If necessity is the mother of invention, politicians of all stripes will have to be spectacularly inventive in dealing with the fallout from the Scottish referendum result. And we may yet stumble upon a new constitutional settlement that will go some way to encouraging both innovation and constraint in the bloated public sector both north and south of the border.

Such an outcome would be remarkable given the depressing, big government, high spending narrative that was deployed by both sides in the referendum. A casual observer may well have concluded that the only economic issue facing Scotland was how to spend the supposedly vast resources at the nation’s disposal. The nationalists barely deigned to acknowledge that wealth generation in an independent Scotland would be a challenge at all – simply splurging more imaginary money on state-run health, education and welfare would be an automatic consequence of separation. The unionists proudly declared that state spending per person in Scotland was measurably higher than elsewhere in the UK – as if achieving colossal levels of government expenditure was somehow the mark of a successful, dynamic and efficient economy.

But if the sound and fury of a hard-fought campaign gave rise to many absurd and fanciful pledges, the need to devise a new constitutional settlement will require hard-headed realistic thinking, and it is here that there are genuine grounds for optimism.

Far from entertaining any suggestion that they should wriggle out of their last-minute ‘vow’ to enhance devolution, the three Westminster establishment parties should deliver more than they have thus far promised.

Health, education and welfare spending account for nearly two-thirds of government expenditure. None of these need to be controlled by a UK-wide government. Alongside a range of much smaller state-funded schemes – arts funding, for example – these can and should be handed over hook, line and sinker to the constituent parts of the UK.

Scotland already has a very different educational system to the rest of the UK. They should be encouraged to experiment and innovate much further.

The same goes for healthcare. The NHS and how to ‘protect’ it became a dominant issue in Scotland in the last few days of the referendum campaign. But if completely and fully devolved, what is the threat healthcare needs protection from? The Scots could devise their own priorities and delivery mechanisms. Perhaps they will allow citizens to opt out of NHS treatment if they are dissatisfied with it – instead choosing to deploy the same amount of earmarked money with a more trusted provider. If such a system were trialled in Scotland and seen to work, those south of the border could learn from it and follow suit.

Pension provision – and welfare more generally – can be wholly ended as a UK competence. The universal state pension in Scotland will have to be paid for by the Scottish taxpayer. They can decide the rates, the age at which recipients are eligible and, crucially, the mechanism for funding it. A wise Scottish administration would adopt a save-as-you-go scheme, seeking to phase out the present, unfunded system and defusing the debt timebomb associated with it.

Of course, if vast areas of spending are transferred away from the UK authorities, tax policy must follow suit. Giving devolved powers to tweak income tax by a few percentage points either way is woefully inadequate. Each devolved nation should be able to construct their own tax system across the board. If the Scots chose to levy very high income tax rates on high earners, we will be able to see whether such people shift their employment south of the border. More optimistically, perhaps Scotland would seek to slash, or even abolish, corporation tax to attract investment and entrepreneurs. If they did, the rest of the UK would face real pressure to follow suit.

If we grasp the opportunity to radically devolve power to the constituent nations of the Union, the dynamic effects could be spectacular. At present, we are the most centralised state in the western world, and this greatly inhibits innovation and experimentation.

The actual impact of a serious programme of fiscal decentralisation would be to encourage a less monolithic, impersonal approach in the delivery of public services, and to subject our absurdly complex and burdensome tax system to real, internal competition.

If our political leaders at Westminster show some real courage, the fallout of the Scottish referendum campaign could be to transform our economy, not merely our constitution. Indeed, a medium-term consequence could be to encourage a lower-tax, lower-spend, less wasteful approach to government across the British Isles. Such an outcome might be a surprise to many, but surely it would be welcome by most.

This article originally appeared in City AM.

