’s Choices: update, 18 September 2013: one year to go

Since the publication of Scotland’s Choices on 18 March 2013, the details of the referendum have been settled and the campaigns have got under way. Both the UK government and the devolved have been heavily involved.

The referendum itself (Chapter 1)

The legislative and other arrangements for the referendum are now virtually complete. The necessary legislation is finishing its passage in the Scottish Parliament, which, as we recorded in Scotland’s Choices, was given the legislative power to do so by a Westminster Order under the Scotland Act 1998. After some to-ing and fro-ing about the wording, the question which has been agreed is a short and simple one: Should Scotland be an independent country? Legislation at Holyrood also determined who will be able to vote. The franchise will be based on the Scottish Parliament and local government election franchise, which comprises all residents on the electoral register, including citizens of other EU countries living in Scotland. The most significant change is that the Scottish government is extending the franchise to include young people over the age of sixteen (as opposed to eighteen at present). One item of controversy has been whether prisoners can vote. Convicted prisoners cannot vote in UK general elections, although this has been declared inconsistent with the European Convention on Human Rights by the Strasbourg Court. (The UK government, like its predecessor, has yet to deal with this.) However, this does not apply in relation to referendums and the Scottish government takes the firm view that prisoners should be forbidden from taking part in the referendum. This may be challenged in court, but the challenge seems unlikely to succeed. The referendum is being regulated by the Electoral Commission. They have already made recommendations on both the question wording and on spending limits for the campaigns and political parties (Electoral Commission 2013). On the question of wording, they tested out the formulation proposed by the Scottish government and suggested an amendment, which was accepted, resulting in the agreed question. They also set out spending limits, which will apply during the regulated period of the referendum (under the legislation this will be sixteen weeks before the vote). Each campaign can spend £1.5 million. The can spend £1.3 million, and the Green Party £150,000. The three pro- union parties can spend about £1.4 million among them. The Commission also designated two umbrella campaign organisations: ‘’ and ‘Better Together’. As we discussed in the book, the regulated period will be relatively short for a campaign which is effectively two years long, but the campaigns are making declarations of their donations voluntarily before then. All this means that the way is clear for a legally watertight and properly regulated referendum.

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Independence (Chapter 2)

Both sides have, as you would expect, focused principally on the case for and against independence. Much of the argument has been between the two governments, more than between the two campaigns. SNP ministers have been making the case in speeches and publications though they have not yet produced the White Paper on independence which will be the core of their case. It is now expected in the next couple of months. UK government ministers have similar been arguing for the union, and have produced several in a series of heavyweight ‘Scotland Analysis’ papers. More are expected.

The constitutional argument

A striking feature of the SNP campaign this summer has been the emphasis on interdependence rather than just independence. Indeed the First Minister has gone out of his way to talk about the ‘unions’ which independence will involve (see for example Johnson 2013). These include a continued shared monarchy, a shared currency and hence an economic union, a defence union (essentially continued membership of NATO) and a social union, whose terms are not well defined. We discuss the challenges to this approach in the book: essentially that the Scottish government is unable to commit others, notably the government of the rest of the UK, to these ‘unions’ on the terms the SNP describe. The Secretary of State for Scotland, for the UK government, dismissed this approach as simply politically motivated (see for example Carrell 2013). The government’s constitutional position was set out in the first of its Scotland Analysis papers, on devolution and the implications of (HM Government 2013e). It included a legal opinion to the effect that after Scottish independence, the UK would be the continuing state and Scotland would be a new one. This broadly accords with the analysis in Chapter 2 of Scotland’s Choices. Legal opinions, or their absence, featured heavily in the debate on Scotland’s potential position in the European Union. The Scottish government turned out not to have (as they had implied) legal advice that Scotland would remain an EU member state automatically. It seems likely that the White Paper will accept the view expressed by both the UK government and the President of the European Commission: that Scotland, as a new member state, would have to negotiate membership and its terms and conditions. The Scottish government would seek to complete these negotiations before independence, with the assistance of the UK government. The possibility however of a UK referendum on the EU membership became more salient as Conservative MPs pressed their party leader to provide for one, in a substantial rebellion over the contents of the Queen’s Speech. Although there does not appear to be a majority in the Westminster Parliament for such a referendum at present (Liberal Democrats are firmly opposed, and the Labour Party does not think the time right) an EU referendum in 2017 remains a distinct possibility. Some commentators have even suggested that this might be a reason for postponing the Scottish referendum, but this seems unlikely. However, the possibility does add a further uncertainty to the choice facing voters.

