Scottish Labour’s devolution proposals: analysis

David Bell and David Eiser

The Scottish Labour Party has proposed further powers for the Scottish Parliament. They are perhaps not as radical as might have been expected, but the argument is that rights that are enshrined at UK level – such as free health and education – should be paid for from UK tax resources. This leaves around 40 per cent of spending that could be directly paid by Scottish taxes.

In terms of cash raised, the most important proposal is to extend the Scottish share of income tax from 10p to 15p of each rate band.  The 10p rate is included in the Scotland Act 2012, and will become a reality for Scottish taxpayers in 2016. The Office of Budget Responsibility is charged with forecasting the revenue from the 10p share. It does so at each budget. Its forecast in March 2013 was that the value of the 10p share to the Scottish Government would be around £4.5bn in 2014-15. Another OBR forecast for Scotland will be published alongside this week’s UK budget, but is unlikely to be substantially different, given the recent sluggishness of tax revenues. Increasing the share to 15p is likely therefore to generate around a further £2.2bn in revenues, broken down across bands as per the table below. Continue reading

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Budget 2014: distributional implications

Speaking before Budget 2014, John Swinney declared the Budget was the Westminster Government’s ‘last chance to seriously tackle inequality’. Early in his Budget speech, George Osborne argued that ‘income inequality is at its lowest level for 28 years’, so he clearly agrees that it is an important issue[i]. But did the Budget measures do anything to improve this statistic further? Continue reading

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The 50p tax rate and inequality

Alex Salmond has twice this week refused to commit to re-introducing the 50p rate of income tax on incomes over £150,000 – first following his New Statesman lecture in London, and then at First Minister’s Questions on Thursday.

In making the case for independence, the Scottish Government has frequently argued that having access to tax and benefit levers would enable it tackle inequality more effectively than successive Westminster governments have tended to do. Against this backdrop, the First Minister’s refusal to support the re-introduction of the 50p rate seems contradictory – but is it?[i] Continue reading

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The Ageing Population Problem

After the release of our paper, Funding Pensions in Scotland: Would Independence Matter?, I was called to the Scottish Affairs Committee at Westminster to give evidence. The most interesting issue that we discussed was the level of net migration into Scotland that we would need to see in order to eliminate the cost differences that are projected between Scotland and the UK, and eliminating the costs of an ageing population. Continue reading

Posted in Migration, Pensions, Population, Uncategorized

The economics of Scotland’s currency choices, by Ronald MacDonald

The recent decision by all of the major unionist parties to rule out an independent Scotland participating in a sterling monetary union has created much political heat. So much so, that there is a danger that the light of the underlying economics will be extinguished in the maelstrom. As an economist, and a specialist in currency regimes, I think it is wise to return to the basic economics of this issue lest some costly mistakes are made for both Scotland and the rest of the UK.

When questioned about the suitability of a sterling monetary union, the Scottish Government’s stock response is to say that its Fiscal Commission (FC)1, comprising a number of eminent and distinguished economists, considered all of the potential currency options open to an independent Scotland and settled on the sterling monetary union as its preferred option. However, in coming to that decision it is striking to note that the FC considered how the Scottish economy compares to the UK today rather than what the economy is likely to look like post independence, which is surely the relevant comparison. Continue reading

Posted in Currency, Uncategorized

Tackling income inequality presents challenges for Scotland

(Press release issued on 20th January)

Scotland faces significant challenges in closing its “inequality gap”, according to new research carried out by University of Stirling academics and funded by the Economic and Social Research Council (ESRC).

Scotland and the UK currently have much higher income inequality than comparable Nordic countries such as Norway and Denmark, with Scotland having a gap against these Nordic countries of 4.7 points on the Gini Coefficient – the recognised measure of the equality of a nation’s income distribution.

The Scottish Government has stated that reducing inequality is a strategic priority. The research found the Scottish Government’s current fiscal powers – including council tax and the new Scottish Rate of Income Tax – are relatively ineffective at tackling inequality because they cannot be targeted at specific income groups. Continue reading

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Call for Papers: Country Size and Border Effects in a Globalised World

We are pleased to announce that SIRE and the  School of Economics at the University of Edinburgh will host a two-day workshop on ‘Country Size and Border Effects in a Globalised World’ on June 26 and 27, 2014.

