The uselessness of the Scottish Variable Rate

One can understand why the SNP might not be terribly interested in the Scottish Variable Rate (SVR), the 3 pence in the pound tax varying power or ‘tartan tax’ given to the Scottish Parliament by the Scotland Act 1998. And one can understand why the Scottish Government might be reluctant to pay £100,000 a year or so to maintain the designated list of ‘Scottish taxpayers’ prepared before devolution, in case that power was to be used – especially as that list had become increasingly out of date and so of dubious value. But the news (reported by the BBC here) that failure to pay the fee means that HM Revenue & Customs has cancelled the list altogether is still pretty startling.

It’s easy to use this as a stick to beat the SNP, and no doubt the other parties in Scotland will do so. But the SVR was never really of much use. Using it would raise only a limited amount of revenue – £350 million per penny in 2010-11, according to this year’s UK Budget documents (and £400 million the following year). If used to the full, that would make £1.05 billion extra this year, and £1.2 billion next year, in the context of a total devolved Scottish budget of £29.71 billion in 2010-11.  That’s not really enough money to make a dramatic change in anything.  Using it would also create a huge amount of pain. This would not just be the pain of increased taxes, but also high administrative costs within government, which I’ve heard estimated as possibly equalling its first year’s revenue. On top of that, there are the compliance costs for business. The tests to determine who is a Scottish taxpayer (set out in section 75 of the Scotland Act 1998) aren’t straightforward by any means – they don’t use residency or place of work as the criterion, but a more flexible measure of whether one is a UK taxpayer whose ‘closest connection’ is with Scotland, which is close to but not quite a residency test. If you work in Carlisle but live in Lockerbie, you’d probably qualify as a Scottish taxpayer for these purposes – especially if you have a family in Lockerbie. Every employer employing ‘Scottish’ taxpayers would have to adjust their PAYE systems, so the costs would be considerable, and not just limited to employers based in Scotland.

Indeed, it’s doubtful whether the power was ever intended to be used. I’ve heard one of those involved in framing it say privately that its real purpose was to forestall Scottish arguments about extra funding through the block grant if the devolved executive were to claim the ‘need’ to cover something, because the power to raise extra revenue would be there in the form of the variable rate.

What we face now is a considerable mess. According to Michael Moore, this means that he power couldn’t be used before 2013-14 no matter what. That may not be quite as dramatic as it sounds, as the list of Scottish taxpayers would have needed considerable work to bring it up to date and make sure it was accurate even if the Scottish Parliament were to decide tomorrow to use the SVR. Moore says that would take 10 months, but that has to be taken with a pinch of salt and from what I’ve heard would be more like a year or even a bit longer, so it wouldn’t actually be available until 2011-12 at the soonest. Moreover, as in reality, no choice to use would be taken until after next May’s elections, it couldn’t apply before 2012-13 in any case. But that does create a poser for the unionist parties, assuming that they’re back in office after May and wish to find a way of moving toward the Calman system, which we’ve been told will be available for the Parliament elected in 2015 (but not before).

Of course, the fact that the SVR is out of use for two further years will narrow the options for all parties in their planning for next year’s elections. Everyone’s spending plans will be constrained by the block grant determined at London plus local taxation revenues and other charges, no matter what. The pressure to introduce or reintroduce charges for things like prescriptions, higher education tuition or road tolls will be all the greater. This situation also turn means that the UK Government’s actions in relation to the block grant are going to be under even greater scrutiny than they were before – there can be no ‘plan B’ for finance in the next few years. The UK Government shouldn’t be surprised at the heat and acrimony that will surround issues like its decisions over consequentials for the 2012 Olympics.  Scotland has no way out, as the SVR was meant to offer it.

One has to ask two questions about what has happened. First, if decisions about the SVR concern a power of the Scottish Parliament, why has the list been terminated because of a decision taken by the Scottish Government? This situation reflects an approach to the division of powers that may be convenient on a practical level, but doesn’t correspond very well with constitutional understandings of how that should work. Surely it should be a vote of the Parliament, not a decision of the Government, that determines whether the list is maintained or not, and the fee paid to do so.

Second, if the power had lapsed as far back as 2007, why have UK Budget documents since then continued to report the value of the SVR if it were used? That was the case under both the former Labour government as well as the Coalition (and has been the case since 1999). Implying that the SVR’s value was a material current factor is simply irrelevant if, for the reasons now stated by the Scottish Secretary, it couldn’t be used. One might go so far as to say that the UK Government was guilty of misrepresentation by continuing to publish those figures without comment.

