Formal Minutes
Tuesday 15 March 2011
Members present:
Mr Ian Davidson, in the Chair
| Fiona Bruce
Cathy Jamieson
David Mowat
Fiona O'Donnell
| | Mr Alan Reid
Lindsay Roy
Dr Eilidh Whiteford
|
Draft Report (The Scotland Bill), proposed by the Chair,
brought up and read.
Draft Report (The Scotland Bill), proposed
by Dr Eilidh Whiteford, brought up and read as follows:
1. The UK Government introduced the Scotland Bill
in the House of Commons on 30th November 2010 with
an accompanying Command Paper, Strengthening Scotland's Future.
The Scotland Bill seeks to implement 35 of the 63 recommendations
of the Commission on Scottish Devolution (the 'Calman Commission')
established by the Scottish Parliament in 2007, and aims to 'enhance
the financial accountability of the Parliament and Government
in Scotland, improve working arrangements between Westminster
and Holyrood Parliaments and Governments, and extend the powers
and functions of the Scottish Parliament and Government' (Command
Paper, Foreword).
2. While the objectives of further empowering the
Scottish Parliament and increasing its accountability are entirely
laudable, the Scotland Bill makes only modest progress in the
direction of those objectives. In this respect, the passage of
the Scotland Bill is a missed opportunity to enhance devolution
more significantly by delivering to Scotland the levers to promote
economic growth and create employment. In the aftermath of a
bruising global recession, when restoring the health of the economy
through sustainable growth and job creation ought to be the top
priority of Governments, the Scotland Bill ducks the challenge
of devolving greater fiscal responsibility to the Scottish Parliament
and Government that would equip them with powers to strengthen
and improve economic and social policy in Scotland, while significantly
enhancing their financial accountability.
3. Provisions in the Scotland Bill are nevertheless
to be welcomed as far as they go, and in as much as they can improve
governance in Scotland and deliver genuine benefits for its people.
A number of witnesses identified this Bill as a step in a process
of devolution rather than an end point, echoing the oft-cited
observation of former Welsh Secretary of State Ron Davies that
'devolution is a process, not an event'. While there are diverse
views in Scotland on the extent, the pace, and the objectives
of further devolution, there is an overwhelming consensus on the
benefits of improving and strengthening the existing devolution
settlement for the good of the country.
4. The principle that the UK Parliament should not
normally legislate with regard to devolved matters without the
consent of the Scottish Parliament is an important one. In this
respect, the timetable of the Scotland Bill has provided less
than optimum opportunity for the Scottish Parliament to scrutinise
the legislation before its progress in the House of Commons, or
to consult adequately with wider civil society in Scotland. In
particular, it is regrettable that the first day of Committee
Stage debate in the House of Commons took place before the Scottish
Parliament had an opportunity to debate its Legislative Consent
Motion. The Report of the Scottish Parliament's Scotland Bill
Committee and the Minority Report submitted alongside it make
numerous suggestions to strengthen the Scotland Bill. It is also
regrettable that the UK Government has had such a very short timescale
within which to consider and digest these proposals; however,
the UK Government is urged to consider those recommendations and
table amendments to the Bill in time for its final stages.
5. A motion passed by the Scottish Parliament on
10th March 2011 (Motion S3M-8114) by a vote of 121
to 3 with 1 abstention demonstrates the breadth of cross-party
consensus in the Scottish Parliament on the need for a further
Legislative Consent Motion before the Bill is given Royal Assent.
The views of the next Scottish Parliament should therefore be
sought on the amended Bill through a Legislative Consent Motion
before it receives Royal Assent.
6. The Committee sought evidence on those recommendations
of the Calman Commission not implemented in the Bill; those provisions
in the Bill that were not recommended or considered by the Calman
Commission; the Bill's fiscal and financial implications for Scotland;
further provisions that might be included in the Bill in order
to amend or develop the Scotland Act 1998.
