House of Commons - The Scotland Bill - Scottish Affairs Committee

The Scotland Bill - Scottish Affairs Committee Contents

3 Financial provisions

The current situation

31. The Scotland Act 1998 gave the Scottish Parliament some limited tax raising powers—most notably, the power to vary the basic rate of income tax by plus or minus 3 pence in the pound (the Scottish Variable Rate (SVR)). This power has never been used. Indeed we were astonished that it had been allowed to lapse by the present Scottish Government, apparently without the knowledge or consent of the Scottish Parliament. Scottish Ministers set non-domestic rates and can influence council tax.[58] The Scottish Parliament currently raises approximately 15% of its budget.[59]

32. The majority of the Scottish Parliament's spending is funded by the block grant from the UK Government. The size of the block grant is determined by the non-statutory Barnett Formula. The Scottish Parliament has discretion as to how the grant currently estimated to be about £30 billion annually is spent.[60] The Barnett Formula, devised in the 1970s is an ongoing source of controversy and debate.[61] This is likely to continue, and perhaps intensify, given the recommendations of the House of Lords Committee on the Barnett Formula, the findings of the Holtham Commission, and the current context of ongoing UK Government cuts during the current spending review period.

CALMAN'S PROPOSALS

33. In line with its terms of reference, the Calman Commission considered the financial arrangements for the funding of devolution in Scotland. It concluded as follows:

34. The Calman Commission therefore recommended a set of proposals designed to improve the financial accountability of the Scottish Parliament as set out in the box below.

Calman Commission proposals
·  A reduction in Scotland of rates of income tax by 10p in the pound with a commensurate cut in the block grant;
·  Replacement of the Scottish Variable Rate of income tax with a new Scottish rate of income tax. This could be set at 10p to restore the level of funding under the current arrangements. Alternatively it could be set at more or less than 10p and the Scottish Government's budget would be adjusted accordingly. These arrangements would mean that the Scottish Parliament would have to make a decision on tax;
·  Income tax on savings and distributions should not be devolved but half the yield assigned to Scotland with a corresponding reduction in the block grant;
·  The structure of income tax, including bands, allowances and thresholds, would remain the responsibility of the UK Parliament;
·  The following taxes should be devolved to the Scottish Parliament with a corresponding reduction in the block grant:
o  Aggregates levy
o  Landfill tax
o  Air passenger duty
o  Stamp duty land tax;
·  The Scottish Parliament should be given the power to legislate for new taxes in Scotland, with the agreement of the UK Parliament;
·  The Scottish Parliament should be granted additional borrowing powers to manage cash flow and to increase capital investment, subject to limits;
·  There should be a strengthening of the intergovernmental arrangements for dealing with finance; and,
·  The changes should be phased in to avoid unexpected variability in Scotland's public finances.[63]

SCOTLAND BILL AND STRENGTHENING SCOTLAND'S FUTURE

35. The Government accepted the central conclusion of the Calman Commission, and has repeatedly emphasised that the Bill and Command Paper are designed to address the Scottish Parliament's lack of financial accountability by proposing "the largest transfer of fiscal power from London since the creation of the United Kingdom".[64] The Bill therefore includes financial provisions which are designed to reduce Scotland's dependence on UK tax revenues and which are intended to "incentivise policies aimed at economic development and to increase accountability for spending decisions".[65]

36. The Bill proposes the devolution of some tax and borrowing powers, worth £12 billion, to the Scottish Parliament. It would be given increased income tax powers from 2015, setting a Scottish income tax rate each year which would apply equally to the basic, higher and additional rates. There would be a corresponding cut to the Treasury block grant, currently worth approximately £30 billion a year, as a result. The Bill also gives the Scottish Parliament power to collect "devolved taxes" to create further revenue. Landfill Tax and Stamp Duty Land Tax will be devolved (with a corresponding cut in the block grant), but two other taxes recommend by the Calman Commission—an Aggregates Levy and Aviation Tax—remain reserved, in the short term at least. The Bill does not assign tax receipts from Scottish savings, i.e. the savings of 'Scottish taxpayers'. The Bill will also see the introduction of Scottish Government capital and resource borrowing powers, worth £2.7 billion, for the first time,[66] the resource element of which is intended, primarily, to offset any shortfall that might occur should the revenue from the Scottish rate of income tax and the devolved taxes be less than expected at the transition.[67]

37. The Scotland Office has indicated that the financial changes outlined in the Bill and Command Paper will be: "introduced carefully with transitional arrangements in place to ensure there is no windfall gain or adverse shock to the Scottish budget. This new tax-raising power will be in place in 2016, in time for the Scottish Parliament elected in 2015 to take the first tax decision".[68] The Federation of Small Businesses welcomed this transitional period as a "safeguard in view of such significant changes".[69]

38. The Government has also indicated that the new funding arrangements will require dialogue between the UK and Scottish Governments. It has outlined its intention to establish an Intergovernmental Bilateral Committee on Fiscal Devolution, which will be chaired by the Exchequer Secretary to the Treasury and will also include relevant Scottish Ministers and the Secretary of State for Scotland.[70]

The Barnett Formula

39. The Government made it clear that while it recognised concerns expressed in relation to the Barnett Formula, it does not have "any plans to change arrangements before the stabilisation of the public finances".[71] However, Professor Gallagher added that there was nothing in the proposals in the Bill that "obliges you to keep using Barnett in the future".[72] Sir Kenneth Calman told us that "the Bill makes the assumption that it continues but that there might have to be some change at some point. It seems to me that managing that process, however it is done, is going to be a key part of the next few years, which is why, if the Bill becomes an Act, it is something that needs a bit of time to be thought through".[73]

Income Tax

40. The main features of the Government's proposals in relation to income tax are set out below:

Income Tax proposals
·  The Scottish variable rate would be abolished;
·  The basic, higher and additional tax rates on income would be reduced by 10p in the £ with a commensurate reduction in the Scottish block grant;
·  The Scottish Parliament would be required to pass a resolution by December each year to levy a new Scottish income tax rate;
·  The Scottish rate would apply to income from earnings and pensions but not income from savings and dividends;
·  The Scottish Parliament would be able to set the Scottish rate in amounts of half pence or whole pence;
·  The Scottish rate would apply to every UK resident taxpayer who is defined as a Scottish taxpayer;
·  The proposals would be introduced in April 2016 with a transitional period of two to three years;
·  The amount paid to the Scottish Government would be based on forecasts prepared by the Office for Budgetary Responsibility with the forecasts being reconciled with actuals up to 12 months after the end of the relevant financial year; and,
·  Only HMRC would collect income tax in Scotland.[74]

41. Under the proposed arrangements, rates of income tax set by the UK Government for Scottish taxpayers would be reduced by 10p in the pound. The Scottish Parliament would then levy a single rate of Scottish income tax which would apply in addition to the UK rate. The Scottish Parliament could choose a 10 pence Scottish rate, which would restore the overall rate of income tax back to the levels in the rest of the UK, or could alternatively choose a rate higher or lower than 10 pence.[75]

