Independence is one thing, but then what for tax in Scotland?

I had some interesting discussions in Scotland yesterday. One, perhaps earlier in the day than desirable for such issues to be considered, concerned the tax transition from the UK to an independent Scotland if that were ever to happen. There is, of course, a precedent. In 1922 Ireland became an independent state. Article 74 of its 1922 constitution said:

Nothing in this Constitution shall affect any liability to pay any tax or duty payable in respect of the financial year current at the date of the coming into operation of this Constitution or any preceding financial year, or in respect of any period ending on or before the last day of the said current financial year, or payable on any occasion happening within that or any preceding year, or the amount of such liability; and during the said current financial year all taxes and duties and arrears thereof shall continue to be assessed, levied and collected in like manner in all respects as immediately before this Constitution came into operation, subject to the like adjustments of the proceeds collected as were theretofore applicable; and for that purpose the Executive Council shall have the like powers and be subject to the like liabilities as the Provisional Government.

In other words, tax continued uninterrupted with the UK tax system being adopted in its entirety by the Irish Free State (as it then was) until such time as it could make amendments.

I strongly suspect that this would have to be the case in Scotland if it too were to become an independent country. But the real question is what happens then? At the risk of simplifying Irish history somewhat grossly, in the years after independence Ireland descended into a trough of intense conservatism during which time innovation was notable by its absence. Scotland could not afford to do that. We now know the success of the modern state is far too closely related to its tax system for such an outcome to be submitted and yet, as yesterday’s hearing in the Scottish parliament showed, there is not enough tax thinking going on in Scotland right now: that is why three of the four witnesses had to come from England (albeit Alex does actually have strong Scottish roots).

This then is an issue of rightful concern and one where it is vital that recourse is not made to the usual suspects, whether they be the Big 4, a major firm of lawyers, or the tax institutes. It is all too obvious that each of these would be conflicted in offering advice: first because they do not think tax is an economic and social issue and second by the interests of the large businesses that dominate their concerns. It would be a disaster for Scotland if they were to shape its taxation future. The chance that they might wish to turn Scotland into a tax haven might also be high.

As a result there is an issue for those with broader concern to address. I will be musing on it. Serious thoughts are welcome.

You can follow Richard  J Murphy on twitter at @RichardJMurphy and at his webpage Tax Research UK

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The economics of Scottish taxation




I have already written about what I think the foundations of Scottish taxation should be. This thinking is based on a report I have submitted to the Finance and Constitution Committee of the Scottish parliament in anticipation of a hearing on 19 April. In that post I referred to the economics that underpins those foundations and said I would write separately on the issue, and now duly do so.

In my submission I say that the foundations of Scottish taxation must reflect

  1. Modern taxation theory;
  2. The role tax now plays in economic policy;
  3. The social and economic priorities of the society that imposes the charge.

The first of these is my concern here. As I say in my submission:

To build appropriate foundations for a tax system the role of tax in the economy and wider society has to be properly understood. It is my suggestion that this is rarely the case. Just as the Bank of England had to say that the role of banking had been almost wholly misunderstood by economists and was incorrectly represented in almost all economics tax books in 2014[1], so too is tax widely misunderstood.

It is widely thought that tax is necessary to pay for government provided services. It has, however, recently been realised that this is not true. This is because all government services can in principle be paid for either by printing money or by QE operations (which amount to much the same thing).

The reality is, of course, that no government would want to pay for all government services this way. That is because the result would undoubtedly be rampant inflation. This though does not, however, change the principle: that principle is that all government services can be paid for without taxation.

What is more, if the proverbial ‘chicken and egg’ question of which comes first with regard to government spending or taxation is asked then it must be government spending. If government did not spend first then none of the currency it insists be used to pay the taxes it demands be paid would actually exist. The fact that much of the money in question has no tangible existence and is only in an electronic bank accounts does not change this conclusion: those banks and the accounts that they operate only exist under a licence granted by the government.

Appreciation of this fact demands a whole reappraisal of the role of tax In the economy, just as happened when the Bank of England said in 2014 that the awareness that it was lending that created bank deposits and not savings that permitted lending demanded a whole reappraisal of the role of money in then economy.

