What Scottish Independence Might Mean For Scotch Whisky

By Richard Thomas

With the Scottish independence vote today and the polls showing the decision in a dead heat, many in the Scottish business community are jittery, foremost among them the Scotch whisky industry. Scotch-making is the region’s second-largest industry, earning £4.3 billion annually and directly employing over 35,000 people. Only the much-vaunted Scottish oil and gas industry exceeds it, and this year lower energy prices brought the two sectors almost into parity

What The Pundits Get Wrong
The importance of the Scotch whisky industry means that Scots should sit up and listen when its spokesmen express concern, even though some of what I’ve seen in the media falls into the realm of pessimistic uncertainty.

The idea that Scotland would somehow be shunned rather than embraced has always struck me as somehow ridiculous. The departure of Scotland from the United Kingdom would more likely follow the Czechoslovak Velvet Divorce model than that of the Rising of 1745. An independent Scotland would probably find itself fast-tracked for membership in the EU, the WTO, and other organizations of the international community. Many countries (but not all) would likely enact “British trading rights” measure to smooth things out in the interim, granting Scotland much the same trading privileges as the U.K.

The Maybes
More uncertain is what might happen with the currency of an independent Scotland. Separatist leaders like Scottish First Minister Alex Salmond have been telling a giant fib in suggesting they could continue to use the British Pound indefinitely, but they needn’t introduce a Scottish Pound in its place. With EU membership, Scotland could join the Eurozone.

Yet even the introduction of a soft Scottish Pound wouldn’t be too serious an obstacle for the Scotch whisky industry. While they rightly fear the instability of a weak currency making pricing whisky difficult, plenty of export industries in other countries have managed that difficulty, and a Scottish Pound would inevitably mean cheaper labor prices in an industry with products commanding plentiful hard currency returns.

Another maybe is that having lost the representation of the UK Foreign Office, the Scotch whisky industry would lose a valuable ally in defending its trade interests against copycats and frauds and be much less able to protect itself. This is partly true, since London will always wield more influence than Edinburgh. Yet as mentioned before, Scotland will inevitably join the EU, and the Scotch Whisky Association is already waging many of its battles in that arena.

The Serious Issues
One thing that is hard to overstate is how important it is for big business in Scotland to have direct access to the City of London and its financial markets. Independence would close that access, making it harder and more expensive to borrow money. If Scotland had gained independence five years ago, many of the substantial investments and acquisitions made in the Scotch whisky industry would have been rendered impossible by higher interest rates.

Furthermore, an independent Scottish government is certain to look at the booming Scotch industry as a cash cow, ready for milking. Voters in Scotland are predominately leftist, and if you listen to the rhetoric of the Scottish National Party and what the people who plan to vote “yes” on independence say about their reasons, a common theme is how Whitehall has mismanaged the economy, austerity isn’t working, and an independent Scotland could do more to preserve social welfare programs.

The problem there is that while an independent Scotland could probably afford its current domestic budget just from keeping all the revenue from its oil and gas industry, the “yes” voters in the referendum don’t want the status quo. They want British Prime Minister David Cameron’s austerity program rolled back, and Alex Salmond would be under heavy pressure to deliver.

As a result, Salmond’s proposed corporate tax rate cut is almost certainly a mirage, never meant to happen. Worse, with Scotland inheriting the U.K.’s high income taxes and VAT rate, the only realistic way to raise the substantial amount of money needed for more social spending would be taxes on the Scotch whisky industry. It wouldn’t be the first time a government sought to ease its budgetary woes by sponging off the profits from a private sector windfall, and the Scotch industry would likely pass the cost of those taxes onto its worldwide consumers.

Officially, the Scotch whisky industry has stood neutral on the matter of independence. Unofficially, the companies making up Scotland’s #2 money-maker have made it quite clear they are opposed to separation. While I believe some of their concerns would ultimately prove groundless, Scotch-makers still have plenty of real cause for concern. So do Scotch drinkers, because those real concerns over independence would quickly turn into higher prices at the bar and the liquor store.