evanEvan Williams looks in detail at what full fiscal autonomy, the Scottish Government’s central demand to the Smith Commission, actually means for Scotland.

 

We don’t know what Archimedes would have thought about the devolution of powers for Scotland but he was undoubtedly right, that given a lever and solid foundations you can move the world.

The Smith Commission, set up as promised, is working to build consensus around how to strengthen the powers of the Scottish Parliament within the UK. Each of the five parties represented in the Scottish Parliament has made a submission exploring what powers and responsibilities can and should be managed in Scotland and those that should remain the competence of the UK.

The nationalist government’s submission to the Smith Commission is heavy on demands for levers, but rather lighter on the firmness of the base from which they might be used. Following the overwhelming rejection of separation by the Scottish People it is disappointing that the nationalists’ contribution to the debate about the right mix of powers for a devolved Scotland is to demand all the tax and spend that the people decided not to give them in the referendum.

The Greens, who also favour separation, are far more measured in their submission and they are to be commended for having applied themselves to thinking about how to control in Scotland those things over which a distinctive Scottish perspective might usefully be applied by the Scottish Government. The liberals adopt a strongly federalist approach to their submission in which they clearly envisage a roll out of more federal structure not just for Scotland but across the UK.

The Tories submission marks a seismic shift in their perspective making them clearly a pro devolution party. Their virtual coalition with the minority SNP government between 2007 and 2011 has clearly left them far more sanguine about the opportunities for Scottish devolution.

Scottish Labour’s submission builds on the progressive transfer of powers already agreed in the Scotland Act 2012 and already on their way to Holyrood. Scottish Labour’s offer is progressive without being revolutionary. All the parties will need to move some and my sense is that there is an appetite within Scottish Labour for much flexibility.

 

Governments can do four things; they can tax, they can spend, they can regulate, and they can borrow. Deciding the balance of where these four things are controlled between Scotland and the UK is the task facing the Smith Commission.

The Scottish Government’s ‘Government Expenditure and Revenue – Scotland’, for the year 2012-13 (GERS) gives the most up to date set of numbers available.

Total tax collected in Scotland is £53.147 billion, including North Sea revenues (as per SG estimate of geographic share). Total public expenditure in Scotland was £65.204 billion. This combination is illustrated in the diagram below – taxes in on the left and spending out on the right. The size of the bar represents the value of the tax income or expenditure.

ew graph 1

The gap between income and expenditure (fiscal deficit) of £12.058 billion represents borrowing required, or transfers from the UK required, to meet spending. A fiscal gap in any one year is not of itself a concern; governments borrow money from time to time. But Scotland has had a fiscal deficit in all but one year since 1990/91 as illustrated in the following chart.

ew graph 2

Incidentally some people made a great deal of the relative fiscal balance between UK and Scotland as though that was an argument that the fiscal deficit in Scotland didn’t matter so long as it were lower than the UK. The following graph represents the relative fiscal balance since 1990.

ew graph 3

 

This shows that for 2 out of every 3 of the last 21 years the relative fiscal balance was negative in Scotland, meaning under a full fiscal autonomy regime Scotland would have required more borrowing as a proportion of GDP than the UK.

On the income side one of the key sources of volatility is tax receipts from oil. With the oil price languishing in the $80s per barrel compared to over $110 for much of the past few years, further instability is to be expected. Fiscal Affairs Scotland have studied this and published a paper recently and I don’t intend to rehash that here.

In the year 2012/13 the revenues from oil fell by around 44%, representing a loss of more than 8% of the total tax revenue income for Scotland. The current pooling and sharing arrangement based on the Barnett formula ensures Scotland’s ability to fund public services is based not on the vagaries of global oil prices but on a share of UK public spending. Even after the worst recesion in generations and an austerity obsessed UK government the block grant to Scotland is reduced by not by more than 8% but by a more modest but still challenging 1.7% in real terms (2015-16 Scottish Government Budget Statement).

The problem for the Smith Commission then, is more than simply rearranging tax and spend between Scotland and UK. It is also to maintain a relatively stable and predictable level of income for the Scottish Government.

In the same year 2012/13, the Scottish Government and local government directly controlled £38.328 billion of the expenditure, which is 72% of tax receipts and 59% of all spending. The following graphic illustrates how expenditure in (or for) Scotland is controlled.

On the left of the diagram is the expenditure by category, and on the right how the expenditure is controlled. ‘S&LG’ represents spending in the direct control of the Scottish Government and local government in Scotland. ‘UK’ represents direct UK expenditure. ‘Non Id UK’ represents non-identifiable expenditure which is expenditure that cannot be allocated to a particular country of the UK but is instead incurred on behalf of the UK as a whole, of which the lions share is defence. Finally debt interest payments are self explanatory. The thickness of the lines going from each budget denotes the value of the expenditure associated with it.

ew graph 4

Nobody is seriously arguing that defence or international development should not remain controlled by UK. Nobody serious is suggesting that Scotland should not be liable for it’s share of debt interest. This leaves about £17 billion in expenditure in the hands of the UK Government, of which £10.4 billion is payments of state pensions (included within social protection expenditure). This leaves a little over £6.5 billion over which there is some possibility of argument.

The Scottish Government already controls virtually all expenditure in the following areas:

  • Health,
  • Education,
  • Transport,
  • Public and common services,
  • Public order and safety (police and justice)
  • Enterprise and economic development,
  • Agriculture, forestry and fisheries,
  • Environment protection,
  • Housing and community amenities,
  • Recreation, culture and religion.

The Scottish Government already has a considerable array of levers at its disposal. What is curious is that their main demand is to move away from the firm ground of pooled and shared resources to a far more volatile and uncertain ground of fiscal autononomy with all of the disadvantages of a small economy coming out of recession.

When you next hear the Scottish Government complain about how tough the budget settlement is, just remember that the cuts of an austerity government have far less impact than the cuts that their misguided fiscal autonomy demands.

Archimedes would agree that more levers (when you have many already) is no substitute for a firm place to stand.