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The economic arguments

Much of the debate has been on the economic consequences of independence. The Scottish government argues that independence would make Scotland both richer and fairer (see for example Scottish Government 2013a). Their position is that an independent Scotland would become the eight richest country in the OECD (because the economic activity in the North Sea would be added to Scotland’s GDP; as we note in Chapter 2, this is just an arithmetical fact – no one would as a result be a penny better off than today). They argue that Scotland is already well off but is held back by membership of an over-centralised UK, and have proposed to promote economic growth under independence by having a corporation tax rate 3% lower that the UK. Scottish government modelling suggests that a 3% cut in corporation tax could increase the level of output by 1.4%, boost overall employment in Scotland by up to 27,000 jobs and raise overall investment in the Scottish economy by 1.9% after twenty years. The Scottish government has argued strongly that Scotland enjoys a stronger fiscal position (a ‘relative surplus’). Because of North Sea oil revenues Scotland has higher per capita tax income than the UK and this more than offsets the cost of higher public spending. This makes independence readily achievable, and independence would promote growth and increase tax income. Opponents seized on a leaked Cabinet paper by John Swinney which appeared to be planning for much less optimistic public finances than the public position (Jones 2013). What currency an independent Scotland should use has been controversial. Scottish ministers accepted the advice of a group drawn from their panel of economic advisers, which contains some very distinguished economists. They said that maintaining a sterling currency union would be right for an independent Scotland; and that the Bank of England should serve both countries, with governance arrangements including joint control over monetary policy and a fiscal pact between the countries, so that the currency would not be undermined by excessive public borrowing (Scottish Government 2013b and 2013c). In their view such an arrangement would be in the interests of both the UK and Scotland. The UK government takes a different view. The second of the papers in the Scotland Analysis series (HM Government 2013a) deals with the currency options for an independent Scotland. The options are essentially the same as in our Chapter 2: a sterling currency union, the unilateral use of sterling, a Euro currency union, or an independent Scottish currency. The paper argues that for an independent small country, there is a trade-off between being able to exercise monetary levers and having a stable exchange rate so as to reduce transaction costs for trade. It draws attention to the swift collapse of Czech–Slovak monetary union in the early 1990s (see Scotland’s Choices, Chapter 2). Monetary union, it suggests, works in the UK because there is a fiscal union and a political union to support and oversee it. The Chancellor of the Exchequer strongly hinted that continued monetary union after independence would not be in the UK’s interests for these reasons. Independent observers have been sceptical of the Scottish government’s plans. Professor Ronald McDonald, for example, described it as not a ‘credible option’ (McDonald 2013). In a paper for the David Hume Institute, Prof Brian Quinn argued that the complex

