Examination of witnesses
Scott Walker, Councillor David O'Neill, Josh Hardie, and Professor Anton Muscatelli.
Q45 The Chairman: Good afternoon. I am tempted to say it is an unusually gender-specific panel but we will not go into that. It is the quality we are after and the people who are best placed to inform us. We are at the end of a long day. I sense that all my colleagues are still up for a few more challenges and we thought it was about time we talked to people from representative organisations outside specifically— leaving Anton aside—the academic world, but we will take him as a representative of the academic world but also the social sciences. He may be wanting to talk constitutional law but we want to get a handle on how people felt, and we are very grateful to you for coming in.
The context of this is an inquiry we are undertaking as part of our Brexit-related stream of work into the implications for the devolved nations and their interaction with the UK Government and, by inference, also the European institutions and the negotiations.
If you are all happy, we will start. It might be simplest—and I think it is the only formality we need discharge—if you just identify who you are for the record.
Josh Hardie: Josh Hardie, deputy director-general at the CBI.
Scott Walker: I am Scott Walker, chief executive of the NFU of Scotland.
Councillor David O’Neill: My name is David O’Neill. I am the President of COSLA, and COSLA is the umbrella body for Scotland’s local authorities.
Professor Anton Muscatelli: Anton Muscatelli. I am an economist and principal of the University of Glasgow, and I also chair the Standing Council on Europe for the Scottish Government, a group of independent advisers.
Q46 The Chairman: Thank you. We have a very distinguished panel, you have identified yourselves, and I think the simplest kick-off question, which you might have anticipated, is: if we do not know everything, we now know something. The Prime Minister made a speech setting out her Government’s approach to Brexit. What do you think the implications for Scotland are of the Brexit model that the UK Government are pursuing? I am happy to do it in sequence again. This is meant to be a fairly free-flowing session, but on this one, we would probably like to get your individual takes. Josh, would you like to start?
Josh Hardie: At the CBI, we try as much as possible to take a whole-economy approach. That is important. What our members, whether north or south of the border, heard from the Prime Minister was some helpful indications: relative clarity about the destination she had in mind and what the desired outcome would be. That stuck quite closely to some of the principles that the CBI had and our members have laid out around barrier-free access, access to skills and regulatory consistency, et cetera. While lots of questions remain around that, it is useful to have that level of clarity. We had been asking for it.
Also encouraging is the increasing recognition of the need for businesses to have transitional arrangements, so a smooth process so that you do not hit a cliff-edge—something, again, we have been very vocal about. We have been asking for those things. We appreciate the Government giving some clarity, so we were approving of that.
On the other hand, there is no doubt, particularly in Scotland but not only in Scotland, that shutting down the option of the single market was if not a seismic shock—because one had to assume that it was likely, given the requirements on immigration and sovereignty—then being explicit about it was something. In many ways, it closes down one route to that desired destination, leaving the other route a bespoke deal. There is, then, concern around that and the customs union, and I am sure, later, when we come on to the devolution of powers, we can revisit what some of the implications of those might be.
Also, the “no deal is better than a bad deal” position runs the risk of increasing, from a business perspective, the likelihood of WTO. The impact of WTO, from a business perspective, is very negative, so making sure that we are clear about what WTO means for businesses, individuals, jobs and communities so that you can judge the desirability of the deal on the table against that effectively becomes a clear priority. There are, then, some useful elements and some areas of concern.
The Chairman: That is helpful. It is useful to take a snapshot first.
Scott Walker: We have a lot of similarities with the CBI in terms of the assessment given there, so I will not go over the same points. I will try to just highlight the differences. In terms of direction of travel, I agree that we have a bit of certainty there, but for us this is going to be a long and drawn-out process that is likely to zigzag in many directions, not least because of the Scottish perspective on this issue. We are still unsure about the timeframe. As Josh has indicated, while there is some reassurance with regard to transitional arrangements, what does that look like? How long would they be in place? How would they operate? That creates huge uncertainty for us.
Maybe specifically, just from a farming point of view, because we are so heavily dependent upon support payments coming from Europe, while we have had guarantees before the Prime Minister stood up and spoke with regard to payments up to 2020, there is nothing in terms of a statement as to what is going to happen post 2020. In terms of any transitional arrangements that may or may not be in place for agriculture, that leaves a huge uncertainty for the farming community at this point in time.
All in all, we have looked at the Prime Minister’s statement with interest but, in terms of people being able to make any clear, decisive decisions going forward, it has not helped at all, really.
Councillor David O’Neill: There has been a big spread in the range of views across the UK’s regions over Brexit. We did find that the Prime Minister’s speech was at odds with the need to bring decision-making back to the people. There has been little discussion of how the Brexit decision should be interpreted, and we would have welcomed a consensus, possibly even a joint agreement, with greater coverage of the role of local government and what happens next. There are two reasons for that. One is that local government is part of the governance of Scotland. We are not civic Scotland; we are part of the governance. Local government manages a substantial proportion of the EU monies that are spent here and is very heavily involved with that.
COSLA wanted to stay in. That was across the board—all the parties and those of no parties. It was a unanimous decision and we thought we should stay in. However, we are where we are now and we have now got to make the best of it. Hindsight is a wonderful thing but perhaps the option of remaining within the single market should have also been put to the people, but I am conscious that some of those who were in the Brexit camp, some of the leading lights—for example, our now Foreign Secretary—were campaigning on the basis that we would remain in the single market, so it did come as something of a surprise to us when the Prime Minister said no.
There has been an apparent lack of offer around EFTA. I am sure other people will have highlighted this issue and the particular circumstances that we have here in Scotland. We welcome powers being repatriated to Scotland but where they lie within Scotland has yet to be discussed. Subsidiarity suggests that some competences should be vested locally or be shared or co-ordinated—for example, state aid. There is a worry that, if state aid does go down into each of the devolved Administrations or even into local government, there is a potential for a race to the bottom, which I do not think is in anybody’s interests across the UK.
We would want to explore some of the opt-ins to EU programmes. Transitional projects for local authorities and regions are important in helping to build partnerships and develop new ways of providing services. The Iceland and Norway council is a case in point. Part of the reason that we want to do this is that the money available through Europe is the single most stable form of financing that is available to the public sector. We have a seven-year programme. We have certainty today up until 2020. We should have been planning for the programme after that. We should be doing that right now and we are not. Nothing is happening about that. Echoing the comments from my colleague from the NFU, that is leading to uncertainty across the board.
We would like to see areas where reciprocity is needed, such as rights of EU and UK nationals. I have to say I am appalled that we are using individuals as bargaining pawns in this light, and I think absolutely the right thing for the UK to say is that we would guarantee the rights of EU citizens living here. If nothing else, it would allow us to take the moral high ground in the discussions that are taking place with the European Union and, I believe, would strengthen our hand in allowing UK residents to remain where they are.
We welcome the idea of the industrial strategy that the Prime Minister announced but we need clarity if this is to be financially supported and, at this stage, there does not seem to be any clarity.
Professor Anton Muscatelli: Just to echo, what was welcome is the clarity because, for the first time since the referendum, we have a good idea at least of an initial blueprint from the Prime Minister on the shape of Brexit. I should say, and I think it is clear for anybody who has read anything I have written after 23 June, that I do, as an economist, believe there is a real cost attached to leaving the single market. There has been a lot of misunderstanding around what access to and membership of the single market and the distinction between those two concepts are, and I certainly believe, like many independent forecasters, that if we were to leave the European Economic Area and if we were to leave the single market and not find a similar arrangement, then the economic losses could be of the order of anything between 3% and roughly 9% of GDP by 2030. We have not seen some of those negative effects yet. Some had thought that they might materialise earlier because of expectations effects, but that is not to say that they will not happen, because these losses come from loss of trade. We have seen the Office for Budget Responsibility, already in its post Autumn Statement forecasts, build some of these negative effects in.
I was disappointed that there was not a consideration at least of a solution that involves staying within the single market but outside the EU through membership of EFTA. Again, I think political discourse in the UK has made that difficult around foreign judges and the European Court of Justice. I do not think there is a genuine appreciation that the EFTA court and the EFTA Surveillance Authority operates quite differently from the ECJ and has a different relationship with the judiciary in individual countries. That is a problem.
Again, around immigration, there is an appreciation, no doubt, around government that there are different needs across the economies of London, Scotland, Wales, Northern Ireland and other parts of the UK. Frankly, to say that that is a red line without taking a more varied approach is something that is concerning.
I should also say that, wearing my hat as chair of the Standing Council on Europe, the UK staying within the single market, even if outside the EU, was something on which probably pretty much all the advisers on that group were agreed on, because it is so important, economically and socially, to the UK.
There are four other areas that I think are problematic about what we heard from the Prime Minister. One is that there is still a lack of realism on the timetable. The notion that, in two years—and this has been mentioned—you could negotiate a divorce arrangement, even in parallel with a trade agreement, and conclude that in two years is unrealistic. If it happens, that is fantastic but I do think there is a very high probability that that will not be realised.
That then makes the issue of transition, as has been mentioned, really important, because you cannot develop a transitional deal if you do not know where you are going to end up, which, again, is why I have argued—certainly in the press, when I have written any opinion pieces on this—that maybe the single market, in the short term, might still be the transitional deal. Even if one believes in a harder Brexit and a bespoke deal, there may be some scope to look at that as a transition, because I think a cliff-edge, as has been mentioned, is an absolute disaster economically for business in the UK, particularly because the UK is so dependent on sectors like services, where non-tariff barriers are huge, but also in key sectors like aerospace and motor vehicles, where the supply chain is so dispersed around Europe that, frankly, no deal is a really bad situation.
The other area where I think there needs to be some clarity is that I do not think the position was entirely clear on the customs union, and that is something we may want to go into. There seemed to be some equivocation, although I interpreted it as wanting to leave the customs union and some discussion of the way things might go after that.
Finally, the point has been mentioned about the importance of getting the agreements within the UK, because it is clear that different devolved Governments and local government have different positions on this. Given that the country was so divided politically on this, and given that the economic needs of different parts of the country differ so much, it would be wise to get some greater agreement certainly before the heat of negotiations begins after the triggering of Article 50, which leaves us very little time to begin to get some clarity on the relationship between the different devolved authorities in the UK.
Q47 The Chairman: Thank you for that. As we are now on the public record, I ought perhaps to declare that I have interests in the agriculture industry, which are in the Register of Members’ Interests. They are relevant to the agriculture question. For good measure, although it was nearly 35 years ago, I was an NFU county chairman in England and continue to retain an interest and, indeed, membership of the NFU. In that capacity, I was nominated to the CBI county committee, but that was, again, a long time ago. Equally, if it cheers Anton up, I was England Universities Minister. You have not talked much about that but it would be helpful to remember that hat as well.
I want to just make one general comment and then ask you one question and ask my colleagues to come in. A general comment was all of us sense that this is a matter for individuals and their destiny and families and their aspirations and so forth, just as much as it is a matter of high politics and diplomatic stuff. It has to be got right or, as the Prime Minister did say, it has to work for the people of Britain and get some way through it.
My specific question was: you have all expressed fairly your concerns, as it were, and strengths and weaknesses of the situation arising from the Prime Minister’s statement. Without asking either for specific details, which is unfair to the individuals, or for anything more than general assurances, examples are always illustrative. It is one thing to do a desk study—and I have done a few in my time—as to what might happen on paper, but are you all finding, in your representative capacity, that you are getting people ringing up and asking, “I am a farmer in X and I am not going to invest in that because I do not know what the position is or whether I get the labour force”, and similar sorts of questions about industry, questions about access to Horizon 2020 funding, or continuing government funding or share funding or ESF funding, for example? How much this is a theoretical set of concerns is a question that has been a rather less developed argument so far, and how much of it is people ringing you up and saying, “I am really concerned about this now”.
