Examination of Witnesses (Questions 170-237)|
PROFESSOR ANTON MUSCATELLI AND PROFESSOR MICHAEL
8 FEBRUARY 2011
Welcome to the meeting. We understand, Professor Keating, that
you are off on Eurostar to somewhere exciting and therefore you
want to be out of here by three o'clock. So thank you very much.
Quarter to three.
Quarter to three. We had better make sure that you go even faster
in that case. Professor Muscatelli, thanks very much for coming
We have been warned, by The Scotsman no less,
that academics are delicate flowers who should not be asked impudent
questions by "common people like what we is", so if
there is anything that you think is impertinent by all means feel
free to let us know. You are indicating that you are a trifle
more robust than that, are you?
Absolutely. We are very happy to take any questions from you,
Fine. Thank you very much. Could I start off by asking you about
the general background to the Scotland Bill? At the moment, the
Scottish Parliament has the power to vary income tax by up to
3p and they have not done so. Are your proposals to allow them
to vary income tax by up to 10p just more of the same or significantly
When my independent expert group considered how to advise the
Calman Commission on how to provide greater fiscal powers, we
did think long and hard about that question, about whether the
tax room proposals that are currently embedded in the Bill would
do exactly that.
There are two reasons perhaps why the tax powers
have not been used. One possible reason is that there is a tendency
to focus on the status quo and it is politically quite difficult
when it comes to making decisions on taxation to move away from
that frame of reference. This is one of the reasons why we suggested
the mechanism, which was defaulting to a rate below the normal
standard rate at UK level because that would force Parliament
to take a decision and actually debate and discuss the issue.
The issue would need to be discussed. Even if the tax was kept
at the same rate as the UK rate, it would need to be an issue
that is discussed. The other reason why perhaps they have not
used the tax powers is because they are rather limited in terms
of additional revenue or less revenue. In terms of the level of
accountability it is relatively small. That was the reason for
providing, or suggesting, larger powers and also forcing the Parliament
to have a discussion on the tax measures.
Can I clarify that? Is there not a real danger that they just
simply end up at the default position, which is that they take
a conscious decision to leave it at exactly the same level as
it is in the UK as a whole and therefore they make no change at
all so this whole thing is pretty meaningless?
There is a risk that no decision will be taken at first. We might
perhaps go back to the adjustment mechanism for the grant because
that will also drive what happens in the transition period. Once
we go past the transition period and there is the definitive adjustment
in the block grant, of course the revenues to the Parliament will
fluctuate with tax revenues so they will no longer be as predictable
as a proportion of UK expenditure in devolved areas. Therefore,
I think there will need to be a discussion about this. There will
need to be a recognition that the tax base matters for the Scottish
economy and, in that sense, that will drive the debate towards
what the right level of taxation should be to encourage the tax
base to grow.
Professor Keating, you have a different view.
I think it is more of the same and there are two ways in which
one can look at this issue. One is that this is a minor adjustment
of the existing settlement, which is based upon the assumption
that we are going to have similar kinds of services and a similar
role for the state in Scotland and England, in which case we should
be discussing the technicalities of Calman and the Bill. It is
very difficult, and it would be very difficult, to do anything
other than go for a default rate because of the technical problems
of changing it and because of the political problems. No Government
has raised income tax since 1975. It is the most difficult tax
to raise, so I think there will be a strong inclination to go
for the default. The only difference would be, as Anton has said,
that you would have to have an explicit decision by the Scottish
Parliament to make a tax rate. That might be a small increase
The other way to look at the issue is as a radical
shift in the basis of the devolution settlement, with real fiscal
responsibility which would imply control of a much broader range
of taxes. This would be appropriate if we anticipate that there
will be significant policy differences between Scotland and the
Could we come on to the question of what the alternatives are
in a moment and just stick with the impact of what is being proposed?
I read one distinguished commentator who is indicating that the
mechanism was going to be much better in the good times for Scotland
and in the worst times much worse. Can you clarify that position?
Because the Scottish Government also seems to be saying that had
the proposals that you are suggesting been in position for some
considerable time in the past, Scotland would have been more in
the slough of despond than it is at the moment.
It is certainly true that once you move to a different mechanism,
Scotland's departmental expenditure limitDELwill
depend not only on UK Government spending but also on the tax
base, so the outcomes will be different under the two systems.
At a time when Government spending in the UK is rising faster
relative to taxation, Scotland will do better under Barnett on
the current system. However, if we do not think that that situation
is going to happen in the future, then clearly Scotland would
do better under the new system whereby a share of UK taxation
would accrue to it.
The best calculations I have seen of what would
happen under the two different systems are in a technical note
which was submitted by the UK Government to the Scotland Bill
Committee of the Scottish Parliament. It shows that if the grant
reduction was made in 1999-2000 on the basis of the receipts over
the whole decade after that, you would be better off with the
new system. If, on the other hand, as the Scottish Government
says, you had simply made the adjustment before the big expansion
in UK public spending, then you would be worse off.
I do not think you can choose a fiscal system to
be based on the experience of a five or 10-year historical period.
It is for life; it is not for a short period of time. Over time,
you would expect UK taxation and UK Government spending as a proportion
of GDP to be broadly in line. Arguably, what we have seen in terms
of public spending in the UK over the last 10 years is not sustainable.
I would think that, in future, the new system would
probably work as well. The only difference, of course, is that
some of the risks in terms of tax revenue fluctuations would be
shared by the Scottish Parliament and it would not simply be a
share of UK Government spending.
I would agree with that as far as the taxes are concerned, but
I do not think you can predict the outcome until you know what
is going to happen to Barnett, because in the past there have
been all sorts of Barnett bypasses which are very obscure and
we need to know a lot more about how that is going to work. For
example, there is a no-detriment clause and it is priced so that
if there is a change in the UK tax allowances, there will be compensation,
but that will be discretionary by the UK Government. What I would
like to see in the Bill is a much clearer statement of exactly
how that would work.
Chair: One of the issues
that we have touched on with other witnesses was the question
of transparency for a number of areas. Perhaps the one that you
are indicating there might be one that we want to pick up as being
an area where there requires to be a greater degree of transparency.
I think it is helpful to have that drawn to our attention.
Q176 Fiona O'Donnell:
Good afternoon, gentlemen. I wonder if I could ask in terms of
what did not make it into the Bill that was in the Commission's
report. Generally, is there anything that you are disappointed
is not there? Specifically, in terms of the four taxes which were
in the Commission's report, now there are only two. It may be
that we will revisit that and that is amended in the future. Are
you disappointed that the other two were left out? I would like
to talk about tax revenue from savings and dividends after that,
but can we start with the general and then the four becoming two?
Obviously, I am disappointed that the four taxes that we certainly
suggested are not going to be devolved. I can understand the reasons
for delaying the decision, but a contingent decision could have
been taken on twothe higher passenger duty and aggregates
Our recommendations were originally to include
savings and dividends within the devolved taxation powers, but
I can understand why that was left out; it does require major
amendment in terms of the administrative arrangements for tax
collection in the UK, because it is difficult to attribute that
without additional administrative requirements, say, on banks
and building societies.
Q177 Fiona O'Donnell:
There was no provision to alter the tax on savings and dividends.
Is that correct? It was just half of the revenue. Where would
the accountability be for the Scottish Government?