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governance arrangements proposed for monetary stability would not enable a swift response to be made to any financial crisis (Quinn 2013). Perhaps in response, the First Minister choose to restate his commitment to a formal monetary union on a visit to the Isle of Man, perhaps thus hinting that the option followed there, which is a form of unilateral use of sterling (‘sterlingisation’) would be an alternative. By contrast, the UK analysis largely dismisses this option, saying it would give the Scottish government only the most limited monetary powers. As we note in Scotland’s Choices, it would be very difficult for a country without a lender of last resort of its own to support a sophisticated financial services sector. Although the UK paper makes no recommendations, its implication is that a separate Scottish currency might be the best option for an independent Scotland. The UK government also published a paper on banking and financial services (HM Government 2013b). It pointed out that Scotland was highly dependent on financial services, more so than any part of the UK except London, serving customers mainly living elsewhere in the UK. It suggested that independence would put this at risk, as there would no longer be a single UK market for financial services, and that an independent Scotland would have difficulty in sustaining depositor protection for its two main banks (because they are so large, and would dominate any Scottish depositor protection scheme) and its pension funds. The banking sector would be an unusually high percentage of Scottish GDP, higher than the crisis-hit economies of Iceland and Cyprus. Both governments produced papers on the microeconomic effects of independence. The Scottish government set out a case for streamlining economic regulators in an independent Scotland (Scottish Government 2013c), both to reduce overhead cost and offer a more flexible regulatory framework. The UK government’s paper on the business and micro economic framework (HM Government 2013c) made a microeconomic argument for an integrated UK market and the benefits it brought to business and trade. The macroeconomic mirror image of that paper (HM Government 2013d) set out an abstract economic argument for the benefits of a single domestic market, and made an estimate of the size of those benefits to each Scottish household (about £2,000). It also dealt with the case for fiscal integration, which we discuss below under oil. A radically different view of what independence might be like, ‘Common Weal: a vision for a better Scotland’, was developed by the left-wing Jimmy Reid Foundation’ (Common Weal 2013). The economists Jim and Margaret Cuthbert have produced a report for Common Weal urging Scotland to adopt its own currency, warning that the conditions likely to be imposed by the rest-of-UK government before agreeing for Scotland to remain in the sterling zone might be ‘crippling’. They also suggest radical changes to the licensing and taxation of land, the seabed and whisky, which would become possible under independence (Cuthbert 2013). Similarly, a report of a recent seminar in the joint British Academy/Royal Society of programme stated that the interests of the parties might ‘make the negotiation of an acceptable monetary union between Scotland and the UK difficult’. It also explored the option of a separate Scottish currency, and warned that the example of Czechoslovakia (1992)

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showed that with full information and without capital controls, the level of the pound Scots vis-à-vis other currencies would be settled very quickly by the money market (BA/RSE 2013).

Defence and foreign affairs

Apart from the EU issue, the international implications of independence have not had such a high profile. The shift of SNP policy towards NATO membership while not just maintaining opposition to nuclear weapons but also having a constitutional prohibition on having them in Scotland, however, created substantial debate. Many unionist commentators, such as George Robertson (Cramb 2013), pointed out that NATO was a nuclear alliance, and that decisions on membership were taken by unanimity. Stuart Crawford (who has written on defence issues from a less unionist perspective) argued that a non-nuclear stance would cause Scotland’s membership to be delayed or blocked (MacNab 2013). The Scottish government’s defence plans were analysed in the round by the Henry Jackson Society in a notably critical report (Grant 2013). This claimed that the plans which had been announced were determined by electoral and not defence considerations (for example basing a Scottish navy at the former nuclear submarine base at Faslane, rather than on the east coast where it would be mostly needed to safeguard oil installations).

The options for more devolution (Chapter 4)

There has also been less attention to devolution policy, but a number of developments have taken place. Think tanks have developed proposals, and each of the main Unionist parties is undertaking a review. The think tank Devo Plus (associated with Reform Scotland) produced three papers arguing for greater powers for the Scottish Parliament, and in particular more tax devolution, adding up to a New Union (Devo Plus 2013). So far as possible, each of the two Parliaments serving Scotland should be responsible for raising the money it spends in Scotland, and devolving income and corporation taxes should be devolved. IPPR’s Devo More Project addresses similar territory. As part of that project, Trench 2013 suggests a financing system with a mixture of devolved and assigned taxes. In addition to the report of the Liberal Democrat Campbell Commission, referred to in Scotland’s Choices, we now have an interim report (entitled ‘Powers for a Purpose’) from the Labour Party’s devolution commission, chaired by its Scottish leader Johann Lamont. (One of the present authors has advised them.) It recommends devolving income tax, on a basis that would involve uniform administration throughout the UK, implying a common tax base. (Scottish Labour 2013). Labour argued strongly for the union, and in particular a common system of welfare. This report was nevertheless controversial within the Labour Party, with some Westminster MPs quoted in the press as being opposed, but it was endorsed by the Scottish Labour conference. The Scottish Conservative party has also set up a Devolution Commission, chaired by Lord Strathclyde, but it has only just started its work. A long-awaited development is the UK government’s response to the report of the McKay Commission on ‘English votes for English laws’ which recommended that:

