With Great Fiscal Power Comes Great Fiscal Responsibility

The issue of "further powers" for Holyrood was discussed at Bute House on Friday when our Conservative Prime Minister met with our SNP First Minister.

This picture is a stark illustration that those who argued "vote SNP and get a Tory government" might just have had a point. Certainly if you buy the argument that Labour's woes in England were exacerbated by Tory warnings about the risks of an SNP influenced Labour government, it's hard not to conclude that the SNP have contributed to the Conservatives' success.

No matter; we are where we are.

Sturgeon is now able to negotiate on behalf of Scotland with the extraordinary mandate that the Scottish people have given her party. They have 56 of Scotland's 59 MP's at Westminster (in case you hadn't heard).

The very fact that the meeting took place in Scotland may have been relevant; was this a conciliatory decision on Cameron's part? Of course he may just have been wary of holding the meeting at Number 10 in case Sturgeon attempted to deliver on her promise to lock him out.

What is clear is that the debate about more powers is going to dominate our political discourse for some time to come.

I confess to a certain weariness with all of this.  We had the referendum, we had the Smith Commission, we've had the general election, we are less than a year away from the next Holyrood election and of course we now have an EU referendum to look forward to.  It would be nice to think that somewhere in amongst all of this electioneering, referendum campaigning and constitutional negotiation our politicians would be able to pay some attention to the small matter of running the country.

But the drip-drip water-torture of the Nationalists' demands for more powers isn't going to stop anytime soon.  They've been at this for a while. I was perusing a rather well-stocked bookshelf the other day and was amused to stumble across this book published by "London Scots Self-Government Committee" nearly 75 years ago.

I confess it requires more stamina and patience than I possess not to be at least tempted to consider simply ceding to the SNP's demands for Full Fiscal Autonomy (FFA) - as long as it really is full autonomy, including the removal of any Barnett-style subsidy.

The SNP have back-tracked spectacularly on this demand of course. In a move that must surely have had many of the less well-informed Yes voters scratching their heads, SNP MP & economist George Kerevan went on record last week to say

"For Scotland to accept fiscal autonomy without inbuilt UK-wide fiscal balancing would be tantamount to economic suicide"

Remember the transparently misleading economic claims made by the SNP during the Independence Referendum? Their declared determination to "kick the last Tory out of Scotland"?  In that context it would be understandable if David Cameron adopted the position - voiced by many senior figures in his party - that he should give the Scots the Fiscal Autonomy they appear to have asked for and see how they like it. After all, it would help his desire to implement English Votes for English Laws and be economically beneficial to the rest of the UK.

So it is to Cameron's immense credit that his statement after the Bute House meeting was so unequivocal;

“I think the option of full fiscal autonomy is not a good option for Scotland inside the United Kingdom. I think it would land Scottish taxpayers with £7 billion of extra taxes or the Scottish people with £7bn of extra cuts.  I believe in the solidarity at the heart of the United Kingdom, so it is an honest disagreement between the First Minister and me about this. But we will deliver a stronger Scottish Parliament. Be in no doubt.”

As an aside: the "honest disagreement" wording implies that Sturgeon was in fact arguing for Full Fiscal Autonomy without "fiscal balancing" (because that's where the £7bn comes from).  The implication is that she was arguing for what her own economist MP describes as "economic suicide". Either we have a kamikaze pilot in control of Scotland's economic destiny or Cameron is playing word-games. What's scary is I find either option equally credible.

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"With great power comes great responsibility"

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Whether you think that quote is attributable to Voltaire or Spider-Man's uncle Ben, it has resonance in this debate.

The reason why the FFA debate has become so confused is that when the SNP now argue for Full Fiscal Responsibility with "UK-wide fiscal balancing" they are in fact arguing for fiscal power without the associated fiscal responsibility.

As long as we continue to share a currency, a central bank and responsibility for our share of the national debt then our economic fates remain interconnected.

Given that reality it would clearly be unacceptable for a Fiscally Autonomous Scotland to continually run a higher deficit and to be contributing disproportionately to our national debt. Whether some of that debt is ring-fenced to Scotland is beside the point - if the ability of Scotland to bear its share of the national debt becomes compromised, the cost of that would fall back on the rest of the UK.  If Scotland is unable (or unwilling) to control its own affairs such that its deficit is in-line with the rest of the UK (i.e. without the need for balancing fiscal transfers like those Barnett delivers), it is only reasonable that the rest of the UK retains control over the fiscal levers.  You can't have the economic power if you don't take the economic responsibility.

