- Only independence allows Scotland the freedom to use the full levers of government to create a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.
- Business and enterprise benefits would emerge from outcome-focused reform of, for example: fiscal and tax policy and collection arrangements; competition and consumer policy; financial services regulation; promotion of international trade; skills and immigration; and transport infrastructure.
- The rest of the UK would remain our closest partner and ally and an independent Scotland would clearly seek to focus policy to enhance trading and other economic opportunities within the British Isles.
5.1. The Scottish Government's considered position is clear. Only independence allows Scotland the freedom to use the full responsibilities of government to create a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth.
5.2. In practice, of course, under independence a range of policy issues would be subject to European and international rules and regulations, such as EU directives on competition, tax harmonisation and the EU Single Market. However, unlike the other options outlined above, Scotland's relationship with the international economic, financial and business community would be set firmly in the context of Scotland acting as an independent sovereign state. Scotland would therefore have the ability to shape and influence policy at the local, national and international level in a way that is currently not possible. Only independence provides Scotland with a full voice in Europe and the capacity to make policy and fiscal choices which address the factors which have contributed to the economic under-performance of the last 30 years and the associated social implications.
5.3. Earlier National Conversations documents have already set out in more detail the options and impact relating to fiscal autonomy, foreign affairs etc. The remainder of this document provides an illustration of some of the choices and options that would be available to a future Scottish Government which could better promote increased sustainable growth by pursuing distinctive policies in addition to those outlined in the enhanced devolution chapter. These examples are provided in relation to:
- Tax collection
- Competition and consumers
- Financial services
- International trade
- Skills and immigration
- Transport infrastructure
5.4. Paying taxes is an important cost factor for businesses and a simplified process is often cited as an objective of reform. An independent Scottish Government would be able to establish a payments system designed for the Scottish economy and Scottish businesses.
Box 4: Tax Collection
Although the statutory rate of business tax is an important element of the overall competitiveness of a country's tax system, the costs of compliance and the administrative burden imposed by the tax system are also important. For example, corporate taxes are inherently complex and a considerable amount of resources are typically diverted both by the taxpayer (the private sector) and the tax collector (the public sector) to meet the administrative burden. In a study commissioned by HMRC in 2006, KPMG estimated that the administrative burden imposed by corporation tax on businesses was £608 million, 70% of which fell on SMEs 8. The complexity of the UK tax system was also highlighted as an important issue for the UK by the CBI in its recent report on reforming business taxation 9.
Simplifying the tax system and increasing transparency reduces costs for businesses and government. It can also reduce incentives for tax avoidance and non-compliance, thereby reducing monitoring costs and potentially increasing revenue. However, under the current fiscal framework, the Scottish Government is unable to introduce reforms which could streamline the tax system. The Commission on Scottish Devolution also chose not to recommend devolving responsibility for the corporation tax system to the Scottish Parliament.
Under full fiscal autonomy in an independent Scotland, the Scottish Government would be responsible for the administration and collection of all taxes. This would provide an opportunity to ultimately put in place a simpler and more transparent tax system. International evidence 10 confirms that small counties can administer their tax systems efficiently and effectively: the UK employed nearly 90,000 people to administer its tax system in 2007, while Norway and Finland both managed with just 6,000 staff; the UK spent nearly twice as much as Norway, and almost two thirds more than Finland, on tax administration (as a proportion of GDP) in 2007. The Scottish Government is open to exploring all possible options. One option would be to focus on simplifying the payment system, such as by streamlining company returns. In addition, new rules could be put in place for the smallest companies, such as assessing tax liabilities on cash flow rather than accounting profits 11, if this was seen to provide a benefit. A key lesson from recent years has also been the need to engage and consult with business prior to any significant tax reform. The uncertainty and negative effects of recent announcements on capital gains tax is a visible demonstration of this point.
One generic element of reform would therefore be to involve business leaders directly in the design of revised tax, regulation and enterprise systems for Scotland. This could provide an opportunity to introduce reforms which reduced the compliance costs faced by companies and the cost to the public sector of administering the system, while still delivering sustainable economic growth and wider benefits for Scotland as a whole.
Competition and consumers
5.5. In simple terms, markets are a mechanism for capturing gains from trade and specialisation. Well-regulated, competitive markets can promote and sustain economic growth where firms strive to gain an edge on rivals by for example improving their products and services or minimising costs.