You are right. Tax sharing of that type would not involve as much
accountability as having the power to vary that taxation. In that
sense, perhaps the thought behind the Scotland Bill was that it
was not going to add significantly to accountability. In terms
of other disappointments, that comes back to the grant reduction
mechanism. My group did not make a specific recommendation on
how to make the block grant reduction, nor about the mechanisms
for co-ordination between UK and Scottish Governments around the
issue of the shared tax base. We hoped that this would be worked
out, but in fact, as Michael hinted, some of that has not been
worked out yet. I think I would like to see that spelt out much
more carefully because it is an important issue.
It is a pity that they did not put the two taxes in, but there
was a technical reason for it. It has not been excluded. The more
serious issue is the tax on savings. I would have liked to have
seen that included. I would also say that in other countries they
also devolve the rights and it is not just assigned. So, technically,
that seems to be possible.
Q178 Dr Whiteford:
Welcome, gentlemen. It is good to see you here. I want to ask
a bit about fiscal and economic drivers, especially to you, Professor
Keating, because in your written evidence you highlighted various
shortcomings in the Bill in terms of how it would deliver its
aims, especially in relation to autonomy, policy innovation and
accountability. What, in your view, would this Bill need in order
to deliver genuine and effective powers of the sort that you envisage
would deliver those aims?
There are a number of issues here. One is about overall levels
of expenditure. What I was hinting at earlierI may come
back to itis about welfare spending and public services.
The debate in Scotland in the last few weeks has been all about
economic development. It has been, in my view, somewhat ill-informed
debate in many ways. What is important from the experience of
other jurisdictions is that when you devolve taxation powers,
it is important exactly how you use those powers and what incentives
you put in place.
For example, in the Basque country, which is a case
I know quite well, the corporation tax is slightly lower than
the Spanish levelvery slightly. But the use of the powers,
the incentives for research and development, the tax credits for
cultural industries and so on are a very important instrument
used by the Basque Government. It is in the detail of how you
use those powers and what the priorities are that is important.
Of course that does not happen automatically. That has to be a
policy choice by Governments, but we need to allow them to make
those policy choices.
Q179 Dr Whiteford:
The other thing that you wrote about in the submissions you made
to us was about a similar issue of VAT and corporation tax in
Scotland. I wonder if you think it was a mistake not to recommend
the devolution of corporation tax in the Calman proposals.
Yes, I do. I think corporation tax could have been devolved. There
are huge economic constraints on variation and it probably would
not have varied very much because of the loss of competitiveness
if you put it too high and the loss of revenues if you put it
too low. The tax competition is a fact. This indeed would have
meant, as we find in other federal countries, that there is not
a huge amount of variation, but it does give the opportunity for
the fine tuning I was talking about earlier on and the use of
that in pursuit of specific industrial policy objectives. If Scotland
had its own priorities, it could use the tax power in order to
Could I follow up one point? One previous witness, when we were
asking about corporation tax, made the points that you have made,
but they also made the point that reducing corporation tax for
Scotland could be, essentially, to cannibalise corporation tax
from the rest of the United Kingdom. The rest of the United Kingdom
would lose considerably as a result of transfers, but Scotland
would gain. Now, if you are in the Scottish position, I can see
that being sensible. If you are taking the UK position, of course
it is not. I wondered if you could maybe comment on either the
dangers or opportunities that cannibalisation would be the main
driver of any change in corporation tax rather than growing the
Yes. There is evidence from Ireland of transfer pricing or declaring
profits in Ireland when they were probably generated somewhere
else. With something like software creation, which is big in Ireland,
you never know where it is actually being done. Then there is
a separate argument about the shifting of economic activity to
Scotland. I am sceptical about corporation tax as a means of shifting
economic activity to Scotland. There is a danger of transfer pricing,
which is why, in my paper, I said that we should do like other
countries do and have some kind of concordats to control this,
which is what exists in Spain. It is to control those negative
Before I ask Eilidh to come back in, can I just be clear? I think
what you were saying, if I understood it, was that you were doubtful
about the ability of small corporation tax changes to generate
additional economic activity. Obviously, a lot of the debate in
Scotland seems to assume that marginal changes of corporation
tax would result in an explosion of economic development. Your
view and your evidence is that that is not the case. Is that correct?
Yes. I do not see the international evidence for that. Indeed,
the studies that have been floating around in Scotland are based
upon some dubious methodology. It is the details of what you do
with taxes rather than the absolute level, and what you spend
the money on, that are more important. If you look at jurisdictions
across the world, there is no association between tax levels and
economic growth. It depends what you are spending the money on
and how you are raising it.
Sorry, Professor, do you want to come in before I go back to Eilidh?
It is just to stress that tax competition was the main reason
why our group recommended that corporation tax should not be devolved.
We have seen evidence from other countries, including Switzerland,
that it would be very likely, if corporation tax had been devolved
and, say, the Scottish Parliament had decided to marginally lower
corporation tax, that it would have put pressure on the rest of
the UK to follow suit. What is happening in other countries like
Switzerland is that you sometimes find that, overall, the rate
of corporation tax is lowered and the burden then falls on personal
income taxation because something has to pay for the taxation
hole. That was the reason why we decided not to.
As Michael said, in most countries where corporation
tax is varied for economic development reasons, that needs to
be as part of a concordat at national level to specify exactly
what the aims are of that measure. It is not simply the Basque
country saying, "We are going to create a tax haven and all
businesses are going to come to us." It requires quite close
co-ordination and then it is not an effective level of fiscal
autonomy that you generate that way. It would be driven by economic
development issues. I think it is something that should be borne
in mind. I cannot envisage a situation in which you could simply
have complete freedom in terms of setting different rates of corporation
tax. Even the Holtham Commission, when it brought recommendations
which, to avoid brass-plating, were based not around turnover
but around employment, which I think was sensible, basically said,
"You should think about this, but it can only be a measure
of economic development and not for fiscal autonomy."
Q183 Dr Whiteford:
I want to come back to decentralised fiscal models because I know,
Professor Keating, that you have very wide expertise in this area
from other parts of Europe and even further afield. I just wondered
if you had any more general thoughts on the hallmarks of the most
This is all very contextual. There are countries that have very
low taxes but very weakly developed welfare states because they
are transition economies. They are developing countries as well.
They are not particularly relevant. I do not think Scotland wants
to go down that road of just radically cutting out the welfare
state. Our comparable must be developed welfare states, not emerging
economies in central and eastern Europe, Asia or, indeed, the
United States, where they do not have a mature welfare state.
Canada, Germany, Spain and Italy are relevant and so on.
The experience of these is very different. In
Germany, they have a highly integrated system in which there is
revenue sharing rather than revenue autonomy. Elsewhere, they
are moving towards autonomy. Spain is moving this way. Italy has
been moving rather haltingly in this direction. Even in France
there are moves in that direction so that local and regional governments
are dependent more on their tax base. This is connected with the
notion of competitive regionalismthat we no longer have
top-down regional policies managing the whole space. Regions are
moulding their own development projects. That is where things
are going. A degree of fiscal autonomy is important in that, but
a fiscal free-for-all, for the reasons that Anton mentioned, would
not necessarily be helpful.
Switzerland is the example where you do get this
destructive fiscal competition. You do not get it amongst federations
because there are intergovernmental arrangements in place to try
to control that to make sure it does not get out of hand, as indeed
there are at the European level. There is a degree of harmonisation
at the European level through competition policy to make sure
that this competition does not become destructive. Competition
can be dynamic and can promote development, but you can also get
this so-called race to the bottom and we need to make sure that
that does not happen.