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decisions at the United Kingdom level having a separate and distinct effect for a component part of the United Kingdom should normally be taken only with the consent of a majority of the elected representatives for that part of the United Kingdom. (McKay 2013)

It proposed complicated ways of doing this, which fell short of the widely canvassed idea of ‘English votes on English laws’ (EVOEL). Under EVOEL, Scottish MPs would not be allowed to vote at all on England-only legislation. This raises two problems. What is England-only legislation? And what if the withdrawal of Scottish MPs leads to the government failing to get its domestic legislation through Parliament? These are deep questions, and it is not clear whether McKay’s proposals get around them. The government response to McKay remains uncertain, despite hints from ministers that the key recommendations from the report are likely to be accepted. Perhaps connected, the government’s response to the Silk Commission recommendations on the fiscal powers for the Welsh Assembly government has also been delayed.

Social union (Chapter 5)

The Scottish government’s approach to pensions and welfare after independence remains unclear, though a paper on pensions is promised shortly. Scottish ministers have been emphatic that unpopular welfare reforms introduced by the coalition UK government would not be applied in an independent Scotland, notably the ‘bedroom tax’. However, its expert working group advising on welfare and independence argued not only (as we do in Chapter 9 of Scotland’s Choices) that there would need to be transitional arrangements to ensure continuity of benefit payment in the event of independence, but also that discussions should take place to consider whether there could be continued benefits administration across the UK (Scottish Government 2013e). It would be difficult to do that and run a radically different benefit policy. By contrast, former Prime Minister Gordon Brown argued very strongly for the social solidarity of a social union across the whole of the UK, saying that this was a ‘bigger idea’ than nationalism and that it, and the permanence of the Scottish Parliament, should be entrenched in the British constitution (BBC 2013). Much attention was attracted by a Report by the Institute of Chartered Accountants in Scotland (ICAS 2013) about occupational pensions. It drew attention to EU rules which required that pension schemes operating across borders in EU nations had to be fully funded in each nation, and suggested that as a consequence independence could require unaffordably large and immediate contributions to pension schemes in the UK which were presently planning to meet their deficits over a long period.

Oil (Chapter 8)

Inevitably the question of oil and the tax revenues accruing from it have featured very highly in the debate. The Scottish government’s position is that the presence of oil means that on any view Scotland is a very rich country. Scotland has the biggest oil reserves in the EU, nearly

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60% of the total. If North Sea oil is included, Scotland’s GDP becomes 118% of the UK average (though such a statistical change makes no one any better off.) The Scottish government points out that Scottish per capita tax revenues, including oil, have always as a result exceeded UK tax revenues. The question is what will happen in the future. The Scottish government says that the value of oil remaining in the North Sea is £1.5 trillion, and that more than half the North Sea’s oil and gas is still to be extracted. An Oil and Gas Bulletin of March 2013 offered the Scottish government estimates (Scottish Government 2012f). There were many uncertainties but the UK OBR’s method was, they said, the most pessimistic, and would result in approximately £31 billion in tax revenue over the six years to 2017–18. The industry could instead generate between £41 and £57 billion in tax revenue over this period. Taking the average of these new scenarios suggests that oil and gas production in Scottish waters could generate as much in the next six years as the last. The Scottish government’s advisory group recommended that because of the volatility of oil revenues and their finite life, an independent Scotland should set up an oil fund when it could afford to do so. It might even make sense to do that even when Scotland was borrowing to finance a deficit. The UK government’s macroeconomic and fiscal performance paper (HM Government 2013d) agrees with the principle of an oil fund but unsurprisingly takes a different overall line. Although its principal argument is that Scotland benefits from an integrated economy, and an integrated fiscal system, it also sets out an analysis of the Scottish fiscal position with and without oil resources. It concludes that the larger and more diverse UK economy benefits Scotland by absorbing the volatility of revenues, and thus gives some of the benefits of an oil fund. It claims that Scotland is currently very far from having the sustainable fiscal position that would make such a fund viable. Implementing an oil fund in a similar way to Norway would imply impossibly large cuts to public spending or tax increases (spending cuts of 19%, or onshore taxes rise of 27%). The UK paper is scathing about the optimism of the Scottish government’s oil revenue estimates, calculating that their least optimistic method overstated income by £800 million even for the year that was finishing just as it was published. Using industry-standard Net Present Value (NPV) methodology, the UK government values remaining North Sea reserves at £120 billion – one twelfth of the Scottish government number mentioned above (HM Government 2013d: Box 1B). Forecasting oil revenues is a very uncertain business, and governments are not disinterested. In an interesting sidelight, the 95-year-old former Labour Chancellor, Denis Healey, said in a press interview (with Holyrood magazine, May 2013) that the Labour government of the 1970s had ‘downplayed’ the potential of North Sea oil for fear of Scottish nationalism. It is hard to escape the conclusion that the SNP have all the political incentives to do exactly the opposite.