[What is clear is that if] tax is not required to pay for government provided services  it must have other reasons for existing. There are six of them:

  1. Reclaiming the money the government has spent into the economy. It may appear that tax revenue is being used to pay for government services supplied but that is not true: the service comes first and the tax comes second. Tax reclaims the money spent to prevent inflation. The amount reclaimed is that which is considered sufficient to leave the desired rate of inflation in the economy. Because we may well want some inflation – and that usually requires that more money be created than be reclaimed by tax – balanced budgets are usually a bad idea for the macro-economy because they deny the economy the cash it needs to function in a mildly inflationary environment.
  2. Ratifying the value of money. Because a government requires that tax be paid using the currency that it creates, and uses when undertaking its own spending, that currency has for all practical purposes to be used in the economy for which it is responsible, assuming that tax forms a significant part of people’s liabilities. Tax does, therefore, give a currency its value in exchange and as a result provide control of an economy to the government that charges it.
  3. Reorganising the economy. Fiscal and monetary policy are the two fundamental tools available to a government to manage its economy, assuming it has its own currency. As the previous analysis has shown, money creation and taxation are the flip side of each other. Tax is then an integral part of macroeconomic policy and so of reorganising the economy to meet social and economic goals.
  4. Redistributing income and wealth within the economy. Experience has shown that market economies are very good at concentrating income and wealth in the hands of a few people in a society whilst economics makes clear that this is harmful to the prosperity of society because it seriously reduces overall levels of demand in the economy. Redistribution of income and wealth is then an essential function that any Government must undertake and appropriately designed taxes are a proven and effective method for delivering this policy.
  5. Repricing goods and services. Markets cannot always price the externalities of the goods and services they supply or reflect social priorities. Tax permits repricing of goods and services to reflect these facts.
  6. Raising representation in democracies. There is little doubt that tax motivates interest in the democratic process. When people recognise that they pay tax they are more interested in engaging with the electoral process.

The foundations for Scottish taxation  that I propose are based on this economic logic. It is a logic that could liberate Scotland to become a fully economically literate and functioning state and truly equip it for independence.


You can follow Richard  J Murphy on twitter at @RichardJMurphy and at his webpage Tax Research UK

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Beyond the Headlines

“[I]f there is to be meaningful debate on this issue then the SNP have a lot of work to do to produce best possible data. The last thing they should do is trust that from London.” – Richard Murphy

Tax expert Richard Murphy, who is currently most notable for exposing the UK’s massive £120 billion per year tax gap, has written an article warning of relying on UK economic data to make the case against Scottish independence.


Before he gets attacked too badly by hacks telling him that the Scottish economic data is produced by Scottish civil servants (Edit: I may already be too late on that) I thought I’d write a parallel piece pointing out what those civil servants have told me about the limits of some of their stats.

The first thing to remember in all of this is that the UK is not a federation or a confederation, it considers itself to be a unitary state of which Scotland is just one region of twelve (plus the “extra-regio” offshore regions). Therefore there is currently no real obligation to even gather the distinct statistics for Scotland and it really only has become important because of the independence campaign.

Tax Revenue

As I’ve pointed out in my paper Beyond GERS, the issue of apportioning tax revenue is fraught with subtle difficulty. GERS itself has updated its methodologies multiple times over the years (particularly since the SNP took the government in 2007. The GERS of today is no longer very closely related to the GERS created by Ian Lang to discredit Scotland in the early ’90’s). There are still differences in the results presented straight by HMRC and the data eventually “Scottishised” [To use the stats folk’s term] and presented in GERS.

Onshore corporation tax is a good example of this. Where an overall UK stat may simply count the location of the HQ of a company for the purposes of assigning corporation tax and this may make sense from a unitary state perspective (albeit this is becoming less true as globalisation increases the ability for multi-national companies to move resources across borders).

For many companies though, the profits one which corporation tax are paid are not generated at the HQ. This is obvious in the case of, for example, a large retail chain which has stores across the country. To correct for this, HMRC and GERS both use different methodologies to apportion the tax more evenly. Various measures (and the weighting applied to those measures) such as estimating volume of sales, number of employees, amount of capital spent in the region and overall population are all used in different ways to reach slightly different estimates. As a result, HMRC estimates that in 2015-16 Scotland produced 7.1% of the UK’s corporation tax compared to 7.3%% estimated by GERS – a gap of  about £100 million.

