Peter Jones: Counting the cost of independence

Keith Cochrane the chief executive of Weir Group said the tax system should be looked at in the round

Here’s an opinion that some of you won’t like. If Scotland votes for independence, some of Scotland’s biggest companies will move their headquarters out of the country. It’s an opinion, sure, but it is also as close to a predictable consequence of independence, backed up now by piles of evidence, as you can get.

I have held that view for quite some time, especially about the big financial firms. But I didn’t think it would apply to industrial concerns until I heard Keith Cochrane, chief executive of Weir Group, speak at a conference run by the Institute of Chartered Accountants Scotland last week.

Let’s be clear. Mr Cochrane did not say his company would move out of Scotland. He didn’t even mention the possibility. What he did say, however, was that independence would have a particular cost disadvantage for the Weir Group. This is a global company. Of its 15,000 employees scattered across some 70 countries round the world, only about 600 are in Scotland. The firm spends about £75 million a year in Scotland, which supports several hundred more jobs. An independent Scotland would therefore be very keen to keep Weir Group in Scotland, not just for the direct and indirect employment, but also for its foreign earnings which would help to boost Scotland’s current account, an important measure of a country’s viability.

Mr Cochrane said he had read the independence white paper with interest and had noted its proposals for improving the business environment in Scotland, including the idea of reducing corporation tax rates by up to three percentage points below the rate applicable in the rest of the UK.

Corporation tax, he said, was only one factor that any business considers when deciding to invest: “Weir is not headquartered in Glasgow by default. We have chosen to stay in our home city because it has proved to be an excellent location to grow a global business. We have access to highly skilled people, a business friendly and stable environment, and open markets.”

So, you may think if the main tax that the business pays got cut, that would make Glasgow even more attractive. Not necessarily, he pointed out, the problem being that Weir’s Scottish functions run at an overall loss. That should be no surprise, because the Scottish operations include running the global headquarters function which, since it mainly does sophisticated paper-pushing and bean-counting, is a big cost directly producing no revenue.

He said: “At the moment, we have the option to offset losses in one part of the UK with the profits we make in other parts. It’s a system called ‘group relief’ … but ‘group relief’ couldn’t survive independence because the current UK tax arrangements would no longer exist.

“At Weir, we estimate in 2013, the changes to corporation tax suggested by the Scottish government would have saved us approximately £400,000 but the flexibility offered by UK ‘group relief’ is worth almost nine times that figure – demonstrating why the tax system should be looked at in the round.”

Thus group relief, now saving about £3.6m, would disappear, with only a modest possible gain of £400,000, leaving Weir at best with a bigger £3.2m tax bill than it had pre-independence.

But Mr Cochrane was worried about a lot more than these costs. His company commissioned Oxford Economics, a perfectly respectable consultancy, to look at the much wider implications of independence, including all the currency options Scotland might face. “Our research says they would all lead to additional costs,” he said flatly.

Even the Scottish Government’s preferred option, assuming UK government objections could be overcome, and assuming even that Scotland got a seat on the Bank of England’s monetary policy committee, would incur costs.

Leaving the UK would mean leaving the fiscal union which offsets the effects of Scotland having an inappropriate monetary policy, for example high interest rates which depress employment, by making increased welfare payments, he argued.

Scotland would also gain control of North Sea oil and gas revenues which, at the moment, don’t significantly affect either Scottish or UK GDP growth. But, he said: “If Scotland had received a geographic share of North Sea revenues, a valuable but also volatile resource, the picture would have been dramatically different, with both economies diverging substantially. That means the UK’s monetary stance over that period would typically have been much less appropriate for Scotland, had we been independent.

“An independent Scotland could accommodate inappropriate monetary policy but it would probably mean more booms, where inflation rises sharply, and more busts where unemployment rises sharply.

“That would inevitably increase credit risk to sovereign debt lenders and therefore mean it would cost more for an independent Scotland to borrow – even in a formal currency union.”

Higher sovereign (ie government borrowing) interest rates means, inescapably, increased interest rates for individual and company borrowings, and increased pressure from financial markets and others in a currency union for borrowings to be reined in, which would inevitably mean either spending increases or tax rises.

So it is pretty clear that whatever upsides Mr Cochrane can see in independence, they are dwarfed by the downsides. His shareholders, mostly outside Scotland, can see that also. So it is entirely reasonable to imagine that his investors would demand that the Weir Group should relocate somewhere safer, probably England.

If he refused, they would either demand his sacking, or desert the company causing its share price to slump, making it an easy takeover target.

Similar thoughts must have occurred to other big companies. Indeed a phalanx of analysts from big international banks have been saying this about Scottish financial firms, where there is a particular worry about whether the Bank of England would continue to be the lender of last resort.

Some readers may say that we heard all this before at the time of the devolution referendum and the Yes vote then caused nothing to happen. Sorry, but you did not hear a complete range of economic, investment, and analytical consultancies and institutions all saying, with remarkable unanimity, these things.

Independence might make Scotland a great place for start-up and early stage businesses. But for established big employers it could make it, at best, a very uncertain place and at worst, a country to get out of.