Scotland and independence - some fiscal considerations

[John Short]

In making a decision over whether to seek independence from the rest of the UK, one of the many issues that the Scottish people will need to consider is the fiscal consequences. The question is not whether an independent Scotland could survive from a fiscal point of view but rather whether, in the short term and in the longer run, the current pattern of taxes and spending is sustainable and hence what choices an independent Scotland might have to make. Would an independent Scotland require higher taxes to finance current levels of spending (or, equivalently, would it need to reduce spending in order not to raise taxes)? Or would the Scots enjoy a fiscal dividend in the form of lower taxes or higher spending?

This is the first output of a new project at IFS, funded by the Economic and Social Research Council (ESRC), looking at some of the fiscal choices that might face Scotland should it choose independence following the 2014 referendum.

http://www.ifs.org.uk/bns/bn135.pdf
http://www.ifs.org.uk/pr/Scotland_Fiscal.pdf

[atseacliff]

Related piece from the Institute of Chartered Accountants of Scotland.

Doesn't answer your questions:

Would an independent Scotland require higher taxes to finance current levels of spending (or, equivalently, would it need to reduce spending in order not to raise taxes)? Or would the Scots enjoy a fiscal dividend in the form of lower taxes or higher spending?

..............however designing a new tax system will potentially be “massive, complex and expensive”. 

[FitzFord]

The analyses are interesting and potentially useful, however, I did not see (enough of) a discussion of whether Scotland, as an independent entity, would have different (better, worse) growth prospects than the current UK as a whole? Isn't this the crucial question that (should) determine the approach to independence that the populace should consider in casting its vote? Do we accept to be poorer and proud (in the worse case scenario)? If not, shouldn't the advocates for independence be required to make a well-examined public case for how the new world would make Scotland better off? The immediate short-term (or start up) effect that these analyses focus on may be considered as "the price of national pride". As an old colonial I understand the impulse, however, the presence of a huge (relative to overall home population)  JA immigrant population to the "Old Country" suggest that the impact of these contrarians may be significant in the future.

Fitz.

[atseacliff]

Of course there are many different interpretations of whether an independent Scotland would be better or worse off.  The negotations on the size of the debt, defintion of boundaries with regard to oil reserves and questions with regard to joining the EU, retention of Sterling make any confident predictions inherently uncertain - which of course plays well to those wishing to retain the status quo. 

As someone living in Scotland I was extremely discouraged by the level of rational debate on the future of Scotland until Westminister's pre-emptive strike in January this year.  As a result the SNP aren't the only game in Town and we do have a healthly debate on the issues.  The input from the Fiscal Commission (including Stiglitz and Mirelees) established by the Scottish Government at the weekend being one example - link attached.

http://www.martinfrost.ws/htmlfiles/scotnews12/121209-tight.html

[FitzFord]

I reflexively support being discouraged on issues like these, these days. I am a bit less discouraged because of the choice and presence of Stiglitz on the Fiscal Commission. (Regular readers will know of my high regard for him). Tempering my latent optimism is the current and projected direction of the UK economy for the next couple of years. It would be reasonable to expect that after the extended societal stress of the adjustments to reforms, limited growth and reduced services, there would be a reflexive and emotional attraction to Independence and if that perspective wins it would be extremely difficult for a newly minted Scottish Government to resist the temptation to open the tap on expenditures without a well-defined program for sustainability. But, it would be refreshing to be wrong in this case.

Fitz.

[John Short]

Recent Reports that add to this debate - the more recent also relevant to the EC debate under Decentralisation - significant newspaper coverage on 23rd April which can be accessed on line for comment such as http://www.guardian.co.uk/politics/blog/2013/apr/23/osborne-independent-scotland-currency-warning.

[FitzFord]

My interpretation of the Scottish Fiscal Commission paper is a valiant attempt to make a case that is somewhat plausible on how to proceed if the UK wanted to be particularly helpful to a separated Scotland. The absent element in this case is why the UK would want be to so helpful when the benefits are perhaps marginal to the reduced UK and the risks of potentially significant costs are clearly higher without the political element. The current UK position is difficult to fault, in my view, as it is analytically sound, and reinforces the argument of the necessity of a political union as the basis for an sound common currency. Will the UK be willing to apply that argument to the EU?

Fitz.

[John Short]

The Debate (sic) hots up as D Day draws near.

[John Short]

The Case For in great detail - thankfully there is a summary - the rebuttal - will it be in as great a detail?

[atseacliff]

As this is a SNP proposition and some of the policy propositions can be addressed as part of the status quo a "detailed rebuttal" isn't required.  At least after two years of policy prescriptions on the hoof us skeptics have 650 pages of detail to get our teeth into. I'm looking forward to a rigorous debate on how an "independent" Scotland's fiscal and monetary policy will work as laid out today.  Apparently post 2014 Sterling is an asset to shared between Scotland and the rest of the UK.     

[atseacliff]

Excellent piece by Simon Jenkins in the Guardian. 

http://www.theguardian.com/commentisfree/2013/nov/26/stop-lecturing-scots-freedom-not-wealth

[John Short]

it is indeed.  One thing that struck me about the White Paper is the need to split what could be done now under existing devolution powers (on expenditure, particularly such as child care) and what are genuine separation issues - currency, EU, defence.  On the former, revenue and taxation powers are important but would independence produce more revenue than the Barnett formulae?  Clearly the pro camp says yes, but on various assumptions which need testing.  Listening to the questioning on the news, the focus was on would the childcare proposals (30 hours free per week) encourage mothers with young children to vote for independence.  Jenkins is right - the focus should be on independence for the reasons he addresses and not on a questionable fiscal framework.

