The white paper’s proposals on devolving tax powers to Scotland

The Calman Commission’s tax recommendations were couched in pretty limited terms.  They were founded on the principle that the purpose of the financing arrangements should be to support the constitutional relationship between Scotland and the rest of the UK.  (It had a pretty conservative understanding of what that relationship should be, but from the political and constitutional point of view this principle has much to commend it.  Some economists would disagree, however.)  Based on this principle, the chief fault the Commission identified with the present arrangements was the lack of financial accountability of the Scottish Government and Parliament, although they are politically accountable for their actions.  That’s why, it argued, the Parliament should be responsible for raising some of its own spending.  This wasn’t to give it significant financial autonomy, but to ensure that it was accountable.  (It’s worth adding that this was an argument that Labour politicians showed no interest in at all until May 2007, after which they quickly got very interested in it.)

What the Commission proposed was a package including:

  • The power for the Scottish Parliament to set 10 points of personal income tax on earned income, on all tax rates (and with UK income tax being reduced to compel the Parliament to make a decision)
  • In lieu of trying to extend that to unearned income (which is administratively difficult), allocating 50 per cent of tax from income on savings and share distributions of Scottish taxpayers to the Parliament
  • Devolution of some smaller taxes linked to particular locations: stamp duty land tax, aggregates levy, landfill tax and air passenger duty.
  • Further powers to borrow, to smooth out fluctuations in tax receipts and to fund capital investment, to be used on a ‘prudential’ basis in the light of ability to repay monies borrowed.
  • A proportionate reduction in the size of the block grant to the Scottish Parliament, to allow for fiscal devolution.
  • A power to legislate to bring in further taxes, with consent of the UK Parliament.
  • Enhanced institutional relationships, including turning the existing six-monthly quadrilateral meeting of finance ministers into a fully-fledged Finance format of the Joint Ministerial Committee.

The UK Government’s response, in the white paper Scotland’s Place in the United Kingdom, looks like it’s a very substantial endorsement of those recommendations.  The Government proposes a devolution of 10 points of income tax; of most of the smaller taxes; a general willingness to consider new taxes; and a borrowing power for capital investment.  But in reality there are some significant departures.  Some have been widely discussed already.  The borrowing power, for example, will only be available if taxes are explicitly increased to cover its use.  That’s not an autonomous borrowing power; indeed, such a constraint makes it very hard to use politically, just as the 3 per cent Scottish Variable Rate has been.  And that may mean it actually reduces capital investment by the Scottish Government, even though HM Treasury has been concerned for some years about capital under-investment by the Scottish Executive/Government.  It doesn’t really widen the range of choices available to the Scottish Government to fund their programmes, which is part of the problem with the present arrangements.

More important, though, are some of the less obvious changes.  First, the package of taxes recommended be devolved by Calman isn’t accepted.  The white paper omits air passenger duty (not hugely valuable: Calman gives a figure of £94 million a year), and a share of income tax on savings and distributions.  That’s worth £500 million a year according to Calman, but its importance is as much for giving the Scottish Parliament a broader tax base covering the whole of income tax and not just personal income tax, as it is for the money it adds.  A significant part of the attraction of Calman was that it devolved a reasonably meaningful bundle of taxes.  Calman ruled out devolution of most of the major sources of tax revenue, on economic, legal or administrative grounds.  That meant VAT, corporation tax, capital gains tax and national insurance all went off the table pretty quickly, and the options narrowed to income tax alone, among the larger taxes, and some small taxes which provide limited revenue and have limited wider economic impact.  This change significantly narrows the fiscal powers of the Scottish Parliament, the incentives it would have to increase its tax base, as well as the levers it would have to do that.

Second, the white paper puts heavy emphasis on the use of estimates – notably for the amounts of tax revenues.  It also proposes an ongoing adjustment of the amount of the block grant for the period of each spending review, rather than the once-and-for-all reduction advocated by Calman. There are some good arguments for this incremental approach, both as a way of managing the transition and at a time when tax receipts are likely to be lower than in the past and fluctuating for some time to come. But many of the arguments given for using forecasts rather than real values of taxes are to do with administrative simplicity rather than economics or constitutional principle.  (A week before the white paper was published, the Scotland Office and HM Revenue & Customs quietly issued a paper on the administrative problems posed by disclosing and using real data rather than estimates and forecasts to underpin fiscal devolution.  Those interested will find it here.)  The effect is to turn real tax powers based on actual revenues into virtual ones based on estimates that, in truth, are pretty hazy.

Third, there’s the question of how we get there from here.  Calman did recommend a staged implementation process, with a sustained effort to improve the quality of data about tax revenues.  Without doubt there’s a lot of work to be done on that, and on collection issues. While the white paper emphasises the difficulties of transition, it doesn’t spell out either a timescale for introduction of the new regime, or have a particularly detailed analysis of the issues that need to be resolved to bring it in.  Refusing to act on anything until it can act on everything is an unconvincing position.  These proposals are a bit like St Augustine of Hippo’s prayer – ‘Lord, make me pure, but not yet’; perhaps ‘Parliament, make me fiscally devolved, but not in the short term’.

Finally, there’s a further flaw in how these changes are being implemented.  What Calman proposed would have helped disentangle devolved and UK-level public finances.   At present these are utterly entangled, and one effect of that is that it’s easy for a Scottish Government to blame London for any problem that arises (not just a shortage of money).  Improving accountability means making it clearer who is responsible for what.  Improved accountability therefore means increased autonomy too.  But this approach, with ‘virtual’ data and an indefinite but extended transition period, means that if anything the entanglement of devolved and UK finance is made worse, not better. This approach will not deliver its promised objective of improving accountability if what we get is an extended set of overlaps and confusions – it will just breed ongoing mutual recrimination.

The fact that Labour doesn’t propose to introduce a bill in this Parliament, or make other changes until after the general election, raises an issue of how firm these plans really are.  Clarity is needed about when the changes would start, and when they would be completed, and that’s the sort of detail that a white paper (even a pre-election one) traditionally contains.  One thing is certain, though.  The statement attributed to Jim Murphy when the Calman report was published, that it would be implemented within 11 months, will not happen.  The lack of a clear timescale other than ‘after the election’ does not imbue confidence that even Labour will actually deliver these changes.  At best, they’re in exactly the same position as the Tories; each party says it will deliver the proposals when it can.   In that sense, and despite Labour having taken the initiative here, there’s now no meaningful difference between them.

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Filed under Calman Commission/Scotland bill, Conservatives, Devolution finance, Labour, Scotland

7 responses to “The white paper’s proposals on devolving tax powers to Scotland

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