The IFS briefing ‘Taxing an Independent Scotland’ has drawn predictable fire from elements of the Indy ‘Yes’ camp for highlighting some of the fiscal realities. However, it actually provides a much more important analysis of what you can do with fiscal powers, whatever the outcome of the referendum.
They start by setting out what most objective analysts agree on. Scotland’s onshore revenues are lower than in the UK as a whole, but that could be covered by oil revenues for at least a few years post independence. How long depends on whose oil revenue estimates you chose to believe.
This still leaves the immediate fiscal problems that beset the UK as much as Scotland. The scary figure headline £2.5bn ‘black hole’ is explained as follows: “if the government of an independent Scotland felt the need to introduce tax rises or spending cuts equivalent to those pencilled in for the UK as a whole for 2016–17 and 2017–18, that would require £2.5 billion of new measures. If it also wanted to offset the decline in oil revenues by 2017–18 forecast by the OBR, that would require a further £3.4 billion, making £5.9 billion in total.”
Of more interest to me is the briefing’s examination of the differences in taxation between Scotland and the rest of the UK. In particular, our more equal distribution of income and the higher take from income than property. Scottish onshore revenue comes less from taxes on wealth and property than the UK’s as a whole (partly because council tax rates in Scotland are about 20% lower than in England), and more from VAT and taxes on alcohol and tobacco. At least our sins are good for tax revenue!
I covered the IFS take on council tax reform in a post on the ‘Public Works‘ blog yesterday. This would be even more important in an independent Scotland, because of the risk of cross border flows. The paper also highlights the risk of tax competition, not just Corporation Tax, but more widely, with a detailed impact assessment on each tax. I take from this analysis the risk that workers both sides of the border would be dragged into a race to the bottom. It doesn’t look much like Scandinavia for Scotland or England. Another reason, as the Red Paper Collective has said, for the rest of the UK to take greater interest in the constitutional debate.
There is more encouragement later in the paper for those arguing for independence or much greater fiscal autonomy. This is because current UK taxes may not be optimal for Scottish circumstances. Our more equal income distribution, less congested roads etc. The paper provides a wealth of data on yields that is enormously helpful when considering these issues. Their recommended solutions may not be to everyone’s taste, including mine, but they concede that these are legitimate political choices.
The important point here is that it enables a focus on what we do with powers, not just arguing over a list of them. As Anas Sarwar puts it in today’s Herald, “No matter which side you are on, this is a change referendum, a choice between two very different visions of the future”. However, the choices may be more nuanced than simply nationalist and Labour.
We should at least be grateful to the IFS for providing the tools for a more rational debate on the fiscal consequences of those competing visions.