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Wednesday, June 22, 2011

More Powers for Scotland - What Should be Supported and What Shouldn't

  This is my latest article from the ThinkScotland site (somewhat improved by Brian editing it into equal sized paragraphs). Please put any comments there.

THE NEW SNP government has said that its priority is to change the new Scotland Act to include, gaining control of the Crown Estates; enhanced borrowing powers; and control of corporation tax.
Westminster has said it can only have the borrowing powers – what should it have done? Let’s deal with the ideas one by one.
The Crown Estate stuff is to get control of the foreshore and the "profits" to be made from setting up lots of sea turbines there and making cheap electricity.
Good luck on that one. The SNP's insane attachment to renewables has been discussed by me before (1) and though the party remains unpersuaded by me, neither has anybody in the party disputed any of my facts.
“Renewables” is a subsidy generating industry more than an electricity producing one. The only “profits” that will ever be made from them will be from the subsidy put into them. Diverting some of the profits into the Scots treasury so that they can increase the subsidy is a perfectly fair way of letting Salmond dig a deeper hole for himself.
To be fair, the SNP's procedure of putting up an X-Prize of £10 million for whoever can produce a "commercial" sea turbine design is an intelligent and innovative way of doing this really stupid thing. Prizes for achievement are provably a far more effective (about 60 times more per £ invested) way of developing new technology than the traditional handing of grants to “preferred bidders” and government employees.
If a truly commercial sea turbine is possible that is the way to develop it, but because renewable power is so dilute the laws of physics strongly suggest it isn't.
Still, the SNP should get credit for proposing a method more progressive than any other government in the world has (though John McCain wanted to use such a prize to develop improved batteries and Newt Gingrich has long been on record as proposing to use X-Prizes on a whole range of projects, all of them more sensible than windmillery).
But giving this power to Holyrood to tax something useless will be no skin off Westminster's nose so what’s the problem?
The borrowing power might be little skin off its nose either but it should not be given. The problem with letting governments borrow money is that they tend to do it and leave repayment to the next generation. We have seen far too much of that lately.
If Holyrood gets that power the pressure to “spend its way out of recession” will be enormous. We could find ourselves in the situation of Greece even before we might become independent. Maybe from the Westminster point of view that looks useful, preventing us choosing independence, but it would also reduce our constructive role in the union. If the union is really to have a future, as I hope, it will be because both parties benefit from it. Independence is only an issue because the British state has failed so abysmally over the past century and a lot of that is because we, particularly but not exclusively Labour governments, have been able to pay for more government than is good for us – out of borrowing.
The only way this could work would be if Westminster was and was seen to be absolutely not guaranteeing the borrowing, in which case it might be instructive to see Holyrood having to pay a higher interest rate than the UK government.
But the big issue is corporation tax.
Cutting corporation tax, along with cutting regulations, particularly building regulations, have been the prime causes of Ireland's spectacular growth (2) from 60% of our per capita GNP in 1989 to what is still, despite its banking crash, significantly higher than the UK's. This has been recognised for some years in Scotland, where we are more attuned to the Celtic fringe than in Westminster (though not as much as in Northern Ireland). Leaders of all parties here have suggested cutting CT here and it is the most noticeable issue on which the Scots, normally considered to be left leaning, are noticeably to the right of the UK average (3).
The SNP first promised to promote cutting CT before the 2007 election and I believe it was a significant factor in its popularity in a very close election. After it came to power Salmond did nothing noticeable to redeem this pledge
This is explainable because it is a power in Westminster's gift. With a little more gumption, however, the SNP could have used the power to give grants matching a proportion of CT thereby circumventing the limits as described in Bruce, A. and T. Miers (2003) Scotland's Hidden Tax Cutting Powers, Policy Institute (4).
Perhaps the reason for not doing so was a lack of gumption or perhaps it was the SNP's vested interests. It is, after all, officially a socialist party. Nor did the SNP get any pushing from the other parties who, united in the Calman Commission, determined to give us almost any power except CT on the grounds that “Divergent rates of Corporation Tax across the UK would create economic inefficiencies as firms react to tax consideration” (5). I.E. don't do it because it would work. The description of reacting to price as an “inefficiency” would not have earned the approval of Adam Smith.
The argument for Westminster parties here is that if Scotland (& Northern Ireland, which is even more determined to get the same power as its neighbour) gets this power they will “steal” jobs from the rest of the UK. I think that is a bad argument for 3 reasons.
Firstly it is openly claiming to sacrifice Scots interests to English ones, and in a way that an independent Scotland could rectify. That is hardly likely to inspire anybody to maintain the union.
Secondly it is an example of Milton Friedman's remark – “Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another”.
Certainly some industries that might choose Scotland might have otherwise gone to England. Some would have gone to Ireland, or France, or Germany, or the USA, or Dubai. It’s a big world out there. And many investments simply wouldn't have been made, the investors spending it on wine women and amateur dramatics. That's how free enterprise works. Moreover, over time successful investments spill over borders. A growing Scottish economy is thus good for the Westminster Exchequer and for English workers.
Thirdly, and more subtly for those who want a successful economy south of Berwick, is the example it would give. Just as Ireland has been a good example for Scotland, leading Scots to appreciate the benefit of pro-growth policies a successful Scotland would encourage the same understanding in England. If Scotland was cutting CT successfully voters, particularly in the north of England would be receptive, indeed clamouring for, similar cuts there.
George Osborne has made a small CT cut and I am certain would like to make a bigger one if it was a priority with the voters. Tax competition, between very similar economic areas in a beneficial direction is unequivocally a good thing. The fact that different states in the USA compete over taxes is one of the reasons why its economy has historically been so successful and a strong argument against both a unitary state and full separation.
Calman’s complaint against tax competition only makes sense if the purpose of government is to get away with as much taxation as possible. Free market radicals, as Scots once were and the present Westminster government claims to be, should welcome Holyrood getting the power to cut the single most destructive tax on economic growth.
There is also the effect on the SNP of them getting what they ask for. The SNP is a strange party with outright libertarians all the way through to Marxists and “environmental” technophobes in its tent. I have suggested that many of them may have been happy not to have been called on to fulfill their free market “Celtic lion” promise (and to have been able to blame the English into the bargain). If they get the power to cut CT they have painted themselves into the corner of having to use it.
If George Osborne were then to use his power to do the same they would have to do it again no matter how many sacred cows had to be sacrificed. The voters would insist on it.
And in due course, with improved growth, both sides of the border would prosper.

(1) Renewable lunacy

(2) Celtic Tiger: Secret of Success

(3) 74% of Scots support business tax cut

(4) Scotland's hidden tax cutting powers

(5) Blog on Calman Report on CT and the leaders who have called for the power to cut it

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