Peter Jones: Freedom bounded by limitations

Independence ain’t what it used to be. Indeed, in economic terms, there ain’t even much difference between independence and devo-max or its weaker cousin devo-plus. Even Alex Salmond is now admitting this, albeit in slightly different terms, it struck me while I listened to him being interviewed by Andrew Neil on the BBC at the weekend.

In his usual style, Mr Neil produced what he hoped was a killer quote that would make the First Minister squirm. He cited one of The Scotsman’s contributors, economist Gavin McCrone, and suggested that an independent Scotland’s fiscal room for manoeuvre – that is the ability to borrow and to raise and lower taxes – would be limited.

Far from squirming, Mr Salmond raised his eyebrows in astonishment at such an apparent statement of the obvious and exclaimed that of course everybody’s fiscal room for manoeuvre was limited.

Well, indeed it is perfectly true that in the current world, where developed economies are struggling with heavy burdens of debt and tax levels have to be kept high in order to ensure the flow of revenues to pay those debts, every country’s room for fiscal manoeuvre is limited.

But Mr Salmond would never have dreamed of making such a statement five years ago when economies such as Ireland’s were still booming away. Those were the days when he talked bullishly of independence enabling Scotland to emulate Ireland’s 12.5 per cent corporation tax rate.

Those days are no more, and the SNP talks no more of such utopias or even Ireland. Indeed, in the interview, Mr Salmond went still further in admitting the constraints that would limit Scotland’s independence as part of a sterling currency zone which, rather than the euro, is now the SNP’s preferred currency option.

Previously, John Swinney, finance secretary has said that in such a zone, he would be happy to share his budgetary plans with the Bank of England but not with the government of the rest of the UK.

Mr Salmond amplified this a little further by saying there would be a fiscal stability pact. This means there would be an agreement which would set limits for tax revenues, public spending, and borrowing within which there would be some of that limited room for manoeuvre.

But with whom? Just with the Bank of England? I rather doubt that. The initial fiscal stability pact would have to be negotiated with the UK government and thereafter policed, at the very least, by the UK Office of Budget Responsibility. There would be some merit in that because, cheeky though it sounds, Scotland would also have to be assured that the UK government was behaving responsibly as well.

But regardless of who is involved, this is now an admission that an independent Scotland will not have complete freedom over taxes, spending and borrowing and that it will have to submit all financial plans to an outside agency for approval.

Mr Salmond brushed aside any assertion that this was not independence. Within such a pact, he said, there were all sorts of policies you could deploy to boost growth. Indeed, he said, he had given half a dozen examples of these in a recent lecture at the London School of Economics.

Looking through his list, I can’t see any that could not also be deployed under either of the proposed alternatives to independence. Devo-max, as I understand it, means Scotland setting and collecting all tax revenues in Scotland, including North Sea oil revenues, but excluding VAT because EU rules mean that has to stay a UK tax.

Devo-plus means Scotland setting and collecting all taxes apart from VAT, National Insurance, and some smaller imposts such as TV licence income. Both proposals would envisage most welfare payments (apart from pensions under devo-plus) being paid by the Scottish government.

Of Mr Salmond’s list, two – support for wind and wave energy development through renewable obligation certificates, and development of renewable energy more generally – are already being delivered under the powers, derided as too paltry, that he already has.

Of the others, cuts in corporation tax and air passenger duties, setting up an oil revenues fund (now caveated “when fiscal conditions allow, ie, not very soon), giving the computer games industry in Dundee tax breaks, and allowing Scottish Water to borrow as Network Rail does, all seem possible under the above devolution models.

So what’s the difference between independence and greatly beefed-up devolution? I think the answer is that it is mainly political – no MPs at Westminster, seats at the UN and the EU – and not economic. This, of course, will be an unacceptable analysis to my many Nationalist fans. But before they hit the keyboards in outrage, listen to what Professor John Kay, an eminent economist who served on Mr Salmond’s Council of Economic Advisers until last year said that the real strength of any advanced economy is in the skills of its people and agility of its businesses and not in its constitutional set-up. Governments, he said, even when they do all the right things, only make a marginal difference.

This, in another guise, was also the evidence of a slew of eminent development economists to the Scottish Parliament committee in the previous term when they gave evidence on the likely economic effects of devolving more tax control to Scotland. There is no conclusive evidence anywhere in the world, they said, that devolving control of tax revenues boosts economic performance. While there are quite strong arguments in favour of greater tax devolution to improve the accountability of politicians, arguments about improving the economy are, in contrast, extremely weak.

The evidence suggests to me that if we do want to improve the Scottish economy, we would get better value for money by investing in education to increase workforce skills and the abilities of managers.

In discussing constitutional change, Prof Kay said: “What is all the fuss about? I think that is actually quite a good question.”

I think it is too, especially as it seems that in the modern inter-dependent world, there ain’t much economic difference between independence and souped-up devolution and, according to Prof Kay, not a lot of economic difference between having lots of powers and very few.