Bill Jamieson: Fiscal autonomy takes a pounding

Published on Sunday 5 February 2012 00:00

WHATEVER your views on independence, First Minister Alex Salmond has set Scotland on its most important constitutional, political and economic journey for 300 years. The next two will see an intensifying scramble to seize the commanding heights of policy credibility.

Last week saw several important interventions: a speech by finance minister John Swinney to the David Hume Institute; remarks by Professor John Kay, a former member of the First Minister’s Council of Economic Advisers; an article in The Scotsman by Professor Arthur Midwinter questioning the integrity of Scottish Government statistics; and an appraisal by the National Institute of Economic and Social Research (NIESR) questioning how much fiscal and monetary independence an independent Scotland could really enjoy.

Of these four, John Swinney’s presentation can lay claim to being the most resonant. It was a key articulation of the economic arguments for independence. It is helpful to have the various strands brought together in a logical and coherent form.

At the heart of the case is a belief that an independent Scotland would fare better economically by virtue of having control of the “fiscal levers” – tax, borrowing and spending powers. An independent Scotland, backed by North Sea oil revenues, would be fiscally strong and more than capable of maintaining the confidence of internal investors. An independent Scotland would be able to set business taxes and conditions to maximise our appeal as a location for business and investment. Scotland would maintain currency union with sterling and it would be in the economic interests of the UK government to maintain such a union with Scotland.

Scant though all of this may be on detail, it is as clear a statement of the SNP’s position as we have seen. That it was set out by Swinney adds credence and a sense of ideas thought out and broadly reflective of the view across the SNP administration.

This matters. The previous week, when answering a question from Lord Myners about the credit-worthiness of an independent Scotland, Salmond replied that the Bank of England would act as lender of last resort to an independent Scotland. This reply took many, not just Lord Myners, by surprise. And I, too, was taken aback, not having detected, around the blazing political camp fire here, any discussions, policy papers or previous utterances by Scottish ministers that this idea had been in gestation, still less fleshed out in consultation and analysis. It might well have been so. Then again it may have been a most worrying example of how important policy can come to be made, erm, on the hoof.

Swinney did not repeat this proposal in his text, though he did state that “the government of the UK could not prevent an independent Scotland from using the pound”. Here again, it would be helpful to know if there had been prior discussion and consultation as to what the position of the Westminster government, and indeed the Bank of England, was likely to be and what conditions would attach to an independent Scotland using the currency of another country.

Until some two years ago, the SNP was happy to give the impression that an independent Scotland would join the euro. That option, however, has been blown away by the Eurozone sovereign debt crisis and the entry of the single currency zone into recession Advocating euro membership now would be ruinous for the SNP case, and the policy is no longer being actively pursued.

However, the decision of the SNP to campaign on the basis of retaining sterling at least for the first years of independence opens up another chasm of uncertainties as to how such an operation would work in practice, particularly in the light of the Eurozone debt crisis. Here it has become manifest that a common currency cannot operate without a high integration of fiscal policy by member governments. The Eurozone, as a result of the near default by Greece and soaring government bond yields across southern member states, is now embarked on a centralisation of fiscal policy oversight and accounting – hitherto politically unacceptable to many – so that the currency area is not thrown into crisis by member governments pursuing unsustainable fiscal and borrowing policies – a lesson the Eurozone has now learnt at horrific cost, both to its taxpayers and to its global reputation.

The First Minister has asserted that 11 of the world’s 20 richest countries are in currency alliances – Switzerland for example. But the context and disposition of these alliances have little resonance with Scotland’s position vis-a-vis England and it would be hard to envisage, for example, a Latin American country pegged to the US dollar having much if any influence on the policies of the US Treasury or Federal Reserve.

There is no escaping the reality that “Scotland within sterling” would almost certainly require a large measure of oversight both by the Bank of England and by the UK Treasury on fiscal policy, borrowing levels, tax rates and spending proposals. Scotland could not hope to operate as a free agent in the manner implied in Swinney’s speech. This may not be a problem for those prepared to take a long view and to see the independence vote, not as the end of a journey but the end of the beginning, with a transitional period likely to last for many years.

But it has a critical bearing on political expectation: encouraging visions of an independent Scotland free to pull the fiscal levers for a set of desired outcomes needs to be heavily qualified by the likely reality. Swinney’s paper also presumes that an independent Scotland would give budgetary priority to business and enterprise through low taxes. It hasn’t happened in the 12 years of devolution with tax varying powers. Why should it be regarded as a certainty under independence?

Earlier in the week, Professor John Kay expressed deep scepticism over the ability of an independent Scotland to cut corporation tax to 12.5 per cent as in Ireland. It was notable that here, too, Swinney did not repeat the 12.5 per cent aspiration. However desirable this is, it would be most unlikely to be allowed by the European Commission, which tried two years ago to force the Irish government to abandon its low corporate tax rate. The Commission hates the idea of tax competition. It wants tax rates kept within bands of its own determination. Scotland could look forward to no favours in this.

Professor Midwinter’s intervention highlights a recurring problem with the provenance and credibility of Scottish Government statistics. The professor’s own predilections notwithstanding, others do share this concern. The proposal for an independent Office for Budget Responsibility-type body to produce stats on Scotland’s debt and fiscal balance has much to commend it.

Finally, the NIESR has pointed to restrictions that would arise on keeping the pound and expresses doubt that the BoE would agree to acting as lender of last resort. What is clear from this, and other interventions, is that a massive array of questions will need to be addressed. The journey to the Holy Grail of policy credibility is going to be a long and arduous march.

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13

Ron Greer

Sunday, February 12, 2012 at 11:24 AM

11---Where did you get the 7 million people from---will Cumbria and Northumberland be included?

