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Fiscal powers for Holyrood bolstered by the recession, says Reform Scotland

The global financial crisis strengthens the case for the Scottish Parliament to be given greater power to raise the money it spends, a leading economic think tank declares today. [sun]

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Reform Scotland says the debate is no longer about whether Holyrood should have more fiscal autonomy, but which revenue-raising functions should be devolved and how. ‘The economic and public sector funding challenges faced by the UK and Scotland over the next few years highlight the weaknesses in the current devolution model and the advantages of increasing the Scottish Parliament’s fiscal powers,’ it says. The independent think tank warns that whatever Scotland’s constitutional future may be there will be a need for policies that address the UK’s serious fiscal deficit.

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‘In the short term, this will require public sector spending cuts or tax rises or a mix of both,’ it says.

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Reform Scotland points out that since it published its acclaimed research paper, Fiscal Powers, in November last year, there have been dramatic shifts in the political, economic and legal landscapes.

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? Politically, all four major parties in Scotland now support an increase in fiscal powers for Holyrood.

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? Economically, there is a need to meet the challenges of the recession, including policies to address economic recovery and growing public sector debt.

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? Legally, the European Court of Justice has ruled that different tax arrangements within a member state are permissible.

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The think tank calls for preparatory work for Holyrood to assume greater fiscal power to begin now so it can be implemented quickly after the necessary political decisions have been taken.It urges politicians to be bold.

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‘If additional fiscal powers are to have a real impact on the governance of Scotland and on the performance of the Scottish economy, they must be of a scale that is great enough to address the fundamental defect of the current

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devolution settlement – its lack of financial accountability.

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‘This can be achieved within the context of the UK if both the UK and Scottish Governments are given responsibility for raising the taxes required to fund their spending proposals,’ it says.

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Leading economist Graeme Blackett and law and tax expert James Aitken, who co-authored Fiscal Powers, say in their update that although the Calman Commission – the body set up to review devolution – recommended a range of fiscal powers for Holyrood they did not go far enough.

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‘Under the Calman recommendations, the Scottish Parliament will still be dependent on a block grant from Westminster for more than two-thirds of its budget,’ they say.

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‘The biggest weakness of the Calman recommendations is that they do not deliver financial accountability. Real financial accountability requires that a government is responsible for raising all, or at least the majority, of the

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revenue that it requires to meet its spending commitments.’

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Reform Scotland, which gave both written and oral evidence to the Calman Commission, says that as long as the Scottish Parliament’s budget is determined by the Barnett formula – or a similar needs-based formula – there

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will be no strong incentive for the Scottish Government to identify where necessary public spending cuts might be made.

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‘Indeed, it could be argued that, since any cuts in budgets in areas of devolved spending will be proportionately lower than in England (due to the Barnett formula which allocates the budget based on population share rather than the

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baseline budget level), there is a disincentive for the Scottish Government to identify areas for saving,’ the report adds.

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‘If the Scottish Government was responsible for raising the money it spent, there would be a much greater incentive to improve the efficiency of public services since any savings could be passed on to Scottish taxpayers, creating the conditions for higher growth.’

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Today’s report says that any doubt about whether European State Aid rules could prevent taxation powers being devolved to the Scottish Parliament have been removed by the European Court of Justice annulling the veto imposed by the European Commission against the reform of corporate tax in Gibraltar.

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Reform Scotland says a new financial settlement has to be worked out for the whole of the UK, identifying which were Westminster taxes and what they were funding, separately from taxes and spending for each of the component nations. This would also entail the establishment of a body to represent English interests.

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Both levels of government should have the flexibility to set a range of taxes in order to cover their spending, with an agreed starting point which enabled them to cover their existing share of spending in Scotland.

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‘Our preferred option would give the UK Government control over all National Insurance contributions; 40 per cent of Income Tax revenues from Scotland; 40 per cent of Scotland’s geographical share of North Sea oil revenues; together with additional income from TV licences, passport fees and the National Lottery tax.

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‘The Scottish Government would set the rates for all other taxes, except for VAT which would be set at a UK level with 40 per cent of the revenue from Scotland going to Westminster and the remainder assigned to the Scottish

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Parliament.’

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Reform Scotland says a key feature of the new financial settlement should be lower, simpler taxes. It would also require Scotland to have its own Exchequer. James Aitken, co-author of the report, said: ‘The work for this to happen needs to start now. This will include, for example, preparing the draft legislation that will be required, business planning for the new institutions such as the Scottish Exchequer and further research into Government expenditure and revenue in Scotland to establish, with greater certainty, the size of the Scottish tax base and the tax revenues collected from Scotland.

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‘There is also a need for parallel work to engage both politicians and important institutions in Westminster (such as HM Treasury) so that there is an increased understanding at the UK level, as well is in Scotland, of the benefits to Scotland and to the rest of the UK of devolution of fiscal powers to Scotland.

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‘Finally, the time has now come for the political debate in Scotland to include what the political parties would do with additional fiscal powers. In the run up to the UK and Scottish Parliament elections, both of which will take place

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within the next two years, Scottish voters are entitled to know what each of the political parties in Scotland would do if given the power to tax as well as the power to spend.’