To support what Michael said, I suppose this was part of our first
report to the Commission. I recognise the limits of economics.
I do think that this is a place where economics cannot provide
definitive answers; it is about what society and politicians believe
should be the right arrangements. This is an area where providing
additional fiscal autonomy would effectively provide more autonomy
at the expense of more risk in Scotland's block grant. It would
provide more levers but, as Michael said, perhaps at the expense
of greater fluctuation. It is an equity versus accountability
trade-off and the Commission decided to position itself in one
particular place on that. I do not think economics can tell you
exactly where you should place because it is going to produce
an economic miracle. As Michael said, there are different systems
in Germany, the USA, Australia and Canada, for very good reasons.
These systems are derived from what these countries want in terms
of that trade-off.
You seem to be suggesting that full fiscal autonomy is not a magic
It is not a magic bullet and I do not think it exists in any other
country which is a country.
"Full fiscal autonomy" is just a phrase. We need to
talk about what taxes you are going to have autonomy over and
in what circumstances. Even independent states in the European
Union do not have full fiscal autonomy. They are constrained in
value added taxes and tax competition and so on.
I was not sure whether or not "autonomy" in this context
was just a weasel word basically to cover separation and that
people who did not want to use "separation" or "independence"
as a word would use "autonomy". Is there a distinction
to be made between fiscal independence and fiscal autonomy or
fiscal separation and fiscal autonomy? Is there some economist-speak
that means there is a difference between those terms or are we
basically talking about the same thing re-badged?
I am not an economist. I am a political scientist. I would say
that there is a spectrum from being dependent to being completely
independent and nobody is at either end of that spectrum anywhere
in the world. It is about managing degrees of inter-dependency.
The big question underlying this for Scotland is what kind of
welfare state and what public services we want in Scotland. Would
be we prepared to pay a higher level of taxes to have a higher
level of public services, especially if in England they are going
to reduce the role of the state? That is the big issue that is
coming up there and we need to have that debate, I think.
I would agree with that.
Q186 Cathy Jamieson:
This is linked to that and, I suppose not being an economist either,
I am struggling with the kinds of questions that ordinary people
have on the doorstep. What they want to know is, knowing what
you know just now, is Scotland going to be better off under the
Calman proposalsraising that proportion of tax directly
in Scotlandor better off continuing with the block grant
as it is in terms of being able to provide services? That is what
I think people want to know.
We can certainly give a definitive answer to that, at least based
on current forecasts of taxation revenues in the UK. I refer
you again to the technical note produced by the Treasury essentially
for the UK Government for the Scotland Bill Committee. It shows
that, if, for instance, the Calman measures had been brought in
in 2010-11, the grant adjustments had been made then which equate
to 17.25% being taken off the block grant and then after that
the Calman proposals had run, essentially by 2014-15, as public
spending in the UK is not growing as fast but taxation will be
growing faster in the next few years, there would be a cumulative
gain to the Scottish budget of about £400 million for that
period. Actually, if you did implement it now, you would be better
However, as I said, there are swings and roundabouts.
There are likely to be fluctuations over the period of that sort
of measure. Over some period, you will see Scotland benefiting
of the order of a few £100 million more or in some period
it might be below that, but it will never deviate. There should
not be a trend, because Government spending and Government taxation
at UK level cannot trend away from each other for very long before
either debt accumulates or something else happens.
Sorry, we were going to ask some other questions, but that leads
directly on, if I may. Sorry, Professor Keating?
Can I say something as well? The Barnett formula, in principle,
is a convergence mechanism. It has never happened that way in
30 years, but had it been applied, Scottish expenditure would
be a lot lower. We do not know whether it is going to be applied
in the future, but given political opinion in the south, I would
imagine that Barnett will be applied in future in a much tougher
way, so we cannot depend on getting the slightly higher share
of expenditure that we have had hitherto.
But I think Cathy asked for a yes or no and Professor Muscatelli
was basically saying yes. One of the things that I was looking
at was a letter which appeared in The Scotsman, the paper
of record in these matters, it would appear. Professors Hughes
Hallett and Scott said, "The only hole we are concerned about
is that into which the Scottish economy is likely to plummet if
the provisions of this Bill become law." That does not seem
to have any element of, "On the one hand or on the other
hand". That has the merit of clarity. What I am not quite
clear about is whether or not it has the merit of accuracy. I
wonder in economic terms, what is a plummet? If they are suggesting
that the Scottish economy is likely to plummet, is that a phrase
that implies a particular percentage reduction or anything similar?
I have not seen any percentage associated with that definition
by Professors Hughes Hallett and Scott, but I would not agree
with that assessment. As I say, over time you should not notice
a huge difference between the two, but if you applied it now,
on the forecast we have till 2014-15, the Calman proposals will
actually generate additional income. But, as I said, I do not
think that is the criterion against which you should assess the
Q189 Jim McGovern:
Professor Muscatelli, you said that you would give a definitive
answer to Cathy's question based on a forecast and it was swings
and roundabouts and speculative. How can that be a definitive
It is a yes based on the current period, but I am also telling
you that over a period of 10 to 20 years you should not notice
a difference because Government spending and taxation at UK level
should stay broadly in line.
Q190 Jim McGovern:
"Should" is not definitive, is it?
No, but two different systems will produce two different outcomes,
otherwise what is the point of moving to a different system? In
fact, one of the problems, for instance, with the transition mechanism
that is embodied in the Scotland Bill is that, over the transition
period, it completely insulates the Scottish Government from any
fluctuation in the block grant, which basically means that over
that periodI will give you a definitive forecastthere
is no way that the Scottish Parliament would vary the tax rate.
Why should it? Whatever the tax rate is, it will produce the same
outcome as the block grant so it would not. Why should it? We
would get no benefit one way or the other. That is the best you
can do in terms of the forecast.
Q191 Jim McGovern:
It is your opinion rather than a definitive answer.
It is my opinion based on my own experience.
One other reason why it is so difficult to predict is that this
is a matter of politics, and we do not know what politicians are
going to do. They can do something under one heading and we can
predict that and then they take the money out of other headings.
This is how public finance works. We are talking about lots of
slippery numbers here and this is why indeed we need a lot more
transparency from the Treasury. It is so that we can actually
find out what has been going on and what is going on.
Chair: It is not only
the numbers that are slippery. It is a lot of the people that
we are dealing with, is it not? Therefore, one of the things that
would greatly improve the governance of Scotland would be much
clearer sets of figures and so on and a much greater understanding.
That is certainly something that has been said to us in a number
of points and something we will certainly reflect in our report.
Alan, you wanted to come in.
Q192 Mr Reid:
Yes. First of all, thank you very much for coming along. It is
just to explore the circumstances in which Scotland would be better
off and in which it would be worse off. Am I right in saying that
the two factors that you say have to be taken into account are
UK public expenditure and UK taxation levels? Is that correct?
UK public expenditure, the UK taxation level and the balance of
UK taxation between personal income taxation and other taxes.
For instance, if the UK Government decided to raise VAT and lower
income taxes by, say, uprating all the income tax thresholds,
that would have a negative impact on the Scottish tax base. That
is why you need an adjustment mechanism which takes account of
that. The UK Government and the Scottish Government will share
a tax base so that what the UK Government does with personal income
taxation would have an impact on the Scottish Government's revenues.
That is why you need a grant adjustment mechanism that takes account
Q193 Mr Reid:
Is this grant adjustment mechanism in the Bill?
