use and Q4617 Pamela Nash: I think Mr Kelly said that even purchase of products and services from financial in that instance you would still have replication of services companies throughout the rest of the UK? regulation. Iain MacNeil: Yes. In principle, I do not have any Owen Kelly: You would still have to comply reason to believe that the Scottish consumer is unique separately, so that almost deadweight cost is in either the UK or Europe, but what is perhaps inescapable. As to whether you could have a word- slightly different and makes the thing a little for-word cut and paste, I suppose it would be worth asymmetric is that perhaps a Scottish consumer is testing whether that really met the expectation of aware that within the rest of the UK there is what you independence in terms of complying with EU might call the old system they were used to in the expectations. past. There might arguably be a little more comfort with that than the other way round. Q4618 Pamela Nash: One of the other proposals that Pamela Nash: That is really interesting. Thank you. came about is that there would be a partially shared system between Scotland and the remainder of the Q4620 Mr Reid: You said earlier that the Chancellor UK, so there would be a separate framework in terms had made it clear there would not be a currency union. of customer regulation. Is that a viable option? Are Do you regard that as a sensible decision by the there any examples of that across the world that you Chancellor? know of? Owen Kelly: I will only offer an opinion on my own Owen Kelly: A lot depends on the currency part on this. I would not claim that I am in any sense arrangement you have. If you have a currency union, trying to represent the views of our member you would necessarily have to have some sort of companies. To be honest, I think it has always been shared responsibility for the kind of big picture clear that the case for a currency union, once you regulation of banking—how much capital and so on— choose to look at it from the point of view of the because you would need that in order to manage the rest of the UK and not only, as I think the Scottish currency properly. That is what the Scottish Government’s own Fiscal Commission working group Government posit in their document “Scotland’s did, on the basis of what would be the right option for Future.” They say you would have a currency union Scotland—they were asked the question, “What would and a shared prudential regulator, but you would have be the right option for Scotland?”—is a different an entirely Scottish separate conduct regulator, so that question from what would be the right option for both is the regulation of day-to-day business. I am not entities once you start to view them as separate. There really aware within the EU of any shared system of are quite big questions. If I try to put myself in the that kind. One of the questions that we have long had, shoes of an official in the Treasury being asked on which I do not think has ever really been answered— day one after an independence vote, “We’ve had a I do not know whether Iain wants to comment on request for a currency union. What do you think?”, I this—is if you have a shared system of any kind and think largely you would get something similar to the a shared central bank, does that meet the EU paper prepared by Nick Macpherson. There are a lot requirement to have a central bank? Can you say to of questions. the EU, “Yes, we do have a central bank. We happen A point that is perhaps not often mentioned is that, to share it with someone else, but it is still a central even if you thought there should be a negotiation bank”? I do not think that has been tested either. about a currency union, it would take some time. That Iain MacNeil: I agree that it has not been tested. My official sitting in the Treasury could not immediately reading of it would be that it does meet the say, “Well yeah, why not?” because you would need requirements of the treaty and of the various to see how Scotland would be governed, what its directives. As I read those requirements, they relate economic policy would be like and what the public to having a legal framework in place. They do not finance was like. You would have to answer some necessarily control where the legal entity, such as the quite fundamental questions before as the rest of the Bank of England, is incorporated; nor, for example, UK, now a separate entity, you could make the according to my understanding, does the EU decision to enter into a currency union. Even the framework restrict the possibility of having a shared process for negotiating a currency union would have regulator, such as the Financial Regulation Authority, to take some time and would, I think, be fairly fraught. because there would be a certain legal framework in It was in some ways an unusual step to declare a place. I do not see any restriction on the competent position, but, if they had not done that, we would have authority being a legal person incorporated in another been going into the referendum with simply no member state, but I agree one cannot be conclusive knowledge of whether or not a currency union would cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 167
26 February 2014 Owen Kelly and Iain MacNeil be negotiated. To the extent we can know very much Q4624 Mr Reid: In practice, would the banks still be at all, we know that that is not going to happen. able to operate in Scotland without the lender of last resort? Q4621 Mr Reid: In response, the Scottish Owen Kelly: I think banks could operate in Scotland. Government have said that, in the event of a yes vote, Whether they could operate on the same basis as they Scotland would use the pound anyway. I think you currently operate is much more open to question, but referred to that earlier as being similar to Montenegro there would certainly be banks operating. with the euro. What implications would that have for the Scottish financial sector? Q4625 Mr Reid: In practice, would it mean higher Owen Kelly: I know Iain will comment as well. The interest rates? big and obvious ones are could you adopt that position Owen Kelly: The interest rates would be set entirely and still expect to be in the European Union? I think separately for the currency you were using; they that is a question that needs to be tested, because I am would be set in London. Scotland would have no not sure you can be a member of the EU if you are involvement at all under this scenario in the setting of using somebody else’s currency on that basis. That is interest rates. In terms of practical implications, I the dilemma facing Montenegro at the moment, as it guess that the pound in your pocket would still be the tries to negotiate entry to the EU. same. You would not have the transaction costs that The other two big obvious issues would be that you would arise from a new currency, which I suppose would then put yourself in a position where you really would be a plus, but overall it would be an unusual did not have any control of monetary policy. I think position for a country to adopt, and it would be hard the ratings agencies would mark down. This is all on to imagine the industry as it currently exists; it would their websites; control of monetary policy is one of have to reconfigure with that new economic the factors in assessing a sovereign rating. It is very environment. difficult to say what the impact would be, but I think there would be some negative impact on the rating if Q4626 Mr Reid: Say I was a depositor and I wanted you really were in that position. to put a significant amount of money into a bank. At The other obvious question is one we have already the moment there is a deposit guarantee scheme. touched on. If you do not have a central bank with the Would that be possible without a lender of last resort? powers of a central bank, how can you act as lender Owen Kelly: I guess it could be, if you could fund it of last resort? You would then only be able to provide from your reserves. It would have to be funded liquidity to the banking system if you had very large differently; or rather, what stood behind it would reserves of currency, which in very general terms is obviously be different. I think we are now getting into the realm of fantasy policy making, but if you were the Hong Kong model. Hong Kong has enormous not in the EU because you had decided to go down financial reserves because of its long-standing peg this route and it was not compatible with EU against the dollar. These are some of the big membership—that seems to be the case, but it would challenges that would come from it. It is also quite an be good to get a definitive view on it from unusual policy position. As a voluntary choice—I somewhere—in that case you might find you did not think Montenegro came into it just out of historical have to comply with EU requirements to have a processes—it would be an unusual one. certain level of financial services compensation scheme. I am straying now. Q4622 Mr Reid: I take it Montenegro does not have much of a financial sector. Q4627 Mr Reid: If you were a depositor, would you Owen Kelly: Not at the moment, no. put your money into such a bank? Owen Kelly: It would depend on where I lived. Q4623 Mr Reid: Let me just explore what in practice it would mean for the financial sector. You mentioned Q4628 Mr Reid: If you lived in Scotland. some of the defects, but what would it mean in Owen Kelly: If I lived in Scotland, I would have to practice for these companies? look at the overall circumstances. Owen Kelly: If you go back to the point about ratings, the rating of the sovereign within which you operate Q4629 Chair: That was hardly a ringing has a certain impact on the rating you as a company endorsement, was it? Earlier you said that such an can command in the markets. It is not, as I understand arrangement would be unusual. That is a bit like Sir it, an iron rule, but it does have an impact. There Humphrey saying, “It’s a very brave decision.” Is that would be impacts there, and that would be something correct? Does “brave” mean “irrational”? You are for companies to think about. using the euphemism “unusual.” What do you actually In terms of the lender of last resort point, that would mean by that? Is it unwise? have to be thought about quite carefully by all banks. Owen Kelly: It is not for me to say, because obviously How you would then do the prudential regulation of this is a political choice. other sectors would also require careful thought. Chair: Well, you are here. Having said all of that, Panama has a financial Owen Kelly: Okay. I think it would be un—I will not services industry. I am not familiar with it in detail, repeat what I said. I think it would not be a policy but it is certainly there. Other countries do it, but it is choice you would make unless you had to, in my an unusual thing to contemplate. opinion. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 168 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil
Iain MacNeil: Maybe I could add a couple of points. Scotland could expect to bring to bear in a currency The first is to compare dollarisation with UK union. My answer would be to say that, generally monetary union and the potential influence that speaking, it is a small minority party and therefore it Scotland would have in setting monetary policy and is not going to drive decision making. interest rates within a monetary union framework. Owen Kelly: Although on a related point, I think I am Depending on how you look at it, there might not right in saying that oil and gas represent roughly 20% be that much difference. Assuming Scotland was a of the Scottish economy. If you were thinking of minority player in the Bank of England Monetary running a dollarised system, you would have to find a Policy Committee implies that it does not have a very way of coping with any volatility in the oil price substantial influence in terms of the whole process, within that, which potentially could be challenging. which may not be that different from dollarisation. I suppose you could counter that argument by saying Q4636 Lindsay Roy: Would it be fair to say that in that at least if you had a monetary union there would terms of a common currency agreement or be an obligation on the MPC to consider the bigger sterlingisation, a separate country, far from being picture within the UK, but Scotland is a relatively independent, would have quasi-colonial status? small part of the whole picture. My feeling is that Owen Kelly: The way it wouldn’t really be probably the issue of influence and monetary policy is independent would be more that, in a dollarised overplayed in making the comparison between system, how would you borrow in the money monetary union and dollarisation. markets? You would be much more susceptible to influence by your borrowing costs and so on in the Q4630 Sir James Paice: Wouldn’t removal of money markets. I am not sure I would call it “quasi- virtually the whole of the North sea oil industry from colonial.” Certainly, the relationship would be a very the UK economy have a major effect? You might be distant one. right about Scotland in terms of people not having a big influence, but the removal of the Scottish economy Q4637 Lindsay Roy: How much influence? and most of the North sea oil sector from the UK Owen Kelly: It is hard to say, but I do not think there economy would have a big influence, would it not? would be any. The model such as we see it in some Iain MacNeil: But when you say removal of the of the countries that have been mentioned is that there North sea oil sector— is none. The European Central Bank simply does not take account of Montenegro. It is probably too small. Q4631 Sir James Paice: It would be part of an independent Scotland outwith the currency union. Q4638 Lindsay Roy: That was what I meant when I Iain MacNeil: My understanding is that if there were said “quasi-colonial status.” Iain, have you any a monetary union— comment to make? Iain MacNeil: I would hesitate to call it a quasi- Q4632 Sir James Paice: It would be in. colonial situation. First, that dollarisation arrangement Iain MacNeil: Yes, it would be in. would exist only with the consent of Scotland and it could be unilaterally withdrawn from—for example Q4633 Sir James Paice: But your point was that by setting up your own currency. If you take the there would not be a lot of difference in the influence example of Hong Kong, it was a British colony while of Scotland inside or even outside a currency union. I being pegged to the US dollar, so the colonial am saying that if it was out it would be quite dramatic, relationship was quite separate in terms of the not by people influence, but the impact of the loss of monetary situation. a major part of what is currently the UK economy. Iain MacNeil: Yes. Clearly, you would have a big part Q4639 Lindsay Roy: Is sterlingisation a better of the UK economy coming out, and in terms of tax option than a common currency agreement? and whatever that would be significant. Iain MacNeil: I do not think so. I would have thought that a common currency would be the better option, if Q4634 Sir James Paice: But the whole monetary it were available, because it continues the framework policy system run by the rest of the UK would be done that is in place in terms of lender of last resort, and completely outwith any influence from North sea oil. the whole structure of the payments system that is Iain MacNeil: I think in a currency union North sea built around the Bank of England. oil would just be another sector that would be taken into account. There would be no special consideration. Q4640 Lindsay Roy: But you would have no influence over interest rates and mortgage rates. Q4635 Sir James Paice: My point is that there is a Iain MacNeil: Within a common currency union? difference between being within the currency union Lindsay Roy: Yes. and outwith it under a dollarised system. I am Iain MacNeil: Coming back to the point I have just suggesting that the lack of influence of Scotland on made, in terms of decision making you are a minority sterling in a dollarised system is bigger than perhaps player and therefore you do not have a huge influence, you are implying. but one would have to say is that very far distant from Iain MacNeil: You may be right. My point was where we are now? thinking more about the governance arrangements within the Bank of England and the FPC and, in terms Q4641 Chair: There is an imbalance here, is there of decision making within the MPC, what influence not? I think you are saying that the best option for cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 169
26 February 2014 Owen Kelly and Iain MacNeil
Scotland is a common currency area. Yet the Q4645 Chair: But nothing ever does, does it, in Chancellor and others are saying that that is not the politics? best option for the UK. Am I right in thinking that Iain MacNeil: That is true. you take the view that the Chancellor’s decision is an entirely rational one? It has been suggested that it is Q4646 Chair: No Parliament can bind its successor, irrational for him to do that because of transaction because there are people who had a view yesterday costs and so on. I want to clarify whether or not you that they will not have tomorrow. think it is a rational decision, as distinct from asking Iain MacNeil: That is true. you whether or not it is correct. Iain MacNeil: I find it hard to understand that it is a Q4647 Chair: Leaving that aside, they are free to rational decision, because I do not have a clear change their opinion on these matters, but presumably impression of why it is bad for the rest of the UK. If the Chancellor did not make this up just when he got I can just clarify that a little more, a lot of reliance up that morning. Presumably it was actually subject was placed on the fact that the rest of the UK would to negotiation and discussion with his governmental not want to assume the lender of last resort function colleagues. Therefore, it is a consensus view that has to a large banking system based in Scotland. To me, come forward. that seems to give too much significance to the Sir James Paice: And the other two parties. function of lender of last resort within the decision on Chair: Indeed. whether there should be a currency union. One of the Iain MacNeil: I am sure it is. All I am really saying reasons it puts too much focus on it is that all the is that I do not have a clear understanding of the efforts towards banking reform that have taken place specifics of why it is bad for the rest of the UK. since the financial crisis have been geared towards Owen Kelly: As Iain observed earlier, this is really a preventing the kind of lender of last resort and bail- political decision. That much is obvious. It seems to out arrangements that have been necessary in recent me that, for a currency union really to be relied on by years. As we stand now, my impression with regard the markets and for the markets and investors to have to the perceived risk relating to bank failure and real confidence, it has to be a currency union that all parties have entered into and all parties are committed lender of last resort is that it is not as great as it has to protecting. That is probably one of the lessons of been in the past. It should not be. If our banking the eurozone in recent years—the sacrifices made by reforms have been successful, the risks inherent in Greece; Germany obviously played a big role. There lender of last resort should not be as great as they is political commitment to the euro, and it looks at the have been in the past. moment as if it is going to come through. Of course one cannot remove risk from the system; it In the initial stages of this discussion, I think the first would be silly to claim that, but my impression is that substantive response from the Scottish Government to this dimension has been overplayed. I do not have a the idea of there not being a currency union was that clear impression of what other aspects of currency the debt would not be accepted. If that negotiating union would be specifically bad for the rest of the UK. tactic succeeds, you would contemplate the rest of the UK rather grudgingly going into a currency union Q4642 Chair: That is very helpful. To be clear, if because, if they did not, something terrible would you think that the Chancellor has taken a decision that happen. Politically, in the aftermath of a yes vote, I you would not have taken, unless I am very much find it quite hard to imagine that a strong political mistaken, do you think he is bluffing when he makes consensus between the participants could be achieved. the statement he has? I think “bluffing” has been used The other political dimension, which I do not think as a euphemism for “lying.” Do you think he is just has been touched on, is what would the attitude be of making that up and that, in the event of a vote for the other EU member states to a new currency union separation, he will collapse and agree that, yes, a being created within the European Union, which is currency union is, after all, the best thing? what we would be asking for. The UK and Scotland Iain MacNeil: I have to take what the Chancellor says would need to go to the other member states and say, at face value. I do not have any grounds for doubting “Look guys, we’ve decided that we want a currency his good faith in terms of what he said. Looking at it union.” The other member states might have a view from a more detached level, in any negotiation one on that, because then you have the euro and all the would expect that the positions people put forward are treaties built around the concept of people moving subject to change as the game closes. ultimately towards the euro, except those with opt- outs of course. You are now creating another currency union. I completely accept that, as Iain says, it may Q4643 Chair: Basically, you think that the be that their currency union will comply with current Chancellor’s position is a negotiating position. requirements around central banks and so on, but there Iain MacNeil: Given that nothing has been finalised are several layers of political decision making that sit and he is not in a position to commit the Government atop the idea of a currency union, and that almost irrevocably to that outcome as of now. conditions this more than the technical and professional, if I can say that, aspects of the debate. Q4644 Chair: Sorry. Why not? The politics are complicated. Iain MacNeil: Because it is a political statement; it has not been transposed into law. It does not have Q4648 Lindsay Roy: A local constituent asked me anything about it which prevents it being reversed. whether, if two business partners decided to go their cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 170 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil separate ways, it would be sensible to retain a joint Q4654 Lindsay Roy: Are there any examples account. He drew the analogy of lender of last resort. throughout the world of that kind of transition? We Is there any merit in that analogy? are told it would take about five years to set up a Iain MacNeil: There is some. Whether it maps over central bank and a separate currency. entirely on to the case for a currency union is less Owen Kelly: I know people who could answer that clear to me. question, but I am afraid I cannot. I cannot think of an example where this has happened and a new Q4649 Lindsay Roy: Particularly if one of the two currency has been created. partners who were dividing had a bigger asset base than the other. Q4655 Mike Crockart: I want to take Iain back to a Iain MacNeil: Your analogy is persuasive, but I point he made. You were saying there was not much would stand by what I said about the currency union. difference between monetary union and dollarisation, certainly in terms of the rate-setting of the Monetary Q4650 Lindsay Roy: If there is not to be a currency Policy Committee. Surely, the larger difference union, what currency option in your view would be between the two is when you look at the larger picture best for Scotland? Would it be sterlingisation, a of monetary union as outlined by Mark Carney, separate currency or what? because then it is not just currency union or monetary Owen Kelly: Again, I can only venture a personal union; it is fiscal union as well. If you go down the view, because it is not a matter on which any of our dollarisation route, that is then ruled out and that is members has an opinion. I do not want anyone to where the bigger problems come. Perhaps that is why misinterpret anything. it is rational for the remainder of the UK to rule it out. Iain MacNeil: That may be right. I think you are Q4651 Lindsay Roy: Or the euro. correct to say that currency union is bigger than Owen Kelly: We were discussing this. I do not think simply control of monetary policy. The UK rules out the euro is an option in the immediate term. To join the currency union because in your view it cannot the euro you have to demonstrate that you comply, have fiscal controls over Scotland. and to do that you have to go through quite a process, so it is not an easy option and it would take some Q4656 Mike Crockart: To make it blunt, it would time. not want to create a situation like Germany and Greece, where, if the economies diverged massively, Q4652 Lindsay Roy: It is not an 18-month option. you would have to have some sort of fiscal transfer Owen Kelly: I do not think so. between the two parts. Iain MacNeil: I accept that. In principle, it has to Q4653 Sir James Paice: What about euroisation, i.e. be accepted that fiscal powers have to go along with the precise Montenegrin situation? monetary union for it to be workable. I think that in Owen Kelly: Before entering into that, you would principle that is a reasonable argument. want the Montenegrin dilemma to be resolved. You would want to know that that was not going to trap Q4657 Mike Crockart: That could be a rational you in a position where you were unable to join. You reason for rejecting. would need to know that it was compatible, and that Iain MacNeil: That can be one of the rational reasons. would require the other member states to agree. In any Perhaps it has been spelt out and I have not seen it in case, you would then introduce transaction costs and sufficient detail. all the other things with your largest trading partner. As some have said on the pro-independence side of Q4658 Chair: Maybe the Chancellor is more rational the argument, having your own currency creates an than you initially thought. environment where you have full autonomy and other Iain MacNeil: Maybe. He has much better resources things. It also solves some of the questions we have than me to do that. been airing a little today about EU membership, Chair: You have the whole of Glasgow university compliance and so on. It does not solve all of them, behind you, surely. but it is a more established route, if you like. It is not unusual to have a currency and then join the EU. Q4659 Jim McGovern: If Scotland were to vote to Everybody does it, apart from those in the eurozone. separate from the United Kingdom, they have now If one were in the position of having voted yes and heard the Chancellor, the shadow Chancellor and the having to reach a decision on how to take it forward, Chief Secretary to the Treasury saying there will be and the currency union has been ruled out—perhaps no currency union. We have heard the First Minister, that has been confirmed in some sort of post- Deputy First Minister and Finance Secretary in referendum discussion—I guess that a separate Holyrood say that, if there is no currency union, they currency is where you end up. will renege on their part of the national debt. Do you Iain MacNeil: I tend to go along with that. In many not agree that reneging on that debt would make an ways a separate currency is the logic of independence. independent Scotland, if that happens, the laughing It gives you the controls that would typically be stock of the world’s economies? Who would take associated with it. It might imply a more difficult them up for loans, bonds and so on? transition, but perhaps in the longer term it gives a Owen Kelly: Many others have observed, and I better foundation to start from and to work for the suppose I would have to agree, that yes, inevitably, if long term. that position were to arise, investors would take some cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 171
26 February 2014 Owen Kelly and Iain MacNeil persuading. It would probably take a bit of time to get in time and no more, it would probably be quite through it. I do not know how long it would last, but challenging, but it would be very important very if that were to arise and if it were to be perceived by quickly to explain to investors, not only retail but the markets in the way you describe, assuming that is international and institutional investors, how things what happens—of course we are trying to anticipate a are going to be managed and how they are going to negotiation process where maybe there would be a unfold. The longer you cannot explain that, the less settlement of some kind—I think investors would good it is, so you need to move quickly. obviously see that as perhaps calling the reliability into question. Q4664 Lindsay Roy: Is that a complex task? Owen Kelly: I think it would be a very complex task. Q4660 Jim McGovern: It would look like a bad bet. It seems to me that one of the facts—going back to Owen Kelly: To some extent. my pursuit of knowable facts—is that we obviously Iain MacNeil: I agree with that. have a UK general election coming up in 2015. That is a fixed timetable event; we know that is going to Q4661 Lindsay Roy: As a Scot, obviously I want happen, so it is probably reasonable to assume that what is best for Scotland, and I believe that is within there will not be an awful lot of agreement between a the union. However, how do you see the industry yes vote in September, if that happens—it is a big if— devolving if we are separate in terms of progress in and the general election, so the timetable is already future? beginning to elongate. Owen Kelly: Do you mean in terms of further devolution? Q4665 Lindsay Roy: It is truncated. Chair: Evolving rather than devolving. Owen Kelly: I do not know. You will know much Owen Kelly: With independence or without it? better than I do because you are all Westminster politicians, but experience suggests that in the run-up Q4662 Lindsay Roy: With separation. If we are to a general election you are not going to get separate, how do you see the financial services Governments signing up to long-term, far-reaching industry evolving in the future? commitments with a country that has just voted to Owen Kelly: As with everything, there is a range of become a different one. optimistic and pessimistic, but I will go for the optimistic. If one imagines that we are through the Q4666 Lindsay Roy: Iain, is that your interpretation transition, Scotland is an EU member state, the as well? currency is sorted out and we are in a steady situation, Iain MacNeil: Yes. The only thing I would pick up is I think it is perfectly plausible that Scotland could the projection of five years to set up a currency and a have a well-regulated, successful financial services central bank. You may have reliable sources that are industry operating in that context. It would look talking about that length of time. To me, that sounds different. I do not think it would have the same a very long period of time—an unlikely long period configuration, with, for example, lots of people of time—to engage in those things. I would have working and serving UK customers as part of the thought that the transitional period might be shorter, same single market, because we would not be that any but the essential point remains that, even if you more. But as was said earlier, Ireland has had amazing significantly shortened the transitional period, you still success in the last 20 years or so in attracting have the uncertainty that may trigger actions that will international financial services jobs. Ireland employs have an effect on the Scottish financial sector. I about 60,000 people in financial services, and roughly envisage that it will be smaller; the shape will be a half of them serve international clients through the little different, in the sense that the proportion of fund networks. Scotland could not replicate that banking would probably become smaller, because of entirely, because that market opportunity has probably the willingness of investors to support a very large passed, and I do not think that is part of the banking sector in terms of the state back-up. Longer mainstream. term, it could be successful, but the killer is the transitional period. Q4663 Lindsay Roy: What I am driving at is how best they would manage the transition period. We are Q4667 Chair: Can you clarify what you mean by saying it would take five years to get a Scottish “killer”? currency and then perhaps join the euro. What are the Iain MacNeil: I mean that, even if firms and tensions around that? customers can envisage the steady state after the Owen Kelly: Uncertainty, obviously. One of the things transitional period, the risks associated with the that are probably knowable at this stage is that, at the transitional period are likely to cause them to make moment, all of the uncertainties we are talking about decisions, say, to relocate or not to buy products from are hypothetical because we have not had a yes vote. that firm, for example in the case of English customers If you have a yes vote, from the moment that is who may be concerned about how the transition is announced many of these questions become real and going to work out. live rather than hypothetical. In those circumstances, there would have to be very rapid work to explain Q4668 Chair: Most people coming into contact with to customers and investors how this was going to be killers do not survive. Therefore, a future steady state managed and why everything was going to be okay. having gone through a transitional period and a dance If we have the current state of knowledge at that point with a killer are almost incompatible, aren’t they? A cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 172 Scottish Affairs Committee: Evidence
26 February 2014 Owen Kelly and Iain MacNeil substantial amount of the industry will not survive this few thoughts that have been unexpressed so far, but transitional period because of the killer effect, and is there anything at all that you think we have not therefore the steady state in the future that you are touched on? imagining is a myth. Iain MacNeil: Not really. Iain MacNeil: In principle, you are correct. What is difficult to judge is how different parts of the financial Q4672 Chair: I certainly have a much greater idea sector would react to the changes taking place. Some of what I do not know than I did when we started. of them might cope better than others. For example, Am I right in thinking that at the moment, with the some aspects of funds management might survive present state of knowledge, separation for the financial better than, say, banking. It is wrong to think that the services industry really is a pig in a poke? There are entire financial sector in Scotland would respond in so many unknowns—many of them are known the same way. There might well be some differences unknowns—that it is almost impossible to say what in the way different parts would feel they were would happen, apart from the likely consequences of affected. meeting a killer. Is that a fair assessment? Owen Kelly: Up to a point. As I said earlier, there are Q4669 Lindsay Roy: You are not scaremongering some things you can know; there are some anchor here. You are saying there would be much greater risk points in this. You know you have to have a new and uncertainty. regulator. You know that for all intents and purposes Iain MacNeil: Than things remaining as they are? the current market and the current jurisdiction become Lindsay Roy: Yes. two. These are structural things that have to happen Iain MacNeil: I think that is inevitable. because you are becoming a separate country, but you cannot know all the stuff that would ultimately follow, Q4670 Lindsay Roy: What about the impact of which would be subject to political decision and Scottish separation on the rest of the UK’s financial discretion. Unfortunately—I say unfortunately, but it sector? Would you like to say a word or two about is just a matter of fact that that currently includes that? some very big issues like the currency. There are some Iain MacNeil: From that perspective, I guess the institutional changes you can know about, changes impact is much less. Scotland is not a huge market. that simply come about as the necessary consequences The impact on the rest of the UK is probably more in of becoming a separate country, so it is not that we do terms of the customer base than the providers, because not know anything, but many things still remain Scotland becomes a small EU market, assuming it is subject to political negotiation. in the EU, that is adjacent to England. I am not sure that it is such a big deal. Q4673 Chair: Is it inevitable that these things will Owen Kelly: One thing would be lost. We spend a remain unknowable until after the referendum? There lot of our time working with colleagues in London is an issue here about whether or not the Chancellor promoting the UK financial services industry because was either rational or bluffing in terms of the decision. we are one jurisdiction. Scotland is a good part of I take the view that, the three parties having come to that—well, I would say that, wouldn’t I? It is good to that decision and made it, that has effectively sailed. be able to say to international investors, if you are Is there a whole number of things like that that can be talking up the UK as a place to do business in settled between now and then, or do they all have to financial services, “We’ve got London, that’s all wait until after a referendum decision is made? marvellous, but we also have Scotland, and other bits Owen Kelly: The political process that has been of the UK as well.” A substantial part of the created for us by the two Governments does not allow employment in the industry is in Scotland, so I cannot that to happen. That was obvious from the outset. We see any benefits for the rest of the UK’s financial have been pointing that out for many months. It was services industry in Scotland becoming a separate completely obvious from the outset. I guess both jurisdiction and country. In terms of the task of Governments have always known that this would be promoting the UK as a financial services centre, the process we would be going through, and neither something would be lost. side, apart from the institutional changes we have talked about, would be in a position to give any Q4671 Chair: Are there any final points? Before we definitive description of what would follow a yes vote. started, I said to you informally that at the end we Chair: I think that has covered everything. Thank you would give you the opportunity to give any answers very much for coming along. This has been very to questions we had not asked. I think there are very interesting. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11
Scottish Affairs Committee: Evidence Ev 173
Examination of Witnesses
Witnesses: Mark Neale, Chief Executive, Financial Services Compensation Scheme, and Sean Martin, General Counsel, Financial Conduct Authority, gave evidence.
Q4674 Chair: Could I thank our witnesses for protection, promoting competition in the interests of waiting so patiently while we had our previous consumers and enhancing the integrity of the discussions? As before, perhaps you would start off financial system. by introducing yourselves and telling us a little about your background and the context in which you are Q4680 Mike Crockart: Broadly, we have one arm helping us in our inquiry into the impact of separation looking at the day-to-day conduct of the companies upon the financial sector. within it and the other looking at the structure of those Mark Neale: I am Mark Neale, chief executive of the companies and making sure they are properly Financial Services Compensation Scheme. The constituted to be able to carry out their role. scheme is to protect consumers when financial Sean Martin: That is right. The only qualifier I would services businesses go bust. We protect deposits up to put is that the FCA is also responsible for what we £85,000 in UK banks, building societies and credit call prudential supervision of all the firms that are not unions, and, unusually, internationally we also protect regulated by the PRA. The PRA has 2,600. We have insurance policies, investment and home finance 26,600, and that includes both the conduct and business. financial soundness of all those firms not regulated by Sean Martin: I am Sean Martin. I am the general the PRA. counsel of the Financial Conduct Authority, which is one of the main regulators for the financial services Q4681 Mike Crockart: Those functions were industry. I am also a member of the FCA’s executive previously integrated under the FSA. How does the committee. new structure affect the relationship between the two parts and the way the industry acts on a day-to-day Q4675 Chair: Can we assume that the Scottish basis? financial services industry is entirely regulated in Sean Martin: It means that for the 2,600 bigger firms exactly the same way as everywhere else in the UK they have two regulators, not one, and that the at the moment? regulators have a very different focus. Whereas the Sean Martin: That is broadly right. PRA is looking very much at whether the firms are financially sound, we are looking at how they behave, Q4676 Chair: What does “broadly” mean? how they treat their customers and whether they are Sean Martin: There is a slight difference in terms of committing some sort of market abuse, so there is a the criminal prosecution function, so if the FCA very different focus from the two authorities. The wanted to take criminal action in Scotland the relationship between the two regulators is set out to a criminal regime is a little different from the rest of large extent in statute in the Financial Services and the UK. Markets Act 2000, as amended in particular by the Financial Services Act 2012. Q4677 Chair: That is a consequential point. What about the regulation itself? Q4682 Mike Crockart: Mark, how does the Sean Martin: The regulation itself is very much the Financial Services Compensation Scheme fit into this? same. Is it there to pick up the pieces when things go wrong? Mark Neale: That is right. We protect firms that are Q4678 Chair: What do you mean by “very much”? regulated by both the Prudential Regulation Authority I want to be clear whether or not it is exactly the same. and the Financial Conduct Authority. We protect Sean Martin: It is exactly the same. deposits, insurance and investments, as I said. Although we are independent in our decision making, Q4679 Mike Crockart: I would like to set the scene we are accountable to both the FCA and the PRA for a little. We are not experts in the regulation of banking the way in which we operate. We have slightly and financial services. Given that they have changed different relationships with both bodies. With the relatively recently under this Government, could you PRA, we are part of the arrangements for the safe explain the different roles of the Financial Conduct resolution of failing banks, building societies and Authority and the Prudential Regulation Authority? other systemically important businesses; that is to say, Sean Martin: It is probably worth thinking about this those businesses can only fail safely if you can protect as a tripartite structure. If one starts with the Bank of consumers, and depositors in the case of banks and England, the bank has a general objective to enhance building societies. That is where the Financial and protect the financial stability of the United Services Compensation Service comes in. It ensures Kingdom. That is the overriding piece. Sitting as a that, in the event of a failure, consumers are protected subsidiary of the bank is the Prudential Regulation and get their deposits back, up to the £85,000 limit. Authority whose objective is concerned with the safety and soundness of about 2,600 firms—banks, Q4683 Mike Crockart: We have a tripartite, with the insurers and a small number of major investment Financial Services Compensation Scheme sitting to firms. The Financial Conduct Authority regulates a one side to pick up the pieces, but is it fair to say they much larger number of firms; we regulate 26,600 are all very closely integrated? firms, and our objective is to ensure that markets work Sean Martin: There are two other players in the well. Within that, we have the objective of consumer jigsaw that I should mention. One is the Financial cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 174 Scottish Affairs Committee: Evidence
26 February 2014 Mark Neale and Sean Martin
Ombudsman Service, which is responsible for Q4688 Pamela Nash: It has to have its own adjudicating individual disputes between consumers scheme—it can’t be incorporated. and firms, and the other is the Money Advice Service, Mark Neale: It has to have its own compensation which has an overriding consumer education function. scheme. An independent Scottish state would need to Mike Crockart: Thank you. I think I have teed up set up a compensation scheme which would protect nicely for the next question. depositors in Scottish-based banks, on the same basis that we now protect depositors in the UK banks up to Q4684 Pamela Nash: Carrying on from my question the £85,000 limit. to the earlier witnesses, it seems clear that if Scotland was a separate country there would be a different Q4689 Chair: Can I be absolutely clear about what regulator and, therefore, eventually a different you are saying? A separate Scotland would have to regulatory framework. Can you tell us what effect it have its own compensation scheme. Are you sure that might have on the financial services industry based in rules out having its own scheme that is shared with Scotland at the moment, if they were in a separate somebody else? You can say, “I’ve got my own Scotland? scheme and I happen to share it with my pal.” The Sean Martin: The Scottish Government have said that fact that we are in the process of divorcing is, to some they would like to see some shared prudential extent, neither here nor there, but it would be your supervision across an independent Scotland and the own scheme even though it was shared, surely. remainder of the UK. That would mean their Mark Neale: My understanding of European law is preference is the PRA and the Bank of England that if Scotland became a member state it would have spanning the remit, whereas for conduct regulation the to have its own compensation scheme—that is to say, proposal is to set up a new conduct regulator. it would have to have its own means of meeting the costs of compensating consumers in the event of the Q4685 Pamela Nash: To take that separately, is it a failure of banks, building societies or credit unions. It viable option? is conceivable that the Scottish Government could ask Sean Martin: In terms of having a single prudential us to run that scheme, but it would have to have its regulator for the two? own scheme. Pamela Nash: Yes, and separating that from the customer regulatory framework? Q4690 Pamela Nash: I apologise for showing my Sean Martin: That is probably not something I can ignorance on this subject. As Mike said, we are not offer any informed comment on, because my interest experts by any means on this topic, but we are is very much on conduct regulation. As to whether it learning rapidly today. If there was a separate scheme would work, Andrew Bailey, deputy Governor of the in Scotland, would that only protect Scottish bank, would be able to speak to that. Clearly, the consumers, or would it have to protect Scottish bank issues would be around currency union and possibly consumers throughout the rest of the UK and beyond? the extent of wider integration. That is something he Mark Neale: If we continue to focus on deposits, it will be able to offer a more informed view on than me. would protect consumers with deposits in Scottish- based banks; that is consumers with deposits in Q4686 Pamela Nash: The reason I push that is that, Scottish-based banks living outside Scotland as well if it is not a viable option, there is no point in as Scottish consumers with deposits in those Scottish discussing what the differences would be, because banks, building societies or credit unions. other people have offered the opinion that there would have to be a completely separate regulatory Q4691 Pamela Nash: That is a considerable point. framework. Because we have such a big and successful sector at Sean Martin: What is clear is that it would be viable the moment, that new scheme would have to cover to have a separate conduct regulator, which is the consumers in the rest of the UK. current proposal. If that is the policy, intention and Mark Neale: That is right. The extent of the coverage political wish, it would be possible. and the liabilities that go with it would depend a bit on the structuring of the Scottish banking deposit-taking Q4687 Pamela Nash: Do you think it would be sector after a vote for independence, but if the current completely dependent on whether or not there was a Scottish-based banks continued to be based in currency union? Scotland and operated their services through branches Sean Martin: Not for conduct regulation. in the rest of the UK, the Scottish scheme would Pamela Nash: No, for prudential. protect all those consumers, wherever in the UK or Sean Martin: On prudential, it is not something where Scotland they were. I can offer an informed view. Mark Neale: In the case of financial compensation, Q4692 Pamela Nash: That would mean that those European Union law varies a bit between the different Scottish-based banks would not have to be involved sectors of the industry. If we take deposits in banks, in the remainder of the UK’s continuing scheme. building societies and credit unions to start with, Mark Neale: There are other models that the Scottish European law is very clear. Each member state must banking and deposit-taking sector could take. Banks have a deposit protection scheme. The implications of currently based in Scotland could decide to set up that are that, if Scotland voted to separate, the new separate subsidiaries in the rest of the UK regulated Scottish state would need to establish a separate by the Prudential Regulation Authority, with their own scheme. separate capitalisation. If that came about, we in the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 175
26 February 2014 Mark Neale and Sean Martin
Financial Services Compensation Scheme would Q4699 Mr Reid: Am I right that the Scottish protect the depositors in those UK subsidiaries. Government would then have a responsibility to ensure that funds were available in the event of a Q4693 Pamela Nash: Would that come at crash? considerable additional cost to those companies? Mark Neale: The Scottish Government would have to Mark Neale: I think you would have to put that to the ensure that there was a scheme in Scotland that could companies themselves. All I can do is set out what meet the compensation costs in the event of a some of the options are for the structuring of the Scottish-based bank, building society or credit union industry. failing. It would almost certainly look in the first instance to pool those costs across the industry, which Q4694 Pamela Nash: To be clear, if they set up a is the way we fund compensation now in the UK. If subsidiary in England, would it cost them to be part the costs of compensation, as occurred in the 2008 of the scheme? failures, are greater than the industry can absorb, just Mark Neale: They would then contribute to the as we borrowed from the Treasury in 2008 to meet Financial Services Compensation Scheme, as they do those costs—indeed, we still owe the Treasury now as UK-regulated financial businesses. £17 billion—the Scottish scheme would need to look to the Scottish Government for financial support. Q4695 Pamela Nash: Is that contribution per Q4700 Mr Reid: That would be to support all banks customer? based in Scotland. Mark Neale: In the case of deposit-takers, it is based Mark Neale: That would be to deal with any on their share of UK insured deposits. compensation costs arising from the failure of a Scottish bank, building society or credit union. Q4696 Pamela Nash: Would that be an additional cost, or would it depend on what the Scottish scheme Q4701 Mr Reid: Can you give a rough breakdown would be? of how the Scottish banking sector is made up at the Mark Neale: You would have to ask the banks moment? Who are the big players? themselves their view about the costs of setting up Mark Neale: At the moment it is heavily dominated separate subsidiaries in the rest of the UK in the event by two players: the Bank of Scotland and Royal Bank of independence. of Scotland.