42. The Scottish Parliament could only choose a single rate which will be applied to all the UK bands; it would not be able to set a different rate to apply to higher rate taxpayers, for example. All elements of the income tax structure such as thresholds, allowances, and the rates which apply in the rest of the UK remain the responsibility of the UK Government.[76] The Scottish Government has suggested therefore that: "the proposals on income tax do not actually devolve the tax," as while "the Scottish Parliament has the responsibility to set a tax rate [... ] the tax itself, and all its associated elements such as bands and thresholds and the administrative arrangements for collecting it, remain reserved".[77]

43. Several of our witnesses argued that the tax proposals should go further. Professor Keating, University of Aberdeen, said that he would favour the devolution of the tax bands and rates "for reasons of good governance". He explained: "I think it is a legitimate decision whether we decide to have a higher or lower marginal rate".[78] He also argued that this would provide room for pursuing social and economic policy objectives.[79] He concluded that the Bill, in its current form would "contribute only partially to the aims of autonomy, policy innovation and accountability and that the motivation for the new 10p tax power is more the political one of forcing the Scottish Parliament to make an explicit tax decision, than to give it more autonomy".[80]

44. Mr Alan Trench, Honorary Senior Research Fellow, UCL, noted:

45. Professor Anton Muscatelli, Chair of the independent expert group of the Calman Commission, agreed that there should be some discussion around "thresholds and different tax bands and whether this (Bill) is a staging post to a more complex discussion around those issues".[82] He noted that the recommendations of the Calman Commission could have been "more precise" about the nature of tax devolution, but emphasised that "simplicity was a factor as well".[83]

46. The Government's proposals are in line with Calman's proposals on income tax. Professor Gallagher noted that this model of a shared tax base in relation to income tax was taken from the Canadian experience. He said: "the idea of knocking 10p off the UK tax and allowing the Scottish Parliament to substitute some tax—the so-called notion of tax room—was something that happened in Canada in the 1950s, which gives one reassurance that it might work".[84] He was subsequently, "strongly of the view" that this "would be the right place for Scotland to start".[85] The Scottish Parliament Committee on the Bill agreed: "sharing income tax is the most obvious and most appropriate start to give the Scottish Parliament its first significant additional tax powers".[86]

47. Professor Muscatelli explained that his group had proposed a 10 pence variation across all the bands is because there was an "issue of administrative simplicity". He added that adding another "level of complexity" would lead to the need for greater co-ordination and greater administrative complexity in terms of applying PAYE.[87]

48. The Secretary of State for Scotland further explained the rationale for this approach:

There are three elements to this. First, this broadly maintains the redistributive nature of the tax system. Our fundamental is that we want to keep the virtues of a unified United Kingdom tax system. We are not going down the road of separate tax systems in Scotland from the rest of the UK—in the main. Clearly, on some of the smaller taxes we will be, but on this main one we will not be. We want to maintain the integrity of the most important tax in the UK. The redistributive element is the first part.

The Scottish Parliament Committee on the Bill concluded that while the flat rate structure "should be adopted initially", this decision should be carefully evaluated "as experience is gained of operating it".[89]

49. We welcome the Government's proposals for the abolition of the Scottish variable rate, and the creation of a new Scottish rate of income tax. We agree that the proposals have the merit of maintaining the integrity of UK income tax, while also allowing the Scottish Parliament to be accountable and responsible for raising some of its own tax revenues.

50. We also note the comments of those witnesses who suggested that the accountability of the Scottish Parliament could be further enhanced through the further devolution of tax rates and personal allowances. However, devolution is a process and, on balance, we conclude that the Government's current proposals are appropriate at this time. We see considerable merit in closely monitoring and evaluating the implementation of these proposals before there should be any consideration or discussion of devolving further powers in relation to income tax. This entire process should be as transparent as possible, and we undertake to monitor it closely.

Implementation Issues

51. Many witnesses raised concerns about the implementation of the Government's income tax proposals. These concerns focus on three key issues: i) the definition of a Scottish taxpayer; ii) the operational and administrative capability of HM Revenue and Customs (HM RC) to deliver the Government's proposed scheme; and, iii) the potential cost and burden of the new scheme for businesses, employers and individuals in Scotland.[90] However, on balance David Moxham, STUC, identified that while there were "likely to be complications" and that this was "likely to be a bumpy process", he added that the problems were not "so large" as to persuade the STUC that the "devolution of the tax in itself is a bad idea".[91]

DEFINING A SCOTTISH TAXPAYER

52. The Bill provides for the Scottish Parliament to set a Scottish rate of income tax to be charged on all 'Scottish taxpayers'. To this end, the Bill retains the definition of a Scottish taxpayer established in the Scotland Act 1998 for the purposes of the 'Scottish Variable Rate' (SVR). Individuals resident in the UK for tax purposes will be liable to pay the Scottish rate if they meet one of three tests:

· if they have a "close connection" with Scotland for a given year;

· if they do not have a close connection with any part of the UK but spend "more days of that year in Scotland" than other parts of the UK; or,

· if they represent a Scottish constituency in Westminster, Edinburgh or the European Parliament for any part of that year.[92]

53. HMRC stated that the net effect of using this definition was: "that, for the majority of people, which part of the UK they live in will determine whether or not they are a Scottish taxpayer. This means that an individual's address will normally be a good indicator of whether or not they are a Scottish taxpayer avoiding the need for individuals to fill in complex forms".[93] However, HMRC went on to acknowledge that "detailed design work" would have to be carried out to deal with "the small number of individuals whose circumstances are less straightforward".[94]Mr Moore conceded, however, that the Government would have to "make assumptions" about where the tax base is resident.[95]

54. At a roundtable discussion in September 2010, hosted by the Chartered Institute of Taxation, concerns were raised about the practicalities of the test of a Scottish taxpayer. A report of the proceedings noted:

55. In its submission to the Scottish Parliament's Committee on the Bill, the Institute of Chartered Accountants of Scotland (ICAS) noted that the definition of a 'Scottish taxpayer' used in the Bill "causes concern for the anomalies it creates". It cited as an example, the case of an itinerant worker, who:

56. The Institute continued:

The acceptability or otherwise of taxation is a very fragile principle. If the public have a perception, no matter how misconceived that perception might be, that a tax is arbitrary in its application and unfair, that tax will be unpopular.

