The Scotland Bill is the first substantial change to devolution for Scotland since 1999, and is often described as ‘radical’ for conferring limited powers about taxation on the Scottish Parliament. In fact, though, it’s a very conservative piece of legislation, which fails to address fundamental questions that won’t go away.
The Scotland Bill’s limited aspirations arise from the nature of the cross-party commission, chaired by Sir Kenneth Calman, which produced the key recommendations in June 2009. Its key idea was that the Scottish Parliament’s political accountability, through the ballot box, should be accompanied by fiscal accountability as well. It didn’t seek to reshape how devolution works more generally, although there is plenty of public opinion evidence that what the Scottish public wants is a stronger form of devolution than it presently has. It simply adds this measure of ‘fiscal accountability’ to the existing model of devolution.
The Bill would make the Scottish Parliament responsible for generating about a third of its own spending from tax revenues. But it does so very largely from income tax; the parliament will also have control over some minor land-based taxes, including stamp duty land tax, but by far the bulk of its revenues will be from income tax. It therefore has a narrow tax base, made narrower by the Bill — the Calman Commission proposed assigning Holyrood a proportion of income tax from savings and share dividends, but this has been dropped. Holyrood will have no control over how progressive the tax system is, and will have to accept the tax rates, bands and exemptions that apply at UK level, and simply levy its own single rate of tax on each of those bands. The Holtham Commission, looking at similar issues for Wales, recommended a similar model for Wales — but with control of the levels of tax charged on the different rates being devolved as well. And as the UK Government will retain control of exemptions and reliefs, Scottish tax revenues will be subject to Westminster control — meaning that when the UK takes decisions to increase the personal allowance to £9,000 or eliminate the 50 per cent top rate, that will affect Scottish revenues — and open up an intergovernmental discussion about how Scotland should be compensated as a result. The Bill doesn’t create a distinct sphere of ‘devolved tax powers’, within which the Scottish Government and Parliament can indeed be held accountable for their decisions. Instead, it emphasises the extent to which Scottish and UK public finances are intertwined and entangled. Creating room for new intergovernmental disagreements is a way of ensuring governments can avoid the very sort of fiscal accountability that the Bill is supposed to promote.
There are other major technical problems with the Bill. If a government raises its own revenue, it needs to be able to borrow to cope with fluctuations in its income as a result. While the Bill does give the Scottish Government the power to do this, it’s a very limited one, amounting to only £500 million, or 2½ per cent of Scottish Government spending. That’s not much flexibility, and would mean that Scotland would be under pressure to make immediate cuts in spending if revenues were to show the slightest dip, even with the proposed cash reserve which would enable the Scottish Government to provide a cushion in good times for when they were less good. As income tax is a pro-cyclical tax, the problems of a downturn in revenues being also a down turn in the economy are high, and Scotland will not able to do much about that.
Then there’s the question of the block grant to Scotland. This will be reduced by an ‘appropriate’ amount, to allow for the new tax-raising powers. But the Command paper Strengthening Scotland’s Future doesn’t say how that will be done — what the ‘appropriate’ amount might be or how it would be calculated. The UK Government had the Calman report for 18 months before publishing the Bill, and in that time the Holtham Commission’s report set out four methods of doing so. All the Command paper says about this is that ‘the circumstances make a definitive statement on the correct reduction to the block grant inappropriate at this time’. The lack of clarity on this key issue is deeply worrying. While there are serious problems with working out the long-term reduction, after this time the UK Government should have come up with a clear proposal so that MPs and MSPs have a clear idea of how the new arrangements will work. There is nothing new about the problems in doing so, as tax revenues are always volatile — these objections would have been equally applicable two years ago, or ten, during the spending boom. Without a clear proposal about the reduction, MPs are not just being asked to approve something that is innately uncertain. That in turn means that these proposals will be subject to attack for years to come, because they lack the democratic legitimacy they would enjoy if they had been clearly understood by parliament when it approved them.
There is only one certainty about the Scotland Bill: that, rather than putting an end to debates about tax and devolution debate, it will lead to renewed controversy about these issues. These piecemeal adjustments to how devolution is financed for Scotland that don’t satisfy widely-based demands in Scotland, and don’t offer the UK level the benefits of a system that emphasises the advantages of the Union by clarifying the division of responsibilities between UK and devolved Scottish levels. Economists and business people have serious concerns about the proposals as well. Because it’s a limited solution, and offers nothing to Wales or Northern Ireland (the Calman model won’t work there — it only works in a place as comfortably-off as Scotland is), it simply puts off a thorough-going review of how devolved government is financed. That sort of review is needed sooner or later, though both Labour and the Coalition have ducked setting it up.
The UK Government isn’t short of things to do at the moment, but making a commitment now to set up a larger-scale, UK-wide review in a couple of years’ time would be a wise move. It would signal that the implementation of Calman isn’t the last word, and the lead times involved in implementing changes would mean that there would be no question of implementing them in this parliament. Indeed, the provisions of the Bill won’t come fully into force until 2016 in any case. As Ron Davies famously said, devolution is a process, not an event; and it’s a process that needs careful management from the centre.