DEP United Kingdom Parliament

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                                  SPEECH BY
               THE SECRETARY OF STATE FOR SCOTLAND
      SCOTTISH FINANCIAL ENTERPRISE BREAKFAST BRIEFING
                      ROYAL SOCIETY OF EDINBURGH
                      THURSDAY 23rd JUNE 2011 08:30


Good morning.


Thank you for the opportunity to be here today at the Royal Society of
Edinburgh at this Breakfast Briefing for Scottish Financial Enterprise.


I was reminiscing earlier that it is more than ten years since I was first elected,
at a time when the original Scotland Bill was being considered. Then we were
debating the very significant constitutional changes that were facing us in
Scotland and the rest of the UK. Some things never change, it seems.


I am very grateful to Mark Tennant and Owen Kelly for inviting me here, and it
is good to see so many familiar faces from Scotland’s financial services
community in the audience.


My theme today is “Scotland’s Future: The Economy and The Constitution”.


They may sound like rather theoretical or academic topics. But fundamentally,
what I want to talk about this morning is this.


It is about how Government, business and individuals can work together in
partnership, to create a better future for Scotland and the rest of the UK.


It is about who is best placed to take on the many different responsibilities that
fall to us, as we seek to turn Scotland’s economy around, and create the
environment in which businesses and families can prosper.


And it is about how we carry on the debate around those issues, in a way that
meets the expectations of people across Scotland.
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These are all issues that deserve serious debate.


Debate founded on evidence, carefully considered positions, and a broad
spectrum of voices, using the language of respect.


But in my view, we are currently failing in our duty to have that debate.


Too much of what we have heard in Scotland around the constitution and the
economy to date has been founded on unsubstantiated claims and
implausible scenarios.


So today, I want to suggest to people from all walks of life – politicians, the
financial services community, the wider business community in Scotland, and
people in their homes and at work – that we should give Scotland the debate
about the economy and the constitution that it truly deserves.


I don’t need to tell people in this particular audience how important these
issues are.


You are all representatives of a sector that, despite its recent troubles,
remains one of the key engines of Scotland’s economy.


Last week I was in Brussels, where I met with Commissioner Barnier and his
Chef de Cabinet. During talks on the Commission’s proposals for regulatory
reform, I impressed upon them the uniqueness and importance of Scotland’s
financial services sector.


More than 90,000 people employed here in Scotland – that’s about 1 in 10
Scottish jobs. The sector contributes a hugely significant £7bn of Scotland’s
GDP.
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We have here a profile that distinguishes Scotland from the City in London,
with strong and deep expertise in banking, alongside life insurance and
pensions, asset management, general insurance and intermediation services.


Your sector has of course been hit by the financial crisis – some parts
spectacularly so. And as many of you would acknowledge, many misfortunes
were brought upon the sector by itself.


But where elements of the financial services sector were very much part of
the problem before, you are now – you must be – very much part of the
solution.


Your efforts are absolutely vital to Scotland’s ability to grow its economy – and
the financial services sector is itself showing signs of recovery.


Assets under management in Scotland have grown from £600 billion to £750
billion in the last few years.


In asset servicing, recent announcements from State Street, BNY Mellon and
Barclays Capital have all involved sizeable job numbers.


You provide the banking services to the businesses that help the economy
grow; mortgages to individuals seeking to buy their own homes; and pension
funds so we can have a secure retirement.


The debate about Scotland’s future cannot take place without your voice
being heard.


So let me set the scene for that debate.


We – all of us – are faced with a toxic economic legacy from a global financial
crisis, and our deepest peacetime recession.
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First, there is the deficit. In 2009, the UK had the largest gap between tax
revenues and spending in peacetime history. The state was borrowing one
pound in every four that it spent.


Britain’s net debt has risen from around 37% of GDP before the crisis to 60%
of GDP today.


Last year, just paying the interest on this debt cost the Government £120
million a day.


On any measure, borrowing at this rate is not sustainable.


The collapse in tax receipts from the financial sector between 2008 and 2009
was a critical feature of this: but our huge fiscal deficit is also a consequence
of deeper, structural problems at the very core of our economy.


The economic model pursued previously, in Scotland and the rest of the UK,
was unbalanced and implausible.