Scott Walker: “Different in different sectors of agriculture” would be the way to best describe, to start with. The initial vote, when it took place, has had the impact of decreasing the value of sterling. For most of the farming community, there has been a boost in prices, so it has been good news, generally, for most of the farming community. However, if you look at areas such as fruit and vegetables, where they employ a lot of seasonal workers that come from the non-UK, the impact has been quite negative for them because what they find is, to attract workers to the country, these workers, in effect, have had a pay cut because they are trying to transfer the money back to their home country. There has been an instant reaction by workers of being determined to come here to Scotland and to come here to the UK. They have also had feedback from workers during the course of this year. The feeling is, “Will they be able to come in the future? How welcome or otherwise would they be in the United Kingdom?” For that sector in particular, having access to an overseas workforce is absolutely vital. I would say for our side, the number one sector that has come up with the greatest concern around what the short-term and long-term impacts will be is the fruit-and-vegetables sector. That is causing considerations for individuals with regard to investment coming forward, because there is very little that they can do themselves to mitigate the impact. That is the initial point.
If you look at the more traditional sector in Scotland, which is livestock-production, you are talking about, on average, a minimum of at least a three-year lifecycle for people to decide breeding patterns and for product to come to the end. At this point in time, then, I would not say it is having a significant impact in terms of people and investment decisions. People are looking with interest to see what is going to happen, particularly on the subsidy front and particularly on UK and Scottish agriculture policy. In terms of them making decisions for investment, other factors probably have a stronger impact at the present time, rather than Brexit.
Professor Anton Muscatelli: In terms of my own sector in higher education, I have no doubt that Brexit and the risks from Brexit are still of very high concern, alongside general concerns about immigration, particularly in terms of international visas. In terms of Brexit, I always like to put it this way: in terms of risks to the sector, the people risk is bigger than the funding risk, in the sense that one can conceive of different funding models whereby the money does not necessarily flow through Horizon 2020 or FP9, although programmes like Erasmus are absolutely unique, as are programmes like the European Research Council. The dependence of the UK higher education sector on talent from across the world but particularly Europe, because it is easier to attract people from Europe’s geographical vicinity, still has not been fully appreciated in government. If you look at our research-only staff, you can find, in some parts of the activity—my own university or similar universities—even up to 50% of the people we hire in key fields are from Europe. That is partly to do with the pathways to PhD study, and postgraduate study in the UK, but it is absolutely critical. If we are not able to attract that talent, it will have an impact on the competitiveness of our universities.
Beyond that, clearly some universities in more geographically remote areas in the UK, like the Highlands, are more dependent on structural funds. In Scotland, the tertiary sector and further education are more dependent on ESF funding than is higher education.
It is varied but, in terms of higher education as a whole, clarity as to immigration rules will be absolutely key. The point has been made around securing existing people who are here; I agree that that should not have been on the table in terms of a negotiating counter. Frankly, it would have sent the right signals to our EU partners to say, “This is not a bargaining issue”.
In terms of future funding for students, both north and south of the border, and in terms of what will happen to that research and innovation funding, that will be critical in terms of getting at least a clear line of sight on that over the next year or two.
Councillor David O’Neill: In terms of community cohesion, and at the risk of repeating myself and repeating what other colleagues have said, we need a very quick decision on the rights of people to either remain and to make sure that we have access to workforce for specific sectors. Some of the sectors have already been mentioned. We are sitting in a city that depends very heavily on the hospitality business, and the hospitality business would struggle without the people from Europe, as would local government and the public sector. The care sector is very heavily dependent on migrant workers. Do we have the individuals to take up these posts, should all these individuals return to their home country? No, we do not. We can see some sectors being absolutely decimated and suffering to the extent that they may actually suffer critical failure if they do not have these individuals here.
In terms of the finance side, I already mentioned the regional funds. Councils manage a third of the regional funds and about 7% of the EU rural development funds, and we definitely need the certainty in that. We should be doing the work right now for what happens after 2020. There is then constitutional Brexit, which will be a challenge to the existing relations between the UK Government and the devolved Administrations and local government. Despite having the devolved Administrations in the UK and within the devolved Administrations, we remain a fairly centralised country and we have seen a 50-year journey of decision-making being taken to the centre, and devolution from London to Edinburgh is not devolution. Devolution from London to Cardiff is not devolution. Devolution from London to Belfast is not devolution. You need to get it right down into the heart of the communities and through local government.
I will give an example of that: the European Charter of Local Self-Government. The UK Government agreed to that some years ago but it has never been put into statute, and it should be done ASAP to ensure the rights of local government and to ensure that local government continues to exist. Local government exists today as a whim of national government. That does not happen anywhere else in the world. Local government is constitutionally protected and we are part of the governance of what happens, particularly here in Scotland where we have a very strong devolved Parliament that is single-tier. It has scrutiny processes that, to date, frankly have been inadequate. The Executive have been able to operate without sufficient scrutiny in a way that is not healthy, in the long term, for a modern western democracy.
One way that you deal with that is by enshrining local government within the governance of Scotland and the UK, and ensuring other strong institutions as well. The UK does not have a written constitution but we do have a constitution. Through legislation, we should be ensuring that there are strong institutions that can act as a check and balance, and we should do that ASAP. It may be something that we should do more because we are leaving the European Union.
Josh Hardie: Just a few brief thoughts from me: first, it is important to realise that businesses are used to uncertainty and, up and down, whether it is in Scotland or the rest of the UK, what we see is businesses, by and large, dealing with it and cracking on—some taking advantage of exchange-rate opportunities, some in a more challenged position. It is not, however, the case that businesses are sitting there saying, “We have to have more clarity and we are going to sit on our hands until we do”. They are doing everything in their power to carry on and to look for prosperity.
Of course, things are challenging and there is a lot of uncertainty. At the CBI, we have downgraded our growth forecast as a result, not just because of uncertainty—inflation as well—but uncertainty is a good part of it. We see businesses holding off some of their big investments again. This is not across the board but there are clear, specific cases. Not surprisingly, those businesses are not always keen on explicitly sticking their head above the parapet, but the time may come when that happens. As I said earlier, the more likely WTO feels, the more sensible risk analysts in business have to factor that into their decisions. A two-year window is not very long, so they have to be taking decisions now based on “what if” in two or three years’ time.
