AN independent Scotland would need better policy options than Alex Salmond’s proposed cut in corporation tax to close the “productivity gap” that exists between it and the rest of the UK, according to a Durham University professor.
Professor Richard Harris, the head of the department of economics, finance and accounting at Durham University Business School, questioned whether Scottish Government plans to make the rate of corporation tax three percentage points lower than the rest of the UK would have the desired impact.
Research he has carried out with Dr John Moffat, also of Durham University, looking at total factor productivity (TFP) found there was a “gap” of around 11 per cent between Scotland and the rest of the UK.
Prof Harris, who was also a special adviser to the UK Parliamentary Commission on Banking Standards, said: “Productivity is the most important determinant of long-run economic growth, and Scotland currently has a productivity gap. Whatever the outcome of the Scottish Independence referendum in September, this is a crucial area for policy to address.
“It is possible to put forward arguments on both sides as to whether this would be better handled by an independent Scottish Government; this study has nothing to say on this matter. But we do question here whether lowering corporate taxes is a panacea for closing the productivity gap, through encouraging more inward investment and/or more business start-ups. Better policy options need to be considered post-2016.”
‘Growth rate key’
The First Minister has already said increasing the long run productivity growth rate, together with a rise in the employment rate and greater population growth, could result in the country being £5 billion a year better off in 15 years’ time without having to raise taxes if it became independent.
But the research paper said Scotland has had “significantly lower average productivity compared to the rest of the UK in all years except 1997 (when it had higher productivity) and 2007 (when the difference was only 0.1 and statistically insignificant)”.
It went on to consider policy changes that could be used to “obtain the ‘step-change’ in productivity levels needed to boost long-run growth and thus government revenues”.
The research claimed new plants starting up in the rest of the UK “contributed substantially to productivity growth during 1997-2012”, but said in Scotland “the contribution of new plant start-ups and the closure of existing plants both contributed negatively to TFP growth”.
It added: “Scotland had too many plants with the ‘wrong’ characteristics that lead to relatively poor outcomes. Based on this it is difficult to see why relying on greater tax incentives post-2016, as the main policy instrument, should result in a closing of the ‘productivity gap’, let alone a ‘step-change’ in productivity growth.”
Scottish Government response
A Scottish Government spokeswoman said: “Scotland is one of the wealthiest countries in the world, more prosperous per head than the UK, France and Japan, and Scotland’s productivity ranks third in the UK behind only London and the South East in terms of output per hour worked, but we need the powers of independence to ensure that wealth properly benefits everyone in our society.
“We recognise the need to improve productivity which is why our economic case for independence has at its heart a plan to re-industrialise Scotland through initiatives such as using our new tax powers to support high value manufacturing, boosting innovation through the establishment of an Innovation Institute and expanding our international presence and reach.
“Using the powers of independence to boost labour productivity in Scotland by just 1 per cent could increase output by approximately £2.1 billion and raise employment by over 21,000 over the long-term.”