The Scotland Bill

Written evidence submitted by the Scottish Council for Development and Industry (SCDI)

Introduction

1. SCDI is an independent membership network that strengthens Scotland’s competitiveness by influencing Government policies to encourage sustainable economic prosperity. SCDI’s membership includes businesses, trades unions, local authorities, educational institutions, the voluntary sector and faith groups.

2. SCDI welcomes the opportunity to contribute to the Scottish Affairs Committee’s inquiry on the Scotland Bill, which will have a considerable impact on the operations of the Scottish Parliament, the devolution settlement and future direction of Scotland.

Executive Summary

3. SCDI’s submission to the Scottish Affairs Committee’s inquiry highlights the following areas:

· SCDI’s history of engagement on the future of the devolution settlement (paragraph 5)

· The priority economic issues for the Scottish Parliament (paragraph 6)

· SCDI’s budget principles (paragraph 8)

· The requirement for economic modelling of the proposes taxation system (paragraph 12)

· The creation of a Scottish Office for Budgetary Responsibility (paragraph 14)

· Sufficient borrowing limits needed to manage the capital investment programme (paragraph 15)

· Concerns raised at the High Level Implementation Group (paragraph 16)

· Possibility of underestimating the number of tax-payers in Scotland and ease of transferring country of taxation (paragraph 19)

· Proposals for further changes to the Parliament’s powers (paragraphs 23-27)

Background

4. In SCDI’s Blueprint for Scotland [1] , published in June 2010, we call for the strengthening of the Scottish Parliament’s responsibility for tax and spending decisions which promote sustainable economic growth. Following the announcement from the coalition Government that it would legislate on the Calman Commission’s proposals, SCDI has continued to be involved in the debate, holding discussion forums for our members and participating in the Scotland Office’s High Level Implementation Group for the Scotland Bill.

5. SCDI’s contribution to the debate reflects recommendations which were agreed by members after discussion of the report Scotland’s Economy: The Fiscal Debate [2] which was commissioned by SCDI and published in 2007. These included the following:

· The current financial arrangements do not provide sufficient incentive or discipline on the Scottish Parliament regarding spending decisions, due to its lack of responsibility for raising substantial revenue.

· The current arrangements, as represented by the ‘Barnett’ process, are unsustainable in the long term, and an evidence base must be built to ensure good quality information is ready and available to feed into consideration of any new system which may be established.

· Any new funding mechanism must provide benefit to Scotland.

· The Scottish Parliament should commission an independent, comprehensive review of Scotland’s fiscal arrangements, which should aim to identify a small number of key fiscal policy measures that would promote sustainable economic growth in Scotland and address some of the weaknesses in accountability and transparency present in the existing arrangements:

o It should be conducted by a panel of independent academics, including members from outside the UK who have not previously engaged in the Scottish debate.

o It should consider Scotland as a discrete economy within the larger UK and EU economies, but should not assume either independence or continued membership of the UK. Instead, where Scotland’s political status is a key factor in assessing a particular fiscal measure, the options with and without independence should be set out.

o The review should also pay close attention to the implications of recent European Commission and ECJ decisions on the legality of different proposals for fiscal autonomy within Member States.

· A new comprehensive needs assessment for the regions of the UK, identifying appropriate English regions for comparison with the territories of Scotland, Wales and Northern Ireland is required.

· There is mixed evidence that devolving greater powers to sub-national governments to raise and spend their own public funds is in itself enough to promote economic growth.

· The majority of SCDI members that participated in consultation discussions regarding the fiscal debate were not convinced by the arguments either for the status quo or for different models of either fiscal autonomy or further devolution. The key problem is the lack of independent evidence which might help inform the decision. There is a strong case for more independent research into the pros and cons for small countries like Scotland of adopting different fiscal powers.

