Charles Jack on Scottish Independence in the Sunday Times
"When Charles Jack saw last weekend's poll in The Sunday Times putting Scotland's independence campaign in the lead for the first time, he immediately booked a flight to Edinburgh ..."
From the Sunday Times 14th September 2014
Fallout!
When Charles Jack saw last weekend’s poll in The Sunday Times putting Scotland’s independence campaign in the lead for the first time, he immediately booked a flight to Edinburgh.
The 62-year-old Scot, who has spent 30 years in England and runs a training company in Salisbury, will fly to the Scottish capital today for back-to-back meetings with solicitors and estate agents.
Jack is desperate to set up a Scottish office ahead of Thursday’s referendum. About 40% of his business is with local authorities in Scotland and he fears they will freeze out English companies if the country votes for independence. The Edinburgh office is his contingency plan.
“My fear is councils will be more conscious of seeking external help from Scottish companies rather than one that is clearly based in the south of Eng–land,” he said. “I have lost contracts in the past because I am not based in Scotland.”
Jack remains passionately convinced that a continued Union is best. “American clients tell me they are buying British, they are buying the UK flag, they are buying quality. I fear we would lose that stamp of quality in the event of independence,” he said.
Five Scottish-headquartered banks, including Lloyds, Royal Bank of Scotland and Tesco Bank, have announced plans to move south of the border in the event of a “yes” vote, but Jack’s experience shows it could be two-way traffic — English companies as well as Scottish have much to lose in the short term from an independent Scotland.
Economists warned last week that the dissolution of the 307-year-old Union could throw Britain’s scorching economic recovery badly off course. Growth could slow, sterling could tumble and inflation could more than double from its current 1.6% — a blow to consumers hoping for a return to real wage growth next year.
“Household incomes would again come under pressure as they did in the great recession,” said Gerard Lane, investment strategist at the broker Shore Capital.
Companies would defer their investment plans, taking GDP growth next year below 2%, according to Axa Investment Managers. This compares with the 3.1% expected for 2014, and could force the Bank of England to delay interest rate rises until later next year, possibly after the election.
A Scottish exit could also precipitate a euro-style currency crisis, with sterling devalued by up to a quarter as international investors take fright at Britain’s current account deficit. This could deteriorate without Scotland’s share of North Sea oil and gas, according to Lane. The weaker pound could push inflation back up to 4% as imported goods become more expensive, he said.
For Scotland, the fallout would be even more severe. Credit Suisse, the investment bank, warned last week that its economy would be plunged into recession, with wages falling 5%- 10% if a new Scottish currency slumped against the pound.
As much as £100bn in deposits could be pulled out of Scottish banks as customers de–camped to protect their assets.
The plans by Lloyds and RBS to move south may not stem the flow — the experience of Quebec in the 1990s shows “deposit flight” would be a risk even if the Union was preserved. Bank deposits in Quebec dropped by about 5% ahead of its referendum on independence from Canada in 1995. Sovereignty was rejected by the narrowest of margins but Quebec’s deposits continued to decline as a proportion of GDP for seven years.
“Every monetary union that has broken up in the 20th century was preceded by large deposit shifts in the banking system,” said Paul Donovan, economist at the investment bank UBS. He warned of “negotiated chaos” if there is a “yes” vote.
Hopes were growing at the end of last week that the unionists would secure a narrow victory, prompting a relief rally in sterling, but the damage may have been done. International investors may reappraise the risk of doing business in Britain, with lasting implications for the economy and markets beyond Thursday.
OWNERS of small businesses in Scotland say the prospect of a “yes” — and 18 months of protracted negotiations over independence — have cast a long shadow over their operations. Deals are falling through and hiring plans have had to be put on hold until the result is known.
Colin Thompson has been trying to sell his 15th-century hotel in the Highlands since January but said possible purchasers have been deterred. “The uncertainty has put off potential buyers for sure. We’ve had an overseas company that is keen to progress but would only do so provided it’s a strong ‘no’ vote. They like certainty,” said Thompson.
He plans to move his family’s money into England in the event of a “yes”. He and his wife are already transferring their pensions south of the border, regardless of the outcome of the referendum.
One of the biggest issues facing businesses is uncertainty over what tax regime would follow Scotland’s exit from the Union. Alex Salmond, the first minister, has pledged to undercut corporation tax in the rest of the UK by three percentage points — meaning a rate of 17% when Britain’s rate falls to 20% next year.
However, businesses are sceptical that he will be able to deliver when Scotland is running a deficit (including oil) of 8.3% of GDP — bigger than the 7.3% for the rest of the UK. The respected Institute for Fiscal Studies has argued that Scotland would in fact need to bring in tax rises or spending cuts equivalent to 10p on the basic rate of income tax.
