“Responsibility without power”: no way to run Scotland in the Union

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By Jim and Margaret Cuthbert

Like many others, we put in our submission to the Smith Commission last week, in our case on behalf of the Jimmy Reid Foundation. Many submissions have rightly focused on what they saw as the important powers that Scotland ought to have. Ours was different: we concentrated on the fundamental problems with the proposals put forward by the Conservative and Labour parties. The reason we did this is that these two parties between them command the bulk of the seats at Westminster: so if these two parties arrive at some sort of consensus, there is every danger that a blend of their proposals will be foisted on us by Westminster.

We argue that there are real dangers in following the Conservative and Labour proposals by choosing income tax as the primary means for delivering increased fiscal responsibility to Scotland. Moreover, these dangers are compounded by the failure to deliver adequate economic powers to Scotland to enable the Scottish government to grow the economy and its tax base. But our submission is in no sense just negative: we make positive suggestions both about taxes and increased powers.

As avowed supporters of independence, we found it difficult to make the mental jump to operating within the spirit of the Smith Commission: that is, to put forward proposals which are consistent with the successful operation of a continuing political and monetary union. Nevertheless, we have made an honest effort to make this jump: so the Jimmy Reid Foundation submission does not consist of a wish list of everything which would have been possible under independence.

The approach we adopted was to develop a number of criteria against which any proposal for delivering increased fiscal responsibility to Scotland within the union should be judged. These criteria cover questions like:

  • Are the right taxes being chosen.
  • Will the Scottish government have appropriate powers so that it has a reasonable chance of growing its tax base.
  • Do the proposals measure up to the promises made before the referendum:

and so on.

The full set of criteria are set out in the JRF submission, which can be accessed on our website at www.cuthbert1.pwp.blueyonder.co.uk under Theme 6, or directly at the link below.

As we have already noted, we spent a lot of time analysing the Conservative and Labour proposals in detail. Fundamental to both sets of proposals is the idea that the Scottish government should have greater responsibility for income tax in Scotland. The Conservatives propose that Scotland should have full control of Scottish income tax, (other than tax on savings income), with the exception that Westminster would still set the tax free allowance. The Labour proposal on income tax is more modest: it would involve extending the Scottish rate of tax being introduced under Calman from 10p to 15p, together with giving the Scottish government the ability to increase tax in the higher rate bands above tax rates in the rest of the UK.

Income tax is not a good choice for this kind of increased fiscal responsibility. As we show in the JRF submission, the distribution of taxable income in Scotland is very different from that in the UK as a whole, with Scotland having a markedly smaller proportion of tax payers at the high end of the income distribution. This reflects, primarily, the unbalanced nature of the UK economy, with its extreme concentration of very high earners in the City of London. We are certainly not arguing that Scotland should mimic the excesses of the City: there is absolutely nothing wrong, and a lot right, with the fact that Scotland has a different distribution of taxable incomes. However, what this difference does mean is that, if there were a further period of finance based expansion in the City, then the income tax base in Scotland is highly unlikely to grow as fast as that in the UK as a whole.  Given the way the Barnett formula would be adjusted under the Conservative and Labour proposals, (there are more details in the full JRF submission), this would impose a squeeze on the finances of the Scottish government – which would put a future Scottish government under pressure either to raise the Scottish rate of income tax, or to cut services, or both.

This danger is compounded because, under both sets of proposals, the Scottish government would have very few increased economic powers: so there is actually very little it could do to grow the Scottish economy, and hence increase the Scottish income tax base. In effect, the fundamental flaw in the Conservative and Labour proposals is that they deliver responsibility without power. They deliver the responsibility for managing our affairs within an unstable and probably relatively declining tax base, without delivering the economic powers to evade this trap by growing the Scottish economy. The likely outcome would be a scenario of increasing Scottish tax rates, shrinking public services, and continued relative economic decline.

While this is the main danger with these proposals, there are other problems as well. In particular, both sets of proposals pay inadequate attention to a whole range of technical problems which should have been addressed. For a discussion of the technical issues, see the JRF submission.

There are also implicit economic assumptions underlying both sets of proposals which need to be made explicit. These seem to us to include, for example, the assumptions that the UK is a largely self-regulating optimal currency area: or that the best way of achieving economic growth is by reducing taxes. Unless such assumptions are clearly brought out, the Scottish people are effectively being lumbered with a neo-liberal economic agenda without being asked whether this is what they want to sign up to.

And on top of all this, both sets of proposals made by the Conservative and Labour parties fall far short of what was promised in the run up to the referendum, namely, to deliver something that would be a modern day home rule, or as close to federalism as it is possible to get.

The Conservative and Labour proposals are poorly thought out and fundamentally flawed – both conceptually, and in terms of their technical aspects. Ultimately, one could speculate that these flaws are driven by the mindsets of the respective parties involved. The Conservatives by a mindset fixated on low taxes, the desirability of a small state sector, and the smack of discipline for the Scots implied by a balanced budget: Labour by the desire to concede the minimum possible power to Scotland, so as to preserve the status of their Westminster Scottish Labour MPs.

As an alternative, the JRF submission puts forward positive proposals, specifically:

  • The two areas we recommend for increased tax responsibility are national insurance, and taxation of land.
  • In terms of powers, the critical thing is that, in those areas where the exercise of reserved powers is currently failing Scotland, powers should either be devolved, or appropriate steps taken to ensure that the relevant powers are exercised properly, in the joint interests of Scotland and the union. Candidates for direct transfer of powers, we suggest, are fisheries, the crown estate, and aspects of representation in Europe. In other areas, what is required is something like a micro-federal solution, where power is shared between Scotland and Westminster, but in a quasi-federal manner which means that the numerical preponderance of England does not simply dominate: these areas include monetary policy, oil and gas policy and taxation, utilities regulation, corporation tax, competition policy, and research and development and support for innovative industries.

We emphasise again that these proposals are made in the spirit of the Smith Commission. It would be a much cleaner solution if Scotland had gained these powers with a full transition to independence.

Overall, Scotland faces grave dangers if anything like a blend of the Conservative and Labour proposals emerges from the current Smith Commission deliberations. This puts a heavy responsibility on the negotiators in this process who are representing us from the other parties – and particularly on the SNP. Our negotiators will need to hold fast, and refuse to have anything to do with proposals which are as fundamentally flawed as those currently on the table from Conservatives and Labour. Unfortunately, a note of caution is required here. On a previous, but less critical, occasion, when the details of the Calman income tax reforms were being negotiated, the SNP meekly acquiesced to a set of proposals which themselves had basic flaws – much, (it now turns out), to the surprise of the unionist negotiators. The SNP will need to be a good deal firmer this time around.

 

 



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26 replies

  1. It seems ‘Responsibility with Power’ should now join ‘Hope not Fear’ as a slogan worth promoting for the next few months. I doubt however if a Commission weighted in favour of unionist parties with its recommendations requiring the approval of the Westminster government of the day will satisfy Scots. The one exception would be if a very powerful lobby of SNP/Independence MPs is capable of holding the balance of power in a hung Parliament and can ensure that the Scottish Government has a veto if the recommendations are unsatisfactory. The final outcome is thus likely to depend largely upon how Scottish Labour voters vote in the General Election – pro the people of Scotland or simply pro Labour Party. It would thus seem, at least on this occasion, if they value a future that is likely to be sustainable and in their own interests, their votes should be cast for candidates who are not simply career politicians seeking entry to Westminster even if they do not favour the party the candidate belongs to.

  2. Good points and gave food for thought/thinking?

  3. I’m no economist, nor are the majority of the people who actively support independence, and that’s why the Cuthberts are indispensable to that cause – a bit worrying, given that they are rather advanced in years. Their warnings, however, are easy to understand and make a good case against basing any kind of devo-max or home rule on mainly income tax, with a few other economic add-ons. It’s so obvious that giving the power to tax income alone is both dangerous and stupid, that the SNP should have flagged this up years ago. After the Calman report would have been a good time. But, of course, as Dennis Canavan has now revealed, any sensible person knew that the SNP’s independence campaign was fatally flawed because they refused to engage in any negative campaigning, and just whinged about Better Together’s `scare stories` against independence. If they had graphically illustrated just how bad the economic outlook is for the UK – and how that will impact on public services and overall quality of life, then this would have contributed to a better referendum result. I also agree with Canavan that the independence `debate` got bogged down in the currency issue, because the SNP settled on a pat solution of backing sharing the use of the pound, without explaining the alternatives in any depth.

    The Cuthberts’ observation about the meek acquiescence of the SNP in negotiating the Calman proposals is apposite – they don’t walk on water, and they do make stupid mistakes. Something of a drawback when they are overwhelmingly the largest and most powerful group who advocate for independence.

  4. Your concerns about devolving Income Tax seem very similar to Gordon Brown’s concerns. In fact Labour are the only party to voice the concerns you raise. Maybe you need to support Labour’s position to give them more influence.

    • Mr Brown does not have concerns about Scotland. He is a Westminster politician and his concerns are with Mr Brown. Do waken up.

    • But he is retiring and mr Murphy will be in charge and he’s all for it. So maybe making sure Labour has absolutely no influence is the correct course of action.

  5. This is an excellent article. You’ve really got to be careful what you wish for with Westminster. It would be an affront should we come out ultimately worse off under extra powers, especially given that the majority of Scots did not vote for such a thing.

  6. I wish I was smart enough to hold the BBC to task like this, they think they are untouchable. I did complain about Nicholas Witchell twice but each reply was dismissive and patronising. My final reply was to cancel my license. It sounds as though SNP could benefit from Jim and Margaret Cuthberts expertise during negotiations. I agree with Optomistic til I Die we must not vote for career politicians who do not care about the people if Scotland.

  7. “Given the way the Barnett formula would be adjusted under the Conservative and Labour proposals..this would impose a squeeze on the finances of the Scottish government”

    There is an assumption that the Barnett formula remains much the same, but there is a case for reforming it to a new system based on need.

    Within a union, it wouldn’t matter so much if Scotland could compete with more tax powers.
    If Scotland was successful in growing its economy, then it would end up paying more into the common pot – to pool and share across the rest of the UK.

    I agree that income tax on its own is insufficient to grow the economy, unless we keep increased revenue here through other taxes – VAT, National Insurance etc.

    • Although there’s a strong moral and practical case for replacing the Barnett Formula (the late Lord Barnett himself said it passed its use-by date years ago) with a system that’s genuinely based on need, there’s no political will to act, because that would mean too radical a change for the Houses of Parliament to contemplate, as it’s only the Barnett consequentials that keep MPs from Scotland, Wales and Northern Ireland voting on business that’s otherwise England-only. Nobody’s ever accused our ‘esteemed’ political classes of neglecting their own interests.

  8. Thanks again for contributing to my education. Whatever is the outcome of the negotiations needs to be very clearly spelled out to the Scottish people. Those on both sides of the independence divide need to understand how the outcome will affect the ability of the Scottish Government to serve the country. The unionist parties will not shrink from blaming Holyrood for deficiencies that are actually inherent in the arrangements imposed.

  9. thanks Jim and Margaret, i think income tax devolved is just a waste of time, without full independence of course. Corporation tax is the one we need. If we get full income tax then the government here will be seen as a nasty taxing party and voted out. Home rule is everything apart from defense, and i know we aint going to get it, Westminster needs the oil. We need to work hard now to show all voters that without home rule we are going to slip under the surface.

    • Well said!
      this is a wast of time and a trap. We will be worse off and the Scottish parliament will be blamed!
      This is a cynical attempt to derail the Indy movement.
      How have we ended up with the British establishment telling us what crumbs we can have from their table?

  10. It’s great to have economists like the Cuthberts and David Comerford making available their expertise particularly since the bulk of economic commentary is given from a unionist perspective (which is not necessarily to impugn the objectivity of the economists, such as the IFS, whose work is used by the unionists).

    I’m probably missing something but I can’t find the full Jimmy Reid Foundation submission either on Jim and Margaret’s page or the JRF itself nor do I see a link below; so I haven’t seen the full article.

    At any rate, I have some worries and queries about the positive proposals both of Jim and Margaret and David Comerford, from the perspective of looking to Full Fiscal Autonomy as the next stage for Scotland. (Not as an end in itself, as a supporter of independence; and not solely as a stepping stone en route, though that obviously, but because it seems to me to be the only way to incorporate Scotland and its parliament inside the UK consistent with the majority view of the Scottish people that Scotland is a nation, not a region. Fiscal transfers occur across regions *inside* nations, but not between nations (rich ones anyway), not eg. between Dublin and Glasgow, notwithstanding the very close historical links and family ties many of us have between those two areas. That’s part of what makes a nation a nation. And secondly because a standard model of partial devolution of public finances as per the usual federal schemes can’t work, where one nation is 84% of the whole, for the much smaller nations).

    Both the Cuthberts and Dr. Comerford seem to reject full fiscal autonomy. I think I understand some of the reasons for this, such as the problem of asymmetric shocks inside a currency union. There is also the worry that if the IFS predictions (and OBR oil predictions on which they are based) are roughly right, a fiscally autonomous Scotland would face severe public sector deficits. I have two queries for the economists, though.