No. The Bill at the moment suggests a transition period in which
the Scottish Government's receipts would be totally insulated
so there would be no impact. Then, after that, it suggests a once-and-for-all
deduction in the grant. After that, all the risk is transferred
to the Government. There is talk about no detriment, but I would
much rather see a mechanism that is clear and transparent and
which does not insulate the Scottish Government from its own actions,
because, after all, that is what accountability is about, but
insulates the Scottish Government from actions taken by the Westminster
Parliament on taxation because it would be unfair to see that
reflected on the Scottish devolved resources.
Q194 Mr Reid: What
you are saying is that, with the Bill as it stands at the moment,
if a future UK Government was to increase tax allowances above
inflation and so reduce the income tax take, the Scottish Government
would lose out.
Q195 Mr Reid:
You are suggesting that a formula needs to go into the Bill to
take that into account.
The formula is very straightforward because the Holtham Commission
did quite a bit more research on this area; indexing the grant
to the UK income tax base would achieve that result.
Q196 Mr Reid:
How does that link to Barnett because Barnett is based on expenditure
and not taxation? You would have a more complicated formula then.
No, you would not have to adjust Barnett. Barnett would stay under
the current measure. The block grant adjustment would not be a
once-and-for-all adjustment. It would be varied every year on
the basis of what is happening to the UK income tax base. On Barnett,
I should also say that my group always had at the back of its
mind that if we move towards this sort of system of income tax
sharing, Barnett might eventually be revisited, as Michael says,
because it is not based on need. Perhaps after 15 or 20 years
you need to look at the issue of how that is going to be handled.
Again, the Holtham Commission raised it in the case of Wales.
Convergence has already happened to a large extent in Scotland
and there is quite a lot of discontent as to whether Barnett delivers
what is needed in terms of public spending there.
Q197 Mr Reid:
You mentioned comparable countries such as Canada, Spain, Italy
and Germany. How do they address these issues?
They all have a system of revenue sharing and fiscal equalisation.
They sometimes assign taxes and then they have an element based
upon need and an element based upon resources. The technicalities
of the system are quite different, but they compensate to a greater
or lesser degree for the tax base. In Germany, this equalisation
is complete so it does not really matter what your tax base is;
you get your money. In Canada, it is much less complete. If you
are an oil-producing provincebecause there is oil tax as
wellyou get the benefit, but you lose when the oil prices
In European countries where they have regional governments,
in Spain and Italy, they are gradually moving towards a similar
kind of system. In Spain, they have been doing this for 20 years.
I am not talking about the Basque country, which has always had
it. I am talking about the other autonomous communities gradually
getting a mix of taxes typically involving the sharing of value
added tax on a population basis, because it is not suitable for
devolution, a share of income tax and a share of business taxation,
because business taxation takes different forms. There is then
the devolution of taxes that are easily identifiable territorially:
property tax, succession tax, vehicle licensing duties and so
Q198 Mr Reid:
Do you have any personal recommendation for the route Britain
should go down?
Those are the technicalities of it. The brutal reality is that
what you get is a political compromise because you do the sums
and you show that Region A should lose and Region B should gain,
but politically it is impossible unless you have lots of money
to compensate people; so you fudge. It is always a political compromise.
The difference here is that we are talking about Scotland in isolation
from the rest of the UK, even from the other devolveds, which
is very difficult to think about. There is no other place that
I know that is in that position. Where you have a federal system
it is fairly clear because you have rules that apply to everybody.
My own view is exactly that. In 15 to 20 years' time, within that
arc of time, you would hope that the UK Government might look
again at the Barnett formula, which was only designed to last
for a few years. It has lasted the test of time, but, as Michael
says, it is simply an administrative formula which does not take
account of relative need and changing need over time.
Chair: We will deal with
the Barnett formula next week, but at the moment we had better
deal with the Scotland Bill.
Q199 Lindsay Roy:
Good afternoon, gentlemen. In your considered judgment, do the
proposals fail to provide Scotland with any significant new economic
levers? Is there a genuine advance here?
I think there is a genuine advance. I think it will require the
Scottish Parliament to have a genuine debate about resources,
taxation and the source of those resources and not simply how
to allocate a block grant. I think there is an advance. Is it
the final step? That is another issue. What we have in front of
us here today does involve a significant increase in accountability.
There is a connection because the more you devolve taxation, the
more you force stakeholders, Scottish business, trade unions,
you name it, to get involved in political debate, which is one
of my interests. To a lot of people in Scotland, it does not make
that much difference to them what the Scottish budget is. If it
really made a difference, then you would improve the quality of
political debate. You would have a debate every year about what
level of taxation we want and what the consequences of that are.
I am not sure this proposal would take us much further in that
direction. I think it is too timid.
Q200 Lindsay Roy:
Would you agree that a key to success in delivering this is a
commitment to work together; in other words, perhaps a stronger
That is right and, as Michael said, it probably takes the UK into
a more federal direction, but, over time, we have to develop those
institutions to have that greater working together between the
countries of the UK. It will also lead to a greater engagement
between the different political parties and other stakeholders
in Scotland because it will involve some substantive discussions
about taxation as well as revenues.
Can I pick up on the assumption that giving additional powers
over some areas results in greater debate and discussion, better
policy and so on? One of the witnesses, in a previous session
about the Scottish economy, from the Federation of Small Businesses
was telling us about the high number of youngsters coming out
of schools who were functionally illiterate and innumerate. There
were even graduates coming out who were not able to deal properly
with interactions and so on. Scotland has had powers for some
considerable time to deal with, say, literacy and numeracy, yet
not a great deal of improvement has occurred. Simply having the
powers does not automatically, in the way that you seem to suggest,
result in better decision making.
Of course not, but there is a lot of work going on in Scotland
at the moment about how to improve policy innovation and policy
making. This is something that was not thought of at the time
of devolution. People talked about the Parliament, the committees
and so on and did not think about this. We have had 10 years of
experience of how to learn how to make public policy. It has been
extremely slow, but I think that is happening. Indeed, when it
comes to education and health, the powers are already there. This
is going to make no difference to the powers. The spending powers
are already there. We should not confuse that with
I understand that, but the point I was responding to is that we
still have problems of illiteracy and numeracy amongst young Scottish
people coming through the education system for which the Scottish
Parliament and Government have been responsible for some 10 years.
Therefore, you cannot automatically assume that additional powers
in relation to the economy will result in better solutions being
devised, in the way that you seem to be doing.
My argument is that the existence of those powers for 10 or 12
years or so has gradually improved the quality of policy debate
in Scotland and the quality of policy making, but these are very,
very long-term things. These are deep-seated social problems that
do not have easy answers. Indeed, extending autonomy into the
fiscal area will bring more people into the policy debate, particularly
the business community that has been a little bit detached from
the policy debate in Scotland, because it will affect them very,
very directly and they will have to get involved then.
I would agree with the statement that it is to do with what the
money is spent on. However, it could lead to a discussion of the
following type. At the moment, the UK is having cuts in public
spending. If we thought that solving some of those problems in
Scotland required additional expenditure over the next few years,
that could be a decision that the Scottish Parliament will be
able to take after 2015 with those powers. If we think that those
issues are not related with choices on the level of expenditure,
then you are right. It is to do with the quality of spending and
it does not matter too much. What this does is to improve the
accountability on the revenue side. It does not improve accountability
of how well the money is spent.
