Smith Commission: what’s next for Scottish business?

As the Smith Commission unveils its cross-party deal for further Scottish devolution, Professor Brad Mackay, Chair in Strategic Management at University of Edinburgh Business School, suggests lessons can be learned from Québec.

Two referendums in 15 years and the rise of the Parti Québécois corresponded with Montreal losing its position as Canada’s leading business hub. The prolonged uncertainty caused by the independence debate became known as the “neverendum”. It tells us that perpetual uncertainty is not only bad for business, it can dampen economic investment and growth, and ultimately the tax revenues which finance social programmes.

The 1995 Québec and 2014 Scottish referendums largely played out the same way – with the polls between the ‘yes’ and ‘no’ camps closing quickly in the last few weeks, with large businesses intervening in the debate, and panicked central governments issuing last-minute commitments to devolution. Post-ballot rhetoric in Scotland is strikingly familiar too. No, it seems, doesn’t mean no.

When we interviewed 70 senior business leaders across Scotland in the lead up the referendum, the majority pointed to the importance of an unencumbered single market in the UK – with a consistent corporate and personal tax regime, and industry regulation across the union.

Around 10% of firms suggested they could re-domicile to other parts of the UK or abroad if the single market was disrupted, if it became more difficult to attract or retain key employees, or if the costs and complexity of trading were to increase.

This remains a real issue for businesses. Devolving income tax rates is likely to be of concern to many. Together with business rates, these levies are important for attracting and retaining talent, maintaining a competitive trading environment, and ultimately driving business behaviour.

Future Scottish Governments have the choice of whether to maintain continuity with taxes and regulations with the rest of the UK, which is clearly the preference of business.

But creating even the slightest possibility of a two-tier income tax regime could lead those businesses to re-consider their plans. Many leaders argue the UK tax regime is relatively competitive, and there are considerable tax incentives for investing in new ventures, for research and development, and for encouraging investment in the North Sea. So why change it?

Recent rhetoric over future referendums, new spending commitments, and the none-too-subtle change in stamp duty to redistribute income, not from the ultra-wealthy (the billionaires who skew inequality statistics are predominantly in London), but from the relatively mobile middle class, has not addressed these fears.

Anecdotal evidence tells us some entrepreneurs are choosing to re-direct new ventures to England. As one business leader recently commented to me, “our policy makers are obsessed by constitutional matters and blissfully unaware of what is happening on the ground”.

Like the post-1980 Québec experience, a relocation of businesses is unlikely to translate into a sudden exodus. It would be instead a slow, quiet bleed. The challenge for the Scottish government will be to use its new powers to deal with issues of deprivation and inequality, while avoiding the Québec experience.

Between 1977 and 1981 some 30 corporate headquarters,or operational equivalents, moved out of Montreal. Referendums in 1980 and 1995 coincided with Québec’s share of Canada’s GDP dropping from 25% to below 20%. And between 1990 and 2011, the province lost some 20% of Canada’s top 500 companies.

It wasn’t just large companies that exited the province. Hundreds of thousands of predominantly English-speaking Québécois also left, taking their businesses with them.

Some of the variables of the francophone Québec experience – with its language and culture – aren’t relevant to Scotland. But the interdependence of the Scottish economy with the UK market could be crucial: whereas Québec’s exports with other Canadian provinces are around 40%, nearly 70% of Scottish exports go to the rest of Britain.

Today’s proposals could go one of two ways.

Hopefully they’ll become a significant gain for Scotland’s capital, encouraging accountability for tax and spend, and enabling the tailoring of economic and social policy for Scottish needs.

But they could also trigger longer-term decline, particularly if uncertainty continues or if the business environment becomes less friendly.

Has the Smith Commission struck the right balance between devolution and economic needs? Will it bring to an end uncertainty among businesses, or could it trigger a longer-term decline? Let us know in the comments below…

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