Fiscal challenge brews after Scotland votes No on independence

Map of Scotland

Scotland remains a member of the UK, but with 45% of Scots wanting to leave the Union, the unionists’ last-ditch offer of fiscal guarantees may come back to haunt them.

The Better Together campaign led by former Chancellor Alastair Darling won 55% of Scottish votes to stay in the UK, compared to the 45% achieved by the Vote Yes movement led by Scotland’s First Minister Alex Salmond, who wanted independence.

The Vote No campaign passed the threshold in Fife with a 55% majority at 6am on Friday. This is despite the Yes campaigners gathering more than 1.6 million votes, including majorities for independence in two of the country’s largest cities, Glasgow and Dundee.

Accepting defeat, Scottish National Party leader Salmond said: “It is important to say that our referendum was an agreed and consented process and Scotland has by a majority decided not at this stage to become an independent country. I accept that verdict of the people and I call on all of Scotland to follow suit in accepting the democratic verdict of the people of Scotland.”Darling said: “Today is a momentous result for Scotland but also for the UK as a whole.”

Politically, Westminster will breathe a huge sigh of relief at keeping together the 300+ year-old union, albeit by a relatively small margin. Conservative Party leader David Cameron will not go down in the history books as the Prime Minister who lost Scotland, while Labour managed to wrestle its traditionally unionist voters back from nationalism.

Prime Minister Cameron said: “The people of Scotland … have kept our country of four nations together and like millions of other people I am delighted.”

Financial implications

But now that the Scottish public have made their decision nearly two years after the Edinburgh Agreement was initially signed between Cameron and Salmond, what are the financial implications on Scotland and the UK?

With such substantial support for the Yes campaign – 45% of Scots want to leave the UK – ministers have no choice but to listen to the country’s concerns.

In the run-up to the vote, one poll sent shockwaves around the world when it showed Yes had nosed ahead. In a last-ditch attempt to bring softer Yes voters back to the No cause, the three major unionist parties made a ‘vow’ to offer a devolved Scotland more powers and to maintain and protect the controversial Barnett formula, a mechanism devised in the 1970s by then Labour minister – and former accountant – Joel (now Lord) Barnett that guarantees the Scots £1,600 more public spending per head than people in the rest of the UK.

On the eve of the referendum Lord Barnett disowned the formula, saying it is was a “terrible mistake”.

Yet the new deal, brokered by Scottish-born former Prime Minister Gordon Brown, guarantees greater levels of state funding and to make the Scottish parliament a permanent institution.

Taxation is one of the key financial areas which could see a radical change in the wake of the referendum. The Conservatives, Labour and Lib Dems have signed a pledge that includes preserving the block grant from the Treasury to the Scottish government. The Conservatives say Holyrood should be able to set its own income tax rates, Labour says Scotland’s income tax should only be allowed to be adjusted by 15 pence in the pound while the Liberal Democrats want the Scottish government to have control of capital gains, inheritance and other taxes north of the border.

At present, a three-year budget is allocated to Holyrood from the Treasury which it has the power to spend as it wishes, and the Scottish Government is also currently entitled to vary income tax by 3p above or below the UK rate.

Further devolution?

However, the route to Downing Street making good on its promises is sketchy. While the three parties must hammer out a compromise, each party must rationalise these devolved power pledges with its backbenchers. The question has already been raised, if Scotland deserves greater fiscal and legislative control over its territories, then why not the English regions? Public Accounts Committee Chair Margaret Hodge is already calling for greater tax powers for London.

Meanwhile, however, the status of Scottish businesses seems clear. Fears that landmark Scottish companies and institutions such as the taxpayer-owned Royal Bank of Scotland would relocate to London should now be quashed.

Also, recent data from the Office for National Statistics shows Scotland’s employment levels to be improving steadily as part of the UK. As the third-richest country or region in the UK after London and South East England, 45,000 new jobs were filled in Scotland between May and July this year. Moreover, small and medium-sized businesses in Scotland will continue to benefit from the freedom to conduct business across the without England without an international frontier.

While the voting maybe over, the debate over the role of regions outside of London will only intensify. And all this just seven and a half months before Scots join other Britons back in the voting booths for the next General Election.

Jermaine Haughton is a journalist and digital media professional.

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