Does Scotland Need this Dead Parrot?


by Stephen Maxwell

The coalition Government’s proposed Scotland Bill stands out for its sheer perversity. The Government’s case for the Bill is that it will increase the accountability of the Scottish Parliament to the Scottish people. But its main component – giving the Scottish Parliament the power to set its own income tax rate balanced by a cut in the Treasury’s annual block grant equivalent to 50% of the yield in Scotland from the going rate of UK income tax – will by itself neither increase nor decrease the level of the Parliament’s accountability to its public.

That accountability depends not on the extent of the Parliament’s powers but on the Parliament’s relationship with the Scottish voter. With its relatively high levels of transparency and accessibility and its more or less proportional voting system the Scottish Parliament does not need to take lessons in public accountability from Westminster.

The coalition’s unspoken intention is rather different. In response to a widely held English view that Scotland is feather bedded by the English tax payer its real aim is to impose a greater sense of financial responsibility on Scotland’s devolved institutions. Requiring the Scottish Parliament to set its own income tax rate will force it to consider the real cost of all those freebies – personal care, no prescription charges, no tuition fees, free bus travel and so on – which successive Scottish administrations have lavished so recklessly on the Scottish voter.

This is patronising arrogance. Of course the focus of devolved Scottish politics has been on spending rather than taxing. That was how Westminster created the Scottish Parliament in1997, as a spending body with very limited tax powers of which the main one, the power to raise or lower the standard rate of income tax – and only the standard rate – by 3p was too regressive to use. Meanwhile the spending cuts which the Scottish Parliament is being forced to make in response to the coalition’s draconian deficit reduction strategy is supplying the Scottish Parliament and public with a daily lesson in the realities of UK fiscal policy.

As shown in repeated opinion surveys Scottish opinion wants more powers for the Scottish Parliament not as a way of increasing accountability but for the more urgent purpose of giving Scotland control over its economic future including the capacity to grow its way out of the current economic depression. The coalition’s Bill not only fails to provide that capacity but threatens to put extra obstacles it its way.

First the Bill devolves only modest additional taxing powers focused mainly on income tax. Westminster will retain complete control over corporation tax, VAT and NI and oil taxes as well as Scotland’s welfare and employment budgets. Second while the proposed new income tax power will be less regressive than the existing power to vary the standard rate it will still be far from progressive. Its advantage is that it would apply across the tax grades from standard to the new additional rate of 50% on incomes above £150,000 but it cannot be varied for different tax bands. If the Scottish Parliament decided to cut or raise the Scottish rate of income tax the same change would apply across all tax bands. Moreover income from savings and dividends is excluded from the new tax and Westminster will retain power over the tax bands. Taken with the uncertain influence that marginal income tax changes have on economic growth, these limitation could mean that Scottish Governments will be as reluctant to use the new tax power as they have been to use the existing one.

Then there is the deflationary threat. In setting the Scottish rate of income tax the Scottish Parliament will depend on estimates from Westminster’s Office of Budget Responsibility (OBR) of how much money any given rate will raise If the estimate is wrong and the yield is lower than projected the Scottish Government will be able to borrow up to a cumulative maximum of £500m provided the shortfall is more than 0.5% of the Scottish Government’s budget. If the shortfall is less than 0.5% of the then it will simply have to be absorbed. But if the OBR underestimates the yield to the Scottish Government Scotland’s share of the surplus will be subject to various Treasury restrictions designed to limit Scottish borrowing from the Treasury.

The Scottish Government has estimated that if the Bill’s proposal had operated since the start of devolution Scotland’s total budget over the period would have been £8bn smaller, of which £900m would have come from 2009/10. The coalition’s proposal acknowledges the risk of fiscal “shocks and windfalls”. It is a measure of its nervousness over the possible deflationary impact that its proposals allow for a transition period stretching to 2018 (sic) before the new powers are fully in Scottish hands. Even the Bill’s most attractive feature – its proposal for a Scottish capital borrowing power of £2.2bn – is circled with Treasury conditions and permissions including a maximum ten year repayment period.

As if dumping a very dead parrot on Scotland was not bad enough the coalition’s proposals seem to delight in devising new ways of tormenting the Scottish voter. For example it claims that current protocols stipulate that the cost of any change to fiscal relationships between devolved and central legislatures should be met by the legislature initiating the change. So despite the unionist parties initiating the proposal – and then refusing to test Scottish opinion in a referendum – a bill for £40m of start- up costs will eventually be coming Scotland’s way along with a £4m annual maintenance cost.

Stephen Maxwell is theTreasurer of the Scottish Independence Convention.