The academic debate

The independence referendum has produced a good deal of academic activity. The work of the Royal Society of Edinburgh and the British Academy referred to in Scotland’s Choices has

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continued with seminars on fiscal, and monetary, policy, defence, broadcasting and other issues. See http://www.royalsoced.org.uk for full details. The Economic and Social Research Council is funding a good deal of work which is now beginning to contribute to the debate Some of this can already be seen on an excellent website on the economics of constitutional change at http://esrcscotecon.com/. Individual universities are also holding events such as Dundee’s ‘Five Million Questions’ (www.dundee.ac.uk/pressreleases/2012/november12/fivemillionquestions.htm). An informative, and readily accessible, contribution to the economic argument is Scottish Independence, Weighing up the Economics (McCrone 2013).

The campaigns

Two campaign organisations are up and running. Yes Scotland is supported by the Scottish Green Party as well as the SNP. Its chair is a former Labour MP Dennis Canavan. Its website (www.yesscotland.net/) offers brief, punchy statements on the independence case, and on policy issues as well as material for campaigners. Better Together is a cross-party campaign chaired by former Chancellor Alistair Darling. Its website includes a long pamphlet by him setting out the case for staying in the UK (Darling 2013).

Where does all this leave us?

The debate so far has been an intriguing one. The Scottish government has been at pains to point out the opportunities of independence, but has found itself defending against detailed criticism of its policies, especially on the EU and currency issues. UK government papers and speeches have tried to be positive in tone, but the unusually detailed analytical work has concentrated on the risk and uncertainties of independence. The impact of the two campaigns has been more limited, though the centre of gravity is likely to shift towards them, and more traditional campaigning, as the referendum date nears. As we note in the book, Scottish public opinion is broadly split into thirds – for independence, for greater devolution and for the status quo. This has not shifted much. One opinion poll concluded that opinion would be shifted more towards No if further devolution were on offer. But despite a flurry of opinion polls as recently as this month, public opinion on the referendum question seems largely static. A helpful guide to the figures is at http://whatscotlandthinks.org/, where Professor John Curtice analyses the polling numbers (including some widely varying results). This is part of the ESRC-funded initiative mentioned above. But only one poll counts – the one in a year’s time.

