UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1093

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

SCOTTISH AFFAIRS COMMITTEE

THE STATE OF THE SCOTTISH ECONOMY

TUESDAY 16 APRIL 2013

IAIN MCMILLAN CBE and LAURA MCMAHON

Evidence heard in Public

Questions 1 - 78

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Oral Evidence

Taken before the Scottish Affairs Committee

on Tuesday 16 April 2013

Members present:

Mr Ian Davidson (Chair)

Mike Crockart

Graeme Morrice

Pamela Nash

Sir James Paice

Mr Alan Reid

Lindsay Roy

Examination of Witnesses

Witnesses: Iain McMillan, Director, and Laura McMahon, Policy Executive, CBI Scotland, gave evidence.

Q1 Chair: I welcome you both to the Committee today. As I mentioned outside the room, we have various votes at certain times, so we will have to leave you at various points. We expect the first vote in 10 minutes, but that does not mean that the session finishes at that stage: there will be more fun to come. Can I start by asking you to introduce yourselves?

Iain McMillan: Thank you very much, Chairman. My name is Iain McMillan, and I am the director of CBI Scotland. The director of CBI Scotland is the professional head of the Confederation of British Industry, which is a UK business representative organisation. On my left is Laura McMahon, who joined the CBI at the beginning of this year as a policy officer; she accompanies me today in her first meeting in this capacity at the Scottish Affairs Committee, and may be known to one or two of you already in a different capacity. We are both very glad to be here. We regard the work of this Committee as being of significant importance and are very glad to be here to engage with you today.

Chair: Fine. That is a cue for Pamela to mention something.

Pamela Nash: Yes, I should like to take this opportunity to declare an interest: Ms McMahon worked for me in my constituency office until she took up her post with CBI Scotland.

Q2 Chair: We all know everybody now. Could we start off by asking you, Iain, to give a CBI view of where the Scottish economy is at the moment and to draw to our attention in particular anything that you think we ought to be aware of?

Iain McMillan: Since the economic downturn hit four years ago, the Scottish economy has by and large tracked that of the UK. There are some differences-there are slight differences in depth and duration-but by and large the Scottish economy is highly integrated with the UK economy. Therefore, if one looks at the graph and tracks the GDP both of the UK and of Scotland, they are very, very similar. At the moment, the economy is pretty flat. We saw some optimism-for example, in manufacturing industry-in 2012, but that has flattened. Optimism, output, orders and exports are all very flat, and indeed there are more negatives than positives-at least, for the moment. We will be releasing our industrial trends survey for April next week; I have not seen the numbers yet, so I am not able to share them with you, but we are not seeing any real strength of recovery there in the next few months. Indeed, across the economy as a whole, when one looks at, for example, the Lloyds banking group purchasing managers index numbers, the output across most sectors is pretty flat.

For the rest of this year there are a number of clues as to what will happen. Our latest forecast for the UK economy is 1% for 2013 and 2% for 2014. We have not revised that figure since it was produced in February, but I think we probably will. The Office for Budget Responsibility forecast that the UK economy would grow by 0.6% this year. The IMF produced its own figures earlier today and it has cut its growth forecast from 1%, which is where we were, down to 0.7%. So you couldn’t put a wafer between the OBR and the IMF.

We don’t produce our own forecast for Scotland but some others do: the Fraser of Allander Institute and the Ernst & Young ITEM Club. Fraser of Allander have forecast 0.9%; E & Y have forecast 0.7%. So when you average them-0.8%-you are within striking distance of the IMF forecast for the UK as a whole. Next year, these two organisations are at 1.75%, a bit below the forecast for the UK economy. That is our forecast, but again, the OBR are at 1.8% for the UK economy as a whole. So I think, looking forward, it’s not great. I think the worst is over, but it is going to be a hard slog. Until things pick up in Europe, until the US economy picks up-and I think there is much that Congress and the President need to do there, particularly in terms of the sequestration-we are not going to see a great deal of growth, alas.

Q3 Chair: And the good news? The good news is it is no getting worse?

Iain McMillan: The good news is that the worst is over. In all of this one does see, for example, growth in employment. That has not been fully explained, particularly as employment in the public sector has been coming down, both in the UK and in Scotland. Nevertheless employment seems to be going up. Fraser of Allander are forecasting a net increase in employment in Scotland in 2013 of 9,400; in 2014, of 19,500; and in 2015, of a whopping 31,800. There is some good news in all of this. We are not sure about the quality of the jobs. Some are probably part-time. Others are on short working. But I think there are signs that businesses in the private sector are holding on to their work forces rather than letting them go and possibly losing them for ever, and making sure that, when the upturn comes, they have people there who can work and get the output up.

Q4 Chair: Unless I was mistaken, you seemed to be clarifying the extent to which the Scottish and the rest of the UK economies are moving in tandem. We often see reported in the media variations as if they were more significant than they really are. Is that a fair way of looking at it or are these variations simply marginal?

Iain McMillan: They are marginal, but it depends on which sector one looks at and also which part of the UK one looks at. Scotland performs round about the average of the UK as a whole, but it performs better than some parts of England, Wales and Northern Ireland, and not as well as some other parts of these other jurisdictions. So it depends on the sector and the geography.

Q5 Chair: Can I clarify whether there is anything in any of this that we should be particularly alarmed about as the Scottish Affairs Committee? Or is the trend and everything else dominated by what is happening UK-wide?

Iain McMillan: It would certainly worry us if we keep going forward in a position where the consolidation of the public finances does not gain traction and we lose ground there. That would give us a great deal of concern. Public sector net debt is huge. The interest bill on the national debt today will reach almost £50 billion this year. By the time we reach the peak, it will have reached almost £70 billion. That is a huge sum in interest that we pay. Every 5 April, we do not just rule off the income and expenditure account and the deficit evaporates. It gets added to previous deficits, and on it goes, so we would be very concerned if the consolidation was to go seriously adrift.

Chair: Colleagues: points that you wish to follow up in that area.

Q6 Sir James Paice: One of the distinctions of the Scottish economy-it applies, as you implied earlier, to certain parts of the rest of the UK-is the balance between the public and private sectors. There is much higher public sector employment and share of the economy in Scotland. How does that play out in a time of recession or flatlining, as we have seen, compared with a period of growth? How does that different balance actually impact on the overall Scottish economy?

Iain McMillan: Public sector spending per head in Scotland is 52% and in the rest of the UK it is 46%, so you are absolutely right. It is more in Scotland, although in Northern Ireland, Wales and the north-east of England it is higher when one looks at the proportion of the public sector to the private sector. How does that play out in a recession? It all depends on fiscal transfers. We have not seen anything other than a straightforward per capita shift in public spending through the Barnett formula into Scotland. We are seeing public spending in Scotland being reduced in real terms in terms of its growth. Over time, that may have an adverse effect on the Scottish economy if it is not matched by private sector growth. We will have to wait and see.