Q4697 Pamela Nash: I understand that, but I am Q4702 Mr Reid: My interpretation of an insurance talking specifically about the cost of being part of scheme is that you have a lot of players, so that if one the FSCS. goes bust the income from the others is sufficient to Mark Neale: They would contribute both to the compensate, but I am not sure about the concept of an Financial Services Compensation Scheme in respect insurance scheme where you have only two big of their UK subsidiary and to the Scottish scheme in players. respect of their Scottish operation. I am not sure that Mark Neale: You are right. Insurance schemes work would necessarily lead to higher compensation costs. best where there are broad, deep pools across which It would depend on what happened within the sector to pool insurance costs. In the case of a separate after independence. Scotland, assuming that the structure of the banking industry remained the same, it is possible that banks Q4698 Mr Reid: Mark, if Scotland adopted the in Scotland would choose to set up subsidiaries in the sterlingisation model and therefore did not have a rest of the UK rather than continue to operate entirely lender of last resort, how would that affect its ability from Scotland. If that structure remained, in the event to set up a compensation scheme? of the failure of one of the big Scottish banks, those Mark Neale: I am not sure it would have any costs would fall to be met in the first instance by the particular bearing on setting up a compensation rest of the Scottish banking industry. scheme. It would still have to set up a compensation scheme, and that scheme would then be liable to meet Q4703 Mr Reid: By the other bank. the compensation costs of the Scottish-based banks, Mark Neale: By the other bank, and some of the building societies and credit unions. It would look to smaller building societies and credit unions. To the banks, building societies and credit unions in extent that they were unable to meet those costs, the Scotland, as we do, to meet the costs of compensation; costs would fall on the sovereign, on the Scottish and it would look to the Scottish Government to Government. provide the stop-gap in the event that the costs of compensation exceeded what the industry could Q4704 Mr Reid: Say I am living in Scotland and I absorb at any one time. It is quite important to want to put a lot of money in a bank. I look at that distinguish that from lender of last resort facilities; set-up and I am not very sure if the assets are there to those are facilities that the Bank of England provides cover it. Can I walk into a branch and say, “I want to in terms of liquidity support to solvent banks and put my money into a bank based in England”? What building societies, not the support that the sovereign is the difference between being based in England and provides to us in the event that we have to make very based in Scotland? Is it the bank that makes the large compensation payments. choice? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 176 Scottish Affairs Committee: Evidence
26 February 2014 Mark Neale and Sean Martin
Mark Neale: It is the consumer who makes the Q4710 Chair: What does that mean in English? I did choice. The protection would in principle be exactly not understand that. Am I right in thinking that the the same. Consumers putting their deposits in Scottish amounts of money involved are so enormous that the banks or banks in the rest of the UK would be Scottish Government could not meet those costs? protected up to £85,000. In the case of deposits in Mark Neale: No, I am not saying that. I am saying Scottish-based banks, building societies or credit that there is a contingent liability associated with unions, the protection would come from a separate compensating Scottish bank consumers, and the Scottish compensation scheme, whereas if you put Scottish Government would have to consider how to your deposit in a UK-based bank, building society or manage the Scottish finances in order to be sure it credit union the protection would come from us—the could meet that cost. Financial Services Compensation Scheme. Q4711 Chair: What does that bit mean? Q4705 Mr Reid: The bank makes the choice as to Mark Neale: It might mean, for example, that the where it is based, and I then choose the bank. Scottish Government created a fund to ensure it was Mark Neale: The consumer chooses the bank, and in a position to meet those liabilities in the future. then the consumer would be protected by whichever compensation scheme was protecting deposits in that Q4712 Chair: To be clear, if I can, on the off-chance particular bank or building society, depending on its that the two main Scottish banks went bust, the location. Scottish Government would have to create a fund in order to balance any contingent liabilities that might Q4706 Mr Reid: Is the £85,000 an EU decision or is arise. Presumably, that fund, which for the sake of it a member state decision? argument we could call an oil fund, would not then Mark Neale: That is an EU decision. The European be available for anything else. Union harmonised compensation. It is €100,000, Mark Neale: It is not for me to say how a Scottish which translates into £85,000. Government would elect to manage that liability, but there would be a contingent liability that would need Q4707 Chair: Can I seek clarification? Am I right in managing. saying that you are suggesting that, in the event that the Bank of Scotland and Royal Bank of Scotland Q4713 Chair: What does that mean? I genuinely do remain domiciled in Scotland and one of them not understand this. How could a Scottish collapses, the liability for all of that would fall on the Government manage that contingent liability other other; failing which, the other sections of the financial than by having a big deposit of their own that might community; and, failing that, it would fall on the be called on in the event that these two banks, or one Scottish Government? I was under the impression that of them, collapsed? in the UK at the moment the lender of last resort was Mark Neale: That would be one option. It could no the Bank of England rather than the UK Government. doubt borrow on the markets to some extent as well, Mark Neale: That is not quite right in the case of but these are decisions for a Scottish Government to compensation. The Bank of England is the lender of make rather than for a compensation scheme to last resort for banks in the UK for liquidity decide. purposes—that is to say, the Bank of England will lend to solvent banks or building societies in order to Q4714 Chair: I understand that, but I am trying to see them over liquidity problems. It obviously will not clarify what options the Scottish Government in these lend to insolvent banks. In the case of compensation, circumstances might have. Unless I am mistaken, it you are dealing with a bank, building society or credit would be sensible for the Scottish Government to try union that has gone bust, so if we need to look beyond to persuade as much as possible of the Bank of the industry for support, we look to the Government. Scotland or the Royal Bank of Scotland to move out of Scotland and, therefore, have the burden in those Q4708 Chair: Is it realistic to expect that in the event circumstances fall on somebody else, like the English, of the collapse of Royal Bank of Scotland or the Bank Welsh and Northern Ireland taxpayers. of Scotland, or both, the Scottish Government would Mark Neale: That is probably a question to put to be able to fund that, given the imbalance between the those in the Scottish Government rather than the financial resources of those banks and the estimated compensation scheme. GDP of a separate Scotland? Chair: But you are here. Mark Neale: The liabilities falling on the Scottish Government in that event would depend on decisions Q4715 Sir James Paice: Among the options, could that those banks had taken about where they wanted they have the option of effectively doing nothing and, to be located. if called upon to fund the deposit guarantee, they could decide to do it in that year out of their current Q4709 Chair: I understood that, but what would budget supplemented by international borrowing, if happen in the event that they did not relocate outside necessary? Scotland? Mark Neale: They might take that option, but again I Mark Neale: In the event that they didn’t, there would think you would have to put that question to them. be significant liabilities, and the Scottish Government would have to manage public finances in Scotland Q4716 Sir James Paice: I just want to clarify that it with that contingent liability in view. is an option. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 177
26 February 2014 Mark Neale and Sean Martin
Mark Neale: You would have to put that to them. setting money aside to defray some of the risk. Is there any feeling for what those costs would be? Q4717 Sir James Paice: I am not trying to establish Mark Neale: I am afraid I cannot answer that whether they would choose it, but it would be an question. option, would it, among the list of possibilities? Mark Neale: You will forgive me. I am not really Q4725 Mike Crockart: What does the UK keen to start prescribing policies for an independent Government do, for example? Scottish Government. Mark Neale: If we take 2008 as an example, the UK Government itself borrowed to meet the costs of the Q4718 Sir James Paice: Forgive me, I am not asking banking failures and to provide us with the funds we you to prescribe a policy. I am just saying that among needed to meet the costs of compensating consumers the range of options, is this one of them? affected by the failures of Bradford & Bingley and the Mark Neale: I guess that might be an option, yes. Icelandic banks. The costs were about £20 billion.
Q4719 Mr Reid: In the scenario where a large bank Q4726 Mike Crockart: You say “itself borrowed.” based in Scotland collapsed and the Scottish What does that mean in real terms? Government were unable to pay out the amount of Mark Neale: It means that the UK Government sold money required under the compensation scheme, gilts in the markets to raise the money necessary to would depositors who were not Scottish citizens have meet the compensation liabilities that we had in 2008. any practical recourse against the Scottish Government? Q4727 Mike Crockart: But that is at the point at Mark Neale: The Scottish Government would under which the failure has happened. European Union law be obliged to meet the Mark Neale: Yes. compensation costs associated with the failure of a Scottish-based bank or building society. Q4728 Mike Crockart: In the years leading up to a failure, is there a cost associated with managing this Q4720 Mr Reid: But, in practice, if they didn’t, what contingent liability? would the ramifications be? Mark Neale: There are other ways of doing it. You Mark Neale: All I can tell you is that they would be can build up pre-funds, as a number of countries do, obliged under European Union law to meet that in which you levy the industry year on year to build liability. up a fund, which you hope will be big enough in the event of a major failure. Those costs then fall on the Q4721 Chair: I think the words blood and stone industry. come to mind here. If the Scottish Government simply cannot do it—cannot borrow—Alan’s point is what Q4729 Mike Crockart: I am not sure you have then happens? answered the question I just asked. You might have, Mark Neale: Again, that is a question you would need to put to a Scottish Government. I am not sure that I, but I don’t think you did. That is one way of doing it. in the position of a compensation scheme, can answer It is obviously not what the UK did. Did the UK just that question for you. sit and wait for a failure and then go out and borrow on the open market, or did it set aside something? Mark Neale: Q4722 Mike Crockart: The difficulty about the The UK has always operated on a pay- contingent liability is that it might fall to be met. as-you-go basis—that is to say, we levy the industry Given the banking sector as it stands at the moment to meet the costs of failures as and when they occur. and the place where it is presently registered—where If those costs exceed what the industry can bear, we those liabilities would fall—what is the size of that borrow from the Treasury and in a major failure like contingent liability for a financial services 2008, the Treasury will itself borrow from the market. compensation scheme for an independent Scotland? That is not the only model; another model is to build Mark Neale: In the case of deposits, the Treasury up a pre-fund. published some information about that in the document on the financial services sector that it Q4730 Mike Crockart: But if Scotland had to go to produced in May of last year, which suggested that the open market to meet the contingent liability that it the insured deposits in Scottish-based banks are about has, given the size of the banking sector in Scotland, 110% to 115% of Scottish GDP. it would have to go to the market for a ridiculously large sum, with huge associated costs, too. Q4723 Mike Crockart: In monetary terms, what are Mark Neale: That would depend on the nature of the we talking about? failure, and also on what option the Scottish Mark Neale: Scottish GDP is about £150 billion. Government took to resolve the failing bank.
Q4724 Mike Crockart: You say they would have to Q4731 Mike Crockart: But given that it is a banking put aside a facility to meet that. You do not want to sector that has two very large players within it, the be drawn on what that facility might look like, but nature of that failure is likely to be pretty catastrophic. there would have to be costs associated with that. Mark Neale: It might be. Failures come in all shapes Unless you close your eyes and say, “Oh, well, we’ll and sizes. The Scottish Government might, rather than borrow if we need to,” there are costs associated with allowing a bank to fail and go into liquidation, elect cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 178 Scottish Affairs Committee: Evidence
26 February 2014 Mark Neale and Sean Martin to resolve it by recapitalising it, as the UK was also a banking union, and one of the attributes of Government did with Royal Bank of Scotland in 2008. a banking union is a common compensation scheme.
Q4732 Chair: How likely do you think it is that a Q4737 Graeme Morrice: If there was a common country could go to the markets to borrow, say, 110% compensation scheme between an independent of its own GDP? Scotland and the residual UK, what would you see as Mark Neale: I think that is a question you should put the disadvantages for an independent Scotland? to my friends in the Debt Management Office. Mark Neale: The first point to make is that clearly the Chancellor has ruled out a currency union. I would Q4733 Chair: Returning to my previous response, take that also to rule out, from the UK Government’s they are not physically here, are they? You mentioned point of view, a banking union, though clearly the selling gilts, or the equivalent, to fund it. Presumably, Financial Services Compensation Scheme will that would be less advantageous to a separate Scotland implement whatever arrangements the two in the event that they had already repudiated debt that Governments, in the event of a vote for they owed the rest of the UK. Would that affect their independence, decide. chances of being able to borrow that amount of money? Q4738 Graeme Morrice: That kind of pre-empts my Mark Neale: That is a very hypothetical question. I next question. The Governor of the Bank of England am not sure I can foresee what the market reaction said that ultimately it is taxpayers who have to stand would be in those circumstances. behind a central bank and any institutions it Chair: Indeed. supports—how it would all work in terms of two separate independent countries and a central bank, if Q4734 Graeme Morrice: I was going to ask some of course we do not have a common currency and we questions about deposit insurance, but you have are not going to have an independent Scotland relying probably answered a lot of the questions I was going on a central bank, i.e. the Bank of England. What to ask in answer to previous questions by colleagues. lessons do you think can be drawn from the eurozone I do not know whether you have covered how the in particular? They seem to be edging towards FSCS specifically administers the deposit insurance banking union. scheme. Perhaps you can add a bit more in terms of Mark Neale: They are edging very slowly towards the mechanics of it and how you discharge your banking union. The European Union is about to adopt responsibilities in that regard. That would be useful. a new directive on deposit protection. That directive, Mark Neale: By all means. It is fundamental to a though it harmonises in various respects deposit successful deposit insurance scheme that it has protection across the eurozone and the European credibility with consumers, and that if we are called Union, falls well short of mutualising, pooling the on to do so we can get people’s money back to them risks across the whole of the eurozone or European quickly. We made an investment three or four years Union. It still relies on national deposit protection ago in what we call fast payout, which means that, in schemes to protect consumers, and that means that the the event of the authorities deciding to put a bank or European Union is continuing to put in place a link building society into liquidation and asking us to pay between the sovereign and the consumer in the event out consumers, we will get that money back to those of major crises. depositors within seven days in the great majority of cases, without those depositors having to make any Q4739 Mr Reid: Am I right in saying that both the application to us. It is an automatic process which we two main banks in Scotland have a majority of their operate based on what we call a single customer view customers in other parts of the UK? file that all banks, building societies and credit unions Mark Neale: I think that is right; I am not sure I know must maintain, which sets out the aggregate balances it for a fact, but it seems highly likely. of all their customers. Q4740 Mr Reid: Can you think of any other country Q4735 Graeme Morrice: That is useful. I think you where that would be the situation—where the biggest said earlier that if Scotland became an independent banks would have their customers in other countries? state it would have to have its own deposit insurance Mark Neale: I do not know of any examples, no. scheme. I think it was suggested that European Union law dictated that. Can you clarify that that is indeed Q4741 Mr Reid: In the event of separation, the case? assuming there isn’t a currency union, do you think it Mark Neale: That is the case. would be in the interests of these two big banks to transfer their base to the rest of the UK, out of Q4736 Graeme Morrice: You will be aware that the Scotland? Governor of the Bank of England, Mark Carney, in Mark Neale: That is entirely a question for the two his speech in Edinburgh recently said that a deposit banks. You would have to ask them what factors they insurance scheme was an essential part of currency would wish to take into consideration in making that union. What is your understanding of what he meant judgment. by that in terms of it being a shared scheme between the two countries? Q4742 Mr Reid: Your expertise is in the Mark Neale: What Governor Carney said was that compensation scheme. We have already heard that the among the attributes of successful currency unions Scottish Government could be faced with a bill greater cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 179
26 February 2014 Mark Neale and Sean Martin than 100% of their GDP. Do you think that would be Chancellor has ruled out a sterling currency union. If a factor in the confidence of depositors? there wasn’t one, what would be the implications for Mark Neale: Depositors would have the same the regulatory system? protection whether they lived in Scotland and Sean Martin: For us, probably the biggest issue, deposited their money in Scottish-based banks or in alongside currency union, is membership of the EU. UK-based banks. They would have the same £85,000 In terms of how firms in Scotland would continue to protection, but the source of that protection would be provide services in the rest of the UK, and vice versa, different as between deposits in Scottish-based banks the key to that would be whether or not Scotland is and deposits in banks or building societies based in part of the EU and therefore able to exercise what are the rest of the UK. called passporting rights. Essentially, that means that if a firm is authorised in one EU member state it is Q4743 Mr Reid: If you were a depositor wanting to entitled to do business in another EU member state. place your life savings of £85,000 in a bank—we have Critical for us is understanding how the framework seen banking crashes, so they can happen again— would operate. would you be more confident that you would get your money back in the event of a crash if it was in a bank Q4749 Chair: The evidence we have had so far based in the UK or a bank based in an independent would suggest that there will not be a seamless Scotland? transition. Scotland might get in eventually—terms Mark Neale: I think that is a judgment for individual consumers to make, and they would no doubt take unclear and everything else—but it will not be straight into account a range of other factors as well in from the UK into independence and automatically into deciding where to place their money. the EU. There would be some period of negotiation and then a period of getting it agreed by all the other Q4744 Chair: So that’s a yes. countries, so there would be an interim period. What Mark Neale: That is neither a yes nor a no; it is an are the consequences of an interim period? answer that says it is for consumers to make that Sean Martin: As I understand it, it is still in dispute choice. whether they would be able to enter the EU at the point of separation from the rest of the UK. Assuming Q4745 Chair: Are there any lessons to be learned there was some interval, firms wishing to do business from what happened in Icesave with the proportion of in the remainder of the UK would need to be banks in Iceland, the size of the economy and all the authorised by the UK regulators. It is possible that the rest of it? Britain and the Netherlands had to step in UK Government could construct a regime that would to compensate depositors in an Icelandic bank because allow for some sort of recognition of Scottish firms, Iceland could not meet those compensation funds. to try to emulate what might otherwise be the Mark Neale: Yes. passporting regime one would get on entering the EU, but that would clearly be for the Government and Q4746 Chair: Is there a potential parallel with Parliament, not the regulators, to decide. Scotland? Mark Neale: I do not think so directly. The situation Q4750 Chair: But you could have the regulation of with the Icelandic banks was a very specific one, and subsidiaries, could you? I would not necessarily read that across to an Sean Martin: Assuming Scotland were to leave the independent Scotland. UK and not join the EU, if a Scottish entity wished to operate in the rest of the UK, it would need to be Q4747 Chair: Is there not a parallel in terms of the authorised either as a subsidiary or as a branch. It relative proportions—the size of the banks compared would still be part of the same legal entity, but it with the size of the economy? The collapse occurred would have to go through the full route to in the Icelandic bank, the Icelandic economy was not authorisation. capable of meeting the compensation, so other people stepped in to protect their nationals, but they need not Q4751 Sir James Paice: But there would be no have done so. Is that not almost an exact potential obligation on the UK regulators to regulate them. I parallel with Scotland, where the size of the banks is appreciate there is an element of politics in this, but it so great compared with the size of the country’s is not automatic that a Scottish financial house— economy that it is very difficult to see how the costs financial institution—would be approved to provide could be met? financial services in the rest of the UK. Mark Neale: All I would say is that clearly the challenges for the public finances of any country, in Sean Martin: That is right. Absent any special terms of the contingent liability to meet compensation legislative regime or absent EU membership, we costs, are greater where those costs are higher as a would need to consider Scottish firms in the same way proportion of GDP. as we do other third-country firms, as we call them. Chair: To be fair, that is a statement of the bleeding obvious, isn’t it? You are just telling us what we heard Q4752 Chair: Coming back to the killer analogy from you earlier. earlier, there could be a pause or break in the ability of Scottish firms to trade in the rest of the UK while Q4748 Lindsay Roy: Can I move to currency? I all these things are arranged. think you were party to our discussions earlier on. The Sean Martin: The killer analogy being? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 180 Scottish Affairs Committee: Evidence
26 February 2014 Mark Neale and Sean Martin
Q4753 Chair: Sorry, I assumed you were here Q4760 Sir James Paice: Whereas, as we have just earlier. The killer analogy is that it is possible to been discussing, we have had a fairly strong body of envisage a steady state where the Scottish financial evidence that there would be an interregnum between industry is stable; the difficulty is getting from here to independence day and accession to the EU, so in that there, and the killer period is in the middle. We were period of time there would be no obligation to have a discussing whether or not most people survived deposit insurance scheme in Scotland. killers. Therefore, there could be a transitional period Mark Neale: My assumption is that the Scottish where firms in Scotland were not endorsed to trade in Government in that event would nevertheless wish to the rest of the UK. put in place arrangements to ensure that happened. Sean Martin: Assuming there is a yes vote in September, we would then have our period through to Q4761 Sir James Paice: That is your assumption; it separation. During that period, Scottish firms would is not a fact or any requirement. continue to operate as they do now. During that period Mark Neale: It is an assumption, not a requirement, one would look either for some sort of legislative no. solution, or you might expect them to seek authorisation to operate in the rest of the UK. It would Q4762 Lindsay Roy: To what extent would not necessarily follow that they would be stopped sovereign debt default by Scotland, or refusal to take from operating in the rest of the UK, but they would on inherited debt, have implications for the stability need to go through some form of process. of the financial system? Sean Martin: That is probably best addressed to my Q4754 Chair: That process and the speed thereof colleagues in the PRA or the Bank of England. That would be entirely at the discretion of the UK. is not an assessment I could easily make. Sean Martin: It would also rest in the hands of the firms themselves. Q4763 Lindsay Roy: You have no view on the matter. Q4755 Chair: But presuming the Scottish Sean Martin: No. Government wanted them to do it and the firms wanted to do it, the speed with which it was Q4764 Chair: Mark, I take it you will refer us to an progressed would be entirely within the control of the answer you gave some moment ago. Government of the UK. Is that correct? Mark Neale: I will indeed. Sean Martin: And the regulators in the UK who Chair: I suspected that. would need to process the applications. Chair: That is right; fine. Thank you. Q4765 Lindsay Roy: Can we get a reference to the individuals who could respond to these questions? Q4756 Lindsay Roy: If there is no common currency Sean Martin: I believe you are seeing Andrew Bailey agreement and no euro, we are left with sterlingisation later this afternoon. He will be better placed than I am. and a separate currency. What implications does that have for the regulation and deposit insurance Q4766 Chair: We will tell him you said he would schemes? answer all these points. Mr Neale, would you be referring it to Andrew Bailey as well? Mark Neale: It would have no implication for the Mark Neale: deposit insurance schemes, because depositors in If you want to ask questions about access to sovereign debt markets, the best organisation Scottish-based banks would have exactly the same to go to is the Debt Management Office and its head, £85,000 protection, but from a different source. Robert Stheeman. Q4757 Lindsay Roy: What about regulation? Q4767 Mike Crockart: Mark, I want to go back to Sean Martin: In the absence of a common currency? a couple of points you made previously and put them Lindsay Roy: In the case of the adoption of together. You said that under EU law an independent sterlingisation or a separate Scottish currency, what Scotland would need a separate compensation scheme, would be the implications for regulation? and it could not be a shared scheme. In Mark Carney’s Sean Martin: Again, I return to the key question for speech he said that a shared deposit insurance scheme us, certainly from the FCA’s perspective. The bigger is an essential part of a currency union. question is EU membership and the entitlement to Mark Neale: Of a banking union and currency operate in the UK. That is the key question. union, yes.
Q4758 Sir James Paice: Can we just go back to an Q4768 Mike Crockart: How do we put those two earlier answer? You say they would still get £85,000 together and end up with a currency union inside the protection. Why? EU? Mark Neale: Because it is an EU-mandated Mark Neale: As I think one of your previous harmonised protection limit. witnesses said, that is an issue that would need to be resolved. Q4759 Sir James Paice: But you are assuming, therefore, that they are in the EU. Q4769 Mike Crockart: Is that shorthand for it is a Mark Neale: I was indeed making that assumption. problem and it would have to be open to negotiation? cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 181
26 February 2014 Mark Neale and Sean Martin
Mark Neale: I think it would have to be open to UK’s best strategy in terms of the organisations you negotiation. represent? Sean Martin: In a sense, we are an independent Q4770 Mike Crockart: But taking those two regulator. Our purpose and our aims are set out in statements together, you cannot have both as it stands. statute, so we would continue to advance those Mark Neale: As it stands, there is a legal requirement objectives in the way we do now, but we would be on member states to have a compensation scheme. doing it for the remainder of the UK rather than for the existing UK. In that sense, our purpose and goals Q4771 Mike Crockart: There would need to be a would not change. negotiated opt-out from EU law. Mark Neale: Yes, conceivably. Q4775 Jim McGovern: It would just mean that Scotland would be excluded from that. Q4772 Jim McGovern: Staying on the subject of Sean Martin: It would. banking and currency, if the overriding aim was to Mark Neale: My answer would be very much the allow Scotland to protect the financial services same. We would continue to protect consumers of industry, how could that be achieved? How could we financial products bought from UK-based businesses. protect the financial services industry in Scotland? Sean Martin: I am not sure I can answer that Q4776 Jim McGovern: I apologise if I offended you question. Certainly the question of a currency union by what I said, but it seems to me that it is almost is probably outside the scope of what the FCA would confrontational. It should not be that way. It is as if be looking at. It is probably more one for the bank. you do not want to give a straight answer to the questions we are putting. Q4773 Jim McGovern: I am sure Hansard will Sean Martin: That was not my intention. record this absolutely accurately and correctly. I do Jim McGovern: Okay. Thank you. not know if you are being deliberately evasive or you just cannot give a straight answer. Q4777 Chair: Well, colleagues, I think we have got Sean Martin: I am certainly not being deliberately as much from yourselves as we are likely to get. evasive, but I think it is not something that the However, are there any answers you had prepared to Financial Conduct Authority has an obvious interest questions we have not asked? I know it is a bit like in. drawing teeth, but is there anything we should have asked you that you think would be helpful to our Q4774 Jim McGovern: Okay. In the event of discussions going forward? separation, if that happens—if the Scottish people Mark Neale: I do not think so. vote for separation—what would be the rest of the Chair: Fine. Thank you very much for coming along.
Examination of Witness
Witness: Andrew Bailey, Chief Executive Officer, Prudential Regulation Authority, gave evidence.
Q4778 Chair: Good afternoon. We are sorry for Scottish bank notes, among other things. During the holding you back a bit. We were having so much fun height of the crisis—I don’t know whether I did that our previous sessions overran. Anyway, we have something wrong in the past—I was also responsible to be out of here by 9 o’clock. for sorting out problems in banks as they arose, which Andrew Bailey: I will settle in then. included emergency lending to RBS and HBOS. The previous time I appeared before this Committee was Q4779 Chair: Mr Bailey, could I welcome you to in relation to resolution of the Dunfermline Building this session? As you are aware, the Scottish Affairs Society, so I guess I have a bit of form. In a nutshell, Committee is conducting an inquiry into various that is what I do. aspects of the impact of separation upon Scotland in an effort to try to provide clarification for those who Q4780 Chair: We have great expectations of you. are about to vote. Therefore, we are trying to The previous witnesses declined to answer a whole illuminate a variety of issues. Today, we are looking number of questions, but they said you would be able at matters concerned with financial markets, banking to explain everything. and the like. Could we start off by asking you to Andrew Bailey: That was what they told me as I came introduce yourself and tell us your background and in, which is a bit worrying. why your experience is relevant to our inquiry? Andrew Bailey: I am Deputy Governor of the Bank of England responsible for Prudential Regulation. I Q4781 Chair: No pressure then. Can we assume that am also chief executive of the Prudential Regulation the financial services sector in Scotland is regulated in Authority, which was established not far off a year exactly the same way as everywhere else in the UK? ago when the UK regulatory system was reorganised. Andrew Bailey: Yes. We are the prudential regulator Prior to that, I was chief cashier at the Bank of for banks, insurance companies and major investment England, so I had quite a heavy involvement in firms. We are a unitary regulator, so we regulate in cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 182 Scottish Affairs Committee: Evidence
26 February 2014 Andrew Bailey exactly the same way irrespective of the location of number of objectives, to create a stable balance the firm. between prudential and conduct regulation. On the whole, during its life, I do not think the FSA achieved Q4782 Mike Crockart: I asked this question of the that stable balance. It was not always the same way FCA, so it will be interesting to see whether we get round, but at various points in time one tended to the same answer. The arrangements for regulating dominate the other, which was not good. banking and financial services have obviously The second observation is a bit more practical but is changed in the very recent past. Can you explain the somewhat in the same vein. I spent two years in senior different roles of the FCA, PRA and, more widely, as management. You had issues coming at you from all was explained by the FCA and FSCS, the Money angles, with 25,000 authorised firms, doing conduct Advice Service and another one that was mentioned? and prudential. It was quite difficult for senior Andrew Bailey: The ombudsman. management to balance the issues, particularly in a Mike Crockart: Yes. Thank you. period when there was quite a severe financial crisis Andrew Bailey: We are the prudential regulator for going on. banks, insurers and major investment firms. The FCA Mike Crockart: I think that sets the scene well for is the conduct regulator for all of those firms, so we independence questions. jointly regulate, but with our different objectives, which I will come back to. As they probably Q4784 Graeme Morrice: In terms of an independent explained, the FCA is the prudential and conduct Scotland, if that was ever to happen, what do you regulator for the rest of the financial services think would be the implications of having different population, which numerically is by far the largest regulatory systems for companies based in Scotland? number of firms. The regulator regulates about 25,000 Andrew Bailey: I cannot give you any view on the firms altogether, about 2,500 of which we are the question of whether Scotland should or should not be prudential regulator for and we share with them. We independent. That is not for me. tend to have the largest firms in our ambit, but we also Graeme Morrice: I am not asking that. have credit unions and small insurers. Andrew Bailey: One thing I would say, which is We have a common objective across all the firms we particularly true in our world of prudential regulate, which is the safety and soundness of firms supervision, is that quite a substantial part of what I in the context of the stability of the financial system. might call the regulatory structure that is applied by For insurers, we have a second objective—an us comes from the European Union. That is true both insurance objective—which is policyholder in banking and in insurance. I know there is an open protection. In an Act of Parliament passed at the tail question about European Union membership, on end of last year, which introduced the reforms of the which again I cannot give a view, but if you were to two commissions, the Independent Banking assume hypothetically that Scotland were to be a Commission and the Parliamentary Banking member of the European Union, there would be a Commission, we were also given a secondary common base of regulation. objective in respect of competition. But there is a second part of it that is not common. I The FCA, as I am sure they explained, has an overall give three examples I very briefly touched on in the conduct of business objective, which it operates across earlier answer, which are major policy initiatives of all the firms. That includes both market regulation and the Westminster Parliament over the last year. The so- regulation in respect of consumers. called ring-fence in banks, which came out of the independent commission chaired by Sir John Vickers, Q4783 Mike Crockart: Your predecessor, the FSA, is entirely a UK policy initiative passed by the incorporated the prudential and the customer aspects. Westminster Parliament. The so-called senior persons What is the benefit of splitting those? regime and the licensing regime for bankers again are Andrew Bailey: The clear benefit is focus. Let me products of the Parliamentary Commission on illustrate that. There are two parts to it. First, these Banking Standards chaired by Andrew Tyrie, again reforms—bear in mind that the PRA is part of the entirely a UK regime. The third one is the competition Bank of England—have brought under one roof what objective we have and the much larger competition we do in terms of individual firm regulation and the role the FCA has, which again is entirely a UK new element, which in the jargon is called macro- regime. There are still substantial elements of what we prudential regulation, and takes a much more macro do where an independent Scotland and an independent view of financial stability. I am a member of the Bank Scottish Parliament would have to decide what they of England Financial Policy Committee. The third leg want. They may decide to follow precedents here, but is monetary policy. Already in the first year we are they may not. seeing clear evidence that having it under one roof can enable the MPC’s view of monetary policy much Q4785 Graeme Morrice: Very simply, if they more effectively to take into account the state of the decided to choose a different solution, presumably banking industry and credit creation. there might be a lot of issues for companies based in On the second thing, I speak mainly from about two Scotland wishing to trade with the rest of the UK. years of experience. In the last two years of the FSA, Andrew Bailey: Up to a point. Major international I worked mostly in the FSA as head of prudential firms do not like it, but one of the things they have to regulation, in the job to be, as it were. There are two put up with is that if they are based in many different things I would observe. First, within that system I jurisdictions—typically they are—they are used to think it was hard for the FSA, given its much larger operating under different regulatory regimes. They cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 183
26 February 2014 Andrew Bailey will all tell you that they wish we would adopt would be between the two structures. I looked around common systems, but the fact of the matter is that the world earlier this week to see if I could answer national Parliaments, for reasons they can well this question. It is not a system, I think, that is used articulate, adopt different approaches. almost anywhere else in the world. The only possible examples I could find were Greenland and the Faroe Q4786 Graeme Morrice: You will be aware of the Islands, and they are not obvious major financial Scottish Government’s White Paper on the whole centres. It is not a system that is in place elsewhere. issue of separation. A section of it relates to the That does not mean to say it could not work. financial services industry. Was your organisation consulted by the Scottish Government prior to Q4789 Chair: The Faroe Islands share their publication of that paper? functions with Denmark rather than doing it Andrew Bailey: No. As I think Mark Carney said themselves. when he made a speech in Scotland quite recently, Andrew Bailey: Yes, but to be honest they are not there have been some low-key technical discussions obvious major financial centres. with the Scottish Government, but in no sense have we been consulted. By the way, I am not saying that Q4790 Chair: I just wanted to be clear about what because we felt in any sense we should be consulted; you were saying. it is not for us to decide these things. We will provide Andrew Bailey: All I can tell you—I am not offering low-key technical advice if asked. That is the limit a judgment on this—is that what we observe in other of it. parts of the world is that that is not a model that is used. But it does not mean to say it could not work, Q4787 Graeme Morrice: Would you like to have but there would be big issues around the institutional been consulted? structure, and they need to be determined by Andrew Bailey: No. It is very clear, because I have Governments. read the proceedings of your previous hearings, that we are not in a pre-negotiation phase at the moment. Q4791 Chair: Can I clarify? What would be in it for Clearly, that has been put off for later, conditional on the UK, in the event of separation, to have a shared the outcome of the referendum. We are very clear that, supervisory function in that way? I can see what might assuming there is a yes vote, there has to be a set of be in it potentially for a separate Scotland, but what decisions at governmental level on what I might call would be in it for the UK? some of the constitutional and institutional structures. Andrew Bailey: I don’t know. You would have to ask They are not for us, just as it is not for us to decide the UK Government that question. One answer I the institutional structure of regulation in this country. would give is that it very much goes to the question What would follow though, if we go down that road, of what structure the two Governments would want to is that there would be issues of a more technical nature have, particularly in respect of the currency. that must follow from that once the institutional Chair: We will come to that later on. structure is determined. Q4792 Graeme Morrice: Do you think a single Q4788 Graeme Morrice: You will be aware that in prudential regulator implies a banking union? the White Paper the current Scottish Government Andrew Bailey: It goes to the question: is this a single suggest that in an independent Scotland they would regulator applying an absolutely common framework? like to see a single prudential regulatory system. Again, that would require both Parliaments to agree, Obviously, it would be down to a future Scottish “We’re going to set up an institutional structure that Government to decide that, if indeed Scotland was to is absolutely common, and we’re not going to let this become independent; it is not down to the current get out of alignment in terms of the non-EU parts,” Government to decide what happens in the future. assuming there is EU membership. Or is it a single How might that work in practice, if it was to be regulator where effectively you are applying two adopted? somewhat different approaches? Andrew Bailey: The question of European Union membership again is important. I am not a lawyer, but Q4793 Graeme Morrice: You will probably be my understanding is that, in the event of European aware that the Governor of the Bank of England Union membership, an independent country is recently said that ultimately it is for taxpayers who required to have a regulatory authority of its own. I have to stand behind the central bank in any think I am right in saying that the Scottish institutions it supports. Can you see how that would Government have said they take that point but could, work with two separate countries and one central in a sense, almost contract with the UK authority to bank? conduct supervision of institutions, to draw that Andrew Bailey: Again it would be a matter for the distinction between the regulatory authority and Governments to construct very careful, what I might supervision. That is, frankly, an issue for the UK call, institutional structuring. Mark Carney is Government and the Scottish Government. absolutely right in that respect, notwithstanding the What I would say, and it comes back to the point I fact—we have it in this country—that the Bank of made earlier about the amount of policy that is England has been given operational independence in determined in a common setting in the EU and the respect of certain functions. A central bank only exists amount that is not, is that we would have to be very because, to use a phrase, it is an emanation of the alive to the question of how much divergence there state. We have no other, in a sense, special specialness cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 184 Scottish Affairs Committee: Evidence
26 February 2014 Andrew Bailey than that. What does that mean? It means exactly your England and the Scottish Government. Obviously, we point, which is ultimately that the resources of the have a strong understanding of the role of the central state—the fiscal base of the state—stand behind it. bank, but this is ultimately a constitutional point; it is That is why, going back to my past, when you come not a point that we can settle as what I might call to areas like emergency lending, lending of last resort technicians. We have said, and Mark Carney said it and anything of a capital nature, it is really the fiscal in his speech, that we are providing private low-key resources of the state that are being used. technical advice. We are having those sorts of discussions; we are open for those discussions, Q4794 Graeme Morrice: Are there any lessons to be because we are happy to give the benefit of our drawn from the eurozone, which seems to be edging technical expertise where it is deemed relevant, but it towards banking union? is not for us to determine the broader constitutional Andrew Bailey: There are a lot of lessons, and I think and institutional structural issues. That is for Mark Carney expanded on this in his speech. The Governments. lessons of the eurozone in this respect are that—in this case, subsequent to the start of the monetary Q4796 Pamela Nash: I understand that, and I would union—they are going through a process, which not expect the Bank of England to wade into a policy obviously has been born of difficult experience, and area, but we as politicians and the Scottish people have had to expand substantially what I call the reach making this decision want to know what the of institutions. I think Mark used the term “fiscal possibilities are. It appears to some of us that the federalism,” which is one way of putting it. There has possibilities the Scottish Government are putting to be some pooling of fiscal resources, because the forward are not possibilities at all. thing they have experienced in a very difficult way is Andrew Bailey: You will have seen from the speech the link between big problems in the banking sector Mark Carney made that he set out a technical but quite and problems of sovereign creditworthiness. important contribution, drawing on the lessons of Having had these very difficult experiences, as Mark currency unions and both the advantages and the said in his speech, all of us are working very hard to pressures that you see in currency unions around the end the “too big to fail” problem and the dependence world. Going back to the discussion we were just of the banking system on taxpayer money, but he having, one of the key points he made, which is the made it quite clear that there are a number of areas lesson from the euro area, is that if you have a where we do not expect ultimately to break that link. currency union, or indeed a sharing of currency, it Lender of last resort is one of them. Even if we get to requires a stronger institutional fabric around it. a point where its credit is in capital providers that essentially provide the solvency support, we will still Q4797 Chair: Can I go back a little to one of the be in a world where lender of last resort will apply. questions Graeme asked about the implications of There is still a deposit guarantee scheme. You were having a different regulatory system? You seemed to talking to Mark Neale about that. That again is be saying that it was entirely possible to have two ultimately an emanation of the state, and you saw in regulatory systems, one in Scotland and one in cases like Iceland what happens when the state cannot England, and it might be a bit of a difficulty for firms support the deposit guarantee scheme. To bring the in Scotland but they should get over it, because they answer to an end, the euro area has learned, and is are multinationals dealing with a whole number of going through the process of having to build a larger different regulatory systems and it is not really a institutional structure around monetary union. problem. Is that a fair summary? Andrew Bailey: The observation I make is that if you Q4795 Pamela Nash: I want to take you back to an are a major UK international bank you are dealing earlier response to Graeme. I was not surprised when with us as your lead regulator, but you are dealing you said the Bank of England had not been contacted with American regulators, who on the whole hunt in for discussions with the Scottish Government; you packs, and you are dealing with the regulators of other confirmed what the Governor had already said. I was parts of the world. You may be in Hong Kong, surprised when you said that it was not something Singapore, Germany or France. We have a college the Bank of England would seek to do, because in structure to bring that together, but you are having to “Scotland’s Future” the SNP have set out very clearly deal with all of them domestically. They will all say their expectations of the Bank of England, not a to you, and I can understand this, “I wish these people negotiating position, but what they are telling the would align themselves better,” but ultimately Scottish people the Bank of England will do. Would national Parliaments have national interests. you enter discussions with the Scottish Government just now if they wished to consult with you on Q4798 Chair: But given there is a common base in possibilities for the relationship with the Bank of the EU, the fact that there are differences in regulation England in the event of a yes vote? between, say, a separate Scotland and UK should not Andrew Bailey: The reason why I said that is very be an insuperable difficulty. important. It is absolutely clear, and, in a sense, it goes Andrew Bailey: No. Certainly, in the prudential area, back to what I said about the central bank being an more so than the conduct area at the moment, there emanation of the state ultimately, that discussions, in will be a larger common base, because if Scotland the first instance—critically, in the first instance— were to be a member of the EU there would be a have to be between the UK Government and the larger common base of regulation coming out of the Scottish Government, not between the Bank of EU. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 185
26 February 2014 Andrew Bailey
Q4799 Chair: Could I also pick up the question of is not reasonable. You then have to answer the the single prudential regulatory system? You raised question going forward: at what point do they get out the issue about whether or not they would be of lockstep to the point where you are really operating supervising one scheme that applied to a separate two systems of regulation? I do not know the answer Scotland and the UK, as distinct from having a to that. Nobody has ever tried it before. divergent system. Would it be possible to operate a divergent system with one agency doing the Q4804 Chair: We are trying to assess how many of supervision? the proposals that the Scottish Government are putting Andrew Bailey: I think it is possible, but over time forward are feasible and acceptable, and how many it would probably create more stress than not having are just nonsense. Unless I am mistaken, what they divergence. It is a bit like a statement of the are saying about having the Bank of England blindingly obvious. operating two systems of supervision at the same time Chair: Yes, that’s what I was thinking. is, you are saying—unless I am mistaken—perfectly Andrew Bailey: But one has to accept that national doable, until we get to the stage where divergence is Parliaments with sovereignty have the right to do that, so great that it breaks apart. It would be entirely if they wish to do so. The UK Parliament has taken a possible that if the Scottish Government modified or number of big steps in the last two years on that front, muted a desire for change, that could be there for, say, and I absolutely understand and support why they 10 years, until things were up and running and they have done it. felt able to move apart. Andrew Bailey: I am afraid that all of this has to go Q4800 Chair: Yes, but are you agreeing with the back to the Governments. They would have to come Scottish Government’s proposal that basically the to an agreement on the governance of the regulator, Bank of England could run two supervisory systems because we have our own governance set by the UK at the same time, even though there was divergence, Parliament. I have a board; there is a process for and there are some stresses and strains but it is all appointing members to the board. I have a majority of doable? non-executive members, because that is the Andrew Bailey: I have been quite careful. I have said constitution. If that were to be the choice of the that it is not a system that operates in any other part Governments, there would have to be a whole of the world where there is a major financial presence, architecture put round it. and both the rest of the UK and Scotland have that. It is not a model you observe anywhere else. I think it Q4805 Chair: But it could be done. This is not a pig would require very careful thought about how the which could not fly. It might be difficult but it could single regulator would go about managing that be done. operation when essentially you would have two Andrew Bailey: I am sorry to keep coming back to sovereign Parliaments. this. It is a pig that I cannot observe flying in any other part of the world, but I am not therefore Q4801 Chair: On the one hand, the fact that definitively saying to you that it can’t fly. It has never something has not been done before is not an been done before but. argument for saying it cannot be done. Andrew Bailey: No. Q4806 Chair: People said to the Wright brothers that it had never been done before, but it didn’t stop Q4802 Chair: Surely, the Bank of England is stuffed them trying. full of very clever people who can make almost Andrew Bailey: There are many things in the world anything work. You are not going to dispute that, that at one point had never been done before. surely. Chair: Indeed. Thanks. Andrew Bailey: It is kind of you to say that. I would just observe—it comes back to the point about Q4807 Lindsay Roy: I want to move to currency. institutional structure—that we would have to be very You will be well aware that the Chancellor, the careful about the issue of serving two sovereign shadow Chancellor and the Chief Secretary to the Parliaments. Treasury have ruled out a sterling currency union. Can you see the logic and rationale of that decision? Q4803 Chair: Clarify for me exactly what are the Andrew Bailey: Frankly, it is not for me to comment hazards and difficulties. Spell out some of them. Why on what the UK Government wish the future currency do you think that maybe it could not be done? I have arrangements to be. not identified any. Clarify where there would be a direct contradiction between what the Scottish Q4808 Lindsay Roy: I am asking you whether you Government were doing and the UK Government can see a logic or a rationale to that decision. were doing that meant the Bank of England could not Andrew Bailey: I think they have taken a view that, do the two things at once. if that were to be the outcome of a referendum and Andrew Bailey: You could have a system where there there was an independent Scottish Government, the is a commitment by both Governments to keep the sharing of the currency between two independent two absolutely in lockstep. Governments would be something they would regard Chair: Yes, I understand that. Absolutely. as too difficult, but you have to ask them that Andrew Bailey: There is no reason why sovereign question. It is not a question we have been at all Parliaments should agree to that. In some sense, that involved in, nor should we be involved in it. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 186 Scottish Affairs Committee: Evidence
26 February 2014 Andrew Bailey
Q4809 Lindsay Roy: I am asking you as a dollar in the United States, Canada and Australia, professional whether you can understand the logic and where they have federal systems? Do you not think rationale behind this. that is the reason behind it, and therefore would you Andrew Bailey: Let’s contrast it with the discussion not agree with that assessment? we have just had. Currency unions are clearly a pig Andrew Bailey: If I put myself in the Chancellor’s that has flown and is flying in other parts of the world. position for a moment, he is, as was his predecessor I observe that, as I was saying earlier, the euro area and his predecessor, directly exposed to the workings lesson is that they require deeper institutional and the issues that the euro area has had to face, integration than the euro area countries believed was through his membership of the Council of Ministers. the case on day one. To use Mark Carney’s phrase, it He will have seen at first hand, for instance, in that requires a lot more fiscal federalism and an case what it takes in terms of institutional integration accompanying banking union, which the euro area is to make that sort of thing work. He can speak about moving towards, but it clearly is a pig that flies more that far more forcefully than I can, because he has that or less well in some areas. But you will have to ask experience more directly than me or any central the Westminster Government on what basis they do banker. He will be able to say, “We observe what is not wish to go into that arrangement. It really is not going on in the euro area,” as Mark Carney said in his for me to second-guess what lies behind their speech, “and this is what it would take.” thinking. Q4813 Graeme Morrice: But there is a difference in Q4810 Lindsay Roy: Are you saying you cannot see the eurozone and in the EU, where there isn’t a logic to this? complete political union, from the United Kingdom. Andrew Bailey: What I am saying is that you can Andrew Bailey: I understand that, but all of this is observe that currency unions are in place in some hypothetically on the basis that there would be a yes parts of the world, or have been in the past. Frankly, vote in the referendum and at that point Scotland some of them have not been particularly successful; would become an independent country. That is the some of them have endured longer. The euro area is hypothesis. the biggest one ever tried, and it is a living example in front of us as to what has to happen. I can give you Q4814 Graeme Morrice: But we have to make that example, but I cannot tell you why the assumptions just in case. Government here reach the conclusion that that is not Andrew Bailey: The point I would make, and this is what they would prefer in the future. You really have certainly true of the work the UK Treasury has put to ask them that question. out, is that they have drawn on the work done on the five tests on euro area membership, with which I was Q4811 Chair: What I am trying to clarify is the somewhat connected in the past. One of the very good thrust behind this. Could this decision by the points they are making—this is slightly in reverse—is Chancellor be described as an irrational one? It has that in the euro area the whole question was to do been suggested that this is not a serious proposal at all, with the degree of convergence of independent that it is just bluff, and all the rest of it. Irrespective of sovereign states and previously independent sovereign whether or not you agree with it—and we are not monetary policies, and how that would operate in a asking you to express an opinion about that—is it a world where you lock down the exchange rate. As I rational decision, even as distinct from other rational think they said in their document, in the Scottish decisions? Put another way, is it an irrational situation you are really looking at it from the reverse decision? point of view, which is, over what period of time Andrew Bailey: I really think you have to ask him. would you get real divergence of the two economies What I can observe is that there are currency unions under separate sovereign control? They are not in the world, and there are clearly many sovereign predicting how that would happen. It is a question of states—most sovereign states—that are not part of a what would a process of divergence mean, whereas currency union, where the Government regard in the euro area the question is how quickly would sovereignty over the currency as something they convergence happen. attach primary importance to. I take the Chancellor to be saying that he takes the view that having primacy Q4815 Graeme Morrice: But in an independent over the currency is an important part of the role of Scotland you would probably have a whole range of the UK Government. That is the norm in most divergences because there would not be fiscal, countries in the world. political and economic union, and therefore how could Chair: Our previous witnesses said that you would be a currency union work? able to answer everything. That is why we are Andrew Bailey: That would be part of the thinking pressing you on that. around how robust the institutional structure would need to be and how you would do it, but you would Q4812 Graeme Morrice: It is a crucial point in have to ask them those questions. relation to currency union. Would you agree that the reason the Chancellor and others are saying that it Q4816 Lindsay Roy: If there is not a currency union, would not be in the best interests of not just the what are the implications for the regulatory system? residual UK but Scotland is that you would not also Andrew Bailey: They would be quite considerable, have the fiscal, economic and political union that you because you have to regard the regulatory system, get in other successful currency unions, such as the particularly the prudential regulatory system, as a cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 187
26 February 2014 Andrew Bailey structure that is dependent on the choices on currency. Q4822 Lindsay Roy: Would it be fair to say that it I suppose there are four broad choices you can make. is a complex process and there are increased risks You can have a currency union; Scotland could move and uncertainties? towards using the euro, although there is a question Andrew Bailey: It is certainly a complex process. I about how you get there; you could have an do not think I am making a particularly controversial independent currency; or Scotland could sterlingise or statement in saying that it is complex. There is a lot dollarise, to use a terrible phrase. of institutional apparatus around setting up a currency.
