The Scotland Bill heralds an unprecedented transfer of fiscal power to Holyrood. It has its flaws but the SNP is wrong not to support the plans
As I noted in this space last time, most of political Scotland expects the Scottish National Party to lose the Holyrood elections in May. So, it might surprise you to learn that, even as SNP MSPs go back to their constituencies to prepare for opposition, Westminster is about to pass a Bill that will involve the greatest transfer of economic power to Scotland since the Act of Union in 1707.
The Scotland Bill, now in committee in Westminster, will give Holyrood the power to vary half of all Income Tax as well as minor taxes such as Stamp Duty. Revenue from Income Tax will be shared 50/50 with the UK and the subsidy from the Barnett Formula, which calculates the rise in Scottish spending, will be reduced in proportion.
The Bill, which will almost certainly be passed, implements the 2009 recommendations of Sir Kenneth Calman’s Commission on Scottish Devolution. This concluded that the Scottish Parliament needed to be made properly accountable by raising at least some of the money it spends on vote-winning policies such as free personal care and university tuition.
Now, you might have thought that the SNP, which has long advocated ‘fiscal autonomy’, would welcome this Bill. But you would be wrong. The nationalists opposed Calman vehemently and they say the Bill is ‘inadequate and unacceptable’.
They argue that the Income Tax split was inherently deflationary and that future Scottish governments would face the Hobson’s choice of either cutting spending or increasing income tax to higher levels than south of the border. They point out that the Barnett Formula has risen faster in the past than income tax revenue has risen. It is anyway the case that public spending in Scotland exceeds tax revenue. Therefore, there will be a fiscal deficit written into any post-Barnett Formula.
This deflationary bias might have been acceptable had Holyrood the power to vary other taxes – such as petroleum revenue or corporation tax – or if it had extensive borrowing powers, but it doesn’t.
In no other fiscal system in the world, say critics, is there a system of tax-sharing involving only one major tax. In a proper federal arrangement, there would be a wider range of devolved taxes and greater clarity about the federal responsibility to maintain spending levels when income tax revenue declines during a recession. Imagine the impact of the 2008/10 recession had the UK government lacked borrowing powers.
These criticisms carry a lot of force. The Scotland Bill arