Scotland’s independent think tank
Scotland’s independent think tank

Reform Scotland response to the publication of the Calman Commission’s final report

Reform Scotland response to the publication of the Commission on Scottish Devolution’s final report “Serving Scotland Better: Scotland and the United Kingdom in the 21st Century”

Today (Monday 15th June) the Commission on Scottish Devolution or Calman Commission, chaired by Sir Kenneth Calman, has published its final report. The report sets out specific recommendations as to how the devolution settlement could be improved, including the financial relationship between Westminster and Holyrood.

In its submission to the Commission, Reform Scotland argued that the fundamental defect of the current devolution settlement is its lack of accountability to the Scottish electorate 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 real incentive to introduce policies which encourage economic growth and deliver real value for money, while denying the Scottish Government and Parliament the fiscal tools which they could use to increase economic growth.

The Calman Commission report recognises the shortcomings of the current financial arrangements and argues that the Scottish Government and Parliament should be given control over half of the income tax revenue raised in Scotland; several other smaller taxes such as Stamp Duty, Aggregates Levy, Landfill Tax and Air Passenger Duty together with limited borrowing powers. In addition to the local taxation powers already devolved (Non-domestic rates and Council Tax), this would mean that over one third of devolved spending would be funded by taxes decided and raised in Scotland.

This is a step towards greater financial accountability, however stops some way short of the change Reform Scotland believes is necessary as two thirds of the Scottish budget would still come in the form of a block grant from Westminster. Reform Scotland’s proposal to address this problem would scrap the Barnett Formula altogether and give both the Scottish and UK Governments the power to raise they money they spend in Scotland.

The Calman Commission’s final report 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% 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) collected by local government. This means that the revenue generated by taxation powers devolved to Scotland accounts for only 13% of devolved spending.

Calman Commission Proposals
The proposals set out today by the Calman Commission would increase the proportion of the Scottish budget raised in Scotland with over one third of devolved spending coming from taxes decided and raised in Scotland. Its main recommendations 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 both 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 remain would be decided at Westminster. Income tax on savings and distributions would not be devolved, but half of the yield would be assigned to the Scottish Parliament again with a corresponding reduction in the block grant.
• Stamp Duty Land Tax, Aggregates Levy, Landfill Tax and Air Passenger Duty would be devolved to the Scottish Parliament with a corresponding reduction in the block grant.
• The block grant from Westminster would continue to make up the remainder of the Scottish Parliament’s budget and would continue to be based on the Barnett Formula until a proper assessment of relative spending need takes place across the UK.
• The Scottish Government’s borrowing powers for capital investment would be extended with an overall limit to such borrowing as currently applies to local authorities.

Reform Scotland’s Solution
Reform Scotland agrees with the Calman Commission that the issue of the financial accountability of the Scottish Parliament needs to be resolved as a priority. At the launch of our report ‘Fiscal Powers’, which was submitted to the Calman Commission, Reform Scotland’s Chairman Ben Thomson 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.’

While the Calman Commission’s proposals are a step in the right direction, they do not provide the necessary level of financial accountability and responsibility to ensure that public money is spent effectively. Reform Scotland’s report ‘Fiscal Powers’, published in November 2008, goes further. It set out a workable scheme to enable the Scottish Government to raise the money it spends while remaining within the United Kingdom. We believe that report and the model we set out offers the best way forward for Scotland. Its proposals included:

• Scrap the Barnett Formula and give both the Scottish and UK Governments the power to raise the money they spend in Scotland.
• Maintain the current split between devolved and reserved functions which has resulted in 60% (around £30 billion) of government spending in Scotland being devolved and 40% (around £20 billion) reserved to Westminster.
• UK Government retains full control over National Insurance revenues in Scotland together with income from other smaller taxes, including TV licences, passport fees and the National Lottery Tax
• Split revenue in Scotland from income tax and North Sea oil with control over 40% of the revenue going to Westminster and 60% to Holyrood. Such a 60:40 split is logical because it matches the respective spending responsibilities of Holyrood and Westminster.
• Assign the Scottish Parliament 60% of VAT revenue raised in Scotland, though unlike Income Tax and North Sea Oil, control over VAT would remain at Westminster.
• All other tax revenues would be devolved to the Scottish Parliament.
• Give the Scottish Parliament borrowing powers.
• Establish a Scottish Exchequer which would be responsible for collecting revenue from all taxes levied north of the Border on behalf of the UK and Scottish governments.

This solution would give both Westminster and Holyrood sufficiently wide ranges of tax revenues and borrowing powers to ensure they had the flexibility to meet their spending needs. Both levels of government would be free to change the levels of the taxes under their control and would, therefore, be properly accountable to their electorates for the financial decisions they take.

It would create a link in Scotland between economic performance and the revenues accruing to the Scottish Government. This 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