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Cablegate: Scotland: Economics Is Changing Politics, Says

DE RUEHLO #3152/01 3521714
P 171714Z DEC 08

C O N F I D E N T I A L SECTION 01 OF 02 LONDON 003152


E.O. 12958: DECL: 12/17/2018


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.

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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 Classified Website: XXXXXXXXXXXX

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