England, Scotland and sharing the money

The Scottish people's unwillingness to give up the pound -- a key reason for the voting against independence -- suggested they wanted to stay in some kind of currency union. How this will work in practice given the SNP's drive for greater fiscal powers remains to be seen

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Cameron and Sturgeon: making a deal?
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John Redwood MP
On 21 May 2015 06:21

The one thing which worked in the referendum campaign to persuade more Scots to vote for the union was the united refusal of the main parties to allow Scotland to stay in the sterling currency union if she wanted to be independent. It was a defining moment which meant I thought the union was safe.

I saw no need to go on and make a better offer on devolved powers, but others thought otherwise.

I regularly pointed out the contradiction of a party claiming to want to create an independent country, at the same time saying they needed to share a currency with its much larger neighbour, a neighbour it otherwise wished to leave.

The fact that the SNP could not bring themselves to say they would have their own currency or join the Euro showed that they judged Scots voters wish to remain part of the transfer and mutual insurance system that is the UK state and sterling union. Their cry was make me independent, but also still dependent if need arises.

Party leaders have now latched on to the argument that a single country with a single currency is a transfer union, switching money from rich parts to poorer parts, and insuring parts of the country against economic adversity.

If Scotland’s oil industry is riding high and generating a lot of taxable income, the rest of the UK should share that. If Scotland’s oil industry is in sharp decline, abetted by a collapse of oil prices, then Scotland should expect the rest of the UK to cushion the blow.

Scotland has the same benefit rates and entitlements as the rest of the Union, whether oil tax is high or low, so they are underwritten by general UK tax revenues.

Into this largely happy transfer and currency union the SNP have injected the idea of fiscal independence. They want to decide how much income tax to raise, how to tax property transactions, how to tax air travel and much else. The logic of this move is to arrive at a place where Scotland spends what Scotland raises from her own economy.

You can do this in a currency union, though the Union Parliament would still need to control Scottish total borrowing as that will be a claim on the currency zone as a whole.

It could become difficult if the Scots chose to set tax rates that either made Scotland very attractive for jobs and business, or were very hostile to jobs and business, as that would distort the labour market where there is free movement of labour. It would have implications for any common welfare system still in place.

Opinion amongst politicians and the public is divided over whether fiscal independence within a currency union is a good thing. As a result we are moving to a compromise system, where the Scots will enjoy some rights to raise their own taxes, but will still also draw on general UK tax revenue to pay some of their bills.

Reaching a political compromise on this at a high level of generality was relatively easy. Making it work in practice is more difficult. The first requirement will be to draw up a new grant regime to pay for the items that are not paid for directly out of Scottish taxation. I will consider some of the complexities in a subsequent article.

Mr. Redwood's writing is re-posted here by his kind permission. This and other articles are available at  johnredwoodsdiary.com

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