    One is that these predictions assume Scotland will be paying £6 billion a year in debt interest to rUK. I don’t dispute the moral liability of Scotland for a share in the debt Brown, Darling, Cameron and Osborne have run up. But it must be balanced against the moral liability of rUK for the greatest mis-sold investment of recent times, I refer of course to the oil, McCrone etc. Again the Cuthberts have done valuable work in showing that had Scotland not been lied to in the 70s and as a result become independent (or even fiscally autonomous) we would be around £148 billion in surplus, on conservative assumptions, not in debt, so in fact rUK should be paying us debt not the other way around. Leaving aside the political feasibility of this (zero, unless the SNP hold the balance of power in May and toughen up their act) wouldn’t that a) hugely improve the fiscal situation and enable us to pay for the current account without using oil revenues b) remove worries about oil volatility, c) greatly reduce the worries about asymmetric shocks and d) enable us to put the oil money to good use. (I’d suggest not via an oil fund but by buying majority state shareholdings in going successful Scottish concerns and turning control of the firms over to the workforce by turning the equity shares into non-voting shares.)

    Secondly, the Fiscal Commission mentioned in its report, when discussing currency, the possibility of a dual currency but it said very little, it was all rather gnomic. I assumed they meant a parallel virtual currency, (as the Euro was for the first three years of its existence), with sterling still the cash currency. Is this a runner for a fiscally autonomous Scotland (well I suppose it means it would be more than fiscally autonomous)? Is there anything to stop an autonomous Scottish government inside the UK setting up a monetary authority which creates its own virtual currency, perhaps initially just as a sort of internal accounting unit for tax payments from large concerns who have to buy the Scottish currency to pay their tax, also for funding the public sector, a currency fixed one:one with sterling? This would reduce the amount of sterling needed in the money supply, so enabling the monetary authority to build up sterling reserves, and in the longer run to float the currency in open markets and have a reserve currency able to take over as the main currency, including cash, if asymmetric shocks mean sterling as the dominant currency is not optimal. Is that legally or economically a non-starter?

    • Alan,
      Don’t know why the direct link to our submission which was at the end of the article didn’t work. Another way to access our submission is to follow the link to our website in paragraph 5 of our article, (which definitely does work), then go to Theme 6, and scroll down to the third last item, which is our submission to Smith.
      As regards your two questions: briefly:
      Yes, proper, or even partial, recognition of £148 billion would play a huge role in transforming the finances of an independent Scotland.
      On your second question, the kind of arrangement you envisage would be more than an accounting arrangement. If Scotland was paying for public services using a Scottish pound, it would have to be a legal currency : and that comes from being approved by the Westminster Parliament (according to the Committee of Scottish Bankers). It is extremely unlikely that this approval would be forthcoming under any feasible form of continued union. Jim and Margaret

      • Jim and Margaret: thanks, got the full article via the link the version on your own website and I see you raise the debt issue and (as I would put it) compensation for the mis-sold oil £148billion on p, 18. The SNP really need to play that up, especially if they are going to push for full fiscal autonomy, not sure why they don’t (and didn’t in the referendum).
        And thanks for the answer to the second question: yes I was envisaging it moving from an accounting arrangement to in effect a legal currency and that sounds conclusive what you say, re the current arrangements. But if (fingers crossed!) the SNP did hold the balance of power in May and negotiated a very high degree of autonomy (in exchange perhaps, if the Tories were the largest party in particular, for withdrawing Scottish MPs from the Commons, and sticking them in the Lords as ‘senators’ or maybe ‘Lords Temporally Spiritual’) could they negotiate the right for the parliament to issue its own fiat currency in addition to, and not replacing or re-denominating, sterling? And would it make economic sense, re a shock absorber for differential asymmetric shocks and so forth?

  11. Another excellent piece by Dr and Mrs Cuthbert. Thanks to both for it.

    I really am quite amazed the Westminster Club should think we are thick enough to concede that Income Tax alone would suffice to fund Scotland’s fiscal needs. That perspective also underpinned my own submission to the Smith Commission.

    • It isn’t that they think people are thick…it is that we are their Children. As children we need to have those who dictate our well being give us choices, from a limited range… As in you can go on the swings or the roundabout….., when you really want to get on the giant roller coaster…..

      Was it Malcolm X who said ‘No one gives you Power, you just take it’?

      That is why the commission is doomed…

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