SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

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Dr Iain McLean FBA FRSE—Written evidence cannot see that Scotland would have any lever over the RUK to force it to make this a condition, therefore I assume that it will not be. 27. If this assumption is correct, then the RUK would retain an intense interest in financial regulation in Scotland. To avoid a “mini-Greece” scenario, the RUK might insist in the independence negotiations that the regime of financial regulation in Scotland must be cleared in advance by the Bank of England. 28. The only counter-threat available to Scotland in that case, that I can envisage, would be that Scotland would unilaterally adopt the £ sterling without specifically asking permission, as Ecuador and Argentina have done with the US dollar at times. 29. However, this counter-threat might alarm Standard Life, the Scottish Widows’ Fund, and Aberdeen Asset Management sufficiently that Scotland would be unlikely to use it. 30. For the same reason, I think that the pound Scots is not a realistic option. It would be more likely to depreciate than to appreciate against sterling in the first days and weeks. The history of the Czech and Slovak crowns immediately after the “velvet divorce” could be relevant here. Fiscal policy and taxation 31. As stated in paragraph 5 above, the implications (in comparative statics terms) of the fiscal implications for RUK of Scottish independence are rather small. Two flows of roughly equal and opposite magnitude would cease. Tax income from the Scottish sector of the North Sea would cease to flow to RUK. Social protection transfers and Barnett consequentials from the UK Treasury would cease to flow to Scotland. The per capita implications are relatively serious for the average Scot, but relatively trivial for the average citizen of RUK. 32. A vote against independence from Orkney and Shetland does not change this much. In this I somewhat disagree with Prof. Rowthorn. I cannot envisage that the independence negotiations would result in an RUK including the Northern Isles: i.e., a country of two detached portions surrounding Scotland. The analogy of East and West Pakistan is not exact but sufficiently close to be worrying. 33. Rather, I expect that, as above, it would enable RUK to drive a harder bargain with Scotland on the price to be charged for the common services which the Scottish Government has signalled that it wishes to share: viz., head of state; overseas representation; perhaps military services; perhaps macroeconomic management and financial regulation. 34. In bygone days, such a payment was called an “imperial contribution”. It featured heavily in discussions and proposals for Irish Home Rule between 1886 and 1972 (for it nominally continued under that name in Northern Ireland until the abolition of Stormont in 1972). In the negotiations now envisaged, it would have a different name but the same function. 35. The effects of tax competition between Scotland and RUK would be relatively minor. Here, the biggest foreseeable risk surrounds Corporation Tax. Scottish politicians are 234
Dr Iain McLean FBA FRSE—Written evidence very tempted by the example of the Republic of Ireland, which for decades has attracted mobile industry with low corporation tax rates. 36. Should Scotland lower its corporation tax rate, there would be a deadweight loss as firms with operations both in Scotland and in RUK would immediately package their activities so as to maximise their taxable receipts in Scotland and minimise those in RUK. This would be pure deadweight loss from the perspective of the current UK. 37. Conversely, should Scotland raise its corporation tax rate, firms would do the opposite. Here there is an asymmetry, because any loss would mostly be borne by the Scottish taxpayer. 38. However, the fiscal prospect for an independent Scotland is poor, as Prof. Rowthorn’s work shows. It is important to note that his numbers mainly come from the official Scottish Government (and National Statistics) publication GERS (Government Expenditure and Revenue in Scotland). In the first years after independence, it would be difficult for the Scottish government to cut corporation tax rates. 39. Variation in VAT would lead to huge retail sheds going up in either Gretna Green or Carlisle. More importantly, it would lead online traders to “locate” in whichever part of the present UK offered them the most favourable tax regime. As with corporation tax, variation would lead to a deadweight loss. Amazon’s recent establishment of a base in Jersey for its online sales offers a case in point. 40. Variation in income tax, and its proxy, National Insurance, would have relatively little effect in the short term. Labour is less mobile than capital, and people choose where to live for many reasons among which relative tax burden is unlikely to be dominant. 41. The taxes where an independent Scotland would be least constrained would be those on the most immobile factor of production, viz., land. As an independent Scotland would inherit a truly dreadful basket of land taxes (Council Tax, Business Rates, and Stamp Duty Land Tax), it would have an excellent opportunity to pluck more feathers with less hissing than at present. But such moves towards tax efficiency would have few knock-on effects, because land is where it is. 42. The extreme volatility of North Sea Oil revenue poses a serious problem for Scotland but none for the RUK unless Scotland approaches fiscal collapse a la Greece. By assumption, the regulation of Scottish debt and deficit will have been discussed in the independence negotiations with RUK and with the EU. As negotiators will all be aware of the fiscal risk arising from a collapse in North Sea Oil revenue, they will have an incentive to design robust institutions. This version 22 June 2012 235
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