By Paul Sutton

On the 27^th November 2014 the Smith Commission presented its proposals to the Scottish Parliament. The Commission had been established following the independence referendum in September to agree a package of enhanced powers to be devolved to the Scottish Parliament on a strict timetable. This envisaged the publication of draft clauses for a new bill for Scottish devolution by the end of January 2015, followed by the tabling of such a bill in the first session of the new UK Parliament following the general election in May 2015. Members of the Commission were drawn from the five largest political parties in Scotland.

The measures proposed by the Smith Commission covered three areas

1. a revised constitutional settlement for Scotland

2. economic and social issues

3. an increase in the financial responsibilities of the Scottish Parliament.

Collectively the measures were designed to strengthen the Scottish Parliament and to create a powerful devolved assembly with important powers over taxation and spending.

In the months since the Commission reported these powers, and especially those concerned with financing the Scottish government, have become a contested issue in Scottish politics. They have set the SNP against the Labour Party and others and have revealed fundamental weaknesses in the SNP approach to managing the economic and fiscal affairs of Scotland. At its heart has been the question of full fiscal responsibility - the demand by the SNP that the Scottish Parliament (Holyrood) should be in control all revenues raised and spent in Scotland, except for reserved areas such as defence, foreign affairs and some matters of common economic regulation which would remain with the Westminster Parliament.

The case for full fiscal autonomy was presented in the SNP’s submission to the Smith Commission. It argued that: “all tax revenues should be retained in Scotland. The Scottish Parliament should have policy responsibility for all taxes unless there is a specific reason for a continued reservation. In particular, the Scottish Parliament should have full autonomy for income tax, national insurance, corporation tax, capital gains tax, fuel duty, air passenger duty and inheritance tax”. It also argued that the Scottish Parliament should be responsible for all domestic expenditure, including welfare, and that it should have borrowing powers.

The Conservative, Liberal Democrat and Labour parties in Scotland all proposed varying degrees of greater fiscal responsibility and further tax devolution to the Scottish Parliament, but all were all opposed to full fiscal autonomy.

The Scottish Labour Party in its submission emphasised the benefits of a “sharing union” with the rest of the UK “in which risks and rewards are collectively pooled”. The Scottish Trade Union Congress also opposed “full fiscal autonomy or Devo Max” arguing that it presented “potential future challenges for the maintenance of current levels of per-capita public spending in Scotland relative to the rest of the United Kingdom”. It was however prepared to see a significant “devolution and assignment of taxation amounting to at least two-thirds of Scottish public spending (over 50% of all spending in Scotland)”.

In the end the Smith Commission delivered a compromise in which economic powers were devolved across a number of areas including taxation, state benefits in specific areas, borrowing and the management of the Crown Estate. This gave the Scottish Parliament an extra £15 billion of taxes to cover some 60% of the spending over which they now had control.

Although the SNP signed up to these recommendations in the Smith Commission Report, it also predictably condemned them on the Report’s publication as failing to deliver the enhanced powers for the Scottish Parliament promised by the leaders of the Conservative, Labour and Liberal Democrat parties in the final days of the referendum campaign if Scotland voted ‘No’ to independence.

By this time however significant questions had been raised on the economic costs and benefits of full fiscal autonomy. The submission and accompanying press release to the Smith Commission by Fiscal Affairs Scotland, an independent think tank, provides a useful summary statement.

According to its analysis falling oil revenues would impact massively if full fiscal autonomy were adopted as revenues raised wholly in Scotland came to replace the Barnett Formula (1) under which Scotland receives a block grant from the Westminster government to cover a significant proportion of its spending.

The figures given for 2014-15 were a deficit in Scottish government finances of £12.9 billion under the estimate calculated by the Office for Budget Responsibility (assuming all revenues generated within Scotland and from North Sea oil and gas (NSOR) were assigned to Scotland) and £10.6 billion if using the more optimistic estimates of the Scottish government which the SNP favoured. The deficit under the Barnett Formula would be £8 billion.

Fiscal Affairs Scotland stated: “What this analysis illustrates is that a movement away from the current Barnett arrangement to one which relies more on the retention of taxes generated in Scotland could put the existing level of Scotland’s public spending at risk…..Under the most recent NSOR forecasts full fiscal autonomy would result in Scotland continuing to have a negative fiscal balance in 2018-19 even though by then the UK is projected to be in a fiscal surplus” (press release, 21 October 2014).

Six months later the situation had become worse. New figures from Fiscal Affairs Scotland now put the deficit at £14.2 billion for 2015-16 (press release, 18 March 2015). Although this was expected to fall to £8.2 billion by 2019-20 the UK deficit as a whole by that time was forecast to have moved into surplus. Without the Barnett Formula and under full fiscal autonomy Scotland could only cover this size of deficit by higher Scottish taxation, or cuts in public services, or borrowing, or all three.

Comparable figures confirming a growing deficit were released around the same time by the separate Institute for Fiscal Studies in London. True to form the SNP sought not to discredit these figures directly but to discredit its opponents claiming they were “constantly talking down Scotland’s financial abilities” (BBC Scotland, 21 April 2015).

But the weaknesses of the SNP case were increasingly being revealed. In the Scottish Parliament Nicola Sturgeon came under attack and in April dodged questions as to whether the SNP would seek to amend the Scotland Bill in the Westminster Parliament to provide for immediate full fiscal autonomy as she had stated only one month earlier. Her assertive Finance Secretary, John Swinney, also became more circumspect speaking of delay and significant periods of transition in reaching full fiscal autonomy.

