Observations

Full fiscal autonomy delayed? The SNP's plans for further devolution to Scotland

Date: 21 April 2015
Authors:
Publisher: Institute for Fiscal Studies

Yesterday, the SNP published their election manifesto. Plans for full fiscal autonomy – now renamed “full fiscal responsibility” – remain as a medium term goal. But, the manifesto suggests that such plans would take “several years” to negotiate and implement. In the meantime, priority would be placed on moving beyond the recommendations of the Smith Commission with the devolution of corporation tax, National Insurance Contributions (NICs), and the welfare system.

In this Observation, part of the IFS' election analysis funded by the Nuffield Foundation, we examine what these plans would mean for the Scottish Government’s budget and powers, and the challenges involved in moving beyond them to reach full fiscal responsibility for Scotland. In doing this we look at the much cited £7.6 billion figure, originally from the IFS, which opponents of the SNP's plans have claimed would be the cost to Scotland of full fiscal responsibility. The figure is taken from recent IFS projections of Scotland’s fiscal position in 2015–16. In particular, we examine and reject a number of criticisms of the figure – that it is a snapshot for a single year and therefore irrelevant, and that it does not account for future growth in the Scottish economy.  

The Smith Commission and beyond

Following Scotland’s “No” vote in the independence referendum last September, the Smith Commission was set up with a remit of agreeing proposals for further devolution to the Scottish Parliament. It published its recommendations just two months later. On the tax side, key recommendations include the devolution of income tax rates and bands on non-savings income, air passenger duty, and the assignment of half of VAT revenues. On the spending side, around £2.5 billion of mainly disability benefits would be devolved to Scotland, as would powers over the housing elements of universal credit (UC), and powers to create discretionary payments that could provide additional support to individuals facing hardship on a case-by-case basis. Taken together, the plans would see devolved or assigned revenues making up more than half the Scottish Government’s budget, substantially higher than the 7% or so, at present.     

All of the parties represented in the Commission say that they are committed to delivering its recommendations for further devolution to Scotland in full. In addition, the Labour Party says it would go further by giving the Scottish Government not only the power to make discretionary payments, but also the power to top up any benefit – even those not being devolved, such as the state pension, child benefit or universal credit – from its own budget.

The SNP’s manifesto suggests going much further though. In the first instance, it says the SNP’s priority would be to secure the devolution of “powers over employment policy, including the minimum wage, welfare, business taxes, national insurance and equality policy”. In 2013–14, the latest year for which figures are available:

  • NICs are estimated to have raised £8.7 billion in Scotland;
  • (Onshore) corporation tax is estimated to have raised £2.8 billion in Scotland, and;
  • Spending on benefits and tax credits currently administered by DWP or HMRC is estimated to have been £17.4 billion in Scotland.

Such plans would therefore mean substantial additional revenue and spending being devolved to Scotland. The amount of taxes under the Scottish Government’s control (including local taxes) would increase by around 70% compared to the Smith Commission plans. And the Scottish Government would gain full control of welfare spending equivalent to almost half its existing budget. This would allow Scotland to not only top up existing benefits, but also engage in more significant reforms to the system. However, Scotland would remain some way short of full fiscal responsibility, especially on the tax side, where inheritance tax, capital gains tax, excise duties, and the remaining half of VAT not assigned to the Scottish Government, for instance, would continue to flow to the UK Government.  

The SNP’s assumption is that the Barnett formula would continue in operation alongside this greater devolution with the “no detriment” principle – that further devolution should not make Scotland any worse off – continuing to apply. Whether the unionist parties would agree to it applying in the face of devolution much greater than that envisaged by the Smith Commission is unclear though.

Moving to full fiscal responsibility

These plans for further devolution represent a stepping stone on the SNP’s medium term goal of full fiscal responsibility (and longer term goal of Scottish independence). The SNP have been clear that they believe that the Barnett Formula and no detriment principles should remain in place while “the Scottish Parliament’s powers remain short of full fiscal responsibility”. The implication is that once full financial responsibility is delivered, these should no longer remain in place. This would imply that the Scottish Government would become responsible for balancing its own budget. It is at this point that the unionist parties claim Scotland would face a fiscal gap necessitating spending cuts or tax rises.

These claims are based, in part, on IFS projections of Scotland’s underlying fiscal position in 2015–16. These figures show an implicit Scottish budget deficit of 8.6% of Scottish GDP compared to a budget deficit for the UK as a whole of 4.0% of GDP. A difference in borrowing of 4.6% of Scottish GDP is equivalent to £7.6 billion in cash terms. This is the figure which has been widely cited as the size of the gap Scotland would need to fill under full fiscal responsibility.

