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Lord Mackay of Ardbrecknish: Normally, I do not speak to the Question whether a clause shall stand part

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of a Bill. However, we have had a divided Committee stage on this Bill in that part of the clause was discussed before the Recess and we are discussing the rest today. I should like to take a few minutes to ask the Government whether they have given any reconsideration to the proposal which I made to resolve some of the difficulties in Clause 69. If they had done so, they would not only have resolved the difficulties of Clause 69 but would also have made Clause 72 totally unnecessary. As Clause 72 is impossible to read and understand, I should have thought that that would be a good thing.

It all started when the Government decided that the Scottish parliament should have the power to raise an extra 3p on the basic rate of income tax. That was quickly translated to £450 million. As I said earlier, the question that then arose was: what happens if, because of changes, the 3p does not raise £450 million? The Government said, "Ah well"--without any thought at all, I suspect; I was going to say, "without a great deal of thought", but I have concluded that it was without any thought at all!--"if that happens, the House of Commons will amend the tax-raising powers to ensure the £450 million"--in some magical way.

The next question was obvious, except to the Government: how will you do that? Where will the new tax come from? We have been around that course this afternoon. We have had a bit of an answer. It is said that it will come from income tax, but we have no details. Nobody knows. It is a simple question so I should have thought that the Government ought to have an answer before walking down that road.

There has been a new twist. The sum is no longer £450 million, but £420 million, so the poor old Scottish parliament has lost £30 million before it is even up and running. We are talking about 3p or £420 million, but £420 million is the top line.

My amendment on the last Committee day before the Recess would simply have removed the "either/or", and would have stated that, up to £420 million, the Scottish parliament can raise or lower the amount that it takes and can do so by amending the basic rate. That would have made this part of the Bill much simpler and easier to understand. Clauses 69 and 72 would not be needed in the Bill at all. It seems to me that that would be a sensible idea. I wonder whether the Minister has had any thoughts on the matter over the Recess and whether he has come to a conclusion that that might be a better way to approach the issue than the way he has chosen in the Bill.

Lord Lang of Monkton: Like my noble friend Lord Mackay, I should like to address a few remarks to the debate on whether this clause should stand part of the Bill. It is a very important clause, giving as it does power to the Scottish parliament to fix the basic rate of tax for Scottish taxpayers. During the Second Reading debate I described the tax-raising powers as "pitiful and peripheral". I still hold to that view; indeed, at that stage I thought that they would raise £450 million, but we are now told that they will only raise £420 million. Once one deducts from that the cost of running the Scottish parliament, the cost of collection of the tax and other

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overheads, it is easily seen that the revenue will be very small in proportion to the Scottish Office budget--something like 3 per cent. of the Scottish Office budget--or less than 2 per cent. of the total resources spent by the Government in Scotland. You cannot do very much with that.

There is a danger that this clause--the provision of tax-raising powers in the Bill--will lead to the dangerous misconception that a Scottish parliament can achieve something worth while with such resources. So, in a sense, we get the worst of all worlds because the Bill concedes the principle of tax-raising powers to this parliament but does not grant it sufficient power to raise a worthwhile amount of tax if it decides that that is necessary. Power without responsibility has been described for many years as the prerogative of the oldest profession, but responsibility without power, or the perception of responsibility without the reality of power, is perhaps an even worse situation.

Having conceded the principle of tax-raising powers, why do the Government not go the whole hog? Why do they seek to limit the level of taxation that can be raised under the Bill? Of course, that is a dangerous game but this is part of a very dangerous project; indeed, the whole establishment of this parliament carries with it great dangers. I shall quote the words of the noble Lord, Lord Sewel, on tax-raising powers in the debate in this Chamber on 23rd July. At that time my noble friend Lord Mackay of Ardbrecknish was seeking to protect the interests of Scottish businesses from the possible depredations of a Scottish parliament or of a local government given powers to vary business rates. In reply, the noble Lord, Lord Sewel, said:

