Economists reject tax raising power

CALLS for Scotland to have its own taxation powers suffered a major setback after Scotland's top economists concluded that, because the country spends billions more on public services each year than it raises in tax, there is no evidence that the deficit can be closed.

Even without tax powers, they have warned of growing tensions over the money Scotland receives from the Treasury in London, with no way of deciding what Scotland's "needs" are and how disputes over future funding can be resolved.

The Scottish Executive's chief economist, Dr Andrew Goudie, has taken the highly unusual step of publishing his own analysis of the nation's public finances, showing the deficit gap between tax and spending in Scotland is more than (pounds) 4 billion. Even if Scotland kept most North Sea oil revenue, it would still be (pounds) 2bn short of balancing the nation's books. The last time oil tax could have put Scotland into the black was 13 years ago.

Goudie also shows deficits have persisted over two decades and three economic cycles, through boom times and recession. His findings are part of the most detailed study ever carried out into the nation's public finances, set out in the academic journal Scottish Affairs.

Eleven of the country's top economists from varying political perspectives have contributed to the study of whether and how Scotland could take control of a devolved tax system. The results will form a major part of the central debate on finance, tax and independence going into the Holyrood elections next year.

While their reports do not examine the cause for independence in detail, the evidence of a persistent net deficit is a significant setback for the Scottish National Party. Even Jim and Margaret Cuthbert, the economists in the study who champion the nationalist case, argue against the party's policy of extending devolution towards "full fiscal freedom".

Instead, they advocate a radical plan which would see Chancellor Gordon Brown setting different tax rates for different parts of the UK. They say the Treasury should levy lower income and business taxes in Scotland. This would help fuel economic growth and compensate for southeast England's economic dominance.

Devolving tax powers from Westminster to the Scottish parliament is backed by 57% of Scots, with 30% against according to a recent Herald poll. The SNP and prominent Conservatives support the idea. It is widely argued that taxing would force MSPs to take more responsibility for their spending. But the new study argues the theory does not translate easily into practice.

There are suggestions that Scotland could make more use of the powers it already has to raise around 15% of the public sector's budget, through council tax, business rates, user fees for services and the ability to vary basic rate income tax by 3p in the pound. But there are big problems with the idea of Scotland setting and collecting all its own income tax and even bigger obstacles for corporation tax - among them the constraints EU membership would place on any new system.

Several in the group argue the Barnett formula, by which additions to Treasury spending in England have for 23 years led to an automatic share also going to Scotland, is under strong pressure for reform. But they warn that it will be hard to avoid tension between Holyrood and Westminster in defining what Scotland's needs are and how a new block grant should be calculated to make up Scotland's tax shortfall.

Dr Goudie adds Scotland already has considerable fiscal autonomy, in that MSPs have freedom to spend the Treasury's block grant as they wish.

Copyright 2002 SMG Sunday Newspapers Ltd.
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