This is of course why the Yes campaign floundered so badly on the issue of currency; you can't be truly independent and share a currency, you have to adhere to fair fiscal constraints. Ask Greece.

So let's move on assuming that FFA is off the table. This means we need to focus our attention on the debate that was reignited by the referendum and progressed through the Smith Commission: what further powers (in addition to Smith) should be devolved to Scotland?

To sensibly progress this debate I'd suggest we have to ask not just how any further devolved powers could be used but also how they could be abused. Is there a risk that these powers could be used in a way that might damage the UK as a whole? We have to ask who will be wielding these powers and to what end.

Fortunately the SNP's written constitution is very clear on this matter

"The aims of the party shall be (a) Independence for Scotland [..] (b) the furtherance of all Scottish interests'"

If the Independence Referendum taught us anything it is surely that for the SNP clause (a) trumps clause (b) every time. Nobody can now seriously believe that the SNP were not aware Independence would have made us poorer.  Remember that FFA is effectively Independence without the associated independence downsides (most notably currency and potential job losses as businesses who serve the UK from Scotland relocate to avoid exposure to export risk).  Even the SNP themselves now tacitly accept - or in Mr Kerevan's case explicitly state - that Scotland's economy is in far worse shape than that we share by being an integral part of the UK.

A simpler illustration of this point is a quote that I have heard attributed to a civil servant describing John Swinney's motivation: "You have to remember, John would live in a cave to be free".

If we're devolving power into the hands of Nationalists motivated by the destruction of the UK then some of us might conclude that devolving more power is not necessarily a good thing.  If you think I'm over-stating this case, let me remind you of the written SNP candidate statement made by George Kerevan

".. After Home Rule, independence will follow as the UK economy implodes .."

This is the same Mr Kerevan who the Scotsman recently revealed is the SNP member invited to help "draw up plans for a federal UK".  Just think about that for a moment.

But it's not just about the potential for what some of us would see as malicious misuse of these devolved powers. After all, if you're one of those who believe the paranoid conspiracy theories about Westminster's vendetta against the Scots, you are just as likely to distrust how those powers are used now.

The more subtle point here is that devolved powers may create a situation where rationally self -interested behaviour could still be value destructive for the UK as a whole.

Take two of the issues that appear high on the SNP's agenda when they argue that the Smith Commission proposals do not go far enough; the Minimum Wage and Corporation tax.

I'm intuitively in favour of raising the minimum wage.  We have a problem with in-work-poverty and shifting some of the burden away from the state and on to business doesn't seem unreasonable to me. But as I argued in the Smith Commission submission I contributed to: 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 (or entrepreneurs) 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.

I've also covered the corporation tax argument elsewhere on this blog. I'm a businessman who would benefit from lower corporation tax in Scotland but I think it's a bad idea for three reasons

• Using differential corporation tax rates to shift business activity around the country is value destructive to the UK as a whole - it simply reduces the UK's overall corporation tax take and hands money back to profitable businesses instead of targeting the less well-off in society

• It creates incentives for creative accounting within businesses to ensure profits are reported in low tax areas of the UK without necessarily needing to change any real economic activity.  Just look at the tax avoidance strategies of Google, Amazon, Starbucks etc. - if they'll do that across international tax borders we can safely assume they would apply similar accounting strategies within the UK
  
• It places an additional reporting burden on UK businesses who would have to report (and audit) Scottish profit separately from rUK profit. Trust me that for many businesses this would be a non-trivial exercise.

If the argument in favour of lower regional corporation tax is about attracting international inward investment then you are simply engaging in a race to the bottom. Helping internationally mobile businesses pay less tax seems to me incompatible with the objectives of social justice.

There are strong, rational, UK-wide arguments against devolving the ability to set the minimum wage or corporation tax rates.

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The Smith Commission may have been necessarily rushed but it seems to me they did a pretty good job. They defined a series of further powers and a set of principles that delivered against "The Vow" whilst limiting the risks of these powers causing UK-wide value destruction. Of course they didn't go far enough for the SNP; nothing short of full independence will ever be enough for the SNP.

So surely it would be appropriate at this stage to focus on delivering the powers already proposed and seeing how these are actually used before pushing for yet more devolution?

Without FFA the SNP may be spared from showing how their "anti-austerity" rhetoric would translate into action if they were actually accountable for the resultant debt ... but with Smith powers they should be able to demonstrate their progressive credentials by redistributing the tax burden.

It will be interesting to see how the SNP's popularity survives when they start demanding a little less and are forced to start delivering a little more.

Smith Commission and Corporation Tax

I try to avoid writing these posts during working hours as I have a business to run; but this morning I was forwarded a link to this Scotland Tonight interview and it irritated me so much I have to get this out of my system.


