Fiscal autonomy offers massive benefits

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In a detailed research paper, the Scottish professors Andrew Hughes Hallett and Drew Scott show that the Calman proposals are unworkable, that significantly more fiscal powers need to be transferred to Scotland and propose that a Scottish Treasury be set up….

In a detailed research paper, the Scottish professors Andrew Hughes Hallett and Drew Scott show that the Calman proposals are unworkable, that significantly more fiscal powers need to be transferred to Scotland and propose that a Scottish Treasury be set up.

The recently published paper contains detailed proposals for allocating taxes to Scotland, and which revenues should be remitted to London. The academics argue that this will reduce UK deficits whilst at the same time improving Scottish growth and employment prospects.

The authors point out that: “The existing block grant system can and has been criticised from such a wide variety of points of view that it effectively has no credibility left.”

They add: ”The Calman proposals (and the UK government proposals that followed) are unworkable“, arguing that such proposals will “invite an eventual breakdown.”

The report shows how, using the proposed framework, every 1% of the budget transferred to Edinburgh could potentially increase incomes per head between 0.6% and 1.3% and £690m more in government revenue and spending.

However, even more astounding is that under the new blueprint the Scottish budget for 2007-08 would have been stronger than the UK as a whole, being close to balance or even in surplus.  By contrast, say the authors, the UK would have had a deficit effectively unchanged at 3% of GDP for the same period.

The report suggests that the Scottish government pay a “rent” for services provided by the UK government.  In 2007-08 it would have meant handing over £6bn for defence, international services and debt payments, and another £5.7bn for pensions.

The main features of our proposal are:

  • Extensive fiscal autonomy is required to provide the levers need to guide the Scottish
    economy and improve its performance;
  • Extended fiscal autonomy is the only arrangement consistent with increasing political and
    economic accountability for Scottish policymakers;
  • Competence to set not only all devolved tax rates, but also all aspects of those taxes
    (bands, base, exemptions);
  • Borrowing powers are necessary to manage the economy while observing stability
    conditions for the UK debt level as a whole;
  • Reserved powers (tax and spending) to be limited to those with no significant economic
    consequences locally but important for the UK as a whole, and certain policies with
    development or infrastructure (physical and non-physical) implications;
  • Reciprocal remittance arrangements to pay for the reserved policies;
  • Limited equalisation payments via a fund linked to economic capacity, not incomes;
  • Addressing potential problems of tax competition, fiscal coordination and reliable debt
    management are a key feature of our blueprint;
  • Certain institutional changes will be necessary (a fiscal policy commission, a Scottish
    Treasury and/or tax service, a UK policy forum/monetary fund).

In an attempt at pre-empting criticisms of the model the authors say:
“We are of course conscious that critics will say that our model of fiscal autonomy has no parallel in any country presently operating a decentralised, or federal, fiscal regime. This is not true: each of the features we introduce has its parallel in another country or in history.”

They also argue that rather than focussing on the constitutional implications of the proposals, that critics ought to instead concentrate on their economic merits.  This is a clear reference to those within Calman who appeared to place the continuation of the Union ahead of improvements to Scotland.

“In our view” say the authors “fiscal autonomy should not be regarded as a “stage” on the route to constitutional independence. Instead it is an opportunity for reforming the fiscal powers and responsibilities of a devolved Scottish administration within the context of the United Kingdom.”

The report points out that fiscal autonomy will allow a Scottish government to make tax and spend decisions that are consistent with the needs of Scotland and her economy and will ensure that the Scottish parliament will be accountable for these fiscal choices – one of the aims of Calman.

In another radical proposal the report argues that the Scottish government should service the Scottish share of the UK national debt arguing that it would “decrease over time as Scotland issued its own debt instruments and took ownership of its own debt burden.”

This would be a transitional process and would also see Scotland receive an equivalent share of the revenue raised when the UK Government eventually returned to private ownership those financial institutions it has a considerable stake in.

Contrary to suggestions by BBC Scotland, this paper was not commissioned by Reform Scotland, it does though appear on the Policy Forum section of the Reform Scotland website.

The paper can be read in full by clicking here.