Part of the reason for this is the failure of the UK Government to think through who should pay for what aspect of the administrative aspects of devolution. I’ve never been able to find a good rationale for the fact that the costs of the Scotland and Wales Offices are borne on the Scottish and Welsh block grants. Why should a grant intended to pay for government and public services in Scotland or Wales have carved out of it an unlimited amount to pay for the UK Government’s relations with those parts of the country? While the amounts involved are pretty modest (the Scotland Office cost £8.1 million and the Wales Office £5.8 million in 2009-10, according to figures recently published on their websites), it’s impossible to see the principle of funding these from the block grant. Not thinking about who should bear the administrative cost of the SVR – the Scottish Parliament or Government – is a similar sort of error, and it’s the unionist parties that now have to grapple with the consequences of a government that wasn’t interested in the SVR not bothering to pay to maintain it.

UPDATE: The Scottish Government has issued a statement responding to Michael Moore about this, which largely consists of a letter from Alex Salmond to the Scottish Secretary.  It’s available here.  To judge by his tone, Salmond’s annoyance is not just cosmetic but real.  The significant point is that the UK Government asked the Scottish Government to bear part of the costs of the HMRC computer upgrade, amounting to £7 million, and the Scottish Government declined to do so.

It’s long been the case that the UK Government expects that the Scottish Government will defray any additional costs arising from devolved powers such as the SVR.  But as the political stakes involved increase, it’s only natural to expect there to be additional scrutiny of the sums involved and what happens to them.  This is going to be a key issue as the principle of devolved fiscal powers for Scotland starts to move from an abstract idea to something that has to work in practice . The real surprise here  is that HMRC were surprised.  In any case, that position is highly contentious, and the UK Government would be well advised to drop it and instead accept that the ‘UK end’ of devolution is a UK cost and not one to be borne by the devolved administration, whether through the block grant or otherwise.  (The trickier issue is working out what the ‘UK end’ is.)  One point to look for in the Calman bill will be what it says about the governance arrangements for HMRC.  If those don’t reflect the fact that HMRC will work to two governments, not one, that shows how little the implications of even the Calman model of fiscal autonomy have been thought through.

The other important point relates to the new HMRC database.  This appears to be the same database as caused such a row earlier in the autumn when it revealed that large numbers of PAYE taxpayers had underpaid and overpaid tax.  The transition to the new system has evidently been a clunky one.  But the new database also appears much more able to respond in more-or-less real time to taxpayers’ changing circumstances than its predecessor.  This makes it much more suitable for acting as a means of collecting taxes that will be payable to both Scottish and UK Governments, and ensuring that tallies of the amounts collected can be relayed in something approaching to real time.

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11 Comments

Filed under Calman Commission/Scotland bill, Devolution finance, Scotland, SNP, Whitehall

11 responses to “The uselessness of the Scottish Variable Rate

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  2. Jeff Jones

    Another cracking article. You argue that the tax varying powers wouldn’t raise much . But if I was a devil’s advocate I could argue that if the Scottish Executive was forced to use the powers and increase income tax by 1 p it would free up the £300 million which Holtham argues that Wales is being short changed because of the failure to reform Barnett and reduce the Scottish block. I can’t wait to see how Scottish politicians will handle the tax varying powers provided by the Calman solution. Who said the consequences devolution hadn’t been thought through?

    • steve muir

      I think the main points of this argument have been missed with regards raising extra taxes. If the Scottish Govt decided to use the SVR and say gain £300m by raising taxes by 1p…..then the only people to benefit are the UK Govt as they then remove that £300m from the block grant sent to Scotland and the only people to lose out are the Scottish people who have to pay 1p more than other parts of the UK.
      Is an absolutely ridiculous power given as a token to bash the SNP with as a power they can use but wont use, but if you look at it properly, who in their right mind would use it??

  3. “…also high administrative costs within government, which I’ve heard estimated as possibly equalling its first year’s revenue.”

    Interesting post, but where have you heard this? Those are some pretty high administrative costs, even by government standards!

    Better Nation had a good take on this, and I can definitely see the other parties making a lot out of the SVR dissapearance.

    • To response to Steve Muir’s point: the Statement of Funding Policy was framed so that revenue raised by the SVR would be additional to the block grant, subject to the costs of collection. That contrast with what might happen if there were to be hefty increases in Council Tax or Non Domestic Rate, where the Treasury gave itself the right to claw back part or all of any ‘excessive’ increase.

      Regarding the first-year costs: well, it’s one thing to create and maintain a list of taxpayers, another to bring it into use, set and collect differential rates of tax, and remit them. I asked a lot of questions about this in 2001-3 about this, and while no-one really knew what the set-up costs would be, it was clear that those were high and could reach as far as the first year’s take. (That was rather less then than the c. £1 billion it is now, as overall tax revenues have grown over that period.)

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  5. Perhaps in government spending £1 bn is “not really enough money to make a dramatic change in anything”. However 3p off income tax would certainly gave a measurable effect on everybody paying it & would be a significant factor in making us a more attractive place to do business.

    The SNP have always said that the reason they haven’t improved our abysmal economic performance is because they need more economic powers. Clearly that argument was never more than an excuse. The reason Scotland continuiusly underperforms England is because our political “leadership” of all parties is crap. If only Scotland could produce somebody as intelligent as Sir John Cowperthwaite.

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