VZCZCXRO8755
PP RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHLO #3152/01 3521714
ZNY CCCCC ZZH
P 171714Z DEC 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 0710
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 LONDON 003152
SIPDIS
NOFORN
E.O. 12958: DECL: 12/17/2018
TAGS: PGOV ECON PBTS UK
SUBJECT: SCOTLAND: ECONOMICS IS CHANGING POLITICS, SAYS
SCOTLAND OFFICE SECRETARY
REF: LONDON 2525
Classified By: PolMinCouns Greg Berry, reasons 1.4 (b/d)
1. (C/NF) Summary. "Economics is changing the politics in Scotland," new Secretary for the Scotland Office Jim Murphy
told Polmincouns December 17, and "the economic crisis has embedded for a generation the idea that Scotland will be
better served as part of the United Kingdom." Scotland Office Head of Office David Middleton, in a separate
conversation, said the Calman Commission's December 2008 Interim Report concluded that devolution was "working pretty
well," but a major political question remained about the overall level of Scotland's autonomy, especially in taxation
authorities. Middleton said the Scottish public is "embarrassed" about the slump in banks with a "Scottish identity" and
that many in Scotland's financial sector are concerned about the implications of a HBOS/Lloyds TSB merger. Middleton
predicted little appetite in a financially uncertain Scottish public for a 2010 referendum on Scottish independence. End
summary.
Scotland Better As Part of a United Kingdom -------------------------------------------
2. (C/NF) Secretary for the Scotland Office Jim Murphy, appointed in the October Cabinet reshuffle (reftel), explained
to PolMinCouns on December 17 that "economics is changing politics in Scotland, and the economic crisis has embedded for
at least a generation the idea that Scotland will be better served as part of the United Kingdom." Murphy, an
up-and-coming Labour leader from Glasgow, cited Labour's November by-election victory in the Scottish constituency of
Glenrothes as evidence. Labour won, he said, because the looming economic crisis shifted the Scottish public's political
thinking in favor of unity and security in the United Kingdom and because the Scottish National Party's (SNP) honeymoon
period in power in Scotland was over. Murphy said the kindest way he could put the SNP's record was "mixed," and
suggested the Scottish public was not impressed with the SNP's ability to govern.
Calman Says Devolution Working ------------------------------
3. (C/NF) In a separate December 17 conversation, Scotland Office Head of Office David Middleton said the Calman
Commission's December 2008 Interim Report, which explored the legal aspects of Scottish devolution, concluded that in
terms of government function, devolution was "working pretty well" and there were "no huge areas of debate." The only
remaining problem was the Barnett Formula, which is roughly based on population and determines the amount of money
Scotland, Wales, and Northern Ireland receive from Westminster in the form a block grant. Middleton noted that Scotland
currently receives more money per individual than the rest of the UK. The Muscatelli Report, drafted by an independent
group of economists as part of the Calman Commission's inquiry into devolved government services financing, concluded
that reforming the Barnett Formula would require a political decision on how much autonomy Scotland should have,
particularly with respect to taxation authority. Because of the economic crisis, Middleton said most people in Scotland
now find the notion of independence "dubious" and Prime Minister Brown has gained "solid support" for his handling of
economic issues. The challenge that remains is how the Labour government will politically handle the issue when the
Commission's final report is released in mid-2009.
The Crunch in Scotland ----------------------
4. (C/NF) On the impact of the economic recession, Middleton said Scotland was likely doing better than the rest of the
UK because it still has lower unemployment. However, he said that many people are anxious about the HBOS/Lloyds TSB
merger, as they believe there will be many layoffs in the financial services sector, which underpins the Scottish
economy. He also noted that there is a little bit of concern that a reduction in the price of oil will have a knock-on
effect of lower local investment by oil companies, though he noted oil is an expanding industry in Scotland.
5. (C/NF) Middleton said many Scots are "embarrassed" over the struggle of banks with a "Scottish identity," like Royal
Bank of Scotland and Bank of Scotland. For a while, Scotland was "punching on the world's stage" in the financial
sector. The "thinking classes" in Scotland are depressed about the banks' slump, and that is likely going to put a
damper on Scottish nationalism. "Independence," he suggested, "is less alive than a year ago." LONDON 00003152 002 OF
002
2010 Referendum Unlikely ------------------------
6. (C/NF) The slated 2010 referendum on Scottish independence, one of the SNP's main planks, is unlikely to happen,
Middleton predicted. If it does happen, it will be defeated. He said pro-independence support generally increases in
campaign periods, as is often the case in Quebec, simply because the question is being asked. At present, however, polls
show perhaps 25 percent of Scots favor independence -- a level of support to low for the SNP to build on successfully in
a campaign leading up to a referendum. In the struggle between SNP fundamentalists, who want independence, and SNP
gradualists, who favor autonomy, Middleton thought the gradualist would win once a "sufficient level of autonomy" had
been reached, similar to Wales. Comment -------
7. (C/NF) Our Scottish contacts report that Murphy's appointment was a good one, and Scotland likes having a "full-time
Westminster Secretary," rather than the double-hatting that Des Browne did as Secretary of Defense. The question of
Scottish independence does seem to have quieted with the on-set of the credit crunch, which apparently prompted Scottish
public reflection on what independence would truly mean, especially in financial terms. And Labour is working to exploit
these trends and capture any ground it may have lost in Scotland during the SNP's "honeymoon" period. Visit London's
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