Scotland and theunited kingdom

Enlightening the Constitutional Debate

What our experts found

We were warned against the ‘false legal certainty’ that was being claimed about Scotland’s admission, readmission, or continuation in the European Union, in an event on Scotland and the EU. The claims of the Scottish Governmentabout the process for this were being contradicted by officials in the UK Government and the EU. As there hasnever been a comparable secession within an EU memberstate, nobody is certain what EU law would require.

Tax and Spending examined how governments would balance the budget in Scotland following either a ‘Yes’ or a‘No’ outcome. Following a ‘Yes’ outcome, the risks identifiedwere the current downward trend of North Sea Oil revenue,and Scotland’s unfavourable old-age dependency ratio (thatis, ratio of the population over 65 to population of workingage). The first would put downward pressure on tax receipts;the second, upward pressure on social protection entitlement spending. Following a ‘No’ outcome, therewould be pressure to reform the current ‘Barnett’ Formula

The most important peacetime issue facing the United Kingdom, since its formation in 1707, will be decided in the Referendum on Scottish Independence on 18 September 2014. The decision reached by the people of Scotland will also be of vital importance to the other nations of the United Kingdom.

Because of the significance of the Referendum and its outcome, The Royal Society of Edinburgh and the British Academy held a series of events to examine the key questions and issues. Each event sought to analyse the effect of constitutional change on a particular issue – currency and financial services; welfare and public services; taxation; the economy; research and higher education; defence and international relations; borders, immigrationand citizenship; and culture and broadcasting.

The series culminated on 8 April 2014 with the launch of a book1 bringing together the discussions and debates which flowed from each event.

for block grant to Wales, Scotland and Northern Ireland. This would likely be led from Wales, where policy makers believe that a needs assessment would be more appropriate. Therefore, relative block grant to Scotland may decline, or be reshaped, following a ‘No’ outcome.

Defence and International Relations outlined the tasks of a defence force. This question should be resolved, for an independent Scotland, before the question of how much tospend on defence is considered. Too often, the discussionproceeds in the opposite direction: deciding a budget first,and what to buy afterwards. On Trident submarines currentlybased at Faslane, it was noted that the UK’s policy of refusingto ‘pre-negotiate’, as it puts it, for the contingency of a ‘Yes’outcome, makes it particularly hard to predict how the issuewill be resolved. But Trident like-for-like replacement policymay cease to be the consensus policy of all UK parties that itcurrently is. The question was also raised as to whether thedecommissioning of Trident could be achieved within theReferendum-to-Independence-Day timetable suggested bythe Scottish Government.

1Enlightening the Constitutional Debate – ISBN: 978 0 902198 27 2 Available from: series-book@royalsoced.org.uk or online at: www.royalsoced.org.uk/series-book

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The Real Economy examined the business case for andagainst independence. Scotland’s brand risked contaminationfrom anti-EU sentiment in England which was not shared by the leading Scottish political parties. An independent Scotland would be a small, open economy, highly dependenton revenues and employment from the North Sea, accountingfor up to 20% of Scottish GDP. As oil is a depleting resource,there is a strong case for an oil fund to invest against the dayit runs out; but oil revenue cannot at the same time be spentto maintain the current level of public services.

There were two expert sessions on Currency and Banking,one in London and one in Edinburgh. The Edinburgh sessionwas particularly topical, as it took place a few hours after theGovernor of the Bank of England, Mark Carney, spoke in Edinburgh on the requirements for a currency union to succeed. Of the various currency options open to an independent Scotland, our experts discarded two as impractical: namely, joining the Euro, and ‘sterlingisation’(using the pound sterling as Scotland’s currency without formal institutions to support it, such as an independent central bank or an agreed currency area with the rest of theUK). The remaining viable options included a formal monetaryunion (the Scottish Government’s preferred option); an independent currency pegged to another, as in Denmark or Hong Kong; or an independent currency allowed to floatacross a wider range of values. Each of these options carriessignificant risks. One risk is of speculative pressure againstthe Scottish currency. Such pressure destroyed the Czech–Slovak monetary union of 1993 within weeks of its creation.

