On Saturday 12th March Nicola Sturgeon, leader of the SNP, implied that the White Paper economic case for Scotland was no longer plausible. She told her party that a new case would be built and that “we must be prepared to challenge some of our own answers”. Which means Rattle’s coverage since launch has been spot on – but you knew that anyway. Much more importantly, it means the entire Independence movement must lay down their old weapons and start anew – which is good for them and a blessing for Scotland. Rattle becomes the first site to start that new conversation as the economist John McLaren offers some thoughts on how an Independent Scotland could respond to its high deficit.
The Scottish Government’s latest publication on Scotland’s public finances – which shows the degree to which taxes raised meets the cost of paying for public services – for the financial year 2014-15 shows an overall deficit of around £15 billion. Projecting forward suggests that by 2019-20, when the UK is expected to have erased its deficit, Scotland would still be around £9 billion in the red. Is this a show stopper for independence or could such a deficit be reasonably managed to get to a viable long term fiscal position?
What not to do.
Do not assume faster economic growth in the future will solve the problem. Every country and government is seeking to achieve faster economic growth but there is no simple (or indeed complicated) way to guarantee it. Depending on such alchemy is simply a politicians way of saying ‘we don’t know’.
Do not assume higher North Sea tax revenues in the future. There may be some bounce back in revenues, but even the Scottish Government doesn’t foresee much in its own scenarios. Better to treat this as a welcome bonus should it happen.
Do not assume you can avoid a share of existing UK debts. Apart from any such calculation being of dubious merit it would start an independent Scotland off on a jarring note, with markets and potential lenders noting the bad faith involved.
What can you do?
Borrowing – allow for £3 billion for growth related investment funding
Allow for a current fiscal balance rather than an overall fiscal balance. In other words balance day-to-day spending with tax revenues, but allow for borrowing to cover investment spending. This can be justified on the grounds that, if well judged, such investment in the likes of infrastructure projects should improve future growth and will benefit multiple generations. As a result of such borrowing only £6 billion of an immediate adjustment needs to be found.
Tax rises – allow for £3 billion, without introducing serious distortions across the UK
It is simplest to concentrate on the biggest sources of tax receipts – Income Tax (£12 billion) and VAT (£11 billion).
Each 1p rise in Scottish Income Tax is estimated to raise just over £500 million in 2018-19. So 3p on the basic rate, with perhaps 5p on higher rates should be able to raise well over £1.5 billion.
If existing VAT exemptions (and reductions) were removed then such tax receipts could grow by over 25%. This is a policy change approved of by many economists, including James Mirrlees, now a member of the Scottish Government’s Council of Economic Advisers. The negative impact on lower income households could be offset by the redistribution of some of the money raised (about £2.5 billion). Net, this could allow for well over £1 billion extra revenue to be made available.
Spending cuts – allow for £3 billion without affecting frontline services
At present Scotland’s share of Defence spending is just over £3 billion. An ‘unarmed’ approach to Defence might reduce this to around £0.5 billion, proportionately in line with other very low spend countries like Iceland, Ireland and Luxembourg.
Other potential areas for cuts include Economic Development (mainly Scottish Enterprise) where Scotland spends disproportionately more than the rest of the UK and, as with Defence, this would have little immediate impact on citizens lives.
Overall, with tax receipts up by £3 billion, spending down by £3 billion and borrowing restricted to funding investment spend, a new equilibrium position might be reached.
What would it mean?
To be clear, none of the changes outlined above are cost free.
– Continued borrowing increases the level of debt and associated servicing charges.
– Tax rises are a burden on households and, in this case, are not compensated for by a higher level of public services.
– Spending cuts, even to Defence, means job losses, localised hardship and knock on effects on suppliers.
The above example is just one of many ways that the deficit cake could be cut. Indeed there are many other changes that might be made, such as increasing spend on preventative services, including early years investment, and a different distribution of tax and spend in general. But these would be redistribution decisions within the revised tax and spend totals.
The main purpose of the illustration is to show that it can be done in a manageable way that does not lead to a dramatically different country.
This new Scotland would also be similar in its tax and spend structure to many other existing OECD countries. A step change would have happened in public finances but probably not a big change in lifestyle or in Scotland’s economic and fiscal structure.
Once such an alternative fiscal vision was widely recognised and accepted it would then be for the electorate to assess these changes in economic circumstances, in combination with all the other possible changes in culture, society, politics etc, in order to gain a clearer picture of what future they preferred for Scotland.