Comments (1)
Dear Mr Littlewood So we get out of the EU as well? If we don't we'll still have the biggest of big governments ordering us around and there will be nothing we can do about it. The EU would dearly love to see Westminster shrink to nothing, with all power permitted by the EU devolved to the EU designated regions and beholden directly to the EU. DP

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

Previous blog posts


Ryan Bourne
22 September 2014

Since the publication of Kristian Niemietz’s seminal work Redefining the Poverty Debate in 2012, many of us have been arguing for a new approach to the perceived problem of poverty and low pay...
Mark Littlewood
21 September 2014

In this new video for ieaTV, IEA Director General Mark Littlewood explains how liberalising the UK’s suffocating planning laws would have a profound and beneficial effect on the cost of living...
Philip Booth
19 September 2014
1 comment

In denying the Scots the option of devo-max, David Cameron made arguably the most monumental mistake of any recent premiership. The fairly narrow ‘no’ vote could lead to the worst...
Len Shackleton
18 September 2014

Greg Dyke, the Chairman of the Football Association, is proposing a new set of rules about the eligibility of non-EU footballers for work visas. The proposals, which would aim to reduce the...
Ryan Bourne
17 September 2014

With low productivity, high inflation and terrible industrial relations, in 1977, Britain was a basket case. So that year, businessman John Hoskyns decided to dedicate substantial effort to analysing...
Christopher Snowdon
16 September 2014
1 comment

The economist Julian Simon once wrote that ‘the economic study of advertising is not deserving of great attention’, ruefully adding that ‘this is not a congenial point at which to...
Ryan Bourne
14 September 2014

Most politicians and commentators think the ‘cost of living’ and its inverse ‘low pay’ are areas of serious concern for public policy. But for some, like the journalist Owen...
Ryan Bourne
12 September 2014

Concern about ‘low pay’ and the ‘cost of living’ are two sides of the same coin. Pay is deemed ‘low’ when the prices of things we need to buy are rising...
Kristian Niemietz
11 September 2014
1 comment

In this video the IEA’s Senior Research Fellow Kristian Niemietz outlines a free-market approach to the cost of living squeeze. Building on his research in Redefining the Poverty Debate, he...
Andreas Strongolou
10 September 2014
1 comment

Planning controls constitute a significant denial of private property rights, with serious economic consequences. The most obvious is the severe housing crisis. However, businesses also suffer as...
Ryan Bourne
9 September 2014

Why do politicians advocate policies which deal with the symptoms of problems rather than the underlying issues directly? In the past week we’ve seen Liberal Democrats react to expensive...
Christopher Snowdon
8 September 2014

Owen Jones’ new book, The Establishment, promises to be more than your average left-wing polemic against austerity, banksters, globalisation and ConDems. The blurb promotes it as an expos...
Ryan Bourne
7 September 2014

Today marks the start of the IEA’s ‘Cutting the UK's Cost of Living’ month as part of our 2020 Vision programme – an attempt to shine a light on key issues which we...
Matt Ridley
5 September 2014

In this interview for ieaTV, Matt Ridley explains that shale gas is readily available in the UK and can be extracted relatively cheaply. Moreover, the environmental problems associated with the...
Philip Booth
3 September 2014

It is often argued by proponents of free markets – especially within the Conservative Party – that we should not pursue equality of outcomes but, instead, pursue equality of opportunity....
John Burton
2 September 2014

One of the most important controversies generated by the Scottish independence debate relates to the continuation (or not) of the present sterling zone between Scotland and the rest of the UK (rUK),...
Carlo Stagnaro
1 September 2014
1 comment

You can’t have your cake and eat it too – even when it comes to energy. Germany has been a champion of the ‘green economy’ for the past decade, but now the time has come to...
Kristian Niemietz
28 August 2014

“Labour’s summary of the ideas […] says they “clear the way for a massive shift of resources from the NHS to private companies”. […] [P]rivate companies (Labour...
Jared Meyer
22 August 2014
1 comment

Prime Minister David Cameron’s “all-in” push for developing the UK’s shale gas reserves continues to generate what seems to be strong public backlash. While vocal protesters...