Culture and Broadcasting discussed how (or whether) therole of the BBC should be fulfilled in an independent Scotland.However, the case for new TV channels in Scotland could bemade whether the Referendum outcome was ‘Yes’ or ‘No’.There was a question to be answered as to the conditionsupon which a Scottish Broadcasting Service, in the event ofindependence, would have access to content produced bythe BBC, which would then be an institution of rUK.

On Immigration and Citizenship, our experts noted that theissue would be more urgent now than when the Irish FreeState was created in 1922, then taking a leisurely thirteenyears to draw up its nationality rules. The Scottish Government is comfortable with Scots having dual citizenship after independence, but one of our expertswarned of the risks of Scottish policy then being “hollowedout” as a result of decisions taken in other jurisdictions withmany dual citizens. Our experts noted that the Scottish Government plans a more liberal immigration policy than thecurrent UK, for good reasons of labour force strengthening;but they wondered how such policies would be consistentwith maintaining the Common Travel Area with the rest of the UK, Ireland, the Channel Islands and the Isle of Man.

Science and Higher Education policy explored what one expert called the “delicate ecology” of higher education and research funding in Scotland. Opposing views were expressed: that the present system of funding via the UK Research Councils should be maintained if Scotland votes

2 In the inelegant jargon of international lawyers.

‘Yes’; and that “small is beautiful" when it comes to research and innovation. The calibre of Scotland’s universities was celebrated. Options for future funding ofScottish, English and EU students are unclear in the event of either a ‘Yes’ or a ‘No’.

On Welfare and Public Services, our experts warned that social protection expenditure would be under severe pressure in Scotland whether the outcome is ‘Yes’ or ‘No’,because of the need to bring the budget closer to balance in either case. The people want welfare expenditure to becontrolled from Scotland, which might be a good idea in anycase even with a ‘No’ outcome, because of the close link withthe NHS and local authority spending, which are already devolved. This would require hard thinking about the purposes and structure of tax to pay for the welfare state.One possibility would be to make National Insurance a morereal (as opposed to notional) social insurance tax.

In the final event, Scotland’s Referendum and Britain’s Future, our experts looked at the historical, legal and constitutional aspects of the debate. The discussion focusedon the future of the Union in terms of changing understandings of sovereignty, shifting patterns of nationalidentity, and uncertainty over the course of post-Referendumconstitutional politics. It was noted that neither side in thedebate sought to emphasise a classically strong conceptionof sovereignty as the 'prize' of a ‘Yes’ or ‘No’ outcome. On the nationalist side, the retention of various historical aspects of Union post-independence – monarchy, currency,social etc., – is stressed. On the Unionist side, there is acceptance in principle that levels of fiscal and legislative autonomy beyond the enhancements to the devolution settlement already provided for under the Scotland Act(2012) are constitutionally viable. If this suggests that the constitutional options are situated on a spectrum rather thanoffering a clear binary choice, the question of political identity, too, is fuzzy. The vast majority of Scots profess aScottish identity, but today this takes a predominantly civicrather than ethnic form. Also, many combine their ‘Scottishness’ with a more or less strong British identity.Identity, then, can be no simple predictor of allegiance in theconstitutional debate and, given the prominence of Scottishidentity, the form and strength of supplementary British identity may be the more significant variable.

In these shifting constitutional sands, it is unlikely that theSeptember Referendum will offer a definitive resolution. Certain matters may be predicted with some confidence, including the international legal standing of rUK as the 'continuator'2 state and the treatment of an independentScotland as a new state. As the vote draws nearer, however,its long-term significance remains shrouded in doubt. A ‘Yes’outcome will be the cue for complex negotiations with theEU and rUK alike. A ‘No’ outcome is also likely to be the prelude to a new constitutional accommodation in which any extension of devolved powers to Scotland is likely to engagethe other nations of the United Kingdom much more thanprevious rounds of Scottish constitutional reform have done.

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Key messagesThe inevitability of change…new powers for ScotlandThroughout the series and across the range of discussiontopics, some overarching messages were heard. One themewhich emerged in many of the discussions was that whateverthe outcome of the Referendum, the status quo will not remain. Things are set to change in Scotland, with or withoutindependence, as the full provisions of the Scotland Act(2012) come into effect.

