Reform Scotland

Divide & unite: how splitting taxes could keep UK together – Scotsman

This article by Geoff Mawdsley appeared in the Scotsman

THE Calman Commission’s interim report published yesterday may have reached no firm conclusions about how to improve the devolution settlement. But it did set out the issues that need to be addressed. Quite rightly, it identified the financial relationship between Westminster and Holyrood as one of the most important.

The Scottish Government’s lack of financial accountability is the fundamental defect of the current devolution settlement. One way to remedy this would be outright independence, and several studies have examined the economics of separation.

However, the objective of Reform Scotland’s recent report, Fiscal Powers, was different: to come up with a workable scheme with specific recommendations to enable the Scottish Government to raise the money it spends while remaining within the United Kingdom.

There is a growing consensus that the current system, based on a block grant determined largely by application of the outdated Barnett Formula, must change. It is unbalanced because, although the Scottish Government has control of more than 60 per cent of government expenditure in Scotland, it has very limited responsibility for raising the revenue required to meet those spending commitments, other than the local taxes (council tax and business rates) collected by local government.

This means the revenue generated by taxation powers devolved to Scotland accounts for only 13 per cent of devolved spending.

The lack of revenue-raising or borrowing powers available to the Scottish Government undermines its autonomy and accountability. Tax rates cannot be set at levels appropriate to Scotland. So there is no way of creating a more attractive fiscal framework in Scotland to boost economic growth.

As a result, the Scottish Government’s ability to respond to the current economic crisis through measures such as a reduction in the tax burden is limited. The lack of borrowing powers further restricts room for manoeuvre and makes it harder to pay for important infrastructure projects.

The problem is compounded by the fact there is no direct relationship between the money received by the Scottish Government and the performance of the Scottish economy.

Even if tax revenues from Scotland go down, the money still rolls in via the block grant. There is, therefore, no incentive to increase revenues because, even if the economy did grow faster, the benefits would accrue to the Chancellor at Westminster and not the Scottish Government.

This has skewed the public policy debate in Scotland – discussion is dominated by how to divide up the public-spending cake rather than how to make it bigger.

Reform Scotland\’s proposal to address this problem would scrap the Barnett Formula and give both the Scottish and UK governments the power to raise the money they spend in Scotland. In doing so, the current split between devolved and reserved functions which has resulted in 60 per cent (about £30 billion) of government spending in Scotland being devolved and 40 per cent (about £20 billion) reserved to Westminster would be maintained.

An equitable starting point that enables both tiers of government to cover their existing share of spending in Scotland needs to be agreed. There are a number of ways of doing this based on the most recent figures for Government Expenditure and Revenue in Scotland (GERS).
Our preferred option would be for the UK government to retain full control over National Insurance in Scotland, together with some smaller taxes such as TV licences and passport fees.

Control over income tax and North Sea oil revenues would be split, with 60 per cent raised and controlled by Holyrood and 40 per cent by Westminster, while VAT would continue to be set at the UK level, with 60 per cent of the revenue assigned to Holyrood and 40 per cent to Westminster.

Such a 60:40 split is logical, because it matches the respective spending responsibilities of Holyrood and Westminster. Control over all other taxes and their revenues would be devolved to the Scottish Parliament.

This would give both Westminster and Holyrood sufficiently wide ranges of tax revenues and borrowing powers to ensure they had the flexibility to meet their spending needs. Both levels of government would be free to change any element of the taxes under their control and would, therefore, be properly accountable to their electorates for the financial decisions they take.

For the first time, it would create a link in Scotland between economic performance and the revenues accruing to the Scottish Government.

This would change the whole nature of the debate in Scotland for the better. Further, it would give the Scottish Government the fiscal tools to improve the growth rate of the Scottish economy.

It would also provide far greater clarity on which level of government was raising which taxes and what services those taxes were paying for. However, this would require a proper separation of UK spending from spending on devolved responsibilities.

The establishment of a body to represent the interests of people in England would aid this process. The absence of such a body has unbalanced the current constitutional settlement.

The upshot would be a new and better deal for everyone – achieving greater financial accountability in both Scotland and the UK as a whole.

• Geoff Mawdsley is director of Reform Scotland.