SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

Professor David Bell—Oral evidence (QQ 1–55)
Professor Bell: I think that the Scottish Government would need to be pragmatic and
consider where their largest markets are. If they took the view that Scotland’s most
important market was the rest of the United Kingdom, they would need a set of financial
regulations that were very close to those for the rest of the UK. Clearly, there would be
potential difficulties if regulation was looser in Scotland relative to the rest of the UK,
because that might set up behaviours among banks that might be deemed to be threatening.
Baroness Kingsmill: Threatening to whom?
Professor Bell: Threatening to overall financial stability.
Q27 Lord Levene of Portsoken: We have talked about the central bank and the
regulator, but what about tax? Would you expect an independent Scotland to introduce its
own rates of corporation tax and personal income tax, which could be different from those
for the rest of the UK? If that happened, what would be the likely economic effects on the
rest of the UK and on Scotland?
Professor Bell: Scotland will very shortly have the ability to change its income tax rate, even
without independence, relative to that of the rest of the UK, but it has actually had that
since devolution in the form of the 3p variation possibility on the basic rate. That facility has
not been used, so it will be interesting to see what happens once the Scotland Bill comes
into force.
On corporation tax, I suspect that that might be part of the negotiation that we have just
been referring to, given the relationship between monetary and fiscal policy. Clearly, if one
takes the Irish example, corporation tax has played an important role in the success of the
Irish economy over the past couple of decades. That advantage is now widely resented.
However, if I may digress slightly, it is wrong to view the success of the Irish economy as
being based purely on having a corporation tax advantage. Between 1997 and 2008, Ireland
had a 50% increase in employment—absolutely massive—and a lot of that was to do with
more women coming into the labour force and large-scale immigration. It is not obvious that
those avenues would be open to an independent Scotland. I suspect that the effect of a
change in corporation tax might be less apparently dramatic than has been the case in
Ireland.
Clearly, the issue of corporation tax is up in the air at the moment. The United States is
getting extremely exercised by the fact that large numbers of its corporations hold huge
amounts of cash overseas and it has targeted a number of what it deems tax havens,
including Ireland, as it seeks ways to extract more tax from these corporations. That would
be an argument to suggest that the seeming tax advantage that Ireland currently enjoys may
not last into the longer term. If Scotland were to cut corporation tax, there would have to
be some increase in taxation elsewhere or some reduction in spending from the Scottish
budget—unless one believes the Laffer curve interpretation that cutting tax rates will
increase revenue.
Q28 Lord Levene of Portsoken: An additional point that I was going to ask about is
VAT, which was recently an issue in the Channel Islands where there is either no VAT or
much less VAT. Companies were diverting their business there so that they could get a
greater share of the cake. If there was a different VAT rate in Scotland, people buying things
online would not really care where the company was located and, because it would be all
part of the same operation, there would be no duty between the two Governments. How
would you sort that out? Would you get into a sort of downwards tax war spiral between
the two as to who would get the biggest share of the cake by charging less VAT?
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