I would echo the people point. We see across business, whether it is in farming but also in tech and financial services, as in construction, increased difficulty right now in recruitment and retention. That is partly because of the devaluation and partly because, if you are about to take a job and need to put your children into school and do not know what the future holds, you may wonder whether to take a job here or, for example, in Germany. We see our members feel the impact of that right now.
There are opportunities but there are also concerns. The one point I would say is that there is enthusiasm about the potential for the industrial strategy, if got right, if it has the right focus and the right approach, to mitigate some of these concerns. The more that we can do around that, the better.
Councillor David O’Neill: I just have one thing to come back on. There is always a danger when you think about farming that you think just about farming, but the food-processing industry is also connected, which is hugely dependent. We have been having discussions with food processors, both here in Scotland and across the rest of the UK. As an industry, proportionally, I would say it is more affected by migrant labour coming across, and particularly once you get into the meat-processing side or any of that “dirty” processing, as I would consider it, there is a lot of migrant labour and huge impacts there.
Also for the food-processing sector, it is looking very closely at what the agricultural policy will be of the country going forward. To give you an example, if you are a meat processor just now, you will always be processing some meat in this country. It is not not going to happen. You will have a decision to make, however, as to whether you are going to be a slaughter-based industry, because you have the raw product in Scotland and the UK, or whether you are going to be a packaging-based industry, importing from abroad and packaging in the UK and then distributing. For those industries, not making decisions now—because, as has been said by the CBI, there are lots of other factors there for businesses, but depending on how things pan out—will have quite a significant impact on future investment plans.
The Chairman: I suppose, just for the record, we might add it is not only food processing but also drinks processing.
Q48 Earl of Kinnoull: A lot of interesting topics have come up. I must declare my farming interests in Perthshire, as well those set out in the register. I might like, at some point, to come back to farming but I wanted to pick up on something that David just mentioned about onward devolution. The Smith commission agreement—I think in paragraph 33—specifically talks about onward devolution specifically to your area. What efforts have so far taken place to put that into place? How does it marry up with the current consultation going on around the Crown Estate?
Councillor David O’Neill: There is considerable effort on the part of local government to do two things: to devolve the powers and the services that we have further down into the heart of communities; and to convince mainly the Scottish Government and, to a lesser extent, the UK Government—the Crown Estate is a good exception to that—to get more powers to the most appropriate sphere of governance and the most appropriate place. It is not about levels of government; it is about spheres. I must say that the journey of more than 50 years of centralisation in Scotland is not going to be turned around overnight. It is a juggernaut, and at best we have ever so slightly started to apply the brakes, but that is as far as we seem to have got.
Earl of Kinnoull: In summary, there are no efforts to get anything out of Holyrood down to you at the moment?
Councillor David O’Neill: No. What we see is an effort from Holyrood to—excuse my use of this phrase—cut out the middleman of local government or local decision-making. An example would be when we see a substantial financial resource bypassing local government and going straight to head teachers, which means that the relationship for that money ceases to be between the head teacher the school and the local authority; the relationship will now be between the head teacher and the Cabinet Secretary sitting in Edinburgh, possibly with some sort of regional setup in between. You can call that whatever you like but it is, in my book, centralisation, taking power back into the centre.
The reason that I feel so strongly about this is not because I want a power grab for local government. It is because, through commissioning strength and local democracy, we were very much aware of how the wealth and health inequalities in Scotland and the wider UK were going in the wrong direction, while, everywhere else in Europe and the developed world, they were going in the right direction. The commonality that we found is that you get better outcomes for communities the closer the decision-making is to them. When you try to do it as a one size fits all—larger organisations taking things to the centre—you end up getting poorer outcomes. Despite the best efforts and intentions of people across the public sector in the UK in the past 50 years, these gaps are widening rather than narrowing. Everybody else is going in the opposite direction and they are getting better outcomes.
Q49 Earl of Kinnoull: That is very helpful. Just a very brief question on farming, if I may just say to Scott, you have been very helpful so far, but could you give us a roadmap for what really needs to be done to get farming to a reasonable position post-Brexit? What are the three or four things—
The Chairman: With a Scottish flavour, I suspect.
Earl of Kinnoull: With a Scottish flavour, yes—the three or four things that need to be done.
Scott Walker: I will restrict myself to only three or four. First and foremost, it is about what trade deal we are going to get with the EU. Currently, approximately 80% of our exports outside of Scotland go to the European Union. If we do default to WTO rules for trading with Europe, in effect that closes any food exports across to Europe, because the restrictions are so great, and that, I would say, is unique to agriculture compared to a lot of other industries, where the tariffs in place, while significant, do not, in effect, close the deal and just stop—
The Chairman: This is good old-fashioned tariffs as against regulatory differences.
Scott Walker: We will come onto that later, but just pure tariffs just close the deal altogether. Again, whether it the Scotland’s Place in Europe plan or what has come out from the UK Government just now, nothing to me appears to address that issue in terms of the trading arrangements with Europe. First and foremost, then, we need a good deal there.
Secondly, in terms of the differences between Scotland compared to the rest of the United Kingdom, in Scotland, for agriculture, 85% of our land is what is called less favoured area land; only 15% of England is less favoured area land. Again, that puts us at a disadvantage compared to the rest of the United Kingdom. It also means we are more heavily dependent upon the support system that has come from Europe. While we get premium for our products—I will come back to that in a minute—the support system has really shaped the nature of agriculture for decades, and that is not something that you can change overnight. We are far more heavily dependent upon the support system and having both appropriate sums of money and appropriate support mechanisms to apply for that money in the future.
Earl of Kinnoull: Could I stop you on that point for one second and ask you to try to fill that into bank finance? I do not want to lead the witness, but a point that had been made prior to the announcement that there were guarantees up to 2021 is that banks were refusing to renew facilities because they could not see enough of a forward cash flow for the rules that they now have about how they can lend money. We have a cliff-edge in 2020 for that but, if there are huge changes to less favoured area subsidy, what will happen then to people who have bank facilities?