57. The Law Society of Scotland shared these concerns and highlighted examples of recent legal cases which indicate that the "residence qualification is not without controversy".[99] It further noted that the relevant sections in the Bill[100] are "difficult to interpret for those who move between jurisdictions within the United Kingdom inasmuch as they create some uncertainty and potential problems regarding compliance".[101] It concluded that: "the provisions will need some amendment to deal with changes in residence status of a number of categories of employee, including those working onboard ship, in oil rigs, in the armed forces and who are neither UK resident nor employed by non-UK employers".[102]

58. The Institute of Chartered Accountants of Scotland recommended that the definition of 'Scottish taxpayer' in the Bill be reconsidered, and a statutory definition introduced, which would give greater certainty to all. It noted that this certainty was required in order to keep the costs of compliance as low as possible.[103]

59. However, Sarah Walker, Director PAYE, Self Assessment & NI Contributions, HMRC, told us that the "sort of things" which had been raised around definitions of a Scottish taxpayer were "things we can very easily address together with the representative bodies".[104] She added that, despite the suggestions to the contrary, HMRC was "not expecting a lot of difficult cases",[105]and that she did not think there were "loopholes".[106]

60. We note the concerns expressed to us in relation to the anomalies and difficulties which occur in defining a Scottish taxpayer. We welcome the reassurances of HMRC that these issues will be addressed. We also welcome the assurances given by the Government during Committee stage, that it will bring forward an amendment to address issues around the definition of a Scottish taxpayer, on Report. HMRC will need to undertake detailed design and implementation work in order to minimise costly delays and the potential for legal proceedings in relation to the definition of a Scottish taxpayer. We will seek regular detailed reports from HMRC to this effect, and will monitor its progress very closely.

61. We recognise that there will always be a minority who wish to evade, avoid or escape their tax responsibilities. Their existence is not sufficient reason to abandon this welcome change in the administration of tax.

HMRC - SYSTEMS AND RESOURCES

62. A second area of concern related to the ability and capacity of HMRC to deliver the new system. Sarah Walker, told us however, that the proposals were "doable".[107] She explained:

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63. However, on 1 February, the Public Accounts Committee (PAC) published its Report HM Revenue and Customs' 2009-10 Accounts.[110] This Report further fuelled our concerns in relation to HMRC's capacity to deliver. The Report identified that the implementation of the New National Insurance and PAYE Service in 2009 was "flawed", resulting in "lasting and costly losses for the Department" and causing "unacceptable uncertainty and inconvenience to the taxpayer".[111]

64. While she was not in a position to comment in detail on the PAC Report, Sarah Walker agreed that HMRC had a "lesson to learn from that". She sought to address our concerns and said that the "changes that we need to put in to implement the Scottish tax are of a much smaller magnitude than the wholesale reform on PAYE".[112] She continued: "the only thing I can add in terms of assurances is that we did give the Scottish Government an indication that we would be able to run the Scottish variable rate with effect from 2013 if they wanted to operate it".[113] She went on to say "that is the vast majority of the IT change that we would need in order to operate the Scottish income tax, which we are aiming another three years beyond that to do. On that basis, if we could do most of it in two years' time but we actually have five years to do it, it seems to me a reasonable expectation that we will be able to deliver it".[114] The Secretary of State for Scotland added that the Government would be appointing an additional accounting officer within HMRC with specific responsibilities, who would be "absolutely named and nailed as responsible for the collection of the Scottish rate of income tax".[115]

65. It was also noted that a number of HMRC staff would be working on Scottish income tax. Sarah Walker said that it was too soon to say where they would be based, but as "we have call centres in Scotland. It might well make sense for those jobs to be in Scotland, but I cannot say".[116] Mr Moore identified these as "operational matters for HMRC" but that he was "reasonably confident" that there would be additional roles for people in Scotland as a result.[117]

IMPACT ON BUSINESS

66. The Federation of Small Businesses noted the potential impact of the new income tax scheme on businesses in Scotland. It noted that this would have "implications on a far greater number of businesses than might originally have been envisaged, as more businesses will be required to navigate different tax codes and accompanying processes (costs of software updates etc). We are also concerned that the burden of identification may be shifted from HMRC to businesses".[118] The Scottish Retail Consortium also pointed out that: "retailers' operating systems (in common with other Scottish employers) will have to be modified to administer the changes, imposing IT, legal, administrative and training requirements. This could place considerable burden on head office personnel, especially at the point of first introduction, handling different taxation regimes once this is implemented".[119]

67. The Low Income Tax Reform Group also identified concern that any mistakes or incorrect coding would have a disproportionate effect on those with low incomes,[120] particularly in relation the link between tax and benefits entitlements.[121]

68. HMRC must get the new Scottish tax system right. There is no room for error or delay. If the definition of a Scottish taxpayer is unclear or inadequate, the burden of identification could fall on small businesses, employers and individuals. This would be unacceptable.

69. Furthermore, the potential impact for small businesses and individuals in Scotland of any delay or error should not be underestimated, as it would result in an additional economic and administrative burden for business. We seek further assurance from both the Government and HMRC that the cost of design and implementation of new payroll systems will be fully met by HMRC and will not be passed on.

70. We recommend that HMRC work closely with business groups in designing and implementing systems and software which is straightforward and easy to use. HMRC should also issue clear and detailed guidance for employers in a timely fashion.

71. We recognise that the new Scottish tax system will involve an additional burden for businesses throughout the UK, the scale of which is as yet unknown. We ask the Government to clarify the scale of this burden, and the level of responsibility which will fall on employers.

IMPLEMENTATION COSTS

72. The Impact Assessment accompanying the Scotland Bill gives an estimate of the annual costs of setting up the new Scotland Tax as £45 million, with an annual running cost of £4.2 million.[122] However, the Explanatory Notes to the Bill also state that "[as the] ultimate compliance and administrative costs depend either on approaches to a number of areas currently under discussion […] it is not possible to provide detailed costings at this stage".[123] Sarah Walker said that HMRC had "reasonable confidence" that the £45 million quoted in the Impact Assessment was a "good" estimate of the cost.[124] She explained that this estimate covered the period between "now and 2016".[125] She explained that of the £45 million, "roughly £10 million is IT costs, computers costs and the remainder is the administration of setting the thing up".[126]

73. Several organisations have suggested, however, that this is an underestimate of the cost. Sarah Walker said that she did not recognise the figure of £150 million quoted by the Institute of Chartered Accountants of Scotland, and could not "see any obvious way" in which figures could escalate to this degree. She said that the costs were unlikely to "go up hugely unless the system becomes much more complicated".[127] However, the Secretary of State for Scotland emphasised that £45 million was a "provisional estimate in the regulatory impact assessment", and wished to "strongly highlight the provisional nature" of that estimate.[128] He concluded:

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74. In relation to who pays for the HMRC costs, the UK Government has outlined that: "it is an established principle that the costs of devolution will be borne by the Scottish budget".[130] However, the Scottish Government suggested that the administrative costs of the new tax system should fall on the UK Government, rather than on the Scottish budget, as proposed.[131] It cites paragraph 3.2.8 of the Statement on Funding Policy, which governs intergovernmental finance:

[...] where decisions taken by any of the devolved administrations or bodies under their jurisdiction have financial implications for departments or agencies of the United Kingdom Government or, alternatively, decisions of United Kingdom departments or agencies lead to additional costs for any of the devolved administrations, where other arrangements do not exist automatically to adjust for such extra costs, the body whose decision leads to the additional cost will meet that cost.

