Arthur Midwinter: Poverty of analysis on devo-max

The SNP administration has been attempting to secure additional fiscal powers to drive economic growth. It is seeking to obtain these through amendments to the Scotland Bill, while proposing a full fiscal autonomy, or devolution max option, in its independence referendum.

The problem is that the SNP has not spelt out clearly how this would work or assessed its financial implications for Scotland. In its submission to the Scotland Bill, it states that this would make the Scottish Parliament responsible for raising, collecting and administering all revenues in Scotland, while funding UK public services in Scotland through an annual subvention. The political logic of this move is clear enough with only minority support for independence, which is likely to fall as its risks and complications become clear, a fall-back option within the Union becomes attractive.

The SNP has not recognised the constraints and complications which even devolution max would raise. The reality beneath the rhetoric is that the devolution max model is incompatible with the UK’s fiscal framework, and would require UK-wide reforms which would bring little benefit to the three devolved administrations. It would permit a devolved fiscal policy that would be a recipe for unnecessary political conflict and wasteful fiscal competition.

The UK model is expenditure based. Resources are allocated according to assessments of requirements. This model has consistently delivered public spending of around 20 per cent above the average for more than 40 years. Taxes are pooled collectively by the central state, in the fashion of modern governance, and fiscal transfers therefore occur automatically.

The Scottish Government argues that this model hampers economic growth, and that it would use new fiscal powers to create a competitive tax regime to promote growth. However, as the thoroughly researched expert group reports for the Calman Commission, set up by Labour, the Conservatives and the Liberal Democrats before the last Scottish election, stated, there is no conclusive evidence that fiscal devolution on low business tax actually drives growth. Indeed, higher growth rates are consistently reported in the Scandinavian countries with higher tax and spend regimes. It would be foolish to restructure the public finances on the basis of such theoretical arguments.

In any case, it would undermine the economic union to have “competitive tax rates” for business in some parts of the state, particularly as the European Union is moving towards greater fiscal interaction.

The proposals in the Scotland Bill, currently before Holyrood and Westminster, seek to increase fiscal autonomy and accountability, while reserving economic management to the central states. It is, therefore, compatible within the Union.

Under the proposals, the Scottish Parliament will have to set an income tax rate of 10p to fund existing programmes, and any increases/decreases around that will have budgetary consequences. New borrowings of up to 10 per cent of the capital budget and up to a total of £22 billion will give greater flexibility in budget management. It will continue to receive its relative share of UK funding with a lower bloc grant in total.

Under devolution, the scope for further tax powers is limited. Three-quarters of Scottish revenues are raised from five main sources:income tax, national insurance contributions (NICs), VAT, property taxes and corporation tax. Most of the remaining taxes raise about £1bn or less.

Oil and gas revenues are very volatile, raising between £1bn and £12bn per annum in the past decade. Calman ruled out NICs, VAT, corporation tax, and oil and gas revenues on economic, administrative or volatility grounds.

Under Calman, the benefits from participation in a highly- integrated economy, with common economic and fiscal policies, a free market in goods and services, capital, labour and knowledge, and similar standards of public services and welfare benefits would remain.

It is difficult to see how devolution max could be regarded as a workable model of fiscal devolution. Indeed, it would be grossly misleading to include it in the independence referendum without the prior agreement of the UK government that it is a practical and acceptable option, given all three major parties positive response to the Calman proposals. Moreover, one of the benefits of the Calman report was the collation of the research into fiscal autonomy in its expert group report, which concluded that there is “no clear pattern from comparative analysis that winning or having greater fiscal autonomy policy is beneficial to economic growth”.

Moreover, there is no devolution max equivalent to draw lessons from autonomy in Spain. Even the differing degrees of regional autonomy in Spain have to be exercised within national fiscal policy and co-ordinated by the central state.

It is clear that none of the three UK parties supports devolution max, as it is in fact an independence model. The UK fiscal structure follows international practice with macro-economic policy vested in the central state, and regional government responsible for the planning, funding and regulation of public services, including economic development.

Central states control most taxes, with property tax the most common form of local tax and income the most common form of regional tax. In the UK under devolution max, “a competitive tax regime” could only be delivered through major public spending cuts in Scotland, on recent Scottish Government figures.

The case for devolution max has not been made. It is a theoretical model, and reforms based on theory always result in unintended consequences. The Scottish Government’s discussion of it to date has been superficial, and rightly criticised by the Treasury for lack of detail and evidence.

The SNP is proposing an advisory referendum, but there is a further important difference with devolution max. Independence is a matter for Scottish residents to decide. Devolution max, however, would require the support of the UK government and the other devolved nations. It is not a feasible middle way in practice, and the realistic choice remains between the Scotland Bill proposals and independence.

The SNP’s record since 2007 is less rosy than the First Minister would have us believe. It has made no progress with its economic targets, despite consistently proclaiming its priority is sustainable economic growth. Yet another budget round has heard expert witnesses rebut this claim on the basis that there is no clear link between its priority and its spending plans.

Finance minister John Swinney claimed he would sustain public employment to assist economic recovery, but the latest public employment statistics shows a further loss of 23,500 jobs in the devolved services last year, including 13,300 in local government which has been consistently underfunded on service budgets to allow the council tax freeze. Overall, 4 per cent of jobs have gone, compared with 2 per cent in reserved services.

This poverty of policy analysis reflects the Scottish Government’s practice of basing budget decisions on unrealistic fiscal assumptions rather than by taking an evidence-based approach. The same comparison holds between its advocacy of devolution max and the Calman report, which reflects the most rigorously researched set of proposals since the Layfield Report on local government finance in 1976.

It would be helpful if the UK government made clear it has no plans for further fiscal devolution beyond Calman at this time, then the referendum choices will be clear. We are approaching the endgame, as few practical options for fiscal devolution remain.

The Scotland Bill provides for greater fiscal accountability under devolution without the fiscal instability inherent in devolution max. It will retain the benefits of the current system, in terms of stable shares and fiscal transfers, which are the hallmarks of the most sophisticated fiscal systems around today.

• Arthur Midwinter is an Associate Professor in the Institute for Public Sector Accounting Research at the University of Edinburgh. This is shortened and updated version of his paper on Fiscal Autonomy in Scotland which will be published in the CIPFA Journal Public Money and Management in January