Scott Walker: Again, I would split it into two types of farming. If you are a tenant farmer and do not have the benefit of the security of your land to underpin your business, banks are looking very closely at the serviceability of those businesses to repay those loans. If there are any hints that the support system will either stop or change dramatically to reduce income to those businesses, banks do not want to lend to them and want to withdraw.
At the same time, the banking industry is very aware of land values and would not want to do anything that destabilises them, so there is a lot of inherent support within the banking system for orderly change. If businesses are to restructure and individuals are to come out of farming, they do not really want a rush of farms coming onto the marketplace. Often, from what we understand, deals are done in the background to try to arrive at some orderly restructuring.
I do not think banks, in general, will close down the industry but they are changing the basis on which they are prepared to lend to the industry, and looking very closely at forwarding any new money to businesses in the future.
The Chairman: We should move from what you might call industrial or professional considerations and look at some of the impacts on your various interests from the devolution situation and the Brexit interaction. I start with Lord Whitty.
Q50 Lord Whitty: The Prime Minister has said that she is going to work with the devolved Administrations but, from all the information we get, there is quite a significant difference between the way the Scottish Government and the British Government are approaching it at the UK level. Is it possible for them to work closely together, given the different politics in the referendum? More particularly, if you look at the single market, although that paper says that the whole of the UK should be in the single market, that is now not going to happen, but the Scottish Government seem to be pursuing the option of Scotland somehow remaining, either via EFTA or otherwise, in the single market. Does that divergence of approach add up or does it undermine the negotiating position of the UK as a whole in relation to Europe? Is it really possible for us to have differentiated market relations with the rest of Europe?
Councillor David O’Neill: It depends on the balance that you are looking for. A one-size-fits-all approach would be the wrong thing. If you end up, for example, with state aid rules saying that you could have different state aid rules for the four Administrations, that would lead to a race to the bottom. That would be bad for workers, it would be bad for terms and conditions and, overall, it would be bad for the local economy. In terms of balance, while we do not want one-size-fits-all for everything, there are some things where you do want that, state aid being an example of that.
In terms of access to the single market and the model that the Scottish Government want to pursue, local government will join with them in pursuing this through EFTA. It is right and proper that we do pursue it. However, if I was a member of EFTA, I would look at what the UK has been doing since it became a member of the European Union and I am not sure that I would be wanting you in my wee club. We should pursue it but I am not at all hopeful of getting a positive result for that.
The whole of the UK should be trying to retain the single market. COSLA did not take a position on that. The position was not whether we should be for Brexit or remain. I suspect, if I asked the membership, they would say that the UK should be retaining the single market. Getting the balance right, however, is important, and you cannot do a one-size-fits-all.
Lord Whitty: The point I am making is that the Prime Minister has now blocked off that option and we are going to have a White Paper in a few days, which will make that more explicit.
Councillor David O’Neill: Parliament has not blocked it off.
Professor Anton Muscatelli: Just to clarify, although it is on record, it is important to emphasise that “Scotland’s Place in Europe” is very much a Scottish Government paper, and the group I lead is not the author of this paper. We were, of course, consulted and we provided advice, but this is very much the Government’s policy position—its White Paper, in a sense, before the White Paper from the UK Government is published tomorrow.
It is technically feasible to have a differentiated solution. It is challenging. One of the strengths of this paper is that it does not shy away from some of those challenges but makes them very clear. In terms of the advantages of trying to pursue it, the first point is that Europe is full of variable geometries. Once you start looking more closely, you realise just how complex it is. It is a variable geometry that is going to get much more complicated in the future. Switzerland is in no-man’s land at the moment in terms of its relationship with the EU. The EU is not happy with the current bespoke agreement and the set of 120 treaties. It will need to move. It is now trying to push Switzerland to have a much more dynamic approach to maintaining its relationship with it under those treaties, because the difficulty with a bespoke agreement is, unless it is like the agreement with Canada or with South Korea, who do you get to police the volume of trade that currently exists between the UK and the EU. That is the unanswered bit of us being outside the single market.
In terms of a differentiated solution, it is challenging on a number of grounds, because it will require us to decide how we maintain, essentially, two parallel single markets: one within the UK and one between, say, Scotland and the rest of Europe. Some of these issues will, however, have to be addressed in respect of Ireland anyway, and Northern Ireland will have to address some of the issues.
In terms of the areas that will require quite a lot of thought, people have made a lot of the border effects on people, but I do not think that that is an issue at all, to be honest. I think that will be addressed as part of the common travel area. It will be around, if you had a differentiated arrangement for Scotland, how that would work in terms of competition law and other dimensions of that with the UK. It could be to the UK’s advantage, which was one of the points that I made in a piece that I wrote for the Sunday Times and a similar piece I wrote for another national newspaper, which is that it would keep UK regulations around markets and products tethered to the single market, thereby allowing those companies around the UK to have some guaranteed access through Scotland, if that is the differentiated approach that is taken.
It is complicated, and I do not think the paper shies away from those complications and challenges. As has been pointed out, it is a way of trying to address what is already a difficult situation, which is that different parts of the UK have different views on this matter. If it was not for the migration issue or, indeed, the ECJ controversy, I suspect the UK Government would probably have chosen the single market solution as being probably the best one, given that being outside the single market is a very unfriendly place to be.
We will wait and see how this evolves, but, speaking personally, the differentiated option for Scotland, while difficult, is possible and technically feasible. Politically, that is a different matter and is for others to judge.
Lord Whitty: We would need to get Europe to agree.
Josh Hardie: I am possibly in a slightly different place from David in that our members feel that, at least as a starting point for negotiations, a whole-economy and a whole-UK approach gives us the best chance of success. Because the economy is so intertwined—sectors work with each other and regions work with each other—if you start to break it up at the very beginning, it becomes harder to get the best possible deal. We are quite clear that starting with a whole-economy approach is important.
If you are successful with that and if you achieve the principles I mentioned and the destination that the Prime Minister wants, it presumably lessens the need for too much differentiation.
