by Patrizio Lecca, Peter McGregor and Kim Swales, Fraser of Allander Institute, Department of Economics and Strathclyde International Public Policy Institute, University of Strathclyde and Centre for Constitutional Change

In tone the White Paper appears to mark a move in the direction of the Scandinavian model, but with the important difference that significantly improved childcare and a collaborative approach to labour markets, for example, are to be accompanied by a decrease  in taxation overall (though only for corporations and those using air transport,  with personal tax frozen in real terms): a kind of “Scandi-lite” model.  Furthermore, there are distinctive policy stances that imply major commitments on the expenditure side including: continuing tuition-free Higher Education for Scottish students, free prescriptions and personal care; maintaining the real value of the state pension (and possible delay of the increase in pension age to 67) ; reductions in energy bills.

One immediate question is therefore the feasibility of such tax and expenditure plans against the background of the IFS’s warnings about the state of future Scottish public finances. Within the White Paper discussion of public finances is restricted to the comparatively short-term: the only data on public finances  relate to single year (2016/17), and this seems to be based on the most optimistic assumptions about oil revenues (and abstracts from the interest rate premium that ESRC research suggests would have to be paid on Scottish-specific debt). Unless Scotland is lucky with the oil price it seems likely that there would be a “price” to pay for independence – at least in the short-run. This likelihood is significantly increased when the costs of transition ( for example, the need for extensive negotiations and establishment of new institutions) are taken into account.

Of course, the economic case for or against independence does not depend on the public finances for a single year. However, in the IFS analysis the problem is that projections of declining North Sea Oil revenues and a more rapidly ageing population imply a significant deterioration in public sector finances in Scotland relative to the UK as a whole, so that while both economies face challenges, the Scottish Government faces a significantly greater challenge. 

Does this inevitably mean that the Scottish Government’s vision of a Scandi-lite economy is unattainable? If the Scottish Government’s optimism on growth was justified, would it provide a way out of the apparent expenditure-tax constraint? Strictly, the methodology of IFS appears to preclude getting out of the expenditure bind by growing faster (since they effectively fix tax take and expenditure to GDP). But in practice policy choices could reduce the ratio of government expenditures to GDP – and these choices are easier within a more rapidly growing economy. Furthermore, in projections of this type the assumed starting position is very important, and if the Government’s optimism on the initial deficit was to prove justified the results could alter significantly. It is also worth noting that IFS do not compare the case of independence with what happens if Scotland remains part of the UK: while elements of the impact of faster ageing may be automatically funded under a continuing union, this would not be true for all age-related expenditure. A more rapidly ageing population is a challenge irrespective of the constitutional settlement.

Higher growth can in practice help Scottish public finances. The key question then is whether independence would generate higher growth rates. A number of possibilities are mentioned in the White Paper.

First, the analysis of (a balanced budget) reduction in the corporation tax rate suggests a beneficial impact on the level of GDP and employment, but typically not its rate of growth. Furthermore, that analysis assumed an agreed reduction within a devolved Scotland so that retaliation was not an issue. Under independence retaliation becomes a real concern with the risk of a “race to the bottom” and lower tax revenues for both governments.

The emphasis on growth in exports is entirely rational in a small open economy like Scotland, but Scotland’s heavy concentration in RUK trade makes it particularly susceptible to the creation of a “border effect” after independence, and these effects are known to be substantial elsewhere.  This is currently being explored by research being conducted by the ESRC team.

Again, a stimulus to the female participation rate could have significant effects on the level of GDP, and on growth during the period in which it is increasing (although there would be downward pressure on real wages). Whether significantly extended child care provision generates a sufficiently significant stimulus to tax revenues to make the policy ultimately self-financing merits further analysis.

Tax incentives to innovation may succeed in stimulating continuing growth, but this is not an impact that appears easy to establish, though tax/expenditure decisions could undoubtedly have some beneficial effect.

The distinctive position of the Scottish Government on net in-migration, provided it can be implemented and proved effective, could stimulate growth, although migration responds to developments in the economy, so that greater growth may be required to encourage in-migration.

So will we be wealthier under independence?  Possibly, but it seems likely that there would be a “price tag” to be paid for independence in the short-run, with some disruption to business as usual. In the longer term higher growth offers the promise of genuine gain, but there is considerable uncertainty about the impact of independence on growth, especially since under devolution the Government already has significant influence over many of the determinants of growth. Furthermore, many of the potential gains identified in the White Paper could be secured under less radical forms of constitutional change.