Peter Jones: Ridiculous, dangerous, unworkable

The SNP’s much-vaunted plan for full fiscal autonomy would land Scotland with more austerity, not less, writes Peter Jones

More and more, the SNP’s plans for Scotland to achieve full fiscal autonomy are looking ridiculous (contradictions abound everywhere), dangerous(savage cuts in public spending would be inevitable) and unworkable (gaps cannot be filled by borrowing). Surely Nicola Sturgeon cannot be serious about this?

Bit by bit, in a debate at Holyrood last week and in questioning over the weekend, more information has been squeezed out of the SNP about the practical implications. The resulting picture is only partial, but no amount of plastering and papering over the gaps and cracks can hide the fact that, far from allowing Scotland to escape austerity, it would cause much worse austerity.

Briefly, full fiscal autonomy means Scotland would collect the revenues from all taxes raised in Scotland, including from offshore oil, and control the rates at which taxes are levied apart from, because of EU restrictions, VAT, alcohol and tobacco duties.

Scotland would also control all welfare spending and pay a sum to the Treasury for Scotland’s share (because we would still be part of the UK) of spending on defence, the national debt, macroeconomic management, EU subscriptions, etc.

It sounds like a great idea, but the fact is it can only be brought in smoothly and made to work if total tax revenues raised are roughly equal to total public spending. It could even work if taxes raised were slightly less than public spending, as the difference can be made up by borrowing.

The problem is that the difference between total public spending and total taxes raised is huge. In 2013-14, according to the Scottish Government’s own figures, onshore and offshore taxes raised £54 billion but the public spending bill was £66.4bn, a gap (or deficit) of £12.4bn.

And that was in a year when the price of crude oil was still over $100 per barrel. As everyone knows, the price has collapsed and is now ranging between $50-60 per barrel, prompting the UK government to slash offshore taxes in order to preserve the oil and gas industry and its associated jobs.

That means the immediate future looks even bleaker. The Institute of Fiscal Studies (IFS) has looked at the projections for likely taxes and spending for 2015-16. It reckons the deficit that year would rise to £14.2bn. Allowing for the fact that the UK would also have a deficit, and that some of the borrowing to fill it (about £6.6bn) would come to Scotland, there would still be a tax shortfall of £7.6bn, says the IFS.

So that means, if full fiscal autonomy was introduced in 2015-16, Scotland would likely fall between £7-8bn short on public spending likely to be about £68bn. Interestingly, Nicola Sturgeon, repeatedly pressed about this in a weekend interview, did not dispute the IFS figure.

Instead, she relies on three counter-arguments. Firstly, that onshore tax revenues will grow by about £15bn by 2020. But that will do nothing to cut a Scottish full fiscal autonomy deficit. That is because just under half of Scotland’s present deficit is being financed by UK borrowing and the UK government aims to eliminate all its borrowing for non-capital spending by 2018-19.

If it does that, then every £1bn increase in Scottish tax revenues is more or less swallowed up by £1bn less in public spending that is being paid for out of UK borrowing. By 2020, when the UK is projected to have a slight surplus, Scotland would still have a deficit of between £7-8bn.

The second counter is that any gap can be filled by borrowing. That assumes, since Scotland would still be part of the UK and the sterling zone, that a UK government which is determinedly cutting the UK deficit would be happy to allow Scotland to postpone the achievement of a zero deficit.

Unlikely, I would have thought. And if a Scottish Government was able to circumvent a block on use of relatively cheap UK government borrowing routes and do its own open market borrowing, that would come at a price. Lenders would charge a premium to reflect the higher risks caused by Scotland being a high deficit borrower dependent on unreliable oil revenues. That would further push up public spending.

The third argument, which finance secretary John Swinney relied on in last week’s Holyrood debate, is that having won control of all taxes, he could better manage the tax system and the economy to create higher growth and more tax revenues.

In theory, he could. But there is absolutely no evidence to support that view. You need only look at the countries hardest hit by the 2008 financial crisis, and which desperately need to cut deficits and boost growth, to see that there is no magic fiscal elixir which banishes austerity pain and promotes rapid growth.

Mr Swinney has another defence. While Ms Sturgeon said last week that SNP MPs would vote as soon as they could for full fiscal autonomy, Mr Swinney refused to say at Holyrood last week when it would be introduced.

That’s because, he explained, it would all have to be negotiated with the UK government and that takes time. Why, he said, the taxes which he has taken control of just this year were first proposed for devolution back in 2009. The implication is that full fiscal autonomy would take six years to negotiate and could only come into being in 2021.

Well, excuse me, but wasn’t independence supposed to take just 18 months to achieve? Why, when there is no need to have negotiations over defence, with the EU or Nato or any of the rest of the full nationhood stuff, does a much lesser degree of independence take four times longer to achieve?

This is where the contradictions in SNP policy just become so absurd that it collapses under the strain. I think that Ms Sturgeon and Mr Swinney privately know that, as they know that full fiscal autonomy would exact a terrible austerity price on the Scottish people.

The numbers are stark and the pain they imply can’t be massaged away. They should abandon the effort and ditch the policy.