Written evidence submitted by Reform Scotland
1. This written submission summarises Reform
Scotland's response to the Scotland Bill. We would be happy to
provide further details on any aspects of this evidence. We would
also be happy to give evidence to the Committee in person.
2. Reform Scotland is an independent, non-party
think tank that aims to set out a better way to deliver increased
economic prosperity and more effective public services based on
the traditional Scottish principles of limited government, diversity
and personal responsibility. Reform Scotland has published
two reports on this issue "Fiscal Powers" in November
2008 and an update in October 2009 (available on our website www.reformscotland.com).
This evidence focuses on two of the four questions that are included
in the Committee's Remit for this Inquiry.
EXECUTIVE SUMMARY
OF EVIDENCE
(i) Scotland will act as an economic drag
on the UK without the powers to grow the economy but can be an
economic driver. The long-term rate of growth in the Scottish
economy is 1.8%, lower than for the UK as a whole. Over the next
few years, in common with the rest of the UK, Scotland (which
has an economy that is more dependent on the public sector than
the UK average) is facing significant cuts to public services.
Under the status quo, the Scottish economy is facing years of
no or very low growth.
(ii) The Scotland Bill represents an opportunity
to create a framework for the devolution of fiscal powers to Scotland.
By enhancing the enabling powers in the Bill, provision could
be made for the future devolution of fiscal powers as and when
there was a political majority to do so and as and when the administrative
preparations for the transfers of taxes were made.
(iii) Increasing the fiscal powers of the
Scottish Parliament, beyond those proposed in the Scotland Bill,
could deliver improved economic performance in Scotland. The
fiscal devolution model proposed by Reform Scotland would provide
the Scottish Parliament with the financial accountability and
the incentives to improve economic performance and deliver better
public services.
(iv) The fiscal powers set out in the Scotland
Bill will increase the volatility of the Scottish Budget.
The proposals make the Scottish Budget overly reliant on income
tax which is volatile over the economic cycle and as a result
of frequent policy changes.
(v) The recognition by the Calman Commission
of the need to increase financial accountability is welcome but
the Scotland Bill does not propose the significant changes required
to deliver that accountability.
(vi) The Scotland Bill is an opportunity for
the Scottish economy but one that will be missed if the proposals
are not substantially enhanced.
What are the fiscal and financial implications
of the provisions in the Bill for Scotland?
Fiscal and Financial Proposals in the Bill
3. The measures in the Scotland Bill would increase
the proportion of the Scottish Budget raised in Scotland. Its
main fiscal and financial measures are:
— The
UK and Scottish Parliaments would share the yield of income tax
with the power to vary the standard rate of income tax in Scotland
by 3p either way replaced by a new Scottish rate of income tax
applying to the basic and higher rates. To bring this about the
basic and higher rates of income tax in Scotland would be reduced
by 10p in the pound and the block grant reduced accordingly, allowing
the Scottish Parliament to set rates for the Scottish income tax
although the structure of the income tax system, including bands,
allowances and thresholds would still be decided at Westminster.
— Stamp
Duty Land Tax and Landfill Tax would be devolved to the Scottish
Parliament with a corresponding reduction in the block grant.
— The
block grant, governed by the Barnett Formula, from Westminster
would continue to make up the remainder of the Scottish Budget.
— The
Scottish Government would be given new borrowing powers for capital
and revenue spending.
4. The chart on the following page shows the
source of the Scottish Budget before and after the Scotland Bill.
These charts show that the changes proposed are modest in the
context of the scale of the Scottish Budget. Based on the latest
figures available (Government Expenditure and Revenue in Scotland,
2008-09), the taxation measures proposed by the Scotland Bill
would increase the proportion of the Scottish Budget funded from
devolved taxes from 11% to 26%.
SOURCE OF SCOTTISH BUDGET BEFORE/AFTER SCOTLAND
BILL (2008-09 GERS), £BN
Financial Accountability
5. The Scotland Bill acknowledges the weaknesses
inherent in the current financial arrangements and accepts that
the present system, based on a block grant determined largely
by application of the Barnett Formula, must change. It is unbalanced
because although the Scottish Government has control over 60%
of government expenditure in Scotland, it has very limited responsibility
for raising the revenue required to meet those spending commitments
other than the local taxes—council tax and business rates
(which, together, account for around 11% of the Scottish Budget).
6. Reform Scotland has argued that the fundamental
defect of the current devolution settlement is the Scottish Parliament's
lack of accountability and responsibility for the way in which
it raises the money that it spends. The vast bulk of the Scottish
budget comes in the form of a block grant from Westminster which:
— provides
no financial incentive to introduce policies which encourage economic
growth and deliver value for money; and
— denies
the Scottish Government and Parliament the fiscal tools which
they could use to increase economic growth and help sustain the
economic recovery.
7. The Scotland Bill recognises the shortcomings
of the current financial arrangements and the benefits of greater
financial accountability and responsibility. However, having identified
the problem with lack of financial accountability, the Scotland
Bill does not provide an adequate solution. It is not reasonable
to argue that increasing the proportion of the Scottish Budget
that is raised from devolved taxes from 11% to 26% delivers financial
accountability.
