At the behest of my friend, Eric, I pass the transcript of this thought provoking speech on, with this additional comment:
Independent or not, the people of Scotland - indeed the UK and elsewhere - really do need to reduce the size of government. Wealth creation does not come from government, whatever it claims; indeed government is currently the single biggest consumer of wealth. In his book, "Life after the State", Dominic Frisby explains that we do not have capitalism in our society presently, but crony capitalism. In other words too many businesses derive their income from a government source, directly or indirectly. To call this "capitalism" is completely wrong.
Frisby further points out that this wealth consumption by government is a feature which has evolved in the 20th century. In 1900 overall taxation stood at around 9%, barely changed since the days of the tithe in the Middle Ages. Societal changes began well in the 20th century, with improvements to the lot of the poorest, health care, and more; but as we have now found, the way to hell was paved by good intention. It was Thomas Paine who, when writing "Common Sense" in 1775-76, said of government in the Thirteen Colonies of America; "Society in every state is a blessing, but government even in its best state is but a necessary evil; in its worst state an intolerable one…"
Let's be clear: No one wishes to return to the dark days of no healthcare, huge levels of criminality, and grinding poverty for most. Let's remember that "Society in every state is a blessing", but acknowledge that big government is probably "intolerable".
I fear that all our politicians, including those in the Scottish Nationalist Party do not see this, and will simply impose even bigger government upon us.
I leave it up to you to decide if these thoughts are worth further transmission.
---------- Forwarded message ----------
Please pass it on.
Eric
Speech by Rupert Soames, OBE, CEO Aggreko
It is a privilege to be asked to speak at this important debate on the implications of Scottish Independence for business.
What interesting times we live in. Really serious constitutional issues are like trams on Princes Street: you wait 300 years for one, and then two arrive together. But the conjunction and relative timing of the referendum on Scottish Independence in 2014 and that of the proposed referendum on the UK’s membership of the EU in 2017 could not, frankly, be worse. The possibility that Scotland might be negotiating its exit from the United Kingdom at the same time as the UK is negotiating terms for continued membership of the EU is one that is going to present significant challenges to the interests of both the UK and Scotland, and will need careful statesmanship to manage if we are to avoid a major car crash.
But happily, the timing of this event is good, because we now have had the opportunity to digest the Scottish Government’s recently-published Economic Case for Independence, which has allowed us to explore their views on the likely effect of Independence on the Scottish economy and business.
Before I get into analysing that document, there are a couple of things I want to make clear.
First, Aggreko has some 500 employees in Scotland, all of whom have a vote, and all of whom will have their own views on independence, which may not be mine, and I do not speak for them. However, businesses are entitled to have interests, and on the whole I think it is helpful to make those interests known, particularly if the political debate touches on matters economic, or, as is the case today, if people want to know what businesses think. But to be clear, Aggreko does not make political donations, does not support political campaigns, although, of course, individual employees may choose to do so.
Now – back to the debate and to the Government’s document on the effect of Independence on the economy.
I have to confess that, having read the document with some care, I am confused. On the one hand, the document paints a picture of a thriving Scottish economy, with world-class businesses in oil services, food and drink, financial services, renewable energy. A business-friendly environment capable of attracting world-class companies to invest here. But it then goes on lament poor Scotland; poor, poor, Scotland, held back for years by the yoke of inappropriate policies which have resulted in lower levels of growth and worse income inequality.
On the one hand, the document describes Scotland as a modern, sophisticated, globally-competitive economy, but on the other hand, it is apparently so divergent from the rest of the UK economy, that the fiscal, employment, competition policy and regulatory environments appropriate for businesses in Newcastle, Manchester and Bristol, are not appropriate for businesses 200 miles away in Glasgow and Edinburgh.
I know which of these two pictures I believe – I believe that Scotland is a great place to do business; and Aggreko has put its money where our mouth is – last year we opened our brand new £20m factory in Dumbarton which employs over 250 people. We believe that the political, economic and regulatory structure works, if not perfectly, then pretty well, and certainly as well as anywhere else. We are delighted to be headquartered in an economy with a well-educated workforce; deep and broad engineering and commercial skills; free access to the rest of the United Kingdom, and with a strong voice in the EU.