6. SCDI has a broad membership which has no single position on the Scotland Bill or wider fiscal proposals. However, members believe that the economy and Scotland’s global competitiveness should be central to the fiscal debate and the possible impact of the Scotland Bill on these issues should be uppermost in the Committee’s deliberations. However, feedback from SCDI members indicates that, in their view, the highest priority economic issues for the Scottish Parliament continue to be:

· Improving the skills of the workforce and increasing productivity

· Encouraging greater private sector research and development

· Ensuring an effective contribution from the public sector in support of growth

· Improving transport and IT infrastructure to help attract and stimulate growth

· Attracting inward investment and increasing Scotland’s exports

Greater financial responsibility leading to economic growth

7. SCDI members have expressed the view that greater financial responsibility for the Scottish Parliament should be considered within the context of policies for sustainable increases in Scotland’s comparatively sluggish long-term economic growth rate. Information gathered by SCDI does not show a clear and consistent link between taxation and expenditure decisions following devolution and this over-arching economic priority. The interest of SCDI’s members is principally in whether new financial powers and accountability will further encourage and enable increasing sustainable economic growth via a competitive and stable environment for business growth and more closely aligning Scotland’s economic performance with the Scottish Parliament’s revenues.

8. The outlook for public spending in Scotland is the most challenging since devolution. SCDI has recently published six Budget principles [3] and urged that these are applied to current and future decision-making by the Scottish Government and Parliament:

1. Increasing sustainable economic growth is now an even higher priority for the Scottish Government and public services

2. Scottish budgets should ring-fence priority outcomes, rather than departmental budgets

3. The core functions of public sector bodies must be identified and resourced. This represents an opportunity to develop new models and partnerships for public service delivery.

4. Public spending should be subject to a ‘Scottish Exports Test’

5. The capital investment programme is a high priority, but business cases should be re-evaluated rapidly to ensure that projects are prioritised with current economic opportunities

6. Scotland’s public spending should be reviewed to ensure inter-generational equity and funding to create new education, training and job opportunities for young people

9. A number of questions arising from these principles should be considered by the Scottish Affairs Committee when reviewing the Scotland Bill:

· Do the proposals encourage and better enable the Scottish Government and Parliament to prioritise increasing sustainable economic growth?

· Will the proposals safeguard and/ or create a more competitive economy, which supports higher business investment and net exports?

· Will the Scottish Parliament’s revenues and grant allow for resourcing of priority outcomes, and long-term planning in and reforms to public service delivery?

· Will they support a higher level of investment in enhancing Scotland’s infrastructural assets?

10. In relation to the Second Principle, SCDI has also suggested that, in view of the rising cost-pressures on public services, demographic changes and increasing public expectations of services, a national debate should be encouraged on the public priority outcomes and on the overall level and form of taxes which could deliver them.

11. SCDI would be very concerned if future changes in the rate of income tax in Scotland were to have the effect of discouraging entrepreneurs or companies from opening, retaining or expanding a presence in Scotland or make it harder to retain and attract people. We would, of course, discuss these issues with future Scottish administrations.

Performance of the Proposed System

12. The original Calman Commission proposals, on which the Scotland Bill is based, were developed prior to the recent global economic downturn. SCDI seeks reassurance, through economic modelling, including Scottish and UK Government facilitation for independent economic modelling, that the proposed taxation system would support the Scottish economy through a period of economic volatility and/ or fiscal contraction.

13. SCDI members strongly believe there is a need for more evidence of how the Scotland Bill would impact on the economy and public spending, particularly in the event of a future economic downturn, where stability of public spending is essential.

14. In an operating environment of greater fiscal powers, it will be of increasing importance for Scotland to have greater independent analysis of public spending. SCDI proposes the establishment of a Scottish Office for Budgetary Responsibility. A Scottish OBR 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.

15. SCDI broadly supports increased borrowing powers for the Scottish Parliament. As a result of the UK Comprehensive Spending Review, capital expenditure is due to fall in real terms by 35.9% from 2010-11 to 2014-15. SCDI is deeply concerned about the impact on plans to improve Scotland’s infrastructure, particularly its connectivity, and the vital construction sector, especially when the need for a new Forth Crossing and Southern General Hospital will account for the vast majority of its capital budget. SCDI believes that borrowing limits must 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.

Implementation

16. Despite being re-assured through our participation in the High Level Implementation group, we would like the Scottish Affairs Committee to be aware of the concerns raised there throughout the deliberation process on the Scotland Bill. These concerns mainly relate to the definition of a Scottish tax-payer, and the additional burden to companies, individuals and the Scottish Government through the potential need to establish a Scottish Treasury function.

17. In particular, SCDI is keen to ensure that the Scotland Bill is implemented as smoothly as possible. This requires the publication and promotion of a full timetable of implementation, including achievable deadlines for Scottish businesses to adapt their systems and processes and an outline of all the changes large and small businesses and individuals on Self Assessment are required to make.