5.6. Competition therefore provides strong incentives for firms to be more efficient and innovative, helping to raise productivity growth across the economy. When markets work well, businesses also thrive by providing what consumers - whether domestic or international - want better and more cost-effectively than their competitors. Effective competition therefore provides significant benefits for consumers through greater choice, lower prices, and better quality goods and services. Left to their own devices, however, markets will not always deliver the best outcomes for consumers, companies or nations. Therefore governments develop legal, institutional and operational frameworks which aim to influence and direct the appropriate conduct of firms and individuals. Markets do not exist independently of Government, which has a legitimate regulatory role. In an independent Scotland the focus of Government would be on securing or sustaining comparative advantage.
5.7. At present both competition and consumer matters are reserved to the UK Parliament by Schedule 5 to the Scotland Act 1998, with the UK Office of Fair Trading ( OFT) enforcing a range of complex legislation including the Competition Act 1998, the Consumer Credit Act 1974 and the Consumer Protection from Unfair Trading Regulations 2008. Independence would allow future developments in competition and consumer policy to be based on Scottish political, social and economic interests rather than those of the UK.
5.8. The business community in Scotland contrasts significantly with the rest of the UK. Authority over competition in Scottish markets, combined with full fiscal autonomy designed to make Scotland a more attractive place for doing business, would drive general and sector-specific productivity and growth benefits in terms of:
- encouraging businesses to improve their internal efficiency and reduce costs;
- incentivising early adoption of new technology and other forms of innovation;
- increasing the international competitiveness of Scottish businesses and products.
Box 5: Using Air Passenger Duty to improve Scotland's competitiveness
The Scottish Government has no responsibility for Air Passenger Duty ( APD) at present. Under independence, Scotland would have the ability to amend or remove the tax to fully reflect the Scottish Government's priorities and objectives. This would also create incentives for businesses and for consumers.
Adjusting the rate of air passenger duty in Scotland would provide an incentive for airlines to retain and develop Scotland's international air links. This would help reduce the need for Scottish residents to undertake air travel connections within the UK and would help support Scottish business, the Scottish tourism industry and the economy more widely.
5.9. There is a body of evidence that policies designed to support effective competition can stimulate economic growth and business competitiveness. There are however some data limitations in analysing the degree of competition within Scottish markets. A recent paper 12 prepared by the Policy Institute has however noted that "there is some evidence of a lack of competition in markets in Scotland, with prices high relative to the UK in areas like transport, utilities, catering and leisure services". A critical mass of informed and demanding consumers can support and encourage innovation and higher productivity.
5.10. Consumers in Scotland would also benefit from regulation which is more closely aligned with their diverse needs and interests.
Box 6: Extract from Consumer Focus Scotland's response to "Choosing Scotland's Future; A National Conversation" (March 2009)
There are particular aspects of Scottish geography and the attitudes of consumers in Scotland that must be recognised and accounted for in order to achieve equity for Scottish consumers. For example, a far higher proportion of Scotland is rural than the rest of the UK, whilst the specific needs and interests of island residents is a particular consideration in Scotland. Scottish consumers who live in areas which are remote from urban centres often, for instance, enjoy far fewer choices in the products and services that they use - particularly in markets such as energy, retail and telecommunications.
5.11. Consumer policy in an independent Scotland could therefore be developed in the context of a set of key principles or considerations such as: access; choice; safety; information; fairness; representation; redress; and education. This would help deliver a consistent yet flexible approach to thinking about the needs of consumers across different markets, increasing the likelihood of producing real consumer benefits and increased business opportunities.
5.12. Financial regulation is one example of the wider benefits of independence likely to derive from the necessity to focus for the first time on Scotland's distinctive context, needs and aspirations across the full range of regulatory responsibilities in order to deliver opportunities for all of Scotland to flourish, through increasing sustainable economic growth. It is sometimes necessary to underpin an efficiently functioning market to ensure investor protection and to maintain financial stability. As we have seen from recent global events, the impact of financial instability in the real economy can be significant in terms of jobs and investment - with Government intervention also leading to significant strain on public sector finances.