Q7 Pamela Nash: We had figures yesterday from the Cabinet Office: around 750,000 private sector jobs are being created to fill the public sector jobs that have gone UK-wide. Do you see any evidence of that happening in Scotland so far?

Iain McMillan: The numbers seem to suggest that lost jobs in the public sector are being offset by new jobs in the private sector. On the numbers that I mentioned earlier by Fraser of Allander, for example, there is a net increase in jobs coming through: 9,400 this year and 19,500 next year suggests that these jobs are being offset. But I need to caveat that, because we do not know the nature of these jobs. Are people leaving jobs in the public sector to go to less well-paid jobs in the private sector, or going part-time or whatever? The numbers seem to be reasonably encouraging, but there is that caveat.

Q8 Pamela Nash: Can I ask a further question about that? There is no evidence at the moment and we are all wondering why these new jobs are being created and where they are being created. Is there any evidence from CBI Scotland’s members as to where these jobs are? Are they part-time jobs? What is the nature of these jobs?

Iain McMillan: That is a very difficult question to answer. If one looks at the leading commentators throughout the UK and in Scotland who write about these things, I think we are seeing from them considerable difficulties in tracking where these jobs are coming from. It is extremely difficult. This is not like any other economic downturn that we have seen in the past. I saw one in 1973; I saw one in the early 1980s; and we saw one in the early 1990s. Unemployment went up to 3 million and more on each occasion. That has not happened this time round. We are seeing other jobs created, but I do not think even the leading commentators really know why.

Q9 Lindsay Roy: Iain, we have heard criticism of the reduction in investment in vocational education. You and I both served on the Scottish Literacy Commission. Is there still an issue around skills shortages? Is there a dearth of applicants for jobs in highly skilled occupations?

Iain McMillan: Yes, there is. For example, if you go to Aberdeen and speak to the oil and gas sector, they will tell you about critical shortages of qualified engineers. One of the reasons why we have put oil and gas companies and the supply chain in touch with our universities in the Aberdeen area and further afield is that we are trying to address that problem. We also see the problem in other sectors. There are shortages of good candidates for information and communication technology jobs as well.

That underscores the fact that we need to get better at getting young people the right kind of careers advice. In all that, there has been some improvement over the years. The careers service in Scotland, for example, was reformed in the early 2000s, but I do not think we are quite getting it right. That is not necessarily a criticism of those who are involved with it; we just need to get better. We need to say to young people, "By all means, if you want to be a lawyer, go to university and do that. But please understand that when you come out of university, you are going to be one in 100 who will be looking for a legal apprenticeship, whereas if you go into an engineering course, or whatever, you will probably get a job quite quickly." So we need to get better than we have been in the past at pointing to where the opportunities are.

Q10 Lindsay Roy: Have you been engaging with the Scottish Government and the colleges on this agenda?

Iain McMillan: We have certainly been engaging with the Scottish Government at Skills Development Scotland on the agenda. Skills Development Scotland has made some strides, for example on the quality of its website. Its website tries to get careers advice more aligned to where the jobs are. That is something we haven’t been very good at in Scotland for quite some time. The signs are that we are getting better, but we have further to go.

Q11 Lindsay Roy: Progress is slow, but there needs to be a real thrust towards this, and a prioritisation?

Iain McMillan: I think so.

Q12 Chair: Can I follow up about the colleges? We hear that the Scottish Government are making substantial cuts to expenditure on colleges. Does that not run directly counter to the point you are making about wanting to help youngsters get into vocational jobs or vocational education that would help them fill jobs for which there are vacancies?

Iain McMillan: We have noticed that the funding for Scottish colleges has been coming down. The Cabinet Secretary for Education certainly has an agenda to group colleges together to try to make them more efficient. We are all in favour of that, but we need to be careful that we do not do two things wrong. First, we must not drive expenditure to the point that the knife goes into the bone after all the fat has been taken out. Secondly, we must not delocalise our colleges by clustering them too greatly. Earlier this year, I asked our members to let me know whether they have any concerns about the degree and the quality of courses that are being offered by our colleges.

Chair: Can you tell us about that when we come back?

Sitting suspended for Divisions in the House.

On resuming-

Q13 Chair: I am sorry about the extra delay.

Iain McMillan: I think I had reached the point where I had advised the Committee that, earlier this year, I had approached our members to say that there were changes to the funding of colleges by the Scottish Government, and that if members began to see any adverse changes in the amount of provision-that is, the extent of provision-or a reduction in the quality of the offering of colleges, would they please let me know, and we would start to take a closer look at that. None of my members thus far has come back to me to report any problems. That is not to say that they will not come back in the future, and it may be too soon to notice some of the changes coming through, but it is on our radar, and we have made that request to our members to let us know.

Q14 Lindsay Roy: As I understand it, there are issues about access to some of the college courses, and therefore upskilling. But we are not quite clear at what level these deficiencies are occurring, whether it is at a fairly high level in the spectrum or whether it is at basic skill level.

Iain McMillan: That is exactly right.

Q15 Lindsay Roy: It would be helpful if you could get feedback and communicate to this Committee.

Iain McMillan: I would be very happy to do that. We have read and heard similar points to yours. If we do hear of any adverse effects we will come back to the Committee and keep you apprised of what’s happening.

Q16 Chair: That would be helpful. Could I pick up another element of it? I see that there is a column in The Herald today-and what an excellent newspaper that is-saying that they are calling for greater emphasis on literacy and numeracy in the classroom. We have heard that for a while about a lot of youngsters coming out of schools with the wrong aptitudes, lacking numeracy and literacy skills that are at a usable level. Is that a problem that your members experience as well?

Iain McMillan: It is. Probably the first thing to say is that much of Scottish education is good and some of it is very good. That is what the inspectorate has found over the years. That is quite an accurate assessment of Scottish education. But some areas of Scottish education are not good. Our members are concerned about levels of literacy and numeracy. We don’t think that they are necessarily any better or worse than some other places in the developed world. Nevertheless, we do have concerns that young people are not coming into the workplace with the levels of numeracy and literacy that we would like.

Lindsay, you and I served on the Literacy Commission and we came up with some very sound recommendations. The Scottish Government then set up a standing Literacy Commission to take forward some of those recommendations. That work is underway at the moment. I don’t think we are going to see any changes overnight. Actually, improving literacy and numeracy in our schools is going to take some time to come through. The reason is that young people starting at school need to move through the years before they become eligible to enter the workplace in any case. The other thing is that where there is a teacher training issue involved-and there will be to some degree-that takes time for the pull-through to work as well. I think the jury is out. We continue to keep an eye on it and we are working with the Scottish Government to try to improve these matters going forward.