So, for a company like Aggreko, who are happy as clams to be based in Scotland, the bar is high when it comes to convincing us that alternative arrangements would be better for our business. Those who wish to convince us of the need for radical change, with all its attendant risks; who wish to persuade us that Scottish businesses need regulation and government different from the rest of the UK to be competitive in global markets; who want to introduce borders and barriers to trade, where none currently exist; these people have to produce solid and reasoned arguments.
It is not that we are not open to persuasion, just that the arguments have got to be good, rooted in fact, and grounded in good economics.
My issue is that the persuasion so far has not been good; the facts presented seem partial and in some cases, misleading; the analysis poor. Furthermore, it is not clear what is being argued for, because there are so many mixed messages coming from the nationalist politicians. Like the good, indeed great, politicians that they are, they dance with seven veils. They give us tantalising glimpses through the veil of lower taxes here, higher spending on public services there, whilst never actually committing to anything.
So to answer the question “what would independence mean for business”, we must try to pierce the veils, distil the arguments down to their essentials, and attempt to understand what the likely consequences are of Independence.
The economic arguments in favour of Independence seem to be twofold:
First, that if Scottish politicians get hold of the levers of power in the economy, they will do a much better job of pulling those levers than the current lot of lever-pullers. Better lever-pulling, more precisely attuned to Scottish needs, will help businesses and the economy grow faster.
Second, it is argued that, with these levers in their hands, it will be possible to create a society which is more fair and where the gap between rich and poor is narrower. And the reason why this is important is because, that Professor Stiglitz says that countries which are more equal grow faster.
So let’s examine these arguments.
On the lever-pulling, the argument is that business will be better served if the all the levers of economic power are being pulled in Edinburgh. The Government’s document lists functions which it believes would be better if they were regulated exclusively by Scottish politicians and civil servants. And the list is long: Consumer Protection, Industry Regulation, Energy Markets, Implementation of EU Legislation, Competition Law, International Trade, Immigration, Public Provision and Procurement. So a future Scottish Government will need to have all the infrastructure and regulatory bodies to administer these functions and pull these levers. Presumably therefore, we will need a Scottish Food Standards Agency, a Scottish Civil Aviation Authority, a Scottish Telecommunications Agency, Competition Law, International Trade, Immigration, Public Provision and Procurement, Advertising Standards Authority, Broadcasting Standards Authority, a Competition Commission, with its associated Appeals Tribunal, a Financial Services Authority, Gambling Commission, Pensions Regulator, perhaps even a Gangmasters Licensing Authority. So a future Scottish Government will need to have all the infrastructure and regulatory bodies to administer these functions and pull these levers. Will Scotland, with Life Sciences being a key sector for growth, want to have its own Human Fertilisation and Embryology Authority? or will it be just liberty-hall for those who want to experiment on human genetics? And then let us think of International Trade and Foreign Affairs; how many civil servants will be required to develop and promote Scotland’s unique approach to trade matters at the European Commission, the World Trade Organisation, at the IMF, at the World Bank?
How many embassies will Scotland need to have in order to protect and promote the interests of its citizens and businesses? Let’s take a wild guess, and say: the same as the Republic of Ireland, which has 72 embassies. So that’s 72 properties, 72 ambassadors, 72 consulates to staff. The UK Competition Commission costs £22 million a year and has 122 people; how much would a uniquely Scottish equivalent cost?
The point is simply this – there are high fixed costs to being an independent government and there is not a lot of point having the levers unless you have the means to pull them. It is absolutely certain, in my view, that an independent Scotland, that aspires to pull all the levers needed to deliver policies optimised for the conditions that pertain in Scotland, is going to require a massive expansion in the headcount and budget of the Scottish Civil Service. Now my point here is not that it could not be done, and countries such as Ireland have the complete range of government bodies.
But it comes at a cost. In 2012, there were 46,000 people employed in the Civil Service in Scotland, but of these, 29,400 worked in UK-wide government departments, and 16,000 in the devolved administration.
If we look at Ireland again, in 2008 there were some 37,000 full-time equivalent people employed in the Irish Civil Service, and I can think of no reason to suppose that Scotland would need many fewer. So doing some quick sums, I get to an additional cost of an Independent Scotland’s civil service of around £700 million a year in people-related costs, which is about £140 a year for every, man woman and child in Scotland. And this is just in administration, and before they start spending money.
