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The North risks falling further behind Scotland whether or not Scots vote for independence, according a new report from the IPPR North think tank. The report is published on the day that Scotland's First Minister Alex Salmond gives a speech in Newcastle to the North East Economic Forum annual dinner.

The report argues that the Northern economy is unable to dispatch a single ambassador to Westminster who can argue for more powers for the North but that Scotland's First Minister helps the Scottish economy 'speak with one voice'.

The report shows that Scotland can already develop and resource a targeted industrial strategy and attract inward investors with generous support packages but argues that the North of England's Local Enterprise Partnerships pale in comparison. The report argues both independence and further devolution to Scotland will put the North at risk of tax competition.

The report also cautions against alarmist claims, arguing Scotland will not be able to make sweeping tax cuts without risking its fiscal credibility. But it argues that Scotland gaining the power to implement small targeted tax cuts, such as to Air Passenger Duty, should be of greater concern than dramatic reductions in corporation tax.

The report recommends:

Northern leaders should join the negotiation about what further devolution for Scotland should look like in the event of a no vote on independence, with safeguards built in to manage excessive tax competition with the North.
Northern leaders should demand control of far more powers and resources from London in order to begin to level the playing field with Scotland.

Katie Schmuecker, IPPR North Associate Director, said:

"As Scotland's nearest neighbours it is important that the North joins the debate about Scotland's future. The North should learn from international experience and argue that a more fiscally autonomous Scotland should sign up to a fiscal code of conduct to allay fears of serious damage to the northern economy.

"The North should not be afraid of developments in Scotland. The risk of Scotland reducing corporation tax has been overstated and in the short and medium term it is extremely unlikely that Scotland would choose to 'do an Ireland' given its current fiscal situation.

"Northern leaders should learn from the ambitious outlook of the Scots, and champion decentralisation and further local powers to the North. This is a chance for the North to renegotiate its position with Westminster to ensure its future prosperity. It needs to ensure that whatever deal is reached between Westminster and Holyrood, the North is not unduly disadvantaged."

Cllr Paul Watson, Leader of Sunderland City Council and Chair of ANEC said:

"This is a critically important issue for the North East economy and one we need to address and so I welcome the report and also am delighted that the North East Economic Forum continues its valuable work and has attracted the Scottish First Minister to address the Forum on Tuesday."

Notes to editors:

IPPR North's new report - Borderland - will be available to download from http://bit.ly/IPPR9885

Northern business and political leaders have expressed concern at the prospect of Scotland gaining control of corporation tax and cutting rates, putting the North at a disadvantage. Cutting corporation tax is on the agenda for Scotland:

Prominent Scottish business leaders like Sir Tom Hunter and Jim McColl have argued for Scottish Corporation tax to be reduced to 12.5% to bring it into line with Irish rates.
The SNP is committed to cutting corporation tax to 20% if they gain control of the tax.

The headline rate of corporation tax is currently 24% in the UK. It is due to fall to 22% by 2014.

Currently Air Passenger Duty adds £24-£26 to flights of up to 2,000 miles, and £65-£130 to flights between 2,001 and 4,000 miles. Because of the tight margins operated by many airlines, just a small drop in passenger numbers could mean the closure of certain routes.

Whether Scotland becomes independent or remains part of the UK but is given greater taxation powers (so-called "devo-max" or "devo more"), its room for manoeuvre will be constrained by the need to balance its budget.

According to Government Expenditure and Revenue Scotland (GERS) data if an independent or fiscally autonomous Scotland maintained current tax and spend policy, it would run a 7.4% deficit (this figure includes revenue from Scotland's 'geographical share' of oil.).
If Scotland was to cut taxes in one area it would either need to raise them elsewhere, cut spending or borrow in order to balance its budget.

Indicative calculations in the report show how much Scotland's GDP would need to grow by to fill the revenue gap if corporation tax had been lower in 2010/11:

If on and off shore corporation tax had been 12.5% (and the 20% supplementary rate for the oil industry maintained), 7.8% GDP growth would be required.
If on and off shore corporation tax had been 20% (and the 20% supplementary rate for the oil industry maintained), 3.9% GDP growth would be required.

Devo-max or devo more would not be the 'best of both worlds' for Scotland. Should Scotland choose to reduce taxes it must bear the consequences of that decision according to precedent set in European law. This means should Scotland fail to raise enough revenue to cover spending as a result of a tax cut decision, she would have to either raise taxes elsewhere, cut spending of borrow to fill the gap. The effect of the decision cannot be offset by a bail out from central government.

Contact:

Richard Darlington, 07525 481 602, r.darlington@ippr.org