Q17 Chair: The Scottish Parliament has been there for quite a long time and has had responsibility for this area of work for quite a long time. To say that there is a pull-through and it will have to wait for teacher training is almost an indication that it hasn’t paid any attention to this in the past. I think many of us who find a disproportionate number of our constituents being adversely affected by this inadequate education do feel that this is something that you as employers and the Scottish Government have not been responding adequately to for a number of years.

Iain McMillan: I think it does go back a number of years, not just during the current Administration. It goes back to the previous Administrations. Efforts have been made over the years. For example, the current curriculum for excellence is embodying some of these changes among others. It had a starting point in 2003. Yes, we would like to have seen greater degrees of improvement there.

I wouldn’t necessarily agree with you that business has not been up to the mark. Sadly, business has had to take remedial steps with some people in our work force to get them up to speed with literacy and numeracy. That is not where we want to be. We want to see young people, not specific job-ready-that would be too much to ask-but certainly generically job-ready when they come into the workplace. Many of them are; this is a minority. Nevertheless, we do need to improve that situation.

Q18 Chair: It is quite a substantial minority in some areas. In as much as a society can be judged by how well it deals with those with the most difficulties or those at the bottom, this is a group that has clearly been neglected for quite a long number of years by successive Scottish Governments.

Iain McMillan: I think there are two groups. There is a group that has additional needs. Their literacy and numeracy skills need to be addressed in a certain way, often by specialists who know how to deal with such things and to help young people. There are others who have the fundamental capability for good literacy and numeracy, but who are falling short of that. That is where gains can be made very quickly. That is where employers have been able to assist in this regard.

It goes back to the fact that for a long time in schools we have perhaps seen a regime where good spelling and grammar do not matter so much. They actually do, because good grammar and good spelling are consistent with logic. If they are not there, logic can be substandard, so I agree that more needs to be done and it is something that we call on the Scottish Government regularly to do.

Q19 Chair: Can I follow up one point there? You seem to be saying that employers are able to take remedial action relatively quickly and easily with those who have the capability-leaving aside those with special needs, which I recognise is a much more specialist area. That implies that the education system could be dealing with these issues at school level relatively easily and relatively quickly as well, but they are obviously neglecting to do so.

Iain McMillan: I think so, yes. Indeed.

Q20 Chair: I would suggest that that is not a problem that goes right back to nursery provision and then the primary and secondary education, because that is the argument of pull-through. If you are saying that employers are able to provide remedial numeracy, literacy and grammar lessons and get people up to an acceptable standard, presumably there is absolutely no reason why this should not have been done by the education service.

Iain McMillan: Certainly at the later stages of school life, where teachers can see that there is a dearth of literacy and numeracy skills, then there is still time to deal with it there. In an ideal world, however, it would be dealt with much earlier in a young person’s school career.

Q21 Chair: Absolutely. From my experience as a local member, quite often the secondaries would tell us that the youngsters that they were being sent by the primaries were not up to scratch and fell behind. The primaries would then tell us that youngsters were coming into them with such difficult levels of socialisation and so on that it was very difficult for them to get them up to scratch. If your experience is that much of this could actually be done relatively quickly by employers, some of these longer-term explanations are more alibis than anything else.

Iain McMillan: That is right, although I think there are two caveats here. The first is that employers can deal only with those who are in the workplace. What they cannot do is deal with those who have not made it into the workplace. The second caveat is really to agree with the point that you made about this not being just an education issue; this is a social issue as well. That is something that the Literacy Commission was very much aware of.

Q22 Lindsay Roy: Recently, what we were saying was that skills are important, but attitude is everything.

Iain McMillan: It is.

Q23 Lindsay Roy: Are you finding a change in attitude in people who are coming into the workplace?

Iain McMillan: I do not think so. In terms of attitude, this is not something that we have specifically surveyed. In terms of getting to work on time, doing a good job for one’s employers, earning one’s salary and wanting to be ambitious for the future, I think that there is a lot of that out there. However, I do not think that it has particularly improved. Again, I think it is one of these areas where this will take time to come through.

Q24 Graeme Morrice: Obviously, the UK has a major involvement in macro-economic policy in so far as it affects Scotland, but do you think the Scottish Government are doing enough to stimulate economic development and growth in Scotland themselves?

Iain McMillan: The Scottish Government have most of the powers to invest in the supply side of the economy, which we consider to be very important, but of course their powers over the macro-economy are very limited-almost non-existent. Those reside here, and that is where we would like them to continue to reside. But on education, on the development of skills, on investment in transport and infrastructure, on housing, on improving the planning system, on all these other areas where they are investing in the supply side of the economy, I think that the Scottish Government have done very well in some areas, but they could do better in others.

For example, connectivity in transport is very important to us. They have completed projects such as the M80; they are pledged to dual the M9 from Perth to Inverness, and preliminary work on that has started; they are not far away from starting work on the M8. However, there have been other areas where we are not happy. The Edinburgh-Glasgow improvement programme for the railways has been scaled back. It should all have been scheduled to be completed by 2016. The main chunk from Glasgow to Edinburgh still should be complete by 2016, but the relief tracks and the line through Stirling to Dunblane were originally scheduled for then, and all of that has been cut back. That is an area that we are not content with.

As for other areas of the supply side, on housing, for example, we need to see more happening. That is something that we would like to see increased in the UK as a whole, and the provisions that were set out in the Budget to help people to purchase their houses and also to increase the housing stock were moves in the right direction. We would like to see the Scottish Government use the Barnett consequentials to make similar improvements north of the border. Thus far, the Scottish Government have been silent in that regard, but Laura wrote to the Finance Secretary last week asking him to clarify the position in terms of that. There is more that could be done: for example, we have called on the Scottish Government in the past to spend more capital on infrastructure. It is within their powers to spend Barnett moneys as they see fit, and therefore that is something it is entirely within their power to do.

Chair: That is helpful.

Q25 Pamela Nash: I have a housing question: are we talking about social housing here or investment in supporting private housing?

Laura McMahon: In the 2013 Budget, the Government introduced a Help to Buy shared equity scheme, and Barnett consequentials were offered to the Scottish Government. However, they were straitjacketed, as John Swinney said, in that they were in the form of loans that have to be paid back. However, it is still a model that we would support and we would encourage them still to use that money for a similar scheme. So it is not necessarily social housing, but certainly it would help first-time buyers and second-steppers as well.

Q26 Chair: Sorry, can I just be clear about that? I didn’t quite catch everything you were saying. The Scottish Government were offered money by the UK Government under Barnett consequentials, which, even though it was straitjacketed, would have allowed them to progress housing?

Laura McMahon: It doesn’t come in the form of hard cash for capital expenditure; it comes of the form of loans. So they are saying they are bound to use it in a certain way, which is true, but we would encourage them to use it in that way.

Q27 Chair: So they have declined to use it in that way, and indeed declined to use it at all?

Laura McMahon: They have not declined; they have not made any comment. What my letter to John Swinney was asking was that they make a comment in order that there can be a level playing field and the investment is not drawn south.