Having said that, there are likely to be requirements for differentiation—we have mentioned Ireland already—so being able to look at those specifics is important. Again, when you are looking at them, coming back to some of the principles, if there is to be differentiation and if there are to be particular devolved-nation deals, making sure that that does not make life harder from our perspective and from our members’ perspective—whether it is the movement of people, whether it is regulatory equivalence, whether it is competition—if it affects the UK single market in order to get access to the EU single market, that becomes quite problematic. Sixty per cent of Scotland’s exports are to the UK, so getting that dynamic and those principles in place for whatever the differentiation might be seems pretty important.
The Chairman: Just picking you up on that, it has been put to me in the past that we, in a sense, have not had a United Kingdom single market because a lot of it has been predicated on the European single market. Regulatory changes have taken place and so forth, but you are relaying to us the message that that will need re-examination in terms of not identical regulatory regimes but at least some degree of comity so that trade can flow.
Josh Hardie: So that businesses can operate across the UK as simply and as easily as possible, yes. Of course, there are some variances but let us keep them to a minimum.
The Chairman: Scott, store cattle look much the same one side of the border as the other.
Scott Walker: But ours are the best.
The Chairman: I was setting you up to make that claim.
Scott Walker: Putting that aside for a minute, one of the problems we have with Scotland’s Place in Europe by the Scottish Government is that we agree that trade with Europe is hugely important. We agree that the basis of having some differentiated approach makes total sense. However, in this paper, food, farming and the CAP are excluded. If this deal was delivered tomorrow, food, farming and the CAP are still left outside. Any differentiated approach, we believe, should take into account food, farming and the CAP.
If you look at Scotland compared to the rest of the United Kingdom, and if you look at our rural areas and how dependent some of our rural areas—Orkney, Shetland, Dumfries and Galloway, and others—are on agriculture, what happens in agriculture will have a huge impact on Scotland’s rural areas and, I suggest, a disproportionately significant impact compared to other areas of the United Kingdom—certainly England. In Wales, there may be some similarities but, compared to England, it is a different ballgame up here.
Professor Anton Muscatelli: The farming point is a fair one but, to some extent, it is because what this paper tries to do is to say, “If the UK has said it is coming out of the customs union and the single market, there needs to be a customs border around the whole of the UK”. The whole proposal is predicated on trying not to create barriers; absolutely, as you know, very much the first supported option is to stay within the single market.
Can I make another point? It is interesting. As we look at how patterns of trade and value chains operate across the UK, some of the data that we have does not always reflect what is happening. For instance, if you look at financial services, it looks as if most of our exports in Scotland in legal, administrative and financial services are to the rest of the UK, but they are probably tied into the value chain for the whole of the UK. That means we are probably underestimating the impact of EU exit on Scotland in that particular sector, particularly legal and administrative sectors.
One of the interesting things about this variable geometry around Europe is that we are seeing how some financial companies operate across different borders. For instance, Liechtenstein is not just a base for Swiss companies and insurers that operate there. It also operates as a base for Austrian companies that are within the single market, because they have a slightly different regulatory regime. It would be interesting to look at the potential impact, as you were pointing out, around a differentiated agreement and how this will impact across the piece.
The Chairman: As an economist—and we did hear some reference to this this morning—are you satisfied that there is an adequate database for working out the input/output flows as activity flows across the existing UK borders between, say, England and Scotland, and in between sectors?
Professor Anton Muscatelli: I do not think that the data is perfect. The data we have is relatively imperfect and we need to get more of an understanding of how exports from, say, Scotland or Wales tie into the value chain for exports to the rest of the UK. That is the bit where I have certainly seen some weakness in the data.
Q51 Lord Selkirk of Douglas: As you will be aware, the Prime Minister committed herself to working very carefully to ensure that, as powers are repatriated from Brussels to Britain, the right powers are returned to Westminster and the right powers are passed to the devolved Administrations of Scotland, Wales and Northern Ireland. I would like to ask: which EU competences do you believe should be transferred to the Scottish Government after Brexit? Are there any powers currently reserved to the UK Government that you believe should be devolved as a consequence of Brexit?
Councillor David O’Neill: Some of the powers should be devolved to the appropriate place, not necessarily to the devolved Administrations. Procurement would be a good one. If we are going to change the way that we do things and we are not doing procurement on an EU basis anymore, for example, is there scope to allow local flexibility so that the public sector, which, in many places within Scotland, is the main employer and the main economic driver, can use the resource that is available to boost the local economy? There are a number of areas where devolution should not be necessarily stopping at Edinburgh, and we would be more than happy to participate in that.
Professor Anton Muscatelli: Scotland’s Place in Europe makes it very clear that the Scottish Government’s position is that repatriated competences in devolved areas should go to the Scottish Parliament—agriculture, fisheries, education, health, justice and environmental protection. One of the strands of work of the Standing Council that I chair was around social protection and human rights, and there is an interesting view there that there may be differential opinions about things such as employment law and health-and-safety legislation. Certainly, it is the Scottish Government’s position that they would like to look at that, whether that is currently reserved and whether, as a result of some of the EU laws being repatriated, there might be different views around the UK as to the extent of social protection, for instance. That is an area where there will be intense political debate.
Scott Walker: The food and farming sector is in a pretty unique position. In essence, for a long time now, what you have had is the framework set by Europe and, since the Scottish Parliament has been put in place, totally devolved powers, in essence, to the Scottish Parliament in terms of how they implement the European framework. We certainly would not want to see any change in that process. We would want the Scottish Government to retain those existing powers in terms of determining agricultural policy, but something that is different with this is the budgetary constraints that go around it. Currently, the budget is determined in Europe, comes back to the UK and is shared among the four regions. What we have here is not only a transition of power of Europe but, in essence, also a transition of budgets from Europe back to the UK. How the UK chooses to address that in terms of splitting that money throughout the United Kingdom is going to be critical.
We have already made mention about the Barnett formula being inadequate to address this repatriation of powers, so I would be looking at certainly the Scottish Government retaining all the agricultural powers it has; the Scottish Government, with the UK Government, agreeing a fair and reasonable budgetary settlement for the adoption of these powers; and thirdly, there is ultimately an issue of the capacity within the Scottish Government and civil servants to deal with these new powers. That has been talked about at the UK level in terms of the need for a significant number of civil servants to be employed. We already see the Civil Service in Scotland stretched in some areas and, if new powers are coming back for people to use, they have to be adequately resourced, so that they can make the correct decisions and put the right mechanisms in place.
