Sunday, April 23, 2006
THE CASE FOR FISCAL AUTONOMY
Last week I was invited to a lecture on the case for fiscal autonomy in Scotland by Professor MacDonald & sponsored by the Policy Institute & Jim Mather SNP MSP.
The paper he was reading from is here though it is pdf format.
Fiscal autonomy means that we raise our own taxes in Scotland & spend them here. One problem, as raised in a question by David McLetchie is that it is a somewhat slippery term. There is fiscal federalism (ie that some taxes are our responsibility, which, in terms of council tax & the 3p income tax variation we have a bit of already), through to "full fiscal autonomy" (ie we raise all our own money & give an agreed amount for such things as, perhaps, the army & our ambassador to the UN Security Council - which is near as dammit independence). As he pointed out fiscal autonomy can be used to describe anything between the 2. Politics is full of terms like this whose meanings change, indeed I did a letter on 24th Feb here on the subject.
The main point Professor MacDonald made for autonomy is that it provides discipline to Holyrood not to waste money. Currently they have little incentive to hold back government spending or real economic incentive to grow the economy (though it is my opinion that the voters would reward it since they certainly have an incentive to be wealthier) & thus the tax base. The main points against are the practical rather than ethical one that gains of the Barnett formula (which as the report acknowledges has been "so generous") would be lost & that a relatively small economy, particularly one dependent on one commodity, is more susceptible to economic swings (this applies particularly to oil whose price has recently gone from $20 to $70 a barrel).
The Professor did, credibly, suggest that bringing tax raising closer to spending is inherently more efficient (that studies in the US relating to cities more than states show that growth improves one standard deviation with levels of financial devolution). He also pointed out that if we achieved growth we would eventually pull ahead of UK wealth levels & therefore we would no longer need to benefit from Barnett.
He was very firmly in favour of cutting corporation tax (currently a reserved matter) & income taxes saying that each 10% cut in corporation tax leads to a 1-2% increase in growth. As regulars here will know this is very very much what I believe though it is good to have somebody who knows more than me confirm it. Thus if Scottish corporation tax were cut from 30% to 12% we could expect our growth to increase about 3% to at least the 4% predicted by the SNP. Clearly the cutting of regulation, business rates, cheap nuclear power, lower income tax, improved infrastructure (ie roads), planning restrictions on housebuilding removed etc. could be expected to bring us up to or indeed significantly above the Irish rate. The vital thing to remember about growth is that it is a permanent & compound function so that if increase we our national income 9% in one year we not only keep that increase next year but it would be 19% next year & our national income would double in 8 years (check it out). Thus Jack McConnell is not overstating it when he says growth should be our "number one priority", it is merely unfortunate that he has done nothing. When I asked Professor MacDonald, after the talk, which particular taxes were most important to growth he said, in order, that corporation tax & income tax were the ones.
Afterwards we had nosh & generally got to meet people. I met Jim Mather (I have emailed him in the past supporting some letters he has had in the Scotsman) & he said he was pleased to have a face to go with the emails. 2 people separately asked me if I was an economist which I found flattering but maybe just means I am opinionated. In discussing the future of UK Federalism, in which I believe, somebody pointed out that while the English have refused regional devolution if we were to get our economy growing faster than the UK as a whole then federalism as such would be much more attractive. Currently Holyrood appears more in terms of an 'orrible warning than a good example. We could change that. My opinion is that if Scotland achieved growth either Westminster would follow our example & we would become the most advanced part of a particularly rich & successful federal state, or they wouldn't & the ever growing divergence would make separation inevitable. I think this is a position any Scots patriot could work towards.
I hope that the debate will resolve itself not so much along the lines of whether we are for or against "fiscal autonomy" & what that means as which particular elements of fiscal policy it would be economically beneficial to devolve. Personally I would like to see a groundswell in favour of devolving corporation tax & possibly some use of the 3p income tax reduction. Anything further before we have used the income tax varying powers would be grandstanding. Eventually I would like to see a federal UK settlement which produces a number of similarly sized units. One historic advantage of federation is that the different federal units to try different solutions & all learn from the good examples (& even more from the 'orrible warnings).
