The UK Government yesterday published its Scotland Bill. This implements many of the recommendations of the Commission on Scottish Devolution or Calman Commission set up by Labour, the Conservatives and the Liberal Democrats to examine how the devolution settlement could be improved, including the financial relationship between Westminster and Holyrood.
Reform Scotland has argued that the fundamental defect of the current devolution settlement is the Scottish Parliament’s lack of accountability and responsibility for the way in which it raises the money that it spends. The vast bulk of the Scottish budget comes in the form of a block grant from Westminster which provides no financial incentive to introduce policies which encourage economic growth and deliver value for money, while denying the Scottish Government and Parliament the fiscal tools which they could use to increase economic growth and help sustain the economic recovery.
The Scotland Bill recognises the shortcomings of the current financial arrangements and the benefits of greater financial accountability and responsibility. It would give Holyrood control over a proportion of the income tax revenue raised in Scotland; Stamp Duty; Landfill Tax and important new borrowing powers. However, the Aggregates Levy and Air Passenger Duty, which the Calman Commission recommended should be devolved, have not been included amongst those taxes devolved at this stage. In addition to the local taxation powers already devolved (Non-Domestic Rates and Council Tax), this would mean that around one third of devolved spending would be funded by taxes decided and raised in Scotland.
Reform Scotland believes that the Scottish Parliament should be responsible for raising the money that it spends. Therefore, these measures stop a long way short of the change we believe is necessary since two thirds of the Scottish budget would still come in the form of a block grant from Westminster. However, Reform Scotland welcomes the fact that the borrowing powers in the Scotland Bill go beyond those advocated by the Calman Commission.
Introduction
The UK Government’s Scotland Bill acknowledges the weaknesses inherent in the current financial arrangements and accepts that the present system, based on a block grant determined largely by application of the Barnett Formula, must change. It is unbalanced because although the Scottish Government has control over 60 per cent of government expenditure in Scotland, it has very limited responsibility for raising the revenue required to meet those spending commitments other than the local taxes – council tax and business rates. This means that the revenue generated by taxation powers devolved to Scotland accounts for around 13 per cent of devolved spending.
The Scotland Bill
The measures in the Scotland Bill, based on the Calman Commission proposals, would increase the proportion of the Scottish budget raised in Scotland with around one third of devolved spending coming from taxes decided and raised in Scotland. Its main measures in relation to the financial settlement between the UK and Scottish Parliaments are:
- The UK and Scottish Parliaments would share the yield of income tax with the power to vary the standard rate of income tax in Scotland by 3p either way replaced by a new Scottish rate of income tax applying to the basic and higher rates. To bring this about the basic and higher rates of income tax in Scotland would be reduced by 10p in the pound and the block grant reduced accordingly, allowing the Scottish Government and Parliament to set rates for the Scottish income tax although the structure of the income tax system, including bands, allowances and thresholds would still be decided at Westminster.
- Stamp Duty Land Tax and Landfill Tax would be devolved to the Scottish Parliament with a corresponding reduction in the block grant.
- The block grant, governed by the Barnett Formula, from Westminster would continue to make up the remainder of the Scottish Parliament’s budget.
- The Scottish Government would be given new borrowing powers for capital and revenue spending.
Reform Scotland’s Position
Reform Scotland believes that the issue of the financial responsibility of the Scottish Parliament needs to be resolved as a priority. As Reform Scotland’s Chairman Ben Thomson has said:
‘The Scottish Parliament’s almost total reliance on the block grant limits its accountability. Equally, it provides no incentive for politicians in Scotland to come up with innovative ideas to boost economic growth or improve public services because, however poorly the economy performs, the money still rolls in via the block grant. If the economy did grow faster the benefits would accrue to the Chancellor at Westminster and not the Scottish Government.’
The measures in the Scotland Bill do not provide the necessary level of financial accountability and responsibility to ensure that public money is spent effectively. The finances of the Scottish Parliament would also rest too heavily on income tax and do not give the Scottish Government and Parliament control over a sufficiently wide range of taxes.
Reform Scotland has published two reports on this issue ‘Fiscal Powers’ in November 2008 and an update in October 2009. Our proposals go much further and set out a workable scheme to enable the Scottish Government to raise the money it spends while remaining within the United Kingdom. The details of our proposals are available on our website www.reformscotland.com and would give Westminster control over taxes which would enable it to raise its 40 per cent share (around £22 billion) of government spending in Scotland. Likewise, Holyrood would have control over taxes which would raise the 60 per cent (around £33 billion) of public spending in Scotland for which it is responsible and would also have borrowing powers.
This would create a link in Scotland between economic performance and the revenues accruing to the Scottish Government and would change the whole nature of the debate in Scotland for the better. Further, it would give the Scottish Government the fiscal tools to improve the growth rate of the Scottish economy.