Alex Massie

Life after Scottish Independence: lower taxes, lower spending, no free lunches

Life after Scottish Independence: lower taxes, lower spending, no free lunches
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Every so often a report is published that cheers you up. Not because it contains any particularly good news but simply - that is to say, selfishly - because it appears to support notions you've held for some time.

So trebles all round for the Institute for Fiscal Studies whose latest report on life in Scotland after independence is published today. Sponsored by the Economic and Social Research Council, the report concludes that 'an independent Scotland could face pressure between [a] need to lower tax rates and [the] need to fix its public finances'. Well, yeah. Some of us have been making this kind of case for some time now. It's just scaremongering, apparently.

Except, of course, it is not. I've never supposed an independent Scotland must fail. Paradoxically, the case for Union would be far weaker if an independent Scotland was liable to be an economic basket-case. It would be one indication that, at least in this respect, the Union had failed.

Be that as it may it has long been obvious that there'd be some ticklish choices to be made after independence and equally obvious that the first years as a brave new country might require some awkward adjustments to be made.

That means there would opportunities to do some things differently. That is, better. As the IFS argue: 'There would be plenty of scope for an independent Scotland to improve its tax system, though to do so would require a Scottish government to make the sorts of bold decisions over tax reform that successive UK governments have failed to make.'

Nationalists will also be pleased by this part of the IFS report: 'Scottish tax revenues per person are very similar to those in the UK as a whole if North Sea oil revenues are allocated in proportion to population but significantly higher if oil revenues are allocated geographically.'

Or, to put it another way, Scottish tax revenues per person are lower than those in the UK as a whole if North Sea oil revenues are removed from the equation and treated as an unearned bonus.

Now, of course, the oil matters. We should not leave it unexploited and it should be counted. Nevertheless, no matter how you calculate these things it remains the case that Scotland's relatively advantageous position is almost wholly explained by oil revenues. This might, of course, change in the future. Meanwhile, however, it also demonstrates that, at least in the short term, it will be exceedingly difficult to maintain current spending levels and establish a meaningful sovereign wealth fund.

What about taxes? According to the IFS:

The Scottish income distribution is more equal, so the scope and need to redistribute through high rates of income tax would be less.

But:

There would be a strong case to focus taxes more on immobile tax bases such as property. This would involve a reversal of long-standing policy which has seen council tax rates in Scotland fall well below English levels.

Not just that. I suspect that we'd see some form of Land Value Tax introduced post-independence. That might be what is politely deemed 'politically difficult' but preferable to increasing rates of personal taxation since this could politely be dubbed 'economically difficult'.  As the IFS explain:

Whilst average income in Scotland is little different from that in the UK as a whole, there are fewer very rich individuals in Scotland than in the rest of the UK. As a result Scotland raises less per person from income tax than does the UK as a whole: £2,102 versus £2,391 per person in 2011-12, expressed in today’s (2013–14) prices.

Moreover:

An independent Scotland might place more value on redistribution or on higher taxes to fund public services. But differences between Scotland and the UK as a whole mostly point towards lower optimal tax rates in Scotland.

And:

An independent Scotland would be a much smaller and more internationally open economy than the UK is – particularly because of what would become cross-border movements of goods and services, people and capital between Scotland and the rest of the UK (rUK). Tax competition between Scotland and rUK could leave their combined tax revenues lower than what would be best for them collectively.

This is what Labour call 'a race to the bottom'. Perhaps. What cannot sensibly be denied is that the first few years (at least) of independent life would require some extremely difficult decisions to be made:

An independent Scotland would probably need to undertake some fiscal tightening. How much would be for the Scottish government to determine. But to give a sense of possible scale, previous IFS research has found that £2.5 billion of tax rises or spending cuts (in today’s terms) would be needed during 2016–17 and 2017–18 to match the UK government’s plans. If a Scottish government also wanted to offset the decline in oil revenues by 2017–18 forecast by the OBR, another £3.4 billion would be needed.

Those OBR forecasts may prove too pessimistic. Even so:

We estimate that a one percentage point increase in all rates of income tax, or in the main rate of VAT, would raise around £430 million in Scotland. Making a substantial contribution to a possible fiscal tightening would require significant tax increases.

Quite. These problems are not necessarily crippling but they are real. Wishing them away or breezily assuring us that they will be solved because, well just because, is not really good enough. It is clear that there's no good reason why independence can't be made to pay; it is equally clear that it would be a damn close run thing.

Most of all, however, today's IFS report is a reminder that the leftist dream of higher taxes and higher spending after independence is one that, if followed, is liable to come at a heavy and plausibly counter-productive price.

This is fine too but let's at least try and cease kidding ourselves that everything will automatically be hunky dory. At present the spending is there but the money is not. That's manageable in the short-term; in the longer-term it's unsustainable.

And that in turn means, as some of us have been arguing for some time now, that there'll be precious little room for shenanigans after independence and that, if anything, the realities of Scotland's particular situation generally point to lowering the tax burden and cutting spending, not increasing either. A New Zealand future, if you like, not a Norwegian one.

Which is OK, really.

(A word about the IFS. They are not infallible. Matters are not necessarily so simple because the Institute for Fiscal Studies deems they are. Nevertheless, the IFS's reputation for rigour and probity is also well-established by now. Perfectly reasonably, you may choose to take issue with their analysis but if you do you'd better be using some high-calibre ammunition.)