SELECT COMMITTEE ON ECONOMIC AFFAIRS - Parliament

British Academy—Written evidence
16. The Scottish economy would be unable to maintain a simultaneously low-tax/ high-spend
position. The Scottish Government would have to contend with establishing a new,
politically-palatable balance between tax and spend.
17. The outcomes of the major structural changes associated with independence will be
uncertain. Outcomes may be better or worse, but bond markets are likely to extract a
risk premium until these uncertainties are eliminated.
18. Agreeing the terms of separation will take time and involve substantial set-up costs.
Debates will centre on the allocation of debt and assets, as well as new institutional
arrangements.
19. Finally, there will inevitably be collisions. Parties other than the governments of Scotland
and the rest of the UK will become involved in negotiations on an independent
Scotland’s proposed fiscal arrangements. Questions likely to be raised include the
prospect of fiscal integration with the Eurozone, and opposition from larger countries
should Scotland seek to reduce taxation rates in line with other small country ‘tax
havens’.
LESSONS FROM THE EUROZONE
20. As is the case with federations such as the United States, automatic stabilisers and risk
sharing measures are part of the UK’s current fiscal system. In the event of a local shock,
tax revenue goes down and social security payments go up, thus cushioning the shock.
These would be lost by an independent Scotland, and thought would have to be given to
how they could be replaced.
21. One alternative to having automatic stabilisers is to employ cyclical borrowing, as occurs
in the eurozone where there is no central fiscal authority. But this method has proved to
be risky, with eurozone countries suffering as a result.
22. An independent Scotland would naturally have scope for independent fiscal policies, e.g.
internal fiscal stabilisation, and introduction of a low corporation tax rate in line with the
Republic of Ireland or Crown dependencies like Guernsey and Jersey.
23. But there is doubt whether the latter would meet with approval from the EU. Such
disapproval could have consequences if conditions for EU and possible eurozone
membership have to be negotiated between the EU institutions and Scotland.
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