The Scotland Act (2012) provides new powers to the ScottishParliament. The main provisions of this Act are:

• a new Scottish rate of income tax to be in place from April 2016;

• new borrowing powers for the Scottish Government;• full control of stamp duty land tax and landfill tax from

April 2015; • the power to introduce new taxes, subject to agreement

of the UK Government;• the power to legislate on matters relating to air weapons;• giving Scottish Ministers powers relating to the misuse of drugs; • giving Scottish Ministers powers to set regulations for the

drink-drive limit;• giving Scottish Ministers powers to set the national speed

limit; • giving Scottish Ministers powers relating to the

administration of elections to the Scottish Parliament; • The Act also formally changes the name of the Scottish

Executive to the Scottish Government.

If the outcome of the Referendum is ‘No’, Scotland will inherit these new powers, and the powers contained in the Scotland Act (2012) may not represent the limit of thesenew powers. All the main Unionist parties in Scotland have signalled that they wish to go beyond the ‘Calman’ schemeembodied in the Act of 2012. All of them would like to devolve more spending powers to the Scottish Parliament.That must require devolving more tax powers. But this raises difficulties. For instance, rates of VAT may not normally bevaried within a single EU member state. An independentScotland can choose its VAT rate. A devolved Scotland cannot. It can vary rates of Corporation Tax, but recent worries and parliamentary inquiries into the tax affairs ofmultinational companies suggest that this would not be awise move for either Scotland or rUK. The only taxes of anyconsequence that are left are the rest of income tax, and National Insurance. We await the Unionist parties’ detailedproposals on what further devolution might look like.

Some unanswered questions…the “known unknowns”Another theme prevalent throughout this series has beenthat of uncertainty, and the acknowledgement of so-called‘known unknowns’. There are many aspects of this debatewhich remain uncertain, and voters in the Referendum musttherefore make their decisions in the absence of completeinformation about what the implications might be for certainaspects of Scottish life. Some of the main uncertainties whichwould result from a ‘Yes’ outcome are summarised here:

EU membershipThe Scottish Government has stated that it is “appropriate …that Scotland’s transition to full membership is securedunder the general provisions of Article 48 [of the Treaty ofEuropean Union, which] … provides for a Treaty amendmentto be agreed by common accord on the part of the representatives of the governments of the member states”.The alternative route, Article 49, “provides the legal basis,and defines the procedure, for a conventional enlargementwhere the candidate country is seeking membership fromoutside the EU”. Under Article 48, the party negotiating onScotland’s behalf would not be the Scottish Government, butthe UK Government. If the UK Government elected in 2015 isConservative, then Prime Minister Cameron has promised anin-out referendum on revised terms which he promises willhave been negotiated: so these matters will certainly beadded to the Article 48 agenda. The Scottish Government, in short, will have no control over either the content or theoutcome of negotiations under Article 48. Under Article 49, it would be in control of its own application. Its White Papersays that it “will approach EU membership negotiations onthe principle of continuity of effect”. But it would not automatically inherit the various opt-outs and rebates thatthe current UK has secured from the EU: e.g., a contributionsrebate and an opt-out from the Schengen common travelarea. The outcome of those will emerge from the negotiations with a counterparty (the European Council),whose composition is currently unknown.

NATOThe Scottish Government states that it “will notify NATO ofour intention to join the alliance…. the basic premise ofNATO is that all members must make an active commitmentto the alliance and Scotland would recognise and play our fullpart in building collective security and capability”. However,the White Paper also states that “The Scottish Government iscommitted to securing the complete withdrawal of Tridentfrom an independent Scotland as quickly as can be bothsafely and responsibly achieved”. We cannot say how NATO’sCouncil will respond to these two commitments. But, as theCouncil acts by unanimity, we can say that its position will bedetermined by whichever member state is both most hostileto Scotland’s proposals and prepared to threaten a veto.

