SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

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Professor Gavin McCrone—Oral evidence (QQ 117–187) we have one UK regulator, or would they have to set up their own regulatory regime? If it was different, that is going to impose costs and— Professor McCrone: I think they would have to set up their own regime. Q149 Lord Forsyth of Drumlean: Would that not create an incentive for companies like the Royal Bank or other large financial institutions to have one regulatory regime by being based south of the border rather than north of the border? Professor McCrone: They would also have to have one in Scotland if they were operating in Scotland. Q150 Lord Forsyth of Drumlean: My point is: why would they want to operate in Scotland in these circumstances? Professor McCrone: What, at all you mean? Lord Forsyth of Drumlean: Yes, because the costs of running a regulatory regime are not insignificant. Is there a risk there? Professor McCrone: I think there probably is, and I think this could affect the insurance companies as well, like Standard Life and Scottish Widows, which do a substantial amount of their business south of the border. These are things that would have to be thought about quite carefully, because it could have major implications on employment in Scotland. Q151 Lord Forsyth of Drumlean: If you just take that slightly further to the macro view, a lot of people in England will say, “Well, if Scotland wants to be independent, that is a matter for them, and they can sort out their affairs and so on”. But, because of the importance of trade cross-border within the United Kingdom and also because of the extent of these financial institutions, in practice, if Scotland were an independent country, to what extent would it still be a problem for England insofar as, rather like the Royal Bank of Scotland was too big to fail, Scotland itself as an economy would be too big to fail? How could the rest of the UK Treasury prepare itself for that kind of situation? Professor McCrone: I had not really thought of that happening. I can see that there is a risk with the financial institutions and one would have to decide how they were going to be run. Lord Forsyth of Drumlean: Or if the oil price collapsed. Professor McCrone: Yes, if the oil price collapsed. I would assume that if the oil price collapsed, there would be one hell of a belt tightening in Scotland. The Scottish Government have said that the revenues from North Sea oil ought to be put into a special fund, like the Norwegians have done. I agree with that, actually. I wish, therefore, we had done that when we found the oil in the first place. In fact, I remember writing a paper for the Treasury at the time advocating that. But we did not do that and so we have been using our capital asset to fund current expenditure, which I think has been a bad thing to do. If we had had a fund like the Norwegians have, a sovereign wealth fund, our present situation would have been a good deal easier than it is, it seems to me. That is what the Scottish Government say they would like to do, but I do not see how they can do it in the present budgetary situation. They would have to get the economy really working a lot better and generating a lot more revenue before they could afford not just to use the oil revenues to balance their budgets. Q152 Lord Forsyth of Drumlean: Yes, because you cannot spend the money twice. 218
Professor Gavin McCrone—Oral evidence (QQ 117–187) Professor McCrone: No, you cannot spend the money twice. Lord Forsyth of Drumlean: The same argument applies with corporation tax. But just on my point, in practice, just as the freedom for manoeuvre for the Scottish Government in terms of fiscal policy would be limited, looking at it from the other side of the border, is it wrong to imagine that Scotland would no longer be the rest of the UK’s problem? I think the UK would have a very considerable economic interest in what was happening to an independent Scotland north of the border. Just as, conversely, the Scottish Government’s freedom for manoeuvre would be rather limited in practice, the rest of the UK would still carry responsibilities for what was going on in Scotland. Is that wrong? Professor McCrone: I am not sure. I do not think the UK Government has worried very much about what happens in Ireland as an independent country. Lord Forsyth of Drumlean: We have just lent them— Professor McCrone: I know, yes. That is true, but generally speaking I do not think it has made a great impact. I think you have to assume that Scotland might get into some terrible mess before you think that would happen. Q153 Lord Forsyth of Drumlean: If we imagine, for example, that we had not had the economic crisis, Scotland became independent, the Bank of Scotland and HBOS were still there, and the financial crisis came along, Scotland would be in very grave difficulty. It seems to me that when people who say, “Well, that would be a matter for the Scots”, it would be very difficult for the rest of the UK. Professor McCrone: No, that is quite true, but if they had had the wisdom to ensure that NatWest was a subsidiary and Halifax was a subsidiary, then it seems to me that the main burden of dealing with that would fall on the Government in London. Q154 Lord Tugendhat: We can see the parameters of the issue that Lord Forsyth is raising in what happened in the case of Ireland before Christmas. Ireland got into very serious difficulties, the British Government decided that Ireland was in a different category from other eurozone countries and that Britain would give a helping hand. But the helping hand was not as big as all that, and the decision was quite a controversial one. I personally supported it, but not everybody did. A lot of people felt that, since the Irish had chosen to go into the euro, they should live with the consequences. It seems to me that the parameters are very similar in this case. If the Scots have decided to go their own way and feel they can run things better by themselves than as part of the United Kingdom, I suspect that British political opinion would not be feeling particularly generous. No doubt if there was a catastrophe some help would be forthcoming, but I suspect that the more the Scots have talked about how much better they could run things by themselves, the less willing the English would be to help if anything went wrong. Professor McCrone: Yes, I am sure that is true. In the case of Ireland, I think the British Government did it mainly out of self-interest rather than altruism, I suspect, because Ireland was an important economy as far as the UK economy is concerned and the links between the two. It did not want Ireland totally impoverished, because that would affect British trade with Ireland, and that would apply to Scotland as well. But that would be the sort of basis— Q155 Lord Tugendhat: Absolutely. But whereas I thought it was a very good idea to support the Irish, I recollect there were a lot of people in the House of Commons who took a contrary view. 219
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