7. The Committee's deliberations have centred mainly
on the financial provisions of the Scotland Bill, as these have
been the focus of considerable public debate and the source of
greatest variation in views. However, the non-financial provisions
of the Bill are also worthy of attention, and the Committee received
numerous written submissions in response to its call for evidence
from a wide range of stakeholders and individuals. Particular
policy areas where proposals of the Calman Commission for further
devolution have been omitted from, or only partially included
in the Scotland Bill include a role for the Scottish in welfare
benefits policy, marine nature conservation, and in relation to
the Crown Estate. It is particularly to be welcomed that this
Committee has decided to give further consideration to the problems
associated with the operation of the Crown Estate in Scotland
in a separate enquiry given the strength of the evidence received
as part of this present enquiry.
8. While the Scotland Bill proposes the transfer
of a share of income tax, stamp duty land tax and landfill tax
to the Scottish Parliament, along with limited borrowing powers,
taxes such as Corporation Tax, 'green' taxes, fuel duty, North
Sea revenues and excise duties remain reserved. Under the Scotland
Bill proposals, Westminster will continue to be responsible for
raising eighty five per cent of the public money spent in Scotland.
This observation may help put in perspective the extent and limitations
of the Bill's proposals for further devolution, highlight the
relative fiscal responsibilities of the devolved and reserved
institutions, and suggest the relative degree of accountability
appropriate to each.
9. Insofar as eighty five per cent of Scottish revenues
will continue to flow to the UK Government, the Bill preserves
a highly centralised fiscal system. During evidence sessions,
witnesses made the Committee aware of a diverse range of advanced
economies in Europe and elsewhere where less centralised fiscal
arrangements work effectively (in particular see the oral evidence
of Professors Keating and Muscatelli, 8th February
2011).
10. In terms of improving accountability for the
Scottish Budget, the UK Government's Command Paper estimates that
the Scotland Bill's provisions would increase the proportion of
the Scottish Budget funded from devolved taxes to around 35%.
In its written evidence to the Committee, think tank Reform Scotland
took issue with the UK Government's assessment of the proportion
of the Scottish Budget that would be funded from devolved taxes
should the Bill be enacted. Based on GERS figures for 2008-09
(the latest available) Reform Scotland estimated that the taxation
provisions in the Scotland Bill would instead increase the proportion
of the Scottish Budget funded from devolved taxes from 11% to
around 26%, some 9% lower than the 35% cited by the UK Government.
Giving oral evidence on 9th February 2011, Dave Moxham
of the STUC indicated that their own calculations accorded closely
with those of Reform Scotland. It would appear that the figure
of 35% has been drawn directly from the Calman Commission's calculations
which are based on the proposals in their own original Report,
not on the actual proposals brought forward by the Government
in the Scotland Bill which are different in some significant respects.
Given that improving the financial accountability of the devolved
institutions has been cited as a prime objective of the Scotland
Bill, it is regrettable that the UK Government did not undertake
robust, independent, and transparent calculations of the Bill's
impact. There is no small irony in this omission given the emphasis
it places on the importance of financial accountability.
11. The proposals to boost accountability through
a partial devolution of income tax have stimulated extensive debate
and have proved to be among the most controversial aspect of the
Bill's proposals. The Committee heard contrasting views on the
extent to which proposals in the Scotland Bill have the potential
to embed a long-term deflationary bias within the Scottish Budget.
While Fiona Hyslop on behalf of the Scottish Government argued
that had the Scotland Bill's proposed model been implemented in
1999 it would have resulted in a cumulative budget shortfall in
the region of £8 billion, Secretary of State Michael Moore,
using a different baseline, has argued that the shortfall would
be lower, at £700 million. Academic economists from whom
the Committee took evidence expressed a range of views on 'fiscal
drag', from Professors Scott and Hughes-Hallett, who see the deflationary
bias as a major flaw, to Professor Gallagher who does not see
it as a problem due to Scotland's shared tax base with the rest
of the UK and continued dependence on adjustable block grant revenue.
