Iain McMillan: The case for financial independence falls flat

AHEAD of the launch of a paper "Scotland: A New Fiscal Settlement" by the Campaign for Fiscal Responsibility last week, I raised concerns about current calls for fiscal autonomy for Scotland.

I warned that such a policy would increase costs for the public purse and for business by fragmenting the UK's unitary tax system. I also drew attention to the deteriorating state of the UK's public finances, including Scotland's share, and that element of the increase in the UK's debt burden that would need to be funded by Scotland if fiscal autonomy were to come about. And I called on those who support fiscal autonomy to make a stronger, more detailed and sophisticated case than that made thus far and to show that the clear balance of advantage rests with going down that route.

In my view, the campaign does not make a convincing case for fiscal autonomy. There are four principal reasons for this.

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First, the campaign's central premise, and the basis on which their policy paper appears to be founded, is that fiscal autonomy for Scotland will inevitably result in more responsible government, greater efficiency and gains in economic performance. The authors cite various studies in support of their argument but also refer to the limited extent of the available literature. In 2006, the Steel Commission also pointed to the evidence on the link between fiscal decentralisation and economic growth being hard to come by. In oral evidence to the Calman Commission in 2008, Professor Franois Vaillancourt suggested that the empirical literature could be summarised as saying, "We don't know".

I would have expected more rigorous research by the authors to show a strong and reliable positive correlation between fiscal autonomy and improved economic performance together with sound evidence of cause and effect.

I didn't see that in the report and there was nothing there to explain the undoubted variations in the performance of developed and autonomous national and sub-national economies, for instance the differing economic performance of the US states.

Second, a system of fiscal autonomy would inevitably give rise to two tax regimes in the UK, more if Wales and Northern Ireland were to be given extensive devolved tax powers. This would mean that firms and pension providers would need to segregate their Scottish employees and pensioners to apply different tax rates, allowances and bands.

Taxes and duties on various products would attract different rates in Scotland. So too would income from savings and distributions. And firms operating on both sides of the Border would need to account separately for their taxable profits in both jurisdictions. There would be considerable costs associated with such a regime for HM Revenue and Customs, a Scottish tax collection authority and business itself.

There would also be a tendency for firms to organise their operations to deliver the highest level of profit in the jurisdiction with the lowest corporation tax. And that might not be Scotland.

Of course, the Calman Commission did propose to devolve tax powers but the Campaign for Fiscal Autonomy plans are of a very different magnitude. I believe if the Calman proposals are implemented sensibly the compliance burdens on business, arising from the income tax measure in particular, can be kept to a minimum.

Third, the paper attempts to address the issue of affordability of fiscal autonomy by using the 2007-8 Government Expenditure and Revenue Scotland statistics and modelling Scotland's fiscal autonomy on these numbers. This is the latest set of statistics available but the claim that Scotland achieved a surplus of 219m in 2007-8 needs additional commentary. The figure does not include capital expenditure. When that is added, the surplus turns into a 3.774bn deficit.

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Also, the statistics assume that Scotland would receive a geographic share of North Sea receipts. But output declined from a peak of 4.5m barrels of oil and gas equivalent (boe) per day in 1999 to 2.8m boe per day in 2008. This decline, and price volatility, is likely to continue and any case for fiscal autonomy that relies on North Sea receipts needs to be treated with caution.

Nor do the statistics reflect the deterioration in the UK's, including Scotland's, public finances since 2008 and the increasing burden of servicing the national debt, including the cost to the UK exchequer of 69bn in direct support for Scotland's two major banks.

The UK Treasury's total exposure, including guarantees to the two banks, is around 470bn. That is three times Scotland's 2008 GDP including a geographic share of North Sea revenues.

Presumably, and in line with the principle of Scotland receiving its geographic share of North Sea receipts, a fiscally autonomous Scotland would be required to fund the support schemes for its banks.

Fourth, the paper states that Scotland would remit to the UK government those funds required to pay for services provided by the UK government, for example defence, foreign policy and central services. A central grants commission would determine the appropriate level and direction of the accompanying financial flows.

But there would still be room for endless disagreements over the amounts to be paid and whether Scotland should pay anything at all towards those areas of foreign and defence policy with which a majority of MSPs might disagree, eg Trident and Iraq. This proposal also contravenes the principle generally held by supporters of fiscal autonomy that the jurisdiction which provides the service should impose the tax to pay for it. And the overarching question arises as to whether Scotland would be able to afford these services at all.

The vision held up by the Campaign for Fiscal Autonomy needs to be supported by a detailed business case capable of delivering the benefits. Implementing fiscal autonomy for Scotland would be irreversible and the case in its favour needs to be clear and unassailable. It isn't and fails to convince.

• Iain McMillan is director of CBI Scotland and was a member of the Calman Commission.

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