Q52 Lord Selkirk of Douglas: You have already answered my next question, which was about adjustments being made to ensure there are sufficient capacity and resources available. May I ask Scott Walker a further question? I should mention a past interest in that I am a director of a small family company that owned a farm that had an interest in the subject in the past, but the farm was recently sold. The question I am going to ask, which relates a past interest, is about the CAP. Should the CAP be replaced with a UK-wide framework policy for agriculture to harmonise regulations and the market for agricultural goods?
The Chairman: Can I just add to that the international perspective? If these powers are coming back and, for example, shall we say, hypothetically, there is no concluded trade arrangement, though there may be a transitional period in which it is protected, how are we going to manage that as a United Kingdom?
Scott Walker: This is an issue that, within the industry, has not been adequately debated as yet, and certainly, at our AGM next week, we are going to start this discussion with our membership. Similar to some of the other statements made earlier today, powers should lie with people who are accountable for the decision-making and who understand the impact of the decisions that they are going to take. As a general presumption, I have more confidence in policy decisions on agriculture being taken at a Scottish level than I would at a UK level, because there are marked differences between the nature of agriculture in Scotland compared to elsewhere.
At the same time, there is a huge linking here of different issues. You cannot do a Scottish agriculture policy in isolation of whatever trade arrangements are agreed with the rest of the world. Everything I have read, in my understanding—I am happy to be corrected—would still seem to indicate that future trade negotiations will sit at the UK level, and those trade negotiations with Europe and with the rest of the world will have a huge impact on what sort of agricultural policy we need going forward. There are certainly going to be different levers of agriculture policy—some at the UK level, some at the Scottish level—but I would not like, in essence, a policy determined by England, where the other regions of the UK choose which element they wish to use but have no input to determine the levers that we have to use.
With the most recent CAP reform, for instance, we in Scotland very much wanted to use coupled payments to keep livestock in some of the most vulnerable areas of Scotland and ensure that the rewards for activity went to the individual who is taking the economic risk rather than an individual who simply owns land. In England, however, they had a different view and perspective, which, while suited for their production systems, would not have been suited if it had been transferred here. I know that there was quite strong opposition, shall I say, to Scotland pursuing the route that it eventually wished to go down, and we needed to get some flexibility at the UK level to allow us to do what we wished to do here in Scotland.
Q53 Baroness Wilcox: All of us—well I—voted to stay in, but it is over. We are a democracy and people voted more to say we are coming out, and that is it. It is a frightening and worrying time. One of the questions that we put down to ask you was: are existing mechanisms for interparliamentary dialogue between Westminster and the devolved legislatures sufficient to deal with the challenge of Brexit? If not, what new structures are needed? What we will go back with, what our report will come out with and what we will be telling the Government is: is that working, can it work and can it be done better? It would be wonderful if you, from your side, can get your Government to say, “We need to negotiate, not just shout at each other across the barriers”. We really have to do this as friends rather than as the enemy. I would like to ask you, then, whether the existing mechanisms are right. If they are not, do you have, in your Parliament, the right people doing the negotiations for you?
The Chairman: Just to interpose, I think it is on two levels. We have a very strong parliamentary interest in doing this, but it is also the intergovernmental and the joint ministerial mechanism as well. One would hope that the two will work in sync.
Baroness Wilcox: I hope I phrased that well enough.
The Chairman: It is clear now.
Professor Anton Muscatelli: On the Joint Ministerial Committee, it is good to hear that, for instance, in the last couple of meetings, not only have the UK Government agreed that Scotland’s Place in Europe is being considered but that, at the last JMC-P, the Prime Minister said that she wanted to accelerate the work—
The Chairman: “Intensify”, I think, was the word.
Professor Anton Muscatelli: Intensify rather than accelerate. I stress the point I made earlier that the next couple of months are crucial because, unless you can lock some of these moving parts together, it creates, to mix my metaphors, more friction later on. In terms of relationships between parliaments, if we end up in a situation post-Brexit where there is some differentiation and redistribution of powers, you will require more mechanisms for joint decision-making.
I will give you an example that is related. At the time of the most recent Scotland Act, greater fiscal powers came across. There was more complexity around the determination of the block grant and the fiscal adjustments, and I suggested at the time that there might be scope to look at whether some arbitration mechanism needs to exist. If you end up with both Governments saying, “Sorry, we think this and the other thinks that”, because of how you interpret behavioural changes in tax, for instance, then you need some way to decide that. In countries with a federal constitution, there are mechanisms to do that— usually a Supreme Court.
The Chairman: Checks and balances.
Professor Anton Muscatelli: The question is—and this is a political question—how the UK Parliament and the devolved assemblies and parliaments deal with where there might be areas of dispute, where competences are clear but where resources are flowing and there needs to be a decision on who is right in particular areas of dispute. That is an interesting issue that needs to be explored.
Councillor David O’Neill: It strikes me that we are now having the politicians having the debate that they should have had prior to the referendum.
The Chairman: I have noted that comment. Thank you.
Councillor David O’Neill: However, we are where we are. Was it Lord Kerr who drew up Article 50?
The Chairman: Yes.
Councillor David O’Neill: He should have said five to 10 years rather than two. Are the present mechanisms suitable? Clearly not. We have to accept that a decision has been taken and move on. It does worry me, though, that, if we move at pace—what is the phrase? Move with haste and repent at leisure? That could certainly happen. There can be a two-tier approach to this, and COSLA will support the Scottish Government in their aspirations, but we will also work closely with the UK Government. The decision has been taken and we want to get out of this for our communities the best deal that we can. There is no point us going in there and saying, “We are here to frustrate what is going to happen”, but party politics is coming into it, particularly in Scotland, and there is a considerable degree of, “Let us see what we can do to frustrate this”.
Baroness Wilcox: We want a deal, not frustration.
Councillor David O’Neill: COSLA has not debated this: this is my own opinion, but I think that that is less than helpful at this stage.
