Andrew Hughes Hallett: Why the fiscal crisis boosts the case for more tax powers
COMMENTATOR Peter Jones is right that it is time to get serious about how to finance Scotland's devolved government.
He is also right, as he wrote in The Scotsman this week, that we should look to rational argument - not political posturing - to advance the debate.
Since July last year, my colleague Professor Drew Scott and I have repeatedly pointed out a series of technical - not ideological - defects in the Calman Commission's proposals for funding Scotland. They have gone unanswered. And some of our objections are exactly those that led the Holtham Commission - the Welsh equivalent to Calman - to reject the Calman model as a suitable basis for funding the Cardiff government.
So, like Peter Jones, we are very keen to ensure the downsides of proposed policy changes are not "swept under the carpet".
Our arguments are driven by straightforward economic logic - not ideology. First, fiscal responsibility will make Scotland's parliament accountable for raising the money it spends. Second, it would give Scotland's government the economic levers (taxation and spending) it needs to address our underperforming economy. The distinction is between simply modifying a formula and providing the means to boost Scotland's economic performance - to the advantage of all in the UK.
Jones wants evidence. Navarra and the Basque country in Spain have fiscal responsibility; the other regions do not. Unemployment, although rising, is now only half that elsewhere in Spain. Income per head is higher than the Spanish average: 29.3 per cent higher (Navarra) and 34.2 per cent higher (Basques). Nothing has changed in the intervening 14 years except the fiscal responsibility which those regions have achieved.
Jones asserts that changes in tax rates have consequences on the level of economic activity. That is the point. Without control over fiscal policy, it is virtually impossible for any government to improve the rate of growth of the economy. The economic crisis makes acquiring those fiscal levers more, not less, important. And it is misleading to claim fiscal responsibility will automatically result in higher taxes and is "anti-business". Every time corporation tax rates have been lowered in the UK, revenues have increased because business conditions improved. So if you want to raise tax receipts, lower tax rates.
Naturally, the power to borrow raises concern, given the level of UK debt. The case for devolving borrowing powers is both to "smooth" a temporary shortfall in tax receipts (something which is inevitable, but cannot be countered under Calman) and to finance capital expenditures whose benefits flow to future generations. Properly used, borrowing of this nature needn't be problematic. Basque government debt, for example, has enjoyed higher credit ratings (AAA) than that issued by the Spanish government (AA).
Finally, there is the question of oil revenues. The 160 per cent increase over five years is 20.9 per cent per year. Yet income plus corporation taxes fell by 24 per cent in 2008-9. Which would you rather have? A 20.9 per cent variation of the forecasted 8bn oil revenues is a change of 1.6bn, but a 24 per cent loss in tax revenues (unrecoverable under Calman) is a 3.2bn loss. Again, which would you rather have?
Norway, a smaller economy, is not obviously poorer for having chosen fiscal responsibility. I agree that it is common for devolved governments to allow surpluses to be deposited in a special natural resources fund to be drawn down if needed. But, to do that, we first need control over the revenues.
lAndrew Hughes Hallett is a professor of economics at St Andrews University.
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