A tale of two letters on Scottish independence from business: Analysis (Repost) |

Brad MacKay encourages readers to analyse the two letters from business leaders published last week and their claims. In a piece published on the blog, Charlie Jeffery looks at the implications of the larger campaign.

Healthy economies work a little bit like old growth forests. They have diverse trees with varying tree diameters and heights. They are characterised by multi-layered canopies with some canopy gaps allowing light to flow through, helping the life below to grow. Such canopies support a diverse habitat with rich wildlife, which, in turn, enhances the bio-diversity of the entire forested ecosystem.

Dynamic economies work much the same way. They need to have a stock of large companies (250+ employees) that provide employment, turnover and scale so that they can compete in an increasingly globalised world. They are the largest exporters, sources of research and development, and attractors of talent. They also build extensive supply chains that allow smaller and frequently medium-sized companies to flourish. They are also the largest source of income, both directly through various forms of business taxation, and indirectly through the personal taxation of their employees, for governments looking to spend on public goods such as education, healthcare, economic development and so on.

Small firms (1-49 employees) provide the rich bio-diversity of the economy, and make up the largest number of firms overall. They thrive under the canopy of large firms by providing goods and services, both directly as sub-contractors to large firms, or indirectly with the goods and services they produce for their communities. Some small businesses, who find success in their niches, will grow to become medium sized companies (50-249 employees). This group of companies, while much smaller in number, are important because they are companies that can frequently disrupt industries, grow quickly and eventually become large companies. Large companies typically are more productive, pay more taxes and provide higher salaries. But the group of medium-sized companies – the Mittelstand companies – are some of the most important drivers of growth in, for example, both Germany and the USA. The economies of countries such as Greece, Italy and Portugal, which are dominated by small firms, have much more sluggish economic growth.

If we look at Scotland’s economy, what we find from Scottish Government figures is that there is a very high percentage of private-sector employment (around 46%), which is dependent on large firms (compared to around 41% in England), and also accounts for over 60% of private sector turnover (i.e. corporate income). There are, however, a relatively small number of them (only about .7% of the overall stock of firms in Scotland is large). Small firms account for the largest number of firms overall (just over 98% of the overall stock of private sector firms in Scotland), and account for around 42.3% of private sector employment and generate 23.6% of private sector turnover. Medium sized firms are the most problematic for the Scottish economy, because there are so few of them. Medium sized firms account for approximately 1% of the total number of private sector firms in Scotland, but only generate around 12% of private sector employment, and an estimated 13% of private sector turnover.

Now consider the two letters signed by business leaders published last week. In the first open letter to the Scotsman last Wednesday August 27th, over 130 business leaders argue that “the business case for independence has not been made”, and they pointed to a range of significant and unresolved uncertainties around currency, regulation, tax, pensions and the EU. In thesecond open letter to the Herald on Thursday August 28th, around 200 pro-independence business figures argued their case for independence, claiming that: “An independent Scotland will recognise entrepreneurs small and large as the real wealth and job creators of the nation’s economic future… It will encourage a culture in which innovation, endeavour and enterprise are nurtured.”

Clearly, every voice counts in the debate about Scotland’s future. This is no less true for business figures as any other constituency. But two things distinguish these two letters. The first letter points to a number of key unresolved uncertainties that may affect some company’s ability to trade. The second letter points largely to a number of aspirations of what, all things being equal, could happen, particularly with government support, in the future. Perhaps more importantly, there is a second distinguishing feature of these two letters; it is the companies that are represented by the signatories. The first letter includes many of Scotland’s large firms – the ‘competitive core’ of the Scottish economy – the second letter, excluding those who are retired from any active management of firms, reflect largely, although not exclusively, smaller firms in the Scottish economy.

It’s important not to draw the wrong conclusions from this observation. Both sets of companies are important for a thriving economy. Indeed, both groups of firms need each other for the Scottish economy to remain strong, grow, and create jobs and wealth. But our research has consistently shown that, depending on how the key uncertainties highlighted in the first letter, are resolved following the referendum, up to 10% of firms could scale back their business activity in Scotland, and shift it elsewhere (for more information, see the final Evidence from Businessreport. A very small proportion of firms in Scotland – around 100 firms – account for an estimated 60% of Scottish exports – they are the economic backbone of the Scottish economy – and many of those firms are signatories of the first letter. For the aspirations outlined in the second letter to be realised – invigorating and supporting the entrepreneurial biodiversity and growth of the forested ecosystem – there also needs to be a canopy of large firms to help nurture it, whether through contracts, financing, research and development or supplying a pool of talent to draw from.

The reality is, if some of those large firms scale back their activity in Scotland, or disappear, there will be a drop in private sector employment and turnover in Scotland, and the productivity, taxes and incomes they provide. The sheltering canopy could become much thinner. This would hurt the prospects of the companies represented by the signatories of the second letter in two ways. First, a drop in private sector output will put pressure on government finances, and this will lead to difficult choices over tax and spend. Government resources to support, for example, a reindustrialisation strategy, may become much scarcer. Second, the indirect support that large companies give to the overall economy would also become scarcer if they scale down business activity in Scotland. What is even more problematic is that, at present, there simply is not yet the stock of medium-sized companies to replace them.

What the business landscape looks like following the referendum vote, whether for ‘yes’ or ‘no’, will be critical for the economic and material prospects of Scotland’s future, and the public services and quality of life that the Scottish economy will support. I’d encourage readers to analyse the two letters and their claims, and using the internet, to do a rough calculation of how much private sector employment and turnover each group of firms (excluding those who are no longer managing firms in an active capacity) provide. This will then give you an idea of what some of the economic implications a ‘yes’ or ‘no’ vote might have in different scenarios for the business ecosystem and the public finances it supports. With so much at stake it is important to make as informed a choice as possible.