21 Apr 2015

SNP: a path to fiscal autonomy, but do the sums add up?

We’re at a moment of elite incomprehension over Scotland.  When a magazine like the Economist berates Nicola Sturgeon for moderating her manifesto, calling it a “suicide note”, you realise how disorienting was the bomb the SNP dropped into politics with its manifesto yesterday.


Let us review the fiscal outlines of what the SNP proposes. It wants – as the IFS explains today – to take the amount of Scottish public spending controlled by Holyrood from its current level – around 7 per cent as calculated by the Institute for Fiscal Studies, to several tens of billions more.

If Westminster sticks to the principle of the Barnett formula, whereby further moves to devolution come with “no detriment” to Scotland, then any costs associated with such increased fiscal freedom would go on being funded by the taxpayers of the whole UK.

However, at the moment Scotland became fiscally autonomous – that is, raising and spending most of its taxes itself – the Barnett principle would be over. Then the gap between Scottish spending and taxation would appear as a transparent “Scottish deficit”, which as the IFS points out would be bigger, percentage wise, than that of the whole UK’s.

Specifically, if nothing else changed, an IFS report today says Scotland would be running a £9.7bn deficit by 2019, compared to a UK surplus. However the SNP’s case is based on the assertion that almost everything would change.

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Abandoning austerity

It wants to use its extra fiscal powers to create a different kind of economy in Scotland: one based on higher wages, more infrastructure investment and a Business Development Bank. By abandoning austerity – which it could only do fully with UK Treasury help – it believes it can stimulate rapid growth.

In response to the IFS report, the SNP’s Ken Gibson MSP said:  “As the IFS acknowledge, these figures are before the end of the austerity that we want to see in order to grow the economy faster.”

Furthermore, the manifesto says that, once fiscally independent, the SNP would lock Scotland into a balanced current budget regime, running a surplus in order to accumulate a sovereign wealth fund, which would give it leeway in any future negotiations over independence.

Labour slammed the manifesto over the commitment to a budget surplus lock – saying this made the SNP a pro-austerity party; the Economist berated it for the absence of left-wing rhetoric; the Institute for Fiscal Studies questioned its assumptions on future growth. As I write, former PM John Major is reiterating the Conservative claim that the SNP has no right to be in a Westminster government.

Here’s my take on what’s doable in the SNP’s manifesto, and under what circumstances, and what it means for the next parliament as a whole.

Sterling union

First – like all mainstream politics – the manifesto is “monetary policy blind”. We saw in the #Indyref why this is not sustainable when it comes to discussing the Scottish economy. Monetary policy is the most important policy tool in modern capitalism and while it tends to “run in the background” like the operating system of your iPad, you can’t ignore it if you want to change things significantly. If Scotland became fully autonomous on tax and spend, the UK would effectively become a “sterling union”.

That’s not a deal breaker – but you would have to engage Westminster (and Cardiff) and the Bank of England in a prior discussion as to what the monetary policy of that sterling union is going to be, especially if your long -term goal was to create a sterling union of the British Isles, with a totally independent Scotland sharing the currency but nothing else.

The electorate is woefully underinformed about it, but monetary policy has been the main driver of UK recovery – and if Scotland is going to pursue a separate growth policy to the UK, you have to assume the Bank of the United Kingdom (as it would properly have to be called) was on board.

Second, how to square the three apparent aspirations: a) to go on spending more than Scotland is taxed; b) to run a balanced budget and c) to accumulate a sovereign wealth fund?

These three commitments only make sense if they are achieved in sequence. Hidden deficits are run via the Barnett Formula until fiscal autonomy; thereafter you lock in balanced budgets and aim for a surplus, and then you build up a sovereign wealth fund.

The only problem is: how do you do this without  the moment of fiscal autonomy becoming a massive moment of austerity?

Unprecedented growth

The answer is through growth. But this pins all the coherence of the SNP’s fiscal policy on the assumption of unprecedented growth. Let’s assume global conditions are benign – through readers of this blog know my assumption is that for the next 50 years global growth will be meagre.

If there’s growth available in the British Isles, and in Western Europe, Scotland’s proto-autonomous economic policy would have to be geared to capturing more of it it through competitive means.

These, to be clear, in the modern context would be: inward migration – boosting the economy through boosting workforce size; inward investment, which would mean lower corporation tax and other business rates compared to the UK; a higher-wage workforce, which would mean different labour market rules; and massive infrastructure spending by the state to prime the pumps. In addition, you would need a permanently loose monetary policy.

These goals would be easier to achieve if you could externally devalue your currency, but unless an “out” vote in a 2017 EU referendum hands Scotland the opportunity to leave sterling and join the euro, that’s not going to happen.

In all cases, the autonomous, growth-oriented Scotland would find itself competing for growth with its nearest neighbours – England, Wales, Northern Ireland and the Irish Republic. In global terms – when it comes to attracting international flight slots or tech centres for IT multinationals – it would be in the same market as Luton, Stansted, Galway and Dublin.

More questions than answers

On all these issues the SNP manifesto contains more questions than it answers. On its concrete plans – education, health, study visas, infrastructure spending – it projects a clear alternative vision. But the fiscal dynamics behind it only make sense if there is differentially high Scottish growth.

In one sense, then, the SNP’s Westminster manifesto of 2015 is simply a holding position. Once we know the powers granted by the next Westminster government, the party’s manifesto for Holyrood 2016 will have to fill in the gaps.

If it doesn’t it will be ripped to shreds not just by a hostile media. Two thirds of the SNP’s members are new, and lean towards a left social-democratic future for Scotland; while what survives of the Scottish Labour Party after 7 May is likely to be more left wing than in the recent past.

Because all English journalism on Scotland is immediately attacked for of bias, let me say here I think the SNP’s implied sequence of Barnett-funded deficits, followed by fiscal autonomy, balanced budgets and a surplus-driven wealth fund are all possible.

But they imply a monetary policy corollary that is not stated, and are reliant on levels of growth that are impossible to guarantee, and the ability to control industrial, migration and infrastructure policy on a scale not envisaged by Westminster.

Now for what this means for the unionist political elite of Westminster.

If Nicola Sturgeon gains a mandate for this manifesto in Scotland, it does not matter how incoherent the IFS thinks it is: the same body has slammed Labour, the Lib Dems and the Conservatives for failing to come clean on much bigger budget anomalies in their own manifestos.

Full fiscal autonomy

What matters is that, come 8 May, large numbers – maybe even a majority – of Scottish people will have voted for a programme of full fiscal autonomy.

It will be a different vote to the 18 September one, with a lower turnout, but it will be a mandate – something the yes campaign did not achieve last year.

During the referendum campaign I met many Labour-supporting Scots who were voting no because their “maximum programme” was fiscal autonomy, not nationhood. So a formal mandate for that is quite a powerful thing for a Scottish first minister to possess.

Given that, the ball will then be in Westminster’s court. If you pull the stops out – the Bank of England, the boss of Sainsbury’s etc – and narrowly defeat independence, but then do not deliver fiscal autonomy, and indeed paralyse Westminster politics due to your on-principle rejection of it, that lays the basis for where things develop next.

That Scotland will dominate the first year of the next parliament is a certainty. What Scots will do if the mandate contained in the SNP manifesto is first delivered then ignored will determine whether the UK survives as a political entity.

That’s why the unionist parties are shouting so loudly today, though they cannot bring themselves to shout anything but diametrically opposed things.

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