12. In relation to the income tax proposals, the
Scottish Government and others have expressed concern regarding
the over-reliance on a single tax (in this case, one which has
been decreasing as a proportion of public spending over the last
forty years) rather than on a basket of taxes. As income tax has
grown at a slower rate than public spending across OECD countries
in the last four decades, the Scotland Bill potentially introduces
risks to the Scottish Budget. These risks could be partially mitigated
by access to other economic levers, but the existing proposals
of the Scotland Bill offer few such provisions. This problem is
compounded by the fact that revenue from higher rate tax bands
tends to grow faster than revenue from the basic rate band, yet
the Bill devolves half of basic rate income tax revenue, but only
a quarter of higher, and a fifth of top rate tax revenues respectively,
thereby potentially exposing the Scottish Budget to unnecessary
volatility, especially in times of economic downturn. During recession,
lower revenue from income tax would be likely to lead to a decline
in the Scottish Budget at a time when demands on it would be increasing
and there would be merit in increasing public spending to stimulate
the economy.
13. The devolution of Corporation Tax has been considered
in the written and oral evidence of a number of respondents and
witnesses. Although the Calman Commission did not advocate the
devolution of Corporation Tax, proponents in business and academic
communities, and the Scottish Government argue that it is a useful
fiscal lever used successfully in other devolved and federal legislatures
around the world that could and should be at the disposal of Scottish
Ministers. The UK Government would seem to accept the argument
that lower Corporation Tax can be an effective lever to boost
economic growth, yet has rejected the devolution of Corporation
Tax to the Scottish Parliament at this time. Those who argue in
favour of devolving Corporation Tax allude to 'flexibility to
have a competitive environment for key sectors' (Fiona Hyslop,
oral evidence 1st March 2011) and the ability to help
Scottish businesses mitigate some of the structural disadvantages
associated with geographical location and distance from markets.
Critics of the proposal cite the potential 'cannibalisation' of
tax revenue as the key objection (Professor Gallagher). Professor
Keating's oral evidence nuanced this debate by highlighting 'huge
economic constraints on variation . . .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. . . . 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 further them.'
14. This debate takes place in the context of lively
discussions in other devolved territories about the merits of
devolving Corporation Tax, most notably in Northern Ireland. Should
Northern Ireland be granted the power to vary Corporation Tax,
this would have implications for the Scottish economy, something
recognised by the Scotland Bill Committee of the Scottish Parliament
who recommended, 'if a scheme to vary Corporation Tax were to
be available in some of the devolved countries of the UK as a
tool of the UK Government's regional economic policy, it should
be available as an option for a Scottish Government to use also.'
The Scottish Parliament Scotland Bill Committee also recommended
that should there be 'discussions between the Treasury and the
devolved administrations about a framework that could see limited
Corporation Tax variation become part of a regional development
strategy, then it is important that Scotland is at the heart of
any such discussions about a future UK framework'. The UK Government
should reconsider its decision not to include the devolution of
Corporation Tax in the Scotland Bill and instead consider how
such provision could be used by the Scottish Parliament and Government
to strengthen the Scottish economy, create jobs and boost sustainable
growth.
15. Although the Bill is intended to improve the
financial accountability of the Scottish Parliament, there is
a distinct lack of clarity around the process and mechanisms by
which the Scottish block grant will be calculated on implementation
of the Bill. The absence of any firm proposals to date for reducing
the block grant has prevented the Committee from giving proper
scrutiny to this crucial element of the Bill. This omission was
noted by a number of witnesses, who highlighted various options
for consideration, including drawing on the work of the Holtham
Commission in Wales. The Scottish Parliament's Scotland Bill Committee
also expressed concerns about this shortcoming in the Bill's proposals.
If increased accountability is a desirable goal for the Scottish
devolved institutions, it should also be a desirable goal for
the UK Government, which, relatively, has greater responsibilities.
