Kezia's Penny on Income Tax and Scotland's Shy Tories

After the 1992 UK election did not give the result the polls had predicted, and the Labour were beaten by the Conservatives, the concept of the “Shy Tory” was born. Those were people who would tell the polls that they were willing to pay more tax to provide for better services, but when it came to the vote, they preferred the Tory choice of having the money in their own rather than the public purse. It shouldn’t really come as a shock that the electorate behave as economic agents looking out for themselves, but it seemed to. Tony Blair and Gordon Brown were smart, and learned the lesson. Removing the high tax / high spend image was a key strategy in their successful attempt to win over middle England, and they committed to sticking to Ken Clarke’s spending plans through their first term. It worked and electoral dominance was assured until the 2007 crash smashed their reputation for economic competence.

Later, in the first Holyrood elections, the SNP ran on a “Penny for Scotland” and were badly burned. Just as with the UK population, the Scots had no real desire to pay additional tax. They were not “Tories” though. It stands as an act of faith in Scotland that “we hate the Tories”. We could never be classed as shy Tories because of this. The idea was simply ridiculous. Like Blair and Brown, the smart people in the SNP leadership learned the lesson from this burning and ever since they have campaigned, not on a tax raising, but a tax cutting agenda. In the independence campaign, the only tax changes proposed by the Nationalists were for a cut to corporation tax and air traffic duty - both on the intellectually right wing basis that cutting taxes can boost the economy and revenues. Now put aside the practicalities of being able to implement these changes in a difficult fiscal environment - the message is everything. Low tax Scotland and essentially a centre or centre right agenda business friendly agenda. 

What the SNP have done then is to take the Shy Tory concept, and internalise it within the same party. They talk left, making the public feel that warm “we live in a caring nation” feeling, while never having any intention of paying the price required. All the handouts to the middle classes are paid for from cuts to services for the poor. I get free eye tests and prescriptions I don’t need, and a council tax freeze that keeps money in my pocket. All very nice and undeniably popular. Tuition fees which overwhelmingly benefit the middle classes, are paid for from cuts to further education college places that are largely taken up by the poor. As long as we can blame the cuts on Westminster, we don’t have to think the uncomfortable thought that these nice benefits we enjoy are being paid for by cuts to services that hit the poor and vulnerable hard. 

Following on from a no additional taxes core to their policy platform, how do the SNP avoid the charge of being a right wing austerity party? They do this by outsourcing blame to the Westminster parliament, and adopting a “grievo-max” agenda. Their only attempt to gain more funds for services is to go batting for Scotland and trying to get a better deal from Westminster, using the politics of grievance as their bargaining position. This is similar in many ways to Margaret Thatcher’s successful handbagging of European leaders to get the rebate from the EU. It is not a call for more tax on “us”, but an attempt to get more from “them”. The groups who represent “us” and “them” may have changed, but the effect is the same. We see a leader fighting on our behalf, and the result is more funds for services, with no downside of additional taxation. There is little surprise that the efforts of Thatcher and Sturgeon went down well with their constituents.

Kezia Dugdale’s tax problem then is that she is arguing that we take some control of our own taxation and spending and we take the pain of additional taxation in order to improve the education services for our people. Unlike Sturgeon’s attempt to grab more money from others and have them take the pain of additional taxation, Kezia thinks we should take the burden on our own shoulders and will be willing to do so. She wants to make explicit that the difficult choices are our choices, not the fault of someone else. She has optimistically decided previous failures of parties announcing tax increases before an election do not apply in Scotland, because these rules do not apply here. She thinks that once the fact that the argument over whether these changes are progressive is won (they are and it has been), then the Scots will come round to the policy. Kezia I think bases her strategy on the idea that once the SNP are shown up as talking left but acting right, the public will move away from them. But perhaps Scots vote SNP not despite the lack of genuine left wing policies from the SNP, but because of that lack. 

Time will tell whether her gamble has paid off. My guess is that the “Shy Tory” is alive and well in Scotland, only they don’t jump to the Tories. They vote SNP. 

Full Fiscal Autonomy Theory

The debate on Full Fiscal Autonomy (FFA) for Scotland has raised a number of issues and concerns, not least what a terrible position it would put Scotland in fiscally, leading to extraordinary austerity. I don’t need to go over this again as Kevin Hague has already gone through the figures. These have not really been disputed (at least not in any informed manner). The main argument being used to counter the fiscal horror show presented is that this is a temporary blip, and Scotland will recover its fiscal balance and then off we go. FFA would actually be delivered when prospects were looking sunnier in other words. That this is unlikely in the short to medium term seems obvious, given the oil revenue collapse, but that is the argument made. Once achieved, and starting from a decent position, the growth from Scotland having its hands on the “levers of power” would bring growth that would lift us permanently into a better position. Well, OK, if you think so, though I note that Nats are very reticent on telling us what these new policies would be. The one idea they had, of reducing corporation tax seems to have been dropped and not much else has arrived in its place. Raising growth through government action....well, if it was really easy to do, they'd all be doing it. That is not really my problem though.

What I think hasn't really been discussed is what a terrible idea it is, even if Scotland was in a much better position than it is now. To think about this, we need to go back to the currency union debate that was at the heart of the independence campaign. Lets start with what makes a currency union work. In optimal currency area theory, there are normally four criteria with which to judge a currency union:

• 1.       Labour mobility
• 2.       Capital mobility and price and wage flexibility
• 3.       Similar business cycles
• 4.       Risk sharing automatic fiscal transfer

You can argue over points 1 -3, but I think we can safely say that the UK broadly fits these criteria; given how integrated our economies are after 300 years of union. It is point 4 that strikes me as important here.

Paul Krugman has touched on an independent Scotland’s position recently in his blog, and he does so (as he often does) by referencing Optimal Currency Area theory. He says:

This theory mainly focuses on the problem of responding to asymmetric shocks — a slump in Spain while Germany booms, etc.. We know, or we think we know, that when this happens fiscal integration — Florida can count on Washington to pay for pensions and medical care, Spain has no comparable cushion — is crucial. 

Krugman is discussing currency issues within an independent country, and that point is worth talking about. What isn’t mentioned though (probably because the FFA debate has not made it that far) is that so many of the issues also relate to FFA.

What FFA does (as independence would have done) is that it removes one of the key levers that keeps our currency union stable. Given a shock to one part of the UK, (an oil slump / a London property crash) then the automatic transfer of resources just would not happen. We could end up in the unhappy position of a Spain or Ireland, having to internally devalue within a currency union to get our country back to competitiveness. Why this could be seen as a good thing is beyond me. When countries within the Euro are thinking of mechanisms that would overcome this lack of fiscal balancing across state boundaries, for Scotland and the UK to abandon these seems to be madness. This idea then is not just bad in practice, as Kevin has pointed out, it is bad in theory too.We live in very strange times.