18. To minimise any extra burden on employers, the impact must be kept under constant review as the changes are implemented, and SCDI will offer regular input to HMRC from members. The Scottish and Westminster Governments should work closely together as the Scotland Bill is implemented and provide sufficient resource to HMRC and business advice agencies to ensure a seamless transition.

19. We seek further assurance that the rules for designation as a Scottish tax-payer do not underestimate the number of tax-payers in Scotland, and are sufficiently robust to ensure individuals are not easily able to switch their home for income tax purposes should the rate of income tax in Scotland vary from the rest of the UK. This issue has received considerable attention on the High Level Implementation Committee and we continue to seek assurances that he Scottish budget would not be adversely impacted by the Scotland Bill.

20. The designation of individuals as a Scottish/Rest of UK tax-payer should be a matter for HMRC and The Government, not a matter for individuals or employers.

21. Tax tables and software used by many organisations has in many cases been updated to accommodate the Scottish Variable Rate when the Scottish Parliament was formed. It is important that the new Scottish Rate is compatible with these systems to avoid the need for further investment from employers. Many small businesses and sole traders do not have specialist software to calculate PAYE levels. The new system should not force the many organisations in this position to face increased accountancy costs for payroll management.

22. Other anomalies raised at the High Level Implementation Group include the issues of mobile workers, foreign workers living and working in Scotland, those moving in or out of Scotland mid-year and those gaining income from land or property in Scotland but living elsewhere in the UK. These are all areas where additional work is required to make certain Scotland does not lose out on its share of the tax take, whilst ensuring that the regulations do not prove a disincentive for people to work in Scotland.

Further changes to the Scottish Parliament’s Powers

23. The Calman Commission proposed that air passenger duty should be devolved to the Scottish Parliament. SCDI understands that this is on-hold due to the Coalition Government’s plans to replace air passenger duty with an aviation tax. Air connectivity is especially important to the Scottish economy and our ambitions to grow our exports and tourism industry. It also provides lifeline services in the Highlands and Islands. If powers in this area are devolved to the Scottish Parliament, the competitiveness of Scotland in sustaining and growing its air route network must be a priority, and the existing exemptions for air services in the Highlands and Islands should be maintained and, potentially, extended.

24. Scotland has a different labour market from the rest of the UK and a demographic outlook which means our working age population needs to expand to enable growth in key sectors of the Scottish economy. However, as analysis by the Migration Advisory Committee has shown, it has attracted a lower than average share of highly skilled and skilled migrants to the UK. SCDI believes that should support the UK Government’s policy of enabling more balanced regional economic growth. Most of the migrant workers coming to Scotland under Tier 2 do so after meeting the resident labour market test and Scotland has not experienced the same impacts of migration which have been felt in parts of south-east England. Overall, highly-skilled and skilled migrant workers in Scotland have made a positive contribution to the Scottish economy and its local economies, local taxation, and the delivery of public services in communities. SCDI recommends that the UK Government should take a flexible approach in Scotland and introduce a regional variation which attracts skilled migrants to work in the Scottish economy. We strongly support the call for the introduction of a Scotland Skilled Workers Flexibility so it is provided with a distinct annual allowance in relation to Tier 2, at a level which is responsive to Scotland’s economic needs. We also consider that a lower qualifying salary level for Intra-Company Transfers would be appropriate for Scotland.

25. SCDI also calls for flexibility for Scotland’s universities and colleges. These institutions are a cornerstone of Scotland’s international reputation and major export earners. Scottish institutions should have the opportunity to succeed in the highly competitive global market for higher education. International students contribute nearly £188m in fees and £231m in spending to the Scottish economy each year, providing diversity within the education system and promoting Scotland’s global reputation for high-quality education. Each year, a number of international graduates choose to stay in Scotland, supporting our population and delivering new skills essential to the success of the Scottish economy. Scotland’s different economic and demographic circumstances require a different approach to immigration regulations.

26. In SCDI’s Blueprint for Scotland, we called for a more localised approach to support people claiming out-of-work benefits into work and employment. This included a call for local devolution of responsibility for delivery of New Deal for the disabled, and greater cross-parliament work to develop benefit and student support mechanisms that work together to take full account of the differing student support systems in use across the UK.

27. With greater fiscal powers, Scotland will require independent analysis of public spending. As mentioned previously, SCDI proposes the establishment of a Scottish Office for Budgetary Responsibility to 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.

January 2011