When we cared, or dared, to look, it rested on an evangelical belief in the
singular capacity of the banking sector to drive growth, and in rising property
prices to create wealth.


It was more financial alchemy than economic science.


At the same time, business investment stagnated, damaging long term
productivity and leaving our basic infrastructure deficient. We lost a swath of
manufacturing.


“Fiscal prudence” involved paying for growing public expenditure through what
amounted to windfall taxes on the financial sector and property transactions.


And now, all that has unravelled.
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As a result, Scotland, in common with the rest of the UK, is a poorer country.


From its pre-recession peak to its lowest point in the recession, Scottish GDP
fell by nearly 6%.


And faced with these testing circumstances, which are being compounded by
external shocks, there cannot fail to be an impact on living standards, and on
the ability of government at all levels to pay for services.


These are the realities we face as we try to turn things around, rebalance our
economy and our public finances, and build a better future for Scotland and
the UK.


There are signs of recovery. Recent Scottish economic data are mixed, but
there are some encouraging areas:


      Survey evidence suggests foreign investors are creating more jobs in
       Scotland than anywhere else in Europe, and at levels not seen since
       the start of the recession. 69 foreign investment projects last year – a
       35% rise on 2009 – creating more than 4000 jobs.


      And the most recent Lloyds TSB Scotland Business Monitor showed
       the most positive results in three years, with 33 per cent of firms
       reporting increased turnover.


But to build on those positive signs, and turn a choppy recovery into a
sustained one, we – all of us – need to maintain a laser-like focus on the
economy, and our activities in support of it.


So how do we do get out of this economic mess?
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If you were to listen to many of the utterances made by politicians in the
Scottish media, you might be forgiven for answering that question by saying:
“It’s the constitution, stupid.”


Certainly, the new Scottish Government has been giving the issue a very high
profile during its first month and a half in power.


Its first action after the May elections was to call for further changes to the
constitutional arrangements that govern the relationship between Scotland
and the UK.


While I entirely respect the right of the Scottish Government to raise these
issues, I would respectfully disagree with the emphasis they are placing on
them.


But given that that is where we are, let us look for a moment at our current
constitutional arrangements, and the way in which they shape our action on
the economy.


It is my belief that, while not perfect – and I will come on to address how they
will be improved – our constitutional arrangements promote the best
economic interests of Scotland.


The powers reserved to the UK Government place a huge responsibility on us
to act in ways that help grow the Scottish and wider UK economy.


And the UK Government has made living up to those economic
responsibilities its top priority.


For example, it is a simple truth that no modern economy can survive without
being outward looking, and finding a place in international marketplaces and
the systems that govern them.
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That is why the UK Government ensures the voice of Scotland – amplified by
its standing within the UK – is heard loud and clear in international trade
negotiations, and in such influential fora as the European Union, the G20, the
G7, and the International Monetary Fund.


It is because the constitution allows us to speak with one strong, unified, voice
in these arenas that we are able to shape their actions to all our benefits.


At home, the UK Government is absolutely clear that its top priority is fixing
the economy.


The Government’s Deficit Reduction Programme has pulled us out of the
danger zone.


It’s worth reflecting on that achievement, and the economic platform it
provides, when you consider the difficulties that other EU partners such as
Greece, Portugal and Ireland continue to face.


But this Government is about much more than deficit reduction.


We are taking responsible action to create the best possible environment for
Scottish businesses to grow, invest and employ.


So we’re investing in apprenticeships, reforming pensions, reducing
regulation, reforming the welfare system and taking low paid people out of tax.


We’re putting in place the lowest corporation tax rates of any major western
economy – a 5% reduction in the space of just four years.


We concluded the Project Merlin agreement with high street banks to lend
more to companies – and on that issue, let me say again that we expect the
banks to meet their commitments on lending to SMEs.


It is vitally important to Scotland’s economic wellbeing that they do so.
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We are creating a Green Investment Bank – which I share your desire to see
in Edinburgh – to help bring private investment into the green economy.


As an aside, Edinburgh has a strong case to host the bank, but the financial
services sector and the wider business community must continue to
collaborate to present the most compelling arguments possible for locating it
here, in the face of increasing competition from cities elsewhere in the UK.