Q4817 Lindsay Roy: To take the latter two, what are Q4823 Lindsay Roy: And it would depend very the implications in having a separate currency and much on good will on both sides. Andrew Bailey: It comes back to the two sterlingisation? Governments coming to an understanding in the event Andrew Bailey: In the case of a separate currency, of a vote. Scotland would set up its own set of institutions. It would have its own central bank. Therefore, I imagine Q4824 Lindsay Roy: If there was a separate Scottish it would have its own regulatory system. There is currency, what implications would it have for plenty of precedent for that around the world, but you financial services? would have to ask the Scottish Government how they Andrew Bailey: All the firms present would have to would propose to do that. take a view on the robustness of the structure and the state support for the institutional structure. You will Q4818 Jim McGovern: Are you talking about get markets taking a view on it, and firms would be Scotland introducing its own currency, or quite alive to the views that the markets will take on sterlingisation? it. Rating agencies will take a view on it. It has to be Andrew Bailey: I sketched out what I thought. Having a robust structure in that sense. read the literature, there are four options broadly that you can choose. Q4825 Lindsay Roy: How long does it take to evaluate how robust the structure is? Q4819 Jim McGovern: Sterlingisation, own Andrew Bailey: It evolves over a long period of time. currency, a negotiated joint currency and eurozone. Andrew Bailey: I say that just to create a set of Q4826 Lindsay Roy: It is to do with trust and options, to have all the choices there. confidence. Andrew Bailey: It’s trust and confidence, yes. Q4820 Jim McGovern: When you answered Mr Q4827 Lindsay Roy: A high degree of trust and Roy’s question was that in the context of a new confidence is not there in the beginning, normally. currency for Scotland? Andrew Bailey: That very much depends upon how Andrew Bailey: I think Mr Roy asked me about a new the structures would evolve in that situation out of currency. I think that was the question. what is there today. Lindsay Roy: Yes. Andrew Bailey: My answer is that there are plenty of Q4828 Chair: Would this trust and confidence, precedents for that around the world because plenty which would be so essential in the event of of new countries have been created in the last 30 establishing a new currency, be enhanced or years. They have adopted the necessary set of diminished by any refusal by a separate Scotland to institutions; a lot of new central banks have come into undertake repayment of a share of the UK national existence in the last 30 years, with currencies and a debt? whole panoply of structures. That model exists out Andrew Bailey: That would be very much dependent there. Obviously, Scotland would have to think on the context in which it happened and the carefully about what would be involved in that, how arrangements with the UK Government. long it would take and so on, but the model is out there. That is a pig that flies quite often. Q4829 Chair: The Scottish Government have suggested that, in the event of not being allowed to Q4821 Lindsay Roy: Taking these pigs that fly, can use sterling in a currency union, they would refuse to participate in the repayment of the national debt, so you give us an indication of how long it would take that would be the context. Moving on, given that there to set up a central bank and a separate currency, was no longer going to be a currency union and they especially given the interconnections within the UK? were trying to establish a new currency—you are Andrew Bailey: That is an interesting question. There emphasising, understandably, the role of trust and is quite a lot of precedent, particularly in the former confidence—I am not clear what would be the impact eastern bloc and the former Soviet Union. upon building that trust and confidence of a separate Institutionally, it depends on how big the institutional Scottish Government deciding to repudiate their share structure is and what form of currency would be of the national debt. issued. One example is Ireland, which when it became Andrew Bailey: I see the point you are making. As a independent moved quite slowly in that direction, over general matter, the whole question of trust and many years. Other countries, the former Soviet Union confidence would be dependent on a stable being a case in point, had to do it very abruptly. institutional structure, which would have to emerge cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 188 Scottish Affairs Committee: Evidence
26 February 2014 Andrew Bailey out of what I might call a reasonably harmonious saying to us, no, it could not possibly be done, that process between the two Governments. That would would give us clarity. If you are saying yes, it could obviously condition it. be done, again that gives us clarity. Andrew Bailey: To introduce a completely new Q4830 Chair: That would be nice, but it does not currency during that period would be, frankly, very look as if in the event that the UK sticks to its guns optimistic in my view, but, as I think you said earlier, and says no, there is no joint currency union, there you would have choices. You could have a longer will be an entirely harmonious relationship in those transition in that hypothetical situation, which would circumstances. I am trying to clarify whether or not have to involve some combination of the options we there are any additional observations you would make were discussing a bit earlier. about the impact of a refusal or a repudiation of the debt. What would be the impact on the financial sector Q4834 Chair: If the Scottish Government, as they in Scotland? seem to do, want to stick to their timetable—let us Andrew Bailey: I think the greater the degree of assume for the moment that that timetable is disharmony in intergovernmental relations and inviolate—and it becomes too difficult to establish the institutional structures, the more difficult the process new currency by the time of separation, what then is would become. the transitional arrangement? Andrew Bailey: The two Governments would have to Q4831 Chair: Can I go back to the establishment of come to an agreement on that. My strong advice as a a new currency? Every witness we have had, when technician would be, “Look, sit down and work out pressed and given the choice between sterlingisation and a separate currency, has said that the less bad is what is feasible, and don’t take excessive risks.” the separate currency. I am genuinely unclear as to how long that might take and what the transitional Q4835 Chair: But not taking excessive risks, which arrangements might be. If the Scottish Government we are all against, is incompatible with the timetable, are saying that 18 months would be the period before surely, that the Scottish Government have come separation, could a separate currency be established in forward with. that time? If not, what would be the mechanism? Andrew Bailey: To be fair to the Scottish Would there be sterlingisation for a period? Can you Government, they have thought about the timetable help to illuminate that? and the context. I do not know how many currency Andrew Bailey: As has been determined, 18 months options they have considered in thinking about the is the period between the referendum and the day of timetable. The one we have just been talking about is independence. In terms of the process of what I call not the one— constitutional and institutional settlement, they are going to have to get on with it, frankly. You are right: Q4836 Chair: It is quite clear. The timetable for that would become much more acute in the event of a separation has been set by the date of the next Scottish much deeper change in the arrangements for the elections. That is the cart driving the horse, and currency. Ultimately, if the option is to introduce a therefore everything else has to tie into that. What we completely new currency, that is a big job. I had some are trying to clarify is whether or not the involvement in that in Iraq 10 years ago. In that establishment of a new currency can be done in that situation it was done quite quickly, but it was not easy, time scale. If not, what is the interim stage until the as you can imagine. This would be a much more new currency is established? Is it a sterling zone and settled environment. There the comparison ends, as it then a move to a separate currency, and is that doable? were, but it is a very big job. To make that type of Andrew Bailey: I do not know, because the way I read time period work, there would have to be very rapid the White Paper—correct me if I am wrong—their progress on the constitutional and institutional assumption was based on a sterling currency union. decisions. The White Paper was based on that. You would have to go back to them and say, “If that were not the plan Q4832 Chair: We have already heard from witnesses hypothetically, do you think that timetable works?” on other occasions that it is unlikely you would have many decisions reached before the UK general election was resolved, which would obviously eat into Q4837 Chair: But you don’t. Am I fair in thinking that 18-month timetable. Are you saying that in your that you do not think it will work? professional view a new currency could be created Andrew Bailey: I can tell you as a technician that within that time scale, or would that run beyond the there is more institutional and practical change period the Scottish Government have established as involved in the alternatives. That is obvious, so I do being the necessary one? not think that is in any sense a controversial statement. Andrew Bailey: All I can say is that I think the risks In the land of the hypothetical, you would have to of doing a very big transformation like that would go back and say, “If there were to be an alternative grow the less time you allow for it. That would be a arrangement, do you think this timetable works?” pretty short period of time. Q4838 Pamela Nash: I think it has been asked and Q4833 Chair: I know that. I am trying to clarify we have been refused an answer so far. whether or not, coming back to the pigs, that Andrew Bailey: I am not familiar with that, so I particular pig could fly in that period. If you are cannot comment. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 189
26 February 2014 Andrew Bailey
Q4839 Chair: You mentioned earlier that you had Andrew Bailey: The first answer comes back to the been involved in establishing a new currency in Iraq whole question of constitutional and institutional and so on. Is there any example you can think of structure. The more stable and assured the plan for where a developed country like Scotland has set up how that is going to be done, the more institutions its own currency? With all respect to Iraq, it is not will naturally take assurance from that. That must be quite a parallel; it does not have the same financial the cornerstone of it. presence. Andrew Bailey: It has many problems but they are Q4846 Chair: What does that mean? different. Andrew Bailey: It comes back to the discussion we were having. They would need clear answers on the Q4840 Chair: Is there an example you can point to cornerstones of economic policy—currency, fiscal of a developed first-world country having established policy, intergovernmental relations and all the things its own currency from scratch? the major financial institutions would naturally look Andrew Bailey: There are many examples in the east to. bloc. I am not going to get into who is developed, who is first world and who isn’t. Obviously, that is a Q4847 Chair: Is it reasonable for the Scottish little bit pejorative. The biggest one of all was the financial community to expect the Scottish establishment of the euro, but that was done quite Government to react to what the UK Government carefully over a number of years. have said—for example about not having a currency zone—and to outline exactly what their plan B is and Q4841 Chair: The timetable of 18 months did not give some thought or clarification as to whether or not apply to the euro. the timetable for separation would be reviewed? Andrew Bailey: In that case, the introduction of notes Andrew Bailey: I am sure they will be looking at and coins came after the locking down of exchange that, yes. rates to establish the monetary union. Q4848 Chair: In the event of separation, what is the Q4842 Chair: Is it fair to say that this is something best strategy for the rest of the UK to adopt to that has never been done before? With respect to the safeguard its own financial sector? Are there particular eastern bloc, the parallels are not exact. Parallels steps that you would be advising the Government to never are in these circumstances, but the stage of undertake? development in particular of the financial sector in the Andrew Bailey: The overriding answer would be that, eastern bloc makes any comparison unrealistic. as soon as the decision came out of the referendum, Andrew Bailey: I am rapidly trying to run around the go into the negotiation phase and do it as quickly as world in my head to see if there are any others I can possible to limit the uncertainty that would be created think of. If you think about every element of this, around it, because there would be a lot of uncertainty. which runs from the rather practical end of notes and coins through to accounting, legal contracts and so on, Q4849 Chair: We have spent quite a bit of time it is an interesting question as to whether any of them discussing the question of a new currency and so on. have been done on that timetable. I’m sorry I do not What do you see as being the main impact of have the answer in my head, but technicians could sterlingisation upon the financial sector in Scotland? approximate an answer to that question. Andrew Bailey: I would say two things, drawing on experience of other parts of the world, because dollarisation, which is the direct parallel with the Q4843 Chair: Do so. dollar, has been used and is used in some countries. Andrew Bailey: I do not have the exact comparisons First, it does require a very clear view on what I might today. call alignment to the home economy of the currency, Chair: Maybe you could drop us a note. because in a sense you are taking monetary policy Andrew Bailey: I will have a think about it. from another economy. It requires hard thought about how to do that. Secondly, to come back to the financial Q4844 Chair: The previous witnesses told us that system, there is an issue about the capacity for lender you would know the answers to everything. of last resort, where the currency is not the base Andrew Bailey: I shall thank them for that. What I currency in terms of the domestic currency. There are can certainly do—again this is going back to the east countries that have successfully adopted either a bloc—is probably to give you some timelines from policy of dollarisation or a currency board—I slightly those examples. extend it. Hong Kong is a good example. They have substantial fiscal reserves which could be used in the Q4845 Chair: That would be very helpful. Could I event of a problem in the domestic financial system. come back to a point that was touched on earlier? One of my colleagues has had to go, I’m afraid. If the Q4850 Chair: I wonder if I could clarify the point overriding aim being pursued was to allow Scotland you made about the need for harmonisation in the to protect the financial services industry in Scotland event of sterlingisation—the need to try to achieve following separation, what would be the steps that harmony between the two economies. should be taken to do that? Andrew Bailey: Alignment. Andrew Bailey: How would you define protect? Chair: Yes, to make sure they avoid divergence. The Chair: Support, retain, sustain. whole point of separation is to do things differently. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Ev 190 Scottish Affairs Committee: Evidence
26 February 2014 Andrew Bailey
If one of the overriding objectives of the Scottish the lender of last resort, in effect a separate Scotland Government in sterlingisation was to keep their with the Bank of England as lender of last resort might economy in line with that of the UK, to some extent still be required to provide financial indemnity to the it negates the whole point of having a vote for Bank of England? In which case you are not really separation in the first place, does it not? Therefore, it the lender of last resort at all, because they are is highly unlikely that that would actually be their standing behind you and end up potentially with the strategy. liability for any enormous cost overruns. Andrew Bailey: That is exactly why these are choices Andrew Bailey: Again I can only say that the two for Governments. Governments would have to think very carefully about Chair: That is helpful. how they structured that, and the Bank of England Andrew Bailey: Sorry. would have to think very carefully about the implications, were that to be the case, for its own Q4851 Chair: No, I understand that. Can I seek position. clarification about the lender of last resort? Is there anything you can usefully add to what has been said Q4853 Chair: In our previous session, we discussed already about this that would help illuminate the the position of Iceland and the relationship between difficulties for us? The Scottish Government seem to the size of the banks and the size of the economy. be making the assumption that, in the event of a There is clearly a parallel with Scotland, given HBOS currency union, the UK Government will be prepared and the Bank of Scotland and the size of the Scottish to have the Bank of England as lender of last resort economy. Our view earlier on was that it was almost for Scottish banks, facilities and so on. Apart from impossible to see Scotland on is own being able to the issue of moral hazard about having somebody else guarantee those banks, and the banks have to be providing a guarantee, are there any other issues we encouraged, or decide for themselves, to move some ought to be aware of? of the weight to the rest of the UK, either by Andrew Bailey: To draw on experience, if this helps, transferring or something similar. There is no plan B when the Bank of England did lender of last resort in those circumstances, since it would appear for RBS and HBOS in the later part of 2008—I was impossible for the Scottish Government to be seen responsible for it—we had to take a view on the seriously as the lender of last resort to banks of that capacity of the Bank of England’s own balance sheet size. to support this type of lending, bearing in mind that it Andrew Bailey: The landscape is changing somewhat, goes beyond the normal monetary operations we do, but the issue is still there. I know there has been a bit which we always do, as a central bank, against high- of argument about the number, but I think it is 12 quality assets or collateral. You are going out into the times the size of Scottish GDP, in terms of the size of more exposed parts, by its very nature, because it is the banks’ balance sheets. The Scottish Government emergency lending. In that case—this is no great argue that it is lower. It is certainly lower if you revelation—we reached a point where we said to the measure it as, “What is financial services as a share UK Government, “We need a formal indemnity from of output?” It is lower if you say, “What is the share of you for any further lending.” With central banks, you banking activity undertaken in Scotland, as opposed to can argue that it is there anyway because the other parts of the world?” The issue, though, is what Government own us, but we needed a formal we tend to call the home authority. One of the indemnity, and the Government gave it to us. There cornerstones is that you are ultimately responsible for are other cases where we have done that. banks that are based in your country—headquarter- The reason why that is important in this context is that based in your country. that makes it what I might call a fiscal action. The What is changing? As you say, we had bad Government are explicitly taking the risk at that point. experiences with Iceland. That is a very good case in That is important because, in the context of lender of point. We are working very hard to end the too big to last resort, if you have more than one Government fail problem. Ending the too big to fail problem will they would have to be very clear about the burden of ameliorate this substantially, as I think the Scottish risk. Frankly, as the central bank we have to be very Government have pointed out in their White Paper, or clear about how this works—again it is pigs, one of their publications, but there will still be a uncharted waters and all that. This is not a system that liability as the lender of last resort. It may well be less operates, so lender of last resort poses those issues, in quantified terms but there will still be a liability. and they ultimately—sorry I keep saying this—come back to being governmental issues because it is Q4854 Chair: Can you quantify, or give us some sort taxpayers’ money. of indication of how big that might be? Would it be As Mark Carney said in his speech in Scotland, we manageable for a separate Scotland? are working to take out the dependency on taxpayer Andrew Bailey: I cannot really quantify it at the money, particularly in terms of capital, the sorts of moment. Unfortunately, it is very much work in things we had to do in late 2008, but I think there will progress in terms of the international agenda to reduce always be backstop dependence on lender of last the too big to fail problem. Like others, I am resort. You can never be 100% sure that that will not absolutely committed to reducing the dependence on spill over into a fiscal action. public money as far as we can. What is harder to answer is the question you pose, which is: but when Q4852 Chair: Am I right in thinking that, if you you have done all that, what is the backstop? We may require financial indemnity from the Government as not know the precise answer to that question even cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG11 Source: /MILES/PKU/INPUT/038186/038186_o011_odeth_SAC 140226.xml
Scottish Affairs Committee: Evidence Ev 191
26 February 2014 Andrew Bailey then, but we certainly will not be able to have a better Government and the Scottish taxpayer, and in the view until we know how far we get down the road in event of separation and a financial collapse they are terms of the too big to fail problem. Speaking not likely to overwhelm any new-born Scottish just for UK officials but international officials, we are Government. absolutely committed to doing as much as we can to Andrew Bailey: In a sense, you have to freeze the reduce this problem, because it affects all of us. system that is in place today in terms of making that judgment. As you say, there is an awkwardness of Q4855 Chair: Is all of that going to be resolved by timing, because there is an international policy the time Scotland might become independent? Would initiative designed to drive progress on this issue that be solved by the time of the Scottish elections? irrespective of the referendum. As you say, I do not Andrew Bailey: There has been quite a public think that by September we are going to be in a commitment internationally to make definitive position to say to you definitively, “We’ve cracked it.” progress this year in the G20 towards tackling this problem, but if you ask me whether by the end of this Q4859 Chair: So that is still a great unknown. year we will know the answer to the question you Andrew Bailey: It is, but I can tell you that it is No. have just posed, I hope we know a hell of a lot more 1 on our agenda. about it, but I am not sure we will be at the point when I could give you a complete answer. Q4860 Chair: That is some consolation. Do colleagues have any other points? Normally, at the end Q4856 Chair: So we will not know the answer by we ask our witnesses whether or not there are any the time people in Scotland are voting. answers they have prepared to questions we have not Andrew Bailey: We will not know definitively by that asked, or anything you feel we have not touched on stage whether the G20 process has come to fruition. that you think would be helpful to the discussions on There is a summit later this year in Australia, which I the areas we have been covering. believe comes after the vote in Scotland. Andrew Bailey: We have covered a lot of the ground I read through. I apologise. I cannot give you answers Q4857 Chair: It is still fair to say that banks are on many of the questions you have because I am not a international in life and national in death. Government official or a member of the Government. Andrew Bailey: Absolutely. That was a Mervyn King statement. The reason he made that comment was Q4861 Chair: You are far more powerful than many exactly the point I made. When banks fail, it comes of them. back to the home country. The work we are doing on Andrew Bailey: I suspect that is a matter of judgment. resolution, which I used to run in the Bank of England What I can say is that, irrespective of the outcome of and am still heavily involved as a supervisor, is all the referendum, we will go on fulfilling our statutory about putting resolution plans in place for obligations until such time as any future settlement international banks to stop that problem happening came into place. That is obviously an obligation that and coming back to the home authority. Parliament has placed on us. Chair: Can I thank you very much for coming along Q4858 Chair: But the lesson for us in terms of the and seeing us today? I apologise, as I did at the referendum is that certainly at the moment, and until beginning, for the delay in bringing you in, because such time as new policy is devised, irrespective of previous sessions overran. I am sorry this has gone on how many subsidiaries overseas the Bank of Scotland a bit longer than expected, but it has been very and Royal Bank of Scotland set up, they will still valuable to us. ultimately remain a potential charge upon the Scottish Andrew Bailey: Good. Thank you very much. cobber Pack: U PL: COE1 [SE] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 192 Scottish Affairs Committee: Evidence
Wednesday 5 March 2014
Members present: Mr Ian Davidson (Chair)
Mike Crockart Sir James Paice Jim McGovern Mr Alan Reid Graeme Morrice Lindsay Roy Pamela Nash ______
Examination of Witnesses
Witnesses: Professor Robert Wright, Professor of Economics, Strathclyde University, and Dr David Comerford, Professor of Economics, Stirling University, gave evidence.
Q4862 Chair: Gentlemen, could I welcome you to favourable in Scotland, because there are slightly this meeting of the Scottish Affairs Committee? As more pensioners, fewer children and more workers. you are probably aware, we are conducting a series of Although the numbers change as you go through the hearings into various aspects of separation and what ONS projections, the pattern stays pretty much the impact will be upon Scotland. We are trying to constant. The old age dependency ratio is always make sure that people in Scotland have as much roughly the same; it is one decimal point. The old age information as possible before they come to cast their dependency ratio is the same in Scotland as in the votes. Today’s session is on the question of pensions whole of the UK. The total dependency ratio is always and related matters. Professor Wright, it has been more favourable in Scotland, because it has fewer drawn to my attention that you are wearing the tie of children. the Scottish Economic Society, which is also being Professor Wright: I agree. However, I am not so worn by our adviser, Professor Gallagher. What a happy about the approach of just comparing small world this is. I am not checking the ties of the population projections in the future, because this is rest of the gathering, but there might very well be based on a set of assumptions to do with fertility, some duplicates from Marks & Spencer somewhere, mortality and net migration, and nobody can predict though I am not suggesting that your tie is. Can I start the future, so there is a lot of uncertainty. To off by asking you to introduce yourselves and tell us understand the situation David has just described, we the work you have done on pensions and benefits that must look at the demographic path of Scotland over would be relevant to our inquiry? The man with the the last 50 years. There have been a couple of big tie first. differences. These differences are going to create Professor Wright: My name is Robert Wright. I am potentially a bit of divergence in the path in future. professor of economics at the University of Fertility in Scotland has been below replacement level Strathclyde. I am originally from Canada, but I have for a longer period of time than for the UK as a whole; lived in Scotland for 24 years, and I have been it has had much heavier out-migration—negative net carrying out research in the area of population migration—for a longer period of time than for the economics for about 30 years. I am very interested in UK as a whole; and it has much higher mortality and the economic causes and consequences of population lower life expectancy, and that has been the situation ageing, and in demographic change more generally. since the second world war. Dr Comerford: I am David Comerford, a research This means that population momentum in Scotland is fellow at Stirling University. At the back end of last different from that of the UK as a whole. But if, say, year we wrote a paper on pensions, which was we have constant fertility in the future, as the published in the National Institute Economic Review projections show, and life expectancy is going to in January, basically using the latest Office for increase, mortality is going to go down and net National Statistics projections. migration will be at a lower level than we have now— we make analogous assumptions for the Q4863 Chair: Can we start off by asking both of you United Kingdom—and if we focus on population to outline for us the key features of Scottish ageing as being, for example, the increase in people demography that are relevant to the debate on in the age 65 and above group, or 85 and above, there pensions, so that we have it on the record and for is no real difference between what is happening in background? Scotland versus the rest of the UK. As David Dr Comerford: I have prepared three snapshots from mentioned, the difference is that, under that set of the Office for National Statistics 2012 projections. assumptions, the labour force in Scotland—the The current situation in Scotland is that we have number of potential workers—is going to decline or slightly more people of working age, very slightly grow at a very low rate compared with the rest of the more people of pensionable age and fewer children. United Kingdom; and in Scotland we are also going The consequence of that is that the old age to see a reduction in the number of young people, dependency ratio, which is the number of old people where the expectation for the UK as a whole is that it divided by the number of workers, is about the same. is going to rise. That is why you get a pattern of We have more old people and more workers and the changes in the dependency ratio that is slightly ratio is the same. The total dependency ratio is more different. My research and understanding of the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 193
5 March 2014 Professor Robert Wright and Dr David Comerford subject suggests there are no massive differences in that we will have another baby boom, but we missed the rate that the population is ageing if you focus on the last one. Who knows? only the growth in the older age groups. For Scotland, the challenge is to reduce the sick man of Europe image where there is a much lower level of Q4864 Lindsay Roy: Given what you have said, life expectancy than there should be, given the socio- what might this mean for public spending in Scotland? economic situation. Some policies are in place, so Dr Comerford: Robert has gone into some detail hopefully this gap between us and almost everybody about what determines the components of these else will decline. The other big question, which is very population projections. I have just used what the ONS topical and everybody has a view on—there is nobody projected. Under the projections they produced, we in between—is the impact of immigration on net see that in the UK as a whole pension costs rise from migration and what it is going to be in future. I will about 12% of taxes now to about 16% or 17% of taxes not comment on the current policies of the UK in about 2040, so there is a large rise in the cost to the Government at the moment, but in the future the only UK from the ageing population. The effect of slightly way the Scottish population is going to grow is if you heavier mortality in Scotland is to make that rise 0.8% have quite a sizeable difference between immigration higher than in the UK, so there is a small additional and emigration—more people coming than leaving. effect. Scotland has a worse outlook in terms of the This is a result of the population momentum that has cost of pensions compared with its tax base, but the built up for five decades. That’s just the way it is. difference between Scotland and the UK is small in Most economists and businessmen will tell you that relative terms. unless you have a growing labour force with the right skills, you are not going to get economic growth. If Q4865 Lindsay Roy: Is that different from other you do not get the economic growth, you are not western societies with ageing populations? going to get the tax revenue, and if you do not have Dr Comerford: Scotland and the UK are both in a the tax revenue, you are not going to provide the pretty favourable position compared with most other services. Making sure that you have the factors of western societies. production that you need to generate economic growth Professor Wright: If you look at the Scottish and UK and the appropriate labour is important, and in the situations on a spectrum from the most ageing to the future immigration will be critical to that. least rapidly ageing, we are more towards the least Lindsay Roy: That is very helpful. rapidly ageing end of it. Dr Comerford: All I would say is that fertility and To get back to something David mentioned, pensions longevity rates do not vary too much; there are trends are one important aspect of what we call in these things. Immigration can vary a lot, so the accommodating the ageing population. What we mean lever you have to affect population and demography by that is to put in place policies that help to ensure is immigration, almost. that the standard of living of old people does not Professor Wright: There is still some confusion about decline. Pensions are one thing, but so is health this in the media. What are the causes of population expenditure, free personal care or home help. All ageing? It is not increases in life expectancy and these things cost a lot of money, and as more and decline in mortality, and it is not immigration; it has more people are eligible for these services and to do with fertility. Fertility is the ultimate driver of demand them, you will have big increases in the population ageing, and it was the reduction of fertility expectation that the Government are going to spend from the peak of the baby boom in the ’60s to below money to provide them. replacement level in the ’70s that has caused this age The important question is not about pensions, personal wave. Once the baby boom generation has died out, care or health; it is all of them added together, and the the age structure will be much more stable, so in a demand for the Government to pay for these things is sense it is a temporary problem, but over quite a few going to rise rapidly both for the UK as a whole and decades. It is not a problem that is going to go on for for Scotland, and in most other countries as well. ever. To a certain extent, call it a middle-term Population ageing is a global phenomenon. Every problem, but it is a serious one, because population single country in the world is ageing; it is just that the ageing will accelerate into the future both for Scotland rate of ageing varies a lot. We are not at the positive and for the UK. or negative end; we are somewhere in between, but the challenge is to put in place policies that will ensure Q4867 Mr Reid: David, do the figures that you gave older people 20 years down the road on average are for the cost of pensions as a proportion of taxes take not worse off than those people now. into account the changes that the Government have already announced in the pension age? Q4866 Lindsay Roy: Can you tell us the variables Dr Comerford: No. They were very simple that are most likely to influence the projections? calculations. It was just an average pension cost and Which ones are most likely to shift? average tax per worker, and then running forward with Professor Wright: Fertility has been below the number of workers and the number of pensioners, replacement level in both the UK as a whole and in although it did take into account the number of Scotland for 40 years, and it seems unlikely that we pensioners who would be affected by the change in are going to get a big increase in fertility in future. the state pension age. The change to age 66 was You should be asking not me but 20 year-old women included. whether they are going to have four children instead of 1.65 or 1.7, which is the average now. It is unlikely Q4868 Mr Reid: But not future changes to 67 or 68. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 194 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford
Dr Comerford: And the change to 67, but no further difficult decisions. On average, people have come changes after 67. down on having fewer children because of this process. I would think it was more or less impossible Q4869 Jim McGovern: Thank you for coming to convince people to go back to the old ways and along. I have a question for probably both witnesses. have big families. There has been frequent use of the word “fertility.” Jim McGovern: That has clarified it for me. Do you mean there are more or possibly fewer people able to have children, or more or fewer people Q4872 Lindsay Roy: That is good clarification on choosing to have more children, fewer children or no the issue of fertility. Colleagues will pick up children? immigration. Is there not a moral obligation on the Professor Wright: I will clarify this. What we mean Scottish Government to deal with the root causes of by below replacement fertility is a fertility rate of less lower life expectancy in Scotland? How easy is it to than 2.1 births per woman. To put it in a nutshell, the address that? UK population and the Scottish population has been Dr Comerford: I am not sure anybody knows why failing to reproduce itself for the last 40 or 50 years, Scotland has lower life expectancy. It is a bit of a so it is a long-term problem. puzzle. Professor Wright: It is a bit of a puzzle. Lots of Q4870 Jim McGovern: But is it a fertility problem? people have theories and hypotheses. If you look at Professor Wright: Ultimately, if you perceive it to be life expectancy in Scotland almost at any age, 65, zero a problem, and the cause of it is low fertility, therefore or whatever, and extract statistically the role of you can consider low fertility to be the problem, but education, income, medical services and all the other the only way that fertility is going to fix this problem things that we tend to associate with mortality is to have a big increase in it, which seems unlikely. differences, they have a mortality rate that is much In fertility, you have a rising share of women with no lower than it should be. It is more like the Czech children at all—being childless. This is a major social Republic, Poland and places in eastern Europe than it trend, and fertility is being concentrated. Fertility is in England. There are various competing theories tends to be higher among lower socio-economic that range from bad weather to bad diet to bad habits groups compared with higher socio-economic groups, related to drinking. There is something called the for obvious reasons, because education is negatively Glasgow effect, where you can trace disadvantage and related to fertility, so the ultimate cause of population focus on that. It is geographically concentrated on ageing is below replacement fertility over a long Glasgow and, if you fix Glasgow, so to speak, you period of time. That is the issue and the momentum may fix the problem. has built up. These trends are in place; population Dr Comerford: Controlling for deprivation and ageing will accelerate and how do you deal with it? If comparing people in Glasgow with equivalent people fertility jumps to five births per woman tomorrow, in Manchester or Liverpool, there is still an effect. It those kids would only become workers 20 years from is not deprivation-caused; it is Glasgow-caused. now, so you still have 20 years of the problem. I do Professor Wright: That is interesting. I am somewhat not think we can really think in these terms, but we optimistic in the numbers I see. Some progress is can think of the other things we discussed, like being made on this, but the way to make progress on improving mortality rates, managing immigration mortality disadvantage is, I am afraid, not for people more effectively and making it easier for women who our age; it is for the next generation. The bad habits want to have children and also work—some form of that some associate with higher mortality in Scotland subsidised child care. Some people have argued that are learned when you are relatively young. If you can in some other countries it does not have an impact on change people’s attitudes when they are young, you fertility, but it does increase the participation rates of will change this problem. I always found it rather women in the labour market, which in Scotland and strange when this two-year life expectancy difference the UK as a whole are much lower than in other was somehow turned into an advantage in the countries in Europe. discussion on independence, because it meant that if people lived on average two years less you had to pay Q4871 Jim McGovern: Could I pursue that? For me pensions out for two years less. At the same time, as a lay person, the word “fertility” suggests a medical there are policies in place and a wish to close this term. Is it your case that it is because women or men gap—that is the way to measure it—with the rest of choose not to have larger families, or is it because the UK. It is a tough problem. they cannot? Another worrying dimension is that, if you look at the Professor Wright: I think that what you are referring ratio of healthy to non-healthy life expectancy, in to is something called fecundability, which is the some countries, as life expectancy increases, the bias biological ability for women to have children. That is towards healthy life expectancy. However, the reaches zero after the age of 50. We are just talking evidence in Scotland suggests that this balance here of fertility as a variable of choice, with people between healthy and non-healthy life expectancy has choosing to have no children, or a smaller number not changed very much, so people are living longer of children than the generation before them and the but in a less healthy manner. I do not have to explain generation before them. In the way we talk about this to this Committee the link between ill health and there is very little medical or biological constraint; it demand for medical and health services. It is quite is about choice and thinking about the long term— critical that all those who have the opportunity can career prospects, family and trying to make these contribute to trying to reduce the mortality cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 195
5 March 2014 Professor Robert Wright and Dr David Comerford disadvantage that we have observed in Scotland for a close the gap between ourselves and the people—the long time. countries—we want to compare ourselves with, the first of which is the UK. Just because we have the Q4873 Lindsay Roy: I understand where you are same life expectancy as the Czech Republic, we do coming from, but Scotland has some of the highest not want to compare ourselves with the Czech life expectancies as well, so it is in pockets. Therefore, Republic, because they have a much lower physical it should be relatively easy to address. When I say standard of living money-wise and health service- “relatively easy,” with determination and tenacity you wise. should be able to improve life expectancy. Dr Comerford: You would hope so. Q4877 Mike Crockart: Everything we have talked Professor Wright: But the evidence suggests, surely, about so far has been about pensions funded by that inequality and deprivation are related to life taxation, because it is the balance between those in expectancy. Even if you net out those factors and employment paying tax and those receiving state control for them in a statistical way, you still have pensions, so it is a direct transfer. Are there any what is clearly some sort of Scottish disadvantage. It similar issues with pensions funded from savings, is not explained by the simple things that we think given the demographics you have talked about? explain mortality differences between the Dr Comerford: Not really. If you buy an annuity from United Kingdom and Brazil: differences in income, a private pensions provider, those companies won’t do health services, education levels—all the observables individual pricing. They will know your postcode and that have been shown to be highly correlated with will control for it roughly, so you will get a cheaper morality for the last 150 years. David is absolutely pension by virtue of being Scottish. correct when he calls it a puzzle. Dr Comerford: It is not just a puzzle of deprivation; Q4878 Mike Crockart: What do you mean by if you compare somebody from Bearsden who is “cheaper pension”? affluent with somebody from Greater Manchester who Dr Comerford: You get more pension for your money. is also affluent, and you control for the relative affluence, you still see higher mortality in Scotland. Q4879 Mike Crockart: Because the expectation is Doctors in Scotland are less healthy than doctors in that they will be paying for less. England. Dr Comerford: Postcode pricing leads to that.