It features our old friend Gordon McIntyre Kemp, Chief Executive of Business for Scotland.  I will resist an ad hominem attack and I've said my piece about Business for Scotland and their Smith Commission Submission so let me focus instead here on the specific question being debated, that of income tax devolution.

To be absolutely clear: I'm a businessman who would benefit from lower corporation tax in Scotland but I think it's a bad idea for two reasons

• Using differential corporation tax rates to shift business activity around the country is value destructive to the UK as a whole - it simply reduces the UK's overall corporation tax take and hands money back to profitable businesses instead of targeting the less well-off in society


• Worse than that: it creates incentives for creative accounting within businesses to ensure profits are reported in low tax areas of the UK without necessarily needing to change any real economic activity.  Just look at the tax avoidance strategies of Google, Amazon, Starbucks etc. - if they'll do that across international tax borders we can safely assume they would apply similar accounting strategies within the UK

I could take apart McIntyre-Kemp's arguments one-by-one but frankly what's the point?  We know he leads an organisation who's very raison-d'etre is to campaign for independence and more powers for Scotland. That's fair enough; he and his members are entitled to think that way.  Unfortunately for them they are not in tune with the democratic will of the Scottish People.  

The Vow itself states:  "We agree that the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen".  McIntyre-Kemp and his members would I'm sure accept they don't share that view

• His focus and that of Business for Scotland is not "sharing resources equitably" but rather on Scotland getting its hands on as much resource as possible


• Their concern is not "defence, prosperity and welfare of every citizen" - they would be compelled to append the words "of Scotland" to that sentence

But even given that context some of McIntyre-Kemp's arguments are a little strange

• He points to discussions around possible devolution of corporation tax to Northern Ireland and suggests the "bit of water" which separates us doesn't make a difference.  Mr McIntyre-Kemp clearly isn't involved in the physical movement of goods if he really thinks that.


• He complains about not being able to control VAT on tourism activities - surely if its a good idea for Scotland it's a good idea for the UK?  Of course arguing to reduce taxes you don't control is easy when you don't have to live with the consequences of reduced tax revenue that might result.  The Nationalists do that a lot.


• He complains about not having control of NI whilst we're being offered full control of income tax. Let's be absolutely clear on this one: the proposed new powers allow the Scottish Government to redistribute wealth through income tax policy changes - nobody seriously argues that not having control of NI is a hindrance to that


• He moans about not having power over oil & gas taxation.  You might have noticed that Nationalists have been a little quiet about that one so it's surprising to hear this on his list. The block grant would be reduced on day 1 by the amount of oil & gas revenues transferred and it would be damaging to Scotland's economy if those revenues continue to decline.  I guess Mr McIntyre-Kemp lacks the economic pragmatism of some of his Nationalist bed-fellows.

McIntyre-Kemp suggest we need to "get serious about the powers that are needed". Maybe he and his memers should "get serious" about deciding what they will do with those we'll be getting.  

• Full control of income tax: so we can redistribute wealth, we can reduce or increase the total income tax burden.  So what are their proposals?


• New powers to make discretionary payments in any area of welfare: so we can use money raised through income taxation or saved in areas of devolved cost to help those less well off in our society.  So what are their proposals?

Instead of using his valuable airtime to make a positive case for how these new powers could be used he - with wearying predictability and embarrassing inaccuracy  -  resorts to asserting that these powers do not represent "substantially more devolution ... unless they meant substantially less" and complains "we've been promised more powers but we're not getting them".  He even argues the powers mean "effectively we can't have a labour government".

The SNP, Business for Scotland and Mr McIntyre-Kemp have become so used to complaining about what we don't have that they appear incapable of changing tack. We are getting substantial new powers; we will face tough tax and spend decisions. Making constructive recommendations around what we'll do with these powers is a lot harder than simply complaining and blaming others for all of our woes.

I look forward to seeing how the Nationalist organisations propose embracing and using these new powers - they are substantial enough to expose expose their "all things to all men" promises and to require them to stop ducking economic reality.

No wonder they're not happy.

Smith Commission: A Simple Summary

The Report itself is very short so I do recommend anybody who is even vaguely interested just reads it (> Smith Commission Report).  I've also appended the published Vow at the foot of this article to remind those who seem to forget what it actually said.

To pluck out the highlights and their implications;

Permanence of the Scottish Parliament(21)

"UK legislation will state that the Scottish Parliament and Scottish Government are permanent institutions."

This was never seriously in doubt and to suggest it might be was one of the more bizarre arguments used by the Yes campaign. That argument is now dead.

