It is an often quoted ‘No’ claim that keeping the pound and allowing The Bank of England to set interest rates, means that Scotland won’t have control of its own economic policy after independence, or that it would not be truly independent.
Leaving aside the fact that this argument implies that France, Germany, Belgium and all the other eurozone countries are not fully independent, I thought the claim was worthy of fuller investigation.
Background: Interestingly the Bank of England operates independently of Government and does not control economic or fiscal policy in the UK at the moment. It has a key role of maintaining inflation at a low level, using interest rates. It does this independently from the Westminster Government but the inflation target is set by the Chancellor.
Economic policy as a whole includes things such as employment policy, social security policies, income tax rates, council tax rates, fuel duties, alcohol duties etc, all the revenues you can generate and the ability to control spending on areas such as defence and foreign affairs etc, so that you can balance the books and afford the economic policies that a government has an electoral mandate to implement.
Here is a list of the key revenue generating powers, and who currently controls them. Also, find below the key spending areas we don’t have control over but would have in an independent Scotland.
Currently Westminster controlled – 26 economic levers:
- Income tax: Westminster controlled but with the ability to increase or decrease by 2p.
- National Insurance Contributions
- North Sea oil and gas revenue (geographical share)
- Corporation tax
- Fuel duties
- Capital gains tax
- Inheritance tax
- Tobacco duties
- Interest and dividends
- Alcohol duties
- Other taxes and royalties
- Vehicle excise duty
- Rent and other current transfers
- Export Duties
- Other taxes on income and wealth
- Insurance premium tax
- Air passenger duty
- Betting and gaming duties
- Climate change levy
- Aggregates levy
- The Crown Estate including shoreline and 11 miles out to sea (affecting wave and tidal power revenues)
- Quantitive easing (printing new money) (Currently outsourced to the independent Bank of England MPC)
- Issuing government bonds (Currently outsourced to the independent Bank of England MPC)
- Setting interest rates to control inflation (Currently outsourced to the independent Bank of England MPC)
- The ability to regulate banks and lenders. (currently under review at a UK/ EU / Global level)
Currently or about to be devolved to Scottish Government – five minor economic levers:
- Council tax: devolved hence Scottish Governments council tax freeze. Prior to the freeze council tax increased 60% under the first two Scottish Parliament sessions (Labour) and if that were repeated it would equate to a £700 per household tax increase.
- Non-domestic rates devolved resulting in rent relief for small business from the Scottish Government.
- Stamp duties (limited): currently Westminster controlled but devolved via 2012 Scotland Act, should take effect in 2015.
- Landfill tax: currently Westminster controlled but devolved via 2012 Scotland Act, should take effect in 2015.
- Borrowing (currently Westminster only). Borrowing powers worth £5bn to be devolved as part of 2012 Scotland Act. You can borrow but you can’t control your revenues. Great care is required here!
Note: Scottish specific tax rates will be collected by the Scottish tax office Revenue Scotland. So we will already have a tax collection system in place / under development, ready for independence.
Spending not devolved
There are also major areas of spending that are retained by Westminster and thus impact significantly on economic policy, such as:
- Defence. No control over who we go to war with, and the Scottish defence force estimated to cost £1.5bn a year less than we currently pay just from Scotland.
- International development
- Financial and economic matters
- Trade and industry
- Social security (currently being cut)
- Employment policy (will change significantly if UK votes to leave the EU)
- Control of Government Borrowing, currently interest payments on the UK debt costs Scotland £4.1bn a year.
All independent countries in common markets or currency zones, have to agree to integrate some of the policies and market conditions that they operate under in order to make the market/zone work as an optimum solution. It does not mean they give up sovereignty as they can always decide to change their minds unlike Scotland today where we have given up 100% sovereignty to Westminster on these issues.
It could even be described as xenophobic to suggest that countries that enter into integrated common markets and or shared currency agreements are not truly independent. Scotland by voting ‘Yes’ and staying within the EU would be gaining at least twenty eight new financial and economic levers, and have control over some of our major expenditures, while trading the ability to set an interest rate in order to maintain a free common market and currency zone with the rest of the UK.
So Scotland as an independent country would have control over its economic and fiscal policy in the same way that other independent countries such as Germany, France, Italy, the Netherlands etc enjoy, but would crucially maintain the correct-levels of interconnectedness and open trading with the rest of the home nations.
Of course I could have saved myself some research time and just summarised the responses I received from my friends from eurozone countries when I asked them if their countries were not truly independent – they basically all said, ‘don’t be bloody stupid!’.
Apparently it’s not as complicated an issue as I thought. “Not really independent” the absurdity is in the proposition.