Up went the flags, click went the cameras and broad grew the smiles as “Gael Force One”- the chartered plane bearing Scotland’s 56 new SNP MPs – flew to London yesterday.
A momentous result and an epochal moment for Scotland, no-one can deny.
Treasure it. For the smiles may not last long.
It’s not our purpose here to deny the SNP its moment of triumph.
But we need to be realistic. The SNP campaign promised the earth – while the IFS warned of a budget black hole.
Now comes the start of a long, hard grind through the tortuous complexities of “more powers” – hard financial negotiation, battles with the Treasury, tax calculations, revenue projections, Barnett re-calibration – and all this while trying to ensure business confidence is not damaged and economic growth put at risk.
It all seems like a brave New Dawn for Scotland. But there’s every risk it may end in Darkness at Noon.
A dense Scottish haar of tax complexity and confusion is already set to roll in.
Bear in mind that the political interests and economic strategies of the SNP and the new Conservative government are diametrically opposed. First Minister Nicola Sturgeon has made no secret of her party’s determination to “end austerity”, defy spending cuts, maintain public spending and prepare tax increases.
First indications of trouble ahead came with a Financial Times front page report on Saturday that Edinburgh-based pensions and asset management giant Standard Life was preparing a “coded warning” on the dangers of Scotland’s tax regime diverging from the rest of the UK.
The voice of Scottish business has barely been heard in any of this. Who stands up for their interests in the coming battle over the extra tax powers of the Smith Commission – and the demands for extra powers beyond?
The chief concern is that our business base may be lumbered with a high tax regime that would put it at a major competitive disadvantage with companies south of the border.
It will be anxious to see a fiscal regime emerge that is competitive and fair. These anxieties are fuelled by the prospect of a fully empowered Scotland barrelling towards a budget deficit of £9.7 billion by 2019-20 on IFS projections.
There’s all manner of problems ahead over ‘more powers’ – on scope, competence, policing – and not least, timing.
And those Standard Life warnings may soon turn out to be a lot less coded if the throttle is opened up for a fast-track to “full fiscal autonomy”. Nicola Sturgeon has hinted at a more measured approach to full fiscal autonomy. Conservative strategists, sensing weakness, may seek to spring a “max dev” offer to the SNP contingent in the first 100 days.
It is a tactic of great political risk. And it is one that could backfire badly for Scots business and finance.
That warning from Standard Life already seems wearisomely familiar – a return to the concerns and apprehensions voiced in the approach to last September’s independence referendum, only with this big difference: changes under the 2012 Scotland Act are already in train. And the Conservative government says no time will be lost in driving through the extra tax and borrowing powers proposed by the Smith Commission.
Several problems immediately present themselves. First, how can the Scottish and UK administrations avoid a mismatched timing in the implementation of changes to tax levels and bands?
With the two administrations so opposed in economic and fiscal policy, how will Scottish taxpayers react if significant differences open up between two neighbouring fiscal systems? ‘Behavioural response’ – companies switching investment out of Scotland, or moving out of Scotland altogether – could inject a major uncertainty when calculating actual revenues raised in Scotland.
What will be the interest rate attached to Scottish government borrowing – and who will determine this? Will it continue to be the Bank of England or a Scottish loans authority? Who will police this system?
Central to the concerns at Standard Life is the imperative of retaining a single market in financial services across the UK.
Without this, every single financial services company in Scotland will be in trouble as the vast majority of their policyholders and customers are based outwith Scotland – indeed, mostly in England.
It was because of this that the taxation of savings and investments was to be retained as a reserved matter determined at UK level. But how will that hold in practice without prejudice to the Scottish administration’s revenue targets?
Standard Life will be under pressure for answers today as the FTSE100 giant faces shareholders at its annual general meeting at the Edinburgh International Conference Centre.
Not least of the problems will be how the taxation of savings and investments in a fiscally autonomous Scotland can be kept separate and administered as a reserved matter. If income tax rates and levels are to diverge to any significant degree – and the SNP raised voter expectations sky high on higher public spending – what of attempts by Scots businesses to seek to protect higher paid employees from measures that could prove a real barrier to recruitment and staff retention?
What happens if some seek to avoid these higher rates by rewarding employees in the form of profit-sharing, generous payments into pension schemes that can be quickly withdrawn, or dividend or capital distributions rather than PAYE income?
Nobody expects any definitive answers soon. But pressure will be building for early clarification.
And there is another reason for prompt attention. This is to do with the timing of introduction of two streams of legislation – the new Scottish tax rate under the 2012 Scotland Act which could be implemented in April 2016, and the Smith proposals. No timetable has been set for these. But much of the Scottish government’s draft budget in December of this year could be shaped by the expectation of these powers becoming ‘live’ in 2016-17. And the enormity of the SNP vote last week, coupled with the prospect of further SNP gains in Holyrood next year, may brook little delay in “getting on with it”.
Owen Kelly, chief executive of Scottish Financial Enterprise, the umbrella body for Scotland’s financial services sector, has warned that a wholesale transfer of tax powers would be likely to have “clear consequences for business… They’d have to serve two separate markets that would be more costly for customers.”
As was the case last year, most of these businesses are extremely reluctant to make any public utterance of their concerns for fear of attracting negative if not outright hostile comment. Many did suffer a capital outflow last year as customers switched to London-based institutions and little of this money has flowed back.
The danger now is that matters will proceed without a full public acknowledgement of problems and consequences while customers reach their own conclusions and resort to “behavioural response” on their own on a significant scale.
A cloudless sky? A move of capital and personnel out of Scotland in the next two years is no less damaging than when undertaken silently and invisibly through the haar. That would truly be the Darkness after the New Dawn.