Peter Jones: SNP playing the financial long game

DOES the SNP really want control of the purse strings knowing that it would be the worst deal for Scotland, asks Peter Jones

Scottish Nationalists, legions of them, are on the march to Westminster. Amidst the hubbub and excitement, you can hear the battle cry: “What do we want? Full financial responsibility! When do we want it? In a number of years!”

Eh? Puzzled onlookers demand to know: “Why not now?” The marchers, quoting yesterday’s SNP manifesto, shout back: “As implementation of the Calman Commission proposals and the Scotland Act 2012 have demonstrated, the transition to full fiscal responsibility – and agreement of the detailed fiscal framework that would require to underpin it – would take a number of years to complete. SNP MPs will work with the Scottish Government to secure the best deal for Scotland in these negotiations.”

So there we are. Independence – negotiating with the UK government, the EU, Nato, the UN, the World Trade Organisation, and probably a lot more besides – takes only 18 months.

But just negotiating with the UK government just to take control of taxes and welfare spending, well, that would take “a number of years”, at least six years, to take the manifesto’s Calman Commission example.

I don’t get it. As far as the tax and welfare system goes, exactly the same negotiations and processes have to be gone through for independence as for full financial responsibility, the new name for full fiscal autonomy. Systems need to be set up to identify and collect from Scottish taxpayers – individuals, businesses, and VAT-payers. A new bureaucracy is also needed – a Scottish HMRC, Treasury, and oversight body.

So where’s the difference? Either we were being sold a pup with independence, or we are now being offered a pig in a poke with full financial responsibility.

Regular readers will know that I have argued using the Scottish Government’s own statistics that full financial responsibility is indeed a big austerity pig in a poke. And I just wonder whether this “number of years” flim-flam is actually recognition of that by Nicola Sturgeon.

I wonder, since the shortfall of taxes raised (£54 billion) on public spending (£66.4bn) in 2013-14 of £12.4bn is a deficit which is only going to get worse because of collapsed oil prices, whether Ms Sturgeon is actually saying that she knows full financial responsibility would be the worst deal for Scotland and that therefore she doesn’t actually want it.

She is right that negotiating such a deal would take a “number of years”, not just because of the complexities already noted. There is the problem of the UK national debt, of which Scotland would have to pay a due share.

This would not just affect Scottish public finances and taxpayers, it would have an impact on all UK taxpayers in exactly the same way as Scottish independence while remaining in the sterling zone would do. This is a serious issue which has just not been discussed, but desperately needs an airing, not least because it makes full financial responsibility an unworkable pipe dream.

According to the March budget documents, the present UK government foresees the national debt, which was £1,402bn in 2013-14, rising to £1,627bn in 2019-20, with debt interest costs rising from £48.7bn to £57.4bn over the same period.

Ms Sturgeon’s plan to increase public spending by 0.5 per cent a year would increase that 2019-20 debt figure to £1,767bn and the interest costs to £58.2bn unless, of course, this spending produced the extra growth she claims it would. That seems a bit unlikely as the UK is now forecast to grow at 2.4 per cent a year, as fast as it has done historically and faster than other big nations. Even if it did produce a bit of extra growth, it still means a 2019-20 debt of around £1,700bn and payments of about £58bn a year.

Scottish taxpayers, under full financial responsibility, would still be responsible for paying their share of UK debt servicing costs which, in 2013-14, Scottish Government statisticians reckon, cost £3bn, rising to about £3.6bn by 2019-20 assuming Ms Sturgeon’s extra spending and growth.

This is also a year in which full financial responsibility might come into being under the revised schedule.

Under such a scheme, the problem arises of how it can be guaranteed that Scotland will meet its share of debt payments.

Unlike, say a share of defence spending, it has to be guaranteed otherwise the people who lend the money will see a risk Scotland will not stump up and accordingly start charging the UK government more, putting an extra burden on English, Welsh and Ulster taxpayers. The problem is all the more acute because, even if the oil price has risen back up to $100/barrel and oil money is flowing again, the risk oil revenues might collapse again is glaringly obvious. And since Scotland has a huge onshore deficit and a government which, ludicrously, sees spending more and increasing the deficit as the way to reduce it, investors will think the chances of a default are high.

And a default would entail a UK bail-out of Scotland. It is ridiculous to argue that Scotland would be exceptionally prudent and therefore the risk does not arise. Even in highly prudent Germany, Laender (regional) governments have needed federal bailouts.

If Scotland is to be fully financially responsible, there needs to be a no-bailout rule. These are generally ineffective (see the EU’s no-bailout rule and the bailouts of Ireland, Greece, etc). The only country which gets close to effective no bailout rules seems to be Switzerland.

The rules, however, force the devolved Swiss cantons, which have considerable tax autonomy, to run balanced budgets and to mandatory automatic tax increases if cantonal deficits rise above certain levels.

Since Scotland’s current deficit of £12.4bn or 8.1 per cent of GDP means there is no prospect of a balanced budget, unless there are savage spending cuts, within a decade, Swiss-type rules are out of the question.

In short, unless and until Scottish spending and tax revenues can be brought into balance, debt problems alone mean that full financial responsibility is unworkable. Small wonder that Ms Sturgeon talks about it taking a “number of years”. A number of decades would be more realistic.