Scotland's Economy

5 ways full fiscal autonomy can create jobs & grow Scotland’s economy

Polls show a significant majority of Scots support DevoMax, meaning all powers transferring from Westminster except shared monetary policy, defence and foreign affairs. So taxation and spending, or full fiscal autonomy (FFA), is an intrinsic and indistinguishable keystone of DevoMax. Without FFA in the mix you don’t have home rule, you have a constitutional fudge and the worst of both worlds with Westminster controlling the key economic levers and a Scottish Parliament with one hand tied behind its back.
More than half of No voters would prefer DevoMax click to enlarge.

More than half of No voters would have preferred DevoMax – Click to enlarge.

Labour are feverishly promoting the £7.6bn black hole scare-story to put people off FFA but it’s a myth; firstly because it assumes oil prices won’t ever recover, and even a moderate increase to $70/80 would go a long way to wiping out any additional deficit over time. Secondly FFA will give the Scottish Government powers to balance income and expenditure. The UK has failed to do this and so the UK is running a deficit of £75billion and a debt of £1.5trillion. As black holes go, Westminster has what’s known as a “super massive”.

Labour's desperate attacks on FFA don’t add up

Labour’s desperate attacks on FFA don’t add up

The choice in this election is between cutting vital services (Tory / Labour austerity) or to borrow modestly in the short term to grow your economy creating jobs and reducing demand for welfare in the medium term (SNP).  Westminster austerity will cut off crucial spending that fuels growth so Labour’s desperate attacks on FFA don’t add up economically. FFA is the key to rapid economic growth and prosperity for Scotland. Here are five key ways Scottish FFA can balance the books, cut the deficit, raise revenues and create jobs.

1) Refocusing the economy on SMEs

Small to medium sized enterprises create the majority of added value employment in Scotland. SMEs make up 99.3% of Scotland’s businesses, employing 1.1million (54.7% of all private sector employment) and representing the biggest opportunity for economic growth. But despite generating 36.7% of private sector turnover in Scotland, SMEs are largely ignored in PLC and London centric UK business policy. FFA offers flexibility to target tax incentives to encourage growth in the SME sector through encouraging best practice exchange, increasing skills, confidence and ambition, innovation, internationalisation and competitiveness.

2) Targeted tax incentives 

Business for Scotland made the case to the SNP policy team to replace the 3% Corporation Tax cut policy with targeted tax reliefs to encourage business behaviours that generate faster job creation and economic growth. As the champion of the SME sector in Scotland, we also argued for prompt payment measures for small businesses to be put into law, as announced by John Swinney this week. With both of these and several other innovative business focused policies now forming SNP policy, we can see the Scottish Government understands that SMEs hold the keys to rapid economic growth. UK Government is refusing to devolve corporation tax and so it is only with FFA these vital job creating tax powers can be deployed to Scotland’s benefit.

3) Increasing Research and Development (R&D)

FFA includes policies to increase overall revenues through targeted tax incentives matched to bespoke grant support for companies to increase investment in R&D. Scotland lags 3% behind the UK average in productivity but up to 40% behind Norway’s, and significantly behind other comparable northern European economiesScotland spends 1.25% of GDP on R&D, and faster growing, more prosperous smaller nations including Norway, Finland, and Denmark, spend an average of 3.4%. The innovation think-tank NESTA calculated that building towards an R&D spend of 3.4% of GDP over a five year period would grow Scotland’s economy by around £12bn a year.

4) Abolishing Air Passenger Duty (APD)

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APD will reduce connectivity from Scotland’s airports

APD, a tax on international travel, has increased by 160% since 2007 reflecting the level of tax that Heathrow and Gatwick can demand but it is too high for airports outside London and the South East. Scotland’s leading airports jointly stated “APD will over the long-term reduce traffic and connectivity from Scotland’s airports, impacting on inward investment, trade and competitiveness.

It also impacts on Scotland’s inbound tourism industry. By 2016 it is estimated that £210m per annum less will be being spent in Scotland by inbound visitors because of APD”.

The Calman Commission recommendation to devolve APD was ignored. APD devolution faces major opposition in Westminster so without a staged approach to FFA it is unlikely that this power will be devolved. A Ryanair report stated that halving APD would mean “travellers to Scotland doubled over a 5-10 year period” benefiting “job creation in tourism”. The tourism sector is worth £4.3bn in direct expenditure from overnight visitors and provides employment to at least 185,900. Tens of thousands of new jobs would be created by getting rid of APD and tourism revenue would increase.

 

5) Reducing VAT on Tourism

21 out of 28 EU nations have lowered VAT on tourism related activity. Unfortunately, as with APD, the rate of VAT on tourism is set by London’s needs and not Scotland’s. Ireland, where the rate is half of the UK’s, provides strong evidence of economic benefit creating 23,324 direct jobs in the tourism industry since the VAT reduction in July 2011 and an additional 10,728 indirect jobs elsewhere due to a multiplier effect. That’s 34,000 new jobs in a tourism sector roughly the same size as Scotland’s.

This move in terms of increased tourism spend and lower welfare spend, combined with higher national insurance and income tax revenues should be worth at least a billion a year to Scotland.

