We may not have heard much about devolution during the Conservative-Liberal Democrat coalition talks, but that doesn’t mean they weren’t thinking about it. Well they should: the new government will rely very heavily on English votes and MPs (340 of its 363 MPs), with only 12 of them from Scotland. While the new government’s mandate in Scotland and Wales may be weak, both parties are strongly committed to maintaining the Union. That suggests that the only way a Conservative-Lib Dem government in London can govern Scotland is going to be to show that it can run a decentralised Union, and that it understands Scottish differences and can accommodate those within the Union.
The policy agreement the two parties reached on Wednesday includes commitments to implement the Calman commission’s recommendations, to set up a commission to consider the West Lothian question, and to allow a referendum in Wales on primary legislative powers. The question will be how it delivers its commitment on Calman, and when.
The Calman recommendations on tax are far from flawless, of course. They’re rooted in a limited conception of devolution which devolves only a few minor extra powers beyond the fiscal ones. Those tax powers are limited in the taxes they apply to and their overall scope, and a number of economists have criticised them for that. When the Labour UK Government endorsed the proposals last November, however, it weakened them further – particularly by basing the revenues that would flow to the Scottish Government from the devolved 10 tax points to Treasury estimates of the revenue this would generate, not actual tax revenues. It also dropped the Calman recommendation to including half of revenues from income tax on savings and share dividends to the Scottish Government, and put restrictions on the borrowing power. For all the Labour claims that this was ‘delivering Calman’, this was really Calman minus. It pleases no-one other than the Treasury, whose role in running the public finances it doesn’t challenge and whose administrative convenience it doesn’t materially disrupt. This is just not compatible with the sort of decentralised state the UK has already become, let alone the needs of the new government.
That said, it’s easy to under-estimate the practical and legal problems that arise from decentralising finance for the Scottish Parliament. The Parliament is responsible for just under 60 per cent of public spending in Scotland. Calman would mean that Scotland would raise about a third of that from its own sources of revenue. Nearly 70 per cent of the total non-North Sea revenues in Scotland come from four taxes: personal income tax, national insurance, VAT and corporation tax. There are significant problems of EU law with decentralising corporation tax and VAT (not necessarily insuperable, but serious), and there are serious economic problems with doing so as well. National insurance pays in principle for part of the (non-devolved) social security system. Working out what taxes to devolve and how it not easy, but income tax is the front-runner by a huge margin. However, as there’s no machinery for collecting taxes on a decentralised basis, that’s going to have to be put in place first, and can’t be done overnight. Implementing some form of Calman is actually a first step for any sort of fiscal devolution.
A ‘Calman plus’ option would build on the Labour government’s commitment, and make it part of a package to make the Union work for devolved Scotland, even when there’s a Tory-Lib Dem administration in London. What would this option involve? First, there needs to be a clear timetable for implementation – and that has to be a tight one. There should be a bill in the new Government’s first Parliamentary session, on the statute book before the 2011 Scottish elections. That will prove how serious the new Government is about these plans. And while there would need to be a transitional period before the new powers can come into effect, that should be as soon as possible –certainly by the 2015 elections, sooner if possible. Second, the use of Treasury estimates for tax revenues should be for as short a period as possible, and the move to using actual figures for Scottish tax revenues should come in no later than the 2019 Parliament. This would mean that Scotland would get a real measure of fiscal autonomy in the foreseeable future, not some virtual form at some distant but not-very-clear date.
Third, the rationale for limiting the ‘Scottish rate’ of income tax to 10 points is not clear. It could be made 12 or even 14 points quite easily, without moving outside the principles laid down by Calman. That would increase the Parliament’s fiscal powers appreciably. Fourth, there’s no strong reason for the Scottish rate to have to move in lockstep across all the rates set by the UK Government. The Scottish Parliament should be free to vary the rates it charges across the UK tax bands, so it could have higher rates on higher earners than in England, or lower ones, if it wished. The choice about just how progressive the tax system is should be part of the package of fiscal autonomy.
Fifth, tax revenues from savings and dividends need to be reinstated. That will help give the devolved government as broad a tax base as possible. And it may be practicable to base that on real revenues, not estimates, if accurate data about actual income tax paid is what’s used for calculating devolved tax revenues.
Sixth, the scope of the borrowing power needs to be extended. The idea that taxes must be increased and revenues specially earmarked for capital projects is simply a deterrent to investing in Scotland’s infrastructure. That should be removed. And the power to borrow also needs to reflect possible fluctuations in collecting tax revenues, so needs to accommodate that as the Treasury plays a declining role as paymaster.
This certainly isn’t full fiscal autonomy, and it’s not altogether the sort of system that Scotland ultimately needs. Even if it were implemented, there would still be a mismatch between the constitutional and financial sides of devolution – and between the overall powers of devolved government and what people in Scotland want. But it’s a significant step in the right direction, which will enable people in Scotland to see tangible progress in the foreseeable future .
(This appeared in the Scotsman on Friday 14 May, under the heading ‘”Calman plus” can rule Scotland within Union’. It’s available here, but it’s a Premium Article for subscribers only.)