Tom Miers: No need for more powers

Many of those who support “devo-max” hope that giving the Scottish Parliament greater fiscal powers will encourage it to govern more responsibly and cut taxes. This has long been the opinion of a section of the centre-right in Scotland, including businessmen, commentators and politicians.

But it’s a flawed one. While there is a strong case for a smaller, nimbler state in Scotland, constitutional reform is the wrong way to achieve this. “Devo-max” is a blind alley, because it is based on a fundamental misunderstanding of the nature of devolved government.

The truth is that Scotland already has effective “fiscal autonomy”. That Holyrood politicians have not used it just shows that autonomy does not lead to good government. The argument for more powers misses three points in particular.

The first is that any government that controls more tax than it wants to cut (or increase) sets the overall level of taxation, and so is fiscally autonomous. So whether the total amount of taxes it controls matches spending is irrelevant.

The idea that Holyrood should raise all the money it spends sounds neat, but is a red herring. It’s the discretionary amount that counts.

The Scottish Government is a clear case in point. It controls 60 per cent of state spending, but only 14 per cent of this is covered by the formal taxes it controls. However, these (council tax, income tax and business rates) are enough to give it autonomy because it is most unlikely that any Scottish Government would want to cut tax and spending by that amount.

Western democracies tend to tax and spend within quite narrow limits, governed by the realities of electoral politics. Government in Britain usually takes about 45 per cent of GDP in tax, and this fluctuates very gradually over the economic cycle. Any slight variation that feeds through from Westminster via the Barnett Formula into the Scottish budget can be counterbalanced by changes to locally controlled taxes. The Scottish Government doesn’t have to accept the current “cuts”, for instance. It could simply increase taxes and pursue a different approach, within the normal bounds that Western society imposes.

But even if Holyrood really wanted to break the mould, it could do so. For in practice the devolved government’s fiscal powers go way beyond even these orthodox taxes.

This is a second truth about devolved government which is widely missed in Scotland. You don’t need formal tax powers to reduce the burden of taxation. For if a government has discretion over its budget, it can decide to “spend” it by returning money to taxpayers, thus replicating tax cuts almost exactly.

The whole point of tax cuts is to improve economic performance by allowing resources to follow the choices of individuals and companies rather than the guesses of bureaucrats. Tax cutters hope to improve economic efficiency by doing so.

Reducing somebody’s tax from £100 to £80 is one way to do this, but another is to take the £100 and give back £20. The Scottish Parliament has the power to do the latter, virtually without limit.

One way is simply to hand the money back as a rebate. Ironically, it is the Westminster government which is pioneering this method in Scotland. Under EU rules, the UK treasury lacks the power to reduce VAT on particular products or for particular people. So its chosen method of cutting the effective rate of tax on petrol in the Western Isles is to rebate it. The Scottish Government could follow this precedent by rebating all kinds of taxes.

Alternatively it could issue vouchers, pay grants or change the way in which public services are financed.

For example, imagine if Scotland adopted a European style system of healthcare finance. Patients would pay medical insurance or fees and apply for reimbursement from government. Such a system would be very similar in effect to a tax cut because the people making the decision about how resources are used are individuals and companies, not the state.

The Scottish Government’s ability to increase taxes is also considerable. On top of the three formal taxes it can impose all manner of charges and tolls to increase revenue.

The Scottish Government also possesses more powers to borrow (and save) than is usually recognised, because it can sell and lease back assets or else buy them. A larger deficit than the UK is perfectly feasible, for instance, as is an “oil fund”.

So because the Scottish Government controls its budget, as well as a wide range of taxes, charges and borrowing powers, it already has “fiscal autonomy”. Its competence does not mirror exactly that of a sovereign state, but goes way beyond the cautious horizons of our current political class.

But all this presupposes that devolving power automatically results in better government. And this raises the third “missing truth” about devolution.

For there is no necessary link between autonomy and economic performance. After all, growth globally is an aggregate of autonomous nations. So it is a truism that autonomous countries, are, on average, well… average. For every Denmark there is a Greece. Economic performance has nothing to do with whether a country is autonomous, but is a product of the political and institutional culture that pervades it.

Indeed, free-market economists are sceptical about the benefits of federal or devolved structures. True, if you devolve power far enough down, government becomes akin to voluntary action, and can become more efficient as it follows public preferences.

But we are talking about groups of tens or hundreds here, not a bureaucratic country of five million souls like Scotland.

Moreover, some public choice economists reckon that creating different tiers of government encourages a race to bestow benefits on voters.

The experience of Scotland certainly bears this out, with politics here sometimes resembling a pork-barrel competition between Westminster and local politicians. Arguably, high levels of public spending are caused by autonomy rather than cured by it.

So who gains from the debate around “devo-max”? Well, nationalists obviously, which is why the SNP is forever clamouring for greater powers. They know that if they fail to achieve outright independence, devo-max will help them on the way, just as the original version of devolution did.

Furthermore, a long bout of political argument about the exact nature of the devo-max settlement (it would be the fourth major constitutional debate since 1997) will keep political debate firmly where the SNP wants it.

But the economic case for more autonomy does not stack up. The powers are already there in large part, and they haven’t been used.

Autonomy itself won’t bestow growth. A radical change in political culture might. Now that is something worth campaigning for.

• Tom Miers is a consultant and independent commentator