Q28 Chair: How long ago was that announced?

Laura McMahon: That was in the 2013 Budget.

Q29 Chair: So it is not unreasonable that they would not have made their mind up yet.

Laura McMahon: Not necessarily, but our members have highlighted to us that-

Chair: You want to chase them on a bit. They are obsessed by other things, but I am sure they will get around to this eventually.

Q30 Mike Crockart: This is a question about the general health of business in Scotland, as you were talking about earlier. One of the things that you talked about was companies holding on to staff to enable them to ramp up very quickly given any upturn that happens in the economy. One of the other things that falls into the same category is the substantial cash holdings among many UK companies in some corporate sectors, although not in all, obviously. Do you have any information that relates to the Scottish economy to say whether that is a similar situation? Is it more in one area than another?

Iain McMillan: No, we do not have any evidence to show what the situation is in Scotland, but I have no reason to believe that it is any different from the position in the rest of the UK. You are quite right that in terms of cash, companies are extremely well endowed, not only here but in the United States of America. That is actually good, because it means that when the upturn comes and companies can be sure of an adequate return on capital employed with the money when it is invested, certainly the profitability of companies and their ability to grow fairly quickly will come through very fast.

Q31 Mike Crockart: What is needed to allow companies to do that? Is it a confidence thing? Is it a certainty thing? What do companies need?

Iain McMillan: Demand. Demand in Europe, demand in the United States of America and demand in other parts of the world. I think also that companies, particularly the mid-sized companies, need more than ever to look at the emerging markets and chase new business in these places, because although Europe is a great trading partner it is not going to go through a period of substantial growth for some time to come. Indeed, in 2013 its GDP is likely to be negative to half a percentage point, so it is not there. The United States, I think, will offer opportunities, but it is not going to be dazzling. China is still going to offer a lot. I think there were reports that their GDP is down, but it is still 7% a year. There are countries such as Indonesia, Venezuela, Mexico, Vietnam and even Pakistan, which is often overlooked, and other countries like that, which are very good exporters but they also offer great opportunities for British and Scottish companies overseas.

Q32 Mike Crockart: You almost read my mind, because that moves seamlessly on to the next topic, which is support for exports. You are quite right that that is where we are aiming to get the growth. If it is not going to come from Europe and it is not going from America, it needs to come from somewhere. Is there sufficient help for Scottish companies coming from either UKTI or Scottish Development International to enable them to get into emerging markets?

Iain McMillan: Although from time to time Scottish Enterprise can be controversial, in actual fact what they and SDI offer is pretty good. Where companies have the ambition to get into the aeroplane, go abroad, find partners and look for new business, Scottish Enterprise, Highlands and Islands Enterprise and SDI can do a very good job for them. What I think does need to happen-for us and perhaps even you in your constituencies, if I may say so-is to encourage businesses to do more of that.

Q33 Sir James Paice: On the back of that, do you feel there is any conflict between the role of UKTI and Scottish Enterprise and SDI? In other words, if you are trying to penetrate overseas markets, is the Scottish brand of significance over and above the UK brand?

Iain McMillan: When I go abroad, Scottish Enterprise-I include that in its widest sense, with SDI-is very highly regarded. Is there some competition between Scotland and other parts of the United Kingdom? Yes, I think there probably is. Good. A good dose of competition can be very healthy. If SDI is able to persuade a company to invest in Scotland for all the right reasons and it does not invest in another part of the United Kingdom, that is a very good thing because we might lose that inward investment altogether. So I think there can be competition. But by and large they work very harmoniously together; at least that is my information. UKTI has an office in Glasgow. I understand that it works quite closely with SDI; at least that is what both organisations tell me. I don’t detect any friction there at all. It is competitive but collegiate.

Q34 Chair: Can I follow up on a point that Mike raised when you responded that quite a lot of firms had substantial cash balances and were not investing because of a lack of demand? I want to ask about the role of the banks. Not every firm will be sitting on cash balances. The banks, we all know, are the generally bad lot. How are they now in terms of making money available for investment if firms come to them with proposals? We had a series of discussions a while ago. When we met the banks, they gave us the impression that they were almost pushing the money out the door to anybody who came along. We met construction, road haulage and a couple of other industries. All of them said that that was not the case and that the banks did not understand them. Have things got better at all?

Iain McMillan: I think they have. The first thing to do is declare that I was a banker for 23 years.

Chair: You’ve been away from it, to be fair, for a while.

Iain McMillan: It was 20 years ago.

Chair: Well, there you are. You’ve almost done your penance.

Iain McMillan: Absolutely, but those were the days when we knew how to do banking properly.

Chair: If only you had stayed.

Iain McMillan: Indeed. There are three factors here. The first is that, during an economic downturn, impairments increase-in other words, bad and doubtful debts increase. There is nothing new about this. This has always happened in economic downturns. When that happens, the banks’ profitability goes down. There are a greater number of write-offs.

Secondly, the banks’ appetite to take risks reduces. Therefore the hurdle at which a loan may be given will go up. There is nothing new in any of this. That is happening now, but what has also happened is that the banks have been required, quite rightly, by the authorities to hold more capital. The more capital that banks have to hold, the less money there is to lend to businesses and other consumers. So those are two issues there.

The other point is that the statistics that come out of the Department for Business, Innovation and Skills appear to show that bank lending is getting better. I don’t have the figures in front of me but they are getting better. The other thing is that a body was set up, under the chairmanship of Professor Russel Griggs, which could be brought in to look at the degree to which credit is being advanced, whether in the round banks have been right to refuse the credit and so on. The reports there seem to be getting better and better as time goes on. I think we are heading in the right direction. I hope that we don’t go back to where we were in 2007. Some banks were lending very irresponsibly. While we want the banks to lend to businesses that are capable of growing and of repaying the advance, we must not go back to the days when banks were lending recklessly to businesses that could not afford to repay the advance.

Q35 Chair: To be fair, I do not think that that is quite what we are arguing. I do not think that that is what the people we met were arguing. I think that they were just arguing that the banks were working their way through their hyper-cautious phase. What we are trying to clarify now is whether you are concerned that there is still too much of an element of that there, or whether you think the hurdle that they are applying is now quite a reasonable one.

Iain McMillan: I think that it will get better over time, because as the economy improves and the degree of impairments reduces, the appetite for risk on the part of the banks will increase. I think that the direction of travel is broadly right: we are seeing fewer loan applications being declined. However, there are quite a number of businesses out there that would have borrowed money in the past but are not borrowing now. They want to find other ways of growing and not take on increased debts. So there is an element of that as well.

Q36 Sir James Paice: The bottom line is, are your members being held back by a lack of capital for investments?

Iain McMillan: Some undoubtedly are. Others are not. We do not go into individual businesses and say, "Show us this proposition and let us judge whether the bank should have lent or not." That is the skill of the bank, to decide whether the advance should be repaid or not. But undoubtedly, there are some businesses that have not been lent the money that they want to have to expand.

