This article by Keith Skeoch appeared in the Scotsman.
Policy must go beyond a solely domestic agenda
The financial services sector in Scotland has a long, proud and well-documented history. Its fortunes have waxed and waned over the centuries but it has seldom faced a period as turbulent as the past decade.
Exceptional growth, led by the banks, marked the opening years of the new century. In 2007, financial services were lauded by Alex Salmond as part of the economy’s vibrant core in his Celtic Lion speech. The global crash saw growth in the sector slam into reverse and the sector become deeply unfashionable.
For a small economy like Scotland’s this turbulent decade raises two important questions. First, was the vibrancy of the sector just another illusion created by the credit fuelled boom? Second, in the wake of the crisis does the sector still represent part of the core of the Scottish economy?
There is no doubting the depth of the economic downturn. But there is little evidence to suggest that Scotland’s macro economy suffered disproportionately, as evidenced by the comparison with the UK and other smaller EU economies as shown in charts one and two below.
The downturn in Scotland is actually a lot shallower than in either Ireland or compared to the consequences of the many financial crises throughout history documented by Reinhart and Rogoff, which suggests an unexpected and unexplained resilience.
The resilience is partly associated with the fact that while RBS and HBOS were based in Scotland, the liquidity and asset quality issues that impacted on their balance sheets were felt elsewhere.
It is also partly due to the success of the life assurance, fund management and support services industries, most of which continued to thrive despite the crash. They are businesses that largely depend on some combination of human capital and technology to sustain their success. What differentiates them from modern banks is that their success does not depend on the need to highly leverage their balance sheets.
Scotland’s financial services industry has weathered the global financial crisis well given the importance of its banks in driving growth during the boom.
The robust and resilient critical mass revealed in recent years suggests that it is, and should remain, a core component of the Scottish economy, not least because it provides a critical connection with the rest of the world. Also, financial services may be deeply out of fashion but the needs of savers have never been greater and their demands will drive growth.
Policy must move beyond a domestic agenda and operate in a global context. It needs to focus on attracting the talent and technology needed to build and grow capital-light businesses to serve savers’ long-term needs. Policymakers must accept that the evidence from the rest of the world suggests that a commitment to a stable low-tax environment is a key component if the decline in international importance is to be reversed and savers’ needs met through domestically based businesses.
• Keith Skeoch is chief executive officer of Standard Life Investments and a main board director of Standard Life plc. He is writing in a personal capacity