Scotland has Full Fiscal Autonomy

With the independence referendum and general election behind us, what now for Scotland?

This week, Prime Minister David Cameron met with First Minister Nicola Sturgeon. Cameron promised to fulfil his promise to implement the Smith Commission devolution agreement, which was effectively a set of recommendations for more devolution and intended to stave off a vote for full independence. Sturgeon argued that with her party winning almost all of the Scottish seats in the general election, there is a desire in Scotland to go further still. Whilst there is no evidence that her extrapolations are true, the positions are roughly this: Sturgeon sees the Smith Commission recommendations as a minimum, whereas Cameron sees them as a maximum (given that he is not compelled other than by his own personal honour to deliver anything).

The Smith Commission key financial points

Income Tax

The Scottish Government will have the powers to set income tax rates and bands. It already has limited powers in this respect, although it has yet to exercise them. Income tax will be collected by HMRC, as it is now, and then the tax paid by Scottish residents will be passed to Scotland. This does not apply to income tax on savings and investments.

VAT

The Scottish Government will receive half of the VAT collected in Scotland. The rate will continue to be set nationally.

Borrowing Powers

Scotland will have limited borrowing powers. The UK won’t allow too much debt as this ultimately counts against the creditworthiness of the UK as a whole.

Benefits

Some benefits will be budgeted for in Scotland. These will not include unemployment benefit.

Air Passenger Tax

Control of APT arising from passengers through Scottish airports will move to Scotland. Scotland arguably depends more on air travel owing to it being further from other centres of population.

This essentially means anything from the shoreline into territorial waters. Onshore assets are not significant. The report states that management of these assets should be further devolved to Scottish regions, who would benefit from their revenues.

Oil

The Report offers onshore oil licensing but not offshore. North Sea Oil has often been held as a key revenue earner for an independent Scotland.

The Block Grant

Scotland currently receives a Block Grant from the UK Treasury based on the Barnett Formula, which in turn is a per-capita share of the costs of providing services. The Block Grant will continue to be calculated as before, but with all of the aforementioned changes to taxation and spending, it will be further adjusted. The date at which the values of the replacement revenue streams and their values becomes very important, because the part adjusted away will never come back. That part of Scotland’s finances will depend on how much tax it raises and how much it spends.

Full Fiscal Autonomy

With independence no longer an option, yet, at least, Full Fiscal Autonomy has become the buzzword. This means that ostensibly all taxes and receipts raised in Scotland are spent in Scotland, apart from amounts handed to the UK for defence and any other UK-wide activities. There are other implications, though, such as:

  • Keeping the pound – something that wasn’t (apparently) an option under independence
  • Paying national pensions – how to allocate costs accrued through the UK years of Scotland’s pensioners
  • Oil revenues, volatile as they are, comprise a significant part of Scotland’s income under FFA
  • Competition with the rest of the UK – there might be a “Dutch auction” for inward investment resulting in lower receipts overall

Depending on which piece of economic research you read, the economic case for Full Fiscal Autonomy leaves Scotland worse off or better off. Unionist parties and media point to the report by the Institute of Fiscal Studies which calculates that Scotland would have to raise an extra £7.6bn in taxes, or cut spending by that amount, just to stand still. The SNP prefer this report by think tank N-56 which suggests an astonishing £56bn in the other direction. N-56’s numbers are, however, based on optimistic projections of growth brought about by Scotland-specific policies which wouldn’t happen under the existing structure.

The optimism contained in N-56’s report is commendable, and I have read elsewhere that Scotland would be on course to be among the top 5 wealthiest nations in the world. In other words, rubbing shoulders with the Qataris and the Swiss. I suspect most will, however, settle for being better off than the rest of the UK. What N-56 doesn’t address is the extent to which the rest of the UK might also change its policies to win back any money otherwise headed to Scotland.

Reading some of the comments on Conservativehome.com on the subject, there is certainly a mindset out there that would like to see FFA for Scotland. However these people see FFA as a way of dumping a liability rather than encouraging growth in the northern part of the UK. Worse, there is a belief among some that watching Scotland fail would be a rather satisfying experience.

Living in Scotland (although born in England) I find I share both the passion for FFA and the caution towards it. This was never the part of independence that attracted me anyway. For me it was more about power – much like the UK/EU battles which are about to start again. It is logical, though, that a devolved government should be assessed by how well it manages its economy. And FFA delivers this, perhaps to scary degrees. And there is no doubt that the general election resulted in an inescapable rejection of the status quo regarding the governing of Scotland.

Questions we need to answer

What financial policies really must be kept at a UK level?

The usual starting point is defence. But we might want to add state pensions, financial regulation, national debt, currency, foreign affairs, immigration and unemployment benefits. (To stop cross-border dole tourism!)

Does the Block Grant still matter

Under FFA is doesn’t. But under the Smith Commission report, it still plays a part. Joel Barnett, who devised the formula for most of the Block Grant, states he never intended it to be a permanent solution. But until anyone thinks of a better one, it’s all there is. Should Scotland receive a proportionate share of the UK’s budget?

Will Scotland/Rest of UK financial policy differentials create unwanted outcomes?

If taxes and benefits differ, are we likely to see movements across the border so people get the better deals for themselves? If so, there will be problems. The country with the highest taxes will lose taxpayers and, because they are also likely to be the country with the highest spending, they will take in more non-taxpayers. That is not sustainable.

Prediction

I don’t see FFA happening for Scotland. The SNP probably doesn’t really want it, but knowing they won’t get it anyway, they are happy to campaign for it. Similarly, David Cameron probably knows he doesn’t have to deliver it. But he will likely be under pressure from within his ranks to do something, and that something might be some kind of federalism, because that will firm his grip on the rest of the UK. Boris Johnson, a likely successor, has already hinted at this as an outcome.

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