The Scottish Government believes that the decision of the UK Government to introduce changes to the system of funding devolved matters in Scotland would lead to additional costs falling on the Scottish Government, and consequently—consistent with the Statement of Funding Policy—these additional costs should be met by the UK Government.

75. The UK Government has cited paragraph 3.2.6 of the Statement of Funding Policy in support of its view:

the devolved administrations will meet all the operational and capital costs associated with devolution from within their allocated budgets.

When asked who would be responsible for paying the costs of additional staff to operate the new tax, Sarah Walker said they "would be paid for by the Scottish Government".[132]

Accountability

76. The Scottish Parliament will receive a report on Scottish income tax receipts as part of the National Audit Office's yearly report on HMRC. Scottish Parliamentary Committees will also be able to ask HMRC Accounting Officers for evidence.[133] In its Report, the Scottish Parliament Committee on the Bill concluded that there needed to be a more "direct relationship between HMRC and the Scottish Ministers and Parliament".[134] While it welcomed the appointment of an Additional Accounting Officer responsible for the Scottish income tax, it expressed concern "that a non-statutory memorandum of understanding, as is proposed, may be insufficient.[135] It concluded:

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77. While the Committee accepted that the costs of the scheme should be met by the Scottish Budget, it concluded that it was not right that the Scottish Budget should "simply be obliged to pay whatever HMRC say the collection costs are. These need to be challenged and scrutinised by both the Scottish Government and the Scottish Parliament".[137] It further concluded:

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78. We note the Secretary of State's admission that the figure of £45 million is only a provisional estimate of the cost. We welcome reassurances from HMRC that the costs will not escalate significantly, given that much of the detailed design and implementation work is still to be done, it is impossible to give a fully accurate estimate of the cost at this time.

79. While we agree with the principle that the costs of the implementation and delivery of the new Scottish tax rate should be met by the Scottish budget, the Scottish Parliament cannot be expected to issue a blank cheque to HMRC. We agree with the Scottish Parliament Committee that both the Scottish Government and Scottish Parliament should be able to challenge and scrutinise HMRC very closely.

80. However, for the avoidance of doubt, it should be made absolutely clear that tax collection remains a reserved responsibility. The provision of information and an ongoing dialogue with the Scottish Government should not be taken to assume any degree of joint ownership or management of HMRC, which will remain directly accountable to the UK Parliament. In addition to the existing mechanisms for monitoring the general work of HMRC by the Government, we believe that the Scottish Affairs Committee should be involved in reviewing the various processes and activities of HMRC, which relate to the collection of Income Tax on behalf of the Scottish Government.

Devolved taxes

81. The Bill would disapply the existing UK Stamp Duty Land Tax (SDLT) and Landfill Tax in Scotland and introduce the concept of a "devolved tax". SDLT and Landfill Tax would become devolved taxes with the Scottish Parliament having power over the collection and management of these taxes. This is in line with what Calman proposed. The UK Government expected that the devolved taxes would be introduced in April 2015. Calman estimated that in 2006-07 SDLT raised £555 million, and Landfill tax £75 million, in Scotland.

82. The Government's proposals differ from the recommendation of the Calman Commission: the proposals exclude the Aggregates Levy and Air Passenger Duty from taxes which should be devolved. Sir Kenneth Calman reminded us that the Commission recommended the devolution of these taxes because these were the ones the Commission "thought most practical and useful".[139]

83. The Aggregates Levy is a tax raised on the quarrying industry, and is currently set at £2.00 per tonne.[140] The Secretary of State for Scotland explained that:

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The Scottish Parliament Committee welcomed the "positive approach of the Secretary of State for Scotland in relation to the devolution of the Aggregates Levy". It therefore recommended that a clause be inserted in the Bill to devolve this tax "which can be brought into force once the relevant court case is resolved".[142]

84. Mr Moore said that "on the issue of Air Passenger Duty, you will be aware that the Government are reviewing that. Once the outcome of that is known, we will take steps to devolve it as appropriate".[143] Glasgow Prestwick airport noted that devolving Air Passenger Duty to Scotland would "permit an appropriate regime to be put in place for Scottish air travel recognising Scotland's particular requirements".[144] The Scottish Parliament Committee agreed with the UK Government—that this should be considered for devolution "once the future of this tax is decided".[145]

85. With the exception of the British Aggregates Association, which stated that "Scotland has lost nothing by the retention of the levy by London",[146] we found a broad consensus in favour of the devolution of both the Aggregates Levy and Air Passenger Duty. Professor Muscatelli was "disappointed" that all four taxes recommended by the Calman Commission had not been devolved. While he understood the Government's reasons for delaying the decision, he argued that a "contingent decision" could have been taken.[147]

86. Dave Moxham, STUC, said that he was not sure that the Government's arguments in relation to the decision not to devolve the Aggregates Levy and Air Passenger Duty "necessarily stand up". He said "I am not sure that it is not possible for those to be devolved to the Scottish Government and then for it to take its view on whether it also needs to make changes, pursuant to court action or other considerations".[148] The Scottish Government agreed, and did not consider the reasons for delay being cited by the UK Government as "substantive barriers" to devolving responsibility for these taxes in this Bill, "particularly given that the other financial provisions are not scheduled to be devolved until 2015 or 2016 at the earliest".[149] The Scottish Government argued that in the event that these taxes were devolved, "it would simply be for the Scottish Government and Parliament to consider options for future reform or to address the consequences of EU judgements, as is already the case in other areas, and any other devolved policy".[150]

87. We welcome the devolution of Stamp Duty Land Tax and Landfill Tax, and share the disappointment expressed to us that the Aggregates Levy and Air Passenger Duty will not be devolved at the same time. We understand the Government's reasons for this and we welcome the Secretary of State's assurance that the Government's intention is to take steps to devolve both taxes "as appropriate". However, we note that while the Government has stated that it will look to devolve the Aggregates Levy following the conclusion of legal proceedings, it is still in the process of considering whether Air Passenger Duty is appropriate for devolution.

88. We appreciate the frustration expressed that there is no provision for the devolution of those taxes on the face of this Bill. Given that the Government intends that these taxes be devolved, we recommend that provision be included on the face of the Bill for an enabling power to devolve the Aggregates Levy and Air Passenger Duty following an affirmative resolution of the House of Commons, with a view to this provision coming into force as appropriate.