Income Tax Powers (76/77)

"the Scottish Parliament will have the power to set the rates of Income Tax and the thresholds at which these are paid for the non-savings and non-dividend income of Scottish taxpayers [...] there will be no restrictions on the thresholds or rates the Scottish Parliament can set [...] other aspects of Income Tax will remain reserved to the UK Parliament, including [...] the personal allowance"

Some fuss has been made about the personal allowance point (the threshold at which people start paying tax) but all this means in effect is the Scottish Government can't lower the threshold (i.e. can't have lower earners paying tax in Scotland than England).  They can effectively raise it (lifting more people out of paying tax) by setting the initial tax rate to zero (or a nominal amount) and introducing a new threshold and rate to create the effect of a higher personal personal allowance.

Welfare Powers (49/53/54)

"Powers over the following benefits in Scotland will be devolved to the Scottish Parliament: (1) Benefits for carers, disabled people and those who are ill: Attendance Allowance, Carer’s Allowance, Disability Living Allowance (DLA), Personal Independence Payment (PIP), Industrial Injuries Disablement Allowance and Severe Disablement Allowance. (2) Benefits which currently comprise the Regulated Social Fund: Cold Weather Payment, Funeral Payment, Sure Start Maternity Grant and Winter Fuel Payment. (3) Discretionary Housing Payments.

The Scottish Parliament will have new powers to create new benefits in areas of devolved responsibility [...] will also have new powers to make discretionary payments in any area of welfare without the need to obtain prior permission from DWP."

The highlighted paragraph is possibly the most significant in the entire report.  Whilst it's unclear to me what the difference is between "benefits" and "discretionary payments", this appears to mean that although the Scottish Government can't reduce the reserved benefits they can effectively increase them through "discretionary payments".

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These new income tax and welfare powers surely deliver against the "extensive new powers" element of the Vow.  Full control of income tax gives the Scottish Government direct control over the most powerful lever of wealth redistribution; the ability to make discretionary payments in any area of welfare (in addition to full control over the devolved benefit areas) means that the Scottish Government can increase welfare payments for the worse off (if they are willing to find the savings in other devolved cost areas and/or increase the overall income tax take).  When the Yes camp highlight that only a percentage welfare expenditure is devolved it's worth remembering that the only complaint they can really have is if the Scottish Government wanted to reduce certain benefits.  I don't think there are any examples in SNP policy but I could be wrong.

As an example: with these powers the Scottish Government could make Food Banks a thing of the past (if addressing the issue is a simple as the Yes campaign suggested).

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Block Grant Adjustment (95)

"No detriment as a result of the decision to devolve further power: the Scottish and UK Governments’ budgets should be no larger or smaller simply as a result of the initial transfer of tax and/or spending powers, before considering how these are used"

This is just common sense, but I highlight it as it has caused some confusion (on social media at least).  All this says is the Block Grant is adjusted to reflect the initial transfer of tax or spending (i.e. so that on "day 1" there is no net value transfer).  There would be no impact oo the Block Grant as a result of the Scottish Government using these powers (e.g. raising more tax in Scotland wouldn't reduce the Block Grant).


VAT (84)

"The receipts raised in Scotland by the first 10 percentage points of the standard rate of Value Added Tax (VAT) will be assigned to the Scottish Government’s budget. These receipts should be calculated on a verified basis, to be agreed between the UK and Scottish Governments"

This one bugs me a bit as it seems to be a largely cosmetic exercise which introduces unnecessary reporting complexity for businesses.  The block grant will be reduced by a commensurate amount and (appropriately in my view) the Scottish Government will have no power to vary VAT - so the only benefit is to create a direct link between changes in VAT-able consumer demand in Scotland to Scottish Tax revenues.  I might be under-estimating the differential variability in demand for VAT-able goods as a result of Scottish Government policy but this seems like a rather second order benefit to me compared to the pain of UK businesses having to separate reporting of VAT-able revenue between sales made in Scotland and rUK.

Correction: Marek Zemanik (who sat in Smith Commission meetings) informs me on Twitter that they were clear there would be no additional reporting burden for business that instead but would use "agreed estimation methods".  I'm happy to be corrected but leave my initial interpretation to show how wrong I can be!

Minimum Wage

This remains reserved and is one of the SNP's main complaints. I was interested hear Nicola Sturgeon cite the Minimum Wage as one of the "job creating powers" she was disappointed not to see devolved.  Whilst there is an argument for raising the minimum wage to drive consumer demand and free up benefit subsidies (thanks @UnisonDave) I think there is a stronger argument for ensuring we don't create low-wage based competition within the UK.  [For what it's worth I'm in favour of controlled increases to the Minimum Wage on a UK-wide level.]

