Tax and spend in an independent Scotland

There has been a lot of interest in the leaked John Swinney memorandum setting out the financial consequences of independence and the Better Together campaign was quick to publish an annotated version.  The main charge is the disparity between what they have been considering privately and what they have been spinning. Well shock horror, no great surprise there for any government. The interesting point when you read it in full is the similarity with the detail in the Fiscal Commission report..

So let’s examine some of the key points.

They are anticipating the risk of public sector job cuts, pressures on pensions and welfare and admit that no additional public spending would be possible. Almost all the credible analysis of the current numbers, including last week's GERS, says that an independent Scotland would face a similar budget deficit to the UK. In the short term we would probably be slightly better off, but in the medium term we would be dependent on volatile oil prices. The private recognition that Scotland’s share of UK tax receipts is projected to fall from 9.9% to 8.8% is something that they don’t mention in public and is a significant drop, even allowing for the unreliability of projections. However, there is nothing new in the overall analysis, even if the candour in this paper is welcome and realistic.

In this context it would be wise not to make too many bold promises about eradicating child poverty and supporting universal services unless you are prepared to have an honest debate about taxation. I haven't seen much evidence of that yet. The paper says: “We will need to be mindful that these pressures could reduce the resources available to provide additional public services”. This reflects the greater pressures Scotland faces from demographic change and that this risk is currently shared across the UK.

The paper recognises that Scotland would face huge costs in setting up a separate state, including £600m for a new tax service. In public they have played this down, but this is self evident. Of course there would also be a share of the resources used to pay for existing UK services, but the paper at least recognises that there are overall net costs in this process.

I was particularly interested in the section on the proposed monetary union, something I have written extensively about in the Red Paper and elsewhere. There is a recognition that Scotland will have to keep within agreements and that will constrain monetary and fiscal policy. I understand the political strategy behind reassuring people by sticking with Sterling, but the constraints on economic policy are substantial. You do wonder if this is John Swinney’s way of restraining some other Cabinet colleagues on spending, if not the rhetoric! John Kay has set out the other options in some detail in the Scotsman and in his chapter in a new book, ‘Scotland’s Future’. By the way, this is well worth a read whichever side of the debate you are on.

The section on defence is interesting in that it accepts that that a lower defence budget must be assumed. That is of course sensible, but doesn’t quite chime with the noise around 15,000 soldiers in Scotland. The SNP do try and have their cake and eat it here. One of the big advantages of an independent Scotland is fewer defence commitments and therefore less spending. But, and it’s a big but, you equally have to accept the consequences for jobs in the defence industry.

Mind you the Better Together campaign is lumbered with Philip Hammond. I sometimes wonder if he is secretly supporting independence as he strengthens the Yes campaign with every utterance. And that’s before Trident replacement comes into play, one of the Better Together campaign’s greatest burdens. Jim Murphy was frankly woeful on this in his BBC Good Morning Scotland interview.

So, overall the leaked memorandum was a good day for the Better Together campaign as it does highlight many of the financial challenges facing independence. However, it is mostly an issue of presentation. There is little in the paper that others have not highlighted and it is at least comforting that the Scottish Government is being more realistic - even if only in private.

 

 

Cross posted at Red Paper