New taxes

89. In Strengthening Scotland's Future the UK Government note that the Calman Commission recommended that the Scottish Parliament should be given a power to legislate, with the agreement of the UK Parliament, to introduce specified new taxes that apply across Scotland.[151] This was described as "an important new power for the Scottish Parliament, providing an instrument that will help deliver desired policy outcomes as well as potentially raising additional revenues". Clause 24 of the Scotland Bill therefore enables new tax raising powers to be devolved to the Scottish Parliament, following approval by both the UK and Scottish Parliaments.

90. Scottish Financial Enterprise pointed out that this provision in the Bill, "appears quite widely drawn".[152] They point out therefore that these proposals "go further" than the Calman Commission's proposals "as generally understood".[153] Mr Moore noted, however, that without this provision, the Scotland Bill would be a "smaller, less impressive Bill",[154] and he highlighted that, for the first time, the UK Government were providing "the facility to allow the Scottish Parliament, with the agreement of the United Kingdom Treasury, to set new taxes".[155] The Scottish Parliament Committee voiced its "strong" support for this aspect of the Bill, as it provided a mechanism and framework for the further development of tax devolution in the future. It concluded that, in this sense, the Scotland Bill was an "enabling" Bill in relation to finance.[156]

91. Ms Hyslop welcomed this Clause, and described it as being "helpful",[157] but added that she thought it was an "excuse for not transferring some of the other taxes that Calman recommended".[158] Nonetheless, she called for this provision to be as "open ended" as possible.[159] Professor Keating explained that similar legislation operated in both Spain and Italy, but that legislation was drafted slightly differently to the effect of meaning "you can tax something that does not duplicate an existing tax". He said: "it has the same effect [...] 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".[160]

92. The Government has also set out the criteria against which it will determine whether or not to devolve powers for a requested tax. It stated in Strengthening Scotland's Future that: "foremost will be the need to ensure that the proposed tax would not impose a disproportionate negative impact on UK macroeconomic policy or impede, to any degree, the single UK market. The Scottish Parliament will be expected to provide supporting evidence confirming a proposed new tax complies with these criteria".[161] Mr Moore explained that the main purpose of the criteria was to make sure that new taxes did not lead to "unbalancing the arrangements between Scotland and the rest of the UK".[162]

93. Mr Moore described how he thought this process might work in practice. He said that it would be a "process of discussion and negotiation with the Treasury",[163] and explained that how the Treasury and the UK Government responded would depend on the specific proposals and their compliance with the criteria".[164] He said: "like much of the rest of the taxation proposals, there is a lot of work that will have to be done after Royal Assent to work through the new mechanisms".[165]

94. We welcome the provisions in the Scotland Bill which will enable the devolution of other taxes in the future, and that for the first time, with the agreement of the UK Government, the Scottish Parliament will be able to set its own taxes. We welcome the criteria which is outlined in Strengthening Scotland's Future, and recognise the need for such criteria in order to avoid the risk of duplicate taxation.

95. We accept that it would not be appropriate for the Secretary of State to speculate on future taxation policy. However, we were disappointed that, when pressed, the Secretary of State could not give us examples of the type of tax which could potentially be acceptable, nor tell us whether two taxes mooted (on strongly caffeinated alcoholic drinks or a universal land tax), would meet the criteria and consequently be considered for devolution. We are also concerned by the absence of any clear process or mechanism by which the criteria will be applied, and ask the Government to provide a more thorough and detailed explanation of how this process would work, during the passage of the Bill through this House. We also wish to consider detailed proposals of how this process would work, before the first request for consideration of a new tax is received from the Scottish Parliament.

96. We agree with the Secretary of State for Scotland when he said that without this provision, the Scotland Bill overall would be less impressive. However, the success of such a provision depends upon the use which is made of it. There will need to be goodwill and co-operation on the part of both administrations to ensure that this provision is used in the spirit intended.

TAX ON SAVINGS

97. The Calman Commission recommended that income tax on savings should not be devolved to the Scottish Parliament, but that half of the yield should be assigned to the Scottish Parliament's Budget, with a corresponding reduction in the block grant. Professor Gallagher noted that the reason the Government decided not to adopt this recommendation was because it would "produce variability in the tax year without increasing accountability".[166]

98. Furthermore, Professor Muscatelli said that recommendation had not been adopted because it would require "major amendment in terms of the administrative arrangements for tax collection in the UK", and that "it was difficult to attribute without additional administrative requirements, for example, on banks and building societies".[167] He added that assigning this revenue would not "add significantly to accountability".[168] However, Professor Keating would have liked to have seen this recommendation being implemented. He said that other countries go beyond the Calman recommendation and devolve the tax on savings rather than just assigning the rights. He concluded therefore that "technically, that seems to be possible".[169]

99. We agree that the assignment of tax receipts from savings would not increase the accountability of the Scottish Parliament, so the decision not to assign these revenues does not undermine the Government's stated aim for the Bill. However, we do not object to the assignment of such revenues in principle. We therefore recommend that further work should be done to evaluate whether the assignment of tax receipts could be achieved without creating a disproportionate financial and administrative burden, and whether the potential advantages of assigning the receipts outweigh the potential disadvantages in this context.

CORPORATION TAX

100. Neither the Calman Commission nor the Bill proposed the devolution of Corporation Tax. However, this subject was the source of considerable debate during our inquiry. Professor Muscatelli stressed that tax competition was "the main reason why our group recommended that Corporation Tax should not be devolved". He explained that "evidence from other countries, including Switzerland" suggested that it would be:

170

101. Professor Gallagher agreed. He said: "if there is a declining tax, it is Corporation Tax".[171] He explained: "the devolution of Corporation Tax within the UK would be a way of ensuring that we cannibalised our own tax revenue. If it is devolved to Scotland and Scotland takes, for the sake of argument, 10p off the Corporation Tax, there is a strong incentive for companies not to change their actual economic behaviour but to change their corporate structures so that they book their profits in Edinburgh and pay less tax. The net effect of that is that the UK as a whole gets less tax and we have simply cannibalised our own tax income".[172]

102. However, Professor Keating pointed to the experience of countries other than Switzerland. He said:

173

Professor Muscatelli agreed that 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. He said "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".[174]

103. The Secretary of State said:

175

104. Ms Hyslop supported the devolution of Corporation Tax as it would give the Scottish Government the "flexibility to have a competitive environment for key sectors".[176] However, the Scottish Parliament Committee supported the Government's decision not to devolve Corporation Tax to Scotland at "this stage" but said that "international experience does show some scope for differentiation of Corporation Tax". The Committee concluded therefore that the devolution of Corporation Tax was "not something we would wish to rule out entirely for the future".[177]

105. We note that in the discussion on Corporation Tax there seemed to be an assumption that any variation would be downwards. We did not encounter any witnesses who were in favour of the Scottish Parliament being given responsibility over Corporation Tax in order to increase it. We further note that if the Scottish Parliament had responsibility for varying Corporation Tax, there would be a commensurate reduction in the block grant to match the amount of tax revenue foregone by HM Treasury. At no time has it been made clear to us, by any of those who argued for a Corporation Tax variation and reduction, as to how the inevitable short term drop in revenue would be compensated for.

