The fallout from the Scottish referendum will affect all of us

 
Allister Heath

REGARDLESS of how Scotland votes on 18 September, change is in the air. Even if the Scots vote no to independence, the status quo is no longer sustainable. All the political parties are promising significantly greater devolution for Scotland within the UK – and in particular, the Scottish parliament would gain greater tax raising powers.

Of course, if the Scots do vote yes and decide to break up the UK, the changes will be immensely greater, but they wouldn’t come as a surprise. More interesting, at least for the purposes of this column, is that few City-based analysts grasp what devo-max or any other settlement of that nature would mean for the rest of the UK.

The Tory contribution to this debate comes in the form of a commission chaired by Lord Strathclyde. It is likely to recommend that the Scottish government and members of the Scottish Parliament (MSPs) be given the right to fully vary Scottish income tax rates and bands. This would be a radical departure and mean that the Tories are promising even greater devolution than Labour. If implemented in a meaningful way, the measures would make the Scottish Parliament responsible for raising 40 per cent of the revenue it spends.

The current rules, which have never been used, allow the Scottish government to increase or cut income tax by 3 points; new rules which will come into force in two years’ time will give it the right to vary taxes by 10 points and gain control of stamp duty. But the freedoms envisaged in the Strathclyde report would go much further even than this.

The language used by Ruth Davidson, the leader of the Scottish Tories, in a preview of the Tory offering was spot on: she bemoaned the shocking disconnect between the Scottish government’s responsibility to raise money and its freedom to spend cash. It is worth quoting Davidson at length: “Holyrood [home of the Scottish government] is, in effect, a giant spending machine; ministers and MSPs the signatories of a vast cheque book... the difficult business of raising public money from taxpayers continue to rest mostly with Westminster. The freedom to spend that money is enjoyed mostly by Holyrood...that system must end...we cannot continue with a pocket-money parliament, which gets its allowance from Westminster and then spends as it pleases. We must move to a new system that brings real accountability to Scotland’s politics. The buck must stop at Holyrood.”

This is right; let us hope that the Tories actually mean what they say. Their plan could lead to two possible outcomes. Scotland could either go socialist, hike taxes and suffer a massive outflow of talent and capital; or it could cut taxes to try and attract as many entrepreneurs and higher earners as possible. This would change everything and revitalise tax competition within the UK.

But the further strengthening of Scottish autonomy cannot happen in a vacuum. Under the UK’s deeply flawed constitutional settlement, Scottish MPs can still vote on the fiscal affairs of the rest of the country, including England – and yet English MPs will soon have even less power over Scottish fiscal affairs than before. This makes no sense. Devo-max (or a variant therefore) is a great idea, but not just for Scotland. The UK needs to adopt a federal structure, and all four nations that make up the UK (and perhaps also London) need to be granted greater devolution, responsibilities as well as rights. The UK-wide government needs to focus on foreign affairs, defence, monetary policy and a few other broad areas; a series of devolved parliaments needs to do the rest and raise their own money to pay for their own spending. Even if Scotland votes no, the current constitutional arrangements are finished. Britain’s broken political system will have to be reformed, and far sooner than the Westminster establishment realises.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath

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