Scottish independence lecture: Nicola Sturgeon on her best behaviour

Nicola Sturgeon’s lecture for the Constitution Unit on Thursday evening, 13 February, was a rare opportunity for her to speak to a London audience, and for a London audience to see her.  What they heard was a very slick presentation of the SNP’s case for ‘soft independence’, carefully tailored for the audience, and predicated on advancing Scottish self-government rather than breaking up the UK.  Her key arguments were that Scotland could be independent, and was well-prepared for that because of the development of devolution; that Scotland could and should become independent, because Westminster’s politics and policies were at odds with those of Scotland; and that independence would be a firm basis for good relations with all the nations of the British isles.  She emphasised that Scottish independence was ‘emphatically not separatist or insular … [n]or … driven by antipathy towards or resentment of our neighbours in the rest of the UK.’  Indeed, she said she was sure independence could be achieved without any lingering sense of resentment in the rest of the UK. She added that the debate was not about ‘identity’ and that the SNP were not asking people to choose their identity as part of the process which may come as a surprise to some observers).  Rather, it was about the best form of self-government for Scotland.

Much of this was familiar to those who have heard the SNP in recent years, and much could be strongly contested.  The line that Scotland’s politics were different to those of England was undermined by arguing that Scottish independence would not doom the rest of the UK to unending Conservative governments, for example.  Sturgeon made a good deal of how important it was for Scotland to have control of such issues as economic management, defence and foreign affairs from Westminster – even though an independent Scotland’s room for manoeuvre under its white paper blueprint would be limited, and even though there is little sign from polling that these issues are key in voters’ minds.

There are news reports of the speech from the Scotsman here, the Herald here, and from the Guardian’s news blog here.  The video of the lecture is available here.

This wider formulation of the objectives of independence enabled Sturgeon to avoid the trickiest issue; the previous day’s announcement by the Chancellor of the Exchequer (supported by his Labour shadow and Lib Dem Chief Secretary) that there would be no currency union between an independent Scotland and the rest of the UK.  This shift is highly significant in itself, because it embodies the elements of continuity and certainty for Scottish voters in voting for independence, and Scottish businesses after it.  Indeed, in his 2012 Hugo Young lecture (and on some subsequent occasions) Alex Salmond ended up going so far as to say that Scottish independence was not about monetary policy but securing fiscal autonomy.  A sterling currency union is also a key element of the wider scheme for what has been called ‘independence lite’, by which independence would change undesirable aspects of the status quo (rule from Westminster), but preserve desirable ones such as currency, the Crown and the EU.  (For a discussion of that, see my earlier post here.)

Sturgeon’s position on the issue was what she stated earlier on the Daily Politics, and Alex Salmond was saying in Edinburgh; the UK was seeking to bully Scottish voters, but it was all bluff and the position would change after a Yes vote.  In other words: UK ministers don’t mean what they say in clear and plain terms, and even when they explain it in terms of the plain self-interest often invoked by SNP speakers as justification why rUK should do what they want it to.  Their true meaning is different, veiled, concealed behind their words.  Sturgeon may have invoked two of UCL’s Scottish founders at the beginning of her speech, Thomas Campbell and Henry Brougham, but the shade inspiring her here was more that of the Chicago political philosopher Leo Strauss.

The most interesting point of her speech – the one where she departed from well-known positions – was when she was asked (by me) about options for enhanced devolution – not on the referendum ballot paper, but being discussed among all three unionist parties in Scotland. Such an option clearly has wide public support, and the IPPR Devo More project is designed to formulate what such an option might be.  Sturgeon had already noted the lack of support for the status quo.  Responding, she said that such an option was necessary for the No side; failure to offer it meant that No-inclined voters might otherwise switch and vote Yes.  While she said no offer could convince her, she set out three tests that such an offer would have to satisfy to be credible.  First, the substance would have to be meaningful, and include substantial tax, welfare and employment policy devolution.  Second, it would have to be agreed between the three unionist parties.  Third, there need to be a clear timetable, and assurances that it would in fact be delivered.

