Analysis: Power over VAT would help SNP build its independence house

THE SNP government’s support for a massive cut in VAT on home improvements shows that Labour and the SNP are reading from the same economic textbook on the big fiscal picture.

Alex Salmond and shadow chancellor Ed Balls both believe it is time for George Osborne to deviate from his Plan A on the economy, and loosen the purse strings a little.

Mr Balls wants a Plan B – and has called for January’s VAT rise to be reversed for a temporary period.

Mr Salmond has his Plan MacB, with its call for an injection of cash into infrastructure spending.

Both are now supporting the cut in VAT on work on homes in the belief that it will encourage families to put up a new extension while the housing market stagnates.

Mr Balls and Mr Salmond are backed on both sides of the Border by big Keynesian-influenced economic think-tanks – with the Fraser of Allander Institute at Strathclyde University declaring this week that “fiscal easing” was both necessary and achievable.

It represents a growing mass of political and economic pressure on the coalition to stimulate Britain’s flatlining growth. With new figures from the Office of Budget Responsibility widely expected to confirm reduced growth forecasts at the end of this month, it leaves Mr Osborne vulnerable to the charge that he is putting ideology before the facts – popular political point-scoring which both Labour and the SNP will make strongly over the coming weeks.

In Scotland, as ever, there is an added constitutional element in all this. Firstly, the Scottish Government has no power over VAT, so if Mr Osborne goes against the tax cut, SNP ministers can make the case, after today’s Holyrood debate, that he is going against the will of the Scottish Parliament.

It can use such issues to add to the discomfort of Scottish Labour MSPs by asking why, if they want a VAT cut, they don’t back those powers coming to Scotland.

Secondly, it is not envisaged that even under “devo-max”, the tax would come to Edinburgh (the think-tank Reform Scotland, which has made the best stab at defining what devo-max would look like, has said Westminster would still control VAT, even if everything else comes north). So, the SNP can argue that only under full independence would power over the sales tax be controlled from Edinburgh.

Making a distinction between devo-max and full independence will be important for Mr Salmond in the run-up to the referendum.

One of his former economic advisers, Professor John Kay, has noted recently that Scotland “can get many of the advantages claimed for independence if it negotiates for more autonomy, while still staying part of the Union”. Mr Salmond therefore needs all the facts and figures he can to show that only complete secession can deliver the goods.

That isn’t going to be achieved solely as a result of issues such as power over VAT. But they will be used to put more bricks on the independence house he is hoping to build over the next few years – with or without a conservatory.