‘WITH what should we fix it, dear Michael, dear Michael, with what should we fix it, dear Michael, with what?” So ran the rhyme from Peter Piper, a reader taking time out from picking his pickled peppers to respond to my column last week lamenting the shrinkage of the Scottish economy at the end of 2016.
This is not only a bad thing in itself (because it means there is that little bit less to go round for everybody in Scotland), it may also wreck the prospect of a successful Yes campaign in a second referendum on independence, since the offer of living in a poorer country is unlikely to attract many swing voters.
I do take the point, mentioned in letters and comments from several other readers, that the Scottish Government lacks the powers to do anything immediately decisive about this sorry state of affairs. On the other hand, the SNP have been in office for 10 years now, espousing for most of them a policy of economic growth. You can look it up at bit.ly/ScotEconomy.
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A policy that after 10 years has not met its target, but rather achieved the opposite, is to my mind a failed policy. What to do? Just wring our hands? I wholly agree it would be best for the Scottish Government to enjoy full fiscal autonomy, even short of independence, and with those powers to set our economy moving. The problem is how to get from here to there. But I don’t agree that nothing can be done in the meantime.
In a couple of weeks’ time, something that might be called a Scottish system of taxation appears with the start of the new financial year, in fulfilment of the Scotland Act 2016 and of the preceding Vow that panicky English politicians made just before the 2014 referendum.
It will still leave us a long way from fiscal autonomy. Some of the taxes to be controlled from Holyrood are by any standards minor, such as the land and buildings transaction tax (on which the yield is lower than expected), the landfill tax and the air departure tax. The only good reason for charging them at all is the principle that our tax bills should for preference be varied. People always resent handing money over to the government, and it would be a mistake if we allowed this resentment be focused on only one or two taxes: the more the types of tax, the less resistance to any single one of them, the more the revenue for the state.
Nothing better proves my point than the history of local taxation in Scotland. The rates of former times were discredited because they charged too few people too much. Then the community charge, or poll tax, charged too many people, including some who could not pay and so didn’t. The present council tax is fairer, but all the same had aroused enough discontent for the new SNP government to impose a freeze on it 10 years ago (which of course, with inflation, meant a cut in real terms over time).
I myself think the experience of the freeze has been positive, forcing local councils to seek efficiencies they would otherwise have neglected. By now we might have squeezed out as much inefficiency as we are ever going to (but, if you can get hold of a copy, read the End of Term Report by my friend and retiring Midlothian councillor Peter de Vink). The freeze has been officially lifted, though three councils will continue it voluntarily.
The other side of local taxation is business rates, which the SNP government originally capped as well. Unfortunately, the benefits from this are now being overwhelmed by the furore over a revaluation. Its net effect may be neutral, as the SNP argue. The problem is that the losers from such a change always shout louder than the winners, and this has now forced concessions to hard-hit sectors.
But it is the partial devolution of income tax that makes the big difference from now on. Half of every Scot’s assessed income-tax liability will be going no longer to Whitehall but to Holyrood. It is at Holyrood that thresholds and rates will be decided too. To a minor extent, the Scottish Government has already made use of its new power, by declining to follow the rest of the UK in raising the threshold for people to move on to the higher rate of tax. Some Scots will therefore be paying more. Alex Salmond was, as first minister, a tax-cutter on a modest scale, in business rates and council tax. His successor, Nicola Sturgeon, is a tax-raiser, in business rates and income tax.
Could this be one reason why on Nicola’s watch Scotland has gone from modest growth to threatened recession? Is her government the author of its own economic woes, in other words? After all, the traditional prescription for an economy heading downhill has been to cut taxes, not raise them, so as to put more money into consumers’ pockets. Among modern politicians only Margaret Thatcher, in her budget of 1981, has shared Nicola Sturgeon’s opposite order of priorities. Just a thought. If The Vow has been fulfilled, it is unlikely to still the calls from Scotland for yet more fiscal powers. We can blame this, like almost every other kind of instability in the UK at the moment, on Brexit. A time is in sight when EU rules will no longer apply – and one of those rules is that VAT, while it is set by each member state for itself, cannot be varied within the territory of the member state. Once we are free of this rule, there is no legal reason why Scotland should be denied control of its own VAT. For the moment, we are only being assigned the proceeds of our VAT, without being able to set its rate or the extent of its application.
Corporation tax too: since a lower rate is already to be charged in Northern Ireland, there is good cause for Scotland to follow (with this cut, at least, the SNP agrees). Both types of revenue could be used to incentivise policies of growth.
Even in advance of that, however, we have the powers to bring about a change in general economic policy. We must shift from subsidy, consumption and deficit to growth, development and exports. The Scottish Government has so far glibly believed the two sets of objectives are compatible, so that nothing in the first lot needs to be sacrificed for the sake of the second. The plunge into recession shows this view is wrong. Our deficits certainly need tackled. For the record, I do not for one minute believe the lurid GERS figures: I cannot see how a country with less than 10 per cent of the UK’s population would account for a quarter of its debts. But Scotland certainly has a deficit of some kind, if probably one within the reach of our unaided capabilities to eliminate.
We do have to set seriously about this task, however – for example, by a freeze on Scottish central government expenditure, much like that beneficial freeze on local government expenditure. It should go on till the deficit is cut to three per cent of gross domestic product (the target which the EU would ask of an independent Scotland).
Afterwards the focus can switch to tax cuts for hard-working families and for the private sector to boost production and employment.
If this actually quite simple programme seems to be asking the impossible, reflect that sooner or later it has to happen. We will not be thanked by later generations of Scots if they are left with large debts from us. And if the European future is the one we are to seek, we will be most welcome to our prospective partners if we turn up on the doorstep not with a begging bowl but with common goals in sound finance.