Corporation Tax

This remains reserved and the SNP are unsurprisingly unhappy given that the only tax policy they offered during the independence referendum was to reduce corporation tax.  The idea that we might start a race to the bottom on corporation tax within the UK (or create low-wage based competition within the UK) seems to me inconsistent with the Vow ("sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen") and - more importantly -the outcome of the referendum.

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The Party Political Implications

I tend to steer clear of party political issues in this blog but it strikes me there are some rather interesting implications of the Smith Commission Report.

Whilst the Vow is still on track it has of course not yet been delivered - it will be the job of the next Westminster Government to implement the agreement.

If the Conservatives gain power it is highly likely that the issue of English Votes for English Laws (EVEL) will become entangled with any implementation of the agreement; if Labour hold the balance of power it would seem implementation is likely to be far smoother (and there won't be an in/out referendum on Europe).

The implications for the SNP are somewhat intriguing. To guarantee delivery of these extensive new powers and to ensure we stay within the EU they should surely favour a Labour Westminster Government.

That the SNP's forecast electoral gains in Scotland will come at the expense of Labour (and increase the likelihood of a Conservative government at Westminster) should cause some head-scratching amongst more thoughtful Scottish voters.  Those interested in seeing more power devolved to a Scotland that remains within the UK and the EU (and arguably those who are interested in seeing social justice delivered through re-distributive policies) may find themselves more drawn to Scottish Labour than the SNP.

The SNP faces another new challenge of course: assuming the new powers are delivered they will surely need to stop blaming Westminster for all of Scotland's social ills and start demonstrating their conviction to actually do something about them; they will finally have to grapple with the difficult tax and spend decisions that they have been able to avoid to date.

We live in interesting times.



Appendix: The Vow

As published by the Daily Record and signed by the main party leaders this is the actual wording of "the Vow":

The people of Scotland want to know that all three main parties will deliver change for Scotland.

We are agreed that:

The Scottish Parliament is permanent and extensive new powers for the Parliament will be delivered by the process and to the timetable agreed and announced by our three parties, starting on 19th September.

And it is our hope that the people of Scotland will be engaged directly as each party works to improve the way we are governed in the UK in the years ahead.

We agree that the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen.

And because of the continuation of the Barnett allocation for resources, and the powers of the Scottish Parliament to raise revenue, we can state categorically that the final say on how much is spent on the NHS will be a matter for the Scottish Parliament.

We believe that the arguments that so powerfully make the case for staying together in the UK should underpin our future as a country. We will honour those principles and values not only before the referendum but after.

People want to see change. A No vote will deliver faster, safer and better change than separation.

Business for Scotland & Smith Commission part II

It has been pointed out to me that my previous post on this topic was a critique of the Smith Commission from the Edinburgh chapter of Business for Scotland (here). That's right: they made multiple separate submissions, presumably on the basis that the more they ask the Smith Commission to read the more they will help the process.

So I have now read the main Smith Commission submission (reference B00246 on SC website).  It's written by Gordon MacIntyre-Kemp who is full-time CEO of Business for Scotland and clearly has a lot of time on his hands.  So here we go again - extracts and translations follow

• "This makes Business for Scotland the largest and most active and influential business group that campaigned in the Scottish Independence Referendum. Our 3,000 members see independence as a both the optimum form of Government for Scotland and also the best way to grow Scotland’s economy, create jobs, address inequality and increase shared prosperity for the people of Scotland."
  
  Translation: We're kind of hoping you haven't read Chokkablog on "Who do Business for Scotland represent" and so will take this assertion at face value.  We see no reason why we can't assert "member" numbers based on email sign-ups to a pledge even though that means as well as members of the general public with no business interests that figure is known to include a number of family pets.  Please don't ask us how many are "stakeholder members" who've paid their £100; we don't answer that question.

• "In the last week of the campaign public polls showed a dramatic shortening of the gap between the YES and NO options with one poll showing a YES lead. We understand that more extensive and reliable canvassing returns for political parties showed a sizeable and growing poll lead for YES."
  
  Translation: of the 100's of official polls only one outlier ever showed a lead for Yes and that wasn't statistically significant.  So we're going to assert a "sizeable and growing" lead based on what we "understand" was the case.  Please ignore all other polls.

• "in the face of what seemed a likely Yes vote"
  
  Translation: you might think "what seemed likely" was what the betting markets or all the other polls were saying but actually we are happy to assert based on approximately no evidence that a Yes vote seemed likely (Ed: are we getting away with this?)

