The financial provisions of ‘Strengthening Scotland’s Future’

The most important provisions of the Scotland bill are the financial ones – though more important than the bill itself is what the Command paper says about how these will work.  The billing for this was, of course, to implement the Calman Commission’s recommendations.  Many details of what that meant weren’t entirely clear, and what I’ve tried to do here is to assess how this package of proposals deals with those issues.  As the UK Government has had the Calman report for 18 months now, by this point it really ought to know how to deliver these commitments.  I’m also concerned with how workable the proposals are, in constitutional and administrative terms, and whether they will in fact deliver the sort of financial accountability that the UK Government claims.  That means I’m not commenting on the merits of the Calman proposals in themselves.  As an example, the principle that the Scottish tax rate would have to be the same in relation to all UK tax rates may be regrettable, but it’s part of the Calman proposals, and it doesn’t form part of this analysis.

On one key issue, whether the Scottish Government will get actual Scottish tax revenues or merely the Treasury’s estimates of them (as proposed a year ago), the proposals get this pretty much right; after a 2-3 transitional period, actual revenue figures will be used.  There are some intricate arrangements outlined here, as it takes some time for actual revenues to be calculated and so there’s a need for a reconciliation after the revenues have actually come in.  So this gets 4½ marks out of 5.

The second key issue is how to calculate the discount that will be applied to the block grant as a result of the new Scottish rate of income tax.  On this, the Command paper avoids a clear conclusion.  We’re told that the reduction will be ‘proportionate’ (a change from the Calman report, which only talked of a ‘commensurate’ reduction), but the way this will be calculated is left to be spelled out in due course when actual levels of Scottish tax receipts are clearer.  For all the detailed discussion of this question in the Holtham Commission’s report (and which the Command paper cites, rather grudgingly), here the position is a cop-out; it will be determined later on.  But – as the paper acknowledges – this is a key decision, and this position is not good enough.  1½ points out of 5.

The next question is about the institutional structures to regulate the new arrangements.  The problems here are substantial and real; HM Revenue & Customs will have to pay taxes to two bodies, and getting accurate and trustworthy data on matters like the levels of Scottish tax revenues (and forecasts of them) is also vital to making the new arrangements work.  The solution found to the former one is to put these matters into the hands of a new bilateral commission between Scottish and UK Governments, chaired by a Treasury minister (the Exchequer Secretary) and meeting biannually.  Much is unclear about this, but the assumption made here is that HMRC is a neutral body and that creating a ‘clear line of sight’ between it and the Scottish Government will suffice to manage that relationship.  So why not allow the Scottish Government to nominate a member of the HMRC’s Board?

The safeguards offered are audit of what HMRC does by the National Audit Office, and the involvement of the Office of Budgetary Responsiblity.  The involvement of NAO is encouraging  as its impartiality is widely accepted, though it does beg  other questions.  NAO is technically part of Parliament, and so it’s not for UK Government to decide what it should or shouldn’t do.  The task of estimating likely Scottish tax income and similar tasks is given to the OBR, and much is made in the Command paper of its ‘independence’.  But that independence has been quite widely questioned already, even though it’s barely started work – it draws its staff and data from the Treasury, even if they’re published on its own responsibility.

There’s a studious attempt here to avoid creating the sort of genuinely impartial body, with representatives of both governments and accountability to both, that would make these arrangements work in a way that is more transparent and likely to command confidence.  So this area gets a mark of 2 out of 5.

Fourth, there are the borrowing powers of the Scottish Government.  Here, the Command paper goes commendably beyond Calman – it accepts the need for a borrowing power to deal with possible shortfalls in tax revenues, as well as the ‘prudential’ borrowing power to fund capital expenditure that Calman recommended.  Thankfully, the absurd idea in the 2009 white paper that tax revenues would have to be expressly hypothecated to cover any borrowing has been dropped.  The recognition of the need for a borrowing power to deal with fluctuations in revenue is welcome, but it’s marred by the conditions attached to use of it by the Scottish Government, and the fact that the ceiling imposed on the power is a low one (only about £500 million) which may well be inadequate if there should be serious volatility in revenues.  That is not the sort of loosening of financial restrictions that would be desirable to make a system of limited fiscal autonomy work.  Score: 3 out of 5.

