Labour tax proposals that would see Holyrood take control over a proportion of the Scottish income tax take have been heavily criticised in a paper by two eminent academics.
Professor Drew Scott of School of Law at University of Edinburgh and Professor Andrew Hughes Hallett School of Public Policy, George Mason University and the University of St Andrews claim that the proposals will cause budgetary instabilities, have adverse effects on the Scottish economy and public services and may also strain relations between Edinburgh and London.
The Labour proposals were announced by Jim Murphy in November 2009 and came in the wake of the Calman Commission report which was widely regarded as a Unionist reaction to the “National Conversation” launched by the new SNP government.
The proposals would see Scottish income tax rates set 10p lower than the UK rate, the UK treasury would then estimate what this 10p portion of the tax might raise and simply cut the Scottish block grant accordingly. The Scottish Government would then have to re-instate the 10p in order to try to make up the shortfall.
Professors Hughes Hallett and Scott point out that any Treasury estimate will be based on figures that are two years old and that there will be no facility for negotiation between London and Edinburgh should there be any disagreement over the figure. The proposals also explicitly reject granting borrowing powers to the Scottish Government and thus any shortfalls resulting from inaccurate treasury forecasts would have to be met through even higher taxes.
The paper also warns that the limited borrowing proposed for funding capital projects is deeply flawed in that it requires an immediate increase on the tax burden of today’s taxpayers rather than spreading the repayments over many years as is the norm in other countries.
Hughes Hallett/Scott say:
“Requiring today’s tax payers to repay a loan which principally benefits future generations is virtually certain to reduce the Government’s capital investment programme below that which is economically efficient. It is difficult to see any sensible government borrowing for investment purposes under such conditions, and that is likely to mean that investment in capital and future infrastructure projects will be restricted below what is economically desirable.”
Further; the paper also explains that borrowing can only be one year at a time at interest rates set by the Treasury. It is unlikely say the authors that any future Scottish Government will be prepared to commit resources to multi-year projects under such circumstances – the effect of such a regime they say would be that: “Scotland’s capital and infrastructure projects are likely to remain significantly underfunded”.
In a further blow to Labour’s plans the authors point out that had the proposed funding already been in place then the Scottish Government would have lost £1.2 billion from its block grant and would have been forced to raise the Scottish rate of income tax every year by 0.21p in the pound in order to make up the shortfall. In other words, the Scottish taxpayer would have to pay extra taxes just to stand still.
The paper envisages a scenario where disagreements between London and Edinburgh could damage relations between the two administrations, especially when different political parties form the respective governments and thus rely on different economic models and beliefs when estimating tax yields.
Hughes Hallett / Scott say:
“Moreover managing this “virtual” revenue system will become highly problematic should the Scottish Government’s forecast of the level of Scottish economic activity – and so income tax receipts – be out of line with the Treasury forecast. Given what is at stake – i.e. the total revenue available to finance public spending in Scotland – inter-governmental disputes over economic forecasts probably are inevitable.”
“… if the Treasury underestimates Scotland’s tax yield then the entire amount of the tax revenue dividend associated with improved economic performance in Scotland will accrue to the UK Treasury.”
In short, Scotland could perform better than anticipated as a result of decisions taken by the Scottish government, however the extra revenue generated would flow to London.
More worryingly is the suggestion by the academics that the arrangement could be open to abuse by Westminster authorities seeking to undermine a future Scottish government.
“Which body, if any, will be established to arbitrate inter-governmental disputes arising from competing expectations of Scotland’s economic performance? And if there is to be no arbitration between competing forecasts, then the UK Government could lay itself open to accusations that the Treasury is manipulating its forecasts as a means of controlling public spending in Scotland”
The authors conclude their report with a list of revisions that they say should be made to Labour’s proposals.
to permit sensible borrowing for non-capital purposes, with rules to prevent excessive borrowing, and allow capital borrowing against future tax revenues rather than against higher tax rates;
to remove the constraints that make the Scottish Parliament de facto accountable to Whitehall (e.g. let the taxes raised by the Scottish tax rate be collected directly in Scotland; and provide a reconciliation between actual revenues received and their earlier forecasts);
to allow Scotland to keep and enjoy the benefits of any extra revenues created (at present actual revenue improvements go to London);
to increase the range of tax autonomy in order to increase political (Parliamentary) accountability, to diversify the revenue sources, and to provide some revenue smoothing; and
to allow the Scottish Parliament to at least supervise the calculations upon which the funding consequences of their own tax decisions will be based.
The complete report can be viewed and downloaded HERE.