Scottish Labour must be bold on devolution

Scottish voters are entitled to know what type of devolution they will get if they tick the No box this September. While the pro-devolution parties are all working separately on their proposals, it is Scottish Labour that is expected to take the lead with the publication of the Devolution Commission report.

There has been much media excitement about ‘splits’ and ‘chasms opening up’, following statements by Ken Macintosh MSP and Ian Davidson MP. Devolving income tax would be “independence by default” claimed Ken, who is assumed to be the outrider for Jim Murphy MP. Ian Davidson MP claimed the proposed move would damage the Barnett Formula.

Of course there is no show without punch, in the form of Alex Salmond, who claimed that Labour’s “bitter in-fighting” over plans to increase the Scottish Parliament’s powers, has made it impossible for the pro-UK campaign to deliver a positive alternative to independence. Leading a party that, with some honorable exceptions, hardly ever questions the great leader, the concept of political party having a debate must seem a bit strange!

I disagree with Ken Macintosh and Ian Davidson on this issue, but they are perfectly entitled to argue their corner. I don’t accept that all MPs, including Ian, hold to this view because “their power and influence will be ¬diminished”, or because they believe it will lead to a cut in the number of MPs at Westminster. Of course there are still some MPs who have never liked the Scottish Parliament, but they are now a much diminished group.

I support the devolution of all taxes on property and income; while retaining business and consumption taxes at the UK level. This would require a balancing mechanism and greater borrowing powers. With such flexibility we could finally get rid of the huge cost of PPP/PFI schemes by giving prudential borrowing powers to health boards, NDPBs and public corporations, including Scottish Water. Most importantly, we would also largely be spared from the financial consequences of public service reforms in England. A point ably reinforced by the IPPR, Devo-More proposals.

Fiscal devolution would enable at least a modest challenge to neo-liberal economic orthodoxies, recognising that the SNP’s approach to independence would operate within the constraints of fiscally conservative policies, particularly with its plan to reduce corporation tax. On the other hand, Devo Plus strategies that rest on the ‘moral hazard’ that occurs when a parliament spends but does not raise revenue, also adopt neo-liberal ideas and limit powers for redistribution. Fiscal policy should support the creation of a more equal society.

But this debate is about more than economics. The driving force for advocates of Home Rule, back in the 1880’s as now, is support for decentralisation, re-distribution of power and extension of democracy as part of the wider struggle to win working class power over the economic, political and industrial decisions affecting their lives. Extending devolution gives Scotland the ability to do things differently, Scottish solutions to Scottish challenges, without undermining the solidarity of the UK.

All the polls make it clear that the majority of Scots want to see a strengthened form of devolution short of outright independence. Scottish Labour has to pitch a radical solution on powers and a vision of the sort of Scotland we could create with those powers. Anything short of that would be a failure of leadership and encourage a drift to independence.

IFS and the fiscal consequences of constitutional change

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.

Economic case for Indy undermined by Laffer Curve economics

The Scottish Government’s economic case for independence is strong on historical analysis but light on how Scotland would address the challenges it highlights. It also falls into the same complacency as the Treasury paper, in not explaining why current devolved powers have not been fully used to tackle inequality.

The Scottish Government has published ‘Scotland’s Economy: the case for independence’.  It sets out their analysis of Scotland’s relative balance sheet in terms of public finance and the strengths of the Scottish economy. It then claims a better future is possible if Scotland had access to all the economic and policy levers.

The first section sets out Scotland’s relative financial strength with a balance sheet as an annex. I say relative because it still looks pretty challenging, but probably in the short term slightly better than the rest of the UK, if you include oil revenues. The debate is over the medium to long term because of the reliance on volatile oil prices.  Then we get a decent analysis of Scotland’s economic strengths sector by sector. So far so good.

Then the paper starts to go downhill a bit. A predictable section on how Scotland has been held back by Westminster in tune with the daily refrain from Scottish ministers. Now, there is much here that I would agree with, particularly the importance of tackling inequality. However, there is little explanation of how the Scottish Government has used their existing powers to address this issue. You should always judge politicians on what they have done – that’s the best evidence of what they promise for the future. Sadly, the Scottish Government’s balance sheet on this is decidedly mixed. On many of the issues they criticise successive UK governments for, there is little evidence that they would have done anything different at the time. Banking regulation is an obvious example.

Finally, we get to how they would use the powers that independence would bring. This is the lightest part of the paper. Of course there are good examples of successful small countries. However, the paper gives insufficient weight to the challenges facing small countries with a large neighbour as their dominant trading partner.

Then we have the currency union argument. I have covered this at length before, but the proposal is being taken to new lengths of absurdity. It is frankly ridiculous to assert that if we vote to leave the UK then we have some sort of entitlement to remain within the institutions of that union. We are entitled to our share of the assets and the liabilities. That might mean 10% of the desks in the Bank of England, but not to put our bums on any of the seats that remain. And even if we did agree a new Sterling union, there would be significant constraints on our fiscal and monetary polices. All the policy drivers that earlier sections of the paper complains about.

That leaves us with cutting Corporation Tax as one of the few concrete proposals in the paper. The FM confirmed that this remains the cornerstone of their policy. In the context of this paper there is a rich irony in the FM wanting to adopt Osborne economics as they are clearly both supporters of the Laffer Curve. The problem is that not even Osborne really believes that it will work as the Red Book shows anticipated revenues falling, even when they predict the economy picking up. There is simply no chance of a future UK government in a currency union agreeing to differential tax rates and even if they did, it would simply lead to a race to the bottom.

Overall, the paper makes a decent case for Scotland’s strengths as an economy and even for our relative position with regards public finances. The paper’s big weakness is on how Scotland would use the powers of independence and the consequences of separating from the UK.  Much more work is needed on these issues.