Financial systems have always been fragile. Barry Eichengreen

From comedy to tragedy

Cameron’s lack of activism nearly divided the United Kingdom. The 2017 referendum will present another crucial test – with consequences for the EU.

The Canongate Wall of the Scottish parliament is adorned with quotations from long-dead sons and daughters of Scotland. Among them is the following disheartening statement by Sir Walter Scott: “When we had a king, and a chancellor, and parliament-men o’ our ain, we could aye peeble them wi’ stanes when they werena gude bairns – But naebody’s nails can reach the length o’ Lunnon.” We have always been good at throwing rocks at our own kings and politicians, Scott said, but never did manage to put pressure on London.

The referendum about Scottish independence has shown that the government in Edinburgh can indeed put pressure on the English through a mix of aggression and agitation. Prime Minister Cameron, the lethargic anti-hero of this political drama, often paled in comparison to the Scottish leader Alex Salmond, seemingly accepted the disintegration of the United Kingdom and the loss of Scotland’s rich natural resources, and revealed a surprising lack of political sensitivity at 10 Downing Street.

Transfer of powers from London to Edinburgh

The Scottish quest for independence from the UK proceeded despite significant uncertainties about the economic and financial consequences of severed ties for both sides. Cameron’s defensive and reactionary approach to Scottish independence has further prevented meaningful discussions. The drama was ultimately brought to its conclusion by the outcome of the referendum, when 55.3 percent voted against independence. It is now being followed by the installation of more decentralized governance structures.

The so-called Smith Commission (in which the Scottish parliamentary parties are proportionally represented) has issued a list of recommendations for political decentralization and the transfer of powers from London to Edinburgh. But this asymmetrical devolution carries enormous risks for the UK: It is likely to further paralyze political discourses, and will enshrine a legal imbalance between the UK’s four constituent powers. It also illustrates the strategy of the British government, which seeks to preempt and prevent any discussion about comprehensive governance reforms through piecemeal concessions, and is keen to silence debates about Scottish autonomy before the coming General Elections.

All but ignored are the results of the 2006 Steel Commission, which identified the advantages of a far-reaching federalist devolution. Its recommendations were unequivocal: Only a federalist system can achieve clear and comprehensive orchestration of administrative and political responsibilities between Wales, Northern Ireland, Scotland, and England. The final report of the Smith Commission focuses and reduces the issue to greater fiscal autonomy of the Scottish government, especially as it relates to income taxes, the value added tax, and environmental fees. This fiscal package is intended both to stabilize the Scottish budget, and to make it more autonomous from London’s fiscal policy. Currently, the parliament in Edinburgh controls around 60 percent of total budget spending but only oversees 7.5 percent of tax revenue. If the recommendations of the Smith Commission are implemented, Scottish control over tax revenue would increase to around 38.5 percent, and thus decrease the glaring imbalance between state control over tax policy and control over tax spending.

Lack of concrete agreements

Yet it remains an open question whether fiscal reforms will significantly affect the political leeway of the Scottish government. The key instrument is the so-called Barnett Formula, which sets annual amounts of public expenditure allocated by the British treasury to Scotland. The lack of concrete agreements points to the delicacy and complexity of the negotiations between Holyrood and Westminster.

The proposed law that would govern partial Scottish autonomy is predicated on the principle that devolution must harm neither Scotland nor the United Kingdom as a whole. For example, new fiscal instruments must not, according to paragraph 95(3) of the Smith agreement, lead to an increase or decrease of regional or national net revenue. Any initial changes are to be compensated through an adjustment of budget allocations. Yet it remains unclear how exactly this adjustment is to be achieved, which economic stimuli are to be included in the calculations, and how one might even measure shifts in the fiscal situation of the UK and its constituent regions.

The current plan aims to expand Scottish control over employment and social policy, but it remains doubtful whether it will really improve Scotland’s fiscal situation without changes to the Scottish welfare state. Such an improvement would require additional tax revenue to the tune of 26.9 billion pounds, or about 55.7 percent of the Scottish budget. The initial demands of the Scottish government for greater fiscal autonomy and for a national fund will not be met. Revenues from offshore oil and gas extraction will not be routed back to Scotland, and the government’s dream of creating a second Norway is over before it could even begin. But the Smith agreement will certainly increase the complexity of intergovernmental relations between Edinburgh and London (which will retain a veto power over important fiscal decisions). Discussions and negotiations will become more frequent and more intense.

Hopes for far-reaching transformations

The decision over Scotland’s future in the United Kingdom is essential for Scottish prosperity and stability, but it also matters in light of debates over the future of the EU. The protection of the status quo has prevented the emergence of a new and fiscally unstable player at Europe’s periphery, while Scottish pro-European sentiments might secure British membership in the EU during the upcoming 2017 referendum. If Britain wants to increase its standing in Brussels and Strasbourg and prevent a concentration of power in Germany and France, it must remain internally united.

The Scottish independence referendum began with hopes for a far-reaching transformation of the relationship between Scotland and the UK. In retrospect, the changes are relatively minor. 800 years after the signing of the Magna Carta, David Cameron has missed a historic opportunity of drafting a constitution for his country. Soon, the General Election in May 2015 will decide his political fate. Theodor Fontane once described Edinburgh as the “Athens of the North”. Maybe the Scottish vote will soon turn a comedy into a tragedy.

Translated from German

Read more in this debate: John Malcolm Watts, John Malcolm Watts, Polly Toynbee.

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