Calman falls short on Scots\’ power to tax

James Aitken, Graeme Blackett, The Sunday Times, 22 November 2009

The Queen’s Speech included this commitment: “In Scotland, my government will take forward proposals in the final report of the commission on Scottish devolution.” The Calman Commission has set out recommendations on devolution, including increased tax powers and borrowing powers for the Scottish parliament. As with anything the government proposes, it should be able to demonstrate that the benefits outweigh the costs and risks.

Calman is supposed to be trying to solve the problem of the Scottish parliament’s lack of financial accountability. It is responsible for 60% of government spending in Scotland (£32 billion) with 40% spent by the UK government (£21 billion). However, the Scottish parliament has control over taxes (council tax and business rates) that raise less than £4 billion — 7% of the total tax raised from Scotland.

This lack of financial accountability is serious because it results in a political debate that rarely tackles the big issues. What is the role of the state and how big should it be? How can we “green” the economy? How do we get Scotland out of recession? All of these questions have their answers in a debate about the level and types of taxation we have, and what that says about the type of society we live in. This is a debate that does not take place in Scotland. Instead, Scottish politics is about how the budget, the size of which is determined in London, should be divided. This is a sterile debate.

The method for deciding the Scottish budget, the Barnett formula, is unpopular on both sides of the border and unlikely to survive the pressure on UK public finances over the next few

The acceptance of the Calman recommendations by the Labour, Conservative and Liberal Democrat parties means the main parties in Scotland agree that its parliament should have greater tax powers. Calman recommended that it is given fiscal powers including a new Scottish rate of income tax, control over stamp duty, land tax and landfill tax, as well as borrowing powers.

The UK has one of the most complicated tax systems in the world. There are more than 40 taxes and duties, each with a different set of rules and collection systems. According to a paper published by the Scotland Office last week, the annual cost of running HM Revenue and Customs (HMRC) is £4 billion and costs to UK businesses of compliance are £5.1 billion. A danger of the Calman proposals is that they will add complexity to an already complex system.

The main problem is that Calman’s proposals do not solve the problem of financial accountability. The Scottish parliament would have responsibility for raising less than a third of the Scottish budget and still be dependent on a block grant from Westminster for the rest. The Scottish parliament is either financially accountable or it is not.

The Institute for Fiscal Studies expects income tax to drop by 8% in the UK this year compared with 2008. So, if a Scottish government had been relying on income-tax receipts to meet its budget commitments, it would have been forced to cut its spending in the current year. This is the exact opposite of the fiscal policy required at a time of recession. The Scottish government would have been forced to follow a policy that resulted in a deeper recession.

Calman’s recommendations will not fix the devolution settlement for a generation, as is claimed by the UK government. That said, they are a first step and have played a vital role in making the case for greater fiscal powers for the Scottish parliament.

The problem of financial accountability within the current devolution arrangements can be addressed, as set out in two Reform Scotland papers. Our proposals are to devolve a wider range of taxes so the Scottish parliament raises all the money it spends. This would be more efficient and cost-effective because it would mean the establishment of a Scottish Exchequer, removing the duplication of a separate HM Treasury and HMRC.

This can be achieved quickly and need not take the 10 years that briefings from Westminster suggest. As a start, legislation can be copied en masse — then it is up to the Scottish parliament to amend.

The time has come for the debate to move on. It must be more than comparing the cost of implementing each proposal. It is about time the parties outlined visions for Scotland’s future. Its voters are entitled to know what each party would do if given the power to tax, as well as the power to spend.

James Aitken and Graeme Blackett were the authors of the Reform Scotland papers on Fiscal Powers and gave evidence to the Calman Commission on financial accountability. Aitken is a lawyer and tax consultant and Blackett is an economist, a director of the consultancy Biggar Economics