The paper he was reading from is here though it is pdf format.
Fiscal autonomy means that we raise our own taxes in Scotland & spend them here. One problem, as raised in a question by David McLetchie is that it is a somewhat slippery term. There is fiscal federalism (ie that some taxes are our responsibility, which, in terms of council tax & the 3p income tax variation we have a bit of already), through to "full fiscal autonomy" (ie we raise all our own money & give an agreed amount for such things as, perhaps, the army & our ambassador to the UN Security Council - which is near as dammit independence). As he pointed out fiscal autonomy can be used to describe anything between the 2. Politics is full of terms like this whose meanings change, indeed I did a letter on 24th Feb here on the subject.
The main point Professor MacDonald made for autonomy is that it provides discipline to Holyrood not to waste money. Currently they have little incentive to hold back government spending or real economic incentive to grow the economy (though it is my opinion that the voters would reward it since they certainly have an incentive to be wealthier) & thus the tax base. The main points against are the practical rather than ethical one that gains of the Barnett formula (which as the report acknowledges has been "so generous") would be lost & that a relatively small economy, particularly one dependent on one commodity, is more susceptible to economic swings (this applies particularly to oil whose price has recently gone from $20 to $70 a barrel).
The Professor did, credibly, suggest that bringing tax raising closer to spending is inherently more efficient (that studies in the US relating to cities more than states show that growth improves one standard deviation with levels of financial devolution). He also pointed out that if we achieved growth we would eventually pull ahead of UK wealth levels & therefore we would no longer need to benefit from Barnett.
He was very firmly in favour of cutting corporation tax (currently a reserved matter) & income taxes saying that each 10% cut in corporation tax leads to a 1-2% increase in growth. As regulars here will know this is very very much what I believe though it is good to have somebody who knows more than me confirm it. Thus if Scottish corporation tax were cut from 30% to 12% we could expect our growth to increase about 3% to at least the 4% predicted by the SNP. Clearly the cutting of regulation, business rates, cheap nuclear power, lower income tax, improved infrastructure (ie roads), planning restrictions on housebuilding removed etc. could be expected to bring us up to or indeed significantly above the Irish rate. The vital thing to remember about growth is that it is a permanent & compound function so that if increase we our national income 9% in one year we not only keep that increase next year but it would be 19% next year & our national income would double in 8 years (check it out). Thus Jack McConnell is not overstating it when he says growth should be our "number one priority", it is merely unfortunate that he has done nothing. When I asked Professor MacDonald, after the talk, which particular taxes were most important to growth he said, in order, that corporation tax & income tax were the ones.
Afterwards we had nosh & generally got to meet people. I met Jim Mather (I have emailed him in the past supporting some letters he has had in the Scotsman) & he said he was pleased to have a face to go with the emails. 2 people separately asked me if I was an economist which I found flattering but maybe just means I am opinionated. In discussing the future of UK Federalism, in which I believe, somebody pointed out that while the English have refused regional devolution if we were to get our economy growing faster than the UK as a whole then federalism as such would be much more attractive. Currently Holyrood appears more in terms of an 'orrible warning than a good example. We could change that. My opinion is that if Scotland achieved growth either Westminster would follow our example & we would become the most advanced part of a particularly rich & successful federal state, or they wouldn't & the ever growing divergence would make separation inevitable. I think this is a position any Scots patriot could work towards.
I hope that the debate will resolve itself not so much along the lines of whether we are for or against "fiscal autonomy" & what that means as which particular elements of fiscal policy it would be economically beneficial to devolve. Personally I would like to see a groundswell in favour of devolving corporation tax & possibly some use of the 3p income tax reduction. Anything further before we have used the income tax varying powers would be grandstanding. Eventually I would like to see a federal UK settlement which produces a number of similarly sized units. One historic advantage of federation is that the different federal units to try different solutions & all learn from the good examples (& even more from the 'orrible warnings).