Finally, there is the question of the taxes other than personal income tax that are to be devolved. As well as the 10 points of income tax, these include stamp duty land tax and landfill tax, as Calman recommended.  This is commendably done, so the Scottish Parliament will have the flexibility to decide how to levy taxes on transactions in land or disposals into landfill, and how they will work.  Aggregates levy and air passenger duty were also recommended for devolution, but are dropped.  Legal challenges to the aggregates levy in Luxembourg are one thing, but revamping air passenger duty offers the chance to allow the Scottish Parliament to decide what form that should take at the same as UK does.  There are good reasons not to devolve this tax and it doesn’t raise much revenue, but this move suggests a disguised abandonment of the Calman recommendation rather than a delayed implementation of it.

A greater cause for concern is dropping the proposal to assign half the income tax arising from savings and distributions.  This is justified on the ground that this would not add to the fiscal responsibility of the Parliament (which is true, as it’s just an assignment of revenues not handing over control of rates), but this also further narrows the tax base available to the Parliament, which is limited to start with.  That’s a retrograde step; so far as possible, the Parliament’s tax base needs to be as broad as possible, and limiting it to earned income plus land-based taxes means it is narrower than it could or should be.

More serious are the restrictions that are proposed on any new taxes that the Scottish Parliament might propose to introduce.  These are so tight that it’s hard to think of a tax that would in fact qualify; it mustn’t create economic distortions or encourage arbitrage within the UK, or create potential for tax avoidance, or affect compliance burden, and must comply with all EU rules and the Human Rights Act.  And it will be for the Parliament to prove in detail its proposed tax satisfies these criteria.  Only taxes on land have any hope of doing so, and even they will face major challenges.  While this provision was always of questionable practical value, it’s now hard to see that it opens up any practical opportunity.  So, on ‘tax base’ issues, 1 out of 5.

Summing up these scores, the fiscal provisions of the bill get a score of 44 48 per cent, given what they could have done.  (On the university marking scale, of course, that’s a comfortable good Third.)  And that’s without taking into account another big issue, how Scottish tax receipts might change as a result of these proposals.  There’s been widespread criticism within Scotland that the Calman proposals don’t give Scottish institutions adequate power to shape the Scottish economy and help it grow.  (True, but they’re not meant to.)  There’s a further criticism that the Scottish tax base has grown behind that of UK overall public spending over the last 10 years.  The Command paper pretty much wishes that issue away too – it assumes these will be ‘broadly neutral over time’.  All that is unlikely to offer much comfort to those who already question the value of the Calman proposals.

(UPDATE, 16 February 2011: Ian Davidson MP was kind enough to point out an error in my arithmetic, which I’ve now corrected above.)

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11 Comments

Filed under Calman Commission/Scotland bill, Conservatives, Devolution finance, Legislation, Lib Dems, Scotland, SNP

11 responses to “The financial provisions of ‘Strengthening Scotland’s Future’

  1. Hamish Scott

    Alan

    Interesting reading. When I read the draft Bill and Command Paper myself I was struck by two things: firstly, that it was wrapped up in Westminster/Whitehall control freakery; and, secondly, I wondered where the advantage is to Scotland of getting tied up with all that controlling – independence would cut THAT Gordian Knot. Indeed, this inability of London to ‘let go’ may be counter-productive and would feed into the theme already being promoted by Alex Salmond and the SNP on the need for full fiscal autonomy/independence.
    The other thing that I found particularly noteable is the restriction on Holyrood introducing new taxes without Westminster approval. This has got very little attention in the media. I do wonder if someone had the sort of land tax proposed by people such as Andy Wightman in mind. The lack of powers of veto or amendment by the House of Lords has already allowed the Parliament of Scotland the sort of Land Reform that had been blocked previously by a House of Lords that was (is?) a bastion of the landed interest. A pre-emptive strike perhaps?

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