Speech by Chief Secretary to the Treasury, Rt Hon Danny Alexander MP; Holyrood Magazine event
Speech by the Chief Secretary to the Treasury.
Thank you. I’m very pleased to be able to join such a strong programme of speakers this afternoon.
It’s absolutely right that we encourage breadth of debate on this issue. Because ultimately, Scottish voters needs to be very clear about the implications of the choice they face.
And the people of the United Kingdom need to be informed too.
There is a long and deep history of unity between Scotland and the rest of the UK. One based on strong ties that have been forged over centuries of shared language, geographical proximity, and historical links.
A full political, fiscal and monetary union has been integral to this.
The Scottish Government are campaigning to dismantle one of the key sources of Scotland’s prosperity - one of the longest standing and most successful economic and monetary alliances in the world.
I’d like to set out how our interconnectedness has supported real economic benefits for Scotland.
And why it means that, for the future, Scotland is stronger in the UK and the UK is stronger with Scotland in it.
Whilst independence is the Scottish Government’s policy not ours - we have made clear as a Government that we are prepared to facilitate a legal, fair and decisive referendum to settle this issue.
People from both sides of the debate in Scotland must be able to look at the process and be able to say that it is conducted in a way that does not favour one side or the other.
I’m please that the Scottish Government have now accepted that the Electoral Commission must be involved in oversight of the referendum. In the way they would be if it were a UK-wide vote.
It’s also vital that a referendum is decisive. We must have a clear result at the end of the process.
To do that we need a single question on independence.
Choosing independence is not just another step towards greater devolution. It is not something we can try for a while and see how it goes.
We need a referendum that achieves a clear and decisive result, and that requires a single, clear question.
Scots clearly don’t support muddying the waters with a second question. Three quarters of Scots support a single question while only 12 per cent agree there should be a second.
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What we need to hear is the answer from people in Scotland.
And that answer needs to be heard clearly at the appropriate time.
But the referendum process is just one small part of this debate - more important is the substance: what would leaving the United Kingdom mean?
The Scottish Government’s pursuit of independence puts at risk the many benefits of one - United - Kingdom.
Those who advocate independence have so far failed to set out the detail of their plans, and they’ve had time to do that.
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The UK Government will set out the benefits of remaining part of the United Kingdom through its work leading up to the referendum.
That programme of work will result in a series of thorough, detailed and analytical documents on the key aspects of the UK.
But let me expand on some of the key points relating to our shared economic, fiscal and financial interconnectedness and strength now.
When talking about the economic benefits of the United Kingdom, what better place to start that in discussing that symbol of our economic integration - our common currency.
It brings very obvious benefits to us all.
A single currency over an appropriate area lowers transaction costs in trade. It improves price comparability but more importantly, eliminates the exchange rate risk and the need to hedge against it.
So our shared currency brings direct economic benefits to businesses and households - both in Scotland and across the UK - by allowing easier and more cost efficient flows of trade and investment.
The closeness of our economic union, and its value to us all, is reflected in the scale of the network of these trade and investment relationships.
In 2010, Scotland exported nearly £45bn worth of goods and services to the rest of the UK, more than twice as much as to the rest of the world.
With the Scottish economy so closely integrated with the rest of the UK, a common currency allows businesses to choose, at no extra cost, the best partners to work and trade with on both sides of the border. And it ensures a more efficient allocation of resources, which boosts economic activity and productivity.
An independent Scotland, with its own currency, would deny our economies these benefits.
Choosing a different currency would also undermine the confidence of businesses and investors in the long-term stability of that currency.
Confidence which is crucial if they are to take decisions with a long term horizon.
Crucial too if they are to continue to invest and commit to growth in Scotland, which I passionately want them to do.
The collective strength of the UK economy, and our collective willingness to see through the necessary but difficult decisions to keep us on the right track, have provided strong confidence in the stability of our currency.
Without similar collective oversight of fiscal policy, Eurozone countries are currently struggling in the face of threats to the stability of the single currency.
It’s important that we understand those benefits of having a shared currency.
Because there are those who have said that an independent Scotland could have its own currency; or that it could join the euro; or even that it could peg its currency to the dollar or to pick a recent example the Bhutanese Ngultrum.
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[However, many would wish] that Scotland continues to use the pound.
At the moment that could mean many things.
On the one hand they could attempt to retain full monetary union - similar to the Eurozone - with the Bank of England as a common central bank between Scotland and the rest of the UK.
That would require agreeing a mutual set of obligations and commitments that would have to be agreed with the UK Government.
On the other hand, in the absence of such agreements, Scotland could continue to use the pound unilaterally. But under these circumstances they of course would have no control over that currency, no central bank protecting Scottish interests or acting as lender of last resort.
In between is a spectrum of possible currency arrangements between our countries. None would be straightforward; none would be without profound consequences.
And the Scottish Government have been unclear about which of these they envisage when they refer to ‘keeping a “sterling zone”.
Some have argued that Scotland would benefit from being able to set its own monetary policy. And, were it to have its own currency, from independent flexible exchange rates.
But it’s not at all clear that there would be substantial benefits from that type of autonomy.
In some ways, excluding volatile North Sea Oil, Scotland is the most typical part of the UK - it’s certainly very similar to the rest of the UK in industrial structure, business cycle and price volatility.
For instance, in the first quarter of 2012, the employment rate in Scotland was 71.2 per cent closer than that of any other region or devolved country to the UK average of 70.5 per cent.
And in 2010, Scottish output per head was 98.7 per cent of the UK average…closer to the mean than any other nation or region.
Because of this closeness, monetary policy chosen to accommodate the UK as a whole is likely to be well adapted to suit Scotland.