Chair: Eilidh, do you
want to pick up the issue about income tax or do you feel that
has already been asked?
Q203 Dr Whiteford:
Yes, I am very happy to ask about income tax. I guess that one
of the concerns there has been around this is about the differential
rates of tax in terms of higher rate taxpayers. This is maybe
a bit of a geeky economic question for which I apologise, but
would you expect, in times of economic growth, total tax yield
to grow faster than income tax yield? Within that, would you expect
more yield to come from higher rates of income taxwithin
the higher bands?
It is certainly true that with economic growth, you would expect
the tax base to grow. The sort of estimates we would seeI
think this was part of the evidence given to the Scotland Bill
Committee by one of the people who gave evidenceis that
the elasticity is around 1.2%, which suggests that, for every
1% of growth in the economy, you should get 1.2% of growth in
the tax base.
Presumably, behind your question is the issue
of the fact that the current powers only allow you to vary all
the rates at once and not to change the shape of the tax curve.
I think you are right; that is an issue. The reason why we suggested
that it should simply be a 10p variation across all the bands
is because there was an issue of administrative simplicity. Introducing
this other level of complexity would lead to the need for greater
co-ordination and greater administrative complexity in terms of
applying PAYE. I think that was an issue. You are right that it
then raises some issues because, if, say, the Scottish Parliament
were to put up the rate by 3p, that might have more impact on
the decision of higher taxpayers than standard rate taxpayers.
Q204 Dr Whiteford:
I think this is very helpful and I welcome the clarification that
simplicity was the guiding motivation. My concern is that that
does introduce a deflationary bias in the system. If the Scottish
economy is actually growing, which presumably we are all keen
to see, a greater proportion of the tax receipts that accrue are
then going to go to London, with a smaller share coming to Scotland.
So there is an inherent kind of flaw in the mechanism that perhaps
we should be looking at a more sophisticated way of ironing out.
I would put a slightly different gloss on it. I do not think it
is a deflationary bias and I would not see any problem, for instance,
if some of the benefits would accrue to the UK after all. The
tax base is being shared and that means that in a downswing, Scotland
also shares some of the benefits, and some of the risks accrue
to the UK tax take. I see it more as an issue of flexibility on
the part of the Scottish Government. For instance, higher rate
taxpayers are the ones who are most mobile. If the Scottish Parliament,
say, was to put up the rate by 10p, that is quite a significant
increase in the higher rate tax and might lead to a large number
of higher rate taxpayers saying, "I will make my main residence
across the border", which might cause a reduction in the
tax take. Those spillovers would be more problematic, which should
cause us to think about whether, in due course, we should have
some flexibility. I am less worried about who benefits, because
both the benefits and the risks are shared in the system.
Q205 Dr Whiteford:
Professor Keating, do you have any thoughts on that in terms of
the differential tax bands and the income tax? How adequate do
you think the income tax proposals are?
I defer to Anton on the economic technicalities of it, but I would
favour for political reasons or constitutional reasonsI
do not mean party reasons but for reasons of good governancethe
devolution of the rates because I think it is a legitimate decision
whether we decide to have a higher or lower marginal rate. This
applies in other federal countries as well. They change not just
the basic rate but also the allowances and the marginal rates.
Q206 Dr Whiteford:
Presumably they get over the technical difficulties of doing so.
I can tell you what the technical difficulties are. It is interesting
because in the case of CanadaMike will correct methey
started by giving the provinces the right to charge a tax on a
tax. They started with a surtax, and over time they have given
them more rights to change thresholds and tax rates. In part,
it is to do with sophistication of decision making.
In terms of the UK tax systemyou will
be able to ask this question of HMRC, who will know the complexities
moreessentially, we have a PAYE system which means that
most UK taxpayers do not fill in a tax form. In most other countries
which have more complex tax systems and devolve more of the taxation
powers at local level, everybody would need to file a tax return
because you would need to do that to properly allocate taxes between
devolved Governments and central Governments. I suspect that the
only way to start applying different tax rates in Scotland in
different thresholds is that you would need HMRC to start issuing
tax returns to everyone and then you would need some sort of mechanism
to ensure that there is not evasion by people switching residence
from one part of the UK to the other. Those are the issues.
I lived in Canada for a long time, and in Ontario the two tax
systems are linked so you fill in your federal tax form and your
provincial tax form. It takes about 30 minutes if you have the
right software. It is very sophisticated. The province can put
into that whatever kind of deductions it wants and it just comes
out the other end. In Quebec, you have to fill in two separate
systems, but the outcome is the same.
Professor Keating, can I just clarify this? Your point about the
merits of devolving powers over additional tax rates is based
on the politics of it. There is not, again, any economic evidence
that automatically devolving the higher tax rates would result
in better growth or better decisions. It comes back again, does
it not, to this question that it depends on the use that is made
There is no automatic gain as a result of doing one thing or the
No, you cannot. It is impossible to say that a given change in
the system automatically produces a policy outcome. It depends
on what you do with the powers. This is true, whichever power
we are talking about.
It slightly confused me because there does seem to be some coverage
in some of the press from some authors that would suggest that
if you do certain things, then some other things will happen automatically.
That is what we are struggling with a little as just mere common
There are various papers. There are many of them and the inferences
depend on large-n studies. You generalise from a large number
of cases. They are methodologically very problematic, because
I cannot quite see what the mechanism is supposed to be. Is it
increasing taxes or reducing taxes? The sample of cases is problematic.
The application, even if you produced a general result that in
general lower taxes produce growth, says nothing whatever about
Scotland because Scotland is a particular case and you cannot
generalise from a statistical analysis to a particular case. My
argument is that the question is not meaningful, not that the
answer is wrong. It is just not a meaningful question. It is just
not something that social science can do.
Just to clarify, it is impossible for any statistical study to
prove it in my view. Suppose you have two countries. One of them
has more fiscal autonomy and the other one has less. Suppose the
one that has greater fiscal autonomy just has greater innovation
and greater resources and happens to grow faster for that reason.
You might find over time that that is what is driving the result.
It is some other variable that you have not picked up, yet the
inadvertent economist might say, "This country has got a
greater fiscal autonomy and has grown faster than this other country."
It is nothing to do with the tax mechanisms. It is to do with
good fortune in the case of natural resources, perhaps good governance
in the case of good policies, or some other factor like innovation
and entrepreneurship. I would not even start looking at the data.
I am surprised that people find this sort of question interesting
and apply statistical techniques to it. I just do not think it
is particularly interesting.
Chair: I did not say I
found it interesting. I just thought I had better ask you about
it; that is all.
Q210 Fiona O'Donnell:
Moving on from income tax because we have a very long session
with HMRC after this, could I ask about the fact that the Bill
proposes that any new taxes set by the Scottish Government would
have to be approved by Westminster? What are your views on that?
Is that about safeguarding Scotland against any risk? Can you
understand, though, that that probably will be seen by a lot of
people as centralising power, or do you approve of that?
My view is that I think it is necessary for there to be some sort
of co-ordination. I can see why it is couched in those terms,
because of issues of tax competition. Suppose the Scottish Parliament
were to introduce some sort of payroll tax that impinged on national
insurance contributions. This would have an impact on UK taxation
so you would need some sort of co-ordination plan. I see it as
that. I am not a constitutional lawyer so I cannot say whether
the way it is drawn up at the moment is too restrictive, but I
think you would need some sort of co-ordination in those cases.