Q37 Chair: But we should not be unduly concerned about the situation at the moment?

Iain McMillan: I do not think you should be concerned unduly. It is something to keep an eye on, but I think the direction of travel is the right one.

Chair: Well, you can keep us posted next time we see you.

Graeme, you wanted to pick up questions related to the referendum.

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Q39 Graeme Morrice: In responding to my earlier question, you made an interesting comment regarding macro-economic policies, suggesting that it should remain reserved. That flags up the whole issue of separation and the pending referendum. What is the view of the Scottish CBI on this question of Scottish independence?

Iain McMillan: I will tell you what the director general of the CBI told the House of Lords Economic Affairs Committee last June and what I repeated last October. Our members value greatly the single market that the UK offers to businesses in Scotland and other parts of the UK. It is one of the oldest single markets in the world, and it works exceptionally well. Our members do not have to deal with two sets of laws, rules and economic policy on both sides of the Scottish border.

In recent times, my colleagues and I have been out to see our members in Scotland to ask, "Is this still your view?" We are getting back the consistent message constantly that the UK offers the best economic, fiscal and legislative environment for businesses in Scotland.

Q40 Graeme Morrice: Thanks. That is clear.

I understand that you published a paper recently dealing with that whole issue, in particular the Scottish Government’s forthcoming White Paper. Could you briefly outline the content of that and, specifically, what the key points are that you would wish to highlight?

Iain McMillan: There were more than 170 questions in the paper that our chairman sent to the First Minister of Scotland and asked for a response on. We look for the response to our various questions coming through in the White Paper this autumn. The important elements in there include: what are the estimates of the full costs of statehood and an independent Scotland? For example, we would need a foreign policy, and embassies, high commissions and consulates abroad. There would be a cost attached to that, and the people who work in them. We would need our own revenue service in Scotland, various Departments of State that exist in the UK to deal with the matters that are reserved to the rest of the UK, and we would need the various regulators that regulate businesses across the United Kingdom as well.

All, or at least most of these, would have to be duplicated; perhaps not in size, but their effectiveness would need to be there and they would need to be duplicated in an independent Scotland. So what would be the cost of all this-the set-up costs and the ongoing costs? We look forward to hearing from the Scottish Government about that. Then there are the public finances. What would the public finances look like in an independent Scotland? The nearest evidence that we have at the moment is the annual GERS accounts, which show the estimates of income tax, expenditure and the estimates of who benefits from the expenditure. What would it look like after independence and going forward into the future? This is quite important, because when one looks at the GERS numbers at the moment, without the contribution of oil and gas revenues, the deficit in Scotland is really quite large. Add in 90% of oil and gas revenues as they were in the last set of accounts and the deficit comes down quite substantially-actually, it comes down to below that of the UK-but we know that oil and gas revenues are volatile. What contingency provision will the Scottish Government make in the future given the likelihood that these revenues will be volatile?

We also need to bear in mind that, although oil and gas output is likely this year to be 1.5 million barrels of oil equivalent a day and is likely up to go back up to 2 million next year, actually the long-term trend is downwards. Oil and gas output peaked in 1999 at 4.5 million barrels of oil equivalent a day, so while there might be a slight upturn over the next few years, the long-term trend is down. What will the Scottish Government tell us about the shape of the public finances into the future, taking account of these changes?

Then there are issues around the currency. The Scottish Government have said that they would like to keep the pound sterling north of the border. Certainly, if independence were to happen, that is what we would like to see too, because we do not want exchange rate costs and risks introduced into intra-GB trade. But how would that work if Scotland becomes a sovereign independent state? We have seen, for example, throughout the eurozone what happens when you have a currency union without a large degree of fiscal and political union. There are questions there that we need the Scottish Government to answer.

Then there are other things like EU membership. The UK Government has published a paper on EU membership that says that the rest of the UK would be the continuing state and Scotland would be a new state that would need to apply for membership. We need to know more about this from the Scottish Government: what happens if the UK Government’s analysis, which is supported by the European Commission, is correct? How will they address that issue going forward? Of course, this also applies to the IMF, the World Trade Organisation, the North Atlantic Treaty Organisation and so on. Answers from the Scottish Government in due course will be very welcome.

Q41 Graeme Morrice: So that is to say that, despite the fact that you have posed a long list of questions, you have not had any answers back to them from the Scottish Government?

Iain McMillan: We haven’t had any answers back. The Deputy First Minister wrote to our chairman in acknowledgment of this, and invited CBI Scotland to engage with her officials. We will do that. But the key document will be the White Paper this autumn. That is where the detailed and crucial questions will need to be answered. As an organisation, we will certainly take the White Paper, appraise its contents and measure them against the questions that we put to the Scottish Government.

Q42 Chair: Before Lindsay comes in, I seek clarification on one point. You said that the Deputy First Minister came back to you and indicated that she wanted you to engage with her officials. You then said that you hadn’t done that yet. What sort of time scale has there been for the liaison to take place?

Iain McMillan: Not a great deal. The paper was sent to the First Minister just before Christmas, and the response from the Deputy First Minister came at least a couple of months after that.

Q43 Chair: But that was just to say, "Speak to my officials"?

Iain McMillan: Yes.

Q44 Chair: Does it normally take two months just to say, "I’m not going to tell you anything; speak to my officials"? There have been at least four months in which no meetings have been set up between yourselves and the officials to explore any of this.

Iain McMillan: No, no meetings have been set up to explore that. That is not to say that we do not meet Scottish Government officials. We see them regularly on a whole panoply of devolved matters. But on this particular paper, no, we have not had meetings with them.

Q45 Chair: Have you not pressed that? It seems a trifle bizarre that you produced 173 questions-whatever the figure is-and you have not had any meetings about any of them. Simply to say, "Wait till the White Paper comes out"-the big bang, as it were-does not seem to be adequate.

Iain McMillan: It needs to be borne in mind that the Scottish Government, like the UK Government, are going to produce a series of papers in 2013. We will look at those papers and appraise their content as we go through the year. If there are areas of those papers that make us feel that we need to speak to Scottish Government officials about their content, we will certainly do that.

Q46 Chair: I am quite surprised, because I would have thought that, even from the Scottish Government’s perspective, having an iterative process would be better. I would have thought that they would want to seek clarification about some of these points from you, bounce ideas off you, go back and reflect and perhaps come back with something else, so that the process is thus improved.

Iain McMillan: It would improve the process, but we need to be patient. It is not just us asking the questions; others are. The Scottish Government have made a number of statements saying that the answers to those questions are in development, and all will be revealed in the White Paper at the end of the year. I do not want to get into a discussion with officials and get half-developed answers.

Q47 Chair: And do you believe that you will get all the answers to your questions by the end of the year?