Q4874 Lindsay Roy: It is not as simple as deep-fried Q4880 Mike Crockart: So there is a benefit. Mars bars. Dr Comerford: Yes. Dr Comerford: No, it is not. Plausibly, it could be to do with sunlight. Maybe we should be comparing Q4881 Chair: If I am buying an annuity, I should ourselves with Norwegians and Swedes, and looking make sure I buy it while I still remain in Glasgow. at people living at the same latitude. Dr Comerford: Yes. Chair: I’ve had a piece of financial advice. Q4875 Lindsay Roy: Finland showed it was not Professor Wright: An extremely important point that impossible. is often lost in the discussion is that we live in a Dr Comerford: Exactly. welfare state. No matter how you want to package up the discussion and the politics around it, the people in Q4876 Chair: But we have had 14 or 15 years of work are paying for the people not in work. That is the Scottish Government and the Scottish Parliament the pay-as-you-go principle, which is basically what focusing on health in Scotland in a way that arguably the welfare state is built on. In Scotland, the UK and it was ignored before. Are you saying there has been almost all other rich countries, that balance is no improvement in that period? changing because of demographic change. In the Dr Comerford: I have not looked at the historical Scottish situation there is a big increase in those who position. are eligible, and low growth, no growth or negative Professor Wright: The bottom line is that of course growth in those who are paying. The system cannot there has been an improvement. Life expectancy has go on like that indefinitely. been creeping up in Scotland and growing more or There are two other factors that you must think about. less at the same rate as for the UK as a whole. The One is that we shift away from the pay-as-you-go set- lines are just parallel shifts, but there is still the gap. up to a more actuarially fair one, where what you pay There has not been as much catching up as all of us in you get out. But when that happens there is a would like. There is some indication that perhaps transition period; a lot of people usually get hurt when there is some catching up, but it is not well you change from one system to the other. You can understood. review the evidence in Chile, which did this. To take the next step, is this because the Scottish The other deeply worrying thing about Scotland, for Government have put in policies that have been me, growing up in a part of southern Ontario where effective? I do not know. There is probably some truth there are more Scottish towns than here, is that to that, but we still have a long way to go. There is savings rates are really low in Scotland. They are some real social cost to having this mortality really, really low. We have the image of somehow disadvantage, so one of the priority areas is to try to Scots being big savers, but if you compare them with fix it, or to try to put in place policies, so that not only almost anybody else it is a very disappointing record. does life expectancy continue to grow but we try to People are not saving enough and they must be cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 196 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford encouraged to save more. I find it very surprising in drop a lot when we retire, so we make decisions based some of the discussion that for a number of people on savings and investment that hopefully will who are expecting to retire their only source of guarantee that. We can get away with it because we income will be the state pension and whatever other have a relatively high income. It is much harder for benefits they are entitled to. That means basically a people with lower levels of income to do that, but the lifetime of not saving, which is more or less unheard thinking should be the same. of where I come from. Dr Comerford: I am younger than you. Professor Wright: I know, but you are on the same Q4882 Chair: Has any rationale been adopted by growth path. people that it is not worth while saving because they Dr Comerford: I do not expect to retire. are not going to live long? Professor Wright: There is a moral hazard problem. Q4885 Chair: Surely, if people with a lower standard Any time you are dealing with insurance markets, the of living are willing, it will be assumed, to settle for moral hazard is that, if you know you are going to get a lower standard of living in retiral, when they look something, you will act differently from the way you at the level of the state pension, they might very well will act if you do not. If you want people to work think, “I’m not all that dissatisfied with it,” and, until they drop dead, don’t give them a pension at all. therefore, they feel that saving, as distinct from That happens in a lot of countries, as we know. This spending at the time, is not a wise proposition, so it is clearly the case. I have heard it said on many is an entirely rational set of choices. occasions. The problem is moral hazard. When you Professor Wright: I do not have a problem with that have insurance markets or systems like this, you will hypothesis. I just wonder how relatively important it always get that. The key issue is to try to establish is. How many people are really thinking in this way? how important it is. I think it is more important than I do not know, but as we see in the data, people’s many other people have argued. There are incentives standard of living tends to drop in retirement, but most here that lead to lower savings, but there are the same people do not want it to drop a lot. I do not think there incentives in other countries that have much higher is anybody I have met out there who expects their savings rates. standard of living to be higher when they retire. Dr Comerford: A stronger effect than the effect you Q4883 Chair: The sense of fatalism about how long are hinting at is probably means-tested pensions you might live as a factor in discouraging pension credit, which really does reduce your incentive to saving might be affected by the geographical parts of save, because your savings will be taken into account. Scotland people are in. They would have a higher expectation of living longer in, say, Bearsden, Q4886 Mr Reid: Will the single-tier pension make a Eastwood and some other parts, as distinct from the difference to people’s attitude to saving? east end or the south of Glasgow. Dr Comerford: I do not know. I do not know how Professor Wright: My feeling is not that people say, well informed people are about it. “I’m going to live two years less, and therefore I’m going to save less”; it is the whole idea that you are Q4887 Mike Crockart: What about auto-enrolment? expecting a pension from the state at the end of the It is enforced saving. day, and you will get that regardless of whether or not Dr Comerford: It is worth a try. you save. It is a pension entitlement. The other Professor Wright: There are other countries that do mortality disadvantage—“I’m not going to live as this. My feeling is that you will probably have to do long as someone in England, and therefore I’m going it here, because people underestimate the challenge to save less”—makes sense logically, but I do not ahead, with the ageing population and the acceleration believe people think in that way. They think that at of the number of people in the older age groups. There the end of the day, whether they have lots of savings will have to be some drastic measures. Another or a little, they will get something from the state—a possibility is to make the state pension means-tested, state pension—and on top of that, some welfare based more on need and not some sort of right. Is it benefits. It will not be a great standard of living, but better to have some people who are rich not getting it at least it will be a standard of living that is tolerable. so that you can give slightly more to those people who need it? That is a debate that will be coming relatively Q4884 Chair: Surely, to some extent people’s soon, I think. You can think of other age-related attitude towards being faced with the prospect of benefits that everybody gets when they hit a certain living on the state pension with some savings and so age. You have to think about whether or not that is a on would be determined by the standard of living they rational way to spend taxpayers’ money. I do not think had beforehand, about what was acceptable and what it is. was not, and in terms of their peer group and so on, would it not? Therefore, allowing for standards of Q4888 Mike Crockart: The Scottish Government poverty, is there still a Scottish non-saving factor are making the case that effectively they do not have taking all of that into account? to think about this quite yet, because of the Professor Wright: I do not really know. I look at the demographics and the slower ageing due to lower life standard of living that I have now; David looks at his expectancy in Scotland. How far is that interpretation standard of living. He has some idea of what his based on real relevant data across the whole of standard of living will be for the rest of his working Scotland? How much of it is, as you have already life. We really do not want our standard of living to said, taking into account the Glasgow effect? You said cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 197
5 March 2014 Professor Robert Wright and Dr David Comerford that if we fix Glasgow, we might fix the problem. If Scotland because people live two years less and, at we take Glasgow out of the equation, does Scotland the same time, to say, “We’re putting in place policies look pretty much like the rest of the UK in terms of its that will decrease the gap,” because if they are life expectancy and the problems related to pensions? successful in one they are unsuccessful in the other. Dr Comerford: No, I do not think it does; it is still If you look at the distribution of mortality worse. geographically in Scotland, in and around Edinburgh you get some very high levels of life expectancy, and Q4889 Mike Crockart: It narrows the gap it is high in some areas of Glasgow. It is not low significantly. everywhere. I did some work for the Board for Dr Comerford: Yes. If the Scottish Government were Actuarial Standards a few years ago. We divided up to do something on health that reduced the life the UK into 600 regions and geographic regions. Of expectancy differential, or if they did not, it would the four lowest life expectancy regions in the UK, still be the case that the cost of pensions as a three were in Glasgow and one was in Paisley. The percentage of tax revenues would be higher, though bottom four lowest life expectancies in the UK at that not hugely higher, in Scotland than the UK. The time were in and around Glasgow. Clearly, Glasgow is Scottish Government cannot use life expectancy as an important for this, but if you increase life expectancy, affordability criterion for delaying the rise in state particularly healthy life expectancy, you will also have pension age. It can use it as a fairness criterion; it can less expenditure on health. If you have less say that a Scot has the same tax contribution history expenditure on health, you have more money to spend as someone in the rest of the UK, and can expect to on other things, whether it be to top up pensions or live for fewer years and, therefore, it is unfair to that whatever. Dealing with this issue in the best way you individual for the state pension age to be put up so can is a priority, but it is not going to happen quickly; rapidly. it will only happen gradually over a long period of time as young people grow up and do not pick up the Q4890 Mike Crockart: If you take that to its natural same bad habits as their parents, which is one conclusion, you have to have some sort of regional explanation for this. system, where it is only Glasgow that should be benefiting in that way. Q4893 Chair: Coming back to Mike’s point, can I be Dr Comerford: The Scottish Government are clear whether or not you support, or think reasonable, proposing their own regional system and want the view that the Scottish Government have independence to do that. expressed, that they can afford to raise the pension age more than in the rest of the UK because people in Q4891 Mike Crockart: But you are then left with Scotland die sooner? the argument that potentially you are giving benefit to Dr Comerford: We have quantified the cost of the some parts of Scotland that others would not get. If Scottish Government raising the pension age at a point you are going to delay putting up the state pension in time at which it achieves the expectation of future age but you still have people, as in my constituency, life that the UK achieves, at the point at which the UK whose life expectancy is 84, they are benefiting to a has decided to raise the pension age. That calculation greater extent than the people about whom we are translates into a 12-year delay in the rise of the state arguing. pension age in Scotland, and the cost of that is about Dr Comerford: Yes. A fairer way to do it would not half a billion pounds a year. be a regionally-based but an income-based system. You would give the state pension to poor people at a Q4894 Chair: You could delay it for 12 years, lower age. assuming that people in Glasgow in particular Mike Crockart: I am not the one who is arguing for continue to die sooner. I am not sure I would be a regionally-based system. reassured on behalf of my constituents in Glasgow that the Scottish Government are budgeting that they Q4892 Chair: Alternatively, presumably you could are going to die sooner and that is what is necessary do it on the basis of how long people have worked. I to make the books balance. can think of people in my constituency who were in Professor Wright: That is exactly what is happening. the building trade or worked in the shipyards and went I do not think it is credible to argue in those ways. into those heavy manual occupations when they were They also argue that they are going to reduce this gap 15 or 16. By the time they reach 65 or 67 they are because they are investing in policies that are physically exhausted. Their bodies are just worn out, supposed to increase life expectancy, with the goal of as it were. It would be far more reasonable, would it catching up to the countries they want to be compared not, to be doing it on the basis of the number of years with. The main one they want to be compared with is people have paid into the system and worked, rather the UK as a whole. As I said before, if they are than simply doing it on a geographical basis? successful at one, they will be unsuccessful at the Dr Comerford: That is all plausible. other because they are tied together. As David said, Professor Wright: There are lots of other countries you can do the calculations that over the next 40 years that have different state pensions depending on the there is a catch-up in mortality; both are growing and number of years you worked, how much you put in Scotland catches up with the rest of the UK as a and so on, so you can vary it. To get back to the issue whole. You still do not have big differences in the raised here, I find it somewhat irresponsible to argue growth rate of the number of people aged 65 and the that it can be more affordable to pay pensions in number of people aged 85, or whatever way you want cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 198 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford to measure someone in the older age groups, because, from one and gaining on the other side, so the as I said, from day one, population ageing is driven equation is massively unbalanced. mainly by fertility, not mortality. We have to keep that Dr Comerford: Yes. in mind; there is a limited range of variability outside the fundamental cause of this. Q4901 Mr Reid: We have heard that the demographic in Scotland is such that pensions would Q4895 Chair: David, do you want to come back on be paid out for less time, and therefore there is a that? saving compared with the UK as a whole, but do other Dr Comerford: Going back to your question, if you factors come in because of the Scottish demographic condition the state pension age rise not on the basis that mean more public spending, for example, on that, “We will raise it in 12 years’ time,” but, “We will health and welfare payments? raise the state pension age when average mortality is Professor Wright: It is certainly the case that this such that it has reached the level to which the UK lower life expectancy—this rather unimpressive Government have already raised it,” the objectives of healthy life expectancy period—is very expensive, the Scottish Government are not really in conflict. because of course it draws on health services. In They want to raise longevity, but if they achieve it Scotland, we have been debating for some time about they will save some money because they will put up free personal care. What is the benefit of subsidising the state pension age. this and giving it to everybody for free? There are two benefits. If you give it to everybody, you do not have Q4896 Chair: I can understand the distinction to administer it and hand it out in a means-tested way, between Scotland and England, but surely that is but if free care for the elderly was not there those enormously discriminatory within Scotland, because services would have to be provided somewhere else— there are parts of Scotland—for example, my for example, in a hospital. Everybody seems to agree constituency—where people will be dying much that it is much cheaper to keep people in their homes earlier and will be getting very little benefit from that, if you can, plus people themselves actually want this. but there are parts of Scotland like Mike’s Some countries have policies in place that people constituency where people will be getting a pension want, but the overall cost of accommodating the for a much longer period than their social equivalents ageing population is the important one. It takes into in England and Wales. consideration health and all these other services. Dr Comerford: That is exactly what you could level When you start to think in those terms, in the work we at the UK Government at the moment for raising the have done the skyrocketing cost of accommodating an state pension age. ageing population is not very happy reading, and it is going to be a real challenge. Pensions are just one aspect; health spending and subsidising personal care Q4897 Mike Crockart: David, in response to the last are other aspects, and they all add up. question you said you could make a fairness argument The other point about raising entitlement to the state for why the Scottish Government could do what they pension is that it will force more people to work. One wanted to do but not an affordability argument, but thing we see with Scottish demography, which is we seem to have been arguing about affordability different from the UK’s, is that labour force growth is questions. going to be much lower, if not negative, depending on Dr Comerford: The affordability quantification is the assumptions made about net migration, so it is a about half a billion pounds, so if the Scottish priority. Those people who want to work should be Government want to say that on the basis of fairness allowed to work, and in some situations people who they want to do this, it will cost them half a billion do not want to work, or would not have to work if the pounds. In the context of a £50 billion public sector pension age was younger, are going to have to work. in Scotland, half a billion is costly and difficult but They will not be very happy, but we need to increase not beyond the realms of possibility. participation rates, particularly of older people and women. Any policies you can put in place to do that Q4898 Mike Crockart: This is not a cost-neutral should be encouraged. There is a good debate going exercise. on in Scotland now about the role subsidised child Dr Comerford: No, it is never a cost-neutral thing. care would play and what that would mean for growing the labour force from within. Q4899 Mike Crockart: It is easy to see how it could be thought that, if you are dying earlier and you start Q4902 Chair: Can I clarify growing the labour paying it a bit earlier, you end up pretty much in the force? At the moment, I have 12% male position where you started. But there are extra costs. unemployment in my constituency. The need to Dr Comerford: For the costs on an annual flow basis, increase the labour force by making people work life expectancy does not come into it at all; it is the longer is therefore not immediately apparent. How do number of pensioners against the number of these two things mesh together? taxpayers. The future life of one of those pensioners Dr Comerford: I think it is to do with a mismatch of matters not a jot. skills and vacancies. Growing the labour force, if that labour force consists of an uneducated population Q4900 Mike Crockart: So the fact that you have mass, is not a good idea. We need to make sure that those extra pensioners who would still have been in we grow a skilled labour force, which means for the the working population means that you are losing people in your constituency that we do not want to cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 199
5 March 2014 Professor Robert Wright and Dr David Comerford multiply the numbers who look like that. We want to courses to upgrade and upskill. Rightly, we invest multiply the numbers coming out of colleges and heavily in academic education; we have a proud universities. record there, but we certainly do not have a proud Professor Wright: That is absolutely right. You should record in developing skilled technicians, engineers think about the situation as having two sides. There and so on, and we need to do something about it. are the firms with specific requirements, and there are Would you agree? the people who potentially supply their labour. You Dr Comerford: I wouldn’t disagree. have a group of people in Scotland who do not have Chair: Is that different from agreeing? much in terms of a skill base and that nobody, more or less, wants to hire. That is why you get a situation Q4905 Lindsay Roy: That is called damning with where the labour force may not be growing at all and faint praise. There is not a big group that is you still have a rather large number of unemployed. unemployable. It is to do with what we call a skill mismatch. When Professor Wright: I don’t agree with that. You are we have these discussions, we usually point our finger right to a certain extent; if you look at what has at the failure of the higher education system and so happened in Scotland over the last 20 years, there has on. We can go into that discussion if you like, but I been a big increase in participation after basic am sure it is being taken care of in other Committees. qualifications and what I would call high school, but You should not in a sense automatically assume that the big growth has been in higher education, and everything is rosy on the labour supply side just further education in a sense has not grown as rapidly because you have a lot of unemployed people in and has suffered. It is the neglect of further education groups. Unfortunately, I cannot see them ever being and the priority of higher education that is causing employed, because they do not have the right skills what we call an over-education problem. A large and other characteristics, and people do not want to percentage of Scots-domiciled higher education hire them. graduates leave Scotland, and my research shows that the main reason they leave is that they cannot get a Q4903 Mr Reid: Is that labour force mismatch worse graduate job in Scotland. Maybe we need to think in Scotland than in the UK as a whole? about the balance between further education—middle- Professor Wright: The only evidence I have is some skill education—higher education and higher skill work done by James Heckman of the University of education. Maybe we have got that balance wrong, Chicago. He came over and was very surprised to see and some people say we have. There is clear evidence the proportion of people in this category. It makes that Scotland is losing a lot of young people because Scotland somewhat atypical compared with many of the problem of finding a graduate job with a other countries. He demonstrated that empirically and graduate education. he found it very surprising. There is a dilemma. One view is that, yes, we have Q4906 Mr Reid: It would seem a fair assumption these people and we need to retrain them and provide that, if the health situation is worse in Scotland than them with skills to make them employable so that they the UK as a whole, more money will be paid out in will be in demand. We have been doing this for 30 or Scotland in benefits such as employment support 40 years and have not had much success at it. Some allowance and personal independence payment to people say that these retraining programmes are just people of working age, because of disability and wasting taxpayers’ money because, at the end of the inability to work. Has any research been done to day, they do not improve the employability of these quantify that? very low-skilled people enough to make them Dr Comerford: The IFS has numbers on benefit employable in the highly technological society we live payments. The overall level of benefits in Scotland is in today. 102% of the UK average. If you break that down, What do we do? Some people say that, unfortunately, it is a bigger increase in disability, and a lot less in we have to forget about this group; pay them a living housing benefit. wage but, at the end of the day, make sure that we Professor Wright: If you look at long-term disabled provide the workers who are demanded by the firms rates, they are much higher in Glasgow than the UK and the Government who are creating the wealth that as a whole, but less than we see in Northern Ireland. generates our standard of living. This is well known, Some people argue that with a less healthy population and it is a tough nut to crack. Nobody has been very you might expect these rates to be higher, but then successful at it, even Sweden. Despite all the policies some will argue that, no, it is to do with the incentives they have there, they still have an unemployment rate built into the benefits system. There is that argument that is far away from zero. They have a similar about which is more important, but as David problem but not on the same scale. There is always a mentioned, it is not a big difference in terms of the group in society that is unemployable. I am afraid that, average for rich countries. by the sound of it, a large percentage of that group are in your riding. Q4907 Mike Crockart: You said 102% of benefits. What are you counting within benefits? Obviously, Q4904 Lindsay Roy: Can I challenge that view? In benefits take in pensions. my local authority in Fife, five years ago there were Mr Reid: Working age? 40,000 students in further education. Today, there are Dr Comerford: I am not entirely sure. I suspect that 60,000, and, rightly and understandably, the focus is it is almost everything—all the stuff that is on 16 to 24 year-olds. A 24 year-old-plus cannot get administered by DWP. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 200 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford
Q4908 Mike Crockart: Working age benefits, not pension but be somewhere else makes it not quite a disability or pensions. parallel along the lines you are indicating. Dr Comerford: It might be working age benefits. You Professor Wright: The Government have to make a will have to look up the IFS stuff. choice with respect to pensions. Do you have to live in the country to get your pension, or can you live Q4909 Mr Reid: Am I right in assuming that all your somewhere else to get it? In a sense, you want to pay studies have been based on people living in Scotland pensions to people living in other countries because, as opposed to people living in the rest of the UK? The if you do that, the other expenditure that you have reason I ask that question is that, after independence, does not apply. What you really want is a lot of old it is legally possible that people living in Scotland people to move to Spain because they will put could choose to retain their UK citizenship and, pressure on the Spanish health system and you do not therefore, would be entitled to a pension from the UK. have to pay for it. Spain is waking up to this. That is Alternatively, people living in England who were born one way of thinking about it. in Scotland could choose to take out Scottish The other is whether there is a real differential. There citizenship and get a pension from Scotland. Is there will be some transitional period if Scotland becomes any way of factoring that into the calculations? independent, where, as you rightly say, you could pick Dr Comerford: Briefly, probably not. Who knows and choose where you want to live and which country what the assumptions are going to be? Those choices you want to get your pension from, but there will be will be made on aggregate. I do not think we have a cut-off and a set of rules, and those rules will apply. One thing that is neglected in this debate is the any reason to suspect it would not be just the transition cost of what it means to move from being population split as it is, as a best guess. But you are part of one country to becoming a separate country. right. Who actually knows? These costs tend to be big. For reasons like that, these issues have to be sorted out and rules put in place. Q4910 Mr Reid: Presumably, if Scotland had a more You may get some outcomes that were not expected, attractive pension system than the UK, there would be but I would be surprised if soon after independence an incentive for people to try to get a Scottish pension there were any big differences between the state rather than a UK pension, or vice versa. Is that pensions paid out in Scotland and the rest of the UK. something you think is likely? Dr Comerford: Considerations like that probably Q4913 Chair: But the Scottish Government have mean that an independent Scotland would choose said that there would. Part of the reason why they exactly the same. want separation is in order that they could change the Professor Wright: There is a good case study where pension age. this has happened. The province of Quebec has much Professor Wright: That’s right. My understanding of more responsibility for governing these matters than what they said is that they may not—may not—have any other province in Canada. All the other provinces to raise the entitlement age for the state pension have one CPP. following the sequence that has already been laid out for the UK as a whole. Q4911 Mr Reid: CPP is? Dr Comerford: I think the only promise they have Professor Wright: Canada pension plan, which is the made is to establish a commission. same as your state pension. Quebec manages their own state pension and it is the exact same amount— Q4914 Pamela Nash: The Scottish Government have the exact same benefit. Everything is the same except said that they would increase inward migration to that they manage it, and that is what they want. It is Scotland in the event of independence, and that this is rather surprising that the yes side lost by only half a required in order to fix their economy, as it were. Do per cent and there has not been another referendum in you agree that that is what is required for Scotland at Quebec for almost 20 years, because basically what the moment? they got was better than independence. They control Dr Comerford: An ageing population is a problem the things that matter to themselves, and they still for the whole western world. One of the only feasible enjoy the benefits of being in a larger, richer country. solutions is to expand your working age population. There is always the discussion that there are going to Increasing immigration appears to me to be the only be movements from one place to the other because lever you have to achieve that, so, yes, I would say welfare benefits are better. Remember that when we that increasing immigration should be a target for had free personal care introduced in Scotland, we improving the economy. would have a big wave of older people from England, Wales and Northern Ireland coming to benefit from Q4915 Pamela Nash: Do you have any idea of the it. It has not happened, because it is not one of the level you would put it at? main factors. Dr Comerford: In the paper we produced, we looked at state pension cost as a percentage of tax revenues, Q4912 Chair: Surely, the question of access to and it is slightly higher in Scotland. Removing that pensions is slightly different, on the basis that if you differential between Scotland and the UK can be were able to qualify for a higher Scottish pension it achieved roughly by using the ONS high migration would presumably not be an obligation that you had projection instead of using its principal projection. to remain living in Scotland. Therefore, the number The difference in net migration is about 8,000 or so of people who might choose to claim the higher per annum. If you look at that as a percentage of total cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:02] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 201
5 March 2014 Professor Robert Wright and Dr David Comerford immigration over the past decade, it equates to an Professor Wright: It would be considerably bigger increase in immigration of about 10%. It does not than 50,000 per year, which is double the current level sound completely unfeasible to me to close that gap, of net migration. but it does not address the ageing population problem; it just addresses the differential between Scotland and Q4918 Chair: What does “considerably bigger” the UK. A 10% increase in immigration sounds okay. mean? Professor Wright: We looked at net migration of up Q4916 Pamela Nash: I do not have it in front of me, to 50,000 a year, and in our analysis we still saw big but I take it to mean that the Scottish Government are welfare losses and big reductions in the standard of not just arguing to put it at the same level as the UK; living—in our model. they want to fix it. Dr Comerford: Sure. The UK should look at the Q4919 Chair: What is necessary in Scotland to fix figures we have produced as well, and think about a the problem? Professor Wright: Some people, including my rise in the amount of your taxes devoted to pensions colleagues, argue that it is not fixable. You can expect of 50%. You are increasing that amount by one and a the standard of living of older people to fall. Other half, so increasing immigration should be a priority countries have accepted that that might happen, but if for Britain as well. you start to think along the lines of what I just Professor Wright: We have done some work along the mentioned, a mix of policies, you can look for areas same lines. I will put it in a slightly different currency. where you can make savings. The current level of net migration is about 25,000, and it has been like that for four or five years. Our Q4920 Chair: I understand that, but I am saying to estimates say that you will probably need to double you that it is highly unlikely that a Scottish that: 50,000, which is 1% of the population. That is a Government in the near future will run for election on very high rate. I do not want to be negative, but it a programme of mass privatisations and school means that we are not going to solve this problem closures. In those circumstances, if those are ruled out, through immigration; it is not going to happen, you have already indicated that 50,000 would only because the number to solve the problem, according scratch the surface. to our work, is a very big number and unfeasible. Professor Wright: I did not say “scratch the surface.” You have to think about this from a variety of different I do not know. I did not do the analysis up to the policies. You have to think about your skill mismatch magic number, because in reality it is going to be a problem. You have to think about how to break the mix of policies. mindset that somehow public services have to be provided by public employees. If there are efficiency Q4921 Chair: I am not clear even about the range gains by privatising these things, you should do it. that the magic number might be in, but I am quite There is a host of things that you should be thinking clear about what I am seeking to get from you: if that about doing; immigration is one of them. For is the main tool used, what level would be necessary? example, the number of young people in Scotland is Professor Wright: I do not know, because we have going to decline. This means that probably you should not done research that identifies that number. What be able to save money on schools because you can research we have done says that double the current close some of them. My rule is that, for every new rate of net migration is not enough. That is the finding. school you build, you close three and you bus students around much more, and things like this. Do not focus Q4922 Chair: By how much is it not enough? on just one aspect of this. You have to think of the Professor Wright: Don’t know. Not sure. larger picture and a series of things you can possibly do to accommodate the ageing population, but in most Q4923 Chair: That’s why you’re here, you see—to other high-income countries immigration is seen as an answer these sorts of questions. important feature of that. That is why a lot of other Professor Wright: Not really, no. Everybody realises countries have a much more economically focused that there is no magic bullet to this. There is not one and rational immigration system that scores people on solution; there is not one fix. It is going to be a mix their employability. If they have high levels of skill of policies addressing issues that we have discussed thoroughly today. These will be very politically and employability, they are welcome; if they do not, difficult decisions to make, but the choice is do you they are not. That is the way to think about it. want, or how much will you allow, the standard of living of your older population to fall? It is like the Q4917 Chair: You said you thought there were lesser of two evils. Do you bite the bullet as Germany several solutions. You thought that this could not be is doing: make these tough decisions and become resolved by migration alone. You were proposing the politically unpopular but have fewer problems with privatisation of public services and substantial the ageing population? numbers of school closures. Neither of these is likely to be responded to with great enthusiasm by the Q4924 Chair: I understand that, and I understand Scottish Government. If those two were ruled out, that closing schools and privatising public services what sort of figure of migration would be necessary if would be tough decisions. I also understand that migration was seen to be the main route to resolve increasing immigration by substantial numbers would this problem? be a tough decision as well, but for that one I am not cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 202 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford clear how tough it might be, in the sense of what Dr Comerford: Can I jump in here and make it clear numbers are involved. You said 50,000. I am not sure that most of the ageing population will be there under whether or not in order to solve the problem using no independence as well, so almost all of that has to that tool alone it would be 5 million, 2.5 million or be done anyway? 500,000. Professor Wright: It is unlikely to be 5 million Q4931 Chair: But my understanding was that the because the population of Scotland is only 5.3 million. rate of immigration in England and Wales was much Chair: Right, we’ve clarified that. more substantial at the moment than in Scotland, and Professor Wright: If you look at the current level and therefore there was a degree of fiscal transfer taking double it, it is still not enough; you still have these place from England to Scotland under the existing welfare losses and you still have a reduction in the regime which, if it continued, would tend to mitigate standard of living. You can ratchet up the number, but the effect of Scotland being in isolation and simply it is going to be a big number. having to balance its own books. Dr Comerford: The state pension cost per unit of tax Q4925 Chair: But it is less than 5 million. At the revenues goes up to about 17% in the UK as a whole, moment, we are between 5 million and 100,000. so all the stuff Robert talked about has to be done in Professor Wright: The other thing is that the number the UK as well. will depend on how successful these other policies are. The more successful the other policies— Q4932 Chair: So where are we between 100,000 and 5 million? Q4926 Chair: Which we’re not accepting. For the Dr Comerford: Multiply it by 12 as well. purposes of this discussion, we have agreed that we Lindsay Roy: Pick a number. are not accepting the other policies you mentioned about privatisation and mass school closures. Q4933 Chair: It is basically pick a number, isn’t? Professor Wright: David looked at it in a slightly Professor Wright: Not really. different way, so maybe he can assist. Dr Comerford: A sensible number. Q4934 Chair: Q4927 Chair: So David’s going to answer it. Where What is a sensible number? Dr Comerford: For the UK or for Scotland? are we between 5 million and 100,000? Chair: Scotland. Dr Comerford: I can give you an estimate. Let me do Dr Comerford: Sixty thousand. some mental arithmetic. I reduced the state pension Chair: Sixty thousand a year. cost per unit of tax by 0.8% by increasing net Dr Comerford: Yes. migration by 8,500. The actual gap to keep the state pension cost as a percentage of tax revenues at today’s Q4935 Chair: For the next how long? level is about 6%. Therefore, you are talking about six Dr Comerford: For the whole period of the projection, divided by 0.8, times 8,500. until 2050 or 2060. Professor Wright: The next five decades. Q4928 Chair: Okay. One of the staff will work that out for me later. That said, I think the figure is Q4936 Chair: That is the sort of figure that would probably between 100,000 and 5 million. be needed to make the Scottish age dependency ratio Dr Comerford: No; it is less than 100,000. equivalent to that in England. Dr Comerford: No. That is the figure that would be Q4929 Chair: That was what I thought, so you needed to keep the Scottish age dependency ratio the disagree with Professor Wright when he says it is same as it is now. 100,000. Dr Comerford: By implication, yes. Q4937 Chair: If it was being done to keep it the Professor Wright: We can run 100,000 through the same as it is in England, what would that be? It would model. be larger. Dr Comerford: It would be 8,500. That is the figure I Q4930 Chair: Normally, we quite like to have calculated as the one to keep it the same as England, panellists disagreeing because it helps to illuminate, which is an increase in net migration of 8,500. but we are not getting much illumination here. When people in Scotland come to vote, they have to be given Q4938 Chair: It may be that we will write to you some idea about what the alternatives are. and say that we are still not clear once we have looked Professor Wright, I understand completely that there at it. would be a range of things: privatisation, substantial Dr Comerford: I can supply that. school closures and increased immigration. We can Chair: By coincidence, you have it there. I must say give people two of them, but not the third. We want we expected a bit more precision from somebody to publish something saying, “This is the range of wearing the tie of the Scottish Economic Society, if I choices you’re going to have to face.” We are not may say so, but maybe we will come back to you going to make a recommendation about which they on that. should accept, but we have to give them some sort of indication about what figures might be necessary in Q4939 Jim McGovern: I was interested in what the event of independence. Robert said about looking at the bigger picture, and cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 203
5 March 2014 Professor Robert Wright and Dr David Comerford relating that to something David said about increasing and not worry about the implications for the countries the working population in this country to maintain they are leaving? benefits. What happens to the countries that we are Professor Wright: Personally, it depends where they taking people from? come from. This is a complicated issue. There is an Dr Comerford: Fantastic question. This is a very self- over-education problem in lower-income countries, interested argument. where education is seen as the way to improve yourself but there are just not the jobs or demand Q4940 Jim McGovern: It is parochial. there. The best example is doctors in India. There are Dr Comerford: Yes. lots of doctors in India but there is not the demand Professor Wright: I have argued this for a long time. there because it is not socialised medicine, so you If you think of Scotland with 5.3 million and the have to pay. It is better off for doctors who emigrate, potential world supply of people who want to move and they also send remittances, so in a sense it is to Scotland, Scotland is a drop in a bucket, so the better off for the country they left. It depends on number of people we need in Scotland relative to the where the people you attract are coming from and why number available is trivial. You need a system that they are coming. attracts people, which we do not have in Scotland. I I think it is socially irresponsible to go to a country do not think the UK model is very effective. where you are involved in an economic relationship In my view, what you do not want to do is go into and poach their young people, put them in jobs well countries like those in eastern Europe, with whom you below their skill level and somehow think this is a are in an economic relationship, and strip out their successful economic policy. It just is not. This is why young workers and bring them to Scotland where they countries that take immigration seriously, and have end up in jobs that are well below their skill levels, done so for a long period of time, have a system that which leads to short-term migration. You will just end sets their hurdle high. It is very difficult to immigrate up paying for that anyway because of the economic and a lot of effort goes into it. When they arrive in relationship we live in within the EU. That is why we have to look further afield and why all the that country they want to be there and the vast immigration from the A8 countries we have welcomed majority stay, and we do not have the big turnover we to provide the services that we all want and so on is currently see in Scotland and the UK where people not a long-term solution. First, I do not think it is from the A8 come for a short period of time, do not ethical to do that, and, secondly, there is not an invest here, sometimes do not even bring their unlimited supply of young people in those countries. children and then go back. It is a convenient but not Their populations are ageing rapidly. The number of long-term policy of immigration to pursue. young people is declining at rates higher than here, so you have to look further afield. This is why you need Q4942 Mr Reid: Would the choice of currency used a system in the UK that is more effective at competing in an independent Scotland have any impact on the for people in the international labour market, not calculations? going out to Poland to see if you can find 30 or 40 Dr Comerford: Not on the calculations we have bus drivers, which are some of the policies that have talked about so far, but I was given a clue as to what been pursued in Scotland. some of the questions might be, and certainly If Scotland was an independent country it would have questions to do with any liquidity premium that to have its own immigration system and an Scottish bonds would attract and who might be able immigration policy to deliver it, but that is not to take advantage of that liquidity premium. If impossible to do even if it stays as part of the Scotland had its own currency, Scottish pension funds United Kingdom; there are countries out there that who had liabilities denominated in the Scottish have in a sense devolved to a large extent the currency would be the natural holders of Scottish responsibility for immigration to provinces or bonds. If Scotland uses sterling, it is not clear who the territories—for example, Canada. The responsibility natural holders of Scottish bonds are. for immigration can be shared between different levels of government. It has been like this in Canada and Australia for many decades. It is just a matter of Q4943 Mr Reid: What are the implications of that political will to make the immigration system work lack of clarity? better and more rationally and generate the number of Dr Comerford: If Scottish pension funds own Scottish people that are needed to make sure that the labour bonds because they have liabilities denominated in force grows at least at a minimal level. Scottish currency, the rate on Scottish bonds could be Chair: But at some stage you would have to clarify deemed to be risk free and could be used for what the number was, and— discounting the pension liabilities. Jim McGovern: But is it socially responsible to expect— Q4944 Mr Reid: But not if Scotland was using Professor Wright: I am sorry; I can listen to only one sterling. person at once. Dr Comerford: If Scotland was using sterling, Jim McGovern: I think I was holding the floor. probably the bonds issued by the rest of the UK would Chair: Okay. be deemed risk free, but there are institutional complications; perhaps the Scottish bonds would be Q4941 Jim McGovern: Is it socially responsible to risk free if they had an agreement with lenders of last expect 60,000 people to come to Scotland per year resort and things like that. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 204 Scottish Affairs Committee: Evidence
5 March 2014 Professor Robert Wright and Dr David Comerford
Q4945 Mr Reid: What would happen without an Canada or Australia is treated by the EU, you will agreement? have much lower growth. There is no doubt about Dr Comerford: Clearly, there is a risk about the that. That is why it is very important that the period solvency behind these bonds. of time when we are out in the wilderness and the courts are arguing about it is as short as possible, but Q4946 Mr Reid: Does that mean that Scottish who knows? pension funds would be taking out bonds from the UK Government? Q4949 Chair: On that happy note, let me come back Dr Comerford: If Scottish pension funds had to the point I made informally to you before you came liabilities denominated in sterling, it is not clear that in. Are there any answers that you had prepared to they would have a particular appetite for Scottish questions we have not asked, or any issues that you Government bonds. They might; they might offer a think we have not covered that are relevant to the better return or attractive features, but it is not an areas we have been discussing? obvious, natural investment. Dr Comerford: I had prepared a bit on the liquidity premium that small country debt issues might attract. Q4947 Mr Reid: What would be the practical Would you like me to talk about that? implications of Scottish pension funds not taking out Chair: Yes. Scottish Government bonds but going to, presumably, Dr Comerford: In November, the National Institute the UK? for Economic and Social Research released a paper Dr Comerford: The practical implications for that said Scotland as a small country would likely whom—the Scottish Government or the pension attract a liquidity premium on its debt. This seems to funds? me to be a plausible thing to claim, but the counter- Mr Reid: For the pension funds. balance is that somebody receives that liquidity Dr Comerford: I suspect they would see very little premium. This is not a risk premium; there is no risk difference from the current situation. attached to these cash flows. The liquidity premium Professor Wright: To look at it in a slightly different reflects search costs and transaction costs. Suppose way—and this is a very good example of the issue— you held a portfolio of Swedish kroner and you if you have high rates of economic growth, you have wanted to swap them for New Zealand dollars. You high rates of tax revenue and therefore you can would be very unlikely to come across somebody who accommodate an ageing population. You can pay for would sell you New Zealand dollars for your Swedish anything if you have enough money to pay for it, and kroner. What you would likely have to do is sell your the only way you are going to get enough money is kroner, buy US dollars and then sell your US dollars to have high rates of growth. The problem about to buy your New Zealand dollars, so you incur double currency is that it increases the cost of trade if you the transaction costs, because you cannot go direct. are trading with a country with a different currency. It increases the number of transactions that you have Transaction costs lead to lower growth so it is to do. important, because growth is what matters here. You For this reason, active investors do not like issues have a period of time until the baby boom dies out from small countries, so there is reduced demand for when you have to make sure, or you would like to these cash flows. Cash flows can be as certain and risk make sure, if you are a responsible politician, that the free as from a large issuer, but by virtue of being a standard of living of that group does not fall. The only small issuer there is reduced demand for them, which way you are going to get that is to think creatively, means that buy-to-hold investors such as pension try to make sure you do all you can to maintain funds, which know pretty much exactly when their growth and make some tough political decisions. liabilities fall due, can buy these cash flows at a What currency do you use? If you do not use the cheaper price, so they get to make money out of this pound, you use the euro. You reduce the transaction deal. If Scottish pension funds are the natural holders costs of trading with the rest of the European Union, of Scottish Government debt, because of the issues but then you increase the cost of trading with the rest that the national institute raised, the costs for the of the UK, so what is the balance? It is extremely Scottish Government go up on debt repayments, but important. The transition period that nobody talks it might be another section of the Scottish population about is a lower growth period. We know from who takes the benefit of that. In our paper we also research that, when one country splits up, there is a made that point. period of low growth in between, and after that there Professor Wright: Even though today was mainly are lots of different paths. Some paths are low growth; about pensions, I want to stress that, in looking at some are high growth. If you look at the Czech accommodating the ageing population and health and Republic and Slovakia, they are rapidly growing personal care, it is the larger pictures of policies that countries, but they certainly had problems when they you have to consider. It is not one single policy that separated. Their currency union lasted three weeks. is going to solve this problem, if it is solvable; it is going to be a series of policies, and it is going to take Q4948 Mr Reid: If Scotland was out of the EU for a considerable amount of political will to put some of a temporary period, would that have any significant these policies in place. implications? It has happened in other countries, and we can learn Professor Wright: It depends on whether their trade from them. I wish I could be more positive about the relationships are allowed to carry over. If all of a research we have done in terms of the welfare loss, sudden Scotland becomes treated in the same way as but it is not a pretty picture; it’s not a happy story. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 205
5 March 2014 Professor Robert Wright and Dr David Comerford
The longer you talk about these things and the longer now time to make some tough decisions to address we wait, the more difficult the problem is to address, this as best you can. because population ageing is accelerating and the Chair: On that cheerful note, we will call the meeting momentum is there. It cannot be changed. I think it is to order. Thank you very much.
