The Scotland Bill

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 per cent 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 per cent 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 per cent share (around £22 billion in 2008/09) of government spending in Scotland. Likewise, Holyrood would have control over taxes which would raise the 60 per cent (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;

· 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