Iain McMillan: I hope so, Chairman.

Q48 Chair: Right. Do you think it will be possible for them to answer all the questions you have quite reasonably posed by the end of the year? And do you think we would be entitled to be very disappointed if we do not get answers to all of them by the end of the year?

Iain McMillan: Yes, I would be very disappointed. Quite frankly, if the Scottish Government cannot answer those questions, their business and economic case for independence will not be robust.

Q49 Lindsay Roy: You have given a very good, broad-brush summary of the paper you produced. Can we distil it a wee bit further? What are the key concerns and issues that have been raised with you by your members? What are their most frequently asked questions?

Iain McMillan: I take it you have all received the paper. You may not have it in front of you.

Lindsay Roy: Yes, I have it here.

Iain McMillan: For example, we highlighted a number of areas of defence. A number of our members are defence contractors, whether it is the Royal Navy, the Royal Air Force or the Army. We have asked what will be the set-up and ongoing costs of an independent Scotland establishing its own armed forces. How could an independent Scotland replace defence jobs at Faslane, in shipbuilding, repair and employment? I know the Committee has looked closely at that area. I think you published something last week.

Lindsay Roy: That is right. All the issues around the supply chain.

Iain McMillan: That is right. There is, for example, energy. Will the GB market for electricity remain, in terms of regulation, pricing, consumer subsidies for renewables and so on, right across Great Britain? That is very important for the financing of renewable energy in Scotland, because British consumers help to fund that. That is very important. What would be the regulatory and enforcement regime for intellectual property rights in Scotland versus the rest of the UK?

How would our financial services industry be regulated? Would there be a financial conduct authority north of the border? We understand from our friends in Scottish Financial Enterprise that the EU requires each member state to have its own financial regulator. What would be the cost and the implications of that? Those are the kind of questions that we have been asking.

Q50 Lindsay Roy: Where does the currency fit in all of this? Is that high up in the scale of priorities?

Iain McMillan: Yes. If Scotland were to adopt a currency other than the pound sterling, immediately exchange rate costs and risks would enter into doing business between Scotland and England.

Lindsay Roy: Which is the predominant market.

Iain McMillan: Yes, indeed. Two thirds of Scottish output goes to England. Were Scotland to join the euro, for example, though I can’t imagine anyone wanting to suggest that-

Graeme Morrice: Alex Salmond did at one point.

Iain McMillan: Or if Scotland had its own currency, that would be a matter of the utmost concern to our members in Scotland, because of the exchange rate cost and risk. For the first time since 1707-and in fact the first time since the union of the Crowns when Scotland and England shared the same currency-we would be introducing exchange rate cost and risk across the Anglo-Scottish border. That would be a momentous change in the business environment in the UK.

Q51 Lindsay Roy: Jim Cuthbert was today advocating a separate Scottish currency. I take it that has not been well received.

Iain McMillan: No. I read the piece in the papers about that proposal. Jim Cuthbert can speak for himself. I think the point he was making was that, unless Scotland has its own currency, true sovereignty of an independent country will not exist, because there will need to be that degree of fiscal union to operate a pound sterling across the Anglo-Scottish border. That is a really difficult question for those who advocate independence. Do they have their own currency and introduce what would undoubtedly be a barrier to doing business between Scotland and England but have that sovereignty, or maintain the pound sterling and have to enter into some kind of fiscal union with the rest of the UK?

Q52 Chair: Which some people have described as neo-colonialism. One issue we were discussing earlier was the question of interest rates and the like in a separate state. Have you sought specific assurances from the Scottish Government about what they believe would be the pattern of interest rates, not only for business but for mortgages?

Iain McMillan: If an independent Scotland were to remain with the pound sterling, interest rates would be set by the monetary authority for that sterling zone, and it would be pretty much as now. If, on the other hand, the Scottish Government changed their policy and decided that they were going to establish a separate currency in Scotland, interest rates would be determined by the central bank or the monetary authority of an independent Scotland-unless, of course, the Scottish Government went back to where we were before 1997 when the Chancellor of the Exchequer and the Treasury had a say in interest rates. I do not want in any way to avoid your question, but one cannot possibly know the answer to that until it happens.

Q53 Sir James Paice: Is not there a case that, although the monetary committee would set the standard rate at the bottom, there is a scenario whereby, to go back to your earlier point, if the Scottish Government were running a significant deficit-as we have seen in the eurozone, individual member states have to pay higher interest rates on their own bonds to fund their deficits-that would drive up the interest rate market in Scotland? Is that not a scenario?

Iain McMillan: Yes. If an independent Scotland had a higher public sector net debt than the rest of the UK, the credit agencies could decide that there needed to be a premium paid by the Scottish Government on money that they borrowed. That could well happen. Whether that would actually read across into the cost of money that the banks would need to charge their depositors is probably another question, because it would depend on the cost of money to the banks that were then lending to their borrowers. It is really quite complex and it is actually very uncertain, and that uncertainty is not helpful.

Q54 Chair: May I pick up that point? The suggestion has been that-notwithstanding the fact that you might have the common currency, as it were- because a separate Scotland was a separate entity and an unknown quantity, the rate at which that Government might borrow would be perhaps higher, and in those circumstances it would be highly unlikely that private organisations like banks would be able to borrow at a rate lower than the Government. Therefore any premium that the Government had to pay, the banks borrowing to lend in Scotland would also have to pay, which would drive up the costs of borrowing both for companies and for individuals through mortgages in Scotland.

Iain McMillan: It would depend on the creditworthiness of the individual banks themselves. That would be the determining factor. The banks, it is to be hoped, would get more of their money from the retail deposits that they would attract and some money from the international financial markets, and that would depend on the degree of their own creditworthiness.

Q55 Chair: Given what has just happened in Cyprus, I would not be inclined, I must confess, to place my money in Cyprus or indeed in Portugal or any of the countries where there was an element of risk, and therefore there would be a high tendency for people in Scotland and elsewhere not to place money with banks in Scotland where there might be a risk and just to play safe and place it with banks either in England or in Germany or somewhere similar, which in turn would drive up the costs of borrowing for banks in Scotland, which would then be obliged to lend at a higher rate to those on mortgages.

Iain McMillan: That is possible. I cannot speak with any authority on this, but I believe there was an element of that in Czechoslovakia-

Chair: Yes, indeed there was.

Iain McMillan: When Czechoslovakia had their velvet divorce into two states, there was a substantial degree of money moving from one of the new states into the other, but I am not an expert on that.

Chair: You’re a banker. We thought you would know all about these things.

Iain McMillan: Chairman, Czechoslovakia still existed when I was a banker.

Chair: So did the Austro-Hungarian empire-no, that was earlier.

Iain McMillan: But contrary to popular belief, I don’t know it all, either.

Chair: You disappoint me.