• "for more powers to be devolved to an extent that can be defined as Devo Max/home rule and as close to Federalism as possible within the confines of the UK."
  
  Translation: look we know the vow only said "extensive new powers" but we've srambled around and have found the words "Home Rule" mentioned once by G Brown and once by D Alexander.  We're not going to give you the context of those quotes and we're going to simply elide them with the vow in the hope you won't notice.  We'll also just throw in the term "Devo Max" despite the fact it's not in the Vow and we can't even find any out-of-context quotes to support it.  (Ed: we're not getting away with this are we?)

• "If the Commission fails to do this, or the Westminster parties seek to water down or fail to implement the Commission’s recommendations, then the people of Scotland may decide to challenge the mandate to maintain the UK gained by the offer of extensive new powers."
  
  Translation: in case the threats in our other submission aren't clear enough; agree with our warped interpretation of what No meant or "the people of Scotland" (who we feel mandated to speak on behalf of, apparently) will revolt

• "A survey carried out by YouGov on March 24th for The Times, when compared to another YouGov survey on September 5th for The Sunday Times, demonstrates clearly both the growing support for YES 34 - 45% when compared to No change, which declined from 24% to 15% support."
  
  Translation: there were hundreds of polls carried out. We will select two from which to extrapolate wildly.

• "Increased devolution maintained steady support, falling slightly from 40% to 38%, but as previously mentioned had the advantage of not being critically scrutinised."
  
  Translation: when even our cherry-picked examples fail to support our argument for increased devolution we will dismiss this as not having had the advantage of being critically scrutinised.  Please ignore this observation when it comes to the rest of our thesis which is that this unscrutinised option was overwhelmingly supported. (Ed: this is getting silly now).
• "Assuming that the Yes supporter, given that independence is not on offer, will support maximum devolution then adding the support for increased devolution in these polls would indicate that more than 3/4 of the population at the very least (and a significant majority of  No voters) support the promised modern form of home rule, near federalism and extensive new powers on offer."
  
  Translation: If you cumulate our unfounded and logically disconnected assertions  and ignore the point we've just made about the fact that these options haven't been scrutinised (in fact they haven't even been usefully defined) then we think we can get away with claiming 3/4 of the population support home rule.  Whatever home rule means.

• "The definition of extensive new powers is the responsibility of the Smith Commission, but the starting point cannot be the previously stated promises of the Unionist parties, which lacked detail and any real commitment to extensive change. Those proposals offered the Scottish Government no more than 20-30% control of taxes raised, and given they were offered prior to the rise in the Yes vote in the polls, they were therefore effectively rejected during the campaign as not extensive enough by the Scottish voters."
  
  Translation: the vow has to be honoured but we insist you ignore any other promises made by the winning side because we assert that they were "effectively rejected"  (Ed; huh?).

• "The Smith Commission should therefore not start its consideration from the point of view of what new powers can the Scottish government justify, but from the position that all powers should be devolved unless there is a mutually agreed reason for not devolving that power."
  
  Translation: please assume the vote was Yes and work your way back from there.

Now to be fair at this point the submission does actually knuckle down to some arguments around fiscal powers that are at least relevant and on topic.  I disagree with the extent of fiscal powers they argue for for reasons outlined in my previous Thoughts on Smith Commission blog post.  But moving on;

• "With full fiscal responsibility all future debt generated in Scotland should be allocated to Scotland and all sovereign debt generated outside Scotland should be allocated to the rest of the UK. Scotland cannot exercise full fiscal responsibility when it is possible that a situation may arise where paying a population percentage of the debt interest on debts generated outside Scotland may severally impact on Scotland’s budget in years when Scotland’s accounts might be in surplus. Likewise all historical debt and share of debt interest payments should be allocated to Scotland’s accounts on a contribution basis, not a population percentage basis. In this way Scotland does not start to manage its own finances either paying interest on less debt than it actually generated, nor would it pay more than it was responsible for."
  
  Translation: we want to continue to share a currency but we don't want to participate in the wider principle of pooling and sharing that's required to make this work.  We basically want to have "accounting separation" such that we can engineer the economic conditions of independence whilst maintaining currency union.  We don't care that this argues for economic separation which clearly goes against the will of the Scottish people as expressed through the No vote.

• "The Scottish Government must have full control over oil and gas taxation, revenues and policy; this must include the ability to create a Scottish sovereign oil fund to invest for the future and also to plan for the transition generations hence from domestic oil and gas production to other sources of energy and alternative economic activity in the North East. It is also vital that the blocking of west coast oil exploration and extraction be lifted so that the west of Scotland can benefit from the reserves that potentially lie off the Atlantic coast."
  