The present positions of the unionist parties are a long way from what Sturgeon stipulated here, with a cross-party platform rejected by Ruth Davidson for the Scottish Conservatives and serious-infighting within Scottish Labour over tax devolution.  It would also be absurd to expect unionist parties to subscribe to a form of further devolution just because it would be acceptable to the SNP.  But the Devo More model includes all those elements of which Sturgeon spoke, in a way that is designed to reinforce not weaken the Union in the longer term.  Sturgeon might be rather surprised by the Devo More proposals for welfare devolution when those are published in March, for example.  Signing up to that model would narrow the ground for the SNP very greatly, in a way they clearly recognise as a threat.

The UK Government and an independent Scotland: taking a currency union off the table

The announcement by Chancellor of the Exchequer (and Danny Alexander and Ed Balls) that the UK Government is not prepared to establish a currency union with Scotland for use of the pound in the event of Scottish independence (see also BBC News coverage here) is a serious blow to aspirations of the SNP for a form of ‘independence lite’. The Chancellor’s speech is available here, and the Treasury analysis – the eleventh paper in the ‘Scotland Analysis’ series – on which Osborne drew in his speech is available here.

The logic of ‘independence lite’ was that it would avoid disrupting many key symbolic and economic ties between an independent Scotland (iScotland) and the remainder of the UK (rUK), so comforting swing voters about the limited scale of the risks of independence.  Those risks are real; think of how attractive Scottish investment trusts and insurance companies look if the complexities and exchange-rate risks of using a different currency are introduced into the equation, for example.  But this shift in the ground also emphasises a number of key issues about the implications of a Yes vote, and what would happen after it.

The first problem – which is particularly the case with the idea of a currency union, but applies to many other important issues – is the asymmetry of interest.  A currency union is central to the way the SNP has formulated its model for independence.  (That view can be contested, of course – whether by the likes of Jim Sillars on, essentially, autonomy grounds, or by Angus Armstrong and Monique Ebell on economic ones, relating to the flexibility of economic policy instruments and the implications of a debt burden.)  But it is of marginal interest or benefit to rUK at best, poses a serious risk at worst, and concluding that the risks of it from an rUK point of view exceed the benefits is a reasonable judgement to come to.  This isn’t the only issue where iScotland has a strong interest in something of limited concern to rUK, either.  In bargaining situations, iScotland has got to have something convincing to offer to rUK – and other than staying in the UK, or the Clyde nuclear bases, it’s hard to see what that might be.

The second problem is what the Yes side do in response to being denied a currency union – the ‘Plan B’ for iScotland’s currency.  There aren’t many currency options; they are using the pound without a currency union (‘dollarisation’, or perhaps ‘sterlingisation’ is the better term), establishing a Scottish currency, or seeking to join the Euro.  (The clearest exposition of those is in a video put together by NIESR, available here.)  The first and third of those pose major problems – dollarisation/sterlingisation would be unstable and expose iScotland to a range of monetary policy risks over which it had no control, while membership of the Euro normally requires having a national currency first, and then joining the Exchange Rate Mechanism to start the process of tying that currency to the Euro.  That implies a lengthy transition, a currency that sunders Scotland from what at the moment is its closest trading partner, and the question of what the constraints of the Eurozone might be in future.  From that point of view, an independent currency is the least unattractive option by some way – even if it seems riskiest to referendum voters, and proposing it now would indicate a significant reshaping of plans for independence at a late stage in the referendum campaign.

The third problem is how rejection of a currency union affects other options for ScotlandTalk of repudiating iScotland’s share of UK debt may be attractive (see also Alex Salmond quoted here) to SNP politicians, but is hot-headed nonsense.  It would create the very opposite of the ‘velvet divorce’ which underpins the Yes side’s strategy.  Indeed, it would amount to a unilateral declaration of independence, as well as creating a major ongoing dispute with rUK.  That would affect all plans for independence, not just currency; social union, an open border, co-operation in other matters will all be off the table.  It would create significant obstacles to any negotiations over EU membership, and an insuperable barrier to NATO membership, and make it very expensive for iScotland to borrow from international lenders if it could do so at all.  Reaching a deal on at least the main issues that underpin statehood with rUK would be vital for Scotland to become independent, and the asymmetry of interest means that rUK holds the whip hand in each strand of those negotiations.