In a debate on the economics of independence it is, I think, fair to ask for evidence that the costs of having the levers of power are going to deliver proportionate economic benefit. If politicians wish to argue that hard-working taxpayers should give them more money, It is not unreasonable that the taxpayers ask that they carefully justify what the benefits of that spending will be. How will that £140 per year every man woman and child be paid back? Will the Scottish people see noticeably better service from a Scottish Embassy than from a British embassy? Will the Scottish Ambassador be able to get Aggreko and Clyde Blowers meetings with the Brazilian Energy minister that the British ambassador cannot? Will the Scottish Civil Aviation Authority make the Scottish economy grow faster, and society more equal, than the UK CAA?
Does the UK Competition Commission do such a bad job for Scotland that it is worth spending £22m a year setting up one of our own? And if Scotland cannot control its own foreign affairs, airspace and competition regulation, is it really an independent country?
The heart of this argument is this: does Scotland, in the round, get a better deal by sharing the cost of being an independent country with 55 million others, or could Scottish politicians do so much better a job of pulling the levers that it is worth imposing the entire cost of independent government on its 5 million souls? Let us make a wild guess and assume that in reality, much of this additional cost would be borne by businesses, and the costs of independent government would be largely borne by Scotland’s 330,000 businesses, rather than being spread across the UK’s 2.2 million.
Which brings me on to the issue of taxation. The Economic Case for Independence lists a number of fiscal levers which could be used to make the Scottish economy grow faster and society more equal. These include Oil & Gas Taxation, Excise Duty, VAT, Air Passenger Duty, Capital Borrowing, Welfare and Social Security, Corporation Tax, Public Sector Pay & Pensions, Capital Gains Tax, and Rural & Environmental Taxation. And here once again, it is fair to assume that the reason why the Government mentions these levers is because it wants to pull them.
But how?
Once again, we are given tantalising glimpses through the veils of lower rates of corporation tax; perhaps lower Capital Gains Tax. Bigger incentives to support investment; in other words, more tax revenue being spent on subsidising businesses. But the most intriguing thing for me is the lever that is not mentioned in the document. We are told that the weapons that the Scottish Government has at its disposal to deliver a fairer society are inadequate. That they need to hand the dagger of Air Passenger Duty, the cudgel of VAT and the trusty sword of Corporation Tax to win the war against unequal income distribution. But this seems to me unconvincing when they already have at their command a main battle-tank in the form of Income Tax. If the objective of a fairer society is to be achieved by making the poor richer, why not reduce income tax? And if it is to make the rich poorer, why not increase it? Why has the most powerful weapon of income redistribution been left mouldering in its garage these past years?
Is it because of idleness? Lack of ambition or courage or vision? I would not charge the nationalists with any of these – to the contrary, I think they show commendable energy and courage in government. My charge is one of wishful thinking.
They might wish to exercise the powers to vary income tax, but the ugly fiscal reality is that the spending programme does not permit less income, and the ugly political reality is that an increase in income tax rates will lose votes. So, while the most powerful weapon in the battle to create a more equal society lies unused, we are offered hints and half-promises of sweeties and good things, but in reality nothing much has happened. The danger for the nationalists is that people come to believe that, to use a Texan term, they are “all hat and no cattle” or “all gong and no dinner”.
And this wishful thinking permeates the whole nationalist economic programme. The nationalists might wish that there was wide economic divergence between Scotland and the rest of the UK, but is simply not true. Average incomes are almost identical, as are unemployment rates; GDP growth rates and GBP per capita are only fractionally different. If you want to see economic divergence, look at the difference not between Scotland and England, look at the divergence between the Central belt and the Highlands & Islands.
The nationalists might wish to have Scandinavian levels of social provision with Irish levels of corporate taxation, but the reality is it ain’t going to happen.
In energy, they might wish for massive investment in windfarms offshore Aberdeen, but in reality, the vast majority of build is offshore East Anglia, near the centres of demand. They might wish for a nuclear-free future, but the reality is that the Scottish nuclear and thermal power plants will have to be kept humming for as long as is technically and economically possible.
They might wish to be able to increase spending or decrease taxes. The reality is that in any common currency area with sterling, the scope for any significant variation in income or expenditure is going to be massively constrained, if not by the Bank of England, then by the bond market.
If we turn now to focus on what the likely day-to-day implications of Independence are for business,
clearly I cannot speak for all businesses, and there may be some who see independence as an advantage.
As far as Aggreko is concerned, my conclusion is that Independence would bring a significant extra burden of cost and complexity to our business, and that this will make us less competitive.
