IT HAS been reported that the Nobel laureate, Joseph Stiglitz, a member of the Scottish Government’s Council of Economic Advisers and of its Fiscal Commission working group, believes that only through independence can Scotland begin to tackle the pattern of growing material inequality it currently shares with the rest of the UK.
Prof Stiglitz is a passionate critic of the wealth gap that has opened up in many parts of the developed world in recent decades between tiny elites of the ultra-rich and the rest, most glaringly in his country, the United States, and here in the UK. Last year, in his latest book, The Price of Inequality, Stiglitz railed against “deficit fetishism” and the synchronised austerity that destroys both demand and jobs.
“My argument,” he explained last October, “is that no large economy has ever recovered from recession through austerity. But more than that, the sharp rise in inequality, especially in the United States, is holding us back. The lack of aggregate demand that has resulted from this inequality is a key factor hindering a return to growth.
“Simply, those at the top, where wealth has concentrated, spend much less of their income than those at the bottom or in the middle. So demand drops. If we want to restore growth, and therefore full employment and greater tax revenues, we need to address the underlying problem of inequality.”
Addressing inequality occupies one small segment in the Fiscal Commission’s first 222-page report to Scottish ministers. The main theme is its preferred macroeconomic framework post-independence. Six paragraphs, two tables, a chart and a box are all the inequality challenge merits. The conclusion that led to that Stiglitz headline is terse. “Without access to the relevant policy levers – particularly taxation and welfare policy – there is little that the Scottish government can do to address these trends,” it says.
But doing more to reduce inequality in an independent Scotland begs two other, big unanswered questions. How constrained will the use of these levers still be, post-independence, by the rest of the macroeconomic package Prof Stiglitz and his commission colleagues are advocating?
And what credible evidence is there of an appetite within the SNP, or in any other party that might one day govern an independent Scotland, for the kind of radical change in the tax and benefits system needed to reverse that yawning wealth and income gap?
The bulk of Monday’s report is devoted to endorsing a formal monetary union with the rest of the UK after independence. I’m not making mischief by slipping that word “formal” into that last sentence. Having considered other options – an independent Scottish currency, whether floating or fixed, and a monetary union with the euro – that’s precisely what the commission calls the choice it has embraced.
An independent Bank of England would continue to set interest rates “to promote price stability across the sterling zone”. Responsibility for financial stability would have to be discharged “on a consistent basis” across the zone too. As “an explicit shareholder in the [central] bank”. Scotland would expect input to its governance and remit.
The commission notes that Scotland’s economy, as part of the current political Union, already achieves 99 per cent of the output per capita of the UK as a whole, 99 per cent of UK productivity (on an output per filled job basis) and 98 per cent of gross disposable household income per head. Average growth during the years of devolution has lagged the UK by 0.2 per cent and the average of small European nation states by 0.3 per cent. But by international standards, the report insists, “Scotland is a wealthy country”. It might have added, “But just as unequal as the rest of these islands”. It didn’t. The other question it didn’t answer is whether, with a continuing formal monetary union with the rest of the UK after independence, Scotland could create the conditions to outgrow the rest of the UK so substantially that it could generate and distribute the resultant wealth to consign currents levels of inequality to the dustbin of economic history.
An independent Scotland would, on the commission’s model, enjoy “full autonomy” over tax and spend. However there would also have to be an “overarching joint fiscal sustainability agreement to govern levels of borrowing and debt” within the sterling zone. This, the report adds, “requires strong and robust application of rules”.
The more you read, the clearer it becomes that, of the four key themes the five commission members set themselves, credibility, sustainability and stability appear to have trumped the fourth, how much autonomy this kind of independent Scotland will be able to exercise, charting its own economic destiny. I’ll leave it to others to decide whether what is emerging is independence-lite, semi-skimmed, low-fat or whatever.
It will certainly constrain radical political action on inequality. An independent Scotland’s population share of UK net debt, on the Commission’s own calculations, will still be sitting at 74 per cent of GDP in 2016-17 and at 72 per cent in 2017-18. Debt interest payments will still be on a rising trend, at 7.4 per cent and 8.2 per cent of total spending in those two years. And volatile revenues from North Sea oil and gas, the report notes, will make the fiscal outlook “particularly challenging to forecast”.
That brings me to my other unanswered question. Where, in any of Scotland’s mainstream parties, is the political will to address rampant inequality through root-and-branch reform of the tax system? This week Labour’s UK leader Ed Miliband, with one eye on the Eastleigh by-election and another on next month’s Westminster budget, embraced the Lib Dem idea of a mansion tax and sort-of-promised to reintroduce the 10p income tax band Gordon Brown abolished in his last budget.
But dangling the carrot of a 10p band, but only on the first £1,000 of taxable income, is just political posturing masquerading as considered policy formation. Here in Scotland, although the power exists, no party has even considered cutting basic rate income tax by up to 3p to help all those on low and middle incomes facing a squeeze on their living standards.
Since 1991, a timid political consensus has abandoned regular revaluations of residential property, ensuring that the council tax system now takes absolutely no account of inflated post-boom house values. Instead councils have been forced into an ongoing tax freeze that costs jobs and hurts service delivery.
Last week finance secretary John Swinney said he does not envisage any increases in personal taxation in an independent Scotland. He appeared to rule out higher taxes on the oil and gas industry too. In spite of all that has emerged about the aggressive tax avoidance practices of big multinationals, the only tax change the SNP has signalled, post-independence, is a competitive cut in the rate levied on corporate profits.
But with the main UK corporation tax rate scheduled to tumble to 21 per cent next year, how much lower would the SNP go? With its fondness for universal giveaways and no plans for a radical break from UK tax orthodoxy, the SNP doesn’t appear to have any more stomach for the kind of assault on inequality Stiglitz has in mind than its Unionist opponents.