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Economists : Smith proposals would leave Scotland in "worse position than Greece

Economists : Smith proposals would leave Scotland in “worse position than Greece

NEW powers for Holyrood proposed by the Smith Commission risk forcing Scotland into a “self-perpetuating cycle of economic decline” which could leave the country in a worse position that Greece, according to respected academics.
Economists Jim and Margaret Cuthbert, in a paper for the left wing Jimmy Reid Foundation, called for more powers to be transferred to Scotland if enhanced devolution is to work, and argued that a form of federalism may prove the price “if England wishes to preserve the Union”.

The cross-party Smith Commission package, agreed following the No vote in last September’s independence referendum, set out plans for powers including control of income tax rates, some welfare policy and limited borrowing to be transferred to Holyrood.

However, a series of experts have said they believe the agreement was hampered by the challenging timetable set out by Gordon Brown ahead of the vote, and pose a series of hugely complicated issues if it is implemented.

The Cuthberts argue that the transfer over income tax had been proposed along with little control of policy that could grow the tax base, which is a problem as a lower proportion of higher-rate taxpayers are resident north of the border.

The Scottish Parliament would also have insufficient borrowing powers to cover volatility in tax receipts, the economists found, while in practice it would be unable to set significantly higher tax rates as it would lead to skilled workers moving south.

They also concluded that there was no satisfactory solution to what has become known as the gearing problem. It is argued that if the UK Government funded an income tax cut by reducing services in reserved areas such as defence, Holyrood would effectively be forced into similar cuts to protect the Scottish economy.

However, the cut would have a disproportionate impact on Scotland, as Holyrood would be forced to make spending reductions in the limited areas it controls, such as education and health, which would not necessarily have been affected south of the border.

The report said it was “difficult, if not impossible” to find a solution without “something akin to a proper federal system for the UK.”

The Cuthberts also identified problems with the financial arrangements that would have to be formed between London and Edinburgh, which would have to be so complex that they “are unlikely to be able to be operated in an open and satisfactory fashion.”

The report concludes: “Any Scottish Government will actually be severely constrained in its freedom of action – and will also have to spend a lot of its policy effort acting in a reactive, rather than pro-active, mode. The constraints arise because, in practice, it will not be able to change rates of income tax in Scotland too much from those in the rest of the UK: because it is being handed a single tool to manage multiple problems: and because it has limited economic powers to attempt to grow the economy and the tax base.

“The perversity of the way the Smith reforms are being implemented means that Scotland could well find itself in a position rather like Greece – locked into a cycle of relative decline within a malfunctioning monetary union. Indeed, in certain important respects, Scotland’s position would be worse than that of Greece. Scotland is a resource rich country, but barred from controlling or accessing much of its own resources, and Scotland does not have anything like the range of economic and taxation powers possessed by Greece.”

Mr and Mrs Cuthbert said: “The paper is of particular importance just now, when the new Conservative government is putting forward its proposals and timetable for implementing the Smith recommendations, and when the SNP will be seeking to use its increased muscle at Westminster to modify the proposals to give Scotland greater powers.

“The debates about implementation and modification have to be informed by a proper understanding of the problems inherent in Smith, some of which are highly technical, but have profound consequences.”

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