Demand for increased devolution in Scotland will reshape UK

Thu, Feb 23, 2012, 00:00

ANALYSIS: Scotland’s determination to have more self-government, if not independence, is provoking worries in the northeast of England

AN INFLATABLE balloon in the shape of a white elephant became the public image in 2004 of the campaign to reject the Labour offer of an elected regional assembly in the northeast of England. In the end, three-quarters of those who then bothered to vote said No, a result that scuppered Labour’s plans to create similar elected bodies elsewhere in England.

Seven years on, some in the northeast wonder if they made a mistake back then, as they sit and watch Scotland become more self-confident in the years since devolution.

So far, the opinion polls in Scotland indicate that a majority of Scots would vote against a break-up of the union, but they would gladly take more powers to run their own affairs.

However, the northeast of England worries about the powers that the Scots already have, let alone the possibility that they might get powers over corporation tax rates.

Last September, it emerged that online retailer Amazon chose Edinburgh rather than Newcastle for a new operation after Scottish Enterprise offered training grants the northeast could not match.

“There is already evidence that a devolved Scotland is stealing a march on the northeast economically,” Newcastle University’s Prof John Tomaney told the Newcastle Journal.

For Newcastle’s Chamber of Commerce, more devolved powers for Scotland poses an even bigger headache for its region than does the possibility that Scots would vote for independence.

Scottish independence, says the chamber’s James Ramsbotham, would leave Edinburgh with a host of new headaches, requiring it “to take a balanced approach”.

However, more devolution would offer Edinburgh fewer difficulties “but allow them to compete with us more intensively”, he said earlier this month.

Scottish first minister Alex Salmond, the leader of the Scottish National Party, still remains at loggerheads with London about the wording of the question, or questions to put to Scottish voters.

Publicly, he insists that it should be just one – a Yes, or No on the union; but, privately, the the party wants to keep the option of a question offering greater self-government on the table, “devo-max”, for now.

Either way, Scotland would have a different corporation tax rate, if Salmond has his way. Speaking in the London School of Economics last week, he said it is “an important weapon” for small economies.

“We have no wish to enter a ‘race to the bottom’ with anyone. However, metropolises like London, or large countries, can exert a centrifugal force which draws power towards them. Small countries, and regional economies, need a fiscal edge to encourage decision-making centres to settle.

“Those headquarters and decision-making centres in turn create prosperity,” he went on, adding that the Scottish government has done the figures on the impact of a 3 per cent corporation tax cut – which would still leave it far higher than the Republic’s. Such a move would support 27,000 jobs, he argues.

In last year’s UK budget, chancellor of the exchequer George Osborne pledged to cut corporation tax incrementally from 26 per cent to 23 per cent by 2014.

However, Salmond’s focus on corporation tax has made some in the treasury wary about acceding to the pressure from some in Northern Ireland for a similar freedom from Whitehall’s diktats, since it fears it could lead to an unravelling of UK-wide common tax rates.

Currently, the Scotland Bill, which is now before the House of Lords, would offer Scotland direct control over raising 10 per cent of the income tax rate. The Scots could then match income tax rates south of the border, or go lower, but they would face the financial consequences of their actions – since the treasury block-grant would change accordingly.

However, many in the UK are beginning to fret about the consequences of greater self-government for Scotland – the so-called “devolution max” option, if it is left to the Scots alone to decide.

Last week, a House of Lords report said “devolution max” would go well beyond the present Scotland Bill “to include – or at least to approach – full fiscal autonomy”.

Saying there is “a profound difference” between “devolution max” and independence, the Lords committee said two “distinct constitutional outcomes” are offered.

“We agree with the UK government that including a ‘devolution max’ option in an independence referendum would conflate two entirely separate constitutional issues,” the committee noted.

Despite Salmond’s argument that the wording, or wordings to be put to Scots are matters for Scotland alone, and not Westminster, the Lords disagree, and vehemently so.

“As illustrated by the potential for competing tax regimes within the United Kingdom, such an arrangement for one member of the union would necessarily have real, deep and immediate consequences for the other members and for the union as a whole.

“Properly to secure the legitimate interests of each and all, proposals as to ‘devolution max’ would first have to be developed through intergovernmental negotiations conducted, not just bilaterally with the UK government, but on an inclusive, multilateral basis across the union.”

Last week, British prime minister David Cameron offered extra devolution to Scotland if it rejects Salmond’s referendum, but he did not detail the powers that would be given.

In turn, Salmond has argued that Cameron, just like the Conservatives in 1979, is asking Scotland to give up a bird in the hand for a promise of something better that may not be honoured.

Between now and the referendum, due most likely in 2014, Cameron will come under increasing pressure to detail exactly what is on offer. If he does, he will then be pressured to add it to the ballot paper.

Then, or later, however, if tax-deciding powers are ceded to Scotland, it is increasingly clear to some in Westminster that Scottish MPs will not be allowed to vote on English matters in the House of Commons.

Either way, the constitutional shape of the United Kingdom is set to change irrevocably – even if the saltire remains part of the union flag.

Mark Hennessy is London Editor