5.13. We now recognise that regulators in national jurisdictions across the world had introduced processes designed narrowly to regulate individual institutions within the different sectors of the industry. In the UK, there was an inadequate development of regulatory mechanisms to address the wider systemic risks, which ultimately led to the crisis which spread through the banking sector, and outside of the financial industry to the real economy. Adair Turner, Chairman of the Financial Services Authority has set out quite clearly that bankers, policymakers and regulators alike were profoundly wrong in their assumptions in the years leading up to the crisis that market discipline was effective. 13
5.14. It is clear, therefore, that although the importance of the financial system to national economies means that financial regulation will remain primarily a national issue - international and European rules are increasingly becoming more important in order to ensure a global response to the current financial crisis and the development of systems to help identify and mitigate these types of risk in the future. It is vital that Scotland is in a position to influence the development of measures to regulate systemic risk in the financial services sector, taking into account the continuing, and welcome, presence of major banks and wider financial services sector in Scotland.
5.15. At present the regulation of financial services is a matter reserved to the UK Parliament by Schedule 5 to the Scotland Act 1998. HM Treasury is the United Kingdom's economics and finance ministry. It is responsible for formulating and implementing the UK Government's financial and economic policy. The Bank of England is the central bank of the United Kingdom. It has two core purposes:
- Monetary Stability - stable prices and confidence in the currency. Stable prices are defined by the Government's inflation target, which the Bank seeks to meet through the decisions delegated to the Monetary Policy Committee, implementing them effectively in the money markets.
- Financial Stability - entails detecting and reducing threats to the financial system as a whole. Such threats are detected through the Bank's surveillance and market intelligence functions. They are reduced by strengthening infrastructure, and by financial and other operations, including, in exceptional circumstances, by acting as the lender of last resort.
5.16. With independence the Scottish Government would judge the most appropriate mechanisms for financial services regulation. This could be done through partnership arrangements with the rest of the UK or following the model adopted by nations such as Ireland, which has its own financial regulator. The needs and interests of the wider economy, consumers and the financial sector itself would be key factors in determining the right approach.
5.17. The importance of financial regulation is significant in relation to the economic future of Scotland as well as the future success of our financial services industry. Importantly, the current global economic crisis has intensified the need for international co-operation on these matters, and policy decisions will need to take account of this.
5.18. In summary, an independent Scotland could determine the best approach to the development and regulation of financial services in Scotland, including making decisions on partnership arrangements with the rest of the UK and in this context which institution(s) should be involved in each of the main aspects of ensuring an efficiently functioning market, financial stability and consumer protection. This would provide opportunities to:
- create a unique Scottish financial services culture to ensure the success of the industry in the future
- ensure market and financial stability aspects meet the needs of the Scottish economy and fiscal policy
- maximise political accountability
- influence EU and international policy from a Scottish perspective
- promote Scotland as a distinct financial centre with a business friendly environment
- attract new institutions to the market.
5.19. Scotland is - and has long been - an outward looking trading nation, with strong global connections. The Government's Economic Strategy places a strong emphasis on international activity, explicitly in the document, and indirectly as a means of delivering long-term growth targets for key sectors and the economy as a whole. The Scottish Government, and its agencies (primarily Scottish Development International), working with businesses, representative and civic organisations, colleges and universities, communities and friends of Scotland across the globe, are already actively working to:
- increase the internationalisation of Scottish companies;
- increase the flow of inward investment to Scotland; and
- promote Scotland internationally as the home of innovative businesses and a vibrant place to do business, work and live.
5.20. While that will continue, increasing the impact of the international sector of the Scottish economy is absolutely crucial in the context of any and all constitutional models.
5.21. The rest of the UK is our biggest trading partner, with "exports" estimated to be worth £26.1 billion in 2007. An independent Scotland would seek to enhance that relationship including developing new opportunities for Scottish business within these isles as well as more widely. Our common history and geography means that the nature of our relationship with the rest of the UK will develop. The UK will continue to be our closest partner and ally with independence bringing the relationship and partnership up to date. The key difference is that this would be an equal partnership. For example, as a full partner in the EU with full voting rights Scotland would want to work closely with the rest of the UK to ensure that common interests were reflected more accurately in EU decision making.
