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Fiscal Autonomy in Scotland: The case for change and options for reform

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1 Introduction and overview

Chapter Summary

  • Choosing Scotland's Future inspired a National Conversation on the type of government which best equips Scotland for the future.
  • This conversation is even more important given the challenges presented by the current economic climate.
  • Scotland needs a fiscal framework that enhances Scotland's long-term competitiveness and our ability to respond swiftly and decisively to short-term economic pressures.
  • This Government believes that independence is the natural state for nations like Scotland and that with greater responsibility for its own affairs and fiscal framework, Scotland could move from a position of relative underperformance and instead match, and even surpass, the higher levels of long-term growth experienced by other, similar nations.
  • The National Conversation is about listening and responding to the views of people across Scotland and further contributions to the debate are welcomed.

Introduction

The National Conversation in context

1.1 Choosing Scotland's Future1, published in August 2007 shortly after the election of Scotland's first SNP Government, acted as the starting point for the National Conversation to allow the people of Scotland to debate, reflect and then decide on the type of government which best equips Scotland for the future. The National Conversation is all about creating the best environment for Scotland to flourish and Scotland's economic responsibilities, including tax, spending and borrowing, are central to this debate.

1.2 The need for a revised fiscal framework to enable the Scottish Government to take decisive action to cut taxation, re-prioritise expenditure and create a more competitive business environment has long been acknowledged by various academics, commentators and politicians from across the political spectrum. The importance of this debate has been thrown into stark relief by the recent sharp deterioration in the global economy. Scotland - in common with the rest of the world - faces significant challenges in responding to current economic conditions. The global economic slowdown is now being felt in Scottish homes and high streets and, with the UK now officially in recession, this is likely to continue over the months ahead.

1.3 The overriding Purpose of this Government has been clear from our first day in office: to focus the Government and public services on creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth. A fiscal framework that enhances Scotland's long-term competitiveness and ability to respond swiftly and decisively to short-term economic pressures and circumstances, such as those Scotland currently faces, is vital to achieving this Purpose.

1.4 The Scottish Government has already set out a wide range of actions as part of our Economic Recovery Programme 2, taking the steps we can, within our current responsibilities, to support small businesses and ordinary households, to maximise jobs and investment and to ensure the Scottish economy is well positioned for recovery.

1.5 However, there is no doubt much more could be done if Scotland had additional economic powers. The current economic conditions have demonstrated more clearly than ever before the importance of Scotland taking responsibility for its own economic success. The National Conversation is the vehicle to take forward this debate.

1.6 People across Scotland have been engaging in the National Conversation throughout 2008 and early 2009. Scotland's civic society, businesses, trade unions, universities and colleges are all taking part in discussions which will help shape Scotland's future. Hundreds of people have attended public events with the First Minister and Cabinet, and the churches, the voluntary sector and Scotland's young people have all made substantial contributions as the momentum of the Conversation has increased.

1.7 Through the National Conversation a range of views have emerged about what is best for the country. The National Conversation is therefore open to all views across the range of issues that face Scotland. This Government is listening, and responding to, the views of people across Scotland and welcomes further contributions to the debate (see Box 1).

Box 1 - National Conversation: What you have told us

The National Conversation has already helped the Scottish Government to get a clearer picture of the issues of importance to Scottish citizens. There have been over 460,000 hits on the website, 35,000 people have read the white paper on-line and 4,000 have left comments on the blog. Around 2,500 people also attended 22 public events last year. We have started 2009 with a public event in Dundee and future events have been planned for across Scotland throughout the year. Through this extensive engagement it has become clear that the public are seeking change and greater financial independence for Scotland.

The public's comments have recognised that: more financial independence will create the right conditions for growth in the Scottish economy; entrepreneurship could be encouraged through competitive tax rates; and Scotland could make decisions about policies based on what is right for Scotland.

Reform Scotland, the non party aligned Scottish think tank, in its contribution to the National Conversation recognised that: "There is now a growing consensus that the current system, based on a block grant determined largely by application of the Barnett Formula, must change. It is unbalanced because although the Scottish Government has control over 60% of government expenditure in Scotland, it has very limited responsibility for raising the revenue required to meet those spending commitments other than the local taxes (council tax and business rates) collected by local government."

The submission goes on to say: "The lack of revenue-raising or borrowing powers undermines the Scottish Parliament's autonomy and accountability. Tax rates cannot be set at levels appropriate to Scotland. So there is no way of creating a more attractive fiscal framework in Scotland to boost economic growth. This lack of fiscal powers limits the Scottish Government's ability to respond to the current 'credit crunch' through measures such as a reduction in the tax burden. The lack of borrowing powers further limits the room for manoeuvre and makes it harder to pay for important infrastructure projects."

1.8 The fiscal framework that currently exists in Scotland is largely a legacy of the constitutional settlement prior to devolution. We believe that the time is now right for a discussion about what fiscal framework is best for Scotland. The Government recognises that there is already a vigorous debate on the funding of the public sector in Scotland, and the economic and other benefits of various models. The Government believes that this work indicates an impetus towards change and that there is strong and growing support for greater tax, spending and borrowing responsibilities - commonly known as 'fiscal autonomy' - for the Scottish Parliament.

1.9 Having the ability to make decisions both to build long-term competitiveness and to respond to short-term economic challenges is essential if Scotland is to fulfil its potential as a nation. We believe that options short of independence would not fully unlock Scotland's economic potential.

Taking the Conversation forward

1.10 This paper takes the National Conversation on tax, spending and borrowing - 'fiscal autonomy' - to the next stage. The paper:

  • explores the rationale for improving current arrangements;
  • identifies and reviews the options for reform, to enable the people of Scotland to make informed decisions;
  • makes clear the Scottish Government's preferred position; and
  • seeks further contributions to the debate.

1.11 Unlike other reviews of the current fiscal arrangements for the Scottish Parliament, this paper examines the full spectrum of options for reform, from maintaining the current framework through to full fiscal autonomy in an independent Scotland. The National Conversation is inclusive of all opinions on the best way forward for Scotland.

1.12 Beyond this exploration of the case for change and options for reform, a series of discussions will be held and further papers will be published setting out how the Scottish Government would use economic policy to deliver a step-change in economic growth for Scotland.

Overview

1.13 The structure of the paper is as follows:

  • Chapter 2 outlines the long-term and short-term trends for Scotland's economic growth and highlights the substantial opportunities for Scotland that could flow from greater responsibility over tax, spending and borrowing.
  • Chapter 3 describes the current framework for tax, spending and borrowing in Scotland and examines the constraints imposed by the current arrangements.
  • Chapter 4 goes on to examine a range of options for reform of tax, spending and borrowing responsibilities in Scotland, with Chapter 5 reviewing these options against key criteria, identifying which options deliver greater growth potential for Scotland.
  • Finally, Chapter 6 concludes and raises a series of issues on which views would be welcome to identify a way ahead for Scotland.