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Response to the Calman Commission’s interim report

Reform Scotland response to the publication of the Commission on Scottish Devolution’s interim report “The Future of Scottish Devolution within the Union: A First Report”

Today (Tuesday) the Commission on Scottish Devolution, chaired by Sir Kenneth Calman, has published its interim report. The report does not outline any specific recommendations. Instead, it outlines the questions regarding Scottish devolution it believes are in need of further examination in order to help the Scottish Parliament serve the people of Scotland better.

In its submission to the Commission, Reform Scotland argued that because there is no direct relationship between the money received by the Scottish Government and the performance of the Scottish economy, the public policy debate in Scotland has become dominated by how to divide up the spending cake rather than how to make it bigger. Reform Scotland’s proposal to address this problem would be to scrap the Barnett Formula and give both the Scottish and UK Governments the power to raise they money they spend in Scotland.

Introduction
The Commission’s interim report suggests it is part of a growing consensus that the current system, based on a block grant determined largely by application of the Barnett Formula, must change. It is unbalanced because although the Scottish Government has control over 60% 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 that the revenue generated by taxation powers devolved to Scotland accounts for only 13% of devolved spending.

Reform Scotland agrees with the Scottish Commission on Devolution that this issue of the financial accountability of the Scottish Parliament needs to be resolved as a priority. At the launch of our report ‘Fiscal Powers’, which was submitted to the Calman Commission, Reform Scotland’s Chairman Ben Thomson said:

‘The Scottish Parliament’s almost total reliance on the block grant limits its accountability. Equally, it provides no incentive for politicians in Scotland to come up with innovative ideas to boost economic growth or improve public services because, however poorly the economy performs, the money still rolls in via the block grant. If the economy did grow faster the benefits would accrue to the Chancellor at Westminster and not the Scottish Government.’

‘Fiscal Powers’ aimed 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. We believe that report and the model we set out answers many of the questions set out by the Commission’s interim report.

Reform Scotland’s solution

  • Scrap the Barnett Formula and give both the Scottish and UK governments the power to raise the money they spend in Scotland.
  • Maintain teh current split between devolved and reserved functions which has resulted in 60% (around £30billion) of government spending in Scotland being devolved and 40% (around £20billion) reserved to Westminster.
  • UK Government retains full control over National Insurance revenues in Scotland together with income from other smaller taxes, including TV licenses, passport fees and the National Lottery Tax.
  • Split revenue in Scotland from Income Tax and North Sea oil with control over 40% of the revenue going to Westminster and 60% to Holyrood.  Such a 60:40 split is logical because it matches the respective spending responsibilities of Holyrood and Westminster.
  • Assign the Scottish Parliament 60% of VAT revenue raised in Scotland, though unlike Income Tax and North Sea oil, control over VAT would remain at Westminster.
  • All other tax revenues would be devolved to the Scottish Parliament.
  • Give the Scottish Parliament borrowing powers.
  • Establish a Scottish Exchequer whcih would be responsible for collecting revenue from all taxes levied north of the Border on behalf of the UK and Scottish governments.

We believe this solution 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.