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Smith Commission proposals revisited

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The Jimmy Reid Foundation has published a fresh analysis of the Smith Commission proposals.  CuthbertJRFSmithPaperMay2015

The paper, ‘Smith Commission: why the economic and fiscal arrangements need to be changed’, by renowned independent economists, Jim Cuthbert and Margaret Cuthbert provides a critique of both the economic and fiscal arrangements recommended by the Smith Commission and the proposals for implementing these recommendations set out by the Westminster government.

Amongst the issues they critique are the nature of the mechanisms necessary for the successful operation of a monetary union between Scotland and the rest of the UK (rUK), and what sort of implicit economic model underpins the Smith proposals. They conclude that:
  •  The income tax base is very different between Scotland and rUK. This means income tax is an unsuitable choice as the primary vehicle for giving the Scottish parliament greater fiscal responsibility.
  •  There is no adequate solution to what we have called the ‘gearing problem’, namely, the problem that arises when changes in rUK in a tax which is devolved to Scotland are allowed to impact on reserved services: (that is, services, like defence, which are for the UK as a whole.)
  • The Scottish Government is being given responsibility for living within its tax resources, without being given adequate powers to grow the economy, and hence its tax base.
  • The technical arrangements surrounding the operation of the new system are unduly complex, and are unlikely to be able to be operated in an open and satisfactory fashion.
  • Implementation of the Smith proposals will weaken the mechanisms for determining fiscal transfers which are a necessary part of the operation of a successful monetary union.
  • A Scottish government operating under the proposed reforms will find itself severely constrained in its freedom of action, with the danger of Scotland finding itself locked into a self-perpetuating cycle of economic decline.

In terms of solutions, the Cuthbert’s argue the Smith Commission proposals will not be workable unless further reform is carried out in three main areas:

1.         Recognition that fundamental constitutional change is required, not just in Scotland, but at Westminster. The paper argues satisfactory implementation of Smith depends on implementing a properly federal system at UK level.

2.         Scotland requires much greater powers if it is to have a chance of making a success of increased fiscal responsibility. These powers are required in three main areas of a) more taxation; b) more economic powers; and c) ability to exploit and benefit from its major natural resources.

3.         Technical problems surrounding the implementation of the Smith proposals need to be tackled. No satisfactory solution can be found without a radical simplification of the whole approach but such a simplification would only be possible under a federal approach.

Jim and Margaret Cuthbert commented: ‘The paper is of particular importance just now, when the new Conservative Government is putting forward its proposals and timetable for implementing the Smith recommendations: and when the SNP will be seeking to use its increased muscle at Westminster to modify the proposals to give Scotland greater powers’.

They continued: ‘The debates about implementation and modification have to be informed by a proper understanding of the problems inherent in Smith, some of which are highly technical, but have profound consequences. What our paper does is to provide a thorough analysis of the problems – as well as putting forward solutions’.