Experts concerned over Calman proposals

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A number of academics and economists have set out their concerns about the fiscal reforms proposed by the Calman Commission.

In their responses to a Scottish Government consultation, Professors Andrew Hughes-Hallett, Sheila Dow and Rod Cross and economists Dr Jim and Margaret Cuthbert and Marc Coleman….

A number of academics and economists have set out their concerns about the fiscal reforms proposed by the Calman Commission.

In their responses to a Scottish Government consultation, Professors Andrew Hughes-Hallett, Sheila Dow and Rod Cross and economists Dr Jim and Margaret Cuthbert and Marc Coleman have made it clear that they consider the Calman Commission’s recommendations on tax varying and borrowing powers to be ‘dangerously flawed’.

Finance Secretary John Swinney said:

“We made our views on the Calman Commission’s financial proposals clear in our response to the Commission’s report last year. The detailed responses we have received from respected experts in this area have reinforced my view that the Calman Commission’s financial proposals would be damaging to the Scottish economy.

“This view has been confirmed recently by the new UK Government’s plan to increase income tax personal allowances, which would result in a significant cut in the revenue ‘assigned’ to Scotland if we were operating under the Calman proposals.

“There is now wide agreement that Scotland needs more financial responsibility than proposed by the Calman Commission. On May 27, the Scottish Parliament rejected the full package of Commission’s recommendations, acknowledged the limitations of its financial proposals, and recognised the need to consider greater fiscal powers, including full fiscal responsibility.

“This week a Campaign for Fiscal Responsibility was launched by leading figures from business, finance and academia with support from trade union figures and the voluntary sector in Scotland.

“A serious debate is therefore going on in Scotland about extending the financial responsibilities of the Scottish Government and Parliament. I am encouraged by the new UK Government’s constructive approach to that debate. I believe we can continue to work together to give the Scottish Parliament the powers it needs to create a public financial framework tailored to Scotland’s interests and aimed at stimulating growth in the Scottish economy.”

Mr Swinney added:

“We received a good number of responses to our consultation on the technical details of the draft Referendum Bill. The responses we have published today are very encouraging. As well as showing that many others in Scotland shared our concern about the weaknesses in the Calman Commission’s financial proposals, particularly in relation to taxation, they will help us to improve the Bill.”

The Scottish Government’s response to the Calman Commission recommendations, sent in November 2009, highlighted a number of weaknesses in the financial elements of the proposals. Many of these were also identified in the responses to the referendum consultation received from academics and economists, as summarised below.

Dr Jim and Margaret Cuthbert’s response argued that ‘Our view is that the Calman proposals on income tax powers are seriously flawed, and pose a major danger to the Scottish economy: under no circumstances should question 1 in the referendum relate to the Calman based financial recommendations.’

They also said that ‘Implementation of the Calman proposals on income tax would be extremely dangerous; with a real risk that the perverse incentives implicit in the proposals would push Scotland into a worsening cycle of increasing Scottish income tax rates and relative economic decline.’

Other respondents highlighted the lack of real additional autonomy which would be provided to the Scottish Government under the Commission’s proposals.

Professor Sheila Dow, School of Management at Stirling University: ‘Even if the Calman proposals were workable, they still only allow limited autonomy compared to apparently successful arrangements in other countries.’

Professor Rod Cross, Emeritus Professor at University of Strathclyde said: ‘I do not think that any Scottish Government would be so ill advised as to consider implementing the Calman Commission proposals, which would involve the costs of collecting some income tax specifically for Scotland without generating any clear benefits in terms of enhanced accountability of the Scottish Government for its expenditure, let alone stimulating growth in the Scottish economy.’

Marc Coleman, former economist at the European Central Bank, said in his response that ‘Scotland requires immediate fiscal autonomy and Calman falls well short of fiscal autonomy.’

Respondents also raised concerns about the Commission’s borrowing proposals.

In his response to the consultation, Professor Andrew Hughes Hallett referred to the arguments contained in his paper (co-written with Professor Drew Scott) ‘Scotland: A New Fiscal Settlement’ in which they said that: ‘The Calman proposals are unworkable because, to function, they require information that the policy makers cannot possibly have: and because, without borrowing for current activities, they contain no mechanism to reconcile contractual spending (most of the budget) with variable revenue flows – which is to invite an eventual breakdown.’

Professor Sheila Dow, School of Management at Stirling University: ‘Apart from the tax proposals, the Calman Commission proposed more scope for borrowing powers but these too would be limited. Borrowing would not be allowed to smooth out cycles. Borrowing to finance capital expenditure would be allowed, but only from the Treasury and under restrictive conditions. Therefore the scope for the Scottish Government to manage its finances in relation to the needs of the Scottish economy and society would be seriously curtailed.’

UK Government’s tax plans and the Calman proposals Under the Calman Commission proposals it is estimated that a £1,000 increase in income tax personal allowances could have resulted in the Scottish Government Budget being cut by between £200-250 million in 2008/2009.

Consultation details

The consultation document asked respondents a series of open questions on the details of the proposed referendum question and on the technical aspects of the draft Bill. The consultation ended on April 30.