106. We agree with many of our witnesses, as well as the Government, that there are risks in devolving Corporation Tax, not least in that this could lead to competition which could result in the "cannibalisation" of the UK's tax base. We recognise that this is not necessarily a concern for those who wish to consider the financial position of Scotland in isolation. However, we are interested in the economic welfare of the UK as a whole, and are not persuaded that the benefits of devolving Corporation Tax outweigh the risks.

Block grant reduction

107. At the heart of the Government's proposals are the provisions to give the Scottish Parliament the powers to raise a single rate of Scottish income tax, and to reduce the block grant accordingly. Indeed, the Government noted in Strengthening Scotland's Future that the methodology for calculating reductions in the block grant was fundamental to the future success of the new financing arrangements. Despite this, the Command Paper is very vague about how the eventual deduction from the block grant will be made. The Government stated that the present economic circumstances "make a definitive statement on the correct reduction to the block grant inappropriate at this time".[178]

108. The UK Government has undertaken to consult the Scottish Government on this issue, and while the Scottish Government has welcomed this commitment, it emphasised that it was "crucial that the options for adjustment are properly understood before the legislation proceeds".[179] Ms Hyslop said, that there was a "kind of feeling of don't worry [...] the Treasury will see you all right". This is inadequate. Ms Hyslop described that situation as "quite worrying", as agreeing to a reduction in the block grant, which as yet, does not have a clearly defined process, basis or formula upon which that calculation would be made, was "like issuing a blank cheque".[180] Professor Keating noted that a much clearer statement of exactly how that would work, was required.[181]

109. It is currently estimated that Scottish income tax receipts would amount to approximately 35% of the Scottish Government's budget, so the reduction in the block grant would be somewhere of this order of magnitude. However, there is some dispute of this figure, for example, Reform Scotland claimed that income tax receipts would be closer to 26% of the total budget. When pressed on how the figure of 35% had been calculated, the Secretary of State conceded that the Government had not analysed this figure itself, but that the figure was cited directly from the Calman Commission. The Secretary of State noted that he was "broadly comfortable" with that assessment.[182]

110. We are concerned that the estimate of the proportion of Scottish tax revenues of the Scottish budget given by the Secretary of State differs from the Government's own model. The Government's figures should be robust, and its calculations transparent.

111. In evidence to us Mr Moore explained that, from financial year 2012, the Office for Budget Responsibility (OBR) would begin to calculate forecasts of Scottish tax receipts. It would therefore "build up the body of evidence" upon which the reduction in the block grant would be calculated.[183] During the transition period, the income received by Scotland from the level of income tax it sets and the deduction from the block grant would both be based on these forecasts, with no subsequent reconciliation to the actual tax received.[184] Professor Muscatelli explained that "completely insulates the Scottish Government from any fluctuation in the block grant".[185] He continued, "after the transition period and there is the definitive adjustment in the block grant, 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".[186]

112. Mr Moore said: "we will want to make that adjustment, based on a period of years, and ensure that the judgment we are making is consistent both for historic figures and expectations going forward. If we get that number significantly out, it makes a big difference to that permanent adjustment".[187] The Government's intention was to "build a body of evidence that will allow us to say "the Scottish tax take is x% of the grant" and therefore "we reduce by that amount." The final adjustment would be made in 2018 or 2019, but the Government would "make sure that we kept that under review, so that there are not massive divergences after that adjustment is made".[188]

113. The absence of a clear method and process by which the block grant would be calculated was described by Mr Trench as "one of the most glaring failings of the Bill".[189] He added that the omission was "hugely disappointing", given that "the UK Government has had 18 months to decide how to respond to the Calman Commission's recommendations".[190]

114. Professor Muscatelli explained that the proposals suggested a transition period in which the Scottish Government would be totally insulated so there would be no impact. There would then be a once-and-for-all deduction in the grant. The UK Government has based this on the principle of "no detriment", which means that any policy changes to the UK tax base that impact (either positively or negatively) upon the Scottish budget will be compensated by an appropriate adjustment to the block grant".[191] However, Professor Muscatelli explained that he 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".[192]

115. Professor Muscatelli further identified the need to "pin down how the grant reduction formula is going to work so that it does not become a political issue for conflict between the two countries [...] it is important that the grant formula should be embedded in such a way that it is understood by all parties".[193] Professor Gallagher agreed and noted that if the Calman Commission had had another six months, it would have considered the "next phase" of "how we calculate the balance between the stream of income tax revenue that the Scottish Parliament will have under the proposals in this Bill and the grant that it gets for the UK Government".[194] Sir Kenneth Calman agreed that, with hindsight, he would have considered "whether that [the reduction in the block grant] could be indexed in a different way".[195]

116. Professor Gallagher highlighted that the most important question to be addressed was "what is a commensurate reduction for access to this stream of revenue".[196] He said:

197

117. Professor Muscatelli proposed that a "straightforward" formula which indexed the grant to the UK income tax base (based on the Holtham Commissions' research) would address this issue.[198] He added that rather than a one off adjustment, that adjustment should be "varied every year on the basis of what is happening to the UK income tax base".[199] He therefore recommended a formula adjustment which indexed the grant adjustment to the UK income tax base".[200] Professor Gallagher also endorsed the Holtham Commission as the "best work" which had been done on the analysis of that question, from both the economic and political perspective,[201] whileMr Trench highlighted the "careful and thoughtful discussion of this issue in the report of the Holtham Commission in Wales; the same principles apply to Scotland as to Wales".[202]

118. The Scottish Parliament Committee on the Bill concluded that it was "attracted to the analysis of the Holtham Commission" and "by the suggestion that the reduction in grant might be indexed to changes in the income tax base for the rest of the UK" as this "might achieve many of the objectives alone".[203] The Scottish Parliament Committee therefore recommended that the option of indexing grant reduction to the income tax base in the rest of the UK should be considered in detail.[204]

119. The major omission of the Government's proposals is that neither the Bill nor the Command Paper provide an adequate explanation as to how the balance between income tax and the reduction to the block grant will be calculated. The Government itself has noted the central importance of this mechanism to its proposals. While we would not expect a definitive statement on the actual amount by which the grant will be reduced at this stage, we would expect the Government to have put forward a considered proposal on the principles and methodology of this system. We recommend that detailed consideration should be given to how the reduction in the block grant will be calculated as matter of urgency.

120. We are persuaded that a straightforward formula which indexes the grant to the UK income tax base merits close consideration. We draw the Government's attention to the detailed work of the Holtham Commission in Wales on this issue.