You cannot just have a free-for-all.
Yes, there is a danger of tax exporting as welltax activity
that was not actually in Scotlandand the UK Government
would have a legitimate interest in stopping that. Most constitutions
I have looked at have a clause that says you can tax something
that does not duplicate an existing tax. They have this in Spain
and Italy, which is pretty restricting. It has the same effect,
I think, as saying that it has to get Westminster approval. I
would rather put it in the way that I have just put it. It seems
to give more autonomy to the Scottish Government and then ultimately
it would be up to the courts to decide whether this was overlapping
with an existing tax. It would be two ways of addressing this
problem that Scotland should not be doing things that have a negative
impact on the UK or vice versa.
Q211 Jim McGovern:
Could I just ask, Professor Muscatelli, about the last contribution
you made prior to Fiona's question? How could one country have
greater fiscal autonomy than another country?
In the example I gave, if one country had devolved more of its
taxes to its local regional state level than another one. For
instance, Canada, at the moment, has more fiscal autonomy than
the UK in the sense that the provinces in Canada have to raise
more of their taxation locally than the UK countries do. It is
in that sense I meant it.
Q212 Jim McGovern:
It is not so much countrywide; it is regional-wide.
Q213 Jim McGovern:
There is no such thing as a country having more fiscal autonomy
than another country.
No, you are quite right. I was imprecise. Within the country,
the regions, states or provinces have greater powers in the example
Yes. There has been quite a lot of confusion in the papers on
that point. You might be saying that countries that are decentralised
have a greater countrywide rate of growth or that the regions
that are devolved have a greater growth than the regions that
are not devolved. These are two quite different questions.
Indeed, in the example cited by Hughes Hallett and Scott, where
they got the figure from had to do with devolution to local government.
It had nothing to do with devolution to state or regional government.
This was why we answered through an article in The Scotsman.
We felt that it was an inappropriate translation of the data
because the study on which it had been applied had nothing to
do with devolution to regional or state government.
Jim McGovern: Could I
just say to you, at the risk of being even more pedantic, that
when they debated the Scotland Bill a couple of weeks ago, it
was confirmed that, at the moment, there is no such entity as
a Scottish Government? It is a Scottish Executive, for the record.
Chair: You are not really
doing very well on a whole number of things, are you? You must
pay more attention, I think.
Q214 Mr Reid:
In calculating the new block grant, one should take the tax base
into account. That will obviously have to be carried out by some
organisation. Would you think that the Office for Budget Responsibility
is the right body to do that?
I personally would be comfortable with the Office for Budget Responsibility
doing that. I know that some other commentators have said that
basically it does still sit within the Treasury and therefore
it might be seen as not an independent party. To create yet another
body would be administrative overkill, but if the OBR had that
responsibility, and if the whole system had oversight from the
National Audit Office, I would have thought that would be sufficient.
Chair: Jim, do you want
to pick up the questions in question 9?
Jim McGovern: Yes. I am
quite intrigued as it mentions the Scottish Government, which
we have already said does not exist.
Chair: Write out 500 times,
"I must pay more attention."
Q215 Jim McGovern:
He has got to go and stand in a corner obviously. I think we have
probably done it to death actually, but what would the risks to
the Scottish economy be of effectively putting all the eggs in
one basket when it comes to taxes?
Our reason for suggesting that personal income taxation should
be the shared tax basis is that it is less volatile than the obvious
other candidates, which were corporation tax and VAT. In the case
of VAT, there are other issues around European competition. If
you look at the data over the last 10 years, corporation tax is
much more volatile than personal income taxation. Regarding the
argument as to whether devolving these other taxes, perhaps through
tax sharing, would reduce the volatility, I do not think it necessarily
would because you are adding two other taxes which are more volatile
than personal income tax and they are quite well correlated over
the business cycle. I do not think it would help offset the risks
from devolving personal income taxation.
That maybe gets us on to the other problem that has been raised
about this, which is what happens to tax volatility and the fact
that the Scottish Parliament, because it is the Parliament technically,
does not have the power to borrow. The Bill gives it very limited
powers to borrow and maybe there should be a greater capacity
to borrow to overcome that kind of volatility, again subject to
various constraints and overall thresholds.
Can I come in on that because I would certainly agree with that
point? When I was asked by the Scotland Bill Committee in the
Scottish Parliament what changes I would make, one of them was
on the grant adjustment mechanisms but the other issue is on the
borrowing powers. The £500 million overall limit does not
cover the potential fluctuations. If you look at the difference
in personal income taxation and receipts accruing to Scotlandthis
is the total as opposed to the bit that would be devolved under
Calmanbetween 2007-08 and 2008-09 there was a fall of about
£500 million in income tax receipts which were attributable
to Scotland. This is from the Government Expenditure and Revenue
Scotland surveythe GERS report. Over time, if you wanted
to protect Scotland from fluctuations in tax receipts or allow
them to smooth the total resources available, you might want to
look at whether £500 million is sufficient.
Q216 Mr Reid: Do
you have any particular figure that you would want to put as the
Any figure is going to be dependent on experience in the last
few years, and the last two years have been particular because
of the depth of the recession, but I would have thought that doubling
that limit would not be exaggerated in terms of prudence and in
terms of giving the Scottish Parliament a bit more room for manoeuvre.
Q217 Mr Reid:
What about restrictions to make sure that it is being used wisely?
For example, a Scottish Government, coming to the end of its term
of office, could decide, "Let's borrow a lot of money and
spend a lot of money to make ourselves popular and either ourselves
or the next Government can worry about it after the election."
Do you have a fear that that might happen and, if so, what sort
of restrictions would you put on to stop, say, irresponsible borrowing?
There are two reactions to that. One is why should that not be
part of the political process because it is up to electors then
to punish the Government which has behaved in that way? In terms
of keeping actual and forecast income taxes in line, one of the
things other commentators and I suggested to the Scotland Bill
Committee in the Scottish Parliament is that, rather than applying
a forecast over four years, we might perhaps update these forecasts
more frequently so that you could not have a Government doing
this and then saying, "The forecasts were wrong." By
having a rolling forecast and keeping actual and forecast tax
receipts closer together, that would become part of the political
process. I think that is fair game. That is what politics is about.
It is about making promises and sticking by them, or being punished.
Chair: Or not, as the
case may be.
Q218 Mr Reid:
How about, say, a Scottish Office for Budget Responsibility so
that the electorate would be aware of perhaps what independent
opinion was of what the Government was doing?
It is possible, but you could also ask the OBR to play that role.
Again, it is a question as to whether you want to create another
body given that we are talking here about a fraction of the total
resources of the Scottish budget. It is whether you want to create
another bodyanother quangoto do that.
The mechanism must ultimately be political. The Parliament should
answer to its electors, but there are things that you can do.
There have been a lot of experiences in Canada in fact with irresponsible
Governments racking up deficits in the 1980s and the 1990s and
there have been some constitutional changes, some of which provide
for a balanced budget, which is a nonsense and never really happens.
The more serious ones set a total limit on the amount of Government
debt, whether it is for accrued deficits, for revenue expenditure
or whether it is capital expenditure, which is what exists in
Europe through the Maastricht Treaty. It is not very well applied
at the moment as it broke down, but something like that could
be done to ensure that the borrowing did not get completely out
of hand. Indeed, something like that exists in Spain because the
borrowing of the regional governments counts towards the overall
Spanish debt for European purposes. The national Government has
negotiated with the regions that there will be a limit on the
total amount of debt that they are allowed to hold at any given
point in time.