5.22. Independence would of course also provide Scotland with substantive opportunities to enhance international trade through the development of relations with other countries based on Scottish political, social and economic interests. This would present opportunities for businesses, for trade, and for inward investment, underpinned by the capacity to take fiscal decisions which are in Scotland's best interests. As set out in Europe and Foreign Affairs - A new and better way for Scotland, Scottish foreign policy and its delivery would be dedicated to Scotland's interests in a way which is not possible under current arrangements. Scotland's international approach would be focused less on the projection of power and more on trade. It would seek to further develop relationships with the Scottish Diaspora and the creation of appropriate alliances.
5.23. In addition, of course, as a full member of the EU Scotland would continue to have access to that considerable market. Indeed, businesses in Scotland could secure a greater share of that international trade given the capacity of an independent Scottish Government to use expanded responsibilities over economic growth to better support their interests and competitiveness. The European Union provides a market for Scottish exports, and guarantees fairness and non discrimination for Scottish businesses in EU markets. Where such markets are highly regulated (such as energy, telecoms and financial services), an independent Scotland could work closely with regulatory bodies in other countries to ensure that the objectives of the EU single market were met. The Scottish Government could put mechanisms in place to ensure cross border co-operation and trade and investment, while removing some of the barriers which have hindered development of Scottish industry in the past.
5.24. Full fiscal autonomy would enable the Scottish Government to pursue a more integrated and focused range of policies designed to make Scotland a more attractive place for doing business.
Skills and immigration
5.25. The Government's Economic Strategy recognised that Scotland has real strength in the most vital factor for modern economies - the human capital offered by our greatest asset, Scotland's people. It recognised the need to build on and sustain that comparative advantage in the global economy. It also makes clear that labour productivity is behind the UK average and significantly behind the levels in the US and our competitors in the more advanced European countries.
5.26. Looking ahead, demographic change will be a key determinant of Scotland's long term economic performance. Scotland faces two principal challenges in relation to population.
5.27. The first challenge concerns the size of the population. Population growth - and in particular growth of the working age population - is a key driver of economic growth performance. In recognition of this challenge, the Scottish Government has established an ambitious population growth target to match average European ( EU-15) population growth over the period from 2007 to 2017 14.
5.28. The second challenge concerns the potential long-term impacts on the Scottish economy that will result from projected changes in the structure of the Scottish population. Over the longer term, Scotland along with the rest of the UK and other western nations looks set to experience a significant demographic shift, which will result in: an increase in the average age of the Scottish population; a decreasing working age population; and an increase in the ratio of persons of pensionable age to persons of working age 15.
5.29. The GES outlines, within the responsibilities and levers that we currently have, the policies the Scottish Government is putting in place to best meet these challenges. An independent Scottish Government could do more.
5.30. For example, as signalled in Europe and Foreign Affairs - A new and better way for Scotland, independence would provide Scotland with substantive opportunities to pursue policies based on Scottish political, social and economic interests. As such, immigration policy could be tailored to address some of the economic challenges that may emerge as a result of demographic change, and to encourage more migrants to move to Scotland in order to stimulate population - and economic - growth. Immigration flows could also help address skills shortages in the labour market, and, in particular, shortages that were unique to Scotland.
5.31. An independent Scotland would manage immigration effectively to meet our own economic, social and demographic priorities and needs. An independent Scotland would be better placed to create the conditions for talented people to live, learn, visit, work and remain in Scotland.
5.32. The current devolution settlement provides no authority for the Scottish Parliament to sanction meaningful borrowing by the Scottish Government. Given that the Scottish Government is responsible for providing most public services in Scotland and significant infrastructure projects, such as investment in roads, schools and hospitals, this situation is a clear anomaly. In an independent Scotland, responsibility for managing public sector borrowing would lie with the Scottish Government giving it the ability to borrow on financial markets subject to the normal market constraints faced by other governments.
5.33. The Scottish Government's views on borrowing autonomy were set out in a paper published earlier this year 16.
5.34. In the context of transport infrastructure, a significant advantage of greater borrowing autonomy is that it would provide the Scottish Government with greater influence over the pace and priorities of Scotland's capital expenditure programme and provide an alternative source of financing for major infrastructure projects as and when required.
5.35. This would create further opportunities to address the clear infrastructure needs of Scotland more quickly, not least in enabling early progress with a wider range of critical projects. For example, by phasing funding for the new Forth Crossing, capital budgets would be freed to take forward a range of other projects at the same time as the bridge construction, bringing additional immediate and long-term economic benefits.