Bill Jamieson: Fiscal autonomy takes a pounding

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.