The fourth problem is what this means for ‘independence lite’ as a wider project.  The idea that independence would widen the realm of autonomy in some areas (such as fiscal and social policy, and to some degree foreign policy) while retaining existing aspects of the Union such as currency or freedom of movement across the England-Scotland border may be attractive in Scotland.  But the reliance on rUK co-operation and goodwill has never made it a robust and achievable plan for independence, and that is what is starting to unravel for the Yes side.  Moreover, they are hoist to their own petard in two ways.  They have wanted to clarify the basis for independence before September’s poll; while the UK Government has rejected ‘pre-negotiation’ of independence, on currency it is clarifying its position in perhaps the most unhelpful way possible.  (The Electoral Commission also said that ‘the UK and Scottish Governments should clarify what process will follow the referendum in sufficient detail to inform people what will happen if most voters vote “Yes” and what will happen if most voters vote “No”‘ in its January 2013 report on the referendum question, so that request of the Electoral Commission has also been addressed.)

The Yes side also has (perhaps reluctantly) embraced the binary Yes/No approach to the referendum (and lost the possible ‘third option’ from the poll).  ‘Independence lite’ was a way of softening the impact of the choice of independence for swing voters and reinstating to a degree the middle ground that was otherwise excluded.  But the rejection of a currency union deprives the Yes side of that comfort as well.  As a result, the choice between independence and remaining part of the UK is becoming increasingly stark.

The challenge that now faces the SNP and the wider Yes campaign is whether to embrace a more radical approach to independence, which may be less attractive to key groups of swing voters (though not other parts of the Yes movement), but produce a more intellectually cogent model of independence, or stick to a middle course predicated on agreements with rUK that look increasingly hard to attain.  Nicola Sturgeon’s diary for the next few weeks included a lecture at UCL on Thursday (of which a report will follow) and she will give another in Cardiff on 24 March, so she will have plenty of opportunity to answer such questions.

None of this alters certain key facts, though.  The Scottish public still support an expanded form of devolution – not independence, but something that confers signficantly greater autonomy than the status quo.  Formulating that option is something that the Unionist parties need to do.  It is in their interests to make devolution work better, after all, as well as enable Scots to have the form of government they desire.  And putting such an option on the table will help people to regard voting No as a positive choice, not just a reaction to the uncertainties surrounding independence.  that also appears to be what voters want, and it is certainly necessary if the referendum is to resolve the wider question of Scotland’s place in the United Kingdom, rather that invite a ’round 2′ of the independence argument at some later date.

This is a slightly revised version of a post that also appears on Alan Trench’s blog Devolution Matters under the title ‘Scottish independence: does taking a sterling currency union off the table change the game?’

“DEVO MORE” A MAJOR ALTERNATIVE TO SCOTTISH INDEPENDENCE BY ALAN TRENCH

The report Funding Devo More: Fiscal options for strengthening the Union is published on Friday 25 January, and is available from IPPR’s website HERE

On Friday, IPPR are publishing a major paper of mine setting out a model for enhanced financial devolution (available here).  It is intended first of all to offer a meaningful option for extended devolution in Scotland, where all three unionist parties have said that further devolution will be on offer if there is a vote to stay in the Union in the 2014 referendum.  That is not all it does, though; it is also intended to work for Wales and Northern Ireland as well, if they wish to go down the path of further fiscal devolution.

This paper draws on work on both devolution finance and the working of federal systems that I have been doing for many years now, starting with my time at the Constitution Unit in the early 2000s working on its Leverhulme-funded programme ‘Nations and Regions: the dynamics of devolution’, as well as work on Brazil and Switzerland I carried out at Edinburgh University.  If nothing else, this indicates how academic research often takes a long time to pay off, and can do so in ways that were unexpected at the outset.