Many retailers north of the border fear they could lose some of Britain’s precious VAT exemptions if an independent Scotland had to renegotiate its relationship with the EU.
Scottish booksellers fear an independent country would impose VAT on their sales (Stephen Finn)Rosamund de la Hey founded the Mainstreet Trading Company bookshop and cafe in the Borders village of St Boswells with her husband Bill in 2008. At present, printed books in the UK and Ireland are exempt from VAT, but de la Hey is worried that a newly independent Scotland would slap VAT on books at a rate of up to 20%.“Let’s say VAT is applied at 5%. At most independent bookshops the net profit, if indeed they have a net profit, is 5% or under. So there you go — it’s gone,” she said. Prices for Scottish consumers might have to rise, she added.
Some of Britain’s biggest retailers were galvanised into action by a reception at Downing Street last Monday night, when the prime minister evoked the defeat of Hitler in a “call to arms” to business leaders.
Sir Charlie Mayfield, the chairman of John Lewis, attended the event and took to the airwaves on Thursday to defend the Union. He said the higher cost of doing business in an independent Scotland would inevitably be passed on.
“It is the case that it does cost more money to trade in parts of Scotland and therefore those hard costs, in the event of a ‘yes’ vote, are more likely to be passed on,” he said.
Lord Wolfson, chief executive of Next, which employs 3,000 staff across 37 stores in Scotland, also went public with his fears over independence. He told The Sunday Times he would continue to invest in Scotland and did not see why the company’s internal costs should rise — but there would be challenges beyond his control.
“Where we are concerned — and this is a worry rather than a fact — is around three things. What will happen to the currency? If the currency devalues, that will push up prices in Scotland. Taxes — no one quite understands what the new financial situation of the Scottish government would be. If taxes go up that will be bad news. Financial sector jobs — some of the big players are now talking seriously about whether they will need to relocate.”
Many companies are making plans to up sticks and leave. One in 10 is considering moving from Scotland in the event of a “yes” vote, 8% have definite plans and 5% intend to increase their English operations or set up an English company, according to a poll by the Scottish Chambers of Commerce.
Individuals, too, are pulling money out of Scottish banks and moving deposits south, where they feel regulators are more likely to stand behind their assets in the event of another banking crisis.
Chris Fisher, chief executive of Multrees, a wealth manager with offices in Edinburgh and London, said it had moved hundreds of millions of pounds out of Scottish bank accounts on behalf of wealthy individuals, family offices, charities and endowment funds over the past week.
“The last time clients were this jumpy was during the Cyprus bailout. People saw what happened to bigger depositors and are worried it could happen again. We are simply custodians of clients’ deposits; it is not our job to say whether they are being rational,” he said.
The risk of “deposit flight” forced many big Scottish-headquartered companies to go public with their contingency plans last week. Lloyds and RBS, which employ 19% and 16% respectively of their UK staff in Scotland, confirmed plans to move their legal headquarters from Edinburgh to London. Tesco Bank, Clydesdale (owned by National Australia Bank but registered in Scotland) and TSB, the bank spun out of Lloyds, followed suit.
Among Scottish life insurers, Standard Life and Aegon will set up English companies to hold pensions and investments. This would protect them from higher taxes, a weaker currency or inadequate regulation in an independent Scotland.
Both Lloyds and RBS insisted they would remain big employers north of the border, but their moves raised fears that Scotland’s financial services would be irreparably damaged. “A vote for independence would call into question Scotland’s ability to maintain both a viable currency arrangement and the large financial services sector that currently supports a large tax base,” said Neville Hill of Credit Suisse.
FOREIGN news crews have been massing in Edinburgh, showing the reverberations of a “yes” vote would spread well beyond the British Isles. A win for the nationalists could encourage separatist movements in Catalonia and Flanders, reviving fears of a eurozone break-up.
“If Scotland shows the way for independent states to break apart currency unions, we have to revise the possibility, downgraded since July 2012, that euro-area nations may have increasing incentives to do the same,” said Hill.
A “yes” vote could also tilt the balance of opinion in Britain towards leaving the EU, ahead of the “in-out” referendum promised by Cameron in 2017. Scottish voters are generally more enthusiastic about membership than the rest of the UK. An EU exit could ultimately spook international investors even more than a Scottish one.
Foreign banks are warning clients that even if the Scots vote “no”, the closeness of the referendum could destabilise markets for some time to come. “Political risk in the UK disappears if Scotland votes ‘no’?” said Jordan Rochester, a currency strategist at the investment bank Nomura. “Far from it; it is only just beginning.”
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