Examination of Witnesses
Witnesses: Martin Potter, Leader of the Scottish Board, Institute and Faculty of Actuaries; and David Wood, Christine Scott and David Davison, Institute of Chartered Accountants Scotland, gave evidence.
Q4950 Chair: Lady and gentlemen, welcome to this the implications are—and trying to educate and meeting of the Scottish Affairs Select Committee. As inform the debate. That has been the approach we you are aware, we are looking at the possible impact have taken to engage with stakeholders and ask of separation on Scotland and trying to clarify a whole questions. number of areas in order that people in Scotland can David Wood: We have been taking a very similar role. be aware of the consequences of a vote, in whichever We are a public interest organisation as well. We have direction they wish to cast that vote. Today, we are been trying to inform the electorate as to the right looking at questions relating to pensions and similar questions. We have issued so far two papers on matters. Could I start off by asking you all to taxation. We are shortly going to be issuing another introduce yourselves, give your backgrounds and tell one, and we are publishing some research on some tax us what qualifies you to speak on this subject rather issues in a couple of months’ time. We have put out than any other? two papers on pensions. There was one last year, and Martin Potter: My name is Martin Potter. I am the leader of the Scottish Board of the Institute and we appeared before this Committee shortly after that. Faculty of Actuaries. I am a partner of Hymans The latest paper is looking at whether our questions Robertson in Edinburgh, so I spend my day job have been answered. We raised a number of questions advising trustees of pension schemes. last year, and we have done a fairly detailed analysis Christine Scott: My name is Christine Scott, assistant as to whether the Scottish Government and the UK director of pensions at ICAS. I am secretary to the Government have answered those questions. ICAS pensions committee, which produced the two Chair: Hopefully, we will cover some of those papers on behalf of ICAS. questions during the discussion this afternoon, but, if David Wood: I am David Wood, executive director of at the end you feel there are questions you have not technical policy at ICAS. I am responsible for a range answered or that we have not asked you about, maybe of subject areas, one of which is pensions. ICAS has you can tell us then. 20,000 members, many involved in advising on pensions from accounting firms, other professional Q4952 Graeme Morrice: There is considerable firms and also acting as trustees. concern about what may or may not happen to David Davison: I am David Davison. I am an owner pensions, whether state pensions, public sector and director of Spence & Partners, which is an pensions or private pensions, if Scotland becomes actuarial consultancy. I am on the ICAS pensions committee, and also spend my day job advising independent. As we know, the state pension is paid trustees, employers and members on pension issues. out of the public purse across the UK. In the event of independence, how could the liabilities for paying the Q4951 Chair: Martin, presumably this is a question state pension be divided between an independent for you. First, maybe you would outline for us what Scotland and the rest of the United Kingdom? ICAS has been trying to do to date to illuminate the David Wood: That goes into the broader question of issues surrounding pensions, and anything else you negotiations on the opening balance sheet for are proposing to undertake between now and the time Scotland. Undoubtedly, there will be some sort of fair of the referendum itself. and equitable basis for splitting the liabilities, Martin Potter: If it is all right with you, I can tell you especially unfunded ones. I think that will be a what the Institute and Faculty of Actuaries has been starting point for the negotiations. doing, but I cannot speak for ICAS. Chair: Sorry, I confused my organisations. Q4953 Graeme Morrice: Martin, is there anything Martin Potter: The Institute and Faculty of Actuaries you want to add to that? is a membership organisation, as you know. We have Martin Potter: I think that is right. It is worth noting 25,000 members worldwide, of whom 43% work overseas. We have been engaging in the question of that the Scottish Government have suggested in one the referendum with an eye on our obligations under of their pension papers how they intend to approach our royal charter, in which it is very clear that we that problem, which is to say that, on the basis of have an interest to the public. The way we have been residency at the time Scotland became independent, executing it is that in areas where we are experts and they would take responsibility for the pensions people actuaries working in insurance, pensions and had built to that date and then accrued in Scotland investment, we have been asking questions about going forward, and for anyone outside Scotland that Scottish independence—what it might mean and what would fall to the rest of the UK to deal with. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 206 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
Q4954 Graeme Morrice: You said earlier that it they keep their UK citizenship, does that mean they would be down to the Scottish Government to tackle are also entitled to a UK pension and they get two this as a problem, so you see it as a problem. pensions? Martin Potter: I would agree with David. The David Wood: I think that is unlikely. Scottish Government’s pension papers are statements of intent. It would absolutely need to be negotiated Q4959 Mr Reid: I agree, but how do you legislate and confirmed that that was agreeable to both sides to stop it? Legislation has to be passed saying which and not assumed that is the absolute outcome. Government is responsible for paying that person’s pension, so, if you were advising the Scottish or the Q4955 Graeme Morrice: It is more assertions than UK Government, how in practice are all these things stated facts. going to be sorted out before 24 March 2016? Martin Potter: I think the Scottish pensions paper David Davison: I think it is unlikely they will be. issued by the Government in September was a very comprehensive document on how pensions work in Q4960 Mr Reid: If they are not sorted out, who pays the UK at the moment, and there was a lot of the pensions on 25 March? statement of intent and reassurance set out there, for David Davison: Practically, there would have to be obvious reasons. almost a transition period whereby there is an acceptance of who pays the pension at outset, whether Q4956 Graeme Morrice: Christine, I think you you are paying it based on residency or citizenship, wanted to come in. for example. Effectively, you will then have to Christine Scott: In dealing with the regulatory issues, negotiate what the cost of providing that is, with there is a question around citizenship and the fact that almost a catch-up balance once you have agreed what there may be some options there. “Scotland Analysis” the final cost might be, and who you are providing published a paper in January which was connected those benefits for. to the Treasury. That mentioned that the question of whether Scots could take UK citizenship would need Q4961 Mr Reid: Are you suggesting that to be looked at or decided upon later in the immediately after independence the UK Government proceedings. I think citizenship may well affect who would continue to be responsible for paying all pays your pension, or whether you might have a pensions to everybody who was a UK citizen as of choice in the matter, so it might not just be for the 24 March, even though they then decide to take out Scottish Government to take on that responsibility. Scottish citizenship? Graeme Morrice: There are a lot of unknowns and David Davison: No. I am suggesting the idea that uncertainties. there is identification of which individuals fit in which David Davison: The other thing is the difficulty of camp, depending on the detail, and then each evaluating it. There are different ways of evaluating Government will take responsibility for paying those pension liabilities as well, so there would be quite a pensions. significant degree of negotiation over the costs of those liabilities and where they sit. Q4962 Mr Reid: But that identification would have David Wood: I would question whether the basic data to happen before 24 March 2016. are there as to the split between Scotland and the rest David Davison: Yes. of the UK to enable that calculation to be done as the starting point for negotiation. Are the data there? Do Q4963 Mr Reid: That goes back to my first question. they have the integrity to be used as the basis for Does that mean that every UK pensioner has to be this calculation? written to before 24 March and asked which Graeme Morrice: At the end of the day, it is down Government they wish to pay their pensions? to negotiations. There will have to be give and take, David Wood: I would be surprised if pensioners were so all the assertions in the Scottish Government’s given the choice. I would have thought there would White Paper are exactly that. be an intergovernmental decision on how that would be split. Q4957 Mr Reid: You seem to be suggesting that Christine Scott: There might be some scope. I do not before independence happens decisions will have to think it is just between the two Governments, because be taken about which Government is responsible for individuals themselves might have a view. paying out pensions. Does that mean that the Scottish Mr Reid: There seems to be some disagreement and UK Governments will have to write to every UK between David and Christine. pensioner before independence day and ask them Christine Scott: I think there is a communication which country they wish to pay them their pensions piece there. How that is conducted I do not know, but after independence? Would that have to happen? this is an issue beyond just the two Governments, and David Wood: I think the Scottish Government’s guide it involves individuals and their particular to independence suggests that for people living in circumstances. There is a big responsibility on both Scotland on the date of independence they would pay Governments maybe to set some criteria as to where the state pension from that date onwards. the room for manoeuvre is for certain individuals.
Q4958 Mr Reid: But say somebody was born in Q4964 Chair: Are you saying people might have a England and is living in Scotland. You have said they choice, in which case I would choose to have my are entitled to a Scottish Government pension, but if pension paid by whoever is paying more? Does that cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 207
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison not seem a reasonable way of doing it? If there is David Davison: To a certain extent one of the things discretion and people have the right to choose, most you are trying to do is pretty consistent with what we sensible people would choose to get their pension paid have been talking about, for example, on currency or by whoever is offering more. EU membership. The problem is that you do not Christine Scott: I am looking at this from the historic know. One of the things we raised in the paper was position, the legacy and what has been built up prior the uncertainty about how the system will actually to independence. What happens after independence is apply. You will have a lead-in time between the vote a different issue, and that will depend on where you and the date of independence when the objective will work and how you are building up credits and national be to try to sort out all these issues from the point of insurance contributions towards a pension. It is what view of the two Governments. happens to people who are in receipt of pension now, having paid into a UK system, and people who are Q4970 Mr Reid: That is right, but what I am asking not retired yet and have paid into that UK system, and you as a panel, or as individuals, is to propose a trying to establish what happens to that legacy. solution to this problem that is practical. Martin is the only one who has come up with a suggestion, but I Q4965 Mr Reid: Yes, but, as the Chairman said, then posed a further problem. Perhaps Martin could given the choice, people will choose the better offer respond to that. or, if they have to make the choice in advance, they Martin Potter: If I was advising Government, I would will make an estimate of which offer they think would say you want a system where people cannot game it. be best in the long run. Chair: I am conscious that Graeme and Lindsay have Christine Scott: At the moment, the Scottish got planes booked. I suspect they could not get on the Government are proposing to adopt the single tier plane you are on, because the later ones are all busy. pension that the UK Government are proposing, with Lindsay Roy: You have booked all the seats. the possibility of a slight uplift if the UK pension is less than a certain amount. I think it is £160. Q4971 Graeme Morrice: Could I ask about the implications for the national insurance fund, which is similar to the question about the state pension? If Q4966 Mr Reid: Say everybody living in Scotland Scotland became independent, is there a risk that and everybody living in England, Wales or Northern Scotland could lose out as a result and, if so, how? Ireland who has some form of connection with David Wood: I think that goes back to your original Scotland believes that offer, could they all choose to question. Does the national insurance fund still exist? be Scottish pensioners? Is it a fund of cash to pay pensions? To what extent Christine Scott: I think we need a set of criteria that will the Scottish Government be able to negotiate shows where the choice might be; for example, if you some of that notional money as part of its opening have worked part of your career south of the border balance sheet to pay future pensions to people in but live in Scotland, you might be able to claim a Scotland, who may have accrued an entitlement to close connection with England and you might wish to pension over their working lives in the UK? have your legacy sit with the UK Government. I think it will depend on individual circumstances and what Q4972 Graeme Morrice: Do you have a view on framework is agreed between the two Governments. how it may go? It is obviously down to the negotiations and the outcome at the end of the day, Q4967 Mr Reid: But you are the experts. If you were and you cannot prejudge that, but do you have a feel being asked by the UK and Scottish Governments to for how it may go? devise a system for sorting out all of this, what would David Wood: The sensible starting point seems to be be your advice? splitting the liability on population share. That is a Martin Potter: There is nothing out there that I have very blunt way of starting. seen to suggest that people would be given a choice, as we have just been talking about. The only choice Q4973 Graeme Morrice: But do you think Scotland that we are clear people will be given is on 18 could lose out as a result? Is that a possibility? September when they go to the ballot box. David Wood: It could; in the negotiations Scotland could gain and it could lose. Q4968 Mr Reid: We are getting conflicting answers from different members of the panel. Q4974 Chair: Surely it all depends on the Martin Potter: The Scottish Government pension negotiations, doesn’t it? paper does not talk about the choice. It is quite clear David Wood: It does. We accept in our paper that that, if you are in Scotland on independence, it will there are still a lot of fundamental uncertainties and take responsibility for your pension, and if you accrue that, even though some of the questions have been one after independence they will also take answered, many of them cannot be. responsibility for that. It is a statement of intent. Q4975 Chair: Is it fair to say that this whole area is Q4969 Mr Reid: It is a statement of intent, but what a pig in a poke, or will people have a greater degree does that mean in practice? Say I was a resident of of clarity by the time we get to the vote? Scotland but had spent a large proportion of my David Davison: If you go back to the first paper— working life in England. Could I say, “I prefer the UK probably the actuarial paper is exactly the same—we Government’s offer”? raised a number of questions, some of which have cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 208 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison been dealt with and quite a few have not. That was Martin Potter: I think it could. A lot of the details the rationale for the second paper, and the actuarial and theory we have been talking about, and some of paper does the same sort of thing. The hope is that, the questions from Mr Reid, would need to be set out. by the time we get to the vote, a lot more of those We have only high-level intent at the moment; the rest questions are going to be answered, so it is an would need to be thrashed out and it would take some evolving process. There is still a lot of information time. That would happen. I believe a lot of data are missing. It is a bit like the previous session. There is already held by the ONS and various other a lot of uncertainty about the demographic numbers. organisations that would fill reams of papers written You were looking for specifics around the by both sides that of course are not suitable for the demographic numbers. There is a lot of uncertainty public, but that those involved in the negotiations around that, and more detailed work needs to be done would have to get into absolutely. to narrow it down to a point where people can understand the financial impact if it goes this way and Q4981 Mr Reid: Martin pointed out that the Scottish the financial impact if it goes that way. There is a Government’s paper says that they will take on huge amount of uncertainty about those figures and responsibility for paying pensions to everybody living getting any degree of clarity about what it actually in Scotland at the time of independence. It is almost means. certain that some of those people will want to retain their UK citizenship, and may prefer, as they are Q4976 Graeme Morrice: Absolutely. To go back to retaining UK citizenship, that their pensions should the question of pensions, you will be aware that the also come from the UK Government. Would they be Scottish Government have said they would like refused a Scottish Government pension if they negotiations on transitional arrangements for pensions retained their UK citizenship? to start immediately. Is this feasible? Do you think Martin Potter: I cannot answer that question on that all the information required to do it is available? behalf of a future Scottish Government and what they David Wood: Is this in relation to the private sector would negotiate, but bear in mind that in this country cross-border issue? we already pay pensions to people who have citizenship of other countries but have worked their Q4977 Graeme Morrice: This is in relation to state life in the UK, so the same could happen in an pensions, which I kicked off with, and the transitional independent Scotland. arrangements with regard to them, but it would also apply to public sector and private pensions where Q4982 Mr Reid: You are right. Somebody could there is a cross-border issue with people having retain their UK citizenship and still be entitled to a worked in England and so on. Take state pensions Scottish pension, but the point I am making is, would first. they also be entitled to a UK pension? Christine Scott: It will depend largely on what Martin Potter: I do not see a necessary link between agreement is made. At the moment there is a system citizenship and your build-up of state pension. Again, which pays pensions, and the question is how far a if I were advising Government, they should avoid separate Scottish system could be established at the people gaming the system and doubling up benefits point of independence, or whether there is some scope and windfalls. It would not be sensible if that was for using the existing system as transitional matters allowed to happen. are sorted out. There is no clear information from the Scottish Government on what the intention is. Q4983 Mr Reid: How would you write the rules to avoid that happening? Q4978 Graeme Morrice: In terms of commencing Martin Potter: Gosh! You would have to get a lot of negotiations on transitional arrangements, is it feasible lawyers and legal drafters into a room to do that. to do that immediately, and is all the information there Chair: That is a transitional expense identified right to do that? away. David Wood: My understanding is that the only area where immediate discussions are intended is in Q4984 Mr Reid: Is that a don’t know? relation to the EU cross-border issue. My Martin Potter: To write that would be a large project, understanding is that other negotiations would not and you would also have to think about people who take place until after the referendum, if indeed there had worked x years under an independent was a yes vote. Government, went to the UK for a number of years and then went overseas. All sorts of different Q4979 Graeme Morrice: I am not sure whether that permutations would need to be codified. was no or yes. Martin Potter: I will try, Mr Morrice. I would Q4985 Mr Reid: Say a foreign national had worked certainly support those negotiations starting in the UK for 30 years and therefore, under the present immediately after a yes vote, if that happens. I have rules, had built up a full pension. They have worked worked in pensions for 20 years, and know that there for some of the time in Scotland and some of the time is enough complexity for it to take a lot of time. That in England. Who becomes responsible for paying would need to happen and it would be very important; their pension? a lot of people would be worried about it. Martin Potter: As is proposed in the Scottish Government’s paper, if they are in Scotland on that Q4980 Graeme Morrice: But could it? day, the Scottish Government picks up the tab; if they cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 209
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison are not, it will be the UK. The belief is that it will Q4989 Mr Reid: What do we do about all the UK average out. pensioners who are living abroad? Who takes on responsibility for them? Q4986 Mr Reid: Take somebody who worked in David Wood: It would have to be negotiated between Scotland for a full 30 years and built up their full the two Governments on a sensible basis. entitlement to a UK pension, working, say, for NHS David Davison: There might be a way of trying to Scotland. They go back to their home country and are make a broad assessment of the numbers of those that entitled to a UK pension. Are you suggesting that the have accrued benefits in each jurisdiction, but again UK Government would be responsible for paying that that is going to be subject to the negotiations. person’s pension, even though all of their working life was in Scotland? Q4990 Mr Reid: There will be a lot of complicated Martin Potter: I was thinking while you were talking. negotiations. The problem is that, if there was a large-scale trend David Davison: Yes. On the national insurance fund, of people working all their life in England and then in reality, if you are in a funded pension scheme there retiring in Scotland, or vice versa, you could have is a pot of money that you can split, but, in terms of inequality, but if we believe the traffic is both ways, this, effectively there is not a pot of money. All you on average, the based-on-residency method proposed are doing is splitting the liabilities in terms of who is in the Scottish Government’s paper will be about responsible for paying the future liabilities. The right. pension liabilities are likely to be offset against other David Davison: The paper produced by the experts liabilities, or you might have a gain on pensions in who were here before us suggested that the transition comparison, so it is all going to be a negotiation as both ways is broadly neutral. That is one of the part of a total opening balance sheet settlement. findings in their research. Q4991 Chair: Pension liabilities is a zero sum game, Q4987 Mr Reid: But that does not take into account is it not? people trying to game the system. David Davison: Yes. David Davison: I agree. You have to protect against it. It is a bit like warranties. Pre-independence, the Q4992 Chair: It is not necessarily going to result in benefit is effectively based on service as you build up an amicable exchange of views, particularly if there years, so you would have to work it on broadly the are rows going on in other contexts and it is a real same basis. Effectively, you would be building up head to head. service; you would have built up a period of service David Davison: Absolutely. and someone takes responsibility for that service at a particular point in time. It would be the rub of the Q4993 Chair: In a head-to-head negotiation in these grain; if somebody worked for 30 years in one area, circumstances, which are zero sum, which side has the moved and then did only a year in another area they advantage? Is it the big one, the wee one or the one would not be the responsibility of that new area, that needs to have a determination by a certain date? because the expectation would be that it would I am not entirely clear what factors might influence balance out over the whole period; otherwise, you are the balance of power in these negotiations. Can you getting into a situation where you are trying to do help us? almost individual calculations for 65 million people, David Wood: All those factors would come into play. which is not going to be practical. You have to make a broad high-level assumption about how the finances Q4994 Chair: Yes, I know that, but I am wondering might work. That is one of the areas where there needs how they might evolve. So many things are up in the to be more research, but broadly the preliminary air. It comes back to the question of a pig in a poke. research that the professors carried out suggested that If it is zero sum, presumably the way in which it is there was not a huge trend of movement across the resolved might very well impact upon the burden of border one way or the other, either from a working public expenditure in an independent Scotland after perspective or people working their whole life in one the due date. Therefore, it has implications. People jurisdiction and retiring in another, so it was broadly need to know what sort of things they might be letting neutral and was quite a small proportion overall as themselves in for. You cannot help us with any of that. well. Is that fair? Martin Potter: You ask about the balance of power in Q4988 Mr Reid: Are you suggesting that where the those negotiations. That seems to me a very political person lives at a particular date, say independence environment rather than one filled with actuarial day, determines which Government takes on factors that can be evaluated. responsibility? David Davison: That is certainly the proposal as it sits Q4995 Chair: We recognise there are a number of at the moment. What we were pointing out in the decisions to be made and lots of big sums to be paper was about whether there was any further worked out. What I was not clear about was whether negotiation about whether each Government would you were able to say that working out the big sums find a different objective in terms of it being based on would resolve 95% of this, and the area for discretion citizenship rather than residency, but at the moment and dispute would be only a relatively small one, or the proposal in the Scottish Government’s paper is whether you would say that it would be the other way that it is based purely on residency. about and the decisions made would determine the cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 210 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison overwhelming majority of the spending and the sums fund. You would be talking about two years to just follow on from that. negotiate that just in terms of the final assumptions Martin Potter: I would expect a capital value to be and details. That could range from schemes that are placed on the value of benefits people in the rest of relatively small to very large ones. It is not a simple the UK had built up in state pensions, and a capital task. It goes back to the point David made, and Martin value could be placed on the amount of pensions alluded to it as well. You have 60 million-odd records people living in Scotland at that date had built up. at the national insurance office—at NICO—and you Those two capital values can be thrown into the are trying to assess the value of those. This is one of negotiation with all the other factors you mention and a huge number of factors. It is just going to be one negotiations will take their course. part of the opening balance sheet in relation to pensions, health and a huge myriad of other things. I Q4996 Chair: But these are enormously complicated suspect a lot of it depends on whether the calculations, and that almost does require the Governments are prepared to take a reasonably broad- examination of every individual, does it not? brush approach to how they do it, or whether they Martin Potter: You could try to break down people’s want to get into the absolute minutiae of a valuation service—whether they have spent three years here and of the level of each individual member’s benefit to try five years there; I do not know if the data exist to do to make sure they are not losing out. It is going to be that—and at a point in time, based on residency in the down to the will of both jurisdictions to achieve a UK and Scotland, you could calculate that capital result within a specific time. value and use the data held by national insurance at DWP. The Government Actuary’s Department could Q4999 Mike Crockart: You would accept that in the help you do those sums, and you would throw them grand scheme of things, with negotiations on a into the mix with all the other things out there being number of fronts, it is unlikely that any one would be negotiated. agreed until others had come to a similar end point. What type of figures are we talking about for pension Q4997 Mr Reid: We heard in the earlier session that liabilities? We are talking about pension liabilities for being Scottish means that, all other factors being the next 30 years, which are large sums of money, so equal, you live less long than somebody in the rest of this would be a major decision that would have the UK. When it comes to working out these knock-on effects on what both Governments would be liabilities, would you be advising that the liability for prepared to accept in lots of other areas. a Scottish pensioner should be less than for a David Davison: Yes; billions of pounds. pensioner elsewhere in the UK because they were less likely to live so long? Q5000 Mike Crockart: Until this one is sorted, it is Martin Potter: You sound a bit like one of my difficult to see how there would be agreement across trustees: “We’re a Scottish pension scheme. Can we myriad other areas where the sums would probably have lower liabilities, please?” I imagine that the also be large. assumptions behind calculating those actuarial values David Davison: I imagine that, potentially, this would of state pensions north and south of the border would be one of the scenarios where there is agreement on be up for discussion. Both Governments would want nothing until there is agreement on everything. to take advice, and life expectancy might be one of the contentious ones. Q5001 Chair: In terms of cost, this is far bigger than Chair: Mike, you wanted to raise a point earlier on, Trident, is it not? This dwarfs Trident. or has it now been covered? David Davison: It is billions of pounds.
