Iain McLean: Fiscal autonomy? It could be extremely taxing

FULL fiscal autonomy is routinely presented as the silver bullet to fix all that is wrong with either Scotland's position in the UK or the Scottish economy, or both, an argument made by Gerry Hassan in these pages last week.

In vocally promoting fiscal autonomy, Gerry dismisses the tax recommendations of the Calman Commission as somehow being reckless or ill-conceived. This is rich in paradox. Calman thought long and deep about the problems. There are good fiscal reasons for his recommendations.

Full fiscal autonomy would mean the Scottish Parliament having full control of every single tax in Scotland. If Scotland becomes independent, it obviously gets full fiscal autonomy. But full fiscal autonomy within the UK means Scotland would have to construct its own set of rules and rates (and, probably, collection arrangements) for corporation tax, fuel duty, VAT, National Insurance, and every other tax it considered necessary.

Any company operating across the Border would have to comply with two tax administrations and segregate every transaction between Scotland and the rest of the UK. How can that be economically efficient, especially considering that two-thirds of all Scottish exports are to elsewhere in the UK? Indeed, it is hard to see how companies headquartered in Scotland but accessing the wider UK market would construct a business case for staying if this were to pass.

If they stay in Scotland, they can access 60 million consumers but their tax compliance costs double; if they relocate to say, Newcastle or Leeds, they can still access 55 million consumers in England, Wales and Northern Ireland, while only having to deal with one tax regime.

If that is not scary enough, full fiscal autonomy within the Union would also expose the entirety of public spending in Scotland to fluctuations in economic circumstance – including those beyond the control of Scottish ministers. Tax receipts from North Sea Oil fluctuate with global oil prices, resulting in recent year-on-year changes as great as 5 billion – equivalent to 15 times the Scottish share of the recently announced 6bn cuts to UK public expenditure.

For that reason, Calman's independent expert group advised against devolution of oil and gas taxation to the Scottish Parliament. And those who think Scotland should raise all its taxes and "pay a portion back to central government" miss a key point. The Scottish Government's own figures show that tax receipts in Scotland do not cover government expenditure.

Two of the most distinguished academics favouring fiscal autonomy, Ronald MacDonald of Glasgow University and Mark Hallwood of the University of Connecticut, offer "a word of warning… it could be that neither the electorate nor the elected politicians get it. Fiscal autonomy imposes serious constraints on public spending".

It will not do to say, "Oh, that's not exactly what I meant by full fiscal autonomy; I only meant that the Scottish Parliament should collect tax revenue from Scotland, not that it should have the power to vary rates".

That is feasible; it is called tax assignment. But it would leave Scotland with a substantial fiscal gap. Calman's expert group advised against assigning oil revenue because it fluctuates so violently that public services would have to fluctuate equally violently.

These realities shaped the package ultimately recommended by Calman. They recognised the benefits of the unified UK tax system and the unimpeded access to the UK market it brings. They also recognised that different tax rates in Scotland would incentivise all kinds of unhelpful behaviour – witness the flow of white vans stocking up in France with alcohol and tobacco for sale on the black market here. Fiscal autonomy is fine if you believe Scotland should go it alone whatever the consequences. The case for independence is not an economic one, but a cultural one. If Scotland votes for independence, I shall proudly queue up for my Scottish passport. But any economic benefits would arise only in the medium or long term. Fiscal autonomy is not in Scotland's immediate material interest.

Calman also articulated the economic benefits of being part of the UK. At present, all tax receipts (apart from council tax and business rates) are collected at the national level by HM Revenue and Customs and redistributed at the national level. This means risks are pooled at the national level and hence spread across a wider economy.

National Insurance may not be truly an insurance scheme, but it is truly national. Last year's floods in the Lake District meant tax receipts there went down and extra public expenditure was incurred. The centralised nature of our taxation and spending regime means the Lake District does not have to meet those costs when it cannot afford to. Indeed, this is a basic principle of insurance: to spread risks over as wide a base as possible. So if one of Scotland's dominant industries were to unravel unexpectedly, the additional costs of increased social security payments are not borne solely by the very economy that has taken the hit. Scotland has both contributed to and benefited from this pooling of risk.

This is why I am surprised that those seeking to rubbish the Calman proposals as threatening to Scotland's finances and economy at the same time promote full fiscal autonomy. The Calman recommendations deliver financial accountability to the Scottish Parliament without unpicking the single market of the UK; they also retain the backbone of stability and support for public spending in Scotland from the pooling of taxes paid throughout the UK. There is no example in the world of a sub-national government having full fiscal autonomy. Such complete control is synonymous with independence.

Far from the "messy fudge" Scottish ministers claim, the Calman proposals offer an elegant solution. Of course I would say that, as I was a member of Calman's independent expert group. But I challenge the fiscal autonomists to counter our arguments with arguments rather than assertions.

• Iain McLean, born and brought up in Edinburgh, is professor of politics at Oxford University. He was a member of the Calman Commission's independent expert group on finance.