An option like this is badly needed, for two reasons.  First, there is clear evidence that it is what the people of Scotland want.  They like devolution and want more of it; in particular, they want devolution to affect control of taxation and welfare.  That has been shown clearly in numerous opinion surveys, particularly the Scottish Social Attitudes ones, and their 2012 findings just released confirm the point.  Outright devolution of those is very difficult within the Union – it would only be possible with some sort of ‘devo max’ approach, which is emphatically not what I am proposing.  Apart from anything else, it would not be viable for Wales or Northern Ireland.  Significant control of those is, however, possible, and that is what this paper (and the wider ‘Devo More’ project of which it forms the first output) is investigating.  Finding practicable ways to ensure devolved control of these functions is part of making sure that Scottish devolution (and devolution elsewhere) matches the aspirations of the Scottish people, a basic democratic goal.  It also serves a more fundamental constitutional purpose; it ensures that government in Scotland (and elsewhere) is, and should remain, legitimate.  Devolution in 1998 was, after all, a response to similar problems that arose both Wales and Scotland in the 1980s and 1990s.

Second, it relates to the 2014 independence referendum.  An ‘enhanced devolution’ scheme is not on the ballot paper, of course.  That is probably right; it would be hard (though not impossible) for a referendum to offer multiple choices to the voters in such a way that it would also establish a clear mandate for independence, if that were the choice of the electorate.  Once the SNP committed itself to having a single referendum on independence, it effectively ruled out putting an ‘extra devolution’ option to the voters in the same poll, even though it dangled the prospect of that in front of Scottish voters after the 2011 election.

There are good practical reasons why more devolution could not have been on offer in any event.  There was no such scheme on the table, and still is not.  You could not prepare for a referendum in which one of the options was essentially undefined until the last minute.  (The Welsh referendum on legislative powers in 2011 shows how badly such polls can go if an expected player doesn’t show up.)  Such a scheme would need to have agreement across the unionist parties to be viable, as the Calman proposals had.  It’s fair to say that before now the unionist parties where in no mood to consider such an option.  This is only a proposal for a scheme which is meant to work for all the unionist parties; we shall see whether they embrace it, and how enthusiastically they do so.  But defining such an option plays into the wider referendum debates by ensuring that the offer of ‘more powers after a referendum’ can be a credible one.  The battle-ground in the referendum campaign is voters who support that; if they do want more devolution but do not believe that promises of it will be delivered after a poll, the risk increases that a referendum will be lost.

Part of what has to define an ‘enhanced devolution’ scheme is what works in the interest of the UK as a whole.  This scheme is meant to do that; it is intended to work for Wales and Northern Ireland as well, if they wish to go down the path of fiscal devolution.  It is also designed to be ‘union-reinforcing’ rather than ‘union-weakening’, as ‘devo max’ would be, and as devolution of taxes like corporation tax, inheritance tax or fuel duties would be likely to be.

It also offers benefits for England, chiefly because the transfer of fiscal capacity to Scotland and other devolved governments will both enable and require them to finance spending on better services than those in England out of their own resources.  Free university tuition in Scotland has become a politically toxic symbol of supposedly generous financing of Scotland.  Some of this anger is misplaced, and is to do with choices made by devolved governments – funding, say, free prescriptions at the cost of other functions.  But some of it has a point.  Transferring a significant degree of fiscal capacity means that, if the Scottish Government wishes to provide an overall higher level of public services, it can do so – but Scottish taxpayers will have to pay for it, and the Scottish Government will have to make the case to its voters for that.  That is what autonomy means.

Fiscal devolution does not stop the UK Government undertaking redistribution across the UK, if it wishes.  A ‘vertical fiscal imbalance’ – a gap between the revenues a regional-level government can raise using its own tax powers, and its spending obligations – is common in federal systems.  In the UK it is unavoidable.  There are many taxes which are not suitable for devolution, either because the administrative costs of doing so would be disproportionate, or because of the character of the taxes themselves.  Take fuel duties as an example.  These are a useful source of revenue (they account for about 5 per cent of total UK tax revenues, proportionally more in Wales and Northern Ireland).  However, devolving something so obviously and necessarily mobile would trigger widespread avoidance, tax competition or both, and even then would incur considerable compliance costs.  The same applies to a good many other taxes, which are best left in UK Government hands.  Scottish, Welsh and Northern Ireland taxpayers will continue to contribute to the UK as a whole, through a wide range of non-devolved taxes, and it is for the UK Government to decide how to use those.

