No doubt everyone in Scotland will by now be aware that the Smith Commission yesterday published its report, setting out heads of agreement for devolving further powers to the Scottish Parliament. We previously covered the positions of the five political parties represented on the Commission here and here, and have been picking through the report to see how our predictions held up. The report is commendably brief at just 28 pages, though that may of course be because the short timescale didn’t allow for anything longer!
There have been a variety of reactions to the Report, with Unionist parties generally expressing support for the report (in Scotland anyway – the BBC reported some unease at Westminster at the scale of the powers to be devolved). However, the SNP (perhaps unsurprisingly) were briefing before the Report’s publication that the recommendations would not go far enough. You can get a sense of the immediate media and political reactions here and here.
As it turns out (and as we previewed on Monday!), while the Commission has gone a bit further in some areas than was originally predicted, there are few major surprises. This post will focus on taxation, with a further post to follow on other powers.
The key recommendations on tax had been broadly trailed, and in particular are:
- Devolving income tax to the Scottish Parliament – Holyrood will have the power to set the income tax rates and bands above the personal allowance, which will remain the responsibility of Westminster. All income tax revenue on the earned income (i.e. NOT income from savings or dividends) of Scottish taxpayers (a term already defined in the Scotland Act 2012) will go to the Scottish Government;
- Allocating a share of ‘Scottish’ VAT revenues (“receipts raised in Scotland by the first 10% of the standard UK VAT rate”, however that is to be defined) to the Scottish Government’s budget; and
- Devolving Air Passenger Duty to the Scottish Parliament.
Another tax that is to be devolved, but which had not been so well-trailed in advance of the report, is the Aggregates Levy. The Report states that the Scottish Parliament will have “the power to charge tax on the commercial exploitation of aggregate in Scotland”.
The Scottish Government’s borrowing powers are also to be expanded, though that is to be agreed between the Scottish and UK Governments.
There will be some interesting operational issues to be worked out in respect of these new devolved taxes, including definitional challenges. Perhaps the trickiest mechanical hurdle will be working out how to adjust the Scottish block grant while complying with the Report’s ‘no detriment’ requirement (to the effect that neither Scotland nor rUK should be worse off as a result of further devolution). That is presumably only relevant at the point of transfer, given that the policy intention is for the Scottish Parliament to then bear the consequences (good or bad) to any changes it then makes to tax rates.
There is an intriguing statement at paragraph 95 of the Report, which says that “the revised funding framework should result in the devolved Scottish budget benefiting in full from policy decisions by the Scottish Government that increase revenues or reduce expenditure, and [vice versa]”, and that “where either the UK or the Scottish Governments makes policy decisions that affect the tax receipts or expenditure of the other, the decision-making government will either reimburse the other if there is an additional cost, or receive a transfer from the other if there is a saving. There should be a shared understanding of the evidence to support any adjustments.”
Attributing particular revenue increases or shortfalls to particular policies is a notoriously difficult task that has bedevilled economists since time immemorial, so it is not at all clear how (or even if) this intention can be made to work in practice. If the Scottish Government changes planning policy to make property development more profitable, is it then entitled to a proportion of Scottish property developers’ corporation taxes? If changes to UK Government welfare policy result in more people being employed in Scotland, does the UK Government get a share of the income tax receipts? How could one even attribute cause-and-effect in such cases? Those particular recommendations seem like a recipe for certain future conflict.
On November 28, 2014