Two pathways have been set out for Scotland. They are markedly divergent – but both deeply troubling. It would be comforting to dismiss them as extreme positions that can be safely ignored. But there is little doubt that uncomfortable truths lie ahead.
The first is an unsparing analysis from The Taxpayers’ Alliance. Its starting point is the latest set of GERS figures. At £14.8 billion, Scotland’s fiscal deficit last year was 9.5 per cent of Scottish GDP, more than twice the UK deficit, and higher than any other member of the EU, including Greece. This deficit has deteriorated over recent years. North Sea revenues have collapsed by £9.6 billion since 2011-12 and falling production means that revenue loss will never be recovered even if oil prices return to previous highs. Despite this collapse in revenues, Scotland’s public spending remains far in excess of England’s, running 20 per cent higher per head.
The declared wish of the SNP administration, should the UK opt to leave the Single Market, is to hold a second independence referendum and apply to become a full EU member. But to do so an independent Scotland would need to tackle its deficit. It would be subject to the rule that any deficit over 3 per cent of GDP is deemed excessive, requiring an agreed programme of fiscal retrenchment.
This, says the Taxpayers Alliance, could be achieved by tax increases. The basic rate of income tax could be increased from 20p to 39p. VAT could be doubled to 40 per cent. But such increases, it adds, would almost certainly prove undeliverable politically, and would be deeply damaging to Scotland’s economy.
The country’s excessive public spending would therefore have to be reduced, but if you thought tax hikes were out of the question, cuts in spending would be even more beyond the pale. These could begin with those areas where provision is currently more generous than in England such as free university tuition, free personal care for the over-65s, and free prescriptions.
To reduce the deficit to 3 per cent of GDP in 2015-16 would have required: eliminating all spending on defence (£3bn), public order and safety (£2.8bn), transport (£3.2bn) and agriculture, forestry and fisheries (£0.8bn). Health spending could be cut by 82 per cent.
The SNP’s riposte is that our tax revenues are understated, the GERS figures are misleading and that an independent Scotland would not be burdened by spending liabilities that largely accrue to public benefit down south. But some element of “fiscal consolidation” is conceded by SNP spokespeople.
So much for “pathway one”. Pathway two has been set out by George Kerevan, former columnist of our sister paper, now SNP MP, a senior member of the party’s economy team and its sole representative on the Treasury Select Committee.
In a forthcoming book he advocates a raft of new and higher taxes, including raising corporation tax and taxing house price rises.
Scotland should become an anti-capitalist “laboratory” in which “social friction” would be the price paid for a radically different economy. From this experiment, he adds, “will come new ways of responding to the existential failure of the existing economic paradigm – and with that comes hope”.
He challenges the party’s policy of cutting Corporation Tax and argues that it “should not be used as “a crude bribe to secure inward investment”. He suggests raising it, while cutting employers’ national insurance.
He said there should be a tax on “any increase in house values” to avoid property bubbles, admitting: “This would be unpopular, of course.”
There should also be a tax on wealth, despite “an inevitable response from the business class and rich that such a move will hurt ‘incentives’, discourage inward investment and ‘force’ high net wealth individuals to migrate”.
To counter deflation, he said Scotland should rethink free trade and use “protection wisely… to create world class firms” backed by the state. Kerevan recently called for the nationalising of Scotland’s entire banking system under independence.
Now it is surely right that there should be more discussion within the SNP about its economic policies rather than the clampdown on debate that has prevailed till now. A recent article by Kerevan on the Citywire website suggesting that tax rises and/or spending cuts lie ahead was soon followed by modification of his views.
And many will hail him as Scotland’s Yanis Varoufakis, the former Greek finance minister who fought EU-imposed austerity. Others, however, may agree with the blunt summation of Scottish Tory MP Alex Johnstone: “Scots do not want to be guinea pigs for George Kerevan’s bonkers social and financial experiments. This would be laughable were he not in such a position of importance. Nicola Sturgeon and the rest of the Scottish Government’s financial team should run an absolute mile from these incredible conclusions.”
There will be many in Scotland who almost certainly would emigrate rather than face the wealth and house price taxes he advocates. Business would also be likely to give Scotland a wide berth.
But here are several suggestions where positive policy steps can be taken. First, undertake an overhaul of Scottish Government economic data. Figures last week on second quarter GDP have again exposed shortcomings in data gathering and analysis.
Second, make it easier for SMEs to recruit and train staff. Many small firms are failing to realise their potential because of regulatory hurdles on staff recruitment.
Third, we need an independently chaired Holyrood finance committee with sufficient time and resources to scrutinise the administration’s budget.
And fourth, we need to police with full vigour the “no detriment” clauses in the recent devolution of fiscal powers.
Ideally, business would love an end to the constant threat of a second independence referendum and the uncertainty this is causing. That looks highly unlikely, but should not block measures that would help improve our understanding of why, for example, our service sector is underperforming the rest of the UK.