Monetary policy which addresses Scotland’s needs in particular is unlikely to counteract the extra costs it imposes on Scottish businesses and consumers.
Indeed those who propose independence recognise the importance of retaining monetary policy authority for the whole UK at the Bank of England.
But we need to recognise that this has implications…
Current difficulties in the Eurozone show us clearly that monetary union needs fiscal integration, meaning close and collective oversight of fiscal and financial policy.
The United Kingdom has just such a combination of monetary and fiscal union. That gives us the tools to address macroeconomic challenges.
A single monetary policy may not adjust to accommodate an economic shock affecting only part of the UK.
But fiscal policy can redistribute funding from unaffected places to the region hit by the shock. That could help to support a smoother recovery.
Let’s take the very plausible example of a drop in oil prices - particularly important given Scotland’s exposure to the oil industry.
While this could boost economic activity elsewhere in the UK by reducing input costs and pump prices. It’s more likely to have a negative effect on the Scottish economy
An overarching monetary policy would be unable to fully adjust to weaker conditions in Scotland.
But with shared fiscal policy - automatic stabilisers kick in.
The amount of tax collected from Scotland falls…
but spending allocated to Scotland through the Barnett formula would remain unchanged,
and centralised welfare spending such as unemployment benefits could rise.
So we see Scottish household and businesses paying less in taxes and receiving more public support. Compensating the country for the negative shock.
Without fiscal union, Scotland takes the full hit - it loses oil revenues and foots the increased welfare bill. A cost which has to be funded by tax increases or cuts in other public spending, or higher borrowing.
All parts of the United Kingdom benefit from having a strong, credible central bank. The Bank of England is responsible for financial stability for the UK as a whole and has the ability to act as a lender of last resort and provide liquidity to prevent a financial crisis.
In addition to the Bank’s standard lender of last resort operations, coordinated action between the central bank and the Government may be needed in the event of a crisis.
As we all know, such a crisis erupted in 2008, resulting in the recapitalisation of RBS and Lloyds. I think it is common ground that Scotland would not have been able to undertake such huge recapitalisations on its own. The very solvency of the country would likely have been called into question - putting it at the mercy of the markets.
The UK Government has been clear no bank should be too big to fail. That is why the UK’s new regulatory framework will be geared towards ensuring that banks can be resolved without risk to the UK taxpayer. And we are implementing the recommendations of the Independent Commission on Banking to ring fence retail banking from riskier investment banking.
But when faced with a crisis on the scale of that which erupted in 2008, the Government does have a crucial role to play in coordinating the response to the crisis. And, if necessary, deploying its fiscal firepower to resolve or reduce threats to financial stability.
The whole of the UK benefits from the enhanced confidence of having a credible central bank, backed by a sovereign with a strong fiscal base, who can work together to prevent contagion and financial instability.
It’s true that there are specific sectors of our economy which flourish in Scotland.
We can be proud of Scotland’s oil industry as well as a historic strength in financial services.
They both make a valuable contribution to the UK.
Nearly a quarter of the UK’s life insurance and pension services are based in Scotland, there’s a strong fund management centre and historic headquarters for RBS and HBOS. These financial firms employ more than 90,000 workers.
They benefit from a single, strong and credible UK regulatory and monetary regime, backed by the fiscal firepower of a large and credible state.
Cutting Scotland off from the rest of the UK would also mean undermining the fundamental strength of this sector.
It would damage the close ties with the rest of the UK financial industry, particularly the City of London. As well as access to the markets that the UK provides both nationally and internationally.
Unless and until the Scottish Government sets out a credible position on how to supervise and regulate a financial services industry in an independent Scotland, it cannot be taken for granted that the industry would be content to remain in Scotland.
Already representatives of the financial sector have been calling for much greater clarity on vital issues like these that will determine their long term decisions.
Even more important to the Scottish economy than financial services is the oil industry. According to the Scottish Government’s own calculations, output from Scotland’s North Sea oil and gas represented more than a fifth of total onshore output in 2011.
To cut Scotland off from the rest of the UK means to rely heavily on these volatile sectors - to bet the economy and the fiscal position each year on financial markets and oil prices.
Indeed, the independent Office for Budget Responsibility is forecasting oil revenues to fall substantially as a percentage of GDP over the next fifteen to twenty years.
There are questions around the feasibility of the Scottish Government’s oil ‘wealth fund’ proposals, too:
Clearly the viability of any such fund would be dependent on the Scottish budget being in surplus in future years -
But according to the Scottish Government’s own figures, an independent Scotland would likely have a significant budget deficit.
So in the absence of significant rises in price and production, any decision to create a sovereign wealth fund may have to be supported by either spending cuts or the imposition of additional taxation, for example on oil and gas production.
It’s clear that relying on financial services and oil wealth is far from certain to provide strong and stable prosperity.
It is only right that Scots make their decision on independence with a clear and well-informed understanding of the implications.
With an understanding of the risks that those who propose independence are making to the economic prosperity of Scotland and the UK.
We will provide them with the detailed analysis they need to understand the benefits of the United Kingdom.
And we will set out why we are all better off within it’s the fiscal and monetary union.
For now, however, we can all learn from the case study on our doorstep.
Euro area countries are currently wrestling with unavoidable contradictions between independent fiscal policies and a shared interest in a single currency.
The inevitable outcome is a desire for closer union - including banking union and a more collective fiscal policy - in order to sustain a shared currency.
In the UK we should recognise the strong benefits of our economic unity - benefits that Eurozone countries are currently learning they will need to embrace.
Liberalism is about breaking down barriers between people.
Nationalism is about building them up.
I don’t want to see a new barrier within the United Kingdom - and independence would be a barrier to trade and prosperity on both sides of the border.
Thank you.