The Chairman: What might be termed the industrial representatives, Scott or Josh.
Scott Walker: I would make three points. The first one is similar to that made by everyone else. Whether structures operate well or not will be determined by how they deal with dispute resolution.
My second point is that we will see an interesting development for food and farming over the next few weeks, with Defra and the UK Government looking at some form of Green Paper on future agricultural policy. In the past, that would have been a paper for England. That paper, presumably, will now be at a UK level, and how they choose to interact with the rest of the UK, how they take on viewpoints with the rest of the UK and how the rest of the UK view that paper and the interaction will be important to see.
Thirdly, just from a personal viewpoint in terms of NFU Scotland, our focus in recent years has largely been in terms of working with the Scottish Government and working with Europe. We have had some interaction with the UK Government, of course, but that has decreased over recent years, because, with the main issues, you go directly to Europe or you go directly to the Scottish Government. Certainly, what we are finding just now is that we are stepping up significantly our interaction at the UK level, because so many of these decisions will ultimately be made at the UK level. While people are listening, we will have to wait and see as to how that pans out over the course of time.
Josh Hardie: There have been positive moves in terms of the structures. We called, on the day after the vote, for proper representation from the devolved nations around the table, and that has happened. Like everybody else, however, we agree that what matters is the conversations that are taking place. We and our members would urge everybody to focus on the pragmatics of what can be done. What are the things we have in common, going back to the principles, that we can focus on to strike the best deal; not what are the things that divide us so that we fragment early on and damage our negotiating position? That is important.
The only other thing I would add is that this is not just about the EU negotiations. The way the Governments join up across a range of issues is absolutely key. Whether it is cross-economy work—the industrial strategy being a very obvious example of that—whether it is specific sectoral work on agriculture, or whether it is cross-sectoral, like the apprenticeship levy, trying to get as much consistency as possible is key.
Q54 Baroness Suttie: In terms of direct engagement with Brussels from Scotland House, which I seem to remember it was called when I was working in the European Parliament—and I think it still is Scotland House—has that worked effectively and how do you see that developing post-Brexit? In terms of at least the CBI, NFU and COSLA, have you already given thought to whether you enhance your operation in Brussels post-Brexit or do you expect it to diminish?
Josh Hardie: Whether the Scottish or English Government, it is a different environment now that we are hearing in Europe, and it is critical that we influence some of the conversations and regulations that are going on at the moment, because they will stick in one way or another. We are also doing a huge amount of work with Governments around Europe and the degree to which they feel that the Scottish or the English voice around the table is a sobering factor that gets European regulation to a better position, and the fear they have that, once that voice is removed, that moderation will genuinely missed, and that is really important. Maintaining that engagement in Brussels now and in the future is key.
I add to that that it is not just about Brussels. There is a real need—this is something we are taking very seriously—to engage with individual Governments and businesses across the continent, so that we understand their views, so that, as we head into the negotiations, we know what we are going into.
Baroness Wilcox: We still want to trade with the European Union more than ever.
The Chairman: It is inevitable.
Baroness Wilcox: It could be fun.
Scott Walker: I believe we have pretty much a unique situation in Brussels in terms of the farming unions, because NFU Scotland, NFU England and Wales and Ulster Farmers Union joined together, share a common office in Brussels and work collectively together. Through that office, we have very good relationships and interactions with Scotland House and with UKRep, and direct contact with the European Commission. In the short term, we are making no changes at all in Europe. We see it as important to maintain those relationships and, as we do already, to maintain relationships with farming organisations across all of Europe, both to get intelligence from them as to how they are thinking, what they are saying to their Government, and also painting a picture for us in Europe, because we think that it is useful for us to feed back to the UK Government as well as useful for our future trading arrangements in Europe.
We will certainly be changing the structure that we have in Brussels in the future, but at this moment, it is far too early to say what that structure should or should not be. I am sure it will change but, at present, we are committed to an office in Brussels, maintaining it and keeping very active across there just now.
Councillor David O’Neill: The four local-government associations—mainly the Local Government Association in England, ourselves here in Scotland and, to a lesser extent, Wales and Northern Ireland—are embedded within the EU institutions. COSLA has an office within Brussels. COSLA is the nominating body for the Committee of the Regions for the councillors who sit on the Committee of the Regions. We will certainly maintain that. It is going to be a moving feast. If we need to enhance that over the course of the negotiations, we certainly will. I am going to quote Boris Johnson, but I should say not in any supportive way: “We are leaving the EU. We are not leaving Europe”. There will have to be a continuing relationship.
Professor Anton Muscatelli: Higher education will continue to have to deal with Europe. Indeed, speaking for my university, we were co-partners with Warwick University before the referendum but with an eye on it—it could have been any outcome—on a new association of research-intensive universities in Brussels. Since then, King’s College London has joined us. We are a group of 19 European universities, some of them in EU states and some not, like Switzerland and Norway. We think that maintaining relationships is going to be critical for higher education, so we will certainly continue to do our best in Brussels.
The Chairman: Thank you for that. That is a note about the relationship. Does anyone else want to add any final thoughts?
Scott Walker: I just have one final thought. Again, for food and farming, we touched very early on in the discussion on the technical barriers to trade, which will be hugely important in the future. Even if we do overcome the tariff issues, for food and farming we already see, in terms of trade around the world, that these technical barriers can stop trade occurring. We will continue to look very closely at what they should and should not be in Europe. There is a strong initial viewpoint from my members that they want rid of all the European rules, because they are generally seen as restrictive, adding cost, and bad. In saying that, however, you have to be careful in what you get rid of, because, if that then acts as a barrier to doing trade with Europe, it can be counterproductive. Again, there will have to be, certainly from our side—and, I would suggest, from others as well—far closer examination of what the benefits are, if any, of getting rid of some of the rules and regulations that we have.
The Chairman: Thank you. It would be appropriate to say how much we value your time. We are conscious that you have obligations to your members, but you have very much done your democratic duty here and you have given input to us in a very thoughtful way. We will reflect on that and we are extremely grateful. We are very happy to continue that relationship as and when things crop up.