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12

just another expat - detatched from reality

Saturday, February 11, 2012 at 11:39 AM

The european commission has no power to prevent a member state from cutting its corporate tax rate. If that had been possible, Ireland would have been forced to increase it's rate in the context of the bail outs. That has not happened.

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11

aonghas

Thursday, February 9, 2012 at 06:56 AM

redpathm Read economics 101 Scottish Oil revenues (which are 86% of uk oil revenues) will generate approx £400 BILLION into Edinburgh instead of Westminster over the next 25 years. Divide that among 7 million people instead of seventy million and you have one of the wealthiest countries in europe. Read International Maritime Law The cartography in law makes the area in scotland - SCOTTISH waters not UK Why not join the english gnats and help spend your megre 14% - and keep ruling the waves - you'll find another colony to oppress. BTW - you owe us £560 BILLION over the last 35 years - but we let you off seeing you have already spent it on e.g. Canary Wharf, Channel Tunnel, Terminal 5, City Airport, Isle og Grain (proposed airport)......................now i am trying to think of what scotland got ..............o yes upgrade of the A9.............British Justice invented in South Kensington wine bars ?

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10

Simonsaid

Tuesday, February 7, 2012 at 04:44 PM

Naw a dinnae want ony o Salmond’s physical anatomy ta very much

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9

redpathm

Tuesday, February 7, 2012 at 01:28 PM

Why do Nats keep on talking about oil revenues? The revenues belong to the people who take it from the bottom of the sea. Scotland might have the right to give licenses to search for it. They might have the right to tax the profits of the companies that bring it up, if, and only if, they are Scottish registered companies. Then there's whisky, most of which has head offices in London. In short, what are they going on about. Anyway, it will never happen so lets not get thongs in a tangle.

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8

JPJ2

Sunday, February 5, 2012 at 02:20 PM

Anything positive or even useful to say....NO , a clear outline of ever twist and turn of the Scottish economy over the next few years under unionism....No........................................an attack on the SNP from the rabid unionist Jamieson..................yes, of course........................how useful is that to anyone, Bill???????????

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rider000

Sunday, February 5, 2012 at 01:12 PM

Scotland hopefully vote overwhelmingly for independence in 2014 then any hint that the money markets get of this potential will result in the pound falling off a cliff............ Errr, why? Scotland is running a budget defecit of 18% and hoping to offset this with a short lived commodity. In 2010 oil delivered £9bn revenue on the back of record high prices, or covered a massive 1.1% of all UK government expenditure. Smell the salts and you may just wake up to a dose of reality.

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6

rider000

Sunday, February 5, 2012 at 01:03 PM

This is all nonsense - The Bank of England is not going to underwrite a foreign country with English, Welsh and Northern Irish taxpayer lender of last resort insurance. End of.

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5

Intervention

Sunday, February 5, 2012 at 10:44 AM

As a share of UK totals, Scotland contributes more in tax revenue than we receive in spending. In 200910 we received 9.3% of UK spending but contributed 9.4% of UK tax. We pay 9.4% of UK tax, but only have 8.4% of the UK population. That means we contribute the equivalent of £1000 extra for every man, woman and child in Scotland. So don't let anyone tell you Scotland is subsidised by London......................................... Scotland is paying the price of UK policies. We are being burdened with extra debt because we are part of the UK. If Scotland had been independent we would have a smaller national debt today. And when we become independent, we will be able to pay off our national debt faster than the UK............................................... Even on the UK government's figures Scotland's national debt is smaller than the UK's. In 200910 our gross debt as a proportion of GDP would have been 4% lower than the UK and a massive 35% lower than the G7 average......................................................................................................................................................................................................................... Scotland would have collateral to cover any debt, in the £1 trillion wholesale value of remaining Scottish oil and gas reserves -reserves that even David Cameron has now conceded will be around for "many, many" years to come.

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4

Scotlander

Sunday, February 5, 2012 at 08:45 AM

Oh Dear! The bull'hit brigade are limbering up. They did the same with Ireland when they voted against Lisbon. They that have the media win the war. The Scots did not want devolution, those Scots in Westminster did. English money was mobilised and Hey presto! we have devolution. Our self serving politicians will win the day and the Scots will be frightened into doing as they are told by Westminster. The British government are the enemy, not Salmond.

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SlyFifer

Sunday, February 5, 2012 at 07:51 AM

Mr. Jamieson. You are a smart enough cookie to realise that should Scotland hopefully vote overwhelmingly for independence in 2014 then any hint that the money markets get of this potential will result in the pound falling off a cliff. Why would an independent Scotland want to be associated with a failing currency ?. Scotland would be well advised to put as much distance between it and the Pound Sterling for some time ahead of the voting date. The advocacy of the SDA on where we should be accords with my thinking and I believe their analysis was done at leisure rather than on the back of the proverbial fag packet. It can be fairly laid at the door of the SNP that just too many policies are made just like this, hence the inconsistency ?.

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2

Beachdair

Sunday, February 5, 2012 at 04:26 AM

Mr Jamieson, your analysis of John Swinney's 2 February "No manipulation" article was excellent. However, when you got to the currency issue you must not have read George Kerevan's 3 February Scotsman article, ‘Scottish free state may be worth buying into’. Starting in his second paragraph, Mr Kerevan answers many of the points raised in your article above. ............... As you must know, it is impossible at this stage to answer all your questions in detail. Details will emerge long before Referendum day. Insisting that the details must be known immediately is little more than heckling.

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Angus McLellan

Sunday, February 5, 2012 at 01:54 AM

I don't think we need a OBR. Why? Sherlock Holmes would deduce that GERS is good enough precisely because the Treasury dog hasn't barked. If it does then we can think again, but for now there's no mystery to be solved.

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