Full Fiscal Autonomy or Supercharged Smith? - Part 1

Published: 11 May 2015
Author: David Bell

David Bell looks at whether there exists a more stable fiscal settlement between Smith and Full Fiscal Autonomy. Part 2 to follow on Tuesday.

Should David Cameron offer Nicola Sturgeon an immediate implementation of full fiscal autonomy (FFA) for Scotland when they meet soon to discuss the U.K.’s constitutional future? There are early indications that such an offer may be on the cards. For him, there are some attractions:

First, FFA would mean an end to the Barnett Formula. This would be popular with Mr Cameron’s backbenchers (and with UKIP supporters). It would also remove a blockage to achieving a more equitable settlement for Wales, which would likely enhance Conservative support in the principality without substantial cost to the Exchequer.

Second, FFA would require Scotland to take responsibility for all of its revenue and spending decisions. Mr Cameron knows that there is substantial support for this position both inside and outside Scotland. Some SNP supporters believe that it will bring unqualified benefits to the Scottish economy. This view cannot be entirely discounted, but would require a miraculous turnaround in economic performance that is difficult to justify based on past performance.

There would also be support for FFA from outside Scotland because substantially more plausible projections suggest its fiscal deficit will be significantly greater than that of the UK as a whole in the short to medium term. FFA would lead to responsibility for this deficit passing to the Scottish Government from the UK Treasury. Clearly this would bring payoffs to other parts of the United Kingdom where the reductions in public spending needed to balance the budget would be less burdensome.

Against the advantages of offering an immediate move to FFA, this strategy runs the risk of stoking further support for independence. However, the process by which independence might come about is now unclear. Another referendum looks unlikely in the short run. The lack of an answer to the currency question and the collapse in North Sea oil revenues both weaken the economic case for independence. The failure of another referendum would be very damaging to the independence cause.  Nevertheless, given the unpredictability of Scottish politics, the risk that FFA would precipitate a further move to independence might be too much for a Prime Minister who is committed to maintaining the union.

The negative budgetary implications of FFA have affected its support within the leaders of the SNP. Although FFA is effectively a practice run for independence with the major exceptions of the responsibilities for currency and monetary policy, the language relating to it has changed noticeably in the last few months. On the Andrew Marr show on 25th January 2015, Nicola Sturgeon said “I want full fiscal autonomy for the Scottish government. I want us to be responsible for raising our own revenues and deciding how those revenues are spent.” On April 19th on the same show she argued that “the Barnett formula should remain in place for as long as Scotland’s budget is determined by Westminster” and “even if we had an agreement for full fiscal autonomy as we said in our submission to the Smith Commission that would take several years to implement”. It appears that the SNP want FFA at some undefined future date. The change in the response seems like a strategy to kick the issue of Scotland’s budget deficit down the road.