The SNP’s corporation-tax folly

Salmond’s plan to reduce Scotland's corporation tax rate to 3 per cent below that of the UK is politically and economically incoherent.

Scotland's First Minister Alex Salmond. Photograph: Getty Images

For some months after the SNP defied electoral arithmetic to secure majority status at Holyrood in 2011, its control of the Scottish political landscape seemed absolute. With his unionist opponents humiliated, Alex Salmond was free, in effect, to run things on his own terms.

Recently, however, a series of badly executed policy U-turns and poorly handled referendum controversies – over Nato membership, EU legal advice and Scotland’s currency options – has taken the wind out of the nationalists’ sails. Now another controversy is stirring as the party’s commitment to cut corporation tax comes under increasing scrutiny.

Salmond argues that setting Scotland’s corporate tax threshold 3 per cent below that of the United Kingdom’s –which stands at 23 per cent but is due to fall to 20 per cent in 2015 –will attract investment, boost growth and create as many as 27,000 Scottish jobs over the next two decades. Despite reports that his deputy, Nicola Sturgeon, the most prominent social-democratic voice in the SNP leadership, is unhappy with the proposal, the First Minister has stuck rigidly to this hypothesis.

But the criticisms have been relentless. Earlier this year, Stephen Boyd, the highly regarded assistant secretary of the Scottish Trades Union Congress, described the Scottish government’s corporation tax discussion paper as “an excruciatingly awful piece of work [in which] every argument presented is easily debunked”. The sentiment was echoed by the director of the Jimmy Reid Foundation, Robin McAlpine, who revealed that Salmond’s faith in the ability of reduced business rates to increase output “comes from a complex computer model . . . built on a series of assumptions . . . one of which is that tax cuts always create growth”.

The frustrations expressed by Boyd and McAlpine are understandable: Salmond has yet to produce any reliable evidence to back up his claims. In fact, more than 40 years of analysis has failed to substantiate Arthur Laffer’s theory that falling tax rates result in higher state revenues.

Canada’s experiment with lower business tariffs is instructive here. Between 2006 and 2012, successive federal administrations slashed corporate tax from 21 per cent to 15 per cent in anticipation that companies would use the savings to hire more staff, invest in research and purchase new equipment. Instead, they hoarded the cash and hiked pay for their executives, compounding the national deficit and paving the way for additional spending cuts. Perhaps it was this folly that provoked Joseph Stiglitz - a member of Salmond’s Council of Economic Advisers - to dismiss commercial tax relief as “just a gift to the corporations increasing inequality in our society.”

If the economic logic behind the First Minister’s policy seems incoherent, the political logic is equally muddled. In order to win the referendum, the Yes campaign has to attract substantial support from three significant, overlapping groups: Labour voters, public-sector workers and trade unionists. The people who make up these constituencies account for a large proportion of lower-middle- and working class Scotland. Their experiences of Westminster rule make them enthusiastic about the prospect of enhanced devolution but they remain sceptical of the case for full political separation from the UK.

Foremost among the reasons for their scepticism is the ever-widening gulf between the SNP’s centre-left rhetoric on welfare and benefits and the detail of the party’s economic programme, which accepts much of the ideological architecture of neoliberal Britain.

Indeed, the SNP’s overarching economic strategy is essentially Brownite. Salmond believes revenues generated by a dynamic free market should fund a generous welfare settlement, while his “sterlingzone” currency union would leave the Bank of England –made “operationally independent” by Gordon Brown in 1997 – in charge of Scottish interest rates.

The New Labour parallel can be extended to include John Swinney’s plan to maintain a UK-wide system of financial regulation – an indication of how keen the SNP is to reassure Scottish financial institutions that independence won’t undermine their interests.

All this has contributed to a sense of despondency among the SNP’s allies on the pro-independence left, who struggle to understand why Salmond values the endorsement of a multimillionaire tax exile such as Jim McColl over a meaningful partnership with, for instance, the Scottish Green Party chief Patrick Harvie, one of Yes Scotland’s greatest campaigning assets.

Salmond’s self-confidence has been a key component of the SNP’s success. It helped guide the party through its difficult first term as a minority government and towards that extraordinary landslide victory four years later. But his instincts have led him astray on corporation tax. The sooner he changes course, the better.