Q56 Mr Reid: I was thinking about the banks. The big banks in Scotland-RBS and HBOS-are owned largely by the UK Government. Off the top of my head, I think that the UK Government owns about 80% of RBS. Presumably, in a split of assets, the Scottish Government would get about 8% of RBS, while the UK Government would still have 72%. The figures are not quite so large for HBOS, but we would have a situation where the biggest banks in Scotland were actually owned by another country. What impact would that have on the banking sector in Scotland?

Iain McMillan: Who knows? It is a good question, but it is very, very speculative.

Q57 Graeme Morrice: You do not think that Mr Swinney will answer that question?

Iain McMillan: No. That would all have to be determined in very long and complex secession negotiations, if the people of Scotland were to vote yes. So I do not know the answer to that.

Q58 Chair: Can I just object quite seriously to that point about conceding that anything has to be settled in long and complex secession negotiations? Surely we cannot accept a situation in which people are being asked to buy a pig in a poke. Surely these things have to be clear before people come to cast their vote. Otherwise, you would almost have to have a second vote as a result of the secession agreements, if they vary at all from what people put forward as the prospectus at the time of the referendum.

Iain McMillan: It is highly possible that the answers to a number of questions will not be known before the referendum because they cannot be known until negotiations take place. As I understand it, the UK Government have made very clear their position that they are not going to pre-negotiate secession arrangements prior to the referendum. So we could be faced with many unknowns as we approach the ballot box in September next year. I suppose that that is where the electorate in Scotland are going to have to make a judgment. Are they going to vote yes or no on imprecise and incomplete information? That is going to be a matter for the electorate.

Q59 Chair: We could do with a bit of assistance from organisations such as yourselves. Once we have had the response from the Scottish Government to your questions and others, we would probably want to discuss further with you the unknown unknowns, the known unknowns, and other Rumsfelds. That way we can try to clarify, or at least narrow down, the areas of uncertainty as far as possible.

Iain McMillan: We would be very happy to do that, Chairman, when the time comes. When the White Paper is published later this year, we will be assessing it against the questions that we have put to the Scottish Government. We will be very happy to share that piece of work with you and others.

Q60 Chair: I understand that there is some suggestion that the publication of the White Paper is going to drift quite considerably in terms of the time that it is produced. Is that your understanding?

Iain McMillan: No, I have not heard that at all.

Q61 Chair: So as far as you are aware they are still sticking to October-is that when they said they were going to produce it?

Iain McMillan: As far as I know.

Chair: Right. Any drift from that October date would obviously be a cause for considerable concern for us.

Iain McMillan: We would like the answers to these questions as soon as possible, so if there was drift away from October, we would be concerned about it. If the Scottish Government were to say, "This drift is happening because some of the answers to your questions are still in development. We hope to be able to give you full and accurate answer in our White Paper, and therefore we need to delay it for a month or so," or whatever, I would prefer that to having incomplete answers in a half-baked White Paper where the primary objective was to bring it out on time.

Chair: That is right, but on the other hand we do not want complete answers promised the day after the referendum. We do, therefore, want some pressure. On some of these points you should perhaps get back to them again, and have the iterative process that we mentioned earlier. I am genuinely surprised that they are not engaging with you a bit more to explore some of these issues.

Q62 Mr Reid: Is this uncertainty having an impact on the real economy? Are you finding that your members or foreign companies are reluctant to invest with all this uncertainty?

Iain McMillan: The information that we have-it is anecdotal-is that it is pretty mixed. Clearly some overseas firms are investing in Scotland. Scottish firms, or other firms that have been in Scotland for some time, are investing, but we do know of instances where companies have decided not to invest because of the uncertainty around in the run-up to the referendum. I am afraid that I cannot tell you who those companies are, because I do not have the authority to give you that information. I can tell you that it is accurate.

Q63 Mr Reid: Are there any particular sectors that are worse affected than others? If there are, can you tell us?

Iain McMillan: No, I do not think that there is any particular sector that would stand out.

Q64 Mr Reid: What about defence? Clearly a lot of the defence jobs are based on the Royal Navy or the Royal Air Force. Is the defence sector particularly concerned?

Iain McMillan: Without naming individual firms, I think they are concerned. I think that many individual firms are reluctant to get into this debate, but there is a concern. We know that at Faslane, for example, the Royal Navy is in the process of moving the entire submarine fleet. That has required investment there. It will probably require some civic investment as well, because when the submariners and their families move up there they will need doctors, dentists and schools and so on. There is undoubtedly some investment going on, but in other areas it is on hold.

Q65 Chair: You realise that by not naming individual firms you are opening yourself up to a torrent of abuse from cyber-nats and the like. I am sure you have been denounced already. If we get it, I am sure you get it as well.

Iain McMillan: It has happened in the past, Chairman, but do I look like I am worried?

Q66 Chair: No, I must confess that you do not look particularly worried. It is coarsening political debate and discourse in Scotland. People have even criticised me, for example, hard though that might be to believe. I have seen it in personal terms and it causes a bit of concern.

Iain McMillan: It is, but the debate has to be full, open and honest. Personally, I do not think that there is any room in this debate for the kind of behaviour that we have seen. It does happen. There are areas around this where it is rough and tough, but it is important that we continue to try to get the answers, because the future of Scotland and the rest of the United Kingdom depends on getting this right.

Q67 Chair: That is absolutely right. We have just got to stand up to those who make full accusations. Can I just mention to you that I have had an apology and a retraction from the Daily Record for something written by Joan McAlpine MSP in her column where she made false assertions? Quite often newspapers are prepared to make those corrections if they have been misled by false and personalised propaganda and smears coming from the nationalists.

Can I carry on to ask whether you have a structure within the CBI that is continuing to monitor developments, as it were? I am not aware exactly of your structure. Are the defence people continuing to look on an ongoing basis at what is happening, or are you just going to wait until the White Paper comes back and convene whatever is convened?

Iain McMillan: The way the CBI works is that we are one entity. We are not, for example, like the chambers of commerce: each chamber is an entity in its own right and the British Chambers of Commerce is an umbrella body, and the Scottish Chambers of Commerce is an umbrella body in Scotland. We are one entity. That allows us to have autonomy in Scotland on those matters that are devolved executively to the Government or legislatively to the Parliament, but also to behave as one organisation on international and UK-reserved matters. What I do from time to time is I brief our various committees on the progress towards the referendum and what matters are becoming devolved under the 2012 Act. I even brief them on areas that perhaps might be devolved in the future-we do not know. I briefed the CBI’s economic affairs committee and our taxation committee at a UK level on these matters. Our chairman has briefed the chairmen’s committee of the CBI, which is our organisation’s supreme policy making body. This whole area of political and business debate is taking place at the CBI and across all sectors.

Q68 Chair: You do have some structures within Scotland, though?

