Corporate tax game rigged against the common good
At this point in the Holyrood calendar MSPs are normally looking forward to a quieter time over the summer recess, while the committee clerks and government officials are preparing for the budget process which begins when Holyrood returns in September.
As you may have noticed, this is no ordinary year.
With the Conservative leadership contest well under way and the Labour Party still teetering on the edge of a cliff, it’s a turbulent time. In the wake of the Brexit vote the economy is defying commentators’ ability to come up with new words for crisis. Meanwhile a nascent ‘Scotland in Europe’ movement is bursting into life and giving fresh energy – and urgency – to the independence cause. This does not have the makings of a quiet summer.
At the same time preparations for the budget process, which normally dominates Holyrood from September till the new year, are on hold. It’s partly because nobody can yet quantify the effect of Brexit on the Scottish public finances. The overall economic impact is almost universally expected to be negative, but the scale isn’t yet clear and won’t be for some time. It’s implausible to think however that it won’t have a knock-on effect on the Scottish block grant. This is all happening at the very time Scotland is about to gain new tax powers, which will link the Scottish Government’s income to the performance of the Scottish economy for the first time – not as close a link as if we were independent, but far from insignificant. This was one thing every party in the Smith Commission agreed on, but nobody thought the UK Government would put the whole economy on black and spin the wheel right before those changes came in.
Over the coming months a new UK Prime Minister (and presumably a new Chancellor) will come into office. It’s looking less likely now that they will introduce an emergency budget with immediate tax rises and spending cuts, but we’ll still have to wait until the Autumn Budget Statement before the Scottish Government will be able to produce a draft budget for next year – and political Autumn tends to last until December! That means MSPs will have only weeks to scrutinise the Scottish budget in the new year before it must be passed, along with tax rates. That would be inadequate in any circumstances, but with a minority government which needs to work harder to win a parliamentary majority, it’s even more challenging.
We can make some guesses about what the UK Government might do. George Osborne has already suspended his deficit target, giving more wriggle-room to hold off on spending cuts. That’s by no means the end of austerity of course, but it could foreshadow a slower deficit reduction path from the new Chancellor. Most recently he has proposed cuts to Corporation Tax. I doubt that even he still believes in the ideological nonsense which predicts that this will magically generate increased revenues. It looks more like a desperate attempt to send “open for business” messages to the City where it seems that more UK investment funds are suspending trading every day.
Corporation Tax has been a contentious issue in the constitutional debate here in Scotland, as well as in Europe. A country-by-country race to the bottom has seen the UK rate cut, cut and cut again by Tory, Labour and coalition governments. Ireland meanwhile has earned the scorn of other EU member states by slashing its rate and attracting some of the world’s most notorious corporate tax dodgers. Efforts by the EU to move toward a common corporate tax base have been frustrated at every step by the UK, and no doubt there are plenty of hard right Brexiteers who would portray this as another reason to “take back control”. In fact it only leaves control in the hands of wealthy corporations which can shift their profits from one jurisdiction to another, while small independent businesses keep paying their fair share.
This corporate tax competition is one of the mechanisms which has created the profoundly unequal economy we see around us today, and it’s the reason so many independence supporters on the Left rejected the SNP’s proposal that Scotland should join the same game by undercutting the UK’s corporate tax rate if the power was devolved.
All of this prefigures the longer term debate about UK’s new relationship with Europe, and whether Scotland can cut its own deal, including the option of independence and full EU membership. In the negotiations ahead, devolution of Corporation Tax, VAT, excise duties and more may be offered. But if we want real economic power, and the chance to build a fairer economy, we must not be bought off with the promise of being dealt in to a game which is fundamentally rigged against the common good.
This article first appeared in the National