Inequality in Scotland: Impact upon the debate

Published: 5 February 2014

On Tuesday 21st January we released 'Constitutional change and inequality in Scotland'. This turned out to be a very political paper (FMQs ends with Baillie and Salmond arguing over who had read the report most closely!) and I was concerned that as the campaigns claimed our research supported them, that we'd be seen as biased in our analysis. The Scotsman for example, inserted "independent" everywhere we said only "Scotland" giving the impression that independence was somehow worse than other constitutional options for tackling inequality. I saw conversations on twitter accusing us of essentially producing research for the No campaign:

When my tweet here was repeatedly retweeted, I thought maybe I'd gone too far the other way! Anyway, what did our research say? And what comfort could it give to either campaign?

Our research quantified the impact of small changes in tax and benefit levels upon inequality, incorporating behavioural responses to policy changes, including a migration response. We concluded that feasible changes have a very small impact upon inequality levels - to achieve Scandinavian levels using only fiscal policy would require massive changes to current policy, which could see a decent proportion of the tax base flee the country.

Assuming an aim of Scandinavian inequality, we say that policy other than simply fiscal policy is likely required. Changes in labour market policy and in the levels of public service provision, to bring down wage inequality (rather than increased redistribution) must also be implemented. Slow policy change and political commitment over a long period of time, may lead to people’s expectations and social norms evolving to permit a more equal, Scandinavian style economy. This is consistent with the prospectus underlying the Common Weal project. Conversely, Taxpayer Scotland also welcomed the report: if reducing inequality is difficult and slow, then they suggest that the aim of reducing inequality should be reconsidered.

What can the campaigns take from this? The No side can claim that since the UK is independent, it already has the powers that an independent Scotland would gain for tackling inequality. The lower behavioural responses induced by the whole UK acting in concert (compared to Scotland acting independently, and rUK acting as an outside option for fleeing Scottish taxpayers), means that, in principle this should be an issue best tackled by the whole UK. The commitment of the Scottish population to implement policy over a generation can also be questioned (polling evidence).

The Yes side can point to the evidence that the UK is a very unequal country. High inequality may be the UK’s optimal policy: the UK is unlikely to ever do much to tackle inequality because it has so much to lose if the tax-base in London flees. Fiscal policy doesn’t have no impact: such policy could reduce inequality relative to rUK. Independence also comes with power over the non-fiscal policy levers – which are unlikely to be included in any enhanced devolution settlement.

The report’s conclusions are not for or against independence. The report simply highlights the real difficulties in using fiscal policy to tackle inequality in either case.