Let me explain to you why I believe this.
Aggreko is a FTSE-100 company listed in London, but we have our headquarters in Glasgow, and all of our manufacturing and product development is done in Dumbarton; we employ about 500 people in Scotland, or 10% of our workforce, but, to the nearest decimal place, 100% of what we manufacture is exported. There is a constant flow of people and assets between Scotland and the rest of the UK, in both directions.
The Economic Case for Independence explicitly states that an independent Scotland would want to have its own particular flavours of EU regulations, So I assume that Scotland would want to have different applications of the various EU Working Time directives, and that people working North of the border will have to have different terms and conditions to those South of the border. Added complexity & cost.
Since VAT is one of the levers of fiscal policy, we assume that there might be differential rates of VAT; More complexity & cost.
We assume that we will have to deal with different Health & Safety and Environmental regulations;
More complexity & cost.
Following Independence, we will have to establish different companies North and South of the border, and every time we move a generator from Edinburgh to go on rent to a customer in Newcastle, we are going to have to raise invoices between the Scottish company and the English company, and move the assets between balance sheets; More complexity & cost.
We will have two tax authorities to deal with; More complexity & cost.
We have many employees who split their working time between Scotland and England, and we will have to start tracking for tax purposes how many days they spend in each. We will have to split our pension scheme into one for Scottish employees and one for the rest of our UK employees, and administer them separately and report to separate regulator; More complexity & cost.
Complexity and cost are enemies of efficient business. It’s not only the money, it’s the diversion of energy and time away from product innovation, from selling, from looking after our customers. Can you imagine the additional paperwork involved? Be afraid, you mighty forests of Scotland, for you will be pulped to produce the invoices and credit notes and balance sheet reconciliations. Rejoice, you herds of accountants, you flocks of consultants and lawyers, at the hours of work that will be required to install and manage borders were none exists today.
And for what benefit? Where, as the First Minister is wont to ask, is the beef? Behind which of the veils lie the benefits which will enable Aggreko to deliver improved service and better value to our customers, and to compete more effectively in Asia, in the Americas, in Africa and Europe? How will the certainty of additional cost and complexity pay back in terms of greater competitiveness?
You see now that there is a common theme between the administration of government and of business. In both there will be the certainty of significant additional costs and complexity as a result of independence. And set against this the nationalist wish to persuade us to weigh benefits which are ill-defined, obscure, and uncertain.
Now I acknowledge that these concerns may seem trivial, piffling, against the wider cause of national self-determination. I accept that the arguments for Independence do not stand or fall on economics alone; and that my worries about competitiveness will be weighed in the balance against concerns of those who would rather have all the power of government to themselves, rather than share it with others. Who would rather be big fish in their own small pond rather than share a big pond with others. But if the nationalists wish to extend their arguments from the powerful poetry of nationhood and descend into the prose of economics and competitiveness, then they must expect challenge in prose.
The reason why I believe that independence will be bad for Scottish business is because I am certain that it will place barriers to the free movement of goods, services and people where none exist today. I am certain that the two thirds of Scottish exports that go to other parts of the United Kingdom, every £ of the £45 billion, will have attached to it cost that does not exist today. I am certain that that the cost of government borne by the Scottish people and businesses will increase substantially.
And I am not certain about the benefits. All I hear from the nationalists is wishful thinking. They wish to have differentiated economic policy and regulation, yet wish to be in a common currency area with the UK. They wish to have all the benefits of oil, but wish to have the benefits of the UK balance sheet as a lender of last resort for its financial services sector.
Let me finish by saying this. I think that there is a danger that those of us who believe in a Britain without borders are seen only as nay-sayers. We are accused of being only negative, of trying to run down Scotland. In my case, nothing can be further from the truth. I love this country with a passion. I think it is a great place to do business, and at Aggreko we are proud to be Scottish and proud to be headquartered here. And we have put our money where our mouth is – when faced five years ago with the choice of where to put our new manufacturing and development facility, we choseScotland. But we chose Scotland in the context that it is part of the United Kingdom, and we can move people and assets around the whole country, and we benefit from being based in a country that is a significant world economic power and one with the heft to support our interests globally. The nationalists might wish to think that we would have taken the same decision had Scotland been independent. Well, let me just say that, as in so much else they wish for, “I hae me doots”.
By Bill Bonner