    "His approach seems to be based upon the perverse idea that almost as soon as a Scottish parliament is elected it will deliberately implement policies which would have as their primary objective the inflicting of damage on the Scottish economy ... I am prepared to trust them and if they get it wrong they will simply suffer the judgment of the electorate. It is as simple and straightforward as that".--[Official Report, 23/7/98; col. 1051.]
If it is as simple and as straightforward as that, why are the Government not prepared to trust the people when it comes to income tax? After all, businesses have no vote but the people do. The answer is that essentially the power that has been granted is not a power of any real substance; it is essentially cosmetic, a piece of pretence, and, as such, is no basis for constitutional change.

The provision of very limited tax-raising powers is dangerous for two further reasons. First, the distribution of resources from the Treasury through the Scottish block will come under attack; indeed, it is already happening. The fact that spending under almost all headings in Scotland is some 20 per cent. higher per head than it is in England is becoming increasingly well known and resented in other parts of the United Kingdom, the more so given the closer alignment of the Scottish economy with that of England which has been achieved in recent years. Why, the English ask, should Scotland with its own parliament continue to get more? They have tax-raising powers, let them use them. Scotland would no longer have power in the Cabinet, in the Government, in Whitehall and at Westminster to resist that.

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The second danger that I see is that revenues per head in Scotland are lower than in the United Kingdom. Therefore, to raise the same revenue from within Scotland requires more per capita in tax than would be required from the UK as a whole. When this debate was taking place in another place in 1988, I calculated that a 10 per cent. increase in spending by the Scottish Office would require a 19 per cent. increase in income tax if levied only in Scotland.

Tax revenues in almost all cases are lower per capita in Scotland than in the rest of the UK. I published a Government paper in 1992 entitled, Government Expenditure and Revenues in Scotland which indicated that revenue from income tax, from national insurance and other contributions--for example, from VAT, from local authority revenues--were all lower per head in Scotland than in England. That was only marginally offset by the counter balancing lower benefits to be derived from tax reliefs and allowances. Only taxation revenue from tobacco and from drink was higher in Scotland. The Scottish Health Education Board has been working hard to put that right.

The debate is often clouded by references to North Sea oil, especially by the Scottish National Party. It points to the vast revenues which it believes belong in Scotland. That is a debate in itself which could take a long time to resolve and one which might have been valid when such revenues were over £12 billion as they were in the mid-1980s, but rather less so in the early 1990s when they fell to £1 billion and now when they are not a great deal higher than that. The fact remains that there is still a substantial structural budget deficit in a separate Scottish economy. Therefore, to start giving tax-raising powers to a Scottish parliament, and running the risk of a gradual transfer of resources from the UK Treasury to a Scottish tax base, is a dangerous trend to set loose. The Scottish parliament has a higher per capita spend to maintain--or, indeed, to increase, if that is what it wishes--and it will have to do so increasingly from a lower tax base.

Another point about these tax-raising powers which concerns me is the regressive nature of the proposals. Over the years the previous government sought to reduce the basic rate of income tax and to raise allowances. They brought in a lower 20 pence rate. Of course, we are talking about tax increases and not tax reductions. Although the Government have adhered to the claim that the powers are essentially tax-varying powers, Clause 74 makes it quite clear that the Scottish people will not have their tax bills reduced under the provisions of the Bill.

How would those tax increases be applied in relation to allowances and social security benefits? Clause 99 covers to some extent the answer on social security benefits, and no doubt we shall have the opportunity to debate that issue. However, will Scottish income tax--and I ask the Minister this question out of ignorance--simply be bolted on to existing tax rates, or will the allowance system and the grading of tax rates be rephased to take account of the quite substantially changed circumstances which would arise, particularly in the case of lower income earners? I understand that it is not to be applied to the 20p rate but only to the

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basic rate. That offers some relief. But even at the basic rate of only 23p in the pound, the application of a 3p in the pound tax increase would raise the tax bill for a basic rate taxpayer by 12.5 per cent., whereas to a 40p in the pound taxpayer, the increase would only be 7.5 per cent. But, for a 20p taxpayer, whose income rises to bring him into the basic tax rate net, his tax bill would rise by 30 per cent. as it went up from 20p to 26p in the pound. That must have very clear and unsatisfactory implications for work incentives.

