However Scotland votes next month, we will see more internal economic competition in these islands. If the outcome is independence, then that competition – for inward investment, tax revenues and indeed for talented people – will become open and extreme.
If it is “devo max”, the passing of many more powers to the Scottish government as promised jointly by the three main parties yesterday, then the competition may appear a bit less overt but in practice it will be just as forceful. We are moving to a new economic model for these islands.
You can catch some feeling for this already, most obviously in the case of Ireland. But remember, too, that 250,000 British people, more than the population of Southampton or Aberdeen, also live outside the jurisdiction of Westminster – in the Channel Islands and the Isle of Man. That is too small a number to have more than a marginal influence on British economic policy, though enough to annoy Her Majesty’s Treasury, which periodically closes off some loophole or other.
But Ireland has had a profound pull on British policy. One example: in 1996, when Ireland moved to a standard corporation tax rate of 12.5 per cent, the UK standard rate was 33 per cent. Now we are down to 21 per cent, with plans to drop to 20 per cent.
Tax is not the only reason why Ireland was able to become the principal European base for many US hi-tech companies, including Google and Microsoft. The availability of a young, well-educated, English-speaking workforce was also a huge draw. But tax certainly helped, and it was interesting that when Ireland had to seek a bail-out from the EU and the IMF, retaining its corporation tax rate was not negotiable. It was, for Ireland, a red line in the deal.
Ireland has a land border with the UK but, thanks to the Irish Sea, there is a practical barrier to economic competition. Besides, it contains only 4.6 million people, against 63.5 million in the UK. But the maths will change. Scotland has a population of 5.3 million, Northern Ireland (which will surely get a much higher degree of economic freedom in the years ahead) 1.9 million.
So even if Wales remains more closely controlled by Westminster, our islands could move to a situation where there are 12 million people competing against 56 million. Were Wales to extract more power, with its 3 million strong population, it would be 15 million versus 53 million.
England will remain the dominant economic force of these islands, and the richest part, thanks to the extraordinary competitiveness of London and the South-east. But the economic and policy dynamics will be quite different from today.
So how will competition develop? Tax is the obvious area and it is easy to sketch the main areas of tension. I suspect that the general pattern will be for lower company taxation combined with higher personal taxation – but the personal taxation will have a twist in that there will be a switch from taxation on income to taxation on assets.
Think of a cut in top rates of income tax but an annual wealth tax. Because taxes can be changed quickly there will be a lot of experimentation, and there will be mistakes. The key point, though, is that people and businesses will find themselves relocating around these islands in response to the incentives that the different legislatures create.
Some will worry about this. There are fears of “a race to the bottom”, where competition drives down tax rates and cuts away revenue. But there will also be “a race to the top”, where different jurisdictions compete to provide better services – services for the business community as well as for individuals.
It is fascinating to see the new ideas about making England’s northern cities more competitive by improving communications between them. This has been billed by the Chancellor as making the North compete more effectively with the South but it is hard not to see the Scotland issue looming over this. If Scotland is to get more freedoms and responsibilities, surely the North should get some too.
In any case, tax and public services are only really a starting point. They are the obvious first areas on which governments try to differentiate themselves: Ireland on business taxation, Scotland on access to public services. But that is where we are now.
Looking ahead, a British Isles where the different parts do things in different ways, sometimes co-operating, sometimes competing, would probably do a better job for its inhabitants than the present over-centralised structures. (A sidebar to the whole independence debate is whether Scotland is over-centralised: should, say, the Orkneys and Shetlands have more independence, not just from London but from Edinburgh?)
Legal and education systems should surely compete against each other to improve the outcomes for all. They do, to some extent, at the moment but there is a lot more scope for that. I could see more scope, too, for competition in planning policy, where speed and certainty is arguably more important than actual decisions. A further area for competition is labour market policy: how do you balance the rights of individual workers against not just the rights of an employer, but also of their co-workers?
The big point here is that there are no right ways of running a country or a region, and no wrong ways. But if different parts of our islands have more freedom to make different choices, then we will see what seems to work and what doesn’t. Westminster becomes less important – but we can live with that.
Who will vote to raise interest rates now?
The Bank of England’s Monetary Policy Committee meets today and will duly announce on Thursday that there will be no change in interest rates.
Boring? Well, yes in the sense that nothing will happen, but no in the sense that we are clearly on the glide-path to a rise in rates, and we will get a hint when the minutes are published in two weeks’ time whether any member voted for one now. The person whose views are most interesting is Martin Weale, former head of the National Institute for Economic and Social Research. He has both a huge amount of experience of watching the UK economy and an intuitive feeling for where it is going. If he votes for a rise, I would trust his judgement.
The Bank’s Inflation Report, published next week, will give a feeling for the collective view of the Bank staff, the key issue being how quickly are we using up the slack in the economy. A Reuters survey shows that City and business economists still, on balance, expect the first move in February next year – but a growing minority are plumping for this November.
That would be my instinct too, though you have to wonder whether three months makes a huge amount of difference either way. But interest rates will become interesting again.Reuse content