The referendum on Scottish independence indicated that a majority of the Scottish people wish to remain within the UK. They have been given commitments that additional fiscal powers will be granted to the Scottish Parliament in the near future. In the paper Scotland’s Fiscal Future David Bell and David Eiser explore some of the issues that follow from this commitment and from the proposals that have already been tabled.
We note that there is wide variation in the proposals coming from the different parties – forming a consensus will not be easy. However, there is some consensus around income tax as the most suitable tax to devolve further. It generates relatively large revenues and has fewer problems than the other significant sources of tax revenue in Scotland.
The more ambitious proposals, such as the Devo Max proposals would put Scotland close to the average levels of fiscal autonomy in Spain, though somewhat less than the Basque Country and Navarre in Spain – among the most fiscally autonomous regions in the world.
Even so, further extension to tax powers may not assuage future demands for independence. There may come a time where the majority of Scots are prepared to sacrifice the efficiency aspects of the Union (risk-sharing, no tax competition) in favour of having a less remote government.
The way in which the block grant (Barnett Formula) is adjusted to make allowance for additional revenue raising powers will make a substantial difference to the spending capabilities of the Scottish Government. There is clear pressure from other parts of the UK that Scotland’s relatively favourable treatment under the Barnett Formula should be removed and the formula replaced by a needs-based mechanism. Under such a scheme, Scotland would likely receive a per capita grant above the UK average, but less than its current allocation.
Under either further devolution or independence, a Scottish Government would be constrained in the extent to which it could use its tax powers by the close linkage of the Scottish and rUK economies and in particular by the common labour and capital markets. In addition, globalisation may create further pressures towards tax harmonisation.