Q219 Mr Reid:
Do you think there needs to be a legal constraint, or simply transparency
such as the OBR saying to the public, "We believe this Government
is acting irresponsibly"?
I would argue that there should be some constraint partly because
there is an issue of moral hazard. The thing about regional governments
or, in this case, the Scottish Parliament is that there is an
issue as to what would happen if, say, very irresponsible decisions
were taken because there is a central Parliament that can always
bail it out. There is a moral hazard issue which would not arise
elsewhere. I would go for a limit but I would not have that limit
of £500 million.
Professor Keating, at the present moment, at half-past two, they
will be stoking the boiler of the Eurostar. You have to leave
in 15 minutes. In particular, Professor Keating, is there anything
that you think the Calman Commission has missed? Is there a better
way? Is there something in particular where you would say, "Look,
from my experience, they really should have considered X or Y"?
I appreciate that a lot of these things are political judgments,
but based on what has happened elsewhere, is there something where
there is some evidence that devolving powers over a particular
area would result in beneficial conclusions?
It is difficult, as I think we have agreed, to say that any given
measure of devolution produces an outcome that is better. It provides
the opportunities for politicians to make better decisions. My
view about Calman is that it was too cautious. The evidence it
received from Government Departments was extremely cautious. The
powers had to be prised out of themnot just the Treasury
but other Departments as well. I would have liked to see something
altogether bolder, including on the fiscal side.
As I said before, it depends on what we are
thinking of this and the framework that we are using for this.
Are we saying, "We are assuming that devolution is going
to continue at present, whereby the Scottish Parliament makes
decisions that are marginally different from England?", or
are we thinking about the possibility of political opinion diverging
in quite a radical way in the future? If we are, then we will
certainly have to revisit this question of fiscal autonomy in
a few years and I think we will.
That is right, but there does not seem to be anything wrong with
the idea of our revisiting the devolution settlement after 10
years. In a few years' time, depending on whether or not Professor
Muscatelli and his expert group got it totally wrong or accurately
right, we will no doubt want to review it again. All of these
things are political judgments, are they not? In a sense, you
are now moving on to the question of your own political judgment
and opinion rather than anything that is particularly firmly based
on evidence, are you not? What I am looking to identify is whether
or not you would be able to say, given your experience, that over
most similar regimes, as it were, such and such has tended to
be an enormous success.
On a comparative basis, we can say certain things. The Basque
case has been evoked in many places in this debate, sometimes
in a rather ill-informed way. In fact, in that case, fiscal powers
enabled them to make a much more effective response to de-industrialisation
in the 1990s than we had in Scotland, with a much more effective
package of proposals and a fine-tuned industrial policy, and they
have come out of the present recession much better.
That was not automatically the result of fiscal
autonomy because they have had fiscal autonomy for a long time.
It was the use of those powers that really mattered. Also, as
a political scientist, I can sayit does not matter about
my political preferencethat where you have the devolution
of a lot of spending powers without the corresponding taxation
powers, there is a problem about accountability. I think the Scottish
Parliament should be raising the money that it spends because
then you can get a better quality of democratic debate and accountability.
You quoted the example that the Basques were able to respond to
de-industrialisation quite effectively. Can you just give me an
indication of what powers they had that Scotland will not have?
They have powers to make tax deductions and tax credits in industrial
areas which are focused on particular sectors, particularly hi-tech
sectors. They use tax powers not to cut taxes in a blanket way
but to focus on key sectors. They are able to bring together various
powers, including fiscal powers, in a package without constantly
having to co-ordinate everything with Madrid. This gave them flexibility
in response that we very often do not have because we have to
negotiate responses to industrial crisis in a very complex system.
They are also able to engage the actors in the Basque country,
whether it is the business community, the trade unions, the social
activists and so on, in a very direct way because they are paying
taxes and they know that the decisions they make have a very immediate
impact upon them. It was that combination, but the fiscal powers
enabled that to happen. It did not cause it; it enabled that to
We have just completed a report on the video games and interactive
technology industries. In there, we are looking at ways in which
we can fine tune some elements of financial support, whether or
not it is tax breaks, R and D expenditure or innovative expenditure
of other sorts. The thing that struck me about that was that,
even though we examined it in the context of Scotland in the Scottish
Affairs Committee, many of the issues about tax breaks and the
like were actually UK-wide and video games industries elsewhere
in the UK would equally benefit from this targeting.
I was not clear whether or not you are saying that,
in a sense, there is a Scottish response to these things, or whether
or not it can be done centrally. There requires a lighter touch
and a more delicate touch than the Treasury is perhaps used to.
Were they willing to do something like that for the video games
industry, which, in the UK, does not depend only on Scotland,
it would be reinforced in Scotland by what happened elsewhere
in the UK; what is required is a degree of fine tuning and delicacy
of touch from a UK Exchequer basis. The objectives you identify
could be met in some cases by another mechanism than just simply
Yes, but what is happening generally across Europe is that these
kinds of industrial policy decisions and regional development
decisions are being devolved to the local level where you can
link up with labour markets, education policies, infrastructure
and so on. That is the place where these come together and where
we see the most successful examples of innovation. It can no longer
be done at the state level.
Can I just continue with Professor Keating because he has to go
and you don'twe've got you for a little bit longer.
In terms of the advantages of decentralisation, which
I understand, can I ask you to what extent that also applies to
decentralisation within Scotland, say, to the local authorities?
One of the things that has concerned a number of us, I know, is
the extent to which power, where devolved to the Scottish Parliament,
has then, in Scotland, been sucked into Edinburgh and away from
local authorities, from individual economic initiatives and the
like. Is that something that from your experience you have noticed
happening in Scotland to a greater or lesser extent than elsewhere?
Is it something that has been reversed in other circumstances?
Is it something that you would recommend we look at?
Yes, because the local level is critically important as well.
Devolution came to Scotland, not because Scotland is some kind
of natural economic unit; but because it is an historic nation.
Yet it is of the scale that is more appropriate than the United
Kingdom for many of these kinds of interventions. Then, of course,
within Scotland there is a very important local dimension and
this is something that Governments have been struggling with for
30 years, through the SDA, Scottish Enterprise and the enterprise
network, to get an appropriate local level response to this. Again,
we are still not there. We still have a very untidy institutional
landscape when it comes to economic development. It needs an awful
lot of work done on it.
Chair: Thank you. Are
there any other points that we want to ask Professor Keating before
we throw him out?
Q225 Jim McGovern:
I want to try and determine something that you mentioned earlier
about the raising of tax powers or additional tax powers for Scotland.
You said that it would promote debate with trade unions and various
other organisations. Are you of the opinion that it would never
actually be applied, but it would be something that would be good
for an argument?
Out of that debate, I assume there will be a result and we will
be faced with the necessity to decide whether we want high taxes
and high welfare or low taxes, because you cannot have both. At
the moment, we have been pretending, or if you read a lot of the
debate there is a belief, that you can have low taxes and high
standards of public services, but you cannot.
Q226 Jim McGovern:
The tax powers that the Scottish Parliament have currently have
never been applied. Is there any point in varying them in order
to promote a debate?