It was therefore not surprising to see that in its General Election manifesto the SNP spoke now of a transition to ‘full fiscal responsibility’ (note the word change) that “would take a number of years to complete”. It therefore proposed a dual strategy that would seek to retain the Barnett Formula alongside new devolved powers over and above those proposed in the Smith Commission.  These would include “powers over employment policy, including the minimum wage, welfare, business taxes, national insurance and equality policy”. They would deliver substantial additional revenue (e.g. national insurance is estimated to raise £8.7 billion in Scotland and on-shore corporation tax £2.8 billion) and more control over spending.

It is a position the SNP has reaffirmed in the new UK parliament. As agreed in the Smith Commission, a new Scotland Bill was introduced in the House of Commons which would give the Scottish Parliament powers to raise 40% of taxes and decide 60% of public spending. As with the Smith Commission, the SNP again complained that it did not meet what was promised in the referendum and by the Smith Commission, demanding the new powers it had set forth in its election manifesto be included as well.

It therefore proposed a number of amendments to achieve this, all of which were defeated. Among them was one to give the Scottish Parliament the right to determine when to move toward full fiscal autonomy. And another sought an ‘Economic Agreement’ between the Tory government and the SNP to set out a plan for implementation of full fiscal autonomy.

In his response to these amendments, David Mundell, the Tory Scottish Secretary, stated that: "An amendment that kills off the Barnett formula and ends the sharing of resources across the UK is about as far away from sensible as one can get. It would be a full fiscal shambles that would cost every family in Scotland around £5,000….. The Institute for Fiscal Studies has estimated that fiscal autonomy would mean Scotland having almost £10bn less to spend by the last year of this parliament" (BBC Scotland, 15 June 2015).

The reference to the Institute for Fiscal Studies figure takes into account the latest figures from the Office for Budget responsibility which shows the impact of the crash in oil prices on Scotland’s North Sea Oil Revenues. It stated: “The effects of accumulated losses reducing the effective rate paid by companies in the North Sea, plus the repayments associated with decommissioning costs, mean that in our central projection just £2 billion of receipts will be raised in total between 2020-21 and 2040-41.” These are down £34.5 billion from their estimates last year (BBC Scotland, 11 June 2015).

Commenting on these figures the Scottish Labour MP Ian Murray said they "blew a further hole in the SNP's plans…..The SNP were once all for full fiscal autonomy, then they weren't so keen and now they say they want it but just not for a wee while yet….It's an utterly confused position” (BBC Scotland, 15 June 2015). 

It is indeed, but it is all of one piece with the SNP’s past approach to economic issues and with its current and medium term plans for Scottish independence.

In the independence referendum the SNP produced what can now be seen as wildly over-optimistic forecasts on the future of the Scottish economy under independence. They were challenged at the time and their economic policy on issues such as retention of the pound sterling as the currency for Scotland after independence were shown to be ill advised and ill thought out. The same can be said for the policy of full fiscal autonomy. It does not make economic sense. As with independence the figures do not add up. It will put public and social services at risk and expose the Scottish economy to the vagaries of the international oil market.

Scotland will be far worse off if it adopts such a policy.

So why do the SNP promote it? Quite simply, it is seen as a policy to move closer to independence. Full fiscal autonomy (or even the slimmer version of full fiscal responsibility) simultaneously erodes and undermines the economic and social benefits of the Union while increasing the autonomy of the Scottish Parliament, moving it ever closer to ‘Devo-max’ and so ever closer to independence, which would then be but a short step away.

It also accords with the dominant SNP approach pioneered by Alex Salmond and now promoted by Nicola Sturgeon of SNP demand and Westminster concession on an ever-escalating basis. There is no way that Westminster concessions will ever satisfy nationalist demands short of independence and another referendum.

Indeed, precisely this prospect was recently raised by Angus Robertson MP, the leader of the SNP at Westminster, in an interview with the Observer (28 June 2015). In it he claimed that some in the UK Parliament seemed to be living in the vain hope that the SNP and pressure for independence were temporary phenomena that would just ‘go away’. But that would not happen. Added to which the failure of the Tory government to deliver what in his view was promised in the Smith Commission were prospective grounds for proposing a second referendum to be held before the end of the current parliament.

The strategy and tactics of the SNP could not be clearer. A policy of appeasement will not work. The SNP needs to be confronted and its policy of ‘independence by increments’ exposed.

To their credit the Scottish Labour Party in Holyrood and the Labour Party in Westminster have mounted a vigorous opposition to full fiscal autonomy, and in particular to the SNP practice of ignoring the true costs of the policy.

It is therefore disappointing that a Labour amendment to the Scotland Bill that would have seen an independent commission of experts established to assess the impact of full fiscal autonomy on the Scottish economy and public finances and report by the end of March 2016 was defeated in the House of Commons by 376 to 192, with the SNP and the Tories joining together to reject the amendment (BBC Scotland, 30 June 2015).

Such a ‘marriage of convenience’ is no surprise. There will no doubt be many more occasions on which the SNP and the Tories in Westminster make common cause while pretending to be implacable foes.

And it should not be forgotten that in the final analysis a Tory government in Westminster serves SNP interests much better than a Labour opposition. It is an indispensable basis for their claim that Scotland is different and thus needs to be independent, when the truth is that Scotland is not that different from the rest of the UK and the interests of the Scottish people are the same as the majority south of the border. On this basis full fiscal autonomy is a retrograde step and full fiscal integration a much better option for most in Scotland. The figures prove it.

 

Notes

(1) Tax paid in Scotland goes toward covering expenditure by the Scottish government and the UK government. The UK government returns money to Scotland to pay for devolved services via a block grant to the Scottish government. The size of this grant does not depend on how much revenue is raised in Scotland but is based on its historic spending in Scotland, adjusted each year using the Barnett Formula so that changes in spending in Scotland and England are broadly in line. Scottish government spending on average has been 11% higher per person than in the rest of the UK (£1600 per head more than in England on 2012-13 figures).