Alex Massie: Forging the fiscal future
Now that Scotland has its “date with destiny” we can be sure of only one thing: the phoney war is over. The battle for independence has entered a new phase. It is one in which realism is replacing fantasy and in which stubborn facts have a chance of supplanting wishful thinking and self-delusion. About time too, you may say.
The first of these awkward truths is that the age of easy money has ended. Austerity bites and independence offers no real alternative to continuing austerity. An independent Scotland would still have to bear the combined consequences of New Labour’s profligacy and the costs of the great economic crash of 2008. As a result of this it seems unlikely there will be any Tartan Social Democratic revolution after independence. Instead, Scotland is likely to be a small, low-tax, outpost of neoliberalism perched on the periphery of Europe.
For understandable reasons the SNP does not like to focus attention on this thrawn reality. It may not have sunk in just how difficult Scotland’s position might be after independence. John Swinney’s ballyhooed “secret paper” advising his Cabinet colleagues about some of the fundamental uncertainties that must inevitably follow independence revealed the true picture.
True to form, Swinney’s paper was encouragingly, admirably clear-headed and sober. Independence might indeed give birth to a new era of liberty and long-term economic opportunity, but the initial years would be difficult and, quite possibly, even painful.
There would be little room for increased public spending while deficit reduction and reducing long-term public debt would require difficult choices to be made. Moreover, any increase to the state pension would necessarily come at the expense of other government programmes.
Since, according to Eurostat, British government spending amounted to 49 per cent of GDP in 2011, it seems evident that the opportunities for increasing overall spending in Scotland after independence are severely limited. There is no free lunch and no magic money tree. Jam is rationed now and there will be no immediate increase in jam provision after independence either. This is not an argument against independence, per se, merely reality. Much of the pro-independence Left remains in denial about this. Protecting Scotland from the present Westminster government’s predations cannot obscure the fact that an independent Scotland would be confronted by many of the same difficulties that are making George Osborne’s tenure at the Treasury so uncomfortable.
AS CRAWFORD Beveridge, chair of the Scottish Government’s Fiscal Commission, observed drily: “An independent Scotland will need to establish its credibility on international financial markets to minimise its borrowing costs. This could be achieved by adopting a strategy for reducing public sector debt, and an effective budget constraint for the public finances.” External pressures, whether from London or the money markets, will have an impact on Edinburgh.
This hardly dents the core SNP argument that decisions for Scotland should be taken by Scots in Scotland, but it does remind us that these decisions might reflect a greater continuity with the past than is sometimes assumed. The warning by Andrew Goudie, a former Scottish Government economic adviser, that many of the assumptions pointing to a rosy future are little more than guesses adds weight to this suspicion too.
The Scottish Government’s own figures, however, make it clear that Scotland cannot tax its way to prosperity. According to the latest Government Expenditure and Revenue Scotland figures, Scotland contributes 9 per cent of UK corporation tax receipts but only 7.4 per cent of income tax revenues. Given the ease of both corporate and personal flight after independence, tax increases would be a “brave” or “bold” move. That is, they would prove disastrous.
Not everyone takes this view. Writing in these pages earlier this week Robin McAlpine, director of the Jimmy Reid Foundation, argued that “if people can be persuaded of the transformational effect of taxation, they will accept tax rises”. There is little evidence to support the idea, much-cherished on the Scottish Left, that the people actually wish to be persuaded that higher taxes are a good thing. Some 75 per cent of voters, for instance, oppose council tax increases.
Nevertheless, according to the latest Social Attitudes Survey, 57 per cent of Scots suspect independence will lead to higher taxes. By comparison, just 19 per cent expect an independent Scotland to reduce the gap between rich and poor. A plurality doubt independence will make any substantial difference to “inequality”.
In their collective wisdom the people are ahead of the politicians. For far too long Scottish politics has been a game of inputs, not of outputs. That is, the splendour of any given policy is measured by its munificence not by whether it actually achieves its stated goals. Money remains the root of all solutions even when experience demonstrates this is not actually the case. It is a mentality that sees high welfare spending as a mark of pride rather than evidence of terrible failure. No-one proposes eliminating the safety-net; celebrating the number of people it supports is a different matter.
But as the Social Attitudes Survey’s findings suggest, the people are not so sure. They may dislike inequality but they do not expect it to be reduced by higher taxes. Moreover, it is hard to avoid concluding that the expectation an independent Scotland will be taxed more punitively restrains the people’s enthusiasm for independence. The people are more neoliberal than they think they are.
The SNP leadership is aware of this. Alex Salmond’s charm offensive in Scottish boardrooms has long been buttressed by a promise that reducing corporation tax would be an immediate priority following independence. Last month, John Swinney went one better, telling the BBC he does not “envisage increases in personal income taxation” post-independence. If this is “Tartan Toryism” then let’s have more of it.
We are where we are. And we are not a Nordic country. In some respects this is regrettable. For all their supposed social democratic bona fides, countries such as Sweden and Denmark do not recoil in horror from the word “private”. Indeed, if Scotland is to absorb lessons from Scandinavia, these should be that welfare dependency and high taxation sap prosperity.
As Anders Borg, Sweden’s pony-tailed finance minister, warned last year, it is “problematic if you drive out entrepreneurs from your country because they are the source of job creation”. Excessive welfare, he argues, encourages “emigration from the labour market”. The result is permanent and crippling “social exclusion”.
Neoliberalism is, I think, often considered an insult in Scotland but an independent Scotland may well prove to be an admirably neoliberal country. The Institute for Fiscal Studies suggested last year that though the short-term outlook for an independent Scotland might be “no more uncomfortable” than that facing the UK as it is but that “in the longer term, the choices may be starker”. Oil revenues help provide a cushion but prudent planning suggests they should not be relied upon to any heroically optimistic degree.
Ironically, then, building a fiscally-sound house after independence might require Scotland to embrace rather than reject neoliberalism. Perversely, those right-of-centre Scots most concerned by independence may have as much to gain as their independence-supporting left-wing compatriots have to lose. If this is the case, then the present constitutional arrangements may indeed put a brake on Scottish aspiration but not, perhaps, in quite the way many supporters of independence imagine them to do.