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Holyrood must have power to raise money it spends- The Scotsman

Ben Thomson, The Scotsman, 28 December 2009

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Scotland’s constitutional future is once again headline news with the publication of the UK Government’s White Paper responding to the Calman Commission recommendations and the Scottish Government’s proposals for an independence referendum due on Monday. 

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But let’s be clear: This flurry of political activity should not obscure the economic necessity to make the Scottish Parliament financially accountable by ensuring it raises the money it spends.

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It is this issue beyond any other that needs to be resolved urgently.  Why?  Because it would correct the fundamental weakness of the current devolution settlement and provide a real incentive for the Scottish Government to spend our money more efficiently. 

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The Scottish Parliament currently only has control over local council tax and non-domestic rates.  This accounts for around £3.7 billion of the total tax raised from Scotland, equivalent to only 7 per cent of all taxes raised from Scotland and 11 per cent of the Scottish Parliament’s budget.  This means that the Scottish Parliament relies for its revenue almost exclusively on a block grant from the Westminster Government, largely determined by the outdated Barnett formula.

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The result is lack of accountability.  Equally, it provides no incentive or fiscal tools for politicians in Scotland to come up with innovative ideas to boost economic growth or improve public services.  Under the current arrangements, however poorly the economy performs, the money still rolls in via the block grant and if the economy did grow faster the benefits would accrue to the Chancellor at Westminster and not the Scottish Government.

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The big question then is – does the UK Government’s White Paper fit the bill?  Although the proposals are a step in the right direction, unfortunately they represent an opportunity wasted.  In certain respects, the UK Government White Paper does not even go as far as the Calman recommendations.  For example, it doesn’t devolve air passenger duty and nor does it fully hand over control of Stamp Duty. 

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When the existing tax-raising powers it already has are added, these proposals would still only enable the Scottish Government to raise a quarter of its £32 billion budget, with the other 75 per cent continuing to come in the form of a block grant from Westminster. 

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To me that is not real financial accountability. You only achieve that when a government is responsible for the vast majority, if not all, of the revenue it requires to meet its spending commitments. 

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But all is not lost.  This is, after all, only a White Paper and, as such, is a consultation document.  I hope the UK Government will be prepared to introduce powers that genuinely deliver financial accountability when it comes to legislation.

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The position we have taken at Reform Scotland, the non-partisan think tank of which I am chairman, is not to get involved in the political debate on the constitution about whether we should or should not be part of the Union.  Our proposals, set out in our paper called Fiscal Powers and published last year, look to work with the current devolved set of responsibilities between the UK and Scotland and to make both governments more accountable for the services they provide by making them directly responsible for raising the money they spend.

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We submitted our proposals in detail to both the Scottish Government’s National Conversation and the Calman Commission.  We have argued that Calman does not go far enough.  We would scrap the Barnett Formula altogether and give both the Scottish and UK Governments the power to raise the money they spend in Scotland.

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The current split between devolved and reserved functions has resulted in 60 per cent (around £32 billion) of government spending in Scotland being devolved and 40 per cent (around £21 billion) reserved to Westminster. 

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Our aim was to give both Westminster and Holyrood a sufficiently wide range of tax and borrowing powers to meet their spending needs.  So the UK Government would retain full control over National Insurance revenues in Scotland together with income from other smaller taxes including TV licences, passport fees and the National Lottery Tax.  Revenue in Scotland from income tax and North Sea oil would be split with control over 40 per cent of the revenue going to Westminster and 60 per cent to Holyrood, matching the respective share of spending responsibilities of the two Parliaments.

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Responsibility for all other tax revenues would be devolved to the Scottish Parliament, except for VAT, control of which would remain at Westminster with the Scottish Parliament being assigned 60 per cent of the revenue raised in Scotland.

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In addition, we think the Scottish Parliament should have borrowing powers and that the package of proposals would require the establishment of a Scottish Exchequer, responsible for collecting the revenue from all taxes levied north of the Border on behalf of the UK and Scottish Governments.

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I think these proposals would provide a number of benefits.  By giving both levels of government the ability to change the levels of the taxes under their control, it would make them properly accountable to their electorates for the financial decisions they take.  These arrangements would also be flexible enough to meet any future contingencies or to take account of any further devolution of power as proposed by the UK Government White Paper.

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Most importantly, it would create a link between economic performance and the revenues accruing to the Scottish Government which I believe would transform the whole nature of the debate in Scotland for the better.

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So where does all that leave the Scottish Government’s plan for a referendum on independence for Scotland?  As I have made clear, I believe the priority is to ensure financial accountability for the Scottish Parliament.  I am less concerned about the process by which this comes about.

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Achieving financial accountability does not require a referendum in Scotland, although I fully accept that a referendum in which all the different options for Scotland’s constitutional future are debated would be helpful.

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But I recognise that because any proposals for change affect other parts of the United Kingdom besides Scotland, taking the debate to a UK level is as important, if not more so, than a referendum.   

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That is what I and Reform Scotland intend to do in the months ahead. 

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