One can also see possible limits of these methodologies especially if taken individually. For example if one looks at employees then one could probably consider a company (and, it should be stressed that this is a completely hypothetical company) which employs a dozen people in Scotland to make, say, a high value, highly exportable product with a geographic link (call it a similarly hypothetical product like “Scotch blisky”) and then employs a couple of hundred people in London to market it. It may be very difficult to properly apportion the “value” of that product and its profits based on employees alone. It’s possible, after all, to find a market without marketing but a bit harder to drink an advertising campaign.

VAT is another issue where these figures can differ for similar reasons. The UK doesn’t demand point of sale ID to determine the location of VAT spend (If you nip down the road to Carlisle for your shopping, then that results in VAT paid in England but Tesco neither knows nor cares where you came from to get there). Again, various methodologies are used to try to estimate the proportions paid and the estimates are slowly aligning (HMRC claims Scotland paid 8.4% of the UK’s VAT compared to GERS’ 8.6% – a gap of £110 million). There is also a further complication wherein the results between HMRC and GERS are simply presented in a different manner (HMRC measures the cash receipts, GERS measures the accruals)

A third prominent example is Income Tax, and is going to become pertinent now as IT is largely devolved to Scotland and all Scottish residents are to be assigned a distinct Scottish tax code and especially now that the income tax bands in Scotland will soon start to diverge from the UK bands. However, HMRC has been recently criticised for a series of administration issues which is making it difficult to roll out this tax code. As with the difficulties in rolling out devolved welfare, this won’t be nearly so much of an issue once Scotland is independent but highlights the difficulty in trying to run a devolved situation from a centralised unitary setup. This said, both HMRC and GERS arrive at a proportion of about 7.2% of the UK’s income tax coming from Scotland although this may change as the new systems are launched (even if tax rates are kept the same).

It is not possible to say whether the HMRC or GERS estimate is “better” or “worse” than the other. The Institute of Fiscal Studies has commented saying, especially of corporation tax:

“Neither of these estimates is clearly superior to the other, and both may be some way off. Profits are not necessarily generated in proportion to the number of employees, or their wages. Some employees may be more instrumental in generating profits than others; and profits also arise from capital assets – both physical (such as buildings and equipment) and intangible (such as intellectual property and brand value) – the location and contribution of which may differ from the location and wages of employees. Calculating how much of a company’s profits are attributable to economic activity in different locations is conceptually and practically difficult and is the source of many problems in international corporate taxation”

Balance of Trade

This is the big one that has attracted a lot of shouting in the past few months. Once again, the UK’s status as a unitary state causes much of the furore over the published numbers to be based on false premises and over-massaged numbers. The UK’s balance of trade figures are published here and probably do do a decent job of estimating the UK’s position in the world. What it doesn’t do is show the internal movements of trade within the UK. As a unitary state it simply doesn’t matter to the external balance of trade whether or not Yorkshire is a net exporter to Sussex. The UK does produce figures which try to estimate the trade balance between the regions  with the rest of the world but it only covers goods, not services (hence excludes nearly half of the UK’s total trade) and it does not cover internal trade. For that internal trade, we turn to ESS – Export Statistics Scotland – which surveys exporting companies in Scotland and asks them where they send their goods and services (contrary to a semi-popular belief, these statistics don’t care how the goods reach their destination so it doesn’t matter if they physically leave the UK via an “English port“). There are some limits, again, to this methodology.

First, not all companies know where their goods are going (see the example of Tesco again. If someone from Carlisle buys a crate of beer in Glasgow then goes home then that’s a Scottish export but Tesco wouldn’t be able to record it easily) so they won’t appear in the survey. Goods which are shipped to England then either re-packaged or used as a sub-component before being exported from England to somewhere else (or even back to Scotland) would be counted only as far as their export to England and there may be some cases where service “exports” are caused by, for example, someone in London buying insurance for their house in London from the London branch of a provider who just happens to have a brass plate in Edinburgh. The total proportion of these anomalies in the data is simply unknown at this point and unlikely to be knowable until after independence.

Beyond the Horizon

And this takes us to the most important point in this whole article.  Even if the methodologies above all align and all can capture the full economic picture of Scotland and everyone can agree on the figures produced and everyone agrees that they produce an accurate and complete picture of Scotland’s economy within the Union there is a fact which should be utterly indisputable (and certainly is within the team which put together these stats).