Q4998 Mike Crockart: Not completely. I go back to Q5002 Chair: The Scottish Government have said your point, David, about different ways of calculating they would like negotiations on transitional pension liabilities; there were nodding heads all over arrangements to start immediately. Is the information the room at that point. It really cast doubt on the available for those sorts of negotiations to begin, or ability to conclude negotiations in quite a short period would the first step still have to be the collection of of time. Is there any experience? We certainly do not lots of information? have experience of countries splitting up and doing Martin Potter: In terms of population statistics, the this, but we probably have experience of large ONS has quite a lot. There probably has not been a companies splitting up pension liabilities. What history of breaking that out in their reports by the rest experience do you have? Lots of constituents come to of the UK and Scotland, but I imagine that much of it me 20 years down the track to say, “My company was already exists, and work could start pretty quickly. taken over by this company, or split from this company, and I have never recovered.” How long does Q5003 Chair: Is it reasonable that some of the it take, and how do we make sure we do not end up negotiations about establishing the basic position in that position with these types of negotiations? could begin as of now almost? David Davison: It is very complex and it can take a Martin Potter: I would think so. long time. A lot will depend on the will of the David Davison: I think it is a matter of assessing the participants and how quickly they can manage to get likes of membership records from national insurance it through. I give you the example of the termination and so on, and identifying what material is available. of a scheme: a company becomes insolvent and the There is absolutely nothing to stop that commencing scheme has to go into the Government protection now, because you could then work out what the cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 211
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison retirement position was likely to be as at the date of why I was raising the point about whether the separation, if that actually happens. There should be differing age profile in Scotland has a substantial advance planning going on to try to achieve that. impact upon possible affordability. Martin Potter: We heard earlier that there are fewer Q5004 Chair: This is going to be either an enormous younger people and a growing pensioner population job creation project or huge amounts paid in overtime. in Scotland. That growth in the pensioner population Presumably, all of you are well above the level at is disproportionately higher, and there is a higher which you get overtime pay, but for those who have pensioner dependency ratio projected to occur for to do these sums is that correct, or is this something Scotland come 2035, which is 20 years from now. that is fairly straightforward? That is the challenge that the previous session was David Wood: Going back to what David said earlier, talking about. if a fairly broad-brush approach is agreed, it may be something can be done relatively easily; but if you go Q5009 Chair: Do you have any observations on down to the detail, you are talking a huge amount these challenges? Was there anything that you thought of resources. you could add to the points we have already heard? David Davison: The Scottish Government paper used Q5005 Chair: Surely, even with a broad brush we ONS statistics. If you extrapolate from those, the are still talking about very, very big sums of money, previous paper was trying to look at it in terms of tax aren’t we? revenue versus paying out pensions. If you exclude David Wood: We are. the life expectancy issue, the ONS statistics create quite a stark view. The pensioner dependency ratio in Q5006 Chair: Therefore, that would tend to militate Scotland is going to worsen much more significantly against there being just a broad-brush approach. Some than in the rest of the UK. In the rest of the UK it is of the other things that are being disputed would be still going to deteriorate, but it will deteriorate more lost in the loose change of these issues about pensions. rapidly in Scotland. For example, broadly we have a Therefore, it is much more likely to be quite an relationship where at the minute about 3.1 working intense discussion and debate. Coming back to Alan’s individuals pay for each pensioner. By 2036, in the point, realistically none of this will be anywhere near rest of the UK that will go to about 2.9, but it will go resolved by the proposed date of independence. to about 2.6 in Scotland, which is very significant over Martin Potter: Traditionally, the capital value of these the next 30 years. benefits has never been put on a Government balance You then have issues about how many additional sheet. These are pay-as-you-go arrangements, so they workers you need, which is the discussion you had tend to be viewed on the basis that, if you get in previously, to maintain the same dependency ratio as enough money from national insurance contributions in the rest of the UK. You then have a wider to pay the benefits out the other way or, if there is a discussion about how many additional workers you gap, that you can meet it from other sources, all is need UK-wide to maintain the 3.1 relationship, which well and good, as long as you keep an eye on the is very significant. Broadly, over the next 20 years to projections for the differential in the future. That is about 2035 or 2036, which was the question I think the challenge of a pay-as-you-go system. The capital you were asking earlier, you will probably need about value sitting behind that is less of an issue, because an additional 800,000 workers in that period. It is not you will never have a call on all of that at one time. quite as simple as that, because, if you look at You have, hopefully, a constant stream of national bringing in additional workers, you will get not just insurance contributions to pay for those benefits. those workers but other dependants—children—and eventually the individuals who come in during that Q5007 Chair: That leads me on to the next point period will retire, possibly in Scotland as well. No about affordability, stream of income and so on. To specific calculations have been made about those what extent do the differing age profiles between demographic issues and how much they impact on the Scotland and the rest of the UK raise issues about actual additional number of people you have to keep affordability of pensions in a separate Scotland? What it going. is your view on the discussion we had in the last session? Martin Potter: Affordability of state pensions can be Q5010 Chair: To be clear, the 800,000 figure you looked at in a number of ways. Is a state pension mentioned is over a 20-year period. affordable by looking at the amount that the individual David Davison: Yes. receives? Is affordability based on how long that person is going to draw it, or on who is eligible for it Q5011 Chair: That would be to maintain the same in the first place? Aside from that, does it depend on ratio as the rest of the UK. whether you have the money to pay for it coming in David Davison: Yes. from national insurance or taxation? There are a lot of factors going on there to pick apart that question, and Q5012 Chair: That is 20,000 a year. difference in life expectancy, which I think you are David Davison: Yes. It is not all that dissimilar to hinting at, is just one of those factors. what was being suggested earlier. If you were trying to maintain the same rate as currently, you would Q5008 Chair: That is the problem. What we are probably need about 1.1 million or 1.2 million over looking for is some help with solutions, and that is the period to do that. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 212 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
Q5013 Chair: If it was 1.1 million or 1.2 million, it Government have said in their paper they would look would be 30,000 a year. at according to their own circumstances. David Davison: Yes. You then multiply that across the UK to get to similar statistics to keep pace with the Q5018 Chair: That is right, but the concept of having change in the number of people. an agreed quinquennial review and possible increases in state pension age is not really the message people Q5014 Chair: This Committee is not going to be have been hearing when the Scottish Government debating the question of independence for the rest of have also been talking about postponing the rise in the the UK. We are looking at the Scottish position. To pension age. Yes, that might be said, but it is not the maintain the existing dependency ratio would require impression being created. We will obviously say to 30,000 a year, leaving aside the question of how many people that this could be tackled by raising the state of those people then become themselves dependent, pension age, but people would also want to hear that or bring dependants in with them, requiring additional if that was not being done, and we are working on the workers and so on. The 30,000 figure is almost an basis that if people in Glasgow continue to die at the irreducible minimum. same rate, there would have to be about 30,000 David Davison: It is just a mathematical calculation. migrants a year. If you want to reduce that figure, it means raising the state pension age on a certain time Q5015 Chair: But it is also a minimum figure, scale and so on, and all of that can be worked in. Does because if you want to maintain the ratio, given that that seem reasonable? others are coming in, it would be a higher figure Martin Potter: The other lever for a future Scottish than that. Government is to decide as a matter of policy that David Davison: Yes. they want to spend more on state pensions because that is the way things are going, rather than to achieve Q5016 Chair: That is helpful. Presumably, that is it through migration. That is the other way to top up before we start raising questions about a more the difference on the pay-as-you-go system. generous state pension and deferring increases in the state pension age as well, so those things would Q5019 Chair: To be fair, there is only a limited require additional numbers coming in as migrants, if number of times you can spend oil money and still the books were to balance. have the books balancing. That is not what has been David Davison: There are a couple of things, as the suggested so far. All the discussion has been about professors said earlier. First, the baby boomer growing the population in order to meet the generation is going to peak before it falls. There need dependency ratio rather than cutting public to be much more detailed calculations about the expenditure elsewhere to fund pensions. You are impact of that pensioner dependency ratio related to nodding. Unfortunately, Hansard does not record longevity. If there is an improvement in life nodding. Let me put on the record that you nodded expectancy in Scotland of x amount over that period, slightly enthusiastically, but not over-enthusiastically. what sort of impact would that have on the finances? Is that fair? That is one of the things we call for in the paper, Martin Potter: I would agree with you, Chair, and I because there are no detailed calculations or would respond that continuous increases in migration assessments out there at the minute. There are broad do not seem as if they would work either. I think you rule-of-thumb calculations, but nothing detailed in have captured the problem. terms of how much that would actually cost. Q5020 Jim McGovern: To be clear on some of the Q5017 Chair: In terms of things that ordinary people points you have raised, the Scottish Government are in my constituency would understand, 30,000 saying in their White Paper that they could afford to migrants a year as a minimum would be necessary to pay a more generous state pension and also defer any keep the same dependency ratio, assuming that they increase in the retirement age. They are saying that is do not tackle the Glasgow effect of people dying based on lower life expectancy in Scotland. I get the younger. If we are successful in tackling the impression you are saying that the ratio between discrepancy in life expectancy between Glasgow and people paying national insurance and people drawing the rest of the country, that requires even more a pension is such that that would not be possible in migrants. Scotland. Martin Potter: The increasing pensioner dependency David Davison: There are two factors: life expectancy ratio we have described is a big feature for the rest of and pensioner dependency. The pensioner dependency the UK as well. We have been talking about migration issue does not really start to manifest itself in terms being the policy to solve that. I am not sure that is of slippage between the rest of the UK and Scotland right. I do not believe I have ever heard that there is quite so significantly until about 20 years out. The an explicit link between getting more migrants in and change over the next 10 years is not as significant; solving our state pension age problem. There are now they are still quite close. If you look at it over a quinquennial reviews taking place for state pension shorter period and take into account life expectancy age for the whole of the UK. One is due to take place projections, as the professors said earlier, there is this Parliament. The lever being used in the UK to possibly a justification on a moral basis in saying that date has been to set future increases to state pension the individuals can get a higher pension in that short age, and that is the one that I believe the Scottish term. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 213
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
The issue is probably affordability 10-plus years out— Christine Scott: We have identified the same type of whenever the pensioner dependency differential issues. Both commitments are unfunded, and again it widens more significantly. From the pensions paper, is how you want to go about assessing who is the Scottish Government are not proposing to do that; responsible for the past service of individuals who are they are proposing to create a commission to members of those schemes. investigate whether they can do that. What we have David Davison: You have two types of pension raised in the paper is that we agree with that as a schemes, funded and unfunded schemes. In most process, because there are so many of these questions cases, the funded schemes are already split to a certain that remain unanswered and there has not been any extent, because you have separate local government detail about comparing the two bits of it. schemes in Scotland as opposed to the rest of the UK, Chair: To be fair, if you say in a quiet voice that you so we are talking primarily about the issues around will set up a commission to investigate, and then you unfunded schemes. The issues on unfunded schemes say in a loud voice that you are decreasing the pension are pretty much the same as they are for state age, it is pretty clear which one people hear, isn’t it? schemes. The only potential difference is that It comes back to the policy on cake—having it and affordability is related to the number of workers. If eating it. A slightly misleading impression is being you take NHS Scotland, the relationship to created, which is why we are trying to pursue this. affordability of the payments of pensions from NHS That is a very interesting point which we had not Scotland is the number of NHS workers rather than picked up before: some of these things might be more the population as a whole. If the costs of the pensions possible, or less unlikely, in the short term, but in the were greater, with a higher working population longer term it gets caught up in the bigger movement. employed in NHS Scotland, for example, that would pay the bill, but there is an additional cost in having Q5021 Jim McGovern: To pursue the same point, those people working within the public sector. It is a the Scottish Government’s White Paper is not entirely two-way street on that one as well. misleading. As Alex Salmond would say, it is not giving an answer to every single question. For Q5024 Chair: Is it fair for us to take the view that anything they cannot answer, they say they will set up funded pension schemes are not an issue here? There a commission. is some detail at the edges and all the rest of it, but David Davison: The paper we have written has raised there is not a major set of issues here. There are no that. We asked a series of questions and identified unknown unknowns or known unknowns. which ones we thought had been answered, and we David Wood: There may be issues about splitting and raised additional ones, of which that is one, in terms going back to the records. of how it is affordable. That is what we raised in our second paper. It is an additional question that still has Q5025 Chair: There are big sums to be done, but the not been properly addressed in looking at the finances principles are all doable. There is not the same scope to provide that. for negotiation or disagreement as there is on some of the issues we touched on earlier. For the funded ones, Q5022 Jim McGovern: Leaving aside the state it is all pretty straightforward. Is that fair? pension, does the population structure of Scotland David Davison: There is more certainty, absolutely. have any other specific implications for the demand for public spending on health, residential care and so Q5026 Chair: When you say “more certainty,” I on? I know I am speaking to a few actuaries. want to be clear whether or not there are any major Somebody once said to me that the definition of an uncertainties. The fact that you cannot think of any actuary was someone who found accountancy too tends to make me think there are not. We can park exciting. that and say to people, “If you are in a funded scheme, Martin Potter: You need to be careful about saying the question of separation or independence does not that in mixed company. You are asking a question on really seem to cause any difficulties.” Is that a fair which I am not qualified to speak. thing to say? David Davison: Our paper was very much written Martin Potter: Instead of talking about funded public around the pension aspect. It has not really touched sector schemes, you would be talking about local on health, because that is not really our speciality. government schemes. They are already set up under Jim McGovern: I accept that. separate legislation and identified as separate regions Chair: If we do not ask, we do not get the answers. of Scotland, England or Wales, as the case may be. There might not be an answer, but if we do not ask, it Separation is there already and becomes more is not an option. transparent. I can think of things that might make that more complicated—currency and EU membership— Q5023 Pamela Nash: I want to move on to public but there will be other people busy debating those sector pensions. If independence happens, unfunded issues. schemes will give negotiators the most sleepless Chair: We will come to EU membership later on, but, nights. ICAS said they were not clear on how in general terms, if you are clear that that is not an liabilities would be distributed. Can you give us any issue about which we ought to be expressing concern, idea of how they might be distributed? What would we are quite happy to move on. your advice be? David Wood: These are similar sorts of issues to what Q5027 Mr Reid: I have a question on public sector we were talking about in relation to state pension. pension schemes. At the moment, the teachers and the cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 214 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
NHS pension schemes in Scotland are paid by the Q5034 Mr Reid: If we move on to private pensions, Treasury rather than by the Scottish Government. are there going to be any issues there that you can Would I be right to assume that, because of the extra identify? spending in Scotland over many years on health and David Wood: There is the remaining one from our education because of the Barnett formula, when we previous paper about the cross-border issue. Pan-UK come to split up the liabilities there will be a greater schemes will become cross-border and, therefore, on liability per head in Scotland for teachers and health the face of it will need to be fully funded. There have service schemes than there would be for the rest of been leaks in the last couple of days suggesting that the UK? the European Commission is proposing to deal with David Davison: Only in the last few days Reform that issue, but it will be over a longer time scale than Scotland produced a paper that has statistics on that would be of help to us in this discussion. which would suggest you are right. The proportion is higher. Q5035 Mr Reid: You think that is not going to be resolved by March 2016. Q5028 Mr Reid: What about UK-wide schemes— David Wood: There will be a need to resolve it in a for example, the armed forces scheme or civil service different way from simply relying on the European schemes? How do you split them up in the event of Commission to sort out the directive. independence? David Davison: I think it is unlikely. Martin Potter: The issues are very similar to those for Mr Reid: I think Mike has whispered that he wants the state pension that we were discussing at the outset. to pursue that. Mike Crockart: Yes; I would like to get a bit more Q5029 Mr Reid: It depends on wherever the soldier detail. happens to be living on independence day. Martin Potter: There is no existing demarcation as far Q5036 Mr Reid: Do the demographic issues that we as I am aware. have discussed for state pension schemes have implications for private schemes as well? Q5030 Mr Reid: We have figures that show the Martin Potter: The funding of occupational pension distribution of pensioners throughout the UK. Can we schemes in this country already requires that the assume that retired soldiers and sailors live in trustees and actuary fund that according to the Scotland in the same proportion as the population as circumstances of the scheme, taking into account the a whole? promises made to members, their earnings and their Martin Potter: All these schemes have individual life expectancy. So, as best as possible, they should member records. They will be paying pensions to already reflect regional or salary differences that affect those assumptions, and those should not change with these people, so they know their bank account details independence. and where they live. That data would be available. I David Davison: The only other one we raised in the have not seen it so I could not answer your question, paper was about auto-enrolment. I think that even the but you must know who you are paying your UK Government had difficulty finding a supplier for pensions to. auto-enrolment in the UK based on the population of the UK, because there is a cost-benefit gain there in Q5031 Chair: All of that is doable and we should terms of it being based just on numbers. You have a not really be concerned about it. better chance the bigger the numbers you have. The Martin Potter: It is doable. proposal is that there is a Scottish version, potentially, Chair: Spoken with true caution. I am never quite of the sort of NEST issue, and that would be, sure whether or not you are just being hyper-cautious potentially, for a population of 5 million-odd, as in these things, or whether there is a bear pit. opposed to 60 million-odd. The question we were raising as part of the paper was how easy it will be to Q5032 Mr Reid: There is an extra cost to Scotland find a supplier, and a supplier at the same price, as the of teachers’ and NHS pensions after independence current solution that is being offered in the rest of which, at present, under the present devolved the UK. settlement, is not being borne by the Scottish Government but by the UK Government, so that is an Q5037 Mr Reid: What about other small countries extra cost of independence. with a population the size of Scotland’s? Do they have Christine Scott: I think that part of the pension auto-enrolment schemes? Are there any other contributions that are being paid in by those examples to base it on? employed, say, in the NHS would go to pay for NHS David Davison: Just Australia. pensioners, but if there was a gap that is what is Mr Reid: Australia is a lot bigger than Scotland. picked by the UK Government. David Davison: It is a compulsory contribution. Where there are auto-enrolment contributions, people Q5033 Mr Reid: Am I right in saying there is a can opt out, so the difference with Australia would be gap—a very big gap? that the provision of the service has a certain outcome, Chair: If you express the view yes, you have to say because you know that all the population has to pay, something, because, otherwise, nodding doesn’t get whereas the concern with the NEST/SEST-type noted. environment is that you could have a population of Christine Scott: Yes. 5 million, of which 2.5 million were eligible but only cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 215
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
500,000 actually join. If you take the same sort of and every different scheme and the backing sponsor. proportions with a population of 50 million, you know I cannot say whether the backing sponsors in that you will still get potentially 5 million to join, so aggregate in Scotland are more risky than in Wales. it is a much lower risk for the provider of that service, You could look at that, but I do not think it would who can potentially offer a lower price because of change the levy basis. It might be interesting to see that. whether, at a macro-economic level, independence caused something to happen so that all Scottish Q5038 Mr Reid: The Scottish Government employers suddenly were more risky. You would have suggested that they will establish a separate Scottish to ask an economist whether there could be an pensions regulator which will operate within a shared argument for that. financial regulatory system, including a pension protection fund. What are your thoughts on that Q5043 Chair: It would very much depend, proposal? particularly from the English interest, on whether or David Wood: I think it is sensible to try to mirror what not they thought there was anything in it for them in is happening in the UK on a transitional basis for a sense, and, if there was likely to be a sheer pragmatic reasons, but you can imagine that disproportionate level of risk from Scottish firms over time the regulatory approach as between coming in, the tendency would be to refuse it really, Scotland and the rest of the UK might differ. That would it not? David, you did say that, yes, you could might bring different pressures on a shared pension see why it was in Scotland’s interests. There is a protection fund, so there could be concerns going whole number of areas, not just pensions, where we forward in the short to medium term, and certainly in are talking about what is actually in England’s best the longer term, as policies diverge. interests, and we are trying to establish that. This seems to be one of these cases where it is not entirely Q5039 Mr Reid: That is what the Scottish clear that there would be anything in it for England Government have proposed, but obviously it requires in particular to have this joint sharing relationship or the agreement of the UK Government. Would it be in pooling arrangement here. the interests of the UK Government to negotiate such David Wood: I think that is a fair summary. The a scheme? demographics of the schemes in Scotland may be David Wood: It would certainly be in the interests of similar to those in England. I think that in the last the Scottish Government. evidence session we highlighted the fact that in Scotland there are one or two very big schemes which Q5040 Mr Reid: Yes, but it needs two to tango. might skew that demographic slightly, but we would Would the UK Government tango? need to do some research on how that compared with David Wood: This is basically a self-insurance the demographic in England. scheme, and the bigger the pool the better. From the rest of the UK Government’s perspective, if you keep Q5044 Chair: Is it reasonable for us to start looking Scotland in shared pooling arrangements, you’ve got at this through the prism of other risk issues, such as a pool that is probably 10% or 15% bigger than it the currency, joining the EU and a possible break would be just for the rest of the UK. There may be a there, and that that would possibly make Scottish slight benefit, but there is not as much benefit for the firms a greater risk and, therefore, it is less likely to rest of the UK as there is for Scotland. be in the English, Welsh and Northern Irish interests to have them in the pool? Is that a reasonable way to Q5041 Chair: Presumably, that depends on whether look at this, or am I missing the point? or not people believe that the 10% or so that Scotland David Davison: I think the macro issues are the big contributes towards the pool is more risky than the ones for this. If everything was equal, there would balance of the pool, doesn’t it? probably be a benefit in having the organisations in Martin Potter: Yes. just for the pooling effect. If, as you say, that 10% or 15% becomes high risk, there is less of an incentive Q5042 Chair: You don’t know that, do you? Again, to have them in or to have them in on the same basis. we work on the basis that the English, Welsh and They might want to have them in, but they might want Northern Irish people will take a decision that is in them to pay a higher premium for being in, which has their best interests in these circumstances rather than an impact on the firms in terms of what they are simply on the basis of Scotland’s best interests. Is paying in levy. there any reason why they would want to shy off from working with Scotland on that, based on past history? Q5045 Chair: If we work on the basis for the I do not know whether or not more firms have moment that the English, Welsh and Northern Irish traditionally gone bust in Scotland and we have drawn schemes did not agree, presumably it is feasible that on the pool more and, therefore, they would want to a Scottish protection fund could be established, or is get shot of us, or the converse in these circumstances. there a minimum size you need to have to make Martin Potter: The pensions protection fund charges something like that a real goer? levies to all occupational pension schemes according Martin Potter: It is a good question, Chair. The to their level of underfunding, the investment risk they smaller that scheme became, the higher the are running and, importantly, the insolvency risk that contingency margins you might want to have to whizz the sponsor of that pension scheme bears. As it is, down shocks, because in a smaller scheme it bounces there is a fairly granular levy being charged to each around; in a bigger scheme you tend to smooth out cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 216 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison those shocks. I can’t answer it in numerical terms, order that people in private schemes in Scotland can but the concept you are explaining makes sense for a have some clarification about how their pensions small scheme. might be protected? Martin Potter: Certainly. We did ask about that Q5046 Chair: When you say “contingency margin,” definition in our paper: what is a Scottish pension does that mean more money? scheme? Martin Potter: Yes. Chair: I am sorry. I am not quite as au fait with the details of your paper as maybe I should be. Mike, do Q5047 Chair: It is sort of banker-speak for more you want to pick up question 28? money, is it? It is more expensive, so you have to pay more to be in a smaller scheme. Q5050 Mike Crockart: This is the subject that we Martin Potter: The pension protection fund currently almost strayed into a while ago about cross-border runs a fund to withstand future claims. In theory, if schemes, which is an interesting one. In the event of you were a smaller fund, what you were keeping in separation and Scotland becoming an independent reserve would be more likely to be not used in some country, its pension schemes which currently operate years and then wiped out in others, whereas for a big across the UK as domestic schemes would thereby fund you would expect the claims to be more stable. become cross-border schemes. You covered it a fair David Davison: There are about 6,200 schemes in the bit in your paper. Could you briefly outline what the most recent PPF index. You are probably looking at main consequences of that would be? 500 to 600 in Scotland. That is the broad number, so David Wood: The EU directive essentially requires that gives you an idea of the scale. such cross-border schemes to be fully funded at all times. That is the biggest impact. That would require, Q5048 Chair: I was struck by the parallel here with essentially, any deficits to be immediately made good. the question of banks and banking. You have two That is clearly not feasible. Most deficits in pension extremely large banks in Scotland where any adverse schemes are being made good under a recovery plan impact could have quite a substantial effect on the over an average of 11 years, according to a recent Scottish economy. In terms of firms in the pension PWC report. Funding that immediately will present a protection fund, is there a parallel there? Are there lot of problems. one or two big firms, or a small number of big firms, The paper of the professors in the earlier session that would require the others to be paying in quite a dismisses that as just a funding issue, suggesting that substantial amount to mitigate the risk? If there are a the companies could borrow the money, pay interest large number of very small firms, my understanding on it and pay it back over a 11-year period. In theory, would be that the risk of any one going would have that sounds very good, but I wonder whether it would less impact and the premiums might be lower. work out like that in practice and whether the banks David Davison: I certainly have not seen any analysis would be willing to lend that sort of money over that of that, and the PPF does not produce any analysis. I length of time to fund a pension deficit. I think there think it just produces an analysis of schemes, but it is are issues there to think through. not an analysis by region, so it is difficult to comment specifically on it because you would just be speculating. Q5051 Mike Crockart: When you say “that sort of Martin Potter: Certainly, the pensions regulator at money over that length of time,” what proportion of present regulates more closely the schemes and Scottish pension schemes—we have covered the employers that pose the biggest risk to more difficulty of defining what that is—are underfunded at members—but also the pension protection fund. For the moment, and what sorts of sums are we talking example, if the BT pension scheme went belly-up, it about? would be a big problem for the pension protection David Wood: I look for help on that, but perhaps I fund. In Scotland, it would be the RBS scheme, if it could highlight that it is not just Scottish schemes. It is was deemed a Scottish pension scheme. That is not a big issue for the rest of the UK as well as Scotland. something we have really talked about. There is no David Davison: To give you an idea, using the definition at present of what a Scottish pension pension protection fund index, at the end of 2013 scheme is, so would it be that its trust deed and rules there were 6,150 schemes UK-wide. Of those, 3,701 are written under Scots law or English law, or is it were in deficit and 2,449 in surplus on a PPF basis. If based on the balance of where its membership is and you were looking at a technical provisions basis of who the sponsoring employers are? That definition fully funded or a buy-out basis, there would be a much does not exist and it would need to be clarified, both greater number. for regulating that scheme going forward and also to whom it pays its pension protection fund levy. Q5052 Mike Crockart: This would have an impact Conceivably, you could have schemes being split and on the majority of pension schemes in the UK; they paying part of their levy to the UK PPF and part to a would have to come up with billions of pounds. Scottish one. David Davison: Yes, they would. Christine Scott: If they were deemed to be cross- Q5049 Chair: I cannot remember whether or not border. these were all issues that you addressed in your David Davison: We are talking about 6,000 schemes, second paper. If not, these are issues that it is of which Scotland has a proportion and of which only appropriate for us to be raising directly, is it not, in a proportion will be cross-border. You could well have cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 217
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison a designated scheme in Scotland that is just for staff underfunding, it is going to be an issue of far greater in Scotland and applies only in Scotland. magnitude in splitting cross-border schemes across the UK. Q5053 Mike Crockart: Another way round this Martin Potter: The regulator in Europe is called would be to split your scheme in two and have a EIOPA based in Frankfurt. I don’t know its view on domestic one for the rest of the UK and a domestic this matter. This is a problem peculiar to the UK—I one for Scotland. was about to say “fairly unique”—both in the number David Davison: In theory, yes. and the type of defined benefit pension schemes we Martin Potter: When this legislation first came in, we have, which is the largest number in Europe compared had the experience that a number of UK employers with any other European country, and the situation we had Republic of Ireland scheme members. The could face of Scotland becoming independent has not experience at the time was that the simplest approach cropped up before. It will be a UK problem that we then—we are talking about small numbers of would do well to discuss in Frankfurt or Brussels, as members—was quickly to set up a small scheme in the case may be. I don’t know how that would go. Ireland to put them in to avoid funding the whole David Davison: As David said, there has been a leak. scheme up to that higher level. That was the route that There are changes to the legislation being proposed, the vast majority of the schemes that found but the concern is that they would not be in in time. themselves in that position took. What we don’t know at the minute is: first, whether there will be any changes; secondly, if there are, when Q5054 Mike Crockart: That was the three-year they will come in; and, thirdly, if they do come in after transitional period to allow that to be sorted out. the date of independence, what the impact is after date Martin Potter: Yes. They did not sort it by raising the of independence. You have got almost three levels of funding up to that level but by putting them in uncertainty about the way this is going to apply. You separate schemes that were not cross-border funded could end up applying it as it sits at the moment, or and could be funded at a more leisurely pace than they applying some other forward basis for this at a point did prior to that; so employers took action to avoid in the future as well. becoming cross-border pension schemes. It is a little ironic that this EU legislation is designed to encourage cross-border schemes and has had the opposite effect. Q5057 Mike Crockart: The Scottish Government David Davison: There are costs and potential risks have recognised this difficulty and proposed involved in doing that. To go back to exactly the same negotiating another exemption from the European argument, if you have a larger number of schemes, Union, saying that it is not really a separate pension there is a spread of risk with the PPF. In exactly the system. It will still have the same regulatory system, same way with a scheme, if there is a larger number if that manages to go through, so really it does not of members, there is a spread of risk. If you have a need to fall within this EU regulation. Is that a scheme with 1,000 members and you are setting up a viable position? scheme somewhere else that has only 50 members, David Davison: The experience of Ireland was that it that is more difficult in terms of funding because it is negotiated an exemption but it was for a much shorter more subject to shocks, which might not be the case period. The answer to that is that I don’t think for a larger scheme. anybody knows. There are quite a few moving parts to that, so I don’t think we can say with any certainty Q5055 Mike Crockart: You have a situation where that they could negotiate something different from EU regulation says that you need to fully fund the what was actually established. scheme. The reaction to that is to split the underfunded pensions, which are now deemed cross- Q5058 Mike Crockart: Ultimately, it was not an border, into separate schemes, of which the Scottish exemption but a three-year transitional period. one will, in all likelihood, be quite a small part of it, David Davison: Yes. if we are talking of large companies, and that is going to be more risky for the Scottish arm of that pension fund. Q5059 Mike Crockart: Whereas here the Scottish David Davison: It is going to be more risky for the Government are saying that this is not actually a smaller scheme potentially, I think it is fair to say. separate scheme or a separate area, because there is a Martin Potter: I am not sure every employer would similar regulatory scheme and, therefore, it should not find itself in a situation of having just a handful of fall within the EU regulations. Scottish employees. The magnitude of this challenge David Davison: As Martin said, they would be would be much greater than the one with the Republic pioneering on this, so there is no certainty about what of Ireland scheme members. Many companies have result they might get. branches and employees in Scotland and England, Martin Potter: On the basis of how big a problem it whether they are headquartered in Edinburgh or is for UK schemes, which would be the larger number Basingstoke, as the case may be, so this issue is likely compared with the Scottish schemes, given the to affect many of the 6,000-plus schemes in the UK. number of schemes in total in the UK, the need to approach the relevant authorities in Europe would Q5056 Mike Crockart: Is the EU likely to be okay apply in the UK and Scotland. As to how sympathetic with this? Given that you have just said the UK- they are and how one goes about that, I don’t know Ireland solution was to split it without thinking about how things work in the corridors of power in Brussels. cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 218 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
David Davison: There is a commonality of interest on David Davison: It is doable, but, potentially, it would that one. It is not just one that affects Scotland; it will be more expensive if you are having to pay to split affect the rest of the UK as well. the scheme.
Q5060 Mike Crockart: Given the uncertainties Q5065 Chair: Sorry—why is it more expensive if about what is happening in the EU and the defined you are doing a split scheme but paying the same time scales that we would need to get to the end of amount? those negotiations, the most likely end result is that David Davison: Effectively, you are paying to run two cross-border schemes would be split into two schemes as opposed to a single one. jurisdictions, because that is the easiest way round it, surely. Q5066 Chair: It is just the administration of the two David Davison: It will be driven by employers and schemes; it is not the lump sum that you have to pay whether they can afford to pay on a different basis, or in. if they want the certainty of not having to do that in David Davison: Not necessarily. There could be a terms of spreading the payment period for the cost, because each scheme would have to be funded deficit— individually based on the risk of each scheme being exposed. Similarly, the PPF levy could be different, so the costs won’t be exactly the same. The costs Q5061 Mike Crockart: It would depend on how fast would be broadly similar. All you are doing is not it was. enforcing a debt to be paid at a single point in time. David Davison: Unless the rules changed. Q5067 Chair: That was the point I wanted to clarify. Q5062 Chair: If they could not afford to pay over David Wood: There would also be some that shorter period, would that mean the closure of administration and advisory costs in splitting, and it the scheme? would take time. David Davison: No. That would probably drive them David Davison: And also in auditing. If they stayed to split the scheme, because if they split the scheme as cross-border schemes, there would be a yearly they would probably be able to pay the liabilities off rather than three-yearly audit. over a longer period of time. I think that would be Christine Scott: That is the actuarial valuation. much better. David Davison: Yes. Chair: I see. Mike Crockart: That would be better for you. David Davison: As Martin said, you have different Chair: Lots of luck. No wonder you are looking so organisations here. If one organisation had a large cheerful about all that. number of members in the UK and a smaller number in Scotland, for example, and had money, it might just Q5068 Pamela Nash: In the evidence submitted to be better for them to pay off the liabilities in Scotland the Committee from ICAS, it says that the choice of and fully fund it in Scotland. That might be easier, currency will have a very significant impact across the whereas, if you had a mix more broadly and you could pensions sector. I am not clear—and I don’t think the not afford to do that, it would be easier to split the Committee is—exactly what impact the currency will scheme. So it is going to be driven probably much have on pensions. Can you tell us a bit about what the more by the individual organisations and what their impact would be, and what the differences would be objectives are. between the four possible currency options—I use that loosely—available to an independent Scotland? Q5063 Chair: If the scheme is split and liabilities David Wood: In our paper we were trying to flag up arise, and the firm feels that it can’t meet them, then, the extent to which it was reasonable to expect our presumably, the answer is closure of the scheme. questions to be answered, and currency, EU What do you do in circumstances where the firm has membership and other matters are fundamental issues there in the background. As to the currency impact on a liability and feels it cannot meet it? Then what pensions, we covered it a little bit in the earlier happens? session. If you have a separate Scottish currency, the David Davison: Say you have a deficit of £1 million pension scheme ought to be matching its assets to the on a funding plan over 10 years and you are paying liabilities, or the currency of the assets to the currency that off over 10 years. The full funding requirement is of the liabilities, to cut down exchange risk. that you would have to pay that £1 million effectively immediately. By splitting the scheme you would still Q5069 Chair: Can I be clear what that means? Let’s be paying off £1 million, but, if the scheme was split take Standard Life at random. If they had liabilities in so that 20% was in one part and 80% was in the other, Scotland, they would have to match those in Scotland you would still be paying the same amount of money with things like Scottish bonds, and, if they had broadly; you would just be splitting it across the two liabilities in the rest of the UK, they would have to schemes. You would still be paying £1 million, but match them up there with bonds and the like in the one organisation would be paying £200,000 of it and rest of the UK. Is that basically the situation the other £800,000. summarised? David Wood: It is pretty much what it would mean. Q5064 Chair: There is no problem and all of that To reduce the risks, you try to match your assets to is doable. the nature of your liabilities. cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 219
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
Q5070 Chair: What does that mean in terms of jobs Q5075 Pamela Nash: The eurozone is entered into in Scotland and the like? What are the consequences? only upon membership. Is that just a paper exercise matching in different Martin Potter: There is an example of informal locations, or does it mean that people physically have adoption of the euro, I believe, by Montenegro. to move? David Wood: I am not sure that has an impact on jobs Q5076 Pamela Nash: Yes, and Monaco as well. If in Scotland. I don’t see why that would impact on jobs there is a significant difference between formally in Scotland, to be honest. using the pound as part of a currency union or just using currency substitution—or sterlingisation, as it Q5071 Chair: If your liabilities and assets have to be has been called in recent weeks—would that have split in that way, do they physically have to move? any impact? Presumably, they will be regulated from another Martin Potter: As I understand how that would work, environment. Would they have to have people there in an independent Scotland would be using someone else’s currency. They would have an economy set the new location in the rest of the UK who were according to the Scottish Government and Scottish interacting with the regulators? circumstances, but a currency that was behaving David Davison: I think the Scottish Government have according to the UK’s economy and the UK proposed in their paper the mirroring of all the Government’s bidding. It is at times of mismatch regulatory effects currently in place in the UK. between the two that things could go wrong in terms of different economies going in different directions. I Q5072 Chair: But, to be fair, that is within a sterling have not explored that further, but again they are zone, is it not? questions for an economist. David Davison: As to the pension regulator, that sort of regulation would apply regardless. Q5077 Pamela Nash: I do understand how it could impact on the economy, but would there be a specific Q5073 Pamela Nash: That is the information we are impact on pensions across the board? looking for. Is that possible regardless, or would that Martin Potter: If you are using sterling with a certain indeed be affected by the choice of another currency? value but living in Scotland and Scottish inflation— David Davison: I can’t see that there is a difference. Scottish RPI—goes in a completely different direction There might be a difference, for example in the from what is then UK RPI, your currency is devalued, investment regulation, but for the broad, high-level so those sorts of issues could affect the value of your pension regulation I can’t see that there would be pension. I guess the same would apply to other much of a difference. investments. Martin Potter: There is a practical issue about how you get paid your pension. That might be in the new Q5078 Pamela Nash: Can you think of any other Scottish currency and you need a bank account, but, impacts? if all your expenses as a member of the public going David Wood: I can’t think of any. into Tesco were in the new Scottish currency, your pension and outgoings would be aligned. That is the Q5079 Chair: So for pensions and financial first thing. What does it feel like to people? How do services—the areas in which you work—you think those schemes match those payments with suitable you could muddle through sterlingisation. Is that investments so that they minimise the currency risk of basically what you are saying? having liabilities in the new Scottish currency with David Wood: I can’t see the particular impact on assets? That is a live issue that the Institute and pensions. For financial services more generally there might be issues, but we are looking just at pensions Faculty of Actuaries has been actively thinking about. here at the moment. It is not something we have spent a lot of time on to date, but the options are: some currency union with Q5080 Chair: For pensions, you just muddle sterling, formal or informal; likewise with the euro, through. There might be some difficulty about formal or informal; or some new Scottish currency. differential inflation rates and so on and so forth, but There are five different options. They would all have you don’t think there is any major difficulty. their pros and cons, and some would involve more David Davison: There might be some currency change and difficulty. I don’t think any of them would exchange costs, but other than that no. be impossible, but from day one, for example, you Martin Potter: My answer, Chair, is that it would be would not have a capital market in the new Scottish difficult but not impossible. currency, and there is no issuance by the Scottish Chair: Difficult but not impossible: there are very few Government today. That would take time to build up. things in life to which that would not apply. That is one of the sorts of issues that would need to be addressed to achieve that matching. Q5081 Pamela Nash: But just because it would be difficult but not impossible, it would still leave a cost Q5074 Pamela Nash: Of the options, I do not think to the pension, wouldn’t it? anyone is advocating an informal usage of the euro Martin Potter: And risk. at all. Martin Potter: No; I just mentioned it for Q5082 Chair: Is that enhanced risk? What are the completeness. enhanced risks? cobber Pack: U PL: COE1 [E] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Ev 220 Scottish Affairs Committee: Evidence
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison
Martin Potter: The enhanced risks are what we have Q5089 Mike Crockart: Presumably, you as pension just described—that is, using a currency that bears no administrators would go for the least-risk option, and, relation to the cost of living or the value of what you if it was RUK gilts, that is what would be bought. own. David Davison: Not necessarily. It is driven by the individual scheme’s objectives. For example, if you Q5083 Mike Crockart: You talked about pension have a very young scheme with a very young average funds balancing liabilities and assets, and generally age and a very long duration to the point where you making sure they are in the same jurisdiction. In a are paying benefits, primarily you will invest it in sterlingisation scenario you would be using sterling, growth assets, not gilts, whereas if you have a very and therefore you would be backing that by UK mature scheme you will maybe invest more in non- bonds. growth assets effectively. The other drivers are the Martin Potter: There is a perfect matching currency. strength of the employer backing the scheme, because, even if you have a very mature scheme and a very A zero-risk asset for a pension scheme is generally strong employer, the employer will invest very much considered to be the UK gilt. It is absolutely not the in growth assets to reduce the cost of buying the case that every pension scheme is 100% invested in benefits, so it depends on the individual scheme. gilts. They invest for return overseas and in non-governmental debts, and I would expect that to Q5090 Mike Crockart: There is something in the remain the case in an independent Scotland. back of my head that I have not shared with you. The point I am trying to get to here is that, yes, lots of Q5084 Mike Crockart: But the non-risk part you decisions are made about the types of assets you would be looking at would be the gilts. invest in, but once you have got to the point where Martin Potter: In theory, yes. you want gilts, then you go for the least risky gilts, which, in the scenarios we have been talking about Q5085 Mike Crockart: Issued by the Government of with economists, are likely to be, certainly at the start- the currency in which they are held. Those would be up point for a Scottish Government, RUK gilts, RUK gilts that pension funds would be interested in because they have a long track record. If that is the buying to match up their assets and liabilities. case, what impact does it have on the ability of the Martin Potter: I lost you there slightly. Scottish Government to raise money to finance their Mike Crockart: I am struggling with this as well. debt? They will have to finance debt from day one Martin Potter: I think that for an entirely Scottish because they are running a deficit. If Scottish scheme, if we can define that—the risk-free matching Government gilts are looked on as being more risky, asset—in an entirely independent Scottish economy where do they raise their debt? with its own currency, it would be Scottish David Wood: If I can just throw out a question while Government debt. other people think of an answer to your question, would we look for the lowest risk assets or the assets Q5086 Mike Crockart: Yes, but in a sterlingised whose risks match the liability of the risk? If the latter, economy using sterling but not within a currency you might well have the balance of some Scottish gilts union, it would then be RUK gilts. Is it yes or no? and rest of the UK gilts because your liabilities are in Martin Potter: It would depend. If the Scottish relation to the Scottish economy. I would not necessarily conclude that it was all UK gilts that you Government were issuing debt, you would have to would be looking to buy. I don’t know whether look at what price they were trading at relative to rest anybody else has any comments on that. I might be of UK debt. That would tell you whether they were wrong, but I just leave that with you as a question. genuinely risk free, because both would be expressed Mike Crockart: Perhaps you can take that one away. in sterling. The markets might have a view that the I’ll give you some homework. Scottish sterling-denominated debt is more or less risky. Q5091 Pamela Nash: In your paper you also mention EU membership and I am sure you expected Q5087 Mike Crockart: Forgive me, but you are that might come up. What implications would there saying it depends really. be for Scottish pensions if Scotland couldn’t join the Martin Potter: It depends on the credit rating of an EU on independence, or even if there was a gap independent Scotland. between membership as part of the UK and its own membership? Q5088 Chair: All the evidence we have had is that David Wood: My initial reaction is that the cross- people would tend to see Scottish gilts, bonds and so border provisions would not kick into play, but they on in those circumstances as being more risky and might kick into play in a different way. We have not therefore require a higher premium. So what would be really researched or thought that one through. That is the consequences of that for pensions? Would there be a very difficult scenario, and there are lots of other any consequences, or would that be avoided? issues, such as VAT and the whole legal framework, David Wood: I think that is covered in the paper by than just pensions. the previous people who were here fairly comprehensively. Q5092 Chair: I understand that. Two whole issues Chair: They have gone, so we just thought we would have come out. One is the question of the ruling out ask you. of the common currency area, and the second is not cobber Pack: U PL: COE1 [O] Processed: [21-03-2014 16:03] Job: 038186 Unit: PG12 Source: /MILES/PKU/INPUT/038186/038186_o012_odeth_SAC 140305.xml
Scottish Affairs Committee: Evidence Ev 221
5 March 2014 Martin Potter, David Wood, Christine Scott and David Davison being able to join the EU right away. Quite a lot of Martin Potter: There is an awful lot of legislation on people have prepared papers and given consideration pensions that is driven by the EU, for example, on sex before these two issues became quite as prominent as equality, against discrimination and all sorts. That is they are now. That is why we wanted to see whether there already for the UK. Would an independent or not, in the light of these two issues, you have any Scotland setting up pension schemes be able to reflections or thoughts that you did not have at the disregard some of that and create schemes that did not time because they were not prominent. have those protections in them? I don’t know. Martin Potter: Many UK pension schemes pay pensions to people based overseas, and that is not a Q5094 Chair: Even if they did, presumably, if they problem. That would be the situation. If you had a subsequently wanted to join, they would have to rump of Scottish pensioners, you would carry on reinstate them, so realistically they are unlikely to do paying their pensions. They may continue to receive all that much drastically different. it in sterling, and if the new currency in Scotland did Martin Potter: I would agree; that seems a sensible something else that would be an issue. They may conclusion to reach. incur extra transaction costs to get it out of their bank. The difficulty would be with active members if Q5095 Chair: Okay; that has covered the points we Scotland was no longer an EU country. It is quite wanted to make. As we always ask at the end, are difficult for people in a non-EU country to remain an there any thoughts unexpressed, or any answers you active member in a UK scheme. UK tax regulations had prepared to questions that we have not asked? prevent that, because it is difficult for HMRC to check No? that people deserve the tax approval that comes with Martin Potter: No. I think you have pretty well being in a UK pension scheme. It would have to be covered everything. settled by taxation treaty. In terms of the security of Chair: You are too kind. On that happy note, can I their benefits, if it is a UK scheme, it is still backed thank you very much for coming along? by the sponsoring employer. That bit would not be different, so it becomes the practicality of whether the UK’s legislation would allow it, and the tax treaty could exist to make that happen.
