A massive day in politics north and south of the border

We discuss the statements by the Chancellor and First Minister today – quite a day for political announcements

Well, what a weekend – the normal superlatives are no longer adequate. In his announcements this morning, the new chancellor has undone pretty much every tax measure in the “mini”-budget. Only those already legislated for will proceed (the scrapping of the health and social care levy and the stamp duty cuts in England will still happen).

Interestingly, the chancellor has chosen not only to reverse the bringing forward of the cut of the basic rate to 19p – but he has scrapped the cut altogether. So there are no plans now to cut income tax in England.

For Scotland – where income tax is devolved – the extra funding that was going to be generated by these tax measures for the Scottish Budget has now largely disappeared, with only the stamp duty reductions generating additional funding for Scotland. This presents significant challenges for John Swinney in managing an already very stretched budget. He is due to come to the Scottish Parliament next week with a response to the UK Government’s announcements.

The review of the energy price guarantee after April will obviously cause concern for households given the projected rise in prices which had been expected in April. It will be crucial to see how the Government choose to support households after April – and also the impact this could have on measured inflation depending on the way the Government chooses to intervene.

There are clearly significant announcements to come in the Medium-Term Fiscal Plan at the end of the month. We still haven’t heard anything from the chancellor about benefits uprating, for example- a decision which will have wide ranging consequences for many of the most vulnerable households.

Building a Better Scotland – economic case published today

Also today, somewhat overshadowed by events at Westminster, the Scottish Government have published the third in their series of papers to set out a new case for independence. This paper, “A stronger economy with independence” was expected to set out the economic case, covering issues such as currency, trade, and public sector finances.

The team here have been pouring over the document since it was published just before midday. Here, we give our initial thoughts on the paper, but we’ll continue to digest it over the course of this week.

Currency

The paper proposes two phases for currency policy after independence. From day 1, Scotland would continue to use sterling. During this phase an independent Scottish Central Bank (SCB) would be established and during the transition period it would build credibility. The aim of this phase is to ensure continuity for business and citizens.

In Phase 2, a new Scottish pound would be established. This would occur as soon as practicable and when economic conditions “are right”. In this phase the role of the SCB would expand.

There is an assumption here that the SCB would receive a share of the foreign currency reserves held by the Bank of England – this is likely to be part of the negotiations in the event of Scotland voting for independence about the division of assets – and of course liabilities.

Trade and migration

One of the well trailed parts of this economic case was of course that the Scottish Government were going to set out that an independent Scotland would rejoin the EU.

The future relationship with UK would be part of the negotiation in the event of Scotland voting for independence. On goods movement, there is a discussion of technology helping with border solutions which sounds quite familiar…

In the paper, it sets out that Scotland would retain travel across UK under the Common Travel Arrangement with no passport/visa needs, while also having similar Schengen arrangements to Ireland. This is likely to require negotiation with the EU and the UK to be agreed.

One of the distinct economic policies the Scottish Government is setting out is the plan for a more welcoming immigration policy, to deal with the challenges we have in the outlook for the Scottish working age population.

Labour Market

The main proposals on the labour market are in line with the general approach that the Scottish Government has had to economic policy in recent years.

There is a proposal for a single minimum wage, and more flexibility for parents and carers. They have set out proposals to increase pay transparency and to offer training, rehabilitation and supported employment, especially for disabled people.

They are setting out a very different relationship with Unions than that being pursued by the current UK Government and have reaffirmed a commitment to “Fair Work”.

Fiscal Sustainability

There is a lot of information in the paper about the fiscal discipline and rules that would be in place in an independent Scotland to ensure that this new country would give confidence to the markets to borrow. Given the events of the last few weeks, it is understandable that this has been a focus.

Discussed extensively is the “Building a New Scotland Fund”, which is a fund estimated at £20bn over the first decade of independence, funded by set aside North Sea Revenues and windfall income. The paper sets out plans to borrow for investment and focuses on the opportunities to grow the economy in order to make an independent Scotland fiscally sustainable.

One of the difficult questions that this paper does not address head on is the likely starting fiscal position of an independent Scotland, and how the Scottish Government plan to meet the fiscal rules they discuss.

It is said in the paper that it is not possible to know what this would be given wider uncertainty. However, we do know the levels of revenue and expenditure under the current constitutional arrangements.

These figures are referenced in the paper. But the substantive issue – of how we would transition from current levels of revenue and spending to something more sustainable, in line with the desired fiscal rules – is not addressed. The uncertainties in the world economy right now simply make that challenge harder – but are not an excuse for not addressing this challenge.

We hope that this will be addressed in a future paper – the First Minister has indicated there will be future papers on both pensions and trade, but this is certainly an issue that requires more discussion and scrutiny. If we’ve learned anything from the last few weeks, it shows that designing economic policy without grasping the realities of the public finances is not likely to be sustainable.

Conclusion

In summary: it is good to see the Scottish Government start to lay out more details about the economic case for independence.

This paper answers some questions – but still leaves some of the most difficult questions unanswered. In discussing the approach to setting up this new state, many assumptions are made with, in some cases, limited discussion of the options if the UK Government don’t agree to certain items in any negotiation. The wishes of one side in a negotiation may not bear contact with reality – as we have seen through Brexit negotiations.

Therefore, we are looking forward to seeing future papers which tackle these questions head on and in particular, tackle the questions around fiscal sustainability more fully.