Independence. Changes. Everything.

None of these figures have any validity if you try to use them to project beyond the independence horizon. Corporation tax may change due to the redomiciling of businesses post-independence. Both those seeking to remain within the UK and those seeking to remain within the EU or EEA may shift operations. Trade exports may suddenly become a lot easier to assign (whether there’s a “hard border” or not) and that “extra-regio” oil which is often excluded from stats due to historical and supply chain accounting issues suddenly has to be accounted for. Those tax streams which are simply too embedded to discuss in any terms other than by a population share have to be audited. And all of this is before Scotland starts to make changes to the tax system to optimise it for the Scottish economy or to do things like close the tax gap.

As with everything in science and in economics, statistics are based on models, models are only ever as strong as their underlying assumptions and projections are only ever as strong as the person making the prediction’s understanding of the limits of those assumptions and the models.

IMF GDP Growth

(One day I’ll write an article about the “Porcupine Plots” which get created when inappropriate models are used year after year in spite of reality)

I don’t mind discussing the economy of Scotland within the Union. I don’t even mind speculating on the economy of an independent Scotland. But I sense that the next two years of campaigning will get very frustrating if pundits continue to stretch their own models past the point of credibility in a quest to push their political point. This, I should warn, goes for both sides. We need a more meaningful economic debate than we saw last time. Let’s get beyond the headlines to create one.

You can read more articles from Dr Craig Dalzell at The Common Green


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How good are the Tories at anger management?

I am rather bored by Brexit. Apart from the revelation of May’s crude and decidedly unsubtle negotiating position that must hav been chosen to alienate we learned little more about the UK’s position yesterday. We did learn that Europe will play by the rules: with 27 states to accommadate that was pretty much inevitable.

What has interested me are the absurd beliefs of those people celebrating our leaving that  television presenters have found to interview. Leaving the likes of Farage aside, what has been apparent is the irrationality of their emotionally based arguments. Of course, I know such interviews are not representative, but I suspect we have all heard similar sentiments expressed.

Taking back control resonates, although all the laws that were imposed are being retained, almost without exception.

Money saving is believed to be possible, without evidence being supplied.

Sovereignty is obviously key.

And, of course, migration will be controlled.

i fear our politicians chosen to negotiate Brexit are woefully inadequate for the task given to them. But that may be a minor concern when those who thought they were regaining control can’t spot the difference when Brexit has happened. What then? And how will that anger be managed? That’s what really worries me. And have no doubt that there is deliberately fuelled anger already driving these emotions. That will not be going away. It will only get worse. Life in 2019 may not be fun.

You can follow Richard  J Murphy on twitter at @RichardJMurphy and at his webpage Tax Research UK

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Why is the UK so intent on giving North Sea oil revenues away?

New analysis of the UK’s North Sea oil and gas suggests that the combination of tax giveaways by the government, and aggressive avoidance by multinationals, means that the country may actually be subsidising the extraction of its natural resources. And this at a time of continuing ‘austerity’ measures, that a UN treaty body has harshly criticised for driving poverty and inequality, undermining citizens’ human rights.

An important shift over the last two decades has been the emergence of active civil society movements in many countries focused on the natural resource revenues obtained by their governments: whether sufficient revenues are obtained, and how they are spent. Sadly, such movements have been largely absent in high-income countries – and nowhere more obviously than the UK.

The UK provided the original base for the Extractive Industries Transparency Initiative, launched by Tony Blair back in 2002. But a failure to obtain appropriate revenues for the state was seen as a problem of developing countries and corruption, rather than what it is – an issue of basic state accountability in the face of aggressive multinationals.  And so for me than a decade, the UK did not even join its own initiative, and only became a candidate country in 2014. It is currently listed as ‘implementing EITI, not yet compliant’.

A new report published today by the International Transport Workers’ Federation (ITF) sets out a series of shocking statistics on the UK’s failure to obtain an appropriate share of its own resource wealth. Among them, these stand out:

  • In 2014, UK consumers paid 6 times more tax on petrol, excluding VAT, than the North Sea oil and gas industry paid on all taxes related to production.
  • Chevron’s effective tax rate in 2014 on earnings from North Sea production was 5.4%; statutory tax rates (of various types) on oil and gas should have totalled 61-82%.
  • In 2014, 3 (Shell, BP & Total) of the top 4 North Sea producers produced more than £4.3 billion worth of oil and gas and received over £300 million in net tax refunds.

