Under ‘Devo-Max’, ‘Fiscal Autonomy’ is an illusion

OED definition of autonomy: a.  The condition or right of a state, institution, group, etc., to make its own laws or rules and administer its own affairs; self-government, independence.

This promise to give Scotland fiscal autonomy has to be good news. Status quo is wrong #indyref http://t.co/goUwyd3hg1

— Douglas Carswell (@DouglasCarswell) March 15, 2014

The Scottish independence debate lacks clarity at the best of times, and many debates rely on its participants guessing or assuming the positions of others. In particular, the ‘further devolution’ options are not well defined, partly because ‘devo max’ will not be debated before a referendum.  Most discussion of devo max so far has exposed widespread confusion about its meaning.  Perhaps the most common mistake is that it involves, ‘a proposal in which Scotland would have full economic independence from the United Kingdom but would still remain a part of it and be governed in specific areas such as foreign policy and defence’ . Devo max is not about autonomy over economic policy as a whole. Indeed, even independence would not guarantee such autonomy if the plan is to keep the pound (interest rates would be ‘set’ by the Bank of England, and the Scottish Government’s fiscal policy would be influenced strongly by discussions with the UK Government).

A lack of clarity on ‘fiscal autonomy’ under devolution is particularly unfortunate because we know that the Scottish population seems to want it without knowing what it is. ‘Fiscal autonomy’ implies the right of the Scottish Government to set its own tax and spending regime.  Yet, most proposals are nothing of the sort.  Instead, we are talking about autonomy over particular tax instruments, not them all – and, therefore, no way to vary the balance between taxes.

Treasury figures for the UK as a whole* give us a rough-and-ready guide to the proportions involved:

• The main taxes already devolved account for 8% of UK government receipts (business rates and council taxes are both 4%).
• The ability of different regions within a single EU member state to have different rates for corporation tax (8%) and VAT (17%) is limited.
• Income tax accounts for 26% (or 25% if we include tax credits), a figure kept low by the separate collection of National Insurance (18%) as a tax on employment income (it is an indicator of entitlement to certain benefits, but goes into the same pot)
• Excise duties are 8% and ‘other’ is 14%.

The breakdown gives us a sense of proportion about the current devolution of taxes and the rather limited fiscal autonomy of the Scottish Government even if it gains, under the Scotland Act 2012, its new ability to vary income tax by ten pence in the pound (a one pence, or 4%, change in income tax might change the Scottish Government budget by little over 1%).  It is also unable to vary the relative difference between lower and higher tax bands and, more importantly, to adjust overall mixes of taxes and spending to influence economic growth (and therefore tax revenue).  The more significant development may relate to a new ability of the Scottish Government to borrow.  The Scotland Act 2012 gives the Scottish Government the ability to borrow up to £2.7bn from the UK Government, subject to Treasury approval.

So what does this all add up to? In my opinion, the further devolution of a small number of taxes does not deserve the title ‘fiscal autonomy’ (indeed, the Scottish Government wouldn’t be much more fiscally autonomous than local authorities, who raise a small proportion of their own income). All it does is allow some parties to look like they are promising significantly more devolution without it doing anyone any good. Or, it gives the impression that the Scottish Government would be increasingly responsible for raising the taxes it spends without giving them the ability to do much with them. It’s a ‘fiscal autonomy’ trick that no one should be invited to fall for.

Qualification 1: focus on what leaders say, not what people say they say

To be fair to David Cameron, a lot of the discussion is by people putting words in his mouth. What he said was vague: “Vote no – that can mean further devolution……more power to the Scottish people and their Parliament”.

A similar, but more detailed, emphasis can be found in the Scottish Labour Devolution Commission’s Powers for a purpose (p5) which talks about ‘scope to enhance the autonomy and accountability of the Scottish Parliament through an extension of tax powers’.

Qualification 2: the production of these figures is political

*Consider three different ways in which to make the calculations outlined above . One method is to adopt the same approach but use figures from the Scottish Government’s Government Expenditure & Revenue Scotland documents which now attempts to take into account a geographical share of North Sea oil taxation revenue. The pro-independence group Business for Scotland uses Table 3.3 to produce its own table which puts, for example, income tax at 20.4%.

Another method is to describe these calculations with reference only to the devolved Scottish Government’s budget, which is approximately 60% of spending in Scotland. This is the approach taken by Powers for a purpose (p6) which recommends ‘widening the variation in income tax in the Scotland Act [2012] by half from 10p to 15p … so that it raises about 40 per cent of its budget from its own resources’. The rough-and-ready calculation is that income tax is 20-25% of UK income, and three-quarters (15p of 20p) of that percentage is 15-19%. Adding this 15-19% to 8% (business and council tax) gives you 21-27% of a notional overall income. Then, to express it in terms of the Scottish Government’s 60%, multiply by 10/6 to give you 35-45% of the Scottish Government budget.

A third is to present both types of calculation on the same table, which is done by Reform Scotland, who try to take into account the Scottish Parliament’s proposed larger budget:

 

See also: Scottish independence referendum: What is Devolution Max?  (Michael Moore’s description of devo max as a ‘brand without a product’ was during evidence to the Scottish Affairs committee).

This is an abridged and updated section from Paul Cairney and Neil McGarvey’s (2013) Scottish Politics