Its a question I have been asked a lot around campus. People are referring to the Scottish referendum, held tomorrow, deciding whether or not Scotland should become independent from the rest of the UK. However, this decision also greatly concerns the organisations operating in the UK. So what does a ‘Yes’ vote really mean for the Scottish and UK businesses and wider economy?
For one, Scotland becoming independent would mean an increase in taxes. The reason behind the increase is simple – in order to maintain the high degree of public spending, the average tax payer would experience an increase of over £1,000 in tax. With increases in taxes, consumers would experience a reduction in their disposable income. This causes businesses to experience reduced demand as consumers have less to spend, especially on items which are non-necessities. Businesses would therefore likely experience a reduction in revenue coupled with an increase in corporation tax on the profits they do earn.
Scottish businesses would experience further reductions in demand as a result of independence due to the loss of direct access to the wider UK market and the EU. As a result of leaving the UK, the domestic market for businesses would shrink from 63 million people to just 5 million people. For businesses, the effect of this could be devastating. Businesses may choose to scale back operations to meet actual demand in the Scottish market, which can lead to widespread job losses. Being part of the UK also allows for businesses to specialise, while becoming independent may mean that certain markets are saturated while others are simply unaddressed by and unattainable to Scottish businesses.
Should a business want to continue trading with the rest of the UK, exchange rates will then become a factor to consider, as independence would mean Scotland would no longer use the £. Businesses may experience instability of a newly independent Scotland’s currency, providing issues such as previously profitable transactions becoming loss making. This discourages smaller businesses to operate South of the border due to the uncertainty it provides, perhaps leading to issues surrounding the growth of small businesses. Customers in the rest of the UK may become tentative when purchasing from Scotland due to the unreliability of pricing caused by exchange rate fluctuations, alongside the fact that they are likely to be able to find the same goods at a lower price elsewhere within the UK.
Larger businesses operating within Scotland are also greatly affected by independence. This week saw the Royal Bank of Scotland announce that despite the history of the company within Scotland, if independence were to go ahead, it would move its headquarters to England. Other companies who have made similar announcements include Lloyds Bank and Standard Life. While many argue that Scotland has many other large companies who would continue to operate in the country, the real effect of the move is on confidence within the Scottish economy. If larger UK companies are moving away from Scotland, it sends a very clear message – they do not believe an independent Scotland would have a desirable economy to operate in. This would then lead to smaller UK businesses being discouraged from continuing to operate in Scotland , choosing to leave an independent Scotland. Their choice may be backed up due to the effect of transaction costs on businesses’ profits.
With confidence within the economy falling, businesses may find it difficult to raise capital. This is due to less consumer spending in the economy making it an unlikely investment environment. This could be particularly damaging to smaller companies and start-ups, which is an industry the Scottish government have noted their interest in in the past. Start-ups will find it difficult to gain investment if there is little or falling confidence in the economy. This is because investors will notice the higher risks of providing the capital to a company at a time when consumer demand may be falling. This could harm Scotland’s future economic growth potentials.
My analysis shows that for the majority of businesses, Scottish Independence would bring a lot of negative effects. While there may be some benefits, such as taxes being tailored to Scotland’s individual needs, they are greatly outweighed. The main issue that independence would cause for businesses is that it would result in decreased consumer demand, causing an array of problems for businesses both North and South of the border.
References
- http://1.bp.blogspot.com/-xt3ISvgo3FM/U-fykJyXUBI/AAAAAAAAABE/iK7F9avj3hQ/s1600/Better_Together_logo.png
- http://www.theguardian.com/politics/2014/feb/07/scottish-independence-economic-implications-niesr
- http://www.independentscotland.org/content/voting-no-for-scottish-independence.htm
- http://www.bettertogether.net/the-facts