Scottish independence: ‘Uncertain’ five years following Yes vote

Published on 20/06/2012 00:00

A FORMER adviser to Alex Salmond has declared that Scotland faces five years of economic uncertainty if it opts to leave the UK in the independence referendum.

Professor John Kay said Scotland would enter a period of negotiations and transition lasting until 2019 following a Yes vote in 2014, as it haggled with the rest of the United Kingdom and the European Union over its new-found status.

Prof Kay, who was a member of Mr Salmond’s panel of economic advisers from 2007 to 2010, said negotiations on the terms of independence alone would take three years to complete. A further two-year “transitional period” would then follow.

But the Scottish Government disputed his claims, saying independence would be “an entirely known and clear proposition” by the time of the vote.

In a damaging analysis of the claims made by the SNP about independence, Prof Kay added that one of the “bottom lines” of both the UK and the EU would be to prevent Scotland from lowering corporation tax rates, as the SNP has said it hopes to do.

He also warned that such were the constraints the UK would impose on Scotland in exchange for using the pound, that the country’s new-found independence would be “undermined”. Given that, he said, the best option might be for Scotland to create its own currency, similar to Denmark and Sweden.

He joined other experts at The Scotsman conference on “The Economics of Independence” in predicting that those negotiations made it difficult for any political party in Scotland to write a blueprint for a new country, given the huge say both London and Brussels would have.

His comments came yesterday as a new poll showed that support for independence has slid since January, with backing running at 35 per cent. The Ipsos Mori poll found that, among those certain to vote, 55 per cent said they would vote against the SNP’s plans.

Faced by such polls, SNP ministers have argued that the new country would stick with the pound, adopt UK financial regulation and maintain close links with the remainder of the UK.

Academics and business leaders at the conference yesterday warned that there remained a significant number of unknowns and the likelihood of a protracted period of negotiation and haggling after a “Yes” vote, with the shape of a new country emerging only then.

It came as the Treasury confirmed there has been no discussion with the Scottish Government on the use of the pound after independence.

Prof Kay, a visiting professor of economics at the London School of Economics, said that in the event of a “Yes” vote, there would be “about five years of considerable uncertainty as far as the Scottish economy was concerned”, both in terms of a negotiating period and a bedding-in phase.

He added: “There will be a fairly lengthy period of uncertainty and we have to ask ourselves how large these costs will be or whether the benefits will be worth it.”

On the detail of those negotiations, Prof Kay said that Scotland would, as a small neighbour to its main trading partner in the south, have only “limited” room for manoeuvre.

“The result of these negotiations would be very important to Scotland and rather less important to England and the rest of the EU,” he said.

On corporation tax, he said Scotland would not be able to copy Ireland by offering a low rate, because the rest of the continent would not want new competition.

Meanwhile, on the use of the pound, he warned that the rest of the UK would attach strings to any monetary pact in order to prevent Scotland overspending. “One would find that the terms would so undermine independence that one would not wish to pursue that particular outcome,” he said.

The likelihood of a long period of transition was also raised by another speaker, oil expert Professor Alex Kemp of Aberdeen University. He said that independence would entail the transfer of major responsibilities from UK departments to new Scottish versions which would involve “negotiations extending over a considerable time” after a “Yes” vote.

Meanwhile, Owen Kelly, the chief executive of Scottish Financial Enterprise, said it was now incumbent on those leading the debate to clear up issues such as EU membership in advance of the vote.

He told the conference: “Can we not find out now which of those interpretations of international law and the process of independence would take place? We really do think that this is key thing that we can know in advance of a referendum. And, actually, if you don’t know that, then so much flows from it then it really is a significant problem.”

The Scottish Government said in January that there “would be a transitional period to allow for necessary legal and practical preparations”. A Scottish Government spokesman said last night that, ideally, Scotland would invest its oil revenues rather than depend on it for current spending.

“Dependence on oil revenues for the national budget is very dangerous because of the volatility,” he added.

David Watt of the Institute of Directors said that, while there was uncertainty, it came mostly from the eurozone crisis. “But as far as whether businesses will stop investing in Scotland because it goes independent, I personally believe that Scotland is a place to invest in both now and for the future. As [Scottish industrialist] Jim McColl said, ‘I invest at the moment in 28 countries. If Scotland becomes the 29th, it won’t stop me investing’.”

Finance secretary John Swinney told the conference that, over the 30 years up to the financial crisis, “growth in Scotland had averaged 2.1 per cent against 2.7 per cent in comparable small EU countries and the wealth we have delivered for the UK has not been shared Instead, growth was squandered on an unsustainable boom that benefited the few rather than the many”.

Former chancellor Alistair Darling talked about the SNP’s assertion that an independent Scotland could keep sterling.

He said: “What you would have with independence is two separate countries, Scotland and the rest of the UK.

“It makes absolutely no sense and the key thing is that, as we see in Europe, if you have a common currency, it takes you inevitably to economic union and then political union. What is the point in leaving the UK only to come back a few years later with effectively political union again – it is just nonsense.”