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Project Reality: How the Scottish financial sector will be right-sized

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Dr Tim Rideout, an economist and the convener of the Scottish Currency Group, had an article published in The National on 18th May under the title Claim banks would flee independent Scotland is a Project Fear lie”

The article appears to be a refutation of some points I have raised previously, and Dr Rideout selects the same example of Natwest/RBS, where he claims Scottish tax revenues will not fall after independence even if the group head office relocates. The evidence cited is that in 2019 The Royal Bank of Scotland plc paid £338 million in corporation tax and that “After independence, that money would be paid to the Scottish Government”.

First up, though, I must put a point that Dr Rideout has not addressed regarding pensions and investments: non-Scottish customers in the UK are not going to leave their pension pots and savings sitting within the grasp of an impecunious Scottish state run by a hostile political regime. In that case the business, the tax revenues and the jobs will all leave Scotland, and completely. That is a big portion of Scotland’s financial services industry, through firms like Aberdeen/Standard Life and Scottish Widows.

Then we come to Natwest/RBS and a series of factors, all of which mean that £338 million would not flow regularly and reliably to the Scottish state.

The 2019 tax payment of that amount by the Scottish bank in the group was inflated, and possibly artificially. It was over 75 per cent of the whole group’s tax payment of £432 million: the rest of the group only paid another £96 million on its profits outside Scotland of £3.2 billion. This points to the rest of the group holding considerable tax-deductible expenses, like tax-loss carry-forwards or toxic loans, either of which could be transferred to the Scottish bank to reduce its profits and tax bill if it suited the group to do so. After all, the toxic loan book was contributed by RBS thanks to its acquisition of ABN-Amro, and if it is now sitting within Natwest Group plc, it can always be moved into The Royal Bank of Scotland plc.

The tax bill of £338 million is not sustainable merely on the tax rate: it was 34 per cent of the bank’s £998 million profit, when the standard tax rate was 19 per cent. At best the normal tax payment would be £190 million.

But even this tax bill will not be sustained after independence because the bank’s business volume and profits will reduce, thanks to the group ensuring that the Scottish bank only deals with Scottish customers. As of 2019 it dealt with many customers from the rest of the UK. Page 5 of the bank’s annual report states that Commercial Banking customers were being transferred to Natwest Bank plc, and that the income trend was downwards. The Scottish bank has been used as the branding and service platform for certain activities across the whole of the UK, particularly in Commercial Banking. The Scottish bank accounted for 28 per cent of the group’s revenues from Commercial Banking and 22 per cent of its revenues in UK Personal Banking in 2019, whereas Scotland had an 18 per cent share of the UK’s population. After any secession these percentages would come into line.

If Natwest Group’s 2019 figures are taken as the baseline for all of Revenues, Operating Expenses and Loan Losses, the Scottish bank would then show a taxable profit of £393 million. The resulting tax payment would be £133 million at the anomalous 34 per cent, but £75 million at the standard rate of 19 per cent.

£75 million represents a 78 per cent reduction from the £338 million paid in 2019, and an 83 per cent fall on what could be in the 2019 GERS figures for Scottish tax revenues if Natwest Group’s entire tax bill is going into those figures.

As Dr Rideout says, all of the services would continue to be supplied to all of the same customers – only not by Scottish institutions. A major hit for Scottish tax revenues and jobs will result.

This would be a direct result of business that used to be “domestic” becoming “cross-border”, which introduces new risks and concerns for firms and their customers. It is exacerbated in the case of Scotland because its regime is openly hostile to England, and because its public finances will be over-stretched.

Pensions and investment firms will have to react to this by transferring customers to new firms not connected to Scotland – or risk 100 per cent capital flight. Banks will take their normal route of reorganising themselves to service their customers on a “domestic” basis: Scottish banks will be employed to serve Scottish customers, and customers in the rest of the UK will be served from England, Wales or Northern Ireland.

The size of the Scottish financial services sector will come into balance after secession with the size Scotland’s population and businesses, and their assets, liabilities, investments and savings. That implies a major shrinkage. This is not Project Fear, it is Project Reality and it will mean what in business we call right-sizing.

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