Speech by the Chief Secretary to the Treasury.
Good morning, and thank you for inviting me here today - it’s always nice to have an excuse to get out of London and get a little bit closer to home….
As a member of the UK Government, and as a proud Scot, I’d like to a talk a bit today about what we are doing to help Scottish business, and also the importance of Scotland’s relationship with the United Kingdom to business - the process of devolution that this Government is continuing, and the benefits to Scotland from remaining part of the UK.
I can think of few better places to talk about the strengths of the UK than in this great city - a city that boomed following the act of Union in 1707 allowed it to exploit vast markets available to Britain at the time, becoming a leading trade hub for international commerce.
And a city that now participates as a major world player in the 21st Century global services trade as a major financial centre and tourism hub, as well as a thriving manufacturing sector.
If there is anywhere that is testimony to the undeniable benefits of integration it is here.
Devolution and the Scotland Act
This coalition government has kept its commitment to develop that relationship in Scotland’s interest - delivering through the Scotland Act last month the largest fiscal transfer of powers to Scotland since the Act of Union.
The Scotland Act will allow the Scottish people to hold the Scottish Government to account for how they raise money, as well as how they spend it, by giving it responsibility for raising a third of the money it spends.
It will allow the people of Scotland a greater say in the level of income tax that we pay.
It will allow us to decide on how we raise taxes on land, and on landfill.
And it will allow the Scottish Parliament to propose new taxes to respond to the particular needs of Scotland.
The Act also, for the first time, gives Scottish Ministers powers to borrow, within appropriate limits, and so will give the Scottish Government the flexibility it needs to manage unexpected changes in revenue, and to bring forward investment. The Act provides for up to £2.2 billion in capital borrowing powers.
The Scottish Government will have access to the most cost-effective form of finance available - the National Loans Fund - therefore benefitting further from the UK’s low cost of borrowing.
The Scotland Act develops the ever evolving relationship between Scotland and the United Kingdom. We will ensure that wherever possible, Scottish people have autonomy over the decisions that affect us, while maintaining the benefits of the most stable and successful political and economic Union in world history.
Benefits of the UK
We announced this week that we will be producing detailed analysis to assess these benefits in conjunction with respected academics, think tanks and others, who will provide expert support and challenge during the process.
Around two thirds of all Scottish exports go to the UK. And each year nearly 50 000 people come to settle and work here from the rest of the UK [General register office, 2009-10: 47,000]; almost as many people move in the other direction [43,500].
Our place in the UK means Scotland benefits from sharing risk and rewards through being part of a larger economic unit.
Being part of the UK means enjoying the diversity offered by being part of a bigger country, or a Government with the firepower to intervene when things go wrong.
Within the UK we benefit from the stability and credibility of the whole UK economy.
Stability and credibility which enables me to take a look today at a new additional power that could be given to the Scottish Government - the power to issue its own bonds.
Foreshadowed during the Scotland Bill, which we amended so that the Scottish Government can be given the power without the need for primary legislation.
I’m pleased to announce that today we are launching our consultation into doing just that - seeking views from academics, investors and market participants on the pros and cons.
There are many questions to think about.
The potential increase in accountability and transparency - with the greater market discipline they might bring
The increased options for Scottish Ministers, who will have the responsibility for meeting interest payments
And equally, the challenges that proceeding might present:
Particularly, the value for money of such an option, given Scotland’s smaller market, lower liquidity, and potentially higher risk - all of which are likely to attract a premium over alternatives.
And the risks to the UK as a whole - would it fragment the UK debt market, driving up costs for everybody?
Or would the rest of the UK be affected if there were a loss of confidence in Scottish bonds?
Today’s consultation shows our willingness to develop the devolution settlement further. I hope you will engage with it to consider whether this could help to strengthen the devolution settlement. It shows the continuing commitment of the UK Government to strengthen Scotland’s place within the UK - demonstrating once again that we are stronger together.
And though the consultation does not consider how an independent Scotland would borrow, it also begs some further questions for the Scottish Government about what independence would mean for Scotland.
Questions they currently refuse to answer.
How does the SNP see an independent Scotland funding its substantial deficit?
How will the markets respond?
How would the credit rating agencies react?
And so, the most important question of all, how much more would the markets demand from Scotland to finance its borrowing compared to the very low interest rates the UK currently enjoys?
These are not theoretical questions.
The Eurozone crisis shows just how vital a sensible approach to future sovereign debt issuance is.
And how important the fiscal credibility of the government and the country standing behind those bonds is.
I am proud to be part of a UK government that has re-established our country’s financial credibility. And the credit rating agencies rate the UK as triple A. The low interest rates today of 1.8 per cent are a consequence of this.
That helps Scottish firms with their borrowing costs, and Scottish households with their mortgage costs. A 1 per cent increase in interest rates would cost Scottish households an estimated £1 billion a year in higher mortgage payments.
I am not going to speculate about what an independent Scotland’s credit rating might be. Though I note that Alex Salmond calls his economic Policy Plan Mac B, which doesn’t bode well!
But I’ll note for now that Moody’s methodology explicitly states of newly independent countries that “Immature economic and political institutions increase the risk of unpredictable behaviour in times of stress, inviting negative credit implications,”
And credit rating agency Fitch said in April that they are not aware of “any situation where we have awarded AAA rating to a newly independent sovereign nation”.
