Iain Docherty and Ronald MacDonald: Let’s give devo-max a look-in

The public should not have to be given just a straight choice between the status quo and full independence, argue Iain Docherty and Ronald MacDonald

AS JOHN Curtice, Professor of Politics at Strathclyde University, has succinctly put it, (Unionist) advocates of devolution “hoped it would strengthen public support for the maintenance of the United Kingdom, whereas its critics feared it would have the opposite effect”. Fifteen years on from the initial devolution debate, Curtice’s question has crystallised with the prospect of a referendum on Scottish independence in 2014.

Critical to the early skirmishes is the question of whether a “middle option”, popularly known as devolution-max, should be offered to the Scottish public. Although yet to be fully defined, devo-max essentially combines the transfer of those “domestic” policy competences, such as broadcasting, trading standards, drugs and firearms, currently held at Westminster to the Scottish Parliament, with the wholesale transfer of economic powers to Holyrood so that Scotland attains fiscal autonomy, where the Scottish Parliament is responsible for generating all, or a substantial part of, its revenues in addition to determining its spending priorities.

In recent articles, Arthur Midwinter argued that fiscal autonomy for Scotland is impossible, with the country facing a stark binary choice between independence and the status quo in the forthcoming constitutional debate. To us at least, Midwinter’s position reflects a particular position on how the future of the UK as a nation state might be best preserved given the current tactical situation, rather than arising from the evidence available.

The form of devolution introduced since 1999 is fundamentally “asymmetrical”, with each of the devolved administrations in Scotland, Wales and Northern Ireland being afforded a different set of powers and competencies. Given this, why is it suddenly impossible to have an asymmetrical position when it comes to the issue of affording Scotland substantial fiscal powers?

After all, the idea that devolved administrations might attain fiscal autonomy has been debated since at least the Kilbrandon Commission on the constitution in the early 1970s, and a system of “assigned” taxes was seriously considered running up to the Scotland Act 1998.

In attempting to defend his opposition to the transfer of economic powers Midwinter has cited the Calman Commission on Scottish Devolution (CSD) in an effort to rule out the devolution of a range of taxes, such as National Insurance contributions, VAT, corporation tax and oil and gas revenues.

However, the Independent Expert Group that advised the CSD on economic issues actually presented a range of options it considered workable for the devolution of fiscal powers to the Scottish Parliament. This included an option with each of these taxes were devolved, with the exception of VAT which cannot be devolved under European law if Scotland were to remain part of a single UK member state. We have had this position confirmed personally by Professor Anton Muscatelli, chair of the independent expert group, which advised the commission. The commission’s eventual decision to rule out this essentially devo-max option was therefore plainly not an evidence-based one, but rather a straightforward political decision. The devolution of corporation tax has worked well for some time now in Canada, Switzerland, the United States and in the autonomous communities of Spain.

Midwinter has also argued that the Basque example of full fiscal autonomy is “one in which devolved fiscal powers must be exercised within a national fiscal framework co-ordinated by the central state”.

It is important to note that the Basque version of fiscal autonomy is not “full” fiscal autonomy, since VAT is not devolved given the restrictions of European law. But the system there is closer to what Paul Hallwood and Ronald MacDonald have referred to in their work as fiscal autonomy within a union, and also the concept of devo-max.

Midwinter is correct to note that any form of fiscal devolution within a nation state, or indeed between separate nations sharing a monetary union, must have “national” co-ordination rules if the system is to be credible and efficient. Indeed, as far as we are aware, no proponent of fiscal autonomy in the Scottish context has ignored this important issue. Indeed, the First Report of the CSD’s independent expert group recognised that precisely this form of considerable fiscal autonomy with co-ordination is as a defining feature of the Spanish system, and relevant to the Scottish case.

Again, we suspect that the reason Midwinter has rejected this option for Scotland has more to do with a desire to retain the UK’s current fiscal structure for its own sake rather than any insurmountable technical problem rendering fiscal devolution impossible.

As the latest Institute of Fiscal Studies Green Budget notes, tax competition between different UK jurisdictions may indeed create a downward pressure on overall tax take to the UK Exchequer. But a fiscally-autonomous (or independent) Scottish Government is hardly likely to care about this if – and admittedly this is indeed an “if” – it manages to recreate the successes of other comparable jurisdictions and deliver on its aspirations for increased economic competitiveness.

Midwinter has also argued that Scotland’s economic performance “is better than the SNP suggests”, and although this may well be true we do not regard it as contentious to suggest that Scotland has underperformed in terms of economic growth for a prolonged period of time with respect to the rest of the UK, other similar-sized developed economies, or indeed its own potential given its fundamental economic assets and resource base. If this underperformance were to continue, the scale of lost prosperity would be truly alarming.

Although we would not regard corporation tax as offering a silver bullet in economic policy-making, the hard empirical evidence does suggest that relatively small changes in corporation tax can have a big impact on a country’s economic growth. Given this, we do not believe that the Basque experience of economic regeneration is unrelated to the existence of fiscal autonomy in that country. As a result, the view that having important economic levers at the disposal of the Scottish Government, particularly the corporation tax lever, could substantially improve Scotland’s economic performance, is more than reasonable.

The emergent debate on the potential of fiscal autonomy may be uncomfortable for supporters of the Union status quo, just as it is for some supporters of independence. But to argue, as Midwinter did, that fiscal autonomy for Scotland would be a policy mess is simply not supported by the evidence. Rather, as the CSD’s cherry-picking of the work of its own expert group on the economy demonstrates, seeking to close down the debate on fiscal devolution is an entirely normative political position.

Equally, Midwinter’s assertion that we are entering an end-game in which it is inevitable that a third devo-max option in the referendum be rejected is little more than an attempt to prematurely cut short a wider debate on Scotland’s fiscal options in the hope that this will help deliver a particular outcome in a binary referendum.

Midwinter’s opposition to fiscal autonomy appears to us as little more than an articulation of the fear that substantive transfer of economic powers to Scotland will undermine the political logic of the United Kingdom that he and others are fighting to preserve. The evidence demonstrates that Scotland has a range of eminently feasible fiscal and constitutional futures to choose from.

We would argue that the merits of each of these options – including fiscal autonomy/devo-max – should be discussed as fully as possible in the debate over Scotland’s constitutional future.

• Iain Docherty is Professor of Public Policy and Governance and Ronald MacDonald is Adam Smith Professor of Political Economy, both at the University of Glasgow Business School.