This article by Professor Sir Donald MacKay appeared in the Sunday Times.
The American colonies demanded “no taxation without representation” but had to fight a successful War of Independence over this principle. The Scottish electorate rejected independence in the referendum. Yet, the so-called “Vow” of greater powers was an implicit recognition that a binary choice was not the most sensible instrument for judging the final political and economic outcome. Indeed, having won the war the unionist parties seem to be in serious danger of losing the peace and this outcome will not be avoided if we muddle around without establishing clear principles which would be likely to find support with the Scottish electorate.
A Home Rule settlement for Scotland requires a high degree of fiscal responsibility to be given to the Scottish Parliament. This responsibility increases the more of its own spending that it raises from its own taxes. In this respect, assigned Scottish revenues from taxes set at the UK level do nothing to enhance accountability and autonomy and, therefore, do not deliver the benefits associated with increased fiscal responsibility.
The old dictum that finance follows function requires decisions on the division of spending responsibilities to be decided first. This was the approach taken in the original devolution settlement which gave the Scottish Parliament control over substantial areas of spending. Roughly 60 per cent of Scottish expenditure comes under the jurisdiction of Holyrood including major areas such as health, education and local government. However, the arrangements put in place to finance these functions fell well short of what was required. This was because the funding came largely in the form of a block grant which did nothing to enhance Holyrood’s revenue autonomy. The Barnett Formula was a fudge from its inception, to which further quantities of fudge were applied over time. Yet, there are some indications that the pro-UK parties wish to continue the Barnett Formula in circumstances where neither the Scottish nor the UK electorate would consider it appropriate.
The benefits associated with increased fiscal autonomy are well-documented. Under Home Rule, certain areas of policy will still be decided at the UK level, such as defence and monetary policy. Yet, different parts of the United Kingdom have differing needs in both economic and social terms and require different policy solutions. Holyrood requires the policy tools to address these issues and control over taxation is a key part of this. Such fiscal autonomy also enhances the accountability of public officials and provides an incentive for greater public expenditure efficiency as any gains in terms of higher economic growth or better social outcomes will accrue to Holyrood.
Assigning to Holyrood the Scottish revenues of a particular tax or taxes set at Westminster does not achieve these desirable goals, although proposals in this direction have been proposed by parties in their various commission reports and in their initial submissions to the Smith Commission. Labour have proposed assigning some income tax revenues, whilst Gordon Brown, the Greens and the Conservatives have suggested doing the same with VAT, whilst the Lib Dems have joined the Greens in suggesting that corporation tax be assigned. So, it’s a complex picture.
However, when tax revenues are assigned, control remains at the UK level and Holyrood has no responsibility for the raising of these revenues. In essence, it is very similar to a block grant in which Holyrood receives revenue based on decisions taken elsewhere. It has the added disadvantage of relying not on real revenue from the tax in Scotland, but on a Treasury forecast of revenue which could lead to disputes between the Treasury and the Scottish Government about revenue models.
Assigned revenues are not a progressive move in terms of the financing of a Home Rule settlement. Tax autonomy is paramount for fiscally responsible and efficient sub-national government and assigned revenues do nothing to enhance this. But if greater tax autonomy is the best solution in policy terms, why do more countries not go down this route? The answer is that central governments fear losing control of fiscal policy while, conversely, some sub-national governments fear taking unpopular tax decisions.
The proposals advanced in the Scotland’s Future white paper with regard to Air Passenger Duty, Corporation Tax and childcare show what could be achieved with genuine fiscal responsibility. These are all supply side measures which would assist the supply-led recovery which has been apparent in the UK as a whole. In each case, these proposals could be expected to enhance income and employment growth and be fundable by a Scottish Parliament with the range of independent taxation powers which should accompany a Home Rule settlement. The main argument against them seems to be that they would disadvantage large areas of England, Wales and Northern Ireland. But sauce for the goose is sauce for the gander; it would be for the UK Government to provide similar reforms for all regions of the UK.
So our goal should be a Home Rule settlement based on as high a level of tax autonomy as possible. Only that will bring the benefits of enhanced responsibility and increased efficiency, while giving us the tools to create both a stronger economy and a fairer society.
This article appeared in the Sunday Times on 23 November 2014