Andrew Wilson: Take charge of tax to plug ‘black hole’

How we structure the way we govern and fund ourselves is a decision we should take with the long term in mind
How we structure the way we govern and fund ourselves is a decision we should take with the long term in mind
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VERY few things in life properly rile me. I like to retain a calm and sunny disposition as a rule: but littering, discourtesy (especially to older people), Motherwell facing relegation play-offs, bigotry, cruelty to children, discussions about the Barnett formula and Scottish public finances… they all do it.

On the last, so much nonsensical argument resounds. The biggest and most obvious one is the decades-long quacking canard that Scotland is effectively subsidised and there is a “black hole” in its public finances that appears like Brigadoon in the event of financial responsibility moving north.

‘It appears like Brigadoon in the event of financial responsibility moving north’

In any other country, an unsustainable deficit would mean the government responsible got fired and the system got changed. In the doublethink world of our politics, the existence of this black hole is used by those who created it to say that things should stay the same, and they should stay in charge.

Think about it, even without the financials and ignoring oil revenues for the moment. Every one of the 11 economic regions of the UK lags the average UK economic performance except the southeast of England. The best of the rest in performance (without oil) is Scotland. On the latest figures it is 94 to the UK’s 100 with the South East at 110 and London at 172. The figures for the other regions are dire. The model is one of unequal, unsustainable performance.

Take this into the public finances and it is (all other things being equal in an overwhelmingly unified expenditure and taxation system) inevitable that when the UK runs a massive deficit overall, so do all of the regions run proportionately greater ones.

Over the long run, oil and gas revenues would have more than plugged the gap relative to the UK average, but with low prices and a huge UK deficit that is not the case.

What does this tell us about the sustainability of Scottish public finances under any future scenario for devolution, federalism or independence? Very little indeed. It reflects how things are now.

How we structure the way we govern and fund ourselves is a decision we should take with the long term in mind. The core issue is how to fund public service choices sustainably from a tax base that is strong, founded on a competitive and successful economy. Right now the incentives in the system force Holyrood to worry only about what it spends and much less about how it raises it. That is changing and must do more so.

Much was made in the election of an analysis from the Institute of Fiscal Studies. It found on its various assumptions that Scotland’s deficit (remember, as part of the system we have now) last year was 8.6 per cent of GDP compared with 5 per cent for the UK overall. The relative difference is evidently a black-hole rendering financial responsibility unaffordable – so went the critique.

Look ahead on the same analysis and the UK (again on pretty big assumptions) is scheduled to return to surplus in three years’ time. At that point, the Scottish numbers are relatively worse, but at 4.6 per cent, better than the UK number last year. Does this mean the UK had a black hole, so it can’t afford to govern itself? I must have missed that point. No, it is in fact securing debt finance at inter-generationally low rates, albeit ticking up a touch.

So to suggest it is impossible or unaffordable for Holyrood to take maximum financial responsibility is clearly wrong. Is it the right choice? Good people can disagree about that.

How would borrowing be managed and constrained? Simple rules have to be agreed and adhered to, as beggaring thy neighbour or the next generation is a fast path to economic hell.

Would losing the Barnett formula cost us? In the current year Barnett is delivering just £362.4m additional to the Holyrood budget, around 1 per cent. Over the last five years of the spending review period, Scotland’s Departmental Expenditure Limit will actually have fallen, via the formula, by £2.8 billion in real terms.

The real question, surely, is does enough financial responsibility make it more or less likely that we get better policy in Scotland helping the economy, tax base and sustainable funding of public services? I think responsibility breeds responsibility.

Should the UK retain a cohesion funding mechanism in any event? Yes. For many years it would have flowed south. Currently it would flow north. But having it clear and transparent should be something no-one fears. It would not be anything like as large as many make out. Look at the Barnett reality this year.

Devolution has been Tony Blair’s greatest legacy in my view. Until its funding is made good, the ability of policymakers to use all the best tools to secure sustainable growth and competitiveness is constrained. The outcome is the most economically unequal regional performance of any country in Europe.

That can change, but a few minds will have to open. I remain hopeful. «