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Without FFA you don’t have home rule, you have a constitutional fudge

If Scotland had FFA we would have the power to do all of the above and grow our economy at unprecedented rates, thus demonstrating conclusively that Scotland would be better off as an independent partner to the other countries of these isles but worse off by remaining a devo-lite region without fiscal autonomy. Just the few policies highlighted above would make 5% growth attainable for Scotland and that is why Westminster is scared of full fiscal autonomy Scotland isn’t.

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About the author

Gordon MacIntyre-Kemp

Gordon MacIntyre-Kemp is the Founder and Chief Executive of Business for Scotland. Before becoming CEO of Business for Scotland he ran a small social media and sales & marketing consultancy.

With a degree in business, marketing and economics, Gordon has worked as an economic development planning professional, and in marketing roles specialising in pricing modelling and promotional evaluation for global companies (including P&G).

Gordon benefits (not suffers) from dyslexia, and is a proponent of the emerging New Economics School. Gordon contributes articles to Business for Scotland, The National and The Huffington Post.

6 Comments

  • Hi
    I’m currently having a debate with someone who has said that the claim about oil being back to $70 – $80 would wipe out the deficit is wrong and they have shown some figures which seem to back up their claim. Can you show me the calculation you used so that I can get back to them? Thanks

    • My workings include a $70 price wiping out the additional deficit in conjunction with the other measures listed – Not the whole deficit. We will be publishing detailed forecasts in the next few months and significant insights into historical surpluses. Feel free to fire through the figures you have seen to [email protected] and I will have a look at them.

  • Hi Gordon

    I am a big supporter of FFA (FFR) as I beleive it is the stepping stone that will prove to the switherers that Scotland can make it on its own.

    I have a question regarding the IFS figures. Do the IFS Corporation Tax take figures for Scotland also include the Corporation Tax that should be allocated to Scotland for companies that operate in Scotland but have their headquarters in England e.g. Tesco, Diagio, HSBC etc?

    I am not implying that the IFS number crunching isn’t an accurate snapshot, given their data sources. I’m just questioning as to whether their numbers reflect the full picture.

    • No the truth is we don’t actually know how much corporation tax is raised in Scotland GERS includes only an estimate based on company registrations but off course larger companies pay the bulk of CT so if they are not registered here the CT they pay on Scottish operations is not included in Scotland revenue figures. Diagio for example from memory controls 40% of Scotch sales and makes 60% of its profits from whisky but is not Scottish headquartered. However estimates are made of national shares by the GERS team in partnership with the treasury. VAT revenues are also an estimate so FFR will require a lot of the revenue and cost calculations to be reworked. I believe (know) that will lower expenditure and increase revenues reported in GERS.

  • Gordon –
    HMRC in Cardiff has a whole office specialising in giving out tax relief for R&D (item 3 above). Most businesses – and certainly most SMEs – know nothing of this and very few accountants seem to know about it or how to apply successfully for tax refunds.
    There’s a fair amount of money available but companies need to know the rules and what qualifies as R&D to get it.
    I’m in Lisbon just now at a conference but if you’re interested I will find more information for you when I return to the university on Monday. Personally I think we should encourage as many companies as possible in Scotland to take advantage of this scheme since, like you, I believe we need to generate much more R&D.
    Very best wishes –
    Peter Wilson
    Director, the Wood Studio
    Institute for Sustainable Construction
    Edinburgh Napier University
    07960 281 955

  • Gordon: I don’t doubt measures such as the five above can help boost growth in an autonomous Scotland, but not instantly and that is surely a problem.

    The project fear line the SNP face is what will happen over the next five years if FFA powers are rolled out but oil does not recover- won’t there be ‘austerity plus’? One response is to go on the attack against the Smith Commission proposals and certainly this should be done. But something positive is also needed.

    Alternatively drop FFA. Like you I strongly oppose this but I am worried that’s what a vote by vote arrangement with Labour would mean, and it would result in a loss of last year’s momentum and tarnishing of the SNP by association with a Labour government which will either fail to take on the City or get gubbed if it does.

    But what puzzles me is why so many on the Yes side accept the fiscal framework assumed by the IFS (although Nicola Sturgeon in recent comments has suggested she doesn’t). I don’t mean to dispute the IFS figures, that’s up to economists. But the IFS acknowledge that an autonomous economy can receive transfers in and out of a non-commercial nature: the £3 billion plus debt interest transfer from Scotland to UK is one such: not a commercial loan deal but a moral liability.

    So I am puzzled as why you and others seem to think the SNP, in pushing for FFA, should not also hold the unionist parties to their promise of a ‘UK dividend’ (which one could see as partial recompense for the enormous mis-sold investment deception which is North Sea Oil). This they calculated pre-referendum at about £7 billion net of the debt interest transfers from us, so £10 billion gross. Probably about £13 billion now with the oil drop. If a deal with Labour included £3billion debt interest in one direction and in the other a sum calculated counterfactually, being the dividend arising given the status quo, would Scotland not be in a very healthy fiscal state over the next five years?

    This would allow us to roll out welfare and pension powers, show No voters we are as capable of running these as any other small West European nation, and prepare the ground for a second referendum. In short, why think FFA and fiscal transfers to and from Scotland and rUK are incompatible- the IFS don’t?

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