Scottish No vote was not the end of an argument, but the beginning

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In the panic engendered by opinion polls that showed the referendum on Scottish independence would be a close-run thing, politicians of all the main UK parties made a “vow” to give Scotland greater autonomy if self-rule was rejected. When the September 18 vote went against secession, the task of delivering this promise of more devolution was delegated to the businessman Lord Smith of Kelvin, with a deadline to report by the end of this month.

A likely package would give the Scottish parliament control over the rates of income tax levied in Scotland, assign the country a statistical share of aggregate value added tax revenue, and make some minor adjustments to welfare provision and some other fiscal and regulatory powers. These measures would be sold as giving Scotland control of more than half the revenues needed to fund expenditures. At present Scotland’s fiscal resources are almost entirely derived from a block grant provided by the UK Treasury.

But revenue assignment gives no authority over VAT revenues, and the Scottish government gained the power to vary income tax in 1999; indeed, the “tartan tax” was approved in a separate vote in the 1997 referendum on devolution. But it has never even come close to using that power. When the UK government embarked on a spending spree from 2000 to 2006 – during these years public expenditure in Scotland increased by almost 50 per cent in real terms – it might have been a sensible decision to cut income tax instead. But the suspicion that the consequence might have been a reduction in subventions from Westminster meant the idea was dismissed. Despite continuous complaint about centrally imposed austerity in the years that followed, the possibility of raising extra revenue through additional income tax to make such “cuts” unnecessary has not been debated. In fact, the administrative procedures necessary to implement such a policy were allowed to lapse.

The centre of political gravity in Scotland is today well to the left of that of England, and an independent Scotland might have chosen a more Nordic regime involving higher taxation and higher public expenditure. But within the context of a United Kingdom, the demand is for policies that are different from those in England only to the extent that they are more generous. The real demand from Scots is not really for more powers but for more money to spend on powers which in large part the Scottish government already has. So long as there is any element of a grant from the UK government, the cry will be that the grant is not enough.

The widespread illusion that more tax authority means more money is likely to be quickly dispelled. The new reality is of political pressure to pay Scotland less, not more. Public spending per capita in Scotland has averaged 10-15 per cent more than English levels and – since average incomes are similar – this difference is hard to justify objectively. The “Barnett formula”, which generates that outcome, was uncontroversial so long as knowledge of its existence was confined to a few fiscal aficionados (yes, there are such people) but the independence debate has brought it to wide public attention. The irrationality identified in the “West Lothian question” – Scottish and Northern Irish MPs can vote on issues of relevance only to England and Wales – was equally a matter acceptable only when it was not widely understood. There are many stable federations in the world, but not with one state (England) constituting more than 80 per cent of the total population.

The close independence vote, together with the hasty promises that preceded it, have rendered unsustainable the quiet compromises that had defused the Scottish issue in British politics. The No verdict in September was not the end of an argument, but the beginning.

This article was first published in the Financial Times on November 12th, 2014.

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