8. However, even if the changes proposed by the
Scotland Bill were to encourage politicians to increase the focus
of political debate on improving economic performance, the Bill
does not provide the tools that would allow it to introduce fiscal
policies to improve the economy. That would require a broader
base of taxes to be devolved, including corporation tax and other
business taxes. It is interesting to note the strong lobbying
from Northern Ireland to devolve corporation tax to the province
so that policies to improve the competitiveness of the economy
could be introduced.
Income Tax Volatility
9. There are many examples of income taxes being
shared between central or federal and regional or state governments.
However, due to the small number of taxes that are to be devolved
by the Scotland Bill (all of the other taxes make very small contributions
to overall tax receipts) the income tax proposal would make the
Scottish Budget more reliant on income tax revenues than the UK
Budget. Income taxes are volatile across the economic cycle and
as a result of frequent changes in policy (the most recent example
is the UK Government decision to increase income tax allowances).
10. One of the weaknesses of the proposed framework
is that revenues associated with the Scottish rate of income tax
will be based on tax receipt forecasts, which are notoriously
unreliable. Variation from the forecasts would be balanced in
future years. During the recent downturn it is likely that the
Treasury would have over-estimated income tax receipts in advance
of the recession, which would have meant that in the second year
of the downturn, the Scottish Budget would have been disproportionately
cut, just at the time that most developed countries were increasing
spending to create a fiscal stimulus for recovery. The Scottish
Government would have had no option but to cut spending at a time
where an increase would have been more appropriate.
Borrowing Powers
11. Reform Scotland welcomes the borrowing powers
in the Scotland Bill, which go beyond those advocated by the Calman
Commission. However, the proposed borrowing powers are modest
in the context of the scale of tax receipts and the size of the
Scottish Budget and would not be sufficient to allow for fiscal
policy in Scotland to vary from the UK's overall fiscal framework.
What further provisions could/should be included
in the Bill in order to further amend and develop the Scotland
Act 1998?
12. Reform Scotland would welcome further provisions
for fiscal powers for the Scottish Parliament. This could be done
by enhancing the enabling powers in the Bill or adding additional
fiscal powers.
Enabling Powers
13. Devolution has been described as a process
rather than an event and there would be merit in recognising this
political reality in the Scotland Bill.
14. In particular, Reform Scotland welcomes the
power to create new devolved taxes. This enabling power presents
an opportunity to deliver the kind of change advocated by Reform
Scotland. There is merit in widening the definition of the devolved
taxes that could be created and also to allow general powers to
remove the application of certain taxes to Scotland (similar to
the specific powers proposed over Stamp Duty Land Tax).
15. Such enabling powers would allow the future
devolution of additional fiscal powers to Scotland as and when
there was a political majority to do so and as and when the administrative
preparations for the transfers of taxes were made.
Additional Fiscal Powers
16. Significant changes are required to make
a difference. The long-term rate of growth in the Scottish economy
is 1.8%, lower than for the UK as a whole. Over the next few years,
in common with the rest of the UK, Scotland (which has an economy
that is more dependent on the public sector than the UK average)
is facing significant cuts to public services. Under the status
quo, the Scottish economy is facing years of no or very low growth.
17. The issue of the financial responsibility
of the Scottish Parliament needs to be resolved as a priority.
The Scottish Parliament should be responsible for raising the
money that it spends. There is a range of alternative options
available, including fiscal devolution and fiscal autonomy. The
graph below shows the taxes raised by the different levels of
government at the minute, under the Scotland Bill proposal, under
Reform Scotland's proposals for fiscal devolution and under fiscal
autonomy.
THE OPTIONS: TAXES RAISED BY UK, SCOTTISH
& LOCAL GOVERNMENT (2008-09 GERS), £BN
18. Reform Scotland's proposals go further and
set out a workable scheme to enable the Scottish Government to
raise the money it spends while remaining within the United Kingdom.
Our proposals (set out in detail in our Fiscal Powers reports
at www.reformscotland.com) would give Westminster control over
taxes which would enable it to raise its 40% share (around £22
billion in 2008-09) of government spending in Scotland. Likewise,
Holyrood would have control over taxes which would raise the 60%
(around £33 billion in 2008-09) of public spending in Scotland
for which it is responsible and would also have borrowing powers.
19. This would create a link in Scotland between
economic performance and the revenues accruing to the Scottish
Government and would change the whole nature of the debate in
Scotland for the better. Further, it would give the Scottish Government
the fiscal tools to improve the growth rate of the Scottish economy.
20. Reform Scotland's view is that fiscal powers
do not, in themselves, improve economic performance. However,
increasing the fiscal powers of the Scottish Parliament would:
— provide
the tools that could be used to improve economic performance;
and
— deliver
the financial accountability required to provide the incentive
to do so.
21. The Scotland Bill does not provide sufficient
financial powers to provide the incentive to focus on economic
performance nor does it provide the tools required.
January 2011
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