At the same time as we lead the debate on financial services regulatory
reform at the international level, we are taking action to reform UK regulation
of financial services.


Last week we published our proposals for a completely new culture of
financial services regulation in the UK.


We expect those proposals to help reinforce the stability of the Scottish and
UK financial services sector, and promote the dependability of the UK as a
business location.


I want to hear your views on this. I will make it my job to ensure that any
legitimate issues raised by the Scottish industry are given a wide hearing
within Government as we develop the proposals.


All these actions, and many others, have been taken by the UK Government
in support of the Scottish and UK economy.


And I am firmly of the view that the UK is the best possible framework within
which to pursue them.


You may ask why that is. Well, for one thing, Scotland’s economic wellbeing is
intimately linked to that of our partners in England, Wales and Northern
Ireland.
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Yesterday’s GERS figures reinforced that point: variations in oil prices are far
better managed in a UK-wide economy. It means Scotland can benefit in the
good times and manage its risk effectively when the price drops.


As part of the UK, we share in the risks and we share in the recovery: that is
very true for the financial services sector, too.


In 2009, Scotland’s total international exports were around £21.1 billion, while
over £44.5 billion went to the rest of the UK.


So it can only be right and sensible that certain Government action in support
of the economy is taken at the UK level.


And it is vital that Scotland continues to enjoy the benefits of a huge domestic
single market, especially in financial services.


But much activity is best undertaken at a more local level. And our current
constitutional arrangements recognise that.


The Scottish Government already holds significant powers to help shape
Scotland’s economic recovery.


Not least in education and training, which produce the skilled workforces
Scottish businesses require. These are entirely Holyrood’s responsibilities.


Scottish Enterprise has a core budget of nearly £200m to help stimulate
economic growth.


The Scottish Government holds responsibility for planning – business needs a
responsive, responsible planning system.


It has control over business rates, the setting of which has an important
impact on both business and government revenues.
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Holyrood has domestic policy responsibility for agriculture, fisheries and
forestry, and tourism, all major sectors of the Scottish economy.


And a whole network of other organisations exists here in Scotland to take
action in support of the economy.


We stand ready to work closely with the Scottish Government – as and when
they place the kind of emphasis on these areas as they are currently placing
on constitutional arrangements.


Let me now turn to those arrangements.


The current devolution arrangements have worked well for twelve years, but
we do not claim they are perfect.


So we are taking action to strengthen devolution, and provide greater financial
responsibility to the Scottish Parliament.


The Scotland Bill and its accompanying package will introduce a new Scottish
rate of income tax, and fully devolve stamp duty land tax and landfill tax.


Responding to sensible, evidence-based arguments from the Scottish Affairs
Committee in the House of Commons and the Scotland Bill Committee in the
Scottish Parliament, we have opened up the possibility of issuing Scottish
bonds in the future, and brought forward access to finance available under
future borrowing powers.


When combined with the existing tax raising powers of the Scottish
Parliament, the Scotland Bill will provide Scottish Ministers with a total of
£12bn worth of financial powers. It represents the most significant transfer of
financial power from Westminster to Scotland since the creation of the UK.


But make no mistake. We are not making these changes for their own sake.
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We are making them because, based on the evidence we have received from
a wide range of sources – including the cross-party Calman Commission, the
Scottish Affairs Committee in the House of Commons and the Scotland Bill
Committee in the Scottish Parliament – we believe they are the most
appropriate package for Scotland and the UK.


They will allow Scots to shape the economy we want, and generate the jobs
we need.


And they will do so within the framework of a strong and stable UK.


There are of course those who disagree with this approach.


Not least the Scottish Government, which has made clear during its first
weeks in power that its priority is further constitutional change – though it
remains unclear exactly what form that change might take.


We have promised to listen carefully to any well thought through proposals.


Earlier this week, we received a ten-page document on borrowing, and
yesterday we received proposals on crown estate revenues. We will respond
to those in due course.


But on most of the Scottish Government’s demands, we have yet to receive
any detail on what such powers would look like in practice.


Take, for example, Corporation Tax.


