Bloomberg News

Scots Flirt With Independence in Biggest Test of United Kingdom

March 05, 2012

Alex Salmond, who runs Scotland’s semi-autonomous government, is gearing up for a referendum on full independence he plans to hold in the fall of 2014. Photographer: Andy Buchanan/AFP/Getty Images

Alex Salmond, who runs Scotland’s semi-autonomous government, is gearing up for a referendum on full independence he plans to hold in the fall of 2014. Photographer: Andy Buchanan/AFP/Getty Images

Three ensigns flutter outside the Scottish Parliament in Edinburgh: a British Union Jack, a local Saltire featuring a diagonal white cross on a blue background, and the yellow stars of Europe. Political leaders inside the building are plotting to get rid of the first flag.

Alex Salmond, who runs Scotland’s semi-autonomous government, plans a vote on independence in the second half of 2014. That gives him 2 1/2 years to convince voters leaving the U.K. is more beneficial to Scotland than sticking with the 305- year-old union. Polls suggest he may prevail, with enough people undecided to sway the result in favor of a break.

“There is a momentum towards independence,” said David Hunter, 50, who sells and rents multimedia gear from his Pegasus Sound and Light shop opposite the parliament. “We’re just not being told the full story about how far this is going to go.”

Whether Salmond wins or loses the vote on making Scotland Europe’s newest sovereign state, the Scottish leader has proven himself a formidable opponent challenging Prime Minister David Cameron to cede more power. Salmond, 57, wants full control over Scotland’s 140 billion-pound ($222 billion) economy, including income and corporation tax and the ability to borrow money. He is counting on renewable energy such as wind and wave power to boost growth, along with financial services and tourism.

‘Something In-Between’

The Scottish government currently has authority over health, transport, justice and education. Scotland’s 5.2 million residents make up 8.4 percent of the U.K.’s 62 million people. They get free care for the elderly, free university tuition and free medical prescriptions, all of which people living in England must pay for.

While Salmond’s Scottish National Party won an unprecedented majority in May 2011 elections, polls show most Scots are lukewarm on independence.

“It’s seems to be that the vast majority of Scots neither want independence nor do they want the status quo,” said David Torrance, author of the 2010 biography “Salmond: Against the Odds.” “They want something in-between. It’s ill-defined.”

A poll of 998 adults between Jan. 25, when Scots celebrate national poet Robert Burns and the day Salmond put forward his referendum plan, and Feb. 1 emphasized the indecision.

When asked whether Scotland should negotiate with the U.K. on independence, 35 percent would vote “yes,” down four percentage points from August, while 44 percent would vote “no,” up six points, with 21 percent undecided, down two points. The survey by TNS-BMRB was published on Feb. 3.

‘Leap of Faith’

Cameron, with the support of all three main parties in the Westminster Parliament in London, says Scotland is better off staying part of Europe’s third-largest economy. Salmond says independence will give the Scottish Parliament, re-established in 1999, the fiscal autonomy it needs to revive growth.

“The unionist argument that independence is a leap of faith isn’t totally inaccurate and there is going to be an element of uncertainty that can’t be resolved,” said Nicola McEwen, co-director of the Institute of Governance at Edinburgh University. “Two and a half years is a long, long time and it’s impossible to predict.”

Salmond, a former oil economist whose supporters include News Corp. Chairman Rupert Murdoch, has said he wants to consider a third option of greater power for Scotland over its own finances that stops short of independence. Cameron advocates a simple “yes” or “no” referendum to staying in the U.K.

Eric Carroll, manager of record store Unknown Pleasures, a two-minute walk from the Scottish Parliament, is adamant Scotland must stay in the U.K.

Growth Comparisons

“I don’t want to live anywhere else in the world, and I’ve been all over, but I’d rather they concentrate on the big issues,” Carroll, 59, said as tourists browsed nearby stores for souvenirs including tartan kilts, bagpipes, Glenfiddich Whisky and stag antlers. “I’ll definitely vote no. I’ve no interest in it. I’m British.”

Gross domestic product in Scotland grew 0.5 percent in the third quarter of 2011, in line with the U.K. overall. In the fourth quarter, the British economy shrank 0.2 percent, while the Scottish figure is due April 18. The unemployment rate in Scotland was 8.6 percent in the September to November period, compared with 8.4 percent for the U.K. overall, the Scottish government said in a statement on Jan. 18.

Taking local responsibility for raising income and spending has won support from Scots, including Martin Gilbert, chief executive officer of Aberdeen Asset Management Plc, Scotland’s largest fund company with 174 billion pounds of assets under management.

Oil Revenue

Control of 90 percent of the oil and gas revenue generated from the seas around the country would deliver about 10 billion pounds to Scotland in the fiscal year ending this month, based on Treasury figures. That’s a bit more than a third of the Scottish government’s budget of 28 billion pounds for the year.

“The trouble with their scenario is it’s a best-case scenario and it assumes rather too much,” author Torrance said. “It assumes an absolutely stable, relatively buoyant situation; it assumes oil prices remain high; it assumes production remains relatively consistent; it assumes the credit rating stays the same.”

David Bell, professor of economics at Stirling University, about 35 miles northwest of Edinburgh, said while oil revenue may represent “cash bonanza,” it isn’t enough to maintain current public spending and set up the sovereign wealth fund that Salmond says he wants.

Banking Errors

Salmond has also said an independent Scotland would not share responsibility for the 132 billion pounds of impaired assets owned by Royal Bank of Scotland Group Plc (RBS), Britain’s biggest state-owned lender. It has its headquarters in Edinburgh and is one of three banks issuing Scottish pound notes.

Those assets are insured by the government’s Asset Protection Scheme. Former Chancellor of the Exchequer Alistair Darling, a Scot, said the decisions the bank made that got it into trouble were made in Edinburgh and not London.

The U.K. government expects to spend 50 billion pounds on interest payments on its debt for the current financial year, according to the 2011 budget. On a per capita basis and assuming it could borrow on the same AAA-rated terms, Scotland’s share would be about 4.2 billion pounds.

The referendum will make it harder to invest in Scotland until the outcome is known, SSE Plc (SSE), the U.K.’s second-largest residential energy supplier, said on Feb. 24. The lack of clarity means SSE may have to seek higher returns from projects in Scotland, the company said in a submission to the Scottish and U.K. governments.

‘Uncertain About Independence’

Hunter at Pegasus Sound and Light watched the construction of the 431 million-pound parliament building from scratch. It opened in 2004, three years late and 10 times over budget, after the legislature moved from temporary accommodation further up the Royal Mile where it had been reconvened for the first time since the Act of Union created the U.K. in 1707.

Hunter does business across Scotland and northern England, and many of his equipment suppliers are based in London. He’s concerned times will get tougher if the U.K. breaks up.

“I’ve seen the parliament grow in power over the years and I agree with that,” said Hunter, who opened his store 25 years ago. “I’m just uncertain about independence.”

To contact the reporters on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net


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