[atseacliff]

Many Scots like the distinctive style of government and public service delivery which devolution has brought.  Much of the political talent has moved into the SNP and even their critics would concede that they have had a reasonable job in the last term and half of government.  The Unionist parties deserved a bloody nose at the last election however I'm not sure we got quite the result we would have liked - recent polls suggest even 30 percent of SNP supporters are against full independence.

On the dodgy fiscal issues I agree with you - the child care and benefits provisions are aimed at working mothers and deprived communities who are either especially skeptical of independence (woman) or the bedrock of support (poorer areas).  These are achievable under the current arrangements and read more like the SNPs next election manifesto than a rationale case for independence.  On fiscal issues last week's IFS report did a credible job of arguing that an independent Scotland would have to raise taxes or cut spending (or both) to create a sustainable economy.  Set against that the White Paper's assertion that taxes wouldn't have to rise maybe politically expedient but lack credibility.  I'm also highly skeptical of the Scottish Government's logic on the proposed Sterling zone and debt sharing arrangements with the rest of the UK if the country delivers a Yes vote are.

         

[FitzFord]

The most interesting comments and arguments distinguishing this discussion are not strictly PFM but political, in the broad, non-negative sense. If the decision is to be made on those bases, they would be difficult to reconcile. The more appropriate question would be, what would be the cost of independence?

Fitz.

[atseacliff]

Loving the knock about stuff on independence debate up here in Scotland at present .  The SNP's bluff and bluster on the use of Sterling debate was finally called by Messrs Balls, Alexander and Osbourne yesterday.  One of the many interesting elements of the story was the publication of a letter to the Chancellor from the Treasury Permanent Secretary (we will call him Sir Humphrey).  This is unheard of and the clarity and strength of tone will be surprising to anyone who has spent time working in Government.

http://blogs.ft.com/westminster/2014/02/sir-nick-macpherson-very-bold-perm-sec/

There is some great PFM and economics material coming out of the Scottish independence debate - I'm not sure it fits in Decentralization or indeed whether it is of interest to folks on this forum - however I'm happy to share if there is appetite. 

[FitzFord]

Atseacliff,

This is great stuff. Please continue!

Fitz.

[STONE]

It was clever of Osborne to do that - so that it would be seen as a technical issue.

But why we should call him Sir Humphrey when it seems he glories in the name of Sir Nicholas Macpherson and attended an Oxford Institution named after the father of one John Balliol.  He also went to another education establishment called Eton, like George

[harnett]

Which brings us back to the Simon Jenkins' Guardian article - the debate may have technical ramifications but it is political - and many of the technical issues presented now will be seen as scaremongering fostered by the English establishment.  The Scots have rarely felt represented by Westminster in the last 50 years or so (or even before), notwithstanding the strong Scottish slant of Blair's cabinet for much of his term in office.  Having lived on Merseyside for much of my adult life I could say the same about that region.  One of the finest April Fools during the "Militant" 1980s was that of an independent Merseyside being established (for the same reason) - the TV article was reasonably polished and serious until the end when it was announced that Ken Dodd would be the new PM.  As a holder of an Irish passport I can further identify with the call for "freedom".  Democracy is supposed to be about representation - and it appears that the lack of such has spurred on the nationalists north of the border.  Wales next?  The irony of all this of course is the limited room for manoeuvre for governments anyway within the EU.

[John Short]

So the "economic" case is a red herring.  It should all be about Scotland and its people being separate and only dependent on themselves i.e.  independent from RUK and ROW and making their own way based on themselves and how they use their other resources whatever the economic/financial cost/loss or gain from separation.  Alec Salmon will not state that but bases his case on being better off from independence- but the trade off should be irrelevant or should it?  Irish citizens might look at it from the non economic case given its history, but is Scotland's history comparable?  Answers?

[harnett]

Certainly not a red herring.  It would be irresponsible to ignore the economic case, but it appears that much of the economic case presented in the media is carefully manufactured scaremongering.  One can't help but think that the companies that have threatened to leave Scotland have been "tapped up" by Westminster.

[FitzFord]

I found this intriguing and wonder if you would apply the ideas to the potential dismantling of the United Kingdom:
Fitz.

Let me know if can be assessed. The WP has changed its linkages, it appears, since ownership has been transferred to the owner od Amazon.com (Jeff Bezos).

The fall of democracy?
http://wapo.st/1dCgEQ2

[John Short]

As decision day draws near another tome to confuse/educate/bore the voters.........

https://www.gov.uk/government/collections/scotland-analysis#documents

[FitzFord]

After reviewing the papers and discussion on the this topic I came to one firm conclusion, as follows: reading each side of the arguments is clearly not designed to enable objective readers to make an objective decision with regard to pro- or con- separation of Scotland from the UK. While it is possible (and perhaps, useful) to carefully dissect to pros and cons of each set of arguments, it is unlikely that reading/studying each side of the argument will go much down the road to assessing what is objectively best for Scotland. I have a view on what would be better for Scotland but I do not necessarily give the same weights to each element as more emotionally engaged individuals may have. Some may place higher values to "autonomy" as in establishing their own values, than greater cash flow. What I do find disconcerting is that the arguments are presented based on carefully crafted focus on elements that pull different chains. Of course, it is quite possible to organize the arguments according to comparative preferences, so all is on the table. The problem is that it is unusual that objectivity is the starting point. (or the end-point). The good news that I draw from this is that consultants/advisors who are two handed (on one hand, this has these benefits; one the other hand, there are demerits as follows...) do have an important role when they objective enough to focus on the two sides of the picture. I see a great case study one generation from now...

Fitz.

[John Short]

consultants/advisors who are two handed (on one hand, this has these benefits; one the other hand, there are demerits as follows...)

I think this element is wholly absent from the information packs - though it may well be present in Scotland though I doubt it judging from the reaction to the financial support to either side in social- (or is that anti-social) media!