To take up the point that Anton made, under this present proposal,
the Parliament would have to make an explicit decision. That may
be just symbolic, but the more the tax powers and the wider the
tax powers, the more people are going to get interested because
the more people are going to be affected. The evidence internationally,
because there are many other things going on, is that this does
engage stakeholders in a really serious way. Their pockets are
going to be affected so they get involved. We have to face up
to the tough decision that we have been avoiding in Scotland for
the last 10 years because there has been so much money going around,
but the money is going to stop and it is about time we decided
now what the priorities are. They may be high taxes or they may
be low taxesthat is a democratic decisionbut we
cannot any longer evade that question.
Chair: Alan, you wanted
to come in?
Q227 Mr Reid:
Are there any taxes other than the ones that Calman recommended
that you think could be devolved to Scotlandthe power to
vary other taxes?
I do not see why you could not change the excise taxes, vehicle
licence duty, alcohol and petrol tax. Of course, there would be
limits because otherwise people would go and buy their petrol
elsewhere, but nobody is going to drive all the way from Inverness
to Carlisle to fill up their petrol tank. That defines what the
limits are. Similarly, with alcohol taxation, there would be a
fairly modest variation. The vehicle licence duty is devolved
to regions in most countries in Europe. That seems to be an obvious
one. You know where people register their car.
Q228 Mr Reid:
Is it practical, particularly with alcohol duties? We already
have cross-Channel smuggling so would we not just have cross-border
smuggling? When I say "smuggling", I mean legally of
Obviously that imposes constraints. If the tax difference is so
high that it pays you to drive a truck down, get the thing and
illegally retail it to your friend, then maybe you will do it.
If the difference is marginal, then the incentives will not be
there. That is true of the world. That is true between the south
of England and France, but that is no reason for not devolving
the taxes. It is just to say that there are limits on the scope
for variation. The more different taxes you have with small margins
of variation means that when you put them all together, you get
a fairly large amount of discretion.
Q229 Mr Reid:
Professor Keating, in your written evidence, at paragraph 8, you
say, "If the UK government should commit itself to a radical
shrinking of the public sector and the Scottish Parliament choose
to maintain the existing welfare state, then more radical devolution
of taxation will be necessary." From what you have said on
excise taxes, there would only be small variations, so what taxes
would it be?
Q230 Professor Keating:
Adding up all these small taxes, you get small amounts of variation.
That generates a certain amount of revenue. Income tax is another
one and possibly corporation tax, but of course that is subject
to competitive constraints. This is true of independent states.
This is true of France versus Germany. You cannot get too far
out of line, but nevertheless we do see in Europe significant
differences. We see countries that have maintained relatively
high taxation levels and also extremely high levels of economic
performance because they have spent the taxes on things that enhance
Q231 Mr Reid:
When you say the existing welfare state, do you mean welfare benefits?
No. I mean education, health, public expenditure. This is a debate
that is being engaged in the UK since the last election: what
should the size of the state be? If the decision in Scotland and
Wales should be different from England, clearly that has implications
for the revenue base. It would imply that they need to raise more
taxes in Scotland.
Q232 Mr Reid:
How much do you think the Scottish Government could vary income
tax without people moving south of the border to escape it? Is
there a figure you could put on it?
Maybe Anton has a figure on that, but I could not. I would just
say that the scope for substantially higher taxation is limited
by precisely that. But if you look, for example, at CanadaI
know Canada is a big country but most people live within 100 kilometres
of the border so actually it is a fairly densely populated countrythere
are all sorts of other things that determine where people will
live, mainly where you can get a job and where your family is.
This does give scope for a certain amount of variation in taxation
without provoking mass migration.
We will let you go, Professor Keating. Thank you very much for
coming to see us. We hope we have not been too hard on you.
No, I was expecting a lot worse.
I was going to say that if you want to complain, write to the
Speaker. I can tell you what he will say. If you feel happy, tell
all your friends that it is not too bad coming along here. Thank
you very much.
Professor Muscatelli, we have been saving all the
hard ones for you. You wanted to come in earlier on a point that
was being made to Professor Keating.
I was just coming in to say that I agree with your statement,
Chairman. If these issues around R and D taxes or a tax break
for particular sectors are economic development issues, then we
have to ask the question, is Scotland a special case or are these
UK industries that need to be encouraged? Is the economic development
issue an issue for Scotland alone or is it also for Northern Ireland,
parts of Wales and parts of the north-west or whatever? If that
is the case, we should be looking at tax breaks around corporation
tax at local level, perhaps within a UK economic development context.
The reason why we resisted the devolution of corporation tax,
or suggested to the Commission that they should not go there,
is because we felt that it would lead to tax competition to vary
the headline rate for all firms. If corporation taxation is going
to be used for economic development issues, we have to ask whether
Scotland, like the Basque country, is definitely a special case
in terms of de-industrialisation.
I think your point about locality within Scotland
is also relevant because why should you stop the devolution there?
What about issues of Glasgow versus Edinburgh, for instance? These
are important issues.
Q235 Fiona O'Donnell:
The Scottish Government, in terms of freezing council tax with
local authorities, has set the situation up so that if local authorities
choose to raise the council tax they will be penalised in terms
of their allocation. Is Scotland at risk with this Bill of similar
treatment from the UK Government?
This is why we have to pin down how the grant deduction formula
is going to work so that it does not become a political issue
of conflict between the two countries. I think that is important.
As Michael pointed out earlier, we have that situation anyway
in terms of formula bypass. Political issues arise anyway around
what is Barnettable and what is notwhether the Olympic
expenditure is or is not Barnettable. It is not as if these issues
do not exist at the moment, but that is why it is important that
the grant formula should be embedded in such a way that it is
understood by all parties.
This is the same sort of point that we made to Professor Keating.
Upon reflection, given all that has happened and the exchanges
that have taken place since you reported, with hindsight, are
there any changes that you would make, or issues that we now
ought to take into account when considering our report, that you
did not consider at the time?
I would say there are three issues, Chairman, and they are largely
areas on which we were silent but with hindsight we can fill in
the gaps, if you like. One is on the formula allocation adjustment
where, in retrospect, I would recommend a formula adjustment which
indexed the grant adjustment to the UK income tax base. Secondly,
we were not precise on the issue of borrowing limits. We simply
said that they had to be prudential, etc, etc, but both in terms
of the borrowing for revenue and capital purposes we could have
perhaps spelt out a bit more precisely what those limits were.
For instance, around capital borrowing, it is not clear to me
that the £2 billion limit is the right limit. Again, in exchanges
with the Scotland Bill Committee, probably one way to fix that
would be in terms of what is prudential serviceability out of
the income tax share of the total departmental expenditure limit
for Scotland. Those are the two main areas. The third is possibly
issues around thresholds and different tax bands and whether this
is a staging post towards a more complex discussion around those
As you pointed out, the Scotland Bill may simply
be a staging post. It may be that in 10 years' time we will see
this as one move in the direction of greater fiscal accountability
and then we have to revisit it. On the third issue, perhaps, we
might have been more precise about the nature of tax devolution,
but simplicity was a factor as well.
Thank you. I very much got the impression from what you were saying
earlier that we should not confuse ourselves about all the furore
that has been kicked up by writers about various other models
and statistics and all the rest of it, as there is very little
substance in that. The politics of the situation is as described
in the Calman report, with minor variations. Is that a fair way
of looking at it all?
Absolutely. I would agree with that, yes. That is our position.
Chair: Does anyone else
have any final questions? Thank you very much for coming along.
As before, if you have any complaints, send them to the Speaker.
Tell your friends that it was not nearly as hard as you expected.
Thank you very much.