In just a little more than six weeks, the people of Scotland will decide whether Scotland should be an independent nation or remain a part of the United Kingdom. Current polls have the “no” vote (separatists) behind the “yes” vote around 39% to 51%, but the recent trend among undecided voters is clearly favoring independence.
Regardless of the results of the September 18th election on Scottish independence, equities analysts Ian Scott and colleagues at Barclays Equities Research thought it would be an interesting exercise to take a closer look and identify issues likely to have a direct impact on business operations if Scotland did vote for independence.
While it’s theoretically possible for the new country to continue with the Sterling currency in the event of Scottish independence, Barclays’ Foreign Exchange Research team believes it’s more probable that an independent Scotland chooses to create its own currency. A brand new currency representing a relatively small economy obviously presents foreign exchange risks for businesses of all sizes.
According to their models, the Barclays analysts argue that an independent Scottish currency would see a real trade weighted depreciation of 1.4% in its first year. However, based on Scotland’s negotiated asset and liability position, the range of potential outcomes is very wide – from a currency appreciation of 5.3% to a 16% plunge in currency value.
Scottish independence: Higher interest rates
An independent Scotland would likely face higher interest rates on its government debt – the National Institute for Economic and Social Research (NIESR) estimates a risk premium of between 0.72% and 1.65%. At least initially, the cost of debt for Scottish based companies would also likely include an additional risk premium associated with the higher sovereign yields.
New tax regime
The Barclays report also notes that Scottish-based firms would have to deal with a new tax regime if Scottish independence becomes a reality. Moreover, the Scottish government has already stated that it would bring corporate taxes down to 3% below the prevailing rate in the remaining UK. The Scottish government also plans to cut Air Passenger Duty by 50%.
VAT, however, could be a sticky issue. The UK negotiated with the EU to have a lower VAT for food, children’s clothes and new house construction. Scotland would both need to apply to the EU and then negotiate these exceptions in order to keep the lower VAT in place.
Higher labor costs
Scott and colleagues note that Scottish businesses would almost certainly have to deal with higher labor costs, as an independent Scottish government would in all likelihood raise the minimum wage.
It’s also important to note that Scottish independence would also mean a new set of regulators, as the country will definitely have its own financial services regulator and its own energy sector regulator.