Reform Scotland

“Waving goodbye to fiscal handicaps” – Scotsman

This article by Ben Thomson appeared in the Scotsman

AS John Swinney said the other day, the Scottish election result is a “game-changer.” Alex Salmond and the SNP have been dealt an incredibly strong hand by the people of Scotland. The question now is how should he play it?

The main concern of the public in the next two years will be how to manage the economy through this difficult period, and fiscal powers – the ability to set and collect taxes – should be one of the key tools for stimulating growth in the Scottish economy.

At present, 93 per cent of all taxes are set and collected by Westminster, making the UK one of the most centralised countries in Europe. Westminster predominantly structures tax to accommodate the South-East of England. This is not to say Westminster is wrong to focus on taxes that will attract international trade or non-doms, but it is just they are not the right fiscal levers to drive our own Scottish economy.

Scotland’s main industries are tourism, banking, investment management, oil and gas, and the fast-growing renewables sector. In addition, Scotland is woefully behind the UK average in business start-ups and corporate headquarters. There are taxes and public sector revenues which, if devolved to Scotland, could make us more competitive in our particular economic sectors. For instance, the Crown Estate is an important part of the development of the renewables sector; the UK government’s windfall tax on oil companies had a particular detrimental effect on our oil and gas sector; and excise duty has had an impact on our whisky industry.

If Scotland had greater control over fiscal powers then it could specifically tailor taxes to help improve economic growth. Particularly important is corporation tax, which can be used as an incentive to attract corporates to set up in Scotland. This is the reason why Dublin has resisted all attempts by the European Union to increase its corporation tax, and why Northern Ireland has been keen to gain control from Westminster over setting corporation tax rates.

In addition to the positive opportunities greater fiscal powers could provide, they could also change the dependency attitude we have towards receiving a budget from Westminster.

As the figures in the graph show, the changes proposed in the Scotland Bill, based as it is on the Calman proposals, offer only a small increase in the tax powers of the Scottish Parliament. Calman moves little from the status quo and results in around £6 billion being raised at a Holyrood level, compared to over £50bn that is spent on public services

The effect of the current system is to incentivise politicians to fight against budget cuts and spend the budget fully, rather than taking responsibility for spending the public money raised through taxes in the most effective way. This lack of financial accountability and responsibility is its fundamental weakness.

That is why Reform Scotland has advocated that both Westminster and Holyrood should raise what they spend on Scotland, thereby giving both levels of government the incentive to tax and spend wisely. This would result in Westminster raising just over £20bn and Holyrood raising at least the £30bn for which it is responsible.

However, the process should not stop there. Holyrood should use these new tax powers to give local authorities the ability to raise a much greater proportion of the £13bn spent at that level and we would like to see councils devolving power further down to local communities and people in their areas.

Greater financial responsibility for the Scottish Parliament, and in turn local authorities, would act as a catalyst for change. They would have the power and the ability to do things differently, but would have to bear the financial consequences of their decisions.

It would also create tax competition. Of course, governments don’t like this competition since it constrains them, but competition benefits the public as a consumer if it means we get better and more efficient public services.

The case for greater fiscal powers is a strong one, and, with a majority in the new Scottish Parliament, Alex Salmond is right to focus on how to extend the powers of the Scotland Bill as the immediate priority. The signs are promising. Already, the Scottish secretary Michael Moore has indicated that the UK government is willing to look at handing over borrowing powers in the near future. It is also willing to consider the issues of control over corporation tax levels and the Crown Estate, which are the other two demands made by the First Minister.

However, I think a broader approach is required. The Scotland Bill is still going through Westminster and I have long advocated making it an enabling bill. This has so far been rejected by Westminster, but the election result provides an opportunity to revisit this issue which I believe could provide the proverbial “win-win” for both governments in Westminster and in Holyrood. The objective of the enabling bill would be to devolve taxes over the next five years to Holyrood that would enable the Scottish Parliament to have the powers to raise sufficient funds to cover its expenditure. The bill would enable taxes to be transferred, as and when they have been agreed, by the Scottish Government and Secretary of State for Scotland.

The scope of the transfers could be wide enough to encompass all of the possible approaches to enhancing the fiscal responsibility of the Scottish Parliament so that decisions are then made from a pragmatic standpoint rather than a political one. This would avoid the confrontational single-solution approach.

How would an enabling bill work in practice? As soon as an enabling act was adopted, non-controversial taxes that all parties have already signed up to – such as the Aggregates Tax and Stamp Duty and income from the Crown Estate – could be passed to Holyrood and their proportional contribution to the block grant reduced. This would allow all parties to demonstrate that progress was being made. In each case, a justification for the tax as an economic lever would be made for the transfer. In the case of Crown Estate income, it would relate to its importance to the development of offshore wind, tidal and wave power, an industry that could be vital to Scotland’s future prosperity.

Other taxes, such as control over a proportion of income tax, corporation tax and capital gains tax, might be introduced over a longer period when technical difficulties had been addressed. An enabling bill can allow such transfers to happen in an orderly fashion when it makes practical sense to do so and both governments can agree that such a transfer is politically expedient. Many in the business community have recognised the problem with the current financial arrangements and would see a pragmatic way to move to greater fiscal responsibility as a crucial part of the solution to growing the Scottish economy in the long run.

The Scotland Bill provides both Holyrood and Westminster with a golden opportunity to proceed quickly with the sort of dynamic, positive changes the electorate in Scotland are expecting, given their endorsement of the SNP last week. Let us hope that David Cameron recognises the voice of the Scottish electorate in his “respect” agenda and that arguments on independence do not deflect us from taking the right economic decision for Scotland.

• Ben Thomson is Chairman of Reform Scotland