Chevron structure 2014

The ITF argue that while the oil sector has successfully lobbied for and won huge tax breaks from the UK government, the companies involved continued to pursue aggressive tax avoidance as standard practice. The Chevron report (see graphic for UK structure, click to enlarge) provides a detailed case study of tax dodging tactics which are replicated by others, particularly Nexen – on which the Times had a frontpage splash yesterday, using ITF analysis to show that the Chinese government-backed company received tax credits of £2 billion.

The ITF analysis covers 2014, when oil prices were still relatively high. Since then the oil sector as a whole has become a net tax drain on the UK budget, not including direct subsidies. On that basis, the ITF conclude that UK taxpayers are now likely to be subsidising the world’s largest oil companies to exploit the country’s natural resources.

The report, and much more, can be found at We highly recommend a visit – and if you’re in the UK, you may want to raise this with your representatives. (If you’re in Scotland in particular, you want to consider what this analysis entails for yesterday’s data showing a large, implicit deficit for an independent Scotland. Would an independent Scotland subsidise the oil and gas sector? In the absence of independence, should the UK be doing it?)

NB: This blog was first posted on the Tax Justice Network website before being posted on Tax Research UK

I happen to think the questions regarding Scotland particularly pertinent 

You can Follow Richard Murphy on Twitter at @RichardJMurphy and at his blog page Tax Research UK

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GERS might comply with the rules but so what when the rules are biased?

My attention was drawn yesterday to a blog by Graeme Roy of the Fraser of Allander Institute, which claims to be ‘Scotland’s leading independent economic research institute’ and is based at the University of Strathclyde. Graeme Roy, who admits he worked on preparing GERS (Government Expenditure and Revenue Scotland, which has been the subject of some discussion here of late) for seven years until 2014, write defending the criticisms I have raised of it, without ever explicitly saying so.

It may be worth starting by recalling what my first (and continuing) criticism of GERS was. I said in a blog that estimated data from the London (which I made clear was the Westminster government) was of little use in deciding the future of Scotland. In that case it’s important to note two things Roy says. They are both in this one paragraph:

In short, GERS estimates the contribution of public sector revenue raised in Scotland toward the public sector goods and services provided for the benefit of the people of Scotland. It’s important to remember that GERS does this taking Scotland as a mini-UK, and the constraints and protections that the current constitutional arrangements bring.

I could almost finish at this point. First, Scotland is not a mini-UK: it is a separate country within the UK. In that case GERS is prepared on an inappropriate basis. And independence assumes the current constitutional arrangements will change.  My claims are, therefore, correct as a matter of fact. But having entirely conceded my argument Roy goes on to defend GERS in ways which do not anyway, in my opinion, make sense, so I will continue.

My main concern is this claim:

It’s a National Statistics publication. This means that the statistics – and how they are presented – have been independently judged to be methodologically sound and produced free of political interference.

In what follows I wish to make clear that I respect what Roy has written, and the integrity of his motives in doing so, and his stated beliefs. I am quite sincere when saying that I believe he sees no problems in making a number of assertions with which I will, however take issue. Nor, I stress, is it the case that in saying these things that I am questioning the integrity of those preparing GERS. What I am saying is that they are working sincerely within a system  which , first of all, imposes political interference as a matter of fact and which is not as independent as Roy would like to claim, albeit entirely honestly.

Let me deal with the second issue first. I am afraid that I have little confidence in almost any claims of professional objectivity. I have long challenged the accountancy professions claim to be objective when it comes to standard setting and enforcement. It patently is not. In fact there’s strong evidence it does not even understand the law and instead construes it to its own advantage. Economists are no better: I always remember with amusement the claim that an economist once made to me along the lines of “Of course I am objective; I accept all the assumptions of neoclassical economics”, to which I fell about laughing, largely because the absurdity of what he’d said was clearly not apparent to him. And when it comes to government statistics the standards are set by one civil service organisation for another civil service organisation and since all such organisations will call upon the same broad pool of talent and operate in the same broad way for the same broad administrative structure, financed in the same broad way it is hardly surprising if there is a convergence of opinion on what is acceptable.  The fact that there is a peer review process does not alter this: peer review is almost always designed to reinforce the status quo. I stress I am not saying that the statistics are not prepared in accordance with a standard, but just as winners write history, it’s a fact that prevailing power elites write rules to reflect their priorities without always realising that they have done so. As a result saying GERS is acceptable because it meets the standards set by Westminster who quite clearly want Scotland to be treated as if it is part of the rest of the UK is no comfort at all. It just says that’s the standard that’s been met. It does not say if the standard is appropriate.

