A lot people are confused by full fiscal responsibility (FFR), what it means, how long it would take to implement and how it would impact on Scotland’s fiscal deficit. I want FFR largely as I think that the more localised the decision making within an economy and society, the more beneficial the decisions made will be. These benefits will “trickle up” to a more advantaged national economic performance. The best way to run the UK is to move towards increased devolution and federalism; each region and nation reaching the optimum level of devolution and independence for their region’s wellbeing. If Scotland then chose independence, then the UK currency zone and common market becomes a confederation, like the best bits of the European common market.
However, it seems that everyone has a different definition of FFR and most describe full fiscal independence – something you can’t actually have within a union. We know what national independence is, it’s a pretty simple concept.That is why a national independence settlement could be arrived at in two years, but maximum devolution will take much longer to work out and requires a staged implementation.
There is no example of full fiscal independence and differing economic approaches within a national union that would be unworkable. A federal system would involve maintaining a system of fiscal stabilisation between regions, for example, if the North East of England suffered significant economic problems that required increased spending and an increased deficit as shown in the regional accounts. No one would describe that fiscal transfer as a subsidy, it would just be part of the natural UK fiscal stabilisation required. Scotland is still part of the UK so if it generates a surplus, that surplus is not Scottish and any deficit is not the sole responsibility of the Scottish tax base. This makes fiscal devolution more complex, firstly as FFR should allow Scotland to try out localised bespoke policies to increase economic and revenue growth and over time improve the deficit as a percentage of GDP. In the first few years under FFR it is likely that the Scottish deficit in cash terms will grow (that’s a good thing, as we would be investing in growth) but in the medium term increased growth and tax revenues would mean the deficit equalises (possibly 3-5 years dependent on policies) with the UK deficit and then in the longer term, 5-10 years, disappears far more quickly than the rest of the UK. Having in this scenario reached a fiscal surplus more quickly than the rest of the UK through FFR, Scotland still being part of the UK will have to, at least in part, make fiscal transfers to the rest of the UK and in the meantime the UK would, in part have had to make fiscal transfers to Scotland.
Westminster doesn’t want Scotland to have a sensibly defined system of maximum fiscal devolution to the point of no detriment to Scotland or the rUK. With an austerity committed Westminster majority and an invest for growth committed Holyrood majority, we would create an A-B test between two mutually exclusive economic belief systems. If invest for growth worked in Scotland and austerity slowed the rUK economy so that the UK’s deficit began to deepen again, then not only would the union be dead but so would the whole neo-classical economic approach, an end to trickle down economics and the near religious belief private sector hegemony in economic thinking.
The unionist / austerity camp have two choices: try to rush through Smith and draw a line under more powers hoping that the Scottish people don’t realise it’s fundamentally flawed (Cameron and Mundell) or declare Smith not fit for purpose because of the SNP landslide, set up a Royal Commission and hope that either kicks more powers into the long grass or buys them a year or so to figure out the constitutional mess they have gotten themselves into (Darling and Rifkind).
When it was published I called Smith “an unworkable constitutional fudge, the worst of both worlds”. Common sense was held hostage to a pre-referendum timescale promise made to win votes with no thought given to practicality. A progressive alliance dragging Labour away from its austerity stance could (possibly) have allowed FFR to work to alleviate the worst effects of austerity on Scotland’s economy and its people. However, Tory austerity now has a majority mandate and it is hard to see any common ground being found on devolving meaningful powers that would effectively allow Scotland to follow such a different path, even if it were possible to have such divergent economic mantras in play within one nation.
So what we will get are some minor powers and a lot of cuts to our block grant that will slow Scotland’s economy which, given Holtham’s indexed deduction formula associated with Smith, would further erode our block grant and negate any real good we could do with the minor powers we have. Don’t blame me, I voted Yes.
There is a way though – if the two tribes agree not to go to war but to work together to agree a no detriment solution. 1) We need business and welfare powers to be devolved as soon as possible, a Smith+ solution but with a new fairer block grant indexing formula. This would include devolution of corporation tax and R&D tax credits, oil and gas regulation and policy, welfare and employment law, so we can start to implement bespoke growth investment policies. 2) GERS (Scotland’s national accounts) requires re-engineered to become accurate and not full of guess work on VAT and corporation tax. Right now GERS is interesting for base level statistical comparisons, but you couldn’t use it to run a country or calculate the impact of FFR. 3) We also need an independent Scottish economic forecasting unit to create accurate projections on various policy scenarios without the Westminster overlord culture that skews the work of the OBR and IFS. 4) Finally a one or two year long constitutional convention for whole UK to draw up a workable timetable to move towards FFR, and with it a federal UK and even subregional localisation of decision making.
There may be an economics based answer to the clash of mandates but it would take unseen levels of co-operation. There is, however, no politically acceptable solution for the unionist MPs. If they fail to deliver on more powers the union is dead, if they offer more powers but undermine them through austerity budgets then the union dead, if they move towards federal UK then the union might last a generation but no longer. Westminster is looking at a heads they lose / tails they lose situation.