Calman Independent Expert Group: Fiscal devolution does not guarantee growth

AS members of the Independent Expert Group who supported the Commission on Scottish Devolution in their work on financial accountability, we feel it important to address some of the issues emerging around possible fiscal powers for Scotland.

First, we firmly believe the Calman Commission's taxation plans have no inherent flaws. A number of questions have rightly been identified around the way the new system would operate and it is heartening to hear that the Scottish and UK governments are now working together on their resolution. One issue which has been highlighted recently and which revolves around changes in income tax allowances impacting on tax yields can be accommodated through proper and impartial intergovernmental procedures and adjustments in the block grant: something which we highlighted in our recommendations to the Commission.

When enacted the proposals recommended by the Commission would represent a radical change to the UK's centralised tax and public expenditure system.

As we noted in our recommendations, full implementation of our proposals would involve the apportionment of actual taxation revenues in Scotland, and this would involve a real decentralisation of the UK tax system. The taxation proposals, in fact, draw on established practices in countries such as Canada and the USA where a state or regional government routinely share tax bases with the national government. We are quite clear that by requiring the Scottish Parliament to set the level of income tax in Scotland in order to make up a significant proportion of its budget will deliver real financial accountability.

But second, the context for considering the next steps for Scotland's future has shifted. When the Commission on Scottish Devolution began its work in Spring 2008, annual Scottish GDP growth was 2.1 per cent, unemployment was 4.7 per cent and Chancellor Alistair Darling asserted that the UK was meeting its self imposed rules on government indebtedness.

Now the Scottish economy is making a hesitant recovery from five quarters of recession, Scottish unemployment stands at 8.0 per cent and the UK is facing the largest deficit in peacetime history. First Minister Alex Salmond recently outlined his case for seeking additional taxation powers as a means of addressing the current economic situation. This has garnered some public support from those academics who advocate the wider devolution of tax powers than proposed by the Calman Commission and a grouping of businessmen who assert that "A Scottish Parliament with far greater responsibility for raising the money it spends would lead to better government in Scotland while giving them (Scottish politicians]… the fiscal tools necessary to achieve… faster economic growth".

In other words, the debate is now around which package of measures will deliver the greatest growth - the Calman proposals or a separate Scottish tax system under fiscal autonomy?

The most accurate answer any economist can give to this is that they do not know. The empirical evidence from around the world shows no confirmed linkage between the decentralisation of taxation powers and growth. Hence it is at best misleading to infer that granting the Scottish Parliament tax powers far beyond those proposed by the Calman Commission is some sort of prerequisite to stimulating accelerated Scottish economic growth.

What we do know is that it would increase the autonomy and accountability of the Scottish Parliament, but financing devolution anywhere in the world involves trade-offs.

One such trade-off is around financial stability. The full devolution of tax powers to Scotland would expose the Scottish budget to all variations in all tax receipts. These can be considerable, for example North Sea Oil and Gas Tax receipts are expected to have fallen by over 6 billion or around 20 per cent of the Scottish Budget in 2009-10 alone. Instead, the Calman Commission wished to provide the Scottish budget with greater stability. This is why it recommended maintaining the link between the Scottish budget and the wider UK taxation and expenditure system, based on the much broader and more diverse UK economy.

The second trade-off is around equity, in that a fiscally independent Scotland would allow levels of public service provision - including social protection - to diverge from that available elsewhere in the UK. This prompts us to caution that fully devolved taxes might not necessarily go down. Scotland has long expressed different social preferences to other parts of the UK, and a democratic mandate may well exist to move to a Scandinavian style high tax and high welfare economy and not the tax haven-type regime some suggest.

The third trade-off for increased autonomy relates to economic and administrative efficiencies. A more financially accountable Scottish Parliament would experience greater pressures to deliver more efficient government. But at the same time, creating a separate Scottish tax system would generate administrative inefficiencies for both government and taxpayers whilst also allowing individuals and businesses to reduce tax liabilities by arbitraging between the Scottish and UK tax systems.

Of course, this does not mean that a fiscally independent Scotland would not be able to deploy its new taxation powers - and its existing competencies around development, education and transport - to deliver economic stability and a level of public service provision comparable with that elsewhere in the UK. And it may be that the extra financial accountability might deliver efficiency gains within government that exceed the economic and administrative inefficiencies associated with the creation of a separate Scottish tax system. But our point is that these are not certainties. The Calman taxation recommendations represent a radical departure from the present, but they largely retain the elements - good or bad - of stability, equity and efficiency that exist at present.

Calman Independent Expert Group consists of: John Aldridge; Professor David Bell; Prof Robin Boadway; Prof Julia Darby; Sandra Eden; Prof Clemens Fuest; Prof Charlie Jeffery; Prof Iain McLean FBA; Prof Anton Muscatelli; Prof Jeremy Peat; Prof David Ulph.