So the Scottish Government owes it to the people of Scotland to answer these questions. To give as much consideration to these issues as we are in today’s consultation on bond issuance by Scotland as a part of the UK.
Because the question of how an independent Scotland would maintain its market credibility is one of the most important of all.
When a small nation, heavily reliant on financial services, proposes detaching itself from a successful fiscal union while maintaining currency union, with no clear plans for a lender of last resort, at a time when the largest currency union in the world finds that greater fiscal integration may be the only way to salvage the mess it is in, the logic seems questionable to say the least.
And of course there are important questions faced by many nations the world over, as the Eurozone continues to trouble.
However much we have secured fiscal credibility and the confidence of the financial markets that has resulted, we cannot as the UK cut ourselves off from what happens elsewhere.
The downgrade of some of our banks by a credit rating agency reflects the risks the world economy is facing, especially for the Eurozone.
UK banks have significantly strengthened themselves since the crisis began and are reforms are all about making the banking system safer and stronger still. Our “Funding for Lending” scheme will help to reduce the costs of finance for business.
As our biggest trading partner, problems in the euro area affect us too. So we of course want the Euro area to sort out its problems.
And throughout the crisis, we have been clear with Euro Area partners on what needs to happen to build confidence - resolving the uncertainty about Greece, ring-fencing other vulnerable Euro Area Member States and properly recapitalising Europe’s banks. Some progress has been made, but major risks remain.
The Eurozone is a stark warning of the dangers of monetary union without fiscal union. The “remorseless logic” of monetary union means a move towards much greater fiscal integration is necessary.
A successful Eurozone is likely to have to include most of the mechanisms that make currencies work in the UK and the US. More pooling of resources; a shared backstop for the banking system to strengthen banks and protect depositors; and as a consequence, much closer collective oversight of fiscal and financial policy.
Much of what happens in response to the ongoing crisis will ultimately be a decision for Eurozone nations, but, with such a great interest in what happens in the rest of Europe, we will always have our part to play. The UK will play a positive role wherever we can: through the IMF; and through the EU, to mend this crisis.
And the UK government will continue to stick with the deficit reduction plans that for now are keeping the UK relatively insulated from the worst of the impacts - keeping our bond yields low to the benefit of businesses and households alike.
In the light of these issues, and the challenges I know they pose for Scotland - an open, exporting economy with a major financial services sector, it is all the more important that we are focussed on helping Scotland’s businesses grow and thrive.
The Scottish Parliament already has full control over many of the key drivers of economic growth: education, skills, economic development, transport, agriculture, fishing, policing and justice.
But we are doing plenty to support growth in Scotland as part of the UK.
We are committed to delivering the most competitive tax regime in the G20 , lowering corporation tax to 22 per cent by 2014 - the lowest in the G7 , and we have lowered corporation tax at every Budget since we came to power.
We are encouraging investment in Scotland’s renewable energy industry. We have set aside £1 billion towards Carbon capture and storage, established the world’s first Green Investment Bank, headquartered in Edinburgh, with £3 billion of initial capitalisation, and announced a new £50m Offshore Renewable Energy Catapult, headquartered here in Glasgow, to drive innovation in offshore renewables.
We are ensuring the tax environment supports Scotland’s world leading creative industry. We have committed to introducing a Corporation Tax relief so that Scotland’s video games development industry continues to lead the world.
We are getting the most from Scotland’s oil reserves. We have put in place long term decommissioning relief and specific field allowances that are already bringing forward billions in new investment.
And we are investing in infrastructure to stimulate growth and increase employment.
100 per cent capital allowances in designated enterprise areas in Scotland,
£150 million improving mobile coverage, including on key roads like the A82 from Glasgow to Inverness,
£50 million to support 10 further super connected cities across the UK, including here in Scotland, where ultra fast broadband will benefit around 8000 Edinburgh businesses, and where Dundee and Aberdeen can compete in the next round.
£100 million in Scotland alone towards extending superfast broadband coverage,
And the £2.2 billion we have provded in capital borrowing powers, together with an additional £700 million in capital funding since the Spending Review - more than £1bn of additional funding overall.
And even in these times of fiscal restraint, we are investing more in the transport infrastructure in these four years than the previous Government did in the four years before we came to power.
Personally, I would like to see the Scottish government give the same priority to transport infrastructure.
Finally, I know that the ongoing uncertainty faced in the world economy means businesses find it hard to access the finance they need to growth and thrive. So we are using the UK’s balance sheet to support businesses in securing loans.In March this year, we launched the National Loan Guarantee Scheme, securing low cost loans for businesses tuning over less than £50 million. The scheme has proven popular, and is already benefitting thousands of businesses with cheaper loans.
And the Chancellor’s announcement together with the Governor of the Bank of England last week to take further action on liquidity and on funding for new bank lending will go further still to inject new confidence into our financial system and support the flow of credit to where it is needed. Further details of the “Funding for Lending” scheme will be available soon - but it should make a real difference to businesses across Scotland.
We are doing everything we can to help businesses in Scotland and across the UK face meet the challenges they face, and will continue to look at what more we can do.
Ensuring the Scottish Parliament has the powers to deliver for what the Scottish people need.
It will of course be challenging, as it has been already. But I hope that by listening and working together we will see a strong recovery. And I hope to hear from you all about how we can continue to make that challenge easier.