Thoughts on The Smith Commission

I have been involved in a number of Smith Commission discussions and helped pull together a submission that was backed by over 60 business people.  That process helped me crystalise some thoughts which I may as well share here.

• Although the Commission is tasked with progressing “the vow” we should not lose sight of the fact that the referendum  was not a vote “for the vow” but a vote answering the question “should Scotland be an independent country”
• The referendum showed definitively that a significant majority of the Scottish people favour retaining the Union (and polls consistently showed this was the case before the formal vow was made)
• When interpreting how the vow should be interpreted and translated into action, the over-riding principle of retaining the Union should therefore take precedence over devolving more powers (if such devolution jeopardises the sustainability of the Union)
• It can be argued that the bed-rock of support for the No vote was built more on the language of “pooling and sharing” than “devolving more power”.  It would be interesting to see how often the phrase “pooling & sharing” was used  during the campaign; it is a principle that must surely remain at the heart of any recommendations

Pooling & Sharing

If we accept that these principles must underpin any future settlement then the Commission must consider what test should be applied when assessing whether any solution achieves equitable sharing. It appears to me there are three broad options;

1. Ensuring minimum standards of living are achieved nationwide before allowing any surplus to remain where it is generated
   or
2. Ensuring as far as possible an equal standard of living nationwide, independent of where the wealth is generated
   or
3. Allowing wide standard of living disparities nationwide based on where the wealth is generated by matching public expenditure to tax revenue generated

It is worth noting that (by lucky chance) the current Barnett Formula and current levels of oil & gas revenue are such that (broadly speaking) both 1 and 3 are simultaneously achieved.

This meant that during the Referendum campaign any arguments about e.g. food banks and child poverty could be credibly countered by showing that these issues were no more prevalent in Scotland than rUK (so 1 is being achieved) whilst at the same time any “we’d get to keep our oil” arguments could be credibly countered by the observation that Scotland effectively does already in the form of higher public spending (so 3 is being achieved).

Any new settlement must recognise that these two principles are not sustainably compatible.  The oil & gas boom of the 80’s meant that Scotland “lost out” in terms of principle 3 during that period. Perhaps more pertinently; as oil & gas revenues decline, applying principle 3 would lead to Scotland losing out in terms of principle 1.  This was crucial to the more considered economic arguments during the referendum: looking back as far as the 80’s we’d have been better off as an independent country but looking forwards now many of us believe independence would have made us worse off. This realisation was surely an important factor in the No vote.

Whether from a selfish “Scottish self-interest” perspective or a desire to respect the vote in favour of the principle of "pooling and sharing", principle 1 (equalisation of base living standards as the first priority) must surely underpin any solution proposed.

The Business Perspective

From the narrow business perspective I would argue for the principles of minimum friction costs and a level playing field across the UK.

Given the high proportion of businesses trading UK-wide, allowing differential corporate taxation rates is likely to be value destructive.  The friction costs associated with accounting separation and/or tax avoidance motivated accounting policies (manipulating where profit is reported) would be net value destructive to the whole UK.  It is important that the constitution is not hijacked as a crude tool for addressing regional development needs; regional development initiatives should be subtle and targeted to ensure any corporate reward is closely linked to true value/job creation.  Regional need is not a uniquely Scottish issue so should not be addressed with a uniquely Scottish solution.

The same argument applies for Capital Gains Tax; we don't want to create tax avoidance reasons to manipulate where in the UK capital gains are realised.

Employment legislation should also be a level playing field.  For example: allowing differential minimum wage levels within the UK would be value destructive - a higher minimum wage in Scotland would damage competitiveness of Scottish businesses and cause some businesses to move South at the expense of Scottish jobs; a lower minimum wage would be be potentially damaging to social welfare by encouraging a regional low-wage economy.

VAT rates should remain harmonised.  For online retailers and national retail chains, differential VAT rates would increase retail price management complexity (different price files for North and South of the border, differing retail pricing online based on delivery address) create additional reporting costs (separation of revenue reporting) as well as creating tax tourism opportunities for consumers.  Changes to VAT rates are a significant burden to retail businesses.

Given common language and small travel distances, talent is relatively mobile within the UK (compared to across Europe where language is a barrier or across the US where distance is a greater issue).  Relatively small differentials in personal taxation levels are therefore likely to have a material impact on senior talent location; this can of course be a good or bad thing depending how it is managed.  But the bigger issue arguing against full devolution of personal taxation is of course that of EVEL (English Votes for English Laws).  Given the dominance of England within the UK economy, English taxation policies would massively influence the wider UK economy - to lose influence over English taxation would be to lose influence over the wider economy and our shared currency and ultimately our capacity for social welfare spending.

So I conclude that whilst "more powers" is a superficially attractive concept, the devil as always is in the detail.  "More powers" could - if not carefully calibrated - lead to the dismantling of the very benefits of Union that the Scottish people voted so overwhelmingly in favour of retaining.