Fiscal autonomy

The economists are getting excited about fiscal autonomy for Scotland. Sad, I know, but that's economists for you. The Herald has two articles today on the matter, both of which report (here and here) that the economists disagree. Sad, I know, but that's The Herald for you.

Being a non-economist, as well as a simple soul, I take the view that fiscal autonomy is not something to worry about, as it will never happen unless Scotland becomes independent. Essentially, fiscal autonomy involves giving the Scottish Executive via the Scottish Parliament control over some or all of the taxes raised in Scotland as well as the abandonment of some or all of the current arrangements whereby all Scottish taxes go to London which then gives us our share of the UK taxes (arguably plus a bit) in the form of a block grant to the Scottish Executive. Purists claim that this would be a Good Thing, as (1) the Executive would need to be rather more disciplined about its spending as it would get the blame if taxes had to rise, and (2) the Executive would be able to tailor fiscal policies to Scottish needs by adjusting tax rates here and there, thus increasing its influence on economic growth.

First point. (Big Gordon widnae like it.) There is no way that the UK Treasury - under Gordon Brown or any other Chancellor - will ever - as a matter of basic principle - allow the Scottish Executive to mess about with the rates of income tax (despite the tartan tax arrangements incorporated in the current devolution settlement), corporation tax or VAT. Such a move would amount to a fundamental attack on the economic unity of the UK. It will not happen. Full stop. End of story.

Second point. (Winners and losers.) It is extremely difficult to calculate how much Scotland pays in taxes. The implementation of fiscal autonomy would not necessarily mean that Scotland was better off. Economists have argued for years over whether Scotland contributes more to the exchequer than it gets out. Without 'Scotland's oil', we would probably lose out; even with 'Scotland's oil', much would depend upon the oil price. At best, there would be a considerable element of uncertainty (and continuing uncertainty) compared with the relative stability of the current arrangements.

Third point. (Where do you go for your messages?) There is no separate Scottish economy: many people in Scotland work for companies headquartered in England and many people in England (not quite so many but enough) work for companies headquartered in Scotland; English-based companies trade freely in Scotland and vice versa. It would get awfully messy to apply separate income tax or corporation tax rates north and south of the border. And any economic effect would most likely be extremely marginal, unless the tax system got even messier.

Two caveats:

(a) If and when Scotland becomes independent, all these matters will have to be addressed. It won't be easy to sort out and it is one of the reasons why independence cannot be declared overnight. I wish I thought that the wonks in the SNP back rooms were actually thinking about these things but I rather doubt it...

(b) None of the above excludes the possibility of introducing greater fiscal freedoms/responsibilities for the Executive, for example by adding a tourist tax to increase their resources or by allowing them to assume control over stamp duty on houses. But any such changes would be marginal compared to reliance on the block grant and would certainly not amount to fiscal autonomy.

Conclusions

(i) Leave the economists to argue about fiscal autonomy.
(ii) Ask any politician promising greater fiscal autonomy precisely what he or she means.
(iii) Keep your fingers crossed.