The workshop will bring together researchers in the fields of International Economics, Macroeconomics and Political Economy to discuss recent empirical and theoretical work on the economics of country size and new borders. Keynote lectures will be delivered by Prof. James Anderson (Boston College and NBER) and Prof. Enrico Spolaore (Tufts University and NBER).

The organisers invite submissions of papers relevant to the theme of the workshop. Topics of special interest are:

  • The border effect in international trade and macroeconomics
  • The political economy of country size
  • The gains from economic integration

Reimbursement of travel expenses and accommodation costs will be available to speakers and discussants subject to conditions.

The deadline for submissions is March 9, 2014.

Paper submissions should be sent as an e-mail attachment to borders2014.ed@gmail.com.

Acceptance decisions will be communicated by March 23, 2014.

The workshop organisers are David Comerford (University of Stirling), Sevi Rodriguez-Mora (University of Edinburgh and CEPR) and Robert Zymek (University of Edinburgh).

A copy of this announcement is attached and available from the SIRE website http://www.sire.ac.uk/news/index.html

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The Scottish Independence Podcast

Just a short blog-post to provide a link to my interview with Michael Greenwell of the Scottish Independence podcast. This is no.46 in Michael Greenwell’s series of interviews which are largely from a pro-Yes viewpoint. In previous interviews Michael has spoken to Lesley Riddoch, Patrick Harvie, Carolyn Leckie, Colin Fox, Robin McAlpine, James Maxwell, Stephen Noon, and Derek Bateman, among others.

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Debt – the first move (published in the Scottish Sun 15/1/2014)

The UK Government has just announced that it will honour its debts. It has done so since before Charles II lost his head, so why did it need to make this announcement? Because it claims that those who lend money to the UK are asking questions about how the debt will be shared if Scotland becomes independent. So far, the UK government has refused to say what it might do after independence. But these concerns have forced it to show its hand. The UK government depends on the money markets to keep our schools open, to pay for pensions and to keep the health service running. Just now it can borrow at very low interest rates. Upset the markets and these rates would rise. The extra costs would have to be paid from higher taxes, or from cuts in public services.

Why the concern about Scottish independence? Because the UK expects that an independent Scotland would become responsible for a share of UK debt. If it was shared equally across all of the UK population, Scotland’s interest charges on the debt would be around £4bn. This is equal to double the total amount of council tax raised in Scotland. Some argue that this is the only fair way to share the debt: the SNP argues that Scotland’s share should be reduced because of the money that North Sea oil has made for the UK.

Uncertainty about the way the debt might be divided will make investors nervous. They will be less willing to lend to the UK. This would push up interest rates. To keep investors happy the UK Government has removed the uncertainty by agreeing to repay all debt issued before the independence referendum. It expects to agree with the Scottish Government that it will pay its share of the debt charges. But, if there is a Yes vote, the Scottish Government can choose not to pay.

A threat not to pay might be part of a strategy to get a good deal when the split takes place. There will certainly be a lot to argue over: the currency, Trident, energy, borders and so on. It will take some time to reach a deal.

But there is a danger in threatening not to take on a share of the debt. One of the first actions of an independent Scotland will be to go to the markets to raise cash. It will also want to keep interest charges as low as possible. For this, it will need a good credit rating. And the markets might be wary of a borrower that would not take a share of UK debt.

Posted in Debt

Scottish Independence: Debt and Assets

The level of debt and how an independent Scottish Government would deal with it is a hugely important issue. Given that it is currently running a deficit – its spending exceeds its tax revenue – Scotland will be dependent on the commercial money markets to supply funds to pay for that part of the costs of public services which cannot be paid from current revenues.

Market sentiment will play a key role in determining the price that the Scottish Government pays for this borrowing facility. If the markets think Scottish bonds will be low-risk and highly tradable, they will charge a low price. If they take the opposite view, then the Scottish taxpayer will have to pay high interest charges on its debt. The White Paper estimates that these charges will lie in the range £2.7bn to £5.5bn. Even the lower end of this range is greater than the Scottish government’s current capital budget.

Continue reading

Posted in Debt