Long-term planning is threatened by report

IN OUR view the fiscal reforms proposed by the Calman Commission are at best an opportunity missed and at worst a recipe for economic instability in the future.

On the first matter, the commission appears simply to have sidestepped entirely the option of a move to fiscal autonomy whereupon a Scottish Government will be responsible for raising all its revenues via taxation and borrowing. We believe this to be a fundamental mistake. Only under fiscal autonomy can the accountability of the Scottish Parliament properly be entrenched, and it is surprising that there seems to have been very little consideration of this option by the independent expert group advising the commission.

Fiscal autonomy permits a Scottish government to utilise the full range of taxes (and other fiscal policy instruments) to maximise the rate of growth of the economy and to borrow on global financial markets in order to fund investment expenditures and, if necessary, engage in countercyclical economic policies.

The Calman Commission proposals will do little to enhance the ability of a Scottish government to introduce measures necessary to improve Scotland's underlying economic growth rate, or to balance the Scottish economy through good times and bad. Furthermore, with such a small proportion of the overall spend of the Scottish parliament being financed by locally raised revenue, the degree of accountability is illusory especially since so much of the spending will still be underpinned by the Barnett block grant.

Second, and potentially more problematic, are the short-to-medium term economic consequences of Calman's proposals. Helpfully the report sets out three illustrative scenarios that simulate the consequences of the proposals for Scotland's revenue if (a) there is no divergence between Scotland and UK income tax rates, (b) Scotland's tax rate falls by 2p, and (c) Scotland's tax rate is the same as UK but Scotland's economy grows faster.

Under the first case, Scotland's revenues remain as they would under the current arrangements; under the second, revenues fall in response to a lower rate of income tax; under the third, Scotland's revenue rises as it is allowed to retain one-half of the increase in total income tax receipts.

Significantly, there is no place in the report for a fourth scenario where, despite leaving taxes unchanged, Scotland's economy under-performs the rest of the UK and receipts from income tax decline, thereby lowering the total revenues accruing to the Scottish government. It is entirely unclear from the report how this situation would be managed, and the presumption must be that this would require a Scottish government either to curtail spending or to raise the Scottish rate of income tax in order to generate higher revenues in the short term regardless of the long term consequences.

Either way, such an outcome will serve only to damage further Scotland's economic growth prospects and diminish future revenue flows. It is entirely unclear what scale of borrowing a Scottish government might require if it was to tackle this type of event and smooth unanticipated revenue volatility as this will depend on both the size and duration of the initial economic shock. And it is unclear if sufficient borrowing powers are built into Calman's proposal to facilitate any revenue shortfall.

Beyond this, the report is seriously lacking in detail of how its proposed fiscal scheme will operate in practice. Receipts from income tax cannot be forecast reliably and public accounts data often are being reviewed two or more years later. Does this mean that Scotland's devolved tax revenues in any one year will be based on a previous years' outturn, or will these be estimated and paid in advance, thereafter to be subject to claw-back or augmentation from/to subsequent Scottish budgets? This seems to us to militate against an efficient planning of public expenditure programmes, which is essential if the Scottish economy is to maximise economic growth. Such plans are also precisely why the Treasury engages in multi-annual public expenditure planning.

It is only fair to point out that the Calman Commission's remit did not extend to devising a fiscal policy regime designed to raise the rate of economic growth in Scotland as would be possible under fiscal autonomy.

However, the real problem with these proposals is that, if implemented, then far from improving Scotland's growth prospects, its recommendations are very likely to have exactly the opposite effect. The Calman patchwork offers few advantages in relation to fiscal autonomy or the present arrangements, but poses several disadvantages.

&149 This article is the result of a collaboration between a group of seven academics with an interest in the European economy: Drew Scott is professor of European Union studies, University of Edinburgh; Ronald MacDonald is Adam Smith Professor of Economics, University of Glasgow; Paul Hallwood is professor of economics, University of Connecticut; Neil Kay is emeritus professor of business economics, University of Strathclyde; Andrew Hughes Hallett is professor of economics and public policy, George Mason University, Washington DC; David Simpson is a former economic adviser to Standard Life; Rod Cross is emeritus professor of economics, University of Strathclyde; Farhad Noorbakhsh is professor of economics, University of Glasgow