David Bell & Michael McGoldrick
University of Stirling
Two of the most important sectors in the Scottish economy are finance and oil & gas. These are highly productive and dynamic elements of the Scottish economy. They are also quite large: the financial sector employs 91,000 people while the oil and gas industry has 31,000 employees. Their views on the independence debate should therefore carry some weight.
This blog reviews responses from the finance and oil & gas industries to a survey carried out by the University of Stirling between March 24th and April 11th 2014. All of the firms are members of one of the Scottish Chambers of Commerce. There were 49 finance sector companies and 35 in the oil and gas industry that responded to the survey. Our findings are broadly consonant with those found by Prof. Brad Mackay, University of Edinburgh who has conducted detailed interviews with senior business leaders in these sectors.
There is no specific reason to expect that these industries would share similar views on independence: the products from the oil and gas sector are traded internationally: the sector includes many multinational companies that are used to operating in different jurisdictions. The Scottish finance sector is less international in its outlook. It is regulated by the Financial Conduct Authority which operates only in the UK. Most of its products are traded within the UK market.
So what do these industries make of the independence debate? Let’s begin with opportunities and risks. The distribution of firms across various options to which they were invited to respond is shown in Figure 1 below:
Figure 1: Main Risks and Opportunities Associated with Independence
The White Paper – “Scotland’s Future” – argues that the oil & gas industry in the UK suffers from an uncertain tax environment, which harms investment. It suggests that, post-independence, there will be no overall increase in the tax burden on the oil & gas industry and no change in the tax regime without consultation. In relation to the finance sector, the White Paper argues that financial institutions would be subject to the same prudential regulations in Scotland as in rUK. Scotland would also be part of a monetary union with rUK.
Even with these assurances, the majority of firms in both sectors are relatively negative about the economic prospects of independence. Specifically, a majority of firms in both sectors do not see any opportunities associated with independence. Across all of the sectors in our survey, 47 per cent of firms did not see any opportunities: the proportions for finance (55 per cent) and oil & gas (53 per cent) seem to suggest that these sectors take a less optimistic view than the rest of Scottish businesses about the opportunities associated with independence.
Much smaller proportions, 10 per cent in finance and 18 per cent in oil and gas, believe that there are no risks associated with independence. Oil & gas is somewhat less likely to identify risks than is the finance sector, perhaps because of its greater linkage to markets outside the UK. Nevertheless, both sectors were more likely to identify risks than were Scottish businesses as a whole, of whom 23 per cent felt there were no risks associated with independence.
The major risk identified by both industries is the uncertainty associated with the nature and length of the independence process. This issue is of particular concern to the finance industry, where changes in regulation and/or monetary arrangements might place them at a competitive disadvantage relative to firms operating in other parts of the UK.
The majority of firms in finance and oil & gas maintain a list of the risks that the firm faces and possible mitigation strategies. This is known as a risk register. Firms in the oil & gas sector were less likely than those in finance to include the possibility of Scottish independence as a business risk.
Businesses were given a number of options and asked “How important do you rate these issues in relation to independence for your business?” Currency was rated as “Extremely important” by 73 per cent of responding firms in the finance sector. This was a much higher share than the 53 per cent of oil & gas industry respondents who also rated currency as “Extremely important”. The oil & gas share was similar to that of the sample as a whole, of whom 55 per cent rated currency as “Extremely important”. The finance sector’s particular concerns are likely to largely stem from the risk of not sharing a currency with rUK and consequent threats to its costs and competitiveness.
If independence occurred, which currency option would be preferred? Using sterling as part of a currency union with the rUK is overwhelmingly the most popular option (See Figure 2). In the financial sector, 69 per cent of firms, and in the oil and gas sector 61 per cent of firms, thought that this outcome would be “extremely positive” or “positive” for their business. In contrast, a majority of firms in both sectors believe that using Sterling, but not being part of a currency union, using the Euro or adopting a new Scottish currency would have a negative impact on their business. Currency union is the option overwhelmingly preferred by the oil and gas and finance sectors of Scottish industry.
Figure 2: Currency Preferences
Withdrawal from the European Union is another risk for business. This could come about whether or not Scotland is independent from rUK. The preferred outcome for both the oil & gas and finance industries is that the UK continues as a single entity and stays a member of the EU. Nevertheless, the finance industry has a stronger preference for this outcome (49 per cent) than the oil & gas industry (29%). These proportions compare with 35 per cent of the overall sample who describe the UK surviving and staying as part of the EU as having a positive impact.
An independent Scotland’s status in the EU is important to both sectors. Our survey shows that either the rUK leaving the EU and/or an independent Scotland leaving the EU is likely to have a negative impact on both the finance and oil & gas sectors in Scotland. Both sectors most preferred option is for Scotland to remain part of the UK, which in turn continues its membership of the EU.
Possible explanations for the antipathy towards leaving the EU include differences in market regulation that might arise following exit and the difficulty of Scotland, or the UK as a whole, establishing trade agreements from outside the EU. Not being in the EU could conceivably hurt the finance sector in Scotland more than the oil & gas industry. Financial institutions based in Scotland would be viewed as outside the regulatory ambit of the EU and the Eurozone, making it more difficult to extend their markets. In contrast, oil and gas firms know that there will be a continuing demand for their products irrespective of the jurisdiction in which they work.
Figure 3: EU Membership
The main message of this blog is that a majority of firms in the oil & gas, and finance sectors believe that independence will bring no opportunities; while a relatively small number of firms believe that there are no risks. Finance sector firms are more concerned about independence than those in the oil & gas sectors, possibly due to their greater focus on the UK market. Currency is a particularly important issue for the financial sector, but both sectors would be concerned if either Scotland or the UK were to leave the EU.