The figure has also been subject to a number of critiques. First, that it is a snap-shot relating to one year only and therefore irrelevant given that full fiscal responsibility would likely take several years to deliver. And secondly that it does not account for future growth in the Scottish economy.  How do these criticisms stack up?

It is true that the figures relate to 2015–16, and that figures for later years may differ. Projecting further into the future is also more difficult as there is more uncertainty about how Scottish and UK revenues and spending will evolve the further ahead one looks. But with these caveats in mind it is possible to undertake such projections. Table 1 shows projections for each year to 2019–20, calculated on the same basis as our figure for 2015–16. It shows that though Scotland’s deficit is projected to shrink from 8.6% of GDP in 2015–16 to 4.6% of GDP in 2019–20, the gap between Scotland’s deficit and that of the UK as a whole would, if anything, grow somewhat larger in the years ahead, reaching £9.7bn in 2019–20 (equivalent to £8.9 billion in today’s prices). The figure for 2015–16 therefore does not seem misleadingly pessimistic given current revenue and spending forecasts.  

Table 1: Net Fiscal Balance, UK and Scotland, 2013–14 (outturns), 2014-15 to 2019-20 (projections)

Net fiscal balance

2013–14

2014-15

2015-16

2016–17

2017–18

2018-19

2019-20

% of GDP

 

 

 

 

 

 

 

Scotland

-8.1%

-8.6%

-8.6%

-6.8%

-5.4%

-4.6%

-4.6%

UK

-5.6%

-5.0%

-4.0%

-2.0%

-0.6%

+0.2%

+0.3%

Difference

-2.5%

-3.7%

-4.6%

-4.8%

-4.8%

-4.8%

-4.9%

Cash-terms difference

-£3.8bn

-£5.9bn

-£7.6bn

-£8.2bn

-£8.5bn

-£8.9bn

-£9.7bn

Source: GERS 2013–14, OBR EFO March 2015, ONS 2012-based population projections, and author’s calculations.

The projections are calculated on the basis of Scotland’s share of UK public spending remaining at 9.2%; Scotland’s share of the UK’s oil and gas revenues remaining at 83.8%; and Scotland’s onshore revenues-per-person remaining at 97% of the UK average throughout the projection period (in each case, the same relative level as in 2013–14 as estimated in the Scottish Government’s GERS publication). This means, for instance, that the figures assume Scottish onshore revenues per person will grow at 1.9% per year in real terms between 2013–14 and 2019–20 – the same rate of growth that the OBR forecasts for the UK as a whole. In cash terms, growth in onshore revenues is projected at £14 billion, very similar to the £15 billion growth the SNP have cited, based on similar projections by Fiscal Affairs Scotland.

Of course if, with additional powers, the Scottish government could grow the Scottish economy more quickly than that of the rest of the UK then revenues would grow more rapidly, shrinking the fiscal gap. But there is no guarantee of such growth and assuming similar growth between Scotland and the rest of the UK is clearly the most useful baseline comparison.

It also provides information to assess how much faster growth would have to be to close the gap. To close the gap by 2019–20, for instance, Scottish revenues per person would need to grow by more than twice as much as forecast for the UK as a whole – 4.5% in real terms per year – between 2013–14 and 2019–20. Even closing the gap over a longer ten or fifteen year horizon would require a step-change in Scottish economic performance, and revenue generation. Such a change is not impossible, but is much easier to promise than it is to deliver. As we have highlighted before, the types of policies previously outlined by the SNP as potential ways to boost growth, such as cuts to corporation tax and air passenger duty, and increases in childcare spending, would, at least in the short to medium run, cost the government money, and widen rather than shrink the fiscal gap, even if they did boost growth.   

Conclusions

The SNP’s manifesto confirms a policy goal of “full fiscal responsibility”, at which point Scotland would have to fund its spending through its own tax revenues and borrowing. In the shorter term though the priority is a package of substantial further devolution of tax and spending powers that stops some way short of full responsibility. The hope seems to be that any fiscal gap opening up as a result of full fiscal responsibility would therefore be delayed by invoking the “no detriment” principle for a package that stops short of full fiscal responsibility.

Delaying a move to full responsibility for a few years would not on its own deal with the fiscal gap though. Indeed, if anything, given current spending and revenue forecasts, the gap would likely grow rather than shrink over the next few years. It would remain the case that full fiscal responsibility would likely entail substantial spending cuts or tax rises in Scotland. While a big and sustained rebound in oil revenues or significantly higher growth in Scotland could mitigate this, there can be no presumption that either would occur. 

Update 22/04/2015: A second Observation by David Phillips has now been published on the SNP's plans to prioritise the devolution of areas of tax and benefits - including national insurance contributions, welfare policy and corporation tax.