Iain McMillan: We do have a sub-structure in Scotland, in so far as CBI Scotland has its own committees, for example our education coalition, our infrastructure group and our trade association group. Many trade associations in Scotland are members of the CBI. That is what gives us our great breadth-as well as our individual members across the business community as a whole.

Q69 Chair: In addition to the generalised issues that you have raised with the Scottish Government, we might want to explore with you privately whether it might be worth while for us to meet some of the trade association groupings to highlight particular areas of concern that we might want to pursue in some of the other papers that we will bring forward. Just as we did the work on defence, for example, as a big exercise, it might be that we can cut that process a bit shorter simply by meeting some of your trade association groups.

Iain McMillan: Yes. If I may say so, Chairman, I think that is a good idea. It would be up to the individual trade associations to accept your invitation, but I would not discourage you from doing that at all.

Q70 Pamela Nash: Mr McMillan, you mentioned earlier the deficit that would be predicted in a separate Scotland even if oil and gas revenue is taken into consideration. Can you see any way that we could get around that without increasing taxation in Scotland?

Iain McMillan: It is very difficult to see how that could happen-that is to say, either public spending being cut or taxation not being raised. It is very difficult to see that. That is not to say that an independent Scotland would definitely have to raise taxes, reduce spending public spending or do both. The economy may behave entirely differently after independence, and whoever governs an independent Scotland may do things differently. We do not know.

What we have to look at is the evidence. The last set of figures that were produced-I mentioned this earlier; the GERS numbers for 2011 and 2012-showed an estimate of taxation in Scotland coming in at 37.1% of GDP. But it showed spending at 46.7% of GDP, which is a very large gulf. The gulf is 14.6% of GDP. If one adds in oil and gas revenues for that year on a geographic basis, the deficit drops from 14.6% to 5%, which is actually lower than the UK deficit of 7.9%. So oil and gas, in the short term, would play a very significant role in bringing Scotland’s public finances into not a good shape, but a better shape than those of the UK are in. In the early days, that would be of significant benefit.

However, as I said earlier, the long-term trend of oil and gas output is downwards, from 4.5 million barrels of oil equivalent a day in 1999 to 1.5 million barrels of oil equivalent last year, going up for two or three years to 2 million barrels and then going down. So in the long run, substantial oil and gas revenues-and also the volatility of the revenues, because of the volatile price of oil and gas-are likely to give whoever governs an independent Scotland a major headache, in terms of how they finance current spending going forward.

Q71 Mr Reid: Do you foresee any issues with pensions if Scotland became independent?

Iain McMillan: When you say pensions, do you mean public sector pensions or private sector pensions?

Mr Reid: Both.

Iain McMillan: Let us take public sector pensions first. In most cases, public sector pensions are not funded-they are funded on a pay-as-you-go basis. There could be pressures in terms of how the effect of the financing of the public sector net debt impacts there. These will all have to be financed. The demographics in Scotland-and I think this is something that the UK Government will publish on some time this year-show an ageing population. So the pressures in terms of financing these pensions could well increase. That may be something for the Committee to look at in more detail.

Q72 Mr Reid: May I just interrupt you there? Do the GERS figures you quoted from earlier include public sector pensions?

Iain McMillan: I believe they do, because they include the costs of devolved government in Scotland, which will include pensions as well.

Q73 Mr Reid: Remember, pensions for the likes of teachers and those in the health service are paid directly by the UK Government.

Iain McMillan: My understanding is that the GERS attempts to disaggregate these costs. That is my understanding.

Now, private sector pensions will probably not change very much if the pound sterling is retained by an independent Scotland. Pensions would still be paid, for example, by headquartered companies and pension trustees in England to Scottish recipients.

Q74 Mr Reid: What about legislative competence over that lying with the Scottish Parliament? If all these firms are based in England, and Scotland is a different country, do you see any issues arising?

Iain McMillan: I think that there could be, but I think the main issue would be that if Scotland had its own currency or entered the eurozone, we could find people in Scotland being paid their pensions in pounds sterling but their spending being in the Scottish groat-or whatever you want to call it-or the euro. We have seen this happening: British people have gone off to places such as Spain to spend their retirement and have been at the mercy of the exchange rate between the pound sterling and the euro. If Scotland has a separate currency, these risks will arise for people based in Scotland who are being paid their pensions in pounds sterling when their expenditure could be in a Scottish currency. However, I don’t think these issues would arise if Scotland retained the pound.

In terms of regulation, my understanding is that the pension trustees based in England, who would be paying pensions into a foreign country called Scotland, would be regulated in England, and Scottish pensioners would be reliant on the good work of the pension regulator. But the opposite would be true; companies headquartered in Scotland would be regulated eventually, I suppose, by a new Scottish authority and therefore their pensioners in England would be subject to that jurisdiction. Again, these would need to be negotiated in secession discussions.

Q75 Mr Reid: If I have a pension that is linked to the CPI rate of inflation, I am living in Scotland and we have different currencies, would it be the English rate of inflation that would determine my pension?

Iain McMillan: Unless new arrangements were put in place it would be the rest of the UK CPI that would determine the annual rate of increase in the pension, yes.

Q76 Chair: Taking on board your point about a disproportionately larger percentage of elderly people in Scotland, the implication of that is quite clearly substantial immigration into Scotland-that is another area that we have not touched on at all-with all the changes that that might cause and the social stress and the like. But look, we don’t want to get into that just now because life is perhaps too short and we ought to draw things to a close. As I mentioned to you before, we always like to end up by asking people whether there are any answers they have prepared to questions that we have not asked. Is there is anything you feel we have not touched on that you would like to get off your chest?

Iain McMillan: I don’t think that there is in terms of the economy. I think that was a good discussion, and I hope that you, Chairman, and your colleagues did as well. We are always happy to come here and have these discussions with you. That is very important to us and we believe that this Committee is very important as well. On the constitutional areas, perhaps it might be an idea for the Committee to look into some other areas as well. For example, the House of Lords Committee expressed disappointment that UK Ministers had not accepted invitations to appear before the Committee and give evidence. I understand that the Ministry of Defence will produce a learned paper in a series of papers being produced by the other Departments of State. As these papers are produced the Committee may wish to probe some of the evidence that is contained therein. I think that would be hugely valuable.

Q77 Chair: To be fair, that has already been agreed by Government in principle.

Iain McMillan: Oh, right. Well that is good.

Q78 Chair: What we have agreed is that rather than meeting immediately after the publication we will leave a bit of a gap to see what the response is and what questions are raised. Therefore, obviously we will wait with interest to see what people like you have to say about the papers that are produced. That will inform and influence the questions that my colleagues want to raise. So, we have obviously made it clear to the Government that we expect their list of papers to come before the date of the referendum as well. So we will want to get them as quickly as possible so that we can have this discussion.

Laura, any points?

Laura McMahon: I have nothing to add.

Chair: Thank you very much for coming along. This has been a very interesting and informative session.

Prepared 18th April 2013