OFFICE FOR BUDGET RESPONSIBILITY

121. The proposal in the Command Paper is that the calculations for the reduction in the block grant, will be based on the new Office for Budget Responsibility's (OBR) forecast of tax revenues.[205] Many of our witnesses expressed concerns about this, first in relation to the expertise of the OBR in relation to the technicalities of forecasting tax receipts, and second, in terms of the accountability and transparency of that organisation.

122. Making such forecasts, even at a UK level, is not straightforward. As the OBR noted in its November 2010 forecast, "public sector receipts are highly dependent on the path of the economy and so projections are subject to [...] risks and uncertainties".[206] The actual level of receipts can differ from the level forecast even at the beginning of the financial year. For example, the April 2009 Budget forecast income tax receipts (gross of tax credits) of £140.5 billion.[207] The latest estimate is that income tax yielded £144.9 billion—over 3% higher than forecast at the beginning of the financial year.[208] The further ahead tax receipts are forecast, the greater scope for their eventual outturn to differ from the forecast value. Professor Gallagher described the OBR as a "new beast", adding that "we don't know what it is like because we haven't seen it do anything yet [...] they have never estimated a Scottish tax revenue before, so I don't know whether they will be over-optimistic or under-optimistic".[209]

123. At the moment, there are no official forecasts of Scottish income tax revenues, although estimates of past receipts are published by the Scottish Government and HMRC. The Secretary of State explained that at present there were no "good forecasting arrangements for income tax receipts. We do not have all the data that we will require".[210] In addition, Mr Moore also pointed out that discussions between the UK Government and the OBR will "only start once the Bill gets Royal Assent".[211] He emphasised that there were a "number of years work ahead" which meant that there was "plenty of time to consider all the different issues".[212]

124. Witnesses expressed some concern about the OBR having this role. Mr Trench identified that "the problem, however, that the Treasury and the OBR have is that they are part of the UK Government, and they cannot be expected to be impartial actors or determiners of finances".[213] He noted that "even if it is independent in relation to HM Treasury it cannot be said to be impartial in relation to the Scottish Government as it is part of the UK Government".[214] The Scottish Parliament Committee on the Bill concluded that while it did not doubt "in the slightest" the integrity of the OBR, it was answerable to the UK Government. It concluded that there should be the possibility of some audit of its work in relation to, or on behalf of, the Scottish Parliament.[215] Ms Hyslop noted that the proposed Joint Fiscal Committee would allow these issues to be more transparent and more accountable, and that this would particularly help in relation to issues relating to OBR and forecasting.[216] Ms Hyslop concluded that both Governments needed to "get into space of working together".[217]

125. The Secretary of State pointed out that when the OBR start forecasting in 2012, its data would be an "open book" in order to "compare how accurate the forecasts will be compared to out-turn.[218] He added that the "reconciliation (between forecasts and receipts) would be publicly notified and would be available for "scrutiny and independent audit as Parliament or Government see fit",[219] and that the OBR would be accountable to this Committee.[220]

126. The Scottish Council for Development and Industry (SCDI) proposed that a Scottish Office for Budgetary Responsibility be established, which "could take a lead role in making an independent yet informed assessment of the public sector balance sheets, have control over forecasting and inform spending decisions".[221]Professor Gallagher agreed that the body would require "a substantial corpus of expertise".[222]However, Professor Muscatelli said that he was "comfortable" with the OBR undertaking this work. He said: "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".[223]

127. The Office for Budgetary Responsibility (OBR) is a relatively new body, and its task of forecasting Scottish income tax receipts is a new task. This will require a body of expertise. We seek assurances from the Government that the OBR will be adequately equipped and resourced to undertake this work, the scale and complexity of which should not be underestimated.

128. We note the assertion of some of our witnesses, who have cast doubt on the ability of the OBR to be impartial in relation to the Scottish Government as it is part of the UK Government. We do not accept this. However, the Government has an opportunity from the outset to operate the principles and practices which are necessary in order to make sure premature concerns about impartiality do not become a reality. We note three key principles:

First, the work of the OBR should be transparent. We welcome the Minister's assurance that its calculations would be an "open book".

Second, the Minister noted that discussions with the OBR would not begin until the Bill had received Royal Assent. We therefore recommend that there be close co-ordination between the UK and Scottish Governments and the OBR from the outset.

Finally, we welcome the Minister's assurance that the work of the OBR will be subject to scrutiny by this Committee. We will closely monitor the work of the OBR in its role of forecasting Scottish tax receipts, and will liaise closely with our colleagues in the Scottish Parliament on this matter.

A shared tax base

129. Professor Muscatelli noted that, should the Bill be enacted, the Scottish and UK Governments will share a tax base. Professor Gallagher explained that the Government's proposals would lead to a "vertical fiscal externality" which means that "when you have two levels of Government that share access to the same tax base [...] the decision of one Government will have an impact on the other".[224] Professor Muscatelli illustrated, for example, that "what the UK Government does with personal income taxation would have an impact on the Scottish Government's revenues".[225]

130. Mr Trench explained that:

226

Sir Kenneth Calman noted that a key part of the Commission's Report and the Bill was about the 'respect' agenda. He said "we need to talk to each other and to do that openly to be able to discuss issues".[227] Professor Muscatelli agreed that the shared tax base resulted in the need for "some sort of co-ordination."[228]

131. The Command Paper makes provision for the creation of new 'Intergovernmental Bilateral Committee on Fiscal Devolution' to be created as a forum to discuss shared UK-Scottish interests in fiscal and economic policy.[229] However, Mr Trench argued that there "should be a more formal framework set to the structure within which good will and individual relationships can function much more effectively",[230] and that this would be in the UK Government's "best interest". He concluded: "if you accept the principle that underlies Calman of delivering a measure of fiscal accountability to the Scottish Parliament and Government to match their accountability through the ballot box, then you have to ensure that accountability is real".[231]

Transparency and accountability

132. The key to achieving the cultural and attitudinal shift outlined above is to make sure the new regime is based on full and proper accountability and transparency. Professor Gallagher said that the UK's public finances were "relatively un-transparent by international standards".[232] He said:

233

133. Professor Muscatelli said "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".[234]

134. The fact that the proposals will result in a shared income tax base needs to be both recognised by, and reflected in, the structures, culture and accountability and oversight mechanisms of the bodies and organisations responsible for their delivery and implementation. The Government must outline in detail how the organisational structures and oversight mechanisms of HMRC, the OBR and HM Treasury will reflect this new reality, and we look forward to receiving this information in the Government's response to this Report.

135. We welcome the Government's proposals to create a Bilateral Committee on Fiscal Devolution. This is an appropriate forum for the discussion and co-ordination of the implementation of the Government's proposals. We note that the success of these arrangements will depend as much on goodwill and cooperation, as on systems and structures. The far reaching changes which will be brought about following the enactment of the legislation need to be accompanied by an equally far reaching cultural and attitudinal shift.