  Translation: It's our oil and we're keeping it so please ignore the bit of the vow that says "We agree that the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen".  Oh, and we think you're choosing not to exploit the untold wealth that lies within our grasp because you'd rather pursue deeply unpopular austerity measures than admit it's there. (Ed: really?).

• "Given that (under the current system) the Chancellor of the Exchequer sets a budget for the implementation costs of applying Government policy in England alone and then the Barnett formula sets the budgets for the rest of the UK with an element to address extra costs. With full fiscal responsibility the Scottish Government would not be forced to react to cuts in the English budget but would set spending priorities on the basis of taxation raised, and as explained with the R&D example above bespoke policies could lead to increased taxation revenues and therefore increased spending ability for the Scottish Government."
  
  Translation: we're hoping you haven't read the vow so you missed the bit that refers to "the continuation of the Barnett allocation" because we'd rather scrap it and be fully economically independent.  So please don't keep this element of the vow either (Ed: are you sure about this?).
• "Obviously the currency union will be maintained and the Bank of England will continue in its current role, but given Scotland’s greater fiscal responsibility and the more federal/modern home rule within the UK structure of the relationship then it would seem natural that the Scottish government be granted a seat on the Bank of England monitory policy committee and be represented on most regulatory bodies."
  
  Translation: although we've argued for a level of "accounting separation" (including balance sheet separation) between Scotland and rUK that is incompatible with effective currency union, "obviously" we assume it will be maintained.  Basically we just want independence whilst continuing to share a single currency; you know, like the option that was rejected by all Westminster Parties during the campaign?

• "The interlinked and interdependent nature of economic and fiscal powers means that a slow and piecemeal devolution process will not work."
  
  Translation: It's really complicated so best to rush it.

• "Playing the Westminster party game of trying to figure out what percentage of tax raising powers would slow the Scottish population’s growing support for independence would create a halfway house between what powers Scotland needs to thrive and ultimately become the worst of both worlds."
  
  Translation: Forget the Edinburgh Agreement and talk of "working together" - we don't trust "Westminster parties" and never will.

• "The Scottish Government needs to have control over immigration policy. This would, of course, require border control security and policy to be set by the Scottish Government and in the spirit of extensive/full fiscal responsibility Scotland would be responsible for the costs of its own border security. Given the need to consider interconnectivity, this would also require coastguard and maritime protection services to be fully devolved to Scotland, as many of Scotland’s borders are maritime borders."
  
  Translation: Forget all that stuff we said during the referendum about talk of borders being scare-mongering; even our version of honouring the No vote will require separate Scottish borders to be maintained.

• "We believe that, to be binding, a referendum on EU membership leading to the UK’s exit must not just generate a simple majority across the whole of the UK but have a majority in each home nation. "
  
  Translation:  Just because it's inconsistent to argue that Scotland could vote to leave the UK without the rest of the UK voting on the issue whilst arguing that the rest of the EU can't vote to leave the UK without the assent of Scotland ... that won't stop us arguing it.

• "If the power to veto an EU exit is not granted, then the UK that the Scottish population voted to stay within on September 19th will be deemed not to exist anymore."
  
  Translation: We know we can't really argue that the risk of a UK EU exit wasn't widely debated during the referendum but let's just ignore that and pretend the Scottish people weren't smart enough to make a balanced assessment of that risk.

• "We will work in good faith to suggest and define powers and policies that will help Scotland thrive within the UK, but believe that if the powers promised are not delivered the Scottish people will be extremely disappointed and may wish to revisit the independence question again."
  
  Translation: We have argued here for a wildly exaggerated version of the vow in some areas and to directly ignore it in others.  We know that what we've asked for can't possibly be delivered and we're simply preparing the ground to cry foul whatever you recommend.  We exist with the sole aim of pursuing independence - it is not a means to an end for us, it is the end itself - so we really hope we get another referendum soon because it's what we exist for.

• "We cannot have a constitutional fudge and end up with the worst of both worlds, especially give that Devo Max was not allowed to be officially on the ballot paper and so it was not fairly and democratically examined in the way that no change and independence were."
  
  Translation: We recognise this Devo Max interpretation we've spent out entire submission arguing for has not been "fairly and democratically" examined but - er - please do as we say anyway.

"Business for Scotland" Smith Commission Submission

I've covered at length elsewhere in this blog the background to "Business for Scotland"; they are a thinly disguised SNP construct that - post referendum - seems to have given up any pretence of being apolitical.