There are many other issues relating to the imposition of tax-raising powers through this Bill and under this clause--for example, the economic burden, the disincentive to industry to locate in Scotland, the disincentive to invest, the burdens on business, the cross-border anomalies and the other points that my noble friends raised in earlier debates. But, in essence, I submit that the power to raise taxes as worded in this clause, is essentially destabilising, It is dangerous because it pretends to do more than it actually allows and because it carries the hidden threat of other taxes, as my noble friends have said this afternoon. It also puts a disproportionately higher burden upon Scottish taxpayers, especially the less well off, in order to buy less than a comparable UK tax rate would do. It would, and will, undoubtedly be a focus for future conflict and tension and will be exploited by those who see a Scottish parliament as only half the story. I believe the measure will do no good, but if we have to have it I believe that we should release the Scottish parliament from the shackles imposed within the terms of this clause and let those who would raise the tax face the consequences more clearly, more honestly and more directly.

5 p.m.

Lord Monro of Langholm: I follow my noble friend Lord Lang and refer to one or two issues that I mentioned on Second Reading relative to the principle of the tax we are discussing. The nearer one is situated to the Border, the greater the repercussions that appear to result from this measure. That is why Dumfries and Galloway voted against the tax raising powers. The figures were 51.2 per cent. against and 48.8 per cent. in favour. The neighbouring inhabitants of the Scottish Borders voted similarly, with 50.7 per cent. in favour of tax raising powers and 49.3 per cent. against. The majority was only 787. The people who live in these areas are aware of the taxation problem as regards cross-Border issues. Later we shall discuss the complications that arise as regards where one lives, where one works and where one pays tax. I should have thought that any company accountant drawing up weekly or monthly payslips would go round the bend trying to find out where his employees have been living and working. This is an important matter because employers may have to pay higher wages to employees in Scotland than to employees of the same rank just the other side of the Border in England in order to make their net pay the same. That is the least one can expect to happen.

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One is aware that industry is considering this matter. I know of a company in my former constituency which is considering whether to locate a new factory in England or in Scotland. This dilemma has arisen because of the possibility of increased taxation in Scotland. We need to think hard about whether we are going down the right route. There is no doubt that anywhere with lower taxation becomes a honey-pot in terms of people moving to that area. I know from my occasional visits to the eastern seaboard of the United States that many people from New Jersey, Philadelphia and Maryland shop in Delaware where there is no sales tax. They perceive they are getting a bargain.

We do not want people to perceive Scotland as a country of high taxation with the tartan tax that we have discussed, because that will have an adverse effect not only in terms of attracting industry but also on those who live in Scotland who will have to pay higher tax for the somewhat doubtful privilege of receiving better services. However, that remains to be seen. We view with horror the Minister's words when he said earlier that it looks more than likely that local taxation will be increased to meet the aspirations of the Scottish parliament. I am sure that will happen. I can envisage that the council tax will be increased substantially with the alleged intention of improving services because people realise that they will not receive the money from the block grant.

I agree with my noble friend Lord Campbell of Croy that if the Treasury were to put a ceiling on local government expenditure all hell would break loose in Scotland as people would consider they were being governed by England yet again. That would negate the whole objective of the Government's wish to devolve a parliament to Scotland. I urge the Minister to look carefully at what the Government propose. The proposed measure could have many adverse repercussions. When one considers Clause 71 and the ins and outs of where one lives and where one will pay tax it is clear that many people will experience immense heartbreak because they will not have understood what hit them.

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