And this is the problem Roy faces when claiming there is no political interference in GERS. He seemingly fails to note when doing so that he has made, and noted, two massive political assumptions i.e. that Scotland is just a part of the UK when it would not have its own parliament if it was, and second that Scotland can survive on UK based data and does not need its own economic data despite the fact that it has devolved economic powers. That’s not an objective assumption. It’s actually an assumption that is, in my opinion, contemptuous of the whole idea that Scotland has the right to exercise discretion by denying it the data it needs to both decide upon appropriate actions and then appraise outcomes. This is a Westminster assumption and is implicit in the data available to prepare GERS.  However good the statisticians who prepare GERS are they can’t overcome this fact and they should, I suggest, recognise that fact, but Roy does not.  In that context the claim Roy then makes that GERS must be right because it looks remarkably like the UK as a whole is, to say the least, mildly absurd. If the data GERS produces for Scotland is an abstraction from that for the UK as a whole the only thing that would be surprising is if it did not look like the UK as a whole. Roy seems to miss this obvious point.

So how might this happen? Roy believes what he has said, I am quite sure. But he has made assumptions that I think are are political and so subjective without realising because, I suggest, they are, to use George Bernard Shaw’s definition, the assumptions of a reasonable person. Reasonable people adapt themselves to the ways of the world. Roy is doing that. So too, of course, are those who establish the standards for statistics with which GERS complies. And if you do comply with the ways of the world you rarely realise that is what you are doing precisely because complying seems so normal you do not even realise it is a choice. There is just one problem though: as Shaw also noted, unreasonable people seek to adapt the world to their ways. As a result he suggested all progress is dependent upon the existence of unreasonable people.

I am, I readily confess, unreasonable on this basis. I was told, endlessly, that I could not have and did not need country-by-country reporting. Now it is to be required worldwide.

And I was told automatic information exchange from tax havens would not happen in my lifetime. It is underway.

Time and again HMRC have said I am wrong on the tax gap, but the feeling that it may be them that is wrong is now becoming widespread.

In fact the whole tax justice agenda has been a story of being told that existing data is just fine by a power elite, whether it be politicians, governments, their agencies or professional bodies that claimed we really did not understand just how well the system was working and to leave them in peace. But we did not, and demanded new data anyway, and we now know we were right to do so.

It is my suggestion that the story in Scotland is the same. GERS was created by a Westminster power elite so suit their purpose. It cannot now meet the needs of Scotland, however much it complies with the statistical standards created by that same power elite. I don’t apologise for saying so. I reiterate: Scotland needs its own data. I don’t think it’s unreasonable to say so, but many apparently do. I don’t apologise for upsetting them.

Which leads to me to my final question in this blog (which is not aimed at statisticians, but politicians), which is why making this suggestion is so contentious? Could that be because some people do not believe Scotland is a country worthy of its own data? And could it be that they really do not think it should have the information it needs to make informed decisions? That’s perfectly possible, but if that’s what they do think then I have to ask why do they also think they have the right to suggest they should govern from Holyrood, whether Scotland is independent or not without the data that will increasingly be required to do so?

The question is a serious one. My suggestion is that those so wedded to GERS that they cannot see what their devotion implies are actually not fit to make the necessary judgements that holding office in Scotland would seem to demand. I would presume that a demand for better data for Scotland would have universal appeal amongst anyone who aspired to office in that country. That it does not suggests to me that some are quite determined that in principle Scotland should not have the information its politicians need to govern. At a quite deep level that’s worrying because it implies that not only are some opposed to independence but that they have not even embraced the idea of devolved power in which, however, they make the appearance of partaking.

Information is power. Scotland must have the information it needs. Without it, whether within or without the UK it will not have the power to shape its future. And that is no minor issue

You can follow Richard Murphy on twitter at @RichardJMurphy  or at his blog  TaxResearchUK