16. The Committee has also heard wildly different
assessments of the costs associated with implementation of the
Scotland Bill, and different assessments of the logistical and
technical challenges it poses. While the UK Government estimates
that costs of implementing the tax proposals will be in the region
of £45 million, others have estimated the costs at over three
times as much. More troubling is the prospect of the Scottish
Parliament being expected to write a 'blank cheque' whereby the
costs, as yet unquantified, will be met through the Scottish Budget
should the Bill proceed in its present form, with no guarantee
that costs will not be significantly higher than the estimated
provisional estimate of £45 million. Sarah Walker of HMRC
told the Committee that HMRC 'have reasonable confidence that
that is a good estimate of the cost, but it will depend.' In the
absence of detailed proposals that can be properly assessed and
scrutinised, there is a need for HMRC to develop its plans in
a fully transparent way that is accountable to both the Scottish
and Westminster Parliaments.
17. The provisions in the Bill devolving Stamp Duty
Land Tax and Landfill Tax are to be welcomed, but it is disappointing
that the proposals of the Calman Commission to devolve Aggregates
Levy and Air Passenger Duty have been dropped. . The Committee
received evidence from Professor McLean pointing out that both
have 'bases that don't move' and that the Aggregates Levy is complementary
to landfill tax. This suggests that it is inconsistent to devolve
one and not the other. Moreover, these taxes already operate in
a differentiated way in Northern Ireland. Notwithstanding the
legal proceedings ongoing in relation to the Aggregates Levy,
this should be devolved in line with the Calman Proposals, a move
that would not only strengthen financial accountability in Scotland,
but also improve environmental accountability.
18. The Committee has also received evidence on and
considered the capital and revenue borrowing provisions contained
in the Bill, which would allow annual borrowing of up to £200
million in any one year, with a maximum limit of £500 million
to finance current expenditure where there are differences between
the forecasts and the actualities of Scottish tax revenue under
the Bill's income tax proposals. Most of the expert witnesses
from whom we took evidence identified these limits as too low
in the context of the introduction of the proposed new income
tax raising powers, and the attendant increased volatility these
are likely to bring. The Scottish Parliament's Scotland Bill Committee
also examined this issue, concluding that the powers are 'inadequate'
as proposed, recommending that the limit on borrowing be 'set
by reference to the capacity of the Scottish Government prudently
to finance it from devolved tax revenue.' That Committee also
invited 'the UK Government to consider bringing forward these
borrowing powers' while recognising the UK Government's wish to
constrain borrowing in the present economic climate. The Scottish
Parliament's Scotland Bill Committee also considered the issue
of bonds, concluding that the ability of the Scottish Government
to access the bond markets 'is not a possibility that should be
ruled out in statute' and recommending 'that the Bill be amended
to permit this, subject, if the UK Government thinks it necessary,
to the agreement from HM Treasury to conditions for bond issues'.
The Bill should therefore be amended in accordance with these
eminently sensible recommendations which will strengthen the proposals
in the Bill and enable more effective governance in Scotland.
Motion made, and Question proposed, That the Chair's
draft Report be read a second time, paragraph by paragraph. -
(The Chair.)
Amendment proposed, to leave out "Chair's
draft Report" and insert "draft Report proposed by Dr
Eilidh Whiteford". - (Dr Eilidh Whiteford)
Question put, That the Amendment be made.
The Committee divided.
Ayes, 1 Noes
6
Dr Eilidh Whiteford Fiona
Bruce
Cathy Jamieson
David Mowat
Fiona O'Donnell
Mr Alan Reid
Lindsay Roy
Main Question put and agreed to.
Ordered, That the draft
Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 164 read and agreed to.
Summary agreed to.
Resolved, That the Report
be the Fourth Report of the Committee to the House.
Ordered, That the Chair
make the Report to the House.
Written evidence was ordered to be reported to the
House for printing with the Report, together with written evidence
reported and ordered to be published on 2 and 8 February.
[Adjourned to a day and time to be fixed by the Chair.
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