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References

BBC News (2013), ‘Scottish independence: Brown in written constitution call’, http://www.bbc.co.uk/news/uk-scotland-scotland-politics-23928469 British Academy and Royal Society of Edinburgh (2013), ‘Currency, banking and financial services after the Scottish Referendum’, http://www.royalsoced.org.uk/cms/files/events/reports/2012-2013/currency-banking.pdf Carrell, S. (2013), ‘Scottish Secretary accuses SNP of retreat on independence’, Guardian, 28 August 2013. Common Weal (2013), ‘A vision for a better Scotland’, http://scottishcommonweal.org/ Cram, A. (2013), ‘An independent Scotland would have to “support nuclear weapons” to gain access to Nato, Daily Telegraph, 10 April 2013. Cuthbert, J. and M. Cuthbert (2013), ‘Economic policy options for an independent Scotland’, http://www.optionsforscotland.com/wp-content/uploads/sites/4/2013/09/independent- scotland-policy-options.pdf Darling, A. (2013), ‘We belong together: the case for a United Kingdom’, http://b.3cdn.net/better/8e048b7c5f09e96602_jem6bc28d.pdf Devo Plus (2013), ‘A stronger Scotland within the UK; improving social outcomes in Scotland; a new union’, http://www.devoplus.com/downloads Electoral Commission (2013), ‘Electoral Commission publishes its assessment of Scottish independence referendum question’, http://www.electoralcommission.org.uk/i-am- a/journalist/electoral-commission-media-centre/news-releases-referendums/electoral- commission-publishes-its-assessment-of-scottish-independence-referendum-question- and-its-advice-on-campaign-spending-limits Grant, G. (2013), ‘In Scotland’s defence – an assessment of the SNP defence strategy’, http://henryjacksonsociety.org/2013/07/02/in-scotlands-defence-an-assessment-of-snp- defence-strategy-2/ HM Government (2013a), ‘Scotland analysis: currency and monetary policy’, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/191786/Sc otlandAnalysis_acc-1.pdf HM Government (2013b), ‘Scotland analysis: financial services and banking’, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/200491/sc otland_analysis_financial_services_and_banking_200513.pdf HM Government (2013c), ‘Scotland analysis: business and microeconomic framework’, www.gov.uk/government/policies/informing-the-debate-on-scotlands-constitutional- future/activity HM Government (2013d), ‘Scotland analysis: macroeconomic and fiscal performance’, https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/236579/sc otland_analysis_macroeconomic_and_fiscal_performance.pdf HM Government (2013e), ‘Scotland analysis: devolution and the implications of Scottish independence’, www.gov.uk/government/uploads/system/uploads/attachment_data/file/79417/Scotland_a nalysis_Devolution_and_the_implications_of_Scottish_Independan...__1_.pdf [sic].

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ICAS (2013), ‘Scotland's Pensions Future: what pension arrangements would Scotland need?’, www.icas.org.uk Johnson, S. (2013), ‘Alex Salmond: independent Scotland will remain part of five unions’, Daily Telegraph, 13 July 2013. Jones, P. (2013), ‘Swinney’s secret report reveals a nation in debt’, The Times, 7 March 2013. McCrone, G. (2013), Scottish Independence, Weighing up the Economics, Edinburgh: Birlinn. McDonald, R. (2013), ‘The currency question’, Scotsman, 24 June 2013. McKay, Sir W. (chair), Report of the Commission on the Consequences of Devolution for the House of Commons, webarchive.nationalarchives.gov.uk/20130403030652/http:/tmc.independent.gov.uk/wp- content/uploads/2013/03/The-McKay-Commission_Main-Report_25-March-20131.pdf MacNab, S. (2013), ‘Scottish government–NATO talks’, Scotsman, 16 August 2013. Quinn, B. (2013), Scottish Independence, Issues and Questions: Regulation, Supervision, Lender of Last Resort and Crisis Management, Edinburgh: David Hume Institute, www.davidhumeinstitute.com/images/stories/publications/HOP/HOP_99.pdf Scottish Government (2013a), ‘Scotland’s economy – the case for independence’, http://www.scotland.gov.uk/Resource/0042/00422987.pdf Scottish Government (2013b), Fiscal Commission Working Group 1st report, Macroeconomic Framework, http://www.scotland.gov.uk/Resource/0041/00414291.pdf Scottish Government (2013c), ‘Currency choices for an independent Scotland’, http://www.scotland.gov.uk/Resource/0041/00414291.pdf Scottish Government (2013d), ‘Economic and competition regulation in an independent Scotland’, http://www.scotland.gov.uk/Resource/0041/00415411.pdf Scottish Government (2013e), Expert Working Group on Welfare Report, http://www.scotland.gov.uk/Publications/2013/06/8875/0 Scottish Government (2013f), Oil and Gas Analytical Bulletin March 2103, www.scotland.gov.uk/Topics/Statistics/Browse/Business/Energy/OilGas Scottish Labour Party (2013), ‘Powers for a purpose – strengthening devolution’, http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/18_04_13_scotdevoreport.pdf Trench, A. (2013), ‘Funding Devo More, fiscal options for strengthening the union’, http://www.ippr.org/publication/55/10210/funding-devo-more-fiscal-options-for- strengthening-the-union

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