I've observed before that one of their founding Directors (Jim Mather) is the former SNP Minister for Enterprise, their CEO (Gordon MacIntyre-Kemp) is a failed SNP local council candidate and the First Minister is fond of using them for photo-opportunities and attended their annual fund-raising dinner. We can now add to that the fact that Business for Scotland Director and spokesman Ivan McKeee - who made a very public show of outrage when I suggested in a public debate that he was aligned with the SNP - has recently announced he has joined the party.

Business for Scotland's Smith Commission submission is authored by David "an SNP and independence supporter all his life" Hood.  Before you read the following extracts you might need to be reminded that these people actually lost the argument and the vote.  Extracts follow, highlighting and translations are my own;

• "any major change to Scotland’s place within the UK requires only the domestic Scottish-based representatives of Scotland and the assent of it’s people to make it so in terms of a democratic process and decision"
  
  Translation: let's ignore the fact that the sovereign will of the Scottish people has just been shown to be to remain in political union with the rest of the UK; instead let's assert that the rest of the UK should have no say whatsoever as any major change in Scotland's relationship with the UK has nothing to do with them


• "This Commission should be viewed and conducted in line with the spirit of the Edinburgh Agreement; that is, to work to remedy the fact that ‘promises and pledges’ made in the Referendum campaign period by the main UK political parties (including the ‘purdah’ period) are meaningfully delivered as a baseline foundation from which to deliberate further. Anything less than that will be an effrontery to democracy and justifiably render this Commission and its findings or recommendations void and justifiably precipitate legitimate political, legal and moral action on behalf of the people of Scotland, to deliver full independence."
  
  Translation: if you don't deliver what we interpret the vow to have meant we'll just declare your recommendations void and become independent anyway (because we didn't like the actual referendum result).


• "The ‘No’ vote that prevailed in the referendum does not sanction or mandate the UK government to consider adding a minimum level of further self governance, to the existing devolution structure. It if anything, the vote sanctioned the opposite. It was given in anticipation of a maximum level of powers and capabilities and must therefore be seen as endorsing a position as close to independence as possible"
  
  Translation: although the electorate answered the very clear and simple question "Should Scotland be an independent country" with a resounding No, you should interpret that as they really meant Yes.  Because - you know - when an electorate says no they really mean yes...


• "Everything should be devolved apart from specific, agreed, reserved items – but those items must be expressly agreed with, and by, the democratically elected representatives that are elected in Scotland, and hence must reflect the ultimate sovereignty of the Scottish people. It is not for those that populate London, Westminster or Whitehall to limit, decide or confer. Nor indeed is it within their competency. Again, anything less than a true reflection of will, that results in an express and sanctioned agreement will be a travesty of democracy, a stitch-up and a lost opportunity to produce something of profound and lasting merit"
  
  Translation: in case you missed it earlier, let's reiterate that despite the will of the Scottish people being to remain in political union with the rest of the UK we urge you to ignore that because any politicians outside Scotland are incompetent.  In fact we're already preemptively whipping ourselves into a fervour of outrage - we can't resist using words like "travesty" and "stitch-up" - because let's be honest we don't really care what you come up with; we'll cry foul if it's anything other than de-facto independence and this submission is just letting you know that.


• "The current ‘democratic deficit’ is of course debatable, depending on perspective; yet what is clear is that things on both and all sides are not as they should be and any deficit needs to be addressed convincingly and completely. If that democratic deficit is not reduced to the point that most of the Scottish people would wish it (that is, the aspirations of the overall majority of the electorate, whether they voted Yes or No in the Referendum), then it should be clear to the Commission that the only way to resolve this would be when, and how, Scotland chooses to take the step to full independence unilaterally"
  
  Translation: If the implied threat earlier wasn't clear enough let's be explicit about this - if we don't like your answer we'll just make a Unilateral Declaration of Independence.  It doesn't matter whether people voted Yes or No in the referendum; we're going to claim they're on our side either way.
  


• "There are an infinitive number of permutations that the Commission could consider whether as a starting point or end, but the simplest of all hypotheses is one where Scotland is already 
• independent, and this starting perspective prevents discourse and deliberation becoming unnecessarily complex. Looking at where there are existing and likely competing agendas, aspirations and desires between the Nations making up the UK, is a fantastic and logical place to start"


Translation: Don't go troubling yourself with any complex discourse or deliberation or worry that Independence was resoundingly rejected by the Scottish people; just pretend the vote was actually Yes so your recommendations have to be as close to independence as possible.

I can't begin to imagine how helpful the Smith Commission will find this submission from this self-styled "political party neutral business and economic policy think tank"

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.