Division of Assets and LiabilitiesThe Scottish Government acknowledges that in the event ofa ‘Yes’ outcome, there will have to be negotiations with representatives of rUK over a huge range of issues. They willinclude:

• Splitting of UK assets and liabilities; • Sharing some existing UK services, including overseas

embassies and consulates, the Driver and Vehicle LicensingAuthority (DVLA) and the BBC;

• The future employment situation of public and military employees of the UK in Scotland, and of Scottish public and military employees in rUK;

• The Common Travel Area currently comprising the UK, Ireland, the Channel Islands and the Isle of Man (this

negotiation will also involve the other counterparty governments);

• Sterling and the Bank of England;• The nuclear submarine base at Faslane and the armed

warhead store at Coulport, which are the main components of what is currently Her Majesty’s Naval Base (HMNB) Clyde.

For many of these negotiations, international law offers a default position. On other matters – most obviously Faslaneand Coulport – principles of international law will not helpthe negotiators. On those, a purely political bargain must bestruck. Splitting liabilities could be more controversial. In relation to the UK’s existing stock of government bonds onissue, HM Treasury has stated that:

The continuing UK Government would in all circumstanceshonour the contractual terms of the debt issued by the UKGovernment. An independent Scottish state would becomeresponsible for a fair and proportionate share of the UK’s current liabilities.

Various principles for apportioning liabilities between Scotland and rUK have been suggested. The Scottish Government says:

The national debt could be apportioned by reference to thehistoric contribution made to the UK’s public finances by Scotland, or on the basis of our population share. We maychoose to offset Scotland’s share of the value of UK assetsagainst our inherited debt.

As there is no default position in international law for the‘historic contribution’ apportionment, we predict that formost liabilities the choice will be between ‘population share’and ‘relative GDP’. Population share is simple and an obviousdefault. Considerations of ability to repay may, however,push the parties towards an apportionment based on relativeGDP. The Scottish Government repeatedly states that, onceNorth Sea activity and tax receipts are assigned to Scotland,Scottish GDP per head will be higher than that of rUK on Independence Day. A relative GDP assignment of liabilitieswould in that case be less favourable to Scotland than a population share assignment. For the liabilities and contingent liabilities arising from the UK bailout of failingbanks in 2008–09 – including RBS and the then Bank of Scotland group – we are not aware of any agreed principlesof international law that may be applicable. Pension liabilities should be easier. There are two main liabilities:state pension entitlements of people living in Scotland orwishing to claim state pension in Scotland; and the liabilities

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of unfunded and under-funded schemes for public employees. For the latter:

The Scottish Government proposes taking our fair share ofpension liabilities based on responsibilities for meeting thepension entitlements of pensioners who live in Scotland.

The bargaining position of rUK is unknown.

The Scottish Government insists that Scotland will remain inthe sterling area, and will seek membership of the MonetaryPolicy Committee of the Bank of England. It argues that thatis in the interests of rUK as well as of Scotland, because thepresent UK is what economists call an optimum currencyarea. The current UK Government insists that the rUK Government would be very unlikely to agree to that. Sterlingis an institution, not an asset. Therefore, after independence,it becomes an institution of the continuator state, namelyrUK. Its negotiators will consider whether admitting Scotlandto a currency union is indeed in the interests of rUK. The ‘optimal currency area’ argument should have some trac-tion; but so too will arguments which conclude that thenear-collapse of the Eurozone from 2009 onwards occurred,among other reasons, because some Eurozone memberswere fiscally undisciplined. It is predictable therefore, thatrUK will insist that if it admits Scotland to a common currency area, Scotland will have to agree to harsh rules capping its maximum public debt and deficit.

The Scottish Government states that an independent Scotland does not wish to be a nuclear weapons state. Indeed it cannot be, because the Nuclear Non-proliferationTreaty (NPT) of 1970, which Scotland would presumably sign,states that “the NPT non-nuclear-weapon states agree neverto acquire nuclear weapons”. Therefore, it is proper for Scotland to give notice to rUK, as it already has done, thatthe nuclear-armed submarines and warheads must be removed from Scottish territory. What is unclear is how therUK will respond. Quite independently of the Faslane question, the UK political parties and the armed services arein the middle of arguments about how, or whether, to replace the present Trident deterrent force. These arguments cut across parties (and Services). We cannot predict the stance to be taken by the UK Government whichwill be elected in 2015. Even if negotiations are started bythe current Coalition Government, its position on Tridentand Faslane may be altered by the new Government. Apartfrom the terms of the NPT, international law is no help here.The outcome, whatever it is, will be intrinsically political.