Flawed process 2 damaging deal

Just as it is often said ‘the child is father to the man’, it is also true that the way a negotiation is conducted will leave indelible marks on the resulting deal. This is very much the case with the negotiations leading to the recently agreed fiscal settlement. So before considering how the fiscal settlement will adversely affect social justice in Scotland, it is worth considering the flaws in the negotiating process which have led to a poor deal.

The fiscal settlement negotiations were a classic case of the Treasury ruthlessly getting its own way. The first thing the Treasury did was to secure agreement that the negotiating process should be conducted in secret. This removed what should have been the Scottish Government’s strongest potential weapon – namely, the tide of public anger which might have arisen if the public had been aware of the course the negotiations were taking. Secondly, secrecy allowed Westminster to exploit its expertise in news management to ensure that what did enter the public domain in the mainstream media was a highly selective view of the issues.

The next Treasury success was to successfully limit the scope of the negotiations, making sure that two important features were taken as givens, even though neither had been implicit in the original Smith agreement. One was that the adjustment to the abatement to the Scottish Government’s block grant should be calculated using tax revenues in rUK (i.e., the amount of tax collected) rather than tax base (the aggregate of taxable incomes). The effect is to expose Scotland to a whole new class of risk.

But critically, the other restriction the Treasury achieved was to limit consideration to variants of what has come to be known as Holtham indexation. In other words, the amount which is subtracted off from Scotland’s block grant will grow, in some way or other, in line with growth in rUK tax revenues. All such arrangements have the effect of pitching Scotland into an economic race with rUK: if you don’t grow your tax revenues as fast, you will be penalised. Note that in the original Smith agreement all that said was that some suitable form of indexation should be used.

Finally, the Treasury’s clincher was to adopt as its starting position an extreme variant: on the Treasury’s originally preferred option, Scotland would have had to grow its tax receipts 13% faster than rUK simply to have kept the same funding we would have had under Barnett. This should have been laughed off the table immediately – but wasn’t. The upshot was the Treasury was able to present its eventual ‘reluctant’ move from this position as a negotiating triumph for the Scots, even though we ended up in another part of the restricted space specified by the Treasury.

So what emerged from this flawed process was a flawed deal, one where we have to grow our tax revenues at least as fast as rUK or be penalised. This brings us then to the central question: do we have adequate economic powers to give us a worthwhile chance of success in this economic race with rUK? The answer is no. After all, it’s not just that monetary policy is made for south east England, not for us. In addition, the Scottish Government will have control of only a single major tax, income tax; it will have restricted borrowing powers; and it lacks control of competition policy, international trade development, licensing of North Sea oil, utility regulation, and a number of labour market responsibilities.

At some point, Scotland will inevitably slip behind in the economic race. The danger is we’ll then get into a self-perpetuating cycle of higher taxes, further economic decline, cuts in public services, and ever increasing austerity. There is little hope, given this prospect, of achieving fundamental social change in the brave, new post-Smith Scotland. Indeed, quite the reverse. A very senior Treasury official let slip, during the course of the negotiations, that he thought Scotland’s most powerful economic weapon would be the ability to lower the higher rates of income tax relative to rUK, and to turn Scotland into a haven for the rich. There is a risk that, under extreme fiscal pressure, some future Scottish government might be tempted to implement such a socially disastrous policy.

Jim Cuthbert is an independent statistician and he analyses of the fiscal settlement can be found on the Jimmy Reid Foundation website (http://reidfoundation.org/)