The recipe I have come up with involves handing over four sets of revenues to devolved governments:

  • All personal income tax, including decisions about rates, thresholds, exemptions and relief.  There will need to be some practical restrictions on this, if HM Revenue & Customs are to continue to collect income tax across the UK (and there are good reasons why they should), but those should be as minimal as possible for administrative reasons.
  • All land taxes.  This should be uncontroversial; to a large degree, it has already been accomplished for Scotland through the Scotland Act 2012, and is recommended for Wales by the Silk Commission (and supported by the Welsh Government).  Land taxes are not a major source of revenue, but they are a secure and easily devolvable tax base, and are an important instrument of policy as well.
  • ‘Sin taxes’, meaning duties on alcohol and tobacco.  This faces serious legal problems, but there is such a close relationship between the harm these products can do and other devolved functions, notably public health, that devolved governments should have control over tax levers as well as regulatory mechanisms when dealing with them.  They are also quite useful as sources of revenue.
  • Assign a large proportion – 10 points, of the 20 currently levied – of Value Added Tax.  EU law prevents devolution of VAT, although sales taxes are commonly levied by state or regional-level governments in federal systems.  Assigning it – passing the revenues directly to a devolved government, which does not have control of the rate of tax or what the tax is levied on – was considered and dismissed by the Calman Commission for Scotland, and the Holtham and Silk Commissions for Wales.  But, if we are looking at going meaningfully beyond that model of fiscal devolution, we have to think again.  VAT is a major source of revenue, and in the hunt for ‘devolvable’ taxes the choice of good taxes to devolve is a very limited one.  A major consumption tax is an attractive proposition for regional-level governments, and assigning it is the best one can do.

This is not so much the end of my work on devolution finance as establishing a clear starting point.  It is impossible to work out a scheme for devolution finance without working out what it is you are financing.  I have used the current division of functions between the devolved governments and London for this work, and if there were further devolution of expensive functions (notably welfare benefits, but also policing and criminal justice in Wales) it would be necessary to look at this again.  In later work in IPPR’s ‘Devo More’ project, we shall be considering those issues; that will mean returning to financial issues afterward as well.  But using 2010-11 figures, this model would have put £21.7 billion directly into the hands of the Scottish Government, £9.7 billion into those of the Welsh Government, and £6.1 billion into those of the Northern Ireland Executive.  That equates to 60.6 per cent of Scottish devolved spending, 62.2 per cent of Welsh devolved spending and 55.6 per cent of devolved non-social security spending in Northern Ireland.  Of that, large proportions would come from wholly devolved taxes: 42.1 per cent of Scottish spending, 44.2 of that in Wales, and 34.3 per cent of that in Northern Ireland.  That contrasts with the measures in the Scotland Act 2012, which would devolve taxes revenues accounting for around 30 per cent of devolved spending in Scotland, and the Silk Commission’s proposals, which would account for about 25 per cent in Wales.

Whatever form fiscal devolution takes, it is important to think about it as a package. Devolving one or two taxes on their own increases the risk of government revenues being exposed to serious shocks.  That is especially the case with volatile taxes like corporation tax.  Some devolved services are simply inflationary in character (notably health). Others are counter-cyclical, with demand increasing somewhat when times are bad (notably education).  None of them get cheaper to provide in hard times.  As there’s no such thing as a counter-cyclical major tax, stable revenues are needed to pay for them, and if the UK Government is to cease to manage the risk of fluctuations in revenue (which it does at present, through the block grant and formula system), devolved governments need tax revenues that are relatively stable, and if possible that balance the fluctuations among them.  The combination of devolved income tax and assigned VAT, in particular, does that.  Assigning VAT might not give devolved governments any control over policy levers, but the revenues are relatively stable, act as a counterweight to income tax ones (they shrink and grow on a different cycle), and over time it is a growth tax.

This model is an attempt to make a devolved UK work better; to enable it to be both more devolved, but also more unified.  Quite a lot of work remains to be done, but it hard to see that any sort of durable and workable solution would not draw heavily on it.