136. We recognise that much of Scottish politics has been, and is based upon a persecution and dependency culture. While increased openness will not, in itself, reduce the perpetual girn nor the search for grievance, they have the potential to help transform political discourse in Scotland by focusing attention less on "how much are we getting" to "what can we do with it". Transparency can help us to stop blaming someone else.

Borrowing powers

137. The 1998 Act allows Scottish Ministers to borrow for short term current spending, with a limit of £500 million. This power has not been used and would be replaced by extended borrowing powers in the Bill.[235] The Bill allows borrowing to fund current expenditure, subject to certain limits and controls. Scottish Ministers will be permitted to borrow up to a total of £500 million to fund current spending with a limit of £200 million in any one year (from 2015).[236] Clause 32 of the Bill re-enacts the parts of the 1998 Act which allows borrowing to provide a working balance for the Scottish Consolidated Fund and to manage in-year volatility of receipts. It extends the power to allow borrowing across years to meet current expenditure where receipts are lower than their forecast value, subject to rules determined by the Treasury.[237] The Bill also sets a cap on borrowing for capital spending to the effect that "aggregates outstanding" must not be more than £2.2 billion (from 2013).[238]

138. Many of our witnesses identified that the limits proposed in the Bill, for both revenue and capital borrowing, were too low. Professor Keating described the Bill as being "too cautious" in this respect.[239]

REVENUE

139. In terms of borrowing for current revenue purposes, Mr Moore noted that the figure of £500 million "was determined by colleagues in the Treasury based on their estimations of what the fluctuations might be in the tax receipts that would need to be covered in any given year".[240] He added that this limit may be varied "from time to time", but that it would "not be reduced".[241] The Scottish Government pointed out that this cap is unchanged from the in year borrowing limit permitted in the Scotland Act, despite the increase in volatility the Scottish Government would be exposed to.[242] Professor Drew Scott, University of Edinburgh, noted that under the new system:

243

140. Many of our witnesses agreed. Mr Trench described the borrowing limits as "seriously low" and Reform Scotland described them as "modest in the context of the scale of tax receipts".[244] Professor Muscatelli concluded:

245

In this sense, Professors Andrew Hughes Hallett, George Mason University, and Drew Scott, University of Edinburgh, consider that borrowing provisions for non-capital spending to be "both dynamically unstable and inadequate".[246]

141. While there was a general consensus that the borrowing limits were too low, there was disagreement as to how, or at what level, limits should be set—if at all. Professor Muscatelli said 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".[247] He added "I would go for a limit but I would not have that limit of £500 million".[248] Mr Trench agreed that this limit should be "much higher", but should be set by the UK Government.[249]

CAPITAL

142. The Secretary of State said that, in relation to capital borrowing limits, "the judgement is about providing sufficient powers to enable the Government in Scotland to get on with major infrastructure projects".[250] He added, however, that provision for this "major capital borrowing power" was not included in the Calman Commission. He made it clear that this was a baseline figure, and while it would not be a "free for all" that would be extended massively at any given point in time, it could be increased with Treasury consent and within the overall United Kingdom borrowing.[251]

143. SCDI believed that borrowing limits should be sufficient for the Scottish Government to manage its capital investment programme effectively and flexibly, and fluctuations in revenue arising from the substitution of a portion of the block grant with income tax revenues, within acceptable UK debt levels".[252]Professor Muscatelli said that it was not clear that "the "£2 billion limit is the right limit".[253] Dave Moxham indicated that the STUC would, "generally looking for those borrowing limits in relation to capital spend from the loans fund to be up a bit".[254] Professor Muscatelli suggested that "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".[255]

144. The Scottish Government welcomed the principle the introduction of a specific power to borrow for capital investment purposes and the flexibility to seek borrowing from the market. However, it noted that the regime as proposed is limited and highly controlled by HM Treasury, and argued that "as with other elements of the financial package, a greater formal role for Scottish Ministers and the Scottish Parliament in the regime, especially adjustments to the debt limit, would be desirable".[256]

145. The Scottish Parliament Committee described the short-term borrowing limits as "inadequate", and suggested that the limits should be "recalculated on a more principled basis".[257] The Committee accepted that there would "be constraints on the amount of borrowing set by HM Treasury but is concerned that there is no principled basis for the particular limits proposed". It proposed that the "total limit should be set by reference to the capacity of the Scottish Government prudently to finance it from devolved tax revenue. The precise amount may be subject to further work, but this is likely to be substantially more than £2.2 billion".[258] It also recommended that the UK Government consider bringing forward these borrowing powers.[259]

146. We welcome the provisions in the Bill for both capital and revenue borrowing powers to be given to the Scottish Parliament. We note the concerns of many witnesses that the limits the Bill places on these powers are too low.

147. We agree that there should be a limit, which should be set by the UK Government and be within the framework of the UK's overall borrowing limits. We recommend that the Government re-consider the proposed limits, based on more thorough analysis, and in close consultation with the Scottish Parliament and with this Committee.

148. We believe a suitable starting point for discussion would be one billion with a limit of £500 million in any one year. We would also look favourably upon changing the date when such borrowing would be accessible to the Scottish Government and ask the Government to consider this further.

BONDS

149. In his written submission, Professor Iain McLean, Nuffield College Oxford, suggested that the Scottish Government should be allowed to issue bonds:

260

The STUC also "favour the ability of the Scottish Government to raise bonds",[261] and expressed disappointment that provision for this had not been included.[262] Dave Moxham explained that: "Local authorities will still be able to run bond issues as potential borrowing [the] mechanism that is available in Scotland to other Scottish bodies should also be available to the Scottish Parliament".[263]

150. While the Scottish Parliament Committee on the Bill thought it unlikely that the Scottish Government would need or wish to access the bond markets in the near future, it concluded that this possibility "should not be ruled out in statute". It therefore recommended that the Bill be amended to permit this, subject to agreement from HM Treasury to conditions for bond issues".[264]

151. It appears strange to us, in principle, that the Scottish Parliament should not be permitted to have access to the bond market, while Local Authorities in Scotland are permitted to access this source of revenue. We endorse the view of the Scottish Parliament Committee on the Bill on this issue.

58 For more detail, see the House of Commons Library, Scotland Bill, Research Paper 11/06, 18 January 2011. Back

59 Cm 7973, November 2010, p 11 Back

60 For more detail, see the House of Commons Library Paper 11/06. Back

61 See for example, House of Lords Select Committee on the Barnett Formula, The Barnett Formula, First Report of session 2008-09, HL Paper 139, 17 July 2009. Back

62 Commission on Scottish Devolution, Final Report, June 2009, para 2.34. Back

63 See Commission on Scottish Devolution, Final Report, June 2009, para 2.34 and House of Commons Library Paper 11/06, 18 January 2011. Back

64 Cm 7973, p 11 Back

65 House of Commons Library Paper 11/06 Back

66 Ibid Back

67 Ibid Back

68 Ev 15 Back

69 Ev w22 Back