Q5093 Pamela Nash: Is there other European legislation which impacts any private or public pension? cobber Pack: U PL: CWE1 [SE] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 222 Scottish Affairs Committee: Evidence
Written evidence
Supplementary written evidence submitted by Rt Hon Dr Vince Cable MP, Secretary of State for Business, Innovation and Skills. During my appearance before the Scottish Affairs Committee last week, you asked if I would write to clarify a number of points. The Committee raised the question of the costs of a possible cross subsidy to the postal service in Scotland that comes from the rest of the United Kingdom. I expressed during the session that Royal Mail does not provide its universal service on a regional basis. Its operations across the UK are an integrated network aimed at providing the universal service to all of the UK’s 29 million addresses and it does not currently separate out or hold data on the cost of doing so by region. So at the moment cost is looked at as a UK-wide concept and I understand it costs Royal Mail around £7 billion to provide the universal service in the UK. This position was also recently confirmed in oral evidence given by the Royal Mail’s Company Secretary, Jonathan Millidge, to a Business Innovation and Skills Committee (BISC) session held on the 17 June 2013. I have attached the direct Q&A excerpts -questions 71 and 72—from the BISC session for your information. I asked Royal Mail again to confirm that it cannot provide this information and it has reiterated to me that it does not have a breakdown of these costs; the Royal Mail network delivers the same obligations in Scotland at a uniform price as it does in the rest of the UK and these costs are looked at in their totality. The company has told me that it is not possible to provide a meaningful assessment of how much it costs to deliver the universal service within Scotland. Whilst there is no specific separation of the overall cost available, it is reasonable to assume that the revenues from mail delivered to high density areas enable universal services to more remote areas to be kept uniform and affordable. In an independent Scotland, the volumes and the ratio between urban and rural is likely to change, as opposed to looking at the UK as a whole, and this could affect the cost of posting a letter in Scotland—to both urban and rural areas. But I must emphasise that this is a general observation as Royal Mail does not have the regional cost breakdown. The cost of postal services in an independent Scotland would of course also be dependent on the postal framework that an independent Scotland chose to implement. Until the full details of this have been set out and agreed, which can only happen after a referendum, then it is not sensible to speculate on what that cost might be. The Committee asked the same question of the annual Post Office Network subsidy payment (£200 million for the current year). Again, I approached the Post Office to ask if there was any breakdown they could provide detailing how the subsidy was allocated to Scotland. However, they are unable to provide a breakdown. The annual network subsidy is a payment to Post Office Limited, which is not allocated out to individual branches, or discrete geographical areas but it supports the loss making branches throughout the Post Office network by going towards meeting the costs incurred by Post Office Ltd in the running of the network including fixed payments to branches, cash and stock provision, IT infrastructure, equipment etc. This point was made by Mike Granville, Head of Stakeholder Relations, at the same June 17 BISC session (excerpts attached). I am sorry that I am unable to provide the Committee with the figures requested but trust the Committee will appreciate the reason why this is the case. Finally, the Committee enquired about the amount of funding provided by Research Councils UK (RCUK) to researchers from abroad. As I explained during the evidence session, my Department, in co-operation with Scotland Office, are looking in detail at the research environment and the benefits to Scotland of the current UK approach. We hope to be able to provide you with some more detail on this issue in the near future.
Annex A JUNE 17 BISC SESSION EXCERPTS Excerpts from the Business Innovation and Skills Committee Evidence Session with Royal Mail and Post Office Ltd—17 June 2013 Royal Mail: Jonathan Millidge, Company Secretary Q71 Katy Clark: Both Royal Mail and Post Office are UK entities and therefore organise their finances at that level. But can you give some indication of the financial health of both organisations in Scotland? Jonathan Millidge: For Royal Mail we do not look at Scotland as a profit centre at all. We have an integrated network; we have the same obligations for delivering mail in Scotland as we do in the rest of the country. So we do not look at separating out the cost of Scotland because it is all integrated. There are networks that go between Scotland and England and Wales and Northern Ireland and so on and we do not disaggregate those. We have an obligation to deliver mail at a uniform price everywhere across the UK. We do not separate out the cost for Scotland in doing that. Q72 Katy Clark: But you know the demographics and the terrain in Scotland are very different. For example, I represent a number of island communities and have a very rural constituency and we know that it must be cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 223
more expensive to deliver mail in those kinds of environments. So even if you do not have the data, if you do not do the accounting in that way, could you inform the Committee of the general position regarding how Scotland compares and its financial health? For example, is it more expensive to provide services in Scotland? Jonathan Millidge: We do not break down how much it costs to provide a service in the different parts of the UK. We do have a massive undertaking there. We have 10,000 post boxes in Scotland that we collect from, for example, and 6,174 delivery routes. It is true that it is more expensive to deliver in rural areas than it is to deliver in urban areas. There are massive rural areas in Wales, for example, and also in England and Northern Ireland. So I could not give you a breakdown of what it is in Scotland. We do deliver about three times as much mail in Scotland as is posted in Scotland. So Scotland is a net importer of mail and that mail obviously then is delivered throughout the 16 postcodes that make up Scotland. But I am afraid I cannot say what the profitability of Scotland is. The universal service obligation that we deliver costs us £6.7 billion across the UK and it is profitable and we deliver in Scotland as we do elsewhere in the UK. I am afraid we do not have a breakdown of much it costs to deliver mail within Scotland.
Post Office: Mike Granville, Head of Stakeholder Relations Q74 Chair: Paul, you wish to supplement that. Paul Hook: Mike, did you wish to say something? Mike Granville: With respect to Post Office Limited, the position is that similarly we integrated across the whole of the UK. In Scotland we have just over 1,400 post offices. Of the post offices in Scotland-this is a point Paul made earlier-about two thirds of them would be classed as rural; another 10% would be seen as urban-deprived; the others urban. In terms of our economics, clearly we have Government-support funding, £1.34 billion, which I am sure this Committee has looked at in the past. It is a combination of network-subsidy funding and investment funding. If you take the network-subsidy funding for 2011–12, that was £180 million. Is it more costly to operate in Scotland? I think perhaps the way to look at it is that it stands to reason that small, rural offices are more costly to operate and Scotland has a high proportion of those than is the case in the rest of the UK. Similarly, as with Royal Mail, we do not separately account across different parts of the country. September 2013
Written evidence submitted by Dr Patrick Mileham Regiment and Corps Structure 1. The regiments and corps of the British Army constitute the uniformed manpower of the current Land Forces of the United Kingdom. They are divided by function into units of the Combat Arms (infantry, armour), Combat Support Arms (artillery, engineer, aviation) and Combat Service Support (logistics, equipment engineering, medical and other personal services). Many individual officers and soldiers of the Service Support Arms are integrated into units of the Combat and Combat Support Arms. 2. There is no separate Staff Corps, but the Ministry of Defence, Command Headquarters and functional directorates, educational and training institutions and schools (for instance Defence Equipment and Support, Defence Academy and RMA Sandhurst) are partly manned by members of designated regiments and corps. The direction and management of Army manpower and units is conducted by the Directorate of Force Development and Training, whose task is to provide for the balanced and integrated “capability” to deliver fighting power within the MOD’s Defence’s Comprehensive Approach (CA), which includes air and maritime capabilities.
Historical Development To 1660–1918 3. From 1660,1 the post-Restoration Regular British Army was based on voluntary2 service and, apart from the periods between 1916 and 1919, and from 1939 to 1960, has remained voluntary. From 1660 the constitutional authority for use and deployment of the Army and Royal Navy was the Monarch, but they were only legally permitted to exist by Parliament and when financially enabled to continue in service. Soldiers, sailors and airmen still owe personal sworn allegiance to the Queen and some details of their service, such as commissions granted to officers, remain within the Royal Prerogative. 4. The basis of formation of regiments from these early times was “proprietorial”. Colonels of regiments were commissioned and contracted to raise and maintain units for regular service, namely battalions of infantry and regiments of horsed cavalry. The latter during the twentieth century have become functional armoured units. 1 The Royal Scots, given 1st of Foot status from 1751, the year of numbering units by Royal Warrant, originated in Hepburn’s Regiment, having been originally raised in 1633 in foreign service. Another early regiment was Monk’s Regiment in the Parliamentary Army, which became the Coldstream Guards, taking its name from a town in Berwickshire. 2 Based on Common law, consolidated in the reign of Henry VIII under Royal Warrant, the Militia was the Constitutional Force for home defence within Counties, partly based on conscripted service. The story of Militia legislation in the parliaments of all three kingdoms is long and tortuous. The last instance of withholding of Royal Assent for a bill was in regard to Scottish Militia in 1708. cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 224 Scottish Affairs Committee: Evidence
5. Originally there were three separate national “Establishments”3 or official listings of regiments for England, Scotland and Ireland. While commissioned to serve the Monarch as Colonel in Chief, but paid through parliamentary procedure, the regiments preserved a remarkable independence of spirit until quite recent times. Some were highly idiosyncratic and fiercely proud of being “different”: many were recruited exclusively from groups depending on regional origin and social standing. 6. The Army reforms between 1868 and 1874 of Edward Cardwell (1813–1896, born Liverpool) and Hugh Childers (1827–96, Australian-British parliamentarian) of 1881 cemented the structure of the “regimental system” on a single Army Establishment, firstly for home defence. It was comprised of part-time Volunteer infantry battalion, Yeomanry Cavalry regiments, together with Militia and reservist battalions. For imperial defence. Regular Army regiments were re-formed as pairs of battalions, one of which was likely at any one time to be on overseas service, in defence of British interests and in support of colonial forces. The other was based at home for home defence and training. Infantry regiments were systematically linked to counties or named regional areas throughout the British Isles, so were the Volunteers and Militia units. 7. Changes over time in the regimental system, being the structure and infrastructure of the Army, matched that in society, being a gradual shift from “status” to “contract” (noted by Sir Henry Maine, 1822–88, Kelso born Oxford comparative jurist and historian). Men serving in the regiments adopted a personal, “exclusive” membership and well-defined “identity”. In peacetime transferring from one regiment to another was unusual, and for officers often frowned upon as breach of loyalty. (It is only in recent years that regiments have become “inclusive” institutions—in the modern-day, human rights associated usage of the expression.) 8. Further reforms under Richard Haldane (1856–1928, born Edinburgh) between 1906 and 1908 consolidated the Army after the lessons of the Boer War, enabling an “expeditionary force” structure. The Territorial Force (TF) of localized, part-time Volunteer battalions were confirmed for service within the United Kingdom, but individuals could volunteer if they so wished to serve overseas. The old Militia battalions became county/region Special Reserve battalions of named regiments.4 Thus was the all- volunteer British Army, comprising various local elements of infantry, but more widely recruited cavalry, artillery, engineers, and other functional corps, made ready to meet whatever contingencies should arise. 9. The reforms had been led by politicians and proved wise in the event. For the infantry, by far the largest of arms of service, the regimental system from 1908 allowed for rapid expansion to achieve a mass army for home defence and overseas service. However in 1914 Britain could only mobilize 711k men; contrasted with France who could immediately field 3.5 million; Germany 8.5 million; and Austria-Hungary 3 million.
Regimental System: Apogee August 1914 10. The German philosopher of war, von Clausewitz, writes famously of the “trinity of government, people and army”, the basis of a “continental model” of military service. Such a real national emergency, requiring home defence and foreign service in 1914 was wholly novel in Britain. However members of the TF volunteered in huge numbers to serve overseas and, from the first weeks of the war, numerous new battalions were raised at an astonishingly rapid rate by Lord Kitchener, and under the “Derby scheme” (instituted by the Earl of Derby), in all parts of the British Isles, including Ireland north and south. The regimental system, coped with an expansion of unprecedented scale. Within five weeks, almost 479,000 volunteers had joined for service. Kitchener required an Army of 3 million. By 1918, 4 million men were serving, even after losing 673k dead and missing and 1.6 million wounded. Even then a high proportion were still of original voluntary entry to military service. 11. The infantry regimental system,5 the basis of often intense competitiveness in attracting recruits, provided for the expanding TF and new armies the following capabilities and factors. It gave — The individual volunteers an immediate regimental affiliation and identity, strong enough to sustain them in mortal combat of long or short duration; — Local county/regional headquarters and depots; — Training systems and infrastructures; — Uniforms, Colours, badges, accoutrements, bands, and other perceived military paraphernalia of great significance, based on; — Regimental reputations and histories of previous generations, dwelling on battle honours and stories of endeavour from around the world, and; 3 The formation of the “Establishments” and regiments of the Scottish regiments of Infantry and cavalry can be followed in three works by Patrick Mileham, The Scottish Regiments, 2 editions, 1988 and 1996, Tunbridge Wells, Spellmount; The Yeomanry Regiments, 3 editions, 1985, 1994 and 2003, Tunbridge Wells, Spellmount; Chapter 6. “The Moral Component—The Regimental System”, in New People Strategies for the British Armed Forces, Ed. Richard Holmes et al., London, Frank Cass 2001. Also Iain Gordon, Bloodline, The Origins and Development of the Regular Formations of the British Army, Barnsley, Pen and Sword, 2010. 4 Soubriquet names, such as “The “Scottish Gunners”, are of recent origin to Assist recruiting. 5 The Scottish based regiments of infantry of the line in 1914 were (shortened names) The Royal Scots, The King’s Own Scottish Borderers, The Royal Scots Fusiliers, The Cameronians, The Black Watch, The Highland Light Infantry, The Seaforth Highlanders, The Queen’s Own Cameron Highlanders, The Gordon Highlanders and the Argyll and Sutherland Highlanders. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 225
— Local affiliation and support from “the people”, in Clausewitz’s prescription, as well as enabling the; and — Expansion of overseas Scots regiments/battalions in the dominions.6 12. All of these factors brought what is described as internal “moral cohesion”7 to units and the Army in general, without which even now, the energies of individuals cannot have corporate advantage in the activity of fighting against enemies. 13. The Scots Guards (formed in 1661) also raised a number of battalions during the two World Wars. The Royal Scots Greys, a cavalry regiment, however, did not expand to create further units of the same name. 14. These features and capabilities of the regimental system were of enormous significance at the time, and eventually provided enough strength and socio-military will-power to win the war in 1918. Each regiment developed further distinctiveness, idiosyncrasies and loyalties.8 The fact that it was a mass Army and involved society so deeply,9 as well as providing new historical events and stories, shows that August 1914 and November 1918 was a defining period in the history of military service of the British Isles. The regimental system became itself a legendary phenomenon. The whole population continued to believe in it strongly. Almost everyone was connected with a local regiment, particularly in Scotland. This meant that the British Army became a truly national army of great magnitude, never before having held so central a place in the constituent kingdoms of the United Kingdom. 15. So in the years between the First and Second World Wars all regiments and corps by association had a self-confident belief in the regiments themselves and acknowledged the strength of the system. In 1919 numerous battalions of each regiment could be easily merged or disbanded without disturbing “the regiment” itself. When expansion was necessary, that could be achieved too, as occurred in 1938–39. Above all, the regimental system proved a superb mechanism for organic continuity, and Army-wide regimental regeneration over time. Other corps modelled their practice on the same system as the infantry and cavalry regiments.
Second World War and Cold War 16. After 1919 politicians were disinclined to take war preparation seriously. Army reform was slow leaving Britain dangerously exposed in Europe and in the Far and Middle East. In 1939 conscription was necessary and the regimental system remained able to cope again with the rapid expansion of the Army. The balance between civilian workforce-military manpower and the balance of combat and supporting arms became much more difficult to plan for, particularly with advancing technological means of war-fighting. There were many man-power problems. Problems of willingness to fight and disruption in individual regimental sensibilities’ were experienced at times, notably during the so-called “Salerno mutiny”, after the invasion of Italy in September 1943, involving Scottish soldiers. 17. As Britain had been successful in two world wars, despite losing the Empire, after 1945 there seemed to be no deep necessity for a complete revolution in thinking about military affairs. The received wisdom about the regiments and the system remained until the 1960s, and through most of the Cold War. Fierce loyalties remained, sometimes taken to a non-sensical degree.10 Regimental idiosyncrasies were a means of maintaining recruiting and averting boredom during the Cold War. Service in operations in Northern Ireland confirmed the need for unit cohesion. Throughout the Army some regiments were re-formed into “large regiments” with amalgamations and comprising two or three battalions, not necessarily of the same name or region. Of these a number of regular Scottish infantry regiments were amalgamated, while others remained single-battalion until 2006. The Territorial Army (TA) developed too, with many name-changes, but it also reduced in size. The Royal Scots Greys amalgamated with another cavalry regiment (partly recruited from Wales) to form the Royal Scots Dragoon Guards. 18. In 1983, the Arnhem veteran, General Sir John Hackett wrote in his book, The Profession of Arms, “Some day I want to turn the ethnologists on to a study of the regimental system as a means of strengthening group resistance to stress. Their advice may well be that instead of a quaint and decorative traditional survival, we have in the British regimental system a military instrument of deadly efficiency”11. 6 For example the Glengarry Highlanders and Highland Light Infantry of Canada and (sic) the New Brunswick Kilties, the 16th Battalion (Cameron Highlanders of Western Australia), The Witwatersrand Rifles (affiliated to the Cameronians). 7 Moral cohesion’ is identified in the MOD’s British Defence Doctrine, Edn. 4, and William D. Henderson Cohesion: the human element in combat , Washington, DC, National Defence University Press, 1985, as well as Carl von Clausewitz’s classic book of 1833, On War . 8 Brigade and Divisional loyalties, based on groups of regiments, also developed distinctive loyalties, for example the 51st Highland Division and 52nd Lowland Division. 9 For instance the Seaforth Highlanders, who recruited in the North of Scotland, particularly Ross and Cromarty, Sutherland and Caithness were comprised of 10 Service battalions for overseas war service (with 8326 killed in action) and 7 for home service. The more populous areas provided many more, such as Liverpool and Manchester, who each provided more than 40 battalions for their two named regiments. Recruiting in and around Glasgow was spread across a number of separate infantry regiments. 10 In the very recent past one regiment was denigrated by a Lieutenant Colonel of another in print as “the auld enemy” . The author, well known to me, wasn’t joking. 11 Sir John Hackett, The profession of Arms, Sidgwick and Jackson, London 1983, p. 224. cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 226 Scottish Affairs Committee: Evidence
Thirty years later the system has evolved further matching modern society and today’s wars. It needs to be ready too for future society and the nature of future military operations.
Will-Power to Fight—Modern Military Capability12 19. Brief mention must be made of military doctrine, practice and particularly the primary role of armed forces which is to use lethal force, fighting if necessary on large scale operations and particularly wars of “national survival”. The “moral component” of fighting power is all about the strength of will-power within armed forces, above the daily routine of maintaining peacetime morale. Will-power of necessary magnitude to sustain soldiers in lethal and intense combat is known in British military doctrine as “fighting spirit”. Many mature liberal democracies do not have the necessary strength of will to engage in “wars of choice”, reserving their armed forces only for a possible war of national survival. Britain has consistently continued to be a nation categorized as deliberately adopting a defence policy of “power-projection”13 and NATO “territorial defence”, which may involve a war which is not directly of national survival but within the UN project, the Responsibility to Protect civilian populations from severe human rights abuse. 20. Over many generations Britain’s armed forces have attracted men, and more recently a greater number of women, who take on levels of considerable personal risk. Operations in Iraq and Afghanistan do not seem to have deterred recruiting or encouraged institutional avoidance of risk. The current death toll of Afghanistan (as of 12 October 2013) is 444, with upwards of 2000 wounded. 21. What motivates officers and soldiers, particularly for combat service? One has to be realistic. My judgment, based on many research interviews and discussions, is that modern-day soldiers enjoy the grim excitement, measuring themselves against their own determination and that of others. They draw their strength from small groups:14 they fight for each other, less so for the mission and the cause of liberal democracy or national sentiment. Asked how they conceive of the success of their last deployment, they tell me “to bring everyone back”. As Crown servants they accept their legal and moral position. They accept the explicit criteria of service, as their part of a “military covenant”, the need for “selfless commitment, respect for other people, loyalty, integrity, discipline and courage”.15 Over history one can detect such covenants, usually unstated, but they were prevalent in regimental rather than all-Army practice. 22. While such “values and standards” are variables of human behaviour, in recent years the British armed forces have performed with great strength of determination and exemplary will-power and, of course, the commendable spirit of restraint on operations within the law of armed conflict and spirit of universal ethical standards. The integration of many small fighting groups into a homogenous, powerful, “one-Army” imbued with “fighting spirit” and physical capability, is a significant meaning of institutional “integrity”, contributing the Armed consistently among the most respected of British institutions.
Civil-Military Relations 23. Personal loyalty to the head of state rather than a constitution is a particular strength of the British military tradition. Armed forces are identifiable features of nationhood, sine qua non the first duty of a government, that of providing security, cannot be fulfilled. Nationalism is comprised of many social and political phenomena, some superficial and others deeply held. Nationhood should not be merely introspective, it requires real recognition by other nations, just as institutional ethos has as a corollary, reputation based on hard facts. The re-invention of previously obscure or invention of hitherto non-existent traditions16 in military practice can be a hindrance to development of professional expertise to meet changing circumstances. 24. Does a nation want decorative, symbolic armed forces, or real, professional and functional ones, or both? Military parades,17 symbolism and visible traditions can have an uplifting, spiritual significance showing the integrity of the Armed Forces with the nation, far beyond the mere entertainment of audiences. The sentiment of soldiers belonging to a regiment has long remained, reinforcing the real operational capability. How vital or anachronistic are the symbols of national military sentiment today is a matter of judgment. 12 MOD British Defence Doctrine, 2008,defines the physical component—which includes manpower—and the “moral component”, which includes military will-power, or “fighting spirit”. The third component is the intellectual or conceptual capability, to make the whole of defence work in every detail up to the national interest, treaty obligations and for the security of the world. 13 Typologies are Power Projection, Territorial Defence (beyond homeland), Post-neutral (meaning heavy reliance of mass reservists in times of national emergency e.g. Sweden, Finland) and Neutral (e.g. Switzerland. See Challenges of Military Reform in Post- Communist Europe, by Anthony Forster et al., Palgrave, London, 2002. Britain has taken part in more operations than any other nation since 1945, according to The Human Security Centre’s series of Reports, University of British Columbia, published at various intervals by Oxford University Press, New York. 14 Patrick Mileham, “But will they fight and will they die?” in International Affairs, Royal Institute of International Affairs, Chatham House, Vol. 77, No 3 July 2001, pp. 621–629. 15 These formal “Values and Standards” were introduced in 2000. 16 The Highlanders were considered barbaric by the Lowlanders in Scotland, until the late eighteenth century. However Highland dress and tartan, the so called clan system, bagpipes and regimental customs were of huge use in the period of change before and during the First World War. The legend of Ossian does not survive academic historical enquiry. The notion of “clan regiments” was defeated at Culloden in 1745, when protestant regiments saw off the Catholic northern clans. However many regiments of all three kingdoms were strongly “clannish” with that adjective as as metaphor. See The Invention of Tradition. Edited by Eric Hobsbawm and Terence Ranger.,Cambridge University Press, 1983. 17 Patrick Mileham “Military Metaphysics, in Praise of Drill”, British Army Review, 130, Autumn 2002. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 227
25. In Britain the civil-to-military relationship is very strong, mirroring the commitment of military servants to the state. Where once this relationship was linked to regiments, it is now support of the whole-Army, the Royal Navy and Royal Air Force. The three Armed Forces have never before been so integrated in the work they do. The official articulation of a “Military Covenant” and “Armed Forces Covenant”18 is a recent development in doctrine, policy and practice. In return for faithful service, based on the criteria and values expressed above in para. 21, the other two constituencies of government and population have accepted the obligation of duty of care and faithful support of the armed forces. In practical terms the Community Covenants have fulfilled a useful and supportive need.
British Society and Defence Needs 2014–20
26. An army’s duty, as well as be prepared to and take part in operations and fighting, is to regenerate itself continuously. All the above considerations have to be taken into account in the annual recruiting needs of an existing army or one newly formed. Today’s regimental structure reflects huge changes in Defence needs and society, particularly over the last quarter century. Centralization and integration of the elements of defence from a previously decentralized, proprietorial system, has occurred. Fragmentary, exclusive loyalties and rivalries, and feelings of personal identity with historical entities, may already be outdated for a large part of the population in Scotland and other parts of Britain, although older generations may still hold on to the spirit and feelings that they recall from their upbringing and youthful experience. Whereas human nature might not change over the generations, motivation in daily occupational life is of the moment, of the present and, to use a modern term that is understood, “existential”.
27. Following the post-Cold War “Options For Change” and “Front Line First”, reviews and the Labour Government’s Strategic Defence Review of 1998, The “Future Army Structure” of 2004 made radical changes to the way in which Army formation and units were to be structured. The “large regiment” of infantry (referred to in para. 17 above), with a single regional or functional name comprising 2, 3 or 4 battalions, had been proved over many years to be more adaptable than the single battalion regiments. The new structure in the Army’s Order of Battle (ORBAT) of these large regiments was designed to reduce and eventually eliminate the hitherto routine practice of moving whole battalions and regiments from one garrison to another, usually from home to overseas or the reverse—a practice going back into history known as “arms plotting”.19 The expense of the constant annual movements was proving to be unaffordable and less necessary.
28. In 2006 all line infantry regiments became large regiments, being single entities with regular and Territorial Army (now Reserve) battalions, albeit some bearing subsidiary names of former, but now disbanded, regiments. This structure was confirmed in 2010 by the Coalition Government’s Strategic Defence Review. However, since the question of former regiments has been re-opened I should like to register that I first used the expression “trace elements” in 2001. In my subsequent research and understanding of battalions carrying former single regimental names I find this is confirmed to be an accurate description of the current position.
29. To be specific, the Royal Regiment of Scotland was formed on 28 March 2006. It was a “merger” of six named single battalion infantry regiments and two Territorial Army (TA) battalions. The antecedent names were retained as prefixes, the actual named regiments leaving the Army’s ORBAT on that day. Later that year the regiment reduced by one battalion. The battalions now are designated one to seven Battalions. On 1 July 2013 the 5th Battalion (Argyll and Sutherland Highlanders) of the Royal Regiment of Scotland was reduced to one Regular rifle company, “Balaclava Company”. The antecedent regiments continue as named entities, such as “The Royal Highland Fusiliers” and “The Black Watch” only so far as they comprise membership of individuals being discharged former soldiers, as well as charitable trusts, museums and event sponsorship.
30. However the serving Scottish regiments, namely the Royal Scots Dragoon Guards, the Scots Guards and The Royal Regiments of Scotland still faithfully embody the ideals of Scottish fighting soldiers. Many former regimental names have disappeared, particularly in the part-time Reserves.20 Individual members of the three regiments, both officers and soldiers, owe their personal allegiance to the Crown not Parliament. The Royal Regiment of Scotland is forging its own identity, ethos and reputation as the Scottish nation’s infantry regiment, in the same way that the Royal Regiment of Wales and Royal Irish Regiment are representatives of Welsh and Irish fighting soldiers. I hesitate to use the word “branding” for something of real substance. Being the most professional fighting Army21 amongst the liberal democracies of the world, understanding the British Army’s ORBAT means going-back to historical entities for a society that has moved on may not work. What was a strength a century ago—fervent inter-regimental competitiveness—is no longer so in today’s British Army. 18 See https://www.gov.uk/the-armed-forces-covenant ; Patrick Mileham, “Unlimited Liability and the Military Covenant” in Journal of Military Ethics,Vol. 9, Issue 1, 2010, pp. 23–40; and Andrew Murrison MP, Tommy This and Tommy That. The Military Covenant, London Biteback, 2011 which while dismissive of my views, is actually a compliment. The term covenant of course has historical reverberations in Scotland. 19 The practice of numerous individuals being moved annually to and between battalions, known as ‘trickle posting, had been long prevalent. 20 The Scottish Yeomanry existed in the TA only between 1992 and 1999. Two sub-units survive. 21 See Patrick Mileham, “Amateurs, Conscripts, Citizens, Professionals. How do modern armed forces measure up?”, Defense and Security Analysis , Vol 21, No 2, June 2005, one of several articles on the factors and features of professional armed forces. cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 228 Scottish Affairs Committee: Evidence
The Future 31. The future might hold no change in the British Army’s ORBAT for the foreseeable future. The regiments remain to meet the “Future Force 2020” requirements, which include an enlarged proportion of the “Reserves”, formerly TA. 32. In the event of an independent Scottish nation, the Ministry of Defence and British Army would decide whether it intended to retain a regiment recruiting from Scotland (like the Gurkha Rifles), or adopt a solution which works for the Irish Guards, in which Irish citizens can opt to serve in a British regiment. The three named regiments could remain in being, whatever the nationality of their members. The alternative would be to disband them or certainly reduce the Royal Regiment of Scotland to Regular only battalions. 33. A future government of an independent Scotland would have to decide on its needs for infantry and armoured elements; of Combat Support and Combat Service Support arms; as well as the whole structure of its armed forces. It is unlikely that the MOD would agree to the transfer of the three named regiments to a new Scottish ORBAT, or any currently serving individual members of those regiments or other arms from the existing British Army ORBAT. 34. If the regiments were disbanded, its soldiers presumably would be free to transfer elsewhere with in the British Army. A new Scottish Parliament could hardly disallow citizens to serve in foreign armed forces, including the British Army, if Scottish volunteers were accepted by other nation for military service. Individual and collective allegiances in a profession where life is endangered and moral ambiguities abound, are matters of deep significance and concern. I judge that current serving Regular and part-time Reserve soldiers and officers are unlikely to want their careers disrupted by retrogressive structural change to the Army they joined. It would be the end of their positive commitment22 and professional career. That having been said, new ways of regenerating the British Army have to be found, as I understand recruiting is currently not healthy. Quite severe Army reductions and an uncertain role for Future Force 2020 hardly help.
Conclusion 35. It is most unlikely in my judgment that a “yes” vote for independence would enable any real advantage to be gained from resuscitating the old regiments’ names. An independent Scotland would almost certainly have to form wholly new armed forces, as was the case in Ireland after 1922. The strength of retro-futurism has to be proven politically and socially before any institution can be based on ambiguous perceptions, and the tension between past and future. In my view, trying to reignite a retrospective brand of “fighting spirit” and restore a once strong, but in future likely to be uncertain moral understanding between the Scottish people and their fighting representatives would be extremely hard to achieve. October 2013
Written evidence submitted by the Ministry of Defence
At its Oral Evidence session on 19 March 2013 the Committee asked Mr Simon Lowe, an MOD official, for further information on various points. This memorandum responds to those requests.
1. Management Information available to Unit Registration Officers (Q 2852). Unit Registration Officers (UROs) have access to data, drawn from the Joint Personnel Administration (JPA) system, on how many personnel within their unit have entered information about their electoral registration. A sample return is enclosed at Annex A. In some cases information would also be available for sub-units (eg a company within an infantry battalion). As noted below, entering such information on JPA is entirely voluntary for the Service person. A URO will therefore be aware that it is neither a complete nor necessarily a reliable description of that unit’s level of registration. Nevertheless it is a broad indicator which can help the URO decide the appropriate approach for their unit.
2. Accuracy of the two-thirds figure (drawn from AFCAS) for those registered to vote (Q 2855) 3. Information on variation in registration levels between services (Q 2856) The annual Armed Forces Continuous Attitude Survey (AFCAS) asks questions of respondents on the subject of electoral registration. The results of this year’s survey were published on 25 July. A copy of the table showing what proportion of respondents stated that they were registered to vote is attached at Annex B. Across the three Services 69% responded that they were registered to vote. The equivalent figure for 2012 was 67% but this is not a statistically significant difference. 22 HMG’s Paper, Scotland Analysis. Defence, October 2013 explains this is detail. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 229
Respondents to AFCAS 2013 were also asked about whether they had registered as an ordinary, Service, or Overseas voter; their reasons for not registering to vote; the importance which they attached to voting in different forms of election; and the impact of efforts to encourage registration.23 AFCAS data is published according to Service and by officer/rank status. The results of the survey cannot be broken down further, because it is conducted using a stratified sampling process, and some units may not be represented. Neither does it enable us to determine how many of those registered as Service voters have appointed proxies. The total tri-Service AFCAS 2013 sample consisted of 26,077 personnel. Personnel are encouraged but not mandated to participate in the survey. The overall response rate this year was 48%. Details of the methodology used and the criteria for determining the accuracy of the results are contained in the AFCAS 2013 report, including the estimated standard error for each question. The samples were designed to provide sufficient responses to yield estimates with a standard error of no more than 1.5% by officer/rank status and Service. The full methodology is described in the report.
4. Who is responsible for the franchise arrangements as regards the eligibility of 16–17 year old service dependants to register via a parent’s service declaration form? (Qq 2869, 2880) Does this require legislative change or a change in the forms used? (Q 2879) The franchise arrangements for the forthcoming Scottish referendum are a matter for the Scottish Parliament. The Scottish Independence Referendum (Franchise) Act bases the franchise for the Referendum on the register of voters for local elections in Scotland, with the addition of 16 and 17 year olds who would otherwise meet the criteria for inclusion on the register, and makes provision for their registration. Currently, registration law does not provide for the children of those who make a service declaration to be entered on to the electoral register on the basis of a parent’s service qualification. However it is open to the Scottish Parliament to make arrangements for such children to be registered for the purpose of voting in the referendum. Legislation is currently before the Scottish Parliament to amend the Scottish Independence Referendum (Franchise) Act so that the 16 and 17 year old children of parents with a service qualification can register to vote as service voters for the purpose of the referendum.
5. Who is designated as the equivalent of the householder for SLA in barracks (Q 2888)? What barriers would there be to the CO being that person? (Qq 2889, 2891). What is the legal obligation on that person? (Q 2907) Single living accommodation in barracks does not constitute a household for the purposes of electoral registration. The legal obligation as to registration is described in the Electoral Commission’s report on the completeness and accuracy of electoral registers in Great Britain (published in March 2010), which states: “It is an offence not to supply information when requested to do so at the time of the annual canvass. While it is possible that fines can be issued where householders do not disclose the information, this happens very rarely in practice. Moreover, the law does not specify that any particular member of the household is responsible for responding to the canvass. While it is frequently assumed that this responsibility rests with the “head of household “, there is no definition of this term in electoral law and nowadays the term is less commonly used...” In the context of the discussion at Qq 2906 and 2907, therefore, we do not believe that we are breaking the law in this regard or condoning its breaking.
6. What information is available on service voters appointing proxies? (Qq 2894, 2896) There is no statistically reliable information on this. As noted in Mr Lowe’s oral evidence, there is a voluntary facility in the Joint Personnel Administration system (JPA) for Service personnel to record details about their electoral registration, such as when and how they registered and whether they intend to vote in person, by post, or by proxy. However, the recording of such information on JPA is voluntary. Many do not record this information and not all those who do so will keep it up to date. Given these limitations on JPA data it would not be a sound basis for estimating the numbers of Service voters overall who have appointed proxies. Nevertheless, Unit Registration Officers have access to the information which is available for their unit on JPA, as noted in response to question 1 above.
7. Examples of Literature (Q 2909) Examples of the leaflets and posters used in support of the annual campaign to encourage electoral registration are enclosed. 23 The responses can be found in tables 2.50 to 2.62 of AFCAS 2013, which is available online at: http://www.dasa.mod.uk/ applications/newWeb/www/index.php?page=48&thiscontent=700&pubType=1&date=2013–07–25&PublishTime=09:30:00 cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 230 Scottish Affairs Committee: Evidence
Annex A ELECTORAL REGISTRATION—SAMPLE OF INFORMATION HELD ABOUT SERVICE UNIT ON JOINT PERSONNEL ADMINISTRATION Information Entered on JPA Category Entered Number
Yes Decline to record registration details 11 Not registered to vote 45 Registered as a Service voter 65 Registered as an Ordinary voter 18 Registered as an Overseas voter 1
No 551 Total 691 cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 231 Annex B EXTRACT FROM ARMED FORCES CONTINUOUS ATTITUDE SURVEY, 2013 November 2013 cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 232 Scottish Affairs Committee: Evidence
Written evidence submitted by Rt Hon Alistair Carmichael MP, Secretary of State for Scotland THE IMPACT ON THE ARGUMENT FOR EXTENDING HIGH SPEED RAIL TO SCOTLAND OF SCOTLAND BECOMING AN INDEPENDENT STATE. At the Committee’s session on 23rd October you raised with me a discussion you had initiated with the Secretary of State for Business at an early session of the SAC; the likely impact on any potential for high speed rail to be extended north from Manchester in the event that Scotland became an independent country. Having very recently taken up my post as the Secretary of State for Scotland, at that time I offered to write to the Committee on this issue. I am clear that Scotland is stronger as part of the UK and the UK is stronger with Scotland in it. The UK Government is not making plans for independence and we have not undertaken analysis on the costs to an independent Scotland of a cross-border high speed rail line. For phases one and two of the HS2 project, between London, Birmingham, Manchester and Leeds, the costs will come from general taxation, paid by tax payers across the whole of the UK. The £3 billion current estimate of benefit to Scotland is based on journey time savings to Scottish passengers. As the Scotland Analysis Programme microeconomic paper points out, all potential transport schemes are assessed on their economic viability and value, and this is based on their costs and benefit to all UK nationals. In the event of a vote for independence, transport investments in the continuing UK that benefit an independent Scottish state may appear less attractive from the UK perspective, or could require substantial investment from an independent Scottish state. On Friday 1st November Baroness Kramer and I announced that HS2 Ltd have been commissioned to undertake a study to look at the broad options for building on HS2, to bring capacity and journey time benefits to Scotland beyond those already brought by Phases 1 and 2. This will include looking to cut journeys from Glasgow and Edinburgh to London to three hours or less. It is not possible at present to provide the Committee with a quantified, evidence based response to the question asked. Should Scotland vote for independence any decision to continue high speed rail from Manchester to Glasgow/Edinburgh would surely require it to be in the interests of each of the two states, Scotland and the remaining UK. Each state would need to decide whether the benefits of any proposal would be worth the cost and of course whether that cost, which would be substantial, was affordable. The Scottish Government’s current transport budget is approximately £1 billion. I hope the Committee finds the material in this letter helpful. If you have any questions I would be happy to provide further information where possible. November 2013
Written evidence submitted by Dr Andrew Murrison, Minister for International Security Strategy, Ministry of Defence I said on 12 November that I would provide the transcript for my opening remarks which we agreed I would not make since time was curtailed because of the bomb scare. Please find it attached; you may wish to include this in your evidence since your questions focussed largely on construction, rather than the Scotland Analysis Paper more generally. You asked what we are doing to promote awareness amongst Service personnel and their families of the voting options for next year’s referendum on Independence. In the New Year, we will conduct the annual campaign I touched on, organised in association with the Electoral Commission, to encourage electoral registration. It is an opportunity to remind members of the Armed Forces that the referendum is taking place. Additionally, we will shortly be issuing to all members of the Armed Forces a Notice which covers the voting arrangements for the referendum. It will set out who will be eligible to vote, including 16 and 17-year olds, and will remind personnel of the different ways in which they can register to vote, discussing the practical aspects of voting in person, by post and by proxy. As I said in my evidence, the most reliable method, for those unable to vote in person, is by proxy. The Notice will make clear that in order to be eligible to vote in the referendum, it will be necessary to be registered at an address in Scotland, and sets out the steps which members of the Armed Forces should take if they consider that they are eligible. I hope this is helpful but, naturally, stand ready to address any further points the committee may have.
OPENING STATEMENT FROM DR ANDREW MURRISON MINISTER FOR INTERNATIONAL SECURITY STRATEGY My name is Dr Andrew Murrison. I am the Minister for International Security Strategy at the Ministry of Defence, where I am responsible for Scottish Affairs. Additionally, I am the Prime Minister’s Special Representative for the Great War Centenary Commemorations. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 233
I served for 18 years as a Medical Officer in the Royal Navy leaving in October 2000 as a Surgeon Commander. I continued my service in 2003 when I was recalled to serve in Iraq. The “Scotland analysis: Defence “ paper analyses the UK’s approach to defence and the potential consequences of Scottish independence. Defence is a reserved responsibility of the UK Parliament and UK Government for the whole of the UK, as it is essential to the integrity of the state, and all people across the UK benefit from a common approach. The UK Government therefore provides for defence of the whole of the UK and all its citizens equally, acting on behalf of people in England, Scotland, Wales and Northern Ireland, as well as the Overseas Territories and UK citizens abroad. If Scotland were to become independent, it would leave the UK and its existing arrangements, and would need to establish its own defence arrangements as part of forming a new state. From a defence perspective, the arguments for Scotland remaining in the UK are extremely strong. As part of the UK, Scotland benefits from a very high level of security and protection provided through the UK’s integrated defence capabilities and network of international defence alliances and relationships, as well as from the opportunities for industry available through the UK’s single, domestic defence market and access to exports. An independent Scotland could not come close to replicating these benefits. As part of the UK, Scotland benefits from every pound spent on UK defence and from the full range of UK defence capabilities and activities. These defend UK airspace, patrol the surrounding seas and help to protect everyone in the UK against both natural and man-made threats. Scotland also benefits from the UK’s extensive defence engagement overseas to project influence and help to safeguard and establish peace and security in countries affected by conflict or instability, maintain competitive advantage and tackle security threats before they reach the UK. The UK has the resources and military capabilities to deal with multiple operations and to respond rapidly to support conflict prevention and resolution and humanitarian crises. It has one of the largest defence budgets in the world at around £34 billion, funding world-class armed forces, equipment and supporting structures and services. This includes a large and increasing presence in Scotland, including major Royal Navy, Royal Marine, Army and Royal Air Force bases and other facilities and, by 2020, 12,500 regular armed forces, which generates economic benefits for communities. Scotland, as part of the UK, benefits from the UK’s strong, established global network of international relationships and alliances. The UK has a geopolitical influence that few states of similar size can match. It is a permanent member of the UN Security Council, a leading member of the EU and a founder member of NATO. And it has an extensive and longstanding network of bilateral defence relationships, principally with the US and France, and with numerous other countries around the world. The scale of UK defence spending is a key factor in sustaining defence industry throughout the UK. The MOD spent over £20 billion with UK industry in 2011–12. Over the 10 years from 2012–13, the MOD will spend almost £160 billion on new equipment and data systems, and their support. According to Scottish Development International, the defence sector in Scotland employs some 12,600 people and has sales in excess of £1.8 billion per year. As an example, there are currently around 4,000 jobs in Scottish shipyards directly linked to the Queen Elizabeth Class aircraft carrier programme. And, as confirmed by the announcements made by BAE Systems and the MOD on 6 November, although there will be job losses at shipyards in Scotland as work on the Queen Elizabeth Class blocks finishes, BAE Systems has decided to focus its shipbuilding activity on the Clyde. Remaining part of the UK offers certainty for people in Scotland, of continuation of their security and defence as part of the UK’s comprehensive and effective existing arrangements and of the UK Government’s plans for continued investment in manpower, bases and other facilities in Scotland, as well as continued investment in military equipment. In the event of a vote for independence, an independent Scottish state would lose the benefits of one of the largest defence budgets in the world and of an integrated approach to defence that currently protects all parts of the UK, while offering significant economies of scale, as well as contributing to conflict prevention and resolution, and to humanitarian operations overseas. The start-up costs and complexity of establishing separate defence capabilities for an independent Scottish state would be very significant, and would need to be factored into the Scottish Government’s budget estimates. It is notable that the most optimistic Scottish Government proposed budget that we have seen of £2.5 billion for both defence and security (including intelligence and cyber) is only about 7% of the UK’s combined budgets for defence, intelligence and cyber. Assuming this estimated budget was adopted, this is less than cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 234 Scottish Affairs Committee: Evidence
Scotland’s population share of the UK. It is not clear what level of security and protection this would provide for Scotland; but it is clear that it would be much less than that provided to Scotland as part of the UK. In the event of a vote for independence by the people in Scotland, the rest of the UK would be the continuing state, retaining membership of international organisations. An independent Scottish state would be required to apply to and/or negotiate to become a member of whichever international organisations it wished to join. If it wished to be a member of NATO, all 28 member states would need to agree unanimously to its accession. Regarding the implications for defence industry, companies based in an independent Scottish state would no longer be eligible for contracts that the UK chose to place or compete domestically for national security reasons under an exemption from EU law. And where they could continue to compete, they would be bidding in a competitive international market dominated by major economic powers. They would therefore see lower domestic demand for defence goods and would lose the support to exports provided in key markets around the world through the UK’s considerable levels of international defence engagement and facilitated by the UK Armed Forces’ global reputation. In sum, our analysis strongly supports the UK Government’s firm belief that Scotland’s defence is best served by being part of the UK; and that the defence of the UK as a whole benefits from Scotland’s contribution as part of it. November 2013
Supplementary written evidence submitted by Professor Adam Tomkins, John Millar Professor of Public Law, University of Glasgow 1. I appeared as a witness before the Scottish Affairs Committee on 15 January 2014. During the course of the evidence I undertook to supply the Committee with further written evidence on what would happen to UK institutions, assets and liabilities in the event of Scottish independence. I indicated to the Committee that the Scottish Government’s independence white paper (Scotland’s Future) contained a number of legally mistaken assertions or assumptions in this regard. This note identifies and explains a number of these mistakes. 2. The background is that, in terms of public international law, what would happen in the event of a Yes vote in the independence referendum on 18 September is that Scotland would become a new State in international law and that the rest of the United Kingdom would continue as the “continuator” State. This position was authoritatively set out in the UK Government’s first Scotland Analysis Paper (Cm 8554, February 2013) and in the legal opinion co-authored by Professors James Crawford and Alan Boyle that was annexed to that paper. As I understand it, this legal analysis has not been seriously questioned by the Scottish Government since February last year. 3. The consequence of this is that institutions of the United Kingdom would automatically become institutions of the rest of the United Kingdom in the event of Scottish independence. Thus, for example, the UK’s security and secret intelligence services would become the security and secret intelligence services of the rest of the UK (“rUK”). The Bank of England is a UK institution. So is the BBC. As UK institutions they would not fall to be apportioned equitably between the rUK and an independent Scotland. 4. The UK’s assets and liabilities, on the other hand, would fall to be apportioned equitably between the rUK and an independent Scotland. The apportionment of the UK’s assets and liabilities would constitute a large part of the separation negotiations that would have to follow any Yes vote in September’s referendum. Whilst the details would be a matter primarily of political negotiation, those negotiations would take place within a broad framework of international law. International law provides a number of presumptions that are likely to shape such negotiations. Among these presumptions are the following: — The UK’s fixed property in Scotland (eg Government buildings) would become the property of the new Scottish State; conversely Scotland would have no claim on the UK’s fixed property in the rest of the UK or overseas. — The UK’s movable property in Scotland would become the property of the new Scottish State where it is specifically for local use. — Other assets and liabilities would fall to be apportioned equitably. This may be calculated by such means as share of population or, possibly with regard to the national debt, for example, by share of GDP. Historical contribution appears to be of no relevance: thus UK fixed property in Scotland would become the property of the new Scottish State even if its construction had been paid for UK taxpayers as a whole, and no compensation would be due to the rUK 5. Working out how these principles and presumptions would apply in the context of unpicking a 307-year- old Union is inevitably going to be a hugely complex task. 6. In the Scotland Analysis Paper on Defence (Cm 8714, October 2013), an indication was given of how complex these negotiations would be in the context of HM Armed Forces. In that Paper it was noted that “an independent Scottish State could not simply co-opt existing units that are primarily recruited or based in Scotland, as these are an integral part of the UK armed forces … While many military personnel and capabilities are located in Scotland, these do not operate in isolation; … they depend on close integration with cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 235
other capabilities, services and infrastructure spread across the UK” (p. 10 and para 1.85). Movable military and defence assets located in Scotland would not therefore become the automatic property of an independent Scotland. If they are integral to the defence and security of the UK as a whole they are not “specifically for local use”.
7. The Scottish Government’s independence white paper appears to be have been written without regard to the distinction explained above between institutions (on the one hand) and assets and liabilities (on the other). As a result, Scotland’s Future falls into legal error in numerous places. The following are among the key examples.
8. On the pound, the white paper states that “The pound is Scotland’s currency just as much as it is the rest of the UK’s” (p. 7). This is incorrect. The pound is Scotland’s currency now precisely because Scotland is part of the UK now. If Scots vote to leave the UK they will be voting to leave the UK’s institutions, including the pound. As we all know, Scotland could then seek to negotiate its way back into these institutions but the rUK would agree to this only if it was persuaded that it was in the national interest of the rUK do to so. And, as we further know, the current UK Government have indicated that it is “highly unlikely” that it would be in the interests of the rUK for it to enter a formal currency union with an independent Scotland, at least without a binding fiscal pact. As I sought to explain in my oral evidence, this does not mean that Scotland would be unable to use the pound: any State may use the currency of another State (as Panama uses the US dollar). But for a State to make this choice means that that State has no control over its monetary policy or interest rates: rather, these matters are effectively surrendered to a foreign power.
9. On the UK’s embassies, the white paper states that “Scotland would … be entitled to a fair share of the UK’s assets” (p. 13) and that “Scotland would be entitled to a fair share of the UK’s extensive overseas properties (or a share in their value) allowing us to use existing premises for some overseas posts” (p. 211). Again, this is mistaken. As explained above international law provides that State property would remain the property of the continuator State (here, the rUK) unless it was located in the territory of the new State (here, Scotland). In the Scotland Analysis Paper on EU and International Issues (Cm 8765, January 2014), the UK Government correctly state that “An independent Scottish state would not be entitled by right to any UK diplomatic premises, equipment or staff” (para 2.16). As the Government go on to state: “the legal position is clear: the bodies that support the UK now … would continue to operate on behalf of the remainder of the UK on the same basis as before Scottish independence. If an independent Scottish state wanted to continue to receive services from UK institutions or utilise them to carry out functions in relation to Scotland, that would be a matter for negotiation and would have to be agreed with the continuing UK” (ibid).
10. On defence assets, the white paper states baldly that “we will inherit a share of existing UK defence assets” (p. 234). While the white paper acknowledges that the matter will have to be negotiated, it suggests that Scotland’s share could be calculated based on population, giving it a share of assets worth £7.8 billion (ibid). As we have seen above, however, such a crude calculation overlooks the complexity of the fact that that which is integral to the defence and security of the UK as a whole might not fall to be apportioned with an independent Scotland at all. Working out what an independent Scotland’s share of the UK’s defence infrastructure would be is a more complex matter than simply dividing the UK total by Scotland’s population share and, moreover, is likely to result in Scotland’s share being markedly less than is assumed in the white paper.
11. Finally, on security and secret intelligence, the white paper states that “In the early years we will make a significant level of investment in setting up the [new Scottish security and intelligence] agency. Scotland, of course, already has a substantial existing capital stake, from our investment in UK intelligence infrastructure. We will expect investment to be recognised in the arrangements that are agreed with the UK as part of the independence settlement” (pp 266–7). Again, this is flawed as a matter of legal principle. Past investment and historic share are not material factors in determining how assets and liabilities should be apportioned equitably. Just as rUK taxpayers would not be compensated if UK property in Scotland became the property of an independent Scottish State, neither would Scotland’s historic contribution to UK institutions affect the fact that such institutions would simply remain those of the rUK in the event of independence.
12. Two conclusions may be drawn from the above analysis. The first is that core elements of the Scottish Government’s approach to independence are based on assumptions which are questionable in law. The second is that the costs of independence may be considerably greater than has generally been understood. If an independent Scotland would have no right to a share of the UK’s embassies and diplomatic services, for example, it follows that it would have to purchase, rent or build its own. The Scotland Analysis Paper on EU and International Affairs explained something of the increased costs that would have to be met by Scottish taxpayers in the context of Scotland seeking accession to the EU as a new Member State. It may be, however, that this is but one example of the hidden costs of independence—a matter which the Committee may wish to explore further in the course of its inquiries. January 2014 cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 236 Scottish Affairs Committee: Evidence
Written evidence submitted by Ian King, Chief Executive Officer, BAE Systems We announced on 6 November that we had recommended to the Ministry of Defence that Glasgow would be the most effective location in which to build the Type 26 Global Combat Ship, and that MOD had accepted our recommendation. We also said that we had made recommendations to MOD about investment in our facilities in Glasgow, with the aim of creating a world class warship design, build and integration facility. The current status of the Type 26 programme is that the major investment decision—known as Main Gate— will be made by MOD at the end of this year. The agreement we have reached with MOD has given us clarity and stability in our planning, and we are getting ahead with ensuring that the programme is sufficiently mature for MOD to make their Main Gate decision this year We have agreed with MOD that we would work on our current plan. We are not working on any alternative, or contingency, plan to the one agreed with MOD, and nor have we been asked to by the Department. It is for the Scottish people to determine the outcome of this year’s referendum on independence. In the event of a yes vote, and as we have made clear, we would be required to discuss the future of the Type 26 programme with our customer, the MOD. It would be for the MOD to determine how the vote affects the final decisions they have yet to make on the programme, including the future location of the build of the ships. We would take our customer’s lead in these circumstances, and work with them to deliver the best, most cost- effective outcome, in these circumstances. We cannot determine this outcome in advance, or without the direction of the MOD. We remain absolutely committed to delivering a world class complex warship capability as part of the Aircraft Carrier Alliance, and in the design and construction of the three OPVs, which MOD have announced that we should build, as well as the Type 26 Global Combat Ship. I hope this clarifies the position, and I am glad to have the opportunity to give a more detailed explanation of the comments reported last week. February 2014
Written evidence submitted by Alastair Sim Director Universities Scotland Thank you for your letter of 5 February, and I appreciated the opportunity to give evidence to the Committee. I have written to the Scottish Government saying that Universities Scotland would value sight of the Scottish Government’s intended “objective justification” of its policy on differential fees treatment of students based on their domicile. Universities Scotland’s publication “Universities in a dynamic constitutional environment, policy issues for consideration” (available at http://www.universities-scotland.ac.uk/) set out in November 2012 the priority which we attach to “Openness of Scottish universities to students from the rest of the UK on a basis which is: — financially sustainable for universities; — fair to students from the rest of the UK; and — manageable in terms of student flows”. It also noted that: “If undergraduate students from the rest of the (current) UK had the same entitlement as that currently available to undergraduate students from the rest of the EU, the total cost of fee and teaching grant provision for these RUK students has been estimated by the Scottish Government (October 2012) as approximately £150m (on the basis of around 20,000 RUK undergraduate students at Scottish universities, at an average teaching cost of £7,500 per year, see Scottish Parliament Question S4W-09932). In this scenario, these RUK students would potentially be competing with Scottish-domiciled students (as with current non-UK EU students) for university places funded by the Scottish Funding Council. Universities Scotland will welcome clarity from the proponents of all constitutional options about how they would support policies which ensure the openness of a Scottish university education to learners from all national backgrounds, in a way which is financially sustainable and which safeguards the availability of university places for Scottish-domiciled learners.” Universities Scotland therefore looks forward to sight of the Scottish Government’s full “objective justification” as soon as it is available, to enable us to understand in full the rationale for the Scottish Government’s policy. If the Committee requires further information on the Scottish Government’s position it can, of course, seek that directly from the Scottish Government. February 2014 cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 237
Supplementary written evidence submitted by James Brokenshire MP, Security Minister During the committee’s hearing on 8 January into the Scotland analysis paper on security I promised to write providing further detail on a number of specific points. These related to the UK’s National Cyber Security Programme, cross-border hot-pursuit arrangements, and the National Crime Agency’s specialist capabilities.
National Cyber Security Programme I undertook to provide a breakdown of spend on the UK’s National Cyber Security Programme (NCSP). The NCSP is investing £860 million over five years. The most recent annual report on progress published by the Cabinet Office in December states that during its first two years the programme has spent £260 million as follows: — £157 million to the security and intelligence agencies to develop the national capabilities to detect and defeat high end threats. — £31 million to MoD to mainstream cyber activity throughout defence. — £28 million to the Home Office to help law enforcement combat cyber crime. — £17 million to BIS on engagement with the private sector including work on cyber standards and advice. — £12 million to the Cabinet Office to improve the resilience of UK public sector networks. — £9 million on programme co-ordination, trend analysis and incident management. — £4 million on education, skills and awareness. — £2 million to the FCO on international engagement and capacity building. Planned spend for year three (financial year 2013–14) of the NCSP is as follows: — £86.6 million to the security and intelligence agencies for the national sovereign capability to detect and defeat high end threats. — £34.2 to the MoD to mainstream cyber activity throughout defence. — £29 million to the Home Office to help law enforcement combat cyber crime. — £9.6 million to BIS on engagement with the private sector. — £8 million to the Cabinet Office for education, skills and awareness. — £5.4 million to the Cabinet Office for incident management/response and trend analysis. — £3.4 million to the Cabinet Office to improve the resilience of UK public sector networks. — £2.2 million to the FCO on international engagement and capacity building. — £1.6 million to the Cabinet Office for programme co-ordination and policy. The categories support one another—for example, funding described above as private sector will also bring benefit to law enforcement to the extent it helps prevent cyber crime—but for the purposes of clarity, spend has only been allocated to one category. These figures do not include spending in support of cyber objectives that are not funded by the NCSP. Spending for years four and five has not been finalized as the NCSP reviews progress annually and will adjust spending to ensure that the overall programme is meeting the UK’s needs and keeping pace with a rapidly changing landscape.
Cross-border hot pursuit and arrest powers The committee sought additional information on cross-border hot pursuit arrangements. With regard to the UK’s land border with the Republic of Ireland, officers of the Police Service of Northern Ireland and the An Garda Siochana have no powers of arrest in each other’s jurisdiction, and there are no powers of cross-border hot pursuit operating across the international border. Within the UK the scope for law enforcement co-operation in the pursuit of suspects and fugitives from justice is considerable. The Criminal Justice and Public Order Act 1994 makes extensive provision for cross- border powers of arrest and detention.
Hot-pursuit between Scotland and England As regards the jurisdictional boundary between England and Scotland, the Home Office does not collect statistical data with regards to cross-border operations. What I can say is that cross-border police co-operation is extensive and that the border is in many respects a virtual one. In fact, both Police Scotland and Northumbria Police sometimes have to cross the border to attend incidents in their own areas due to the geography and the road network. cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 238 Scottish Affairs Committee: Evidence
The Scottish Government’s White Paper proposals The Scottish Government’s Independence White Paper concedes that European Arrest Warrant (EAW) arrangements would regulate matters between an independent Scottish state and the continuing-UK (assuming that it can negotiate successfully to join the European Union). Unfortunately, it would not deliver an outcome as effective or as efficient as the one enjoyed at present. The White Paper fails to address the bureaucratic effects created by the introduction of EAW arrangements between Scotland and the continuing-UK where none currently exist: of moving from an enforcement based model within the UK, to an extradition based model between two independent states. The overall effect, as I said in my evidence to the committee, would be one of introducing new bureaucratic hurdles between the respective criminal justice systems. Co-operation between states is not the same as integration within the UK.
Third sector concerns The ability of the police north and south of the border to combat sexual offences and domestic violence in the event that Scotland should leave the United Kingdom and become an independent state is something that has been raised with the UK Government by representatives of the voluntary sector working in this area. My colleague David Mundell mentioned that the issue arose as part of a programme of engagement he has been undertaking across Scotland with a variety of Third Sector groups on the questions they have in relation to the referendum. At one of these sessions, a voluntary organisation providing vital support and advocacy to female survivors of rape and sexual violence expressed concern about the potential for these issues to be made more difficult because of the Scottish Government’s plans for independence. In such cases victims need to feel confident that the police have the powers to apprehend suspected perpetrators quickly and efficiently. The knowledge that a perpetrator can use temporary residence in another state to delay or even try to evade justice adds very considerably to the distress and anxiety felt by the victims of such crimes.
The NCA’s specialist capabilities I turn finally to the question you raised about the National Crime Agency and your request for clarification on the capabilities that we believe would be lost or have to be replicated in the event of independence. As I mentioned to the Committee, the Government’s Security paper provides details at paragraph 3.17 and Annex B of the capabilities that are routinely accessed by Police Scotland. I appreciate the Committee is interested in costs, but we are not in a position to estimate the cost of providing those capabilities to Police Scotland. These are considerations for the Scottish Government. Furthermore, as we also mention in the paper, many of the capabilities that Police Scotland draw upon from the NCA are done so on a surge capacity, where the capabilities at the national level are used to supplement the capabilities of Police Scotland. As I said to the Committee, it would be a matter for the Scottish Government to consider if and how it should supplement the existing capabilities of Police Scotland to reflect the loss of the additional support that it can currently draw on from across the rest of UK policing and the NCA in the event of independence. I would expect few of these capabilities would require start-up costs but would rather be additional resources/capabilities for Police Scotland. To aid the Committee however, I have considered the capabilities again and I draw your particular attention to the following where the NCA is either the sole national provider or provides an EU service on behalf of UK policing: NCA as sole UK provider NCA capabilities which are required to meet EU obligations —Child Exploitation and Online Protection Command —UK Financial Intelligence Unit —UK National Centre for Counterfeit Currency —UK Human Trafficking Centre (running the National Referral Mechanism) —SARs Regime24 —Interpol/Europol liaison bureau services —Anti-Kidnap and Extortion Unit —Illicit Laboratory Team —Missing Person Bureau —International network25
Where the NCA is the sole UK provider, an independent Scotland would need to consider whether such capabilities needed to be replicated, or not. To take the Child Exploitation and Online Protection Command (CEOP) as an example, in the event of independence, CEOP would continue to have a relationship with Police Scotland, sharing intelligence and responding to requests. The nature of the relationship would be very different, and CEOP’s role in processing intelligence reports for Police Scotland would not continue in the same way. Whilst it would not be necessary for Police Scotland to replicate the CEOP model in full, the international 24 Suspicious Activity Reports—the regime for which flows from the requirement within the UKFIU 25 The National Crime Agency officers are one of a number of different international networks, the support from which can be drawn upon by Police Scotland. See paragraphs 3.23–3.25 of the Security paper. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 239
relationships that CEOP has established and its recognised training and education packages may need to be replaced by a specific response from Scotland in the event of independence. I repeat the point that I made to the Committee, Police Scotland works now to tackle serious and organised crime and it does so effectively—on its own and in partnership with the rest of UK law enforcement, including the NCA. The UK’s interests as a whole benefit as much from the efforts of Police Scotland as Scotland does now from the efforts of wider law enforcement. The issue is that if Scotland were to become independent, it would not affect what organised criminals do across the UK, but it would affect the collective law enforcement response to them, risking increased bureaucracy and hindering efforts which will only serve to aid the interests of criminals rather than the response of law enforcement charged with protecting the nation’s interests. I am copying this letter to the chairs of the Home Affairs Select Committee, and the Joint Committee on the National Security Strategy respectively. February 2014
Written evidence submitted by the Financial Conduct Authority Introduction 1. In the event of a yes vote in the 18 September referendum, the decisions on currency, banking union and EU membership would be decisions for the UK and Scottish governments. These matters would need to be resolved before the implications for conduct regulation could be properly considered. 2. As an independent regulator we are unable to comment on constitutional issues. This note is designed to help the Scottish Affairs Committee (“the Committee”) understand the current regulatory landscape including mechanisms for conducting cross-border financial services business (both within and outside the EU). The note also contains statistical information on the financial services industry in Scotland. However, it should be noted that FCA systems were not designed to capture data on a geographical basis and we are therefore limited in comparing regulated financial services in Scotland with the rest of the UK. The note: — outlines the role and powers of the Financial Conduct Authority; — explains how we regulate firms from other EU member states and from outside the European Union; and — provides some statistical information on our role in regulating the financial services industry in Scotland.
The Financial Conduct Authority and the Regulatory Landscape The current regulatory system 3. The Financial Services Act 2012, which came into force in April 2013, introduced the following model of financial services regulation. — HM Treasury is ultimately responsible for the UK financial system, its structure and the legislation that supports it. — The Bank of England is responsible for protecting and enhancing the UK’s financial and monetary stability. It has primary operational responsibility for financial crisis management and is responsible for oversight of payment, clearing and settlement infrastructure in terms of financial stability. It is also the UK’s resolution authority. Within the Bank of England: — Monetary Policy Committee (MPC)—responsible for monetary stability meaning stable prices and confidence in the currency. Stable prices are defined by the Government’s inflation target, which the Bank seeks to meet through the decisions taken by the MPC. — Financial Policy Committee (FPC)—responsible for contributing to the Bank of England’s objective of protecting and enhancing the stability of the UK financial system and, subject to that, supporting the economic policies of the Government including its objectives for growth and employment. The FPC has powers of direction and recommendation to both the PRA and the FCA in relation to financial stability. The FPC is chaired by the Governor of the Bank of England and the Chief Executives of both the PRA and FCA are FPC members. — Prudential Regulation Authority (PRA)—a subsidiary of the Bank of England responsible for promoting the soundness of the financial system and for the prudential regulation of deposit- taking firms, insurers and systemically important investment firms. — The Financial Conduct Authority is responsible for ensuring that relevant markets function well, for the conduct supervision of financial services firms as well as the prudential supervision of firms not supervised by the PRA. — The Financial Ombudsman Service—is the independent service set up by Parliament to resolve disputes between financial service providers and consumers. cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 240 Scottish Affairs Committee: Evidence
— The Financial Services Compensation Scheme—is the statutory compensation fund of last report for customers of authorised financial service firms. The scheme covers up to £85,000 of cash deposits with a firm, up to £50,000 of investments and 90% of insurance claims if the insurer goes bust per person per firm. — The Pensions Regulator—regulates all occupational pensions schemes and personal pension schemes and stakeholder pension schemes where there is a direct payment arrangement operated by an employer. — Money Advice Service—is a free independent money advice service set up by the Government.
The Financial Conduct Authority 4. We are the conduct regulator for around 26,300 financial service firms, of which 19,000 are UK Authorised and a further 7,300 are EEA Authorised. We are also the prudential regulator for 23,700 of these firms, with the remaining 2,600 regulated by the PRA for prudential purposes.26 From April 2014 we will be responsible for the regulation of consumer credit and estimate that this will bring 51,000 credit firms under our regulatory regime27. 5. Our strategic objective is to ensure that markets work well. Underpinning this are three operational objectives: — Seek an appropriate degree of protection for consumers. — Protect and enhance the integrity of the UK financial system. — Promote effective competition in the interests of consumers. 6. Parliament has given us wide-ranging powers to intervene in the operation of firms or markets, to achieve our statutory objectives. These powers include the ability to: — Grant, refuse, vary or cancel permission for firms or individuals to carry out FCA-regulated activities; — Impose requirements on firms to undertake or cease a particular action; — Take enforcement action against firms and individuals when regulatory standards are breached; — Block an imminent product launch or stop an existing product; and — Require firms to withdraw or amend misleading financial promotions with immediate effect. 7. The work of the FCA can be divided between five operational divisions: — Authorisations Division—responsible for the gateway for operating in the UK. It grants and varies permissions for individuals and firms and is responsible for the passporting of EU firms into the UK. — Supervision Division—responsible for the conduct supervision of all 26,300 regulated firms and the prudential supervision of the 24,600 firms not regulated by the PRA. — Enforcement and Financial Crime Division—aims to reduce financial crime and conducts forensic investigations into suspected misconduct and compliance failures. — Policy Risk and Research Division—acts as the organisation’s radar in terms of forward-thinking intelligence and analysis including our new approach to competition and consumer protection. — Markets Division—combines the above disciplines and helps deliver the FCA’s responsibilities for the supervision of market infrastructures, the formulation and negotiation of markets policy, the identification and investigation of markets abuse and the functions of the UK Listing Authority. 8. For supervisory purposes, authorised firms are divided into four categories based on the risk they pose to our statutory objectives. If a firm is regulated by us for both prudential and conduct matters, so not regulated by the PRA, it will have two categories (C/Conduct and P/Prudential).
Conduct Categories — C1 firms—the highest impact firms. These firms have a named supervisor and an annual risk assessment. There are currently 11 C1 firms across the UK. — C2 firms—medium high impact firms. These firms have a named supervisor and a biennual risk assessment. There are currently 111 C2 firms. — C3 and C4 firms are medium and small firms respectively. There are approximately 700 C3 firms and 17,000 C4 firms. These firms do not have a named supervisor but are supervised by a team of sector specialists.
Prudential Categories — P1 firms—are those firms which are prudentially critical and whose disorderly failure would have a significant impact on the market in which they operate. 26 Of firms regulated by the PRA, 1,700 are UK authorised with the remainder EEA authorised 27 Around two thirds of these firms will be new to FCA regulation cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 241
— P2 firms—are prudentially significant firms and their disorderly failure would have a significant impact on the markets in which they function but there is a smaller client asset and money base or an orderly wind-down can be achieved. — P3 firms—are those firms which are prudentially non-significant and their failure even if disorderly is unlikely to have a significant impact on their market. — P4 firms—are those firms which because of their specific nature or circumstances require a different approach to prudential regulation for example because they are in administration. 9. We are a member of the International Organisation for Securities Commissions (IOSCO), the European Security and Markets Authority (ESMA), and the Financial Stability Board (FSB). We also engage with other European and global standard setters where their work is relevant to our objectives. 10. The FCA is entirely funded through fees and levies from the firms we regulate. Budgeted expenditure for 2013–14 is £445.7 million, of which 60% covers staff costs.
European Regulatory Requirements and Passporting Overview of the regulatory structure 11. In order for a firm to carry on a regulated activity in the United Kingdom they must generally be an authorised person. In broad terms a firm can become an authorised person either by (a) applying to the FCA (or if carrying on a PRA regulated activity, the PRA) for “permission “ to carry on a regulated activity or, (b) if they are authorised in another EU28 member state to provide financial services, by “passporting “ into the UK. The passporting process reflects the principle of mutual recognition which underpins the single market: once a firm has been authorised to provide services in one member state, they are recognised as suitable to carry on that activity in another EU member state without requiring separate authorisation.
Financial services in the EU 12. A key part of the principle of mutual recognition is the application of harmonised standards across the EU. EU legislation covers most areas of financial services, for example the standards that apply to investment firms, banks, insurers and investment fund managers are all derived from EU legislation. This means that similar standards apply to those financial services firms no matter which Member State they operate and are authorised in. 13. In the event that Scotland was independent and part of the EU they would benefit from the principle of mutual recognition. Financial services firms which were authorised in Scotland would be subject to broadly the same standards as firms in the UK and would be able to passport into the United Kingdom and the rest of the EU either on a services basis (ie from a place of business in Scotland) or an establishment basis (by setting up an office in the UK). 14. In terms of the arrangements for supervising financial services firms which passport, EU financial services legislation broadly works on the principle of Home and Host State regulation. Host States (the Member State the firm is passporting into) are generally responsible for conduct of business regulation in relation to branches established in their territory. Home States are generally responsible for the supervision of systems and controls and prudential requirements. 15. The EU has also established a framework for supervising financial services firms termed the European System of Financial Supervision (ESFS). This comprises: — The European Systemic Risk Board (ESRB)—this conducts macro-prudential analysis at an EU level with the aim to monitor risks and potential threats to financial stability at an EU level. — The European Supervisory Authorities (ESAs)—three EU agencies, the European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pension Authority (EIOPA). In broad terms these develop policy making in financial services and aim to harmonise supervision of financial services in their respective areas. — National competent authorities—the financial regulators in each EU member state, which in the UK are the FCA, PRA and Bank of England. 16. One of the principal aims of the ESFS is to harmonise supervision of financial services firms across the EU. There are numerous mechanisms for achieving this, but they include obligations on national regulators to cooperate with regulators in other Member States, including sharing information, and the creation of supervisory “colleges “ where regulators of firms which operate in different Member States meet to ensure a consistent approach to supervision.
28 We have referred throughout this section to the EU. However, the same principles which govern the EU generally apply to a country which is part of the European Economic Area (EEA) (currently Norway, Liechtenstein and Iceland). cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 242 Scottish Affairs Committee: Evidence
Financial services from outside the EU29 17 A country outside the EU (often termed a “third country “) does not generally benefit from passporting arrangements. To carry on a regulated activity in the UK a third country firm must therefore apply to the FCA or PRA for permission to carry on that regulated activity. If such a firm wanted to carry on financial services business in more than one EU Member State, they would need to apply to the financial services regulators in each of those Member States to gain authorisation. Similarly, if a UK financial services firm wanted to conduct business in a third country it would have to comply with local requirements, which is likely to involve applying to the financial services regulator in that country for authorisation; this can impose significant costs. 18. The standards which apply to a third country firm operating in the UK depends on the sector in which they operate. In some cases, the position of third country firms is specifically addressed by EU legislation and would accordingly not be a matter solely for the UK. For example, the Capital Requirements Directive 2013 (CRD) provides that branches of third country banks shall not receive more favourable treatment than branches of credit institutions having their head office in the EU. This means that a branch of a bank from the United States must be subject to broadly the same requirements as a bank based in the UK. For those areas where EU legislation does not prescribe the standards which apply to third country firms, EU Member States have greater discretion to determine regulatory requirements. This means that in some sectors a third country firm could need to comply with different requirements in different EU Member States, again this would have cost implications for the firms involved. 19. Arrangements for coordinating supervision between the UK and third countries will either depend on the bilateral arrangements agreed between the respective financial regulators, or in some cases, will be governed by EU law. EU financial services legislation generally operates on a sectoral basis so the position would depend upon whether EU legislation has been made in relation to the particular activity and the arrangements (if any) such legislation prescribes for “third country “ firms. For example third country managers of alternative investment funds which wish to market their funds in the UK must comply with a number of requirements derived from EU law. 20. The FCA has agreed Memorandums of Understanding (MoUs) with many third country financial services regulators, these generally set our arrangements to consult, cooperate and exchange information in connection with the supervision of firms and markets which are relevant in each jurisdiction. These stop short of creating legally binding obligations, however under the Financial Services and Markets Act 2000 the FCA is under an obligation to cooperate with organisations which have similar functions.
Key EU Legislation — Alternative Dispute Resolution directive - will take effect in July 2015, requiring all member states to have ADR(s) in place for all sectors of the economy for consumers. — Market in Financial Instruments Directive (MiFID)—provides a single authorisation mechanism for investment firms. The directive sets down conduct and systems and control requirements. — Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR)—provides a single authorisation mechanism for credit institutions. Sets out prudential and systems and control requirements. — The Consolidated Life Directive: provides a single authorisation system for life insurers. The Directive sets down minimum criteria for home state authorisation including certain financial and consumer information requirements. — The Non-life Directives: provide a single authorisation system for non-life insurers. The Directives set down minimum criteria for home state authorisation including certain financial and consumer information requirements. — The Reinsurance Directive: provides a single authorisation system for reinsurers. Key provisions include the harmonisation of minimum standards across the European market and the abolition of collateral requirements (funds pledged to cover a reinsurer’s liability). — The Insurance Mediation Directive provides a single authorisation system for insurance intermediaries. The Directive provides certain minimum criteria for home state authorisation including skill and competence and certain minimum consumer protection requirements.” — Undertakings for Collective Investment in Transferable Securities Directive IV (UCITS IV)— Provides for a single authorisation mechanism for managers of “UCITS” funds. — Alternative Investment Fund Managers Directive (AIFMD) —provides a single authorisation mechanism for managers of alternative investment funds (such as hedge funds and private equity funds). Sets out prudential, conduct of business and system and control requirements. — Payment Services Directive (PSD) —sets out the regulatory requirements that Member States must apply to firms providing payment services in the EU. 29 It should be noted that WTO rules on trade in services also cover trade in financial services. The extent to which firms from third countries can access UK financial services markets may depend upon whether the third country is a member of the WTO and, if not, any bilateral trade arrangements with that country. cobber Pack: U PL: CWE1 [O] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Scottish Affairs Committee: Evidence Ev 243
— Deposit Guarantee Scheme Directive— requires EU Member States to establish a deposit guarantee scheme which reimburses depositors whose bank has failed. — Investor Compensation Scheme Directive—requires EU Member States to ensure that minimum safeguards are in place to compensate investors in the case of a failure of an investment firm.
The FCA and financial services in Scotland Authorised firms and approved persons in Scotland 21. There are approximately 1,150 authorised firms in Scotland with 56% of these in Glasgow and Edinburgh.30 These firms employ 9,287 approved persons though our records do not specify how many are based in Scotland. This figure does also not include the number of UK (ex-Scotland) firms that have offices or staff in Scotland. HM Treasury estimate that 85,000 people work directly in financial services in Scotland with another 100,000 employed indirectly.31 22. The firms authorised and working from Scotland cover a wide sectorial representation including banks, insurers, investment managers and intermediary firms which offer advice to customers on investments, mortgages and insurance. A detailed breakdown of numbers of authorised firms and persons in Scotland by region, sector and category can be found in Appendix 1. 23. The FCA is currently working through an interim permissions process for consumer credit firms. There are currently 2,031 Scottish firms with interim permissions for this type of business and the estimated final count for full permission in Scotland is 2,970. 24. There is one C1 category firm incorporated in Scotland and with its registered office in Edinburgh. There are seven C2 category firms with either their registered office in Scotland or their principal base of business there. Not all are incorporated in Scotland.
The FCA Edinburgh office 25. We have an office in Edinburgh based in Fountainbridge with 70 staff. The majority are supervisory staff and supervise a broad range of firms including banks, building societies, credit unions, asset managers, financial advisers, mortgage intermediaries, stockbrokers and general insurance intermediaries. From 1 April 2014, one of our supervisory teams responsible for consumer credit firms will also be based in Edinburgh. Other divisions such as Policy, Risk and Research, Enforcements, and Authorisations have a small number of staff working from the Edinburgh office. February 2014
APPENDIX 1 BREAKDOWN OF APPROVED PERSONS AND FIRMS IN SCOTLAND Category Primary Category Firms Approved Persons Advising and Arranging Intermediary (exc. FA & Stockbroker) 16 72 Advising only Intermediary (exc. FA) 2 8 Arranging only Intermediary (exc. Stockbroker) 7 60 Authorised Professional Firm 43 178 Bank (other than Wholesale only) 10 2,380 Building Society 2 9 CIS Administrator 5 37 Corporate Finance Firm 7 27 Credit Union 113 1,252 Custodial Service Provider 1 15 Discretionary Investment Manager 73 2,481 Energy (including Oil) Market Participant 2 41 Financial Adviser (FA) 427 1,409 General Insurance Intermediary 279 580 General Insurer 4 28 Home Finance Administrator 1 3 Home Finance Broker 86 98 Home Finance Provider 5 15 Life Insurer 17 328 Media Firm 1 2 Money Remitter 17 Non-discretionary Investment Manager 4 40 30 FCA records as at February 2014 31 HM Hovernment, Scotland Analysis: Financial Services and Banking, May 2013 cobber Pack: U PL: CWE1 [E] Processed: [21-03-2014 16:04] Job: 038186 Unit: PG13
Ev 244 Scottish Affairs Committee: Evidence
Primary Category Firms Approved Persons Personal Pension Operator 4 23 Service Company 2 10 Stockbroker 6 75 Venture Capital Firm 12 107 Wholesale Market Broker 1 8 (blank) 3 1 Total 1,150 9,287
Region Region Firms Approved Persons Aberdeen 83 555 Dumfries and Galloway 21 58 Dundee 40 201 Edinburgh 280 5,298 Falkirk 51 210 Galashiels (Tweed) 18 37 Glasgow 365 1,921 Inverness 42 135 Kilmarnock 50 129 Kirkcaldy 44 148 Motherwell 63 230 Outer Hebrides 5 16 Paisley 51 211 Perth 35 123 Shetland (Zetland) 2 15 Total 1,150 9,287
Sector Sector Firm Approved Persons Advising, Arranging & Dealing as agent 834 2,380 Custodians 11 78 Deposit Takers 125 3,641 Insurance Firms 21 356 Investment Managers 89 2,628 Mortgage Lenders 5 15 Payment Institution 17 Professional Entities 43 178 Trading, Clearing and Settlement Systems 2 10 (blank) 3 1 Total 1,150 9,287
Printed in the United Kingdom by The Stationery Office Limited 03/2014 038186 19585