The Scottish Government has demanded devolution of Corporation Tax
before it has even conducted the public consultation it promised the electorate
on the issue. That means that vital questions remain unanswered.
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The Scottish Government has hinted that Corporation Tax would go down
further than current UK levels – which are already falling - if it were devolved.
We are unclear on what basis they make that assessment.


Figures from the Treasury show that if the Scottish Government were to cut
Corporation Tax to the same level as Ireland there would be a gap of more
than £2bn in the Scottish Budget. They also estimate that Scotland could
expect to lose around a further £600m due to the higher number of
multinationals – particularly from the financial sector - located in Scotland.1


What effect would the immediate reduction in public revenues have on
Scottish public services? The Scottish Government appears to believe the
shortfall will be made up for by increased growth – but we don’t know how
many years they believe that would take, and that is a critical factor in the
debate.


How would they avoid “brass plating” and cannibalisation of the tax base?


How would compliance arrangements work and what would be the costs to
businesses and government?


These are not simple matters, and they would take time to work through – so I
think it is rash to suggest that powers over corporation tax should be devolved
immediately, as if that is a panacea for the economy.


Indeed, it will surely take time and effort to sort out the detail of the powers
that are currently being devolved under the Scotland Bill. It is important that
we get that detail right, and we have set a timeframe of five years to do so.

1
  HM Revenue and Customs, who are responsible for collecting UK wide taxes, have
produced an explanatory note (deposited in the Commons library) on estimating the cost of a
reduction in the Corporation Tax (CT) rate in Scotland for onshore companies. UK oil and gas
companies are excluded. The paper presents provisional estimates of the cost of cutting the
main rate and small profits rate of CT in Scotland to 12.5% from April 2011. The costing
models used for this exercise are approved by the independent Office for Budget
Responsibility (OBR). The Treasury has indicated it would be happy to engage further with
the Scottish Government on the issues of the potential costs of reducing the rate of
corporation tax in Scotland.
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But the Scottish Government is also proposing to hold a referendum on
Scottish independence at some unknown future date. They have not spelt out
what they mean by independence or how many questions they will ask.


There are certainly many questions for us to ask. What, for example, would
happen to the many and real benefits that Scotland’s place in the UK brings?


The benefits of our fully integrated economy and long standing monetary
union. The benefits of our welfare and pensions system. The benefits of
having a strong, united voice at the most senior levels of international
relations, from the EU to NATO, the WTO to the G20. The benefits of
common defence arrangements for the whole of the UK.


There are too many questions about independence to which there are as yet
no answers.


The Prime Minister has made clear that we will make the positive, optimistic
case for Scotland’s place in the United Kingdom.


As a proud Scot, I am happy to join him in making that case. I am absolutely
clear that Scotland’s interests, and Scotland’s future, are best protected by a
devolved Scottish Government working within the framework of the United
Kingdom.


And the UK Government will happily put forward further evidence in support of
the case for Scotland remaining part of the United Kingdom as the debate
develops.


But I want to stress that this is not just a debate for politicians. It must involve
Scots from all walks of life.


So today, I invite you to be part of the debate on Scotland’s economic and
constitutional future.
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A debate that is founded on evidence and carefully considered positions.


That debate must include your voice – the voice of Scotland’s financial
services sector – and the voice of people from all other walks of life.


You may ask why. Why should you care?


Well, quite simply, these issues matter to you, and they matter to your
customers, and they matter to your shareholders.


You have a choice between the uncertainty generated by a partial, narrow,
political debate.


Or you can have the greater certainty generated by a debate that includes the
best informed voices in Scottish society. Voices such as yours. Voices that
insist on the facts, on hard evidence to support claims for any particular
constitutional position.


Ladies and gentlemen, this morning I have set out the huge economic
challenges we are facing in Scotland and the rest of the UK.


For all our sakes, we must remain focused on those challenges in the coming
months, and work to create the best possible environment for businesses to
grow, invest and employ.


That must be our priority. It must be the priority of the UK Government, and it
must be the priority of the Scottish Government.


The debate around the constitutional status of Scotland is a serious one, but it
cannot be at the expense of our focus on growth.


The debate must start to engage with the reality of hard facts and figures. All
of us must set out clearly what it is really about. And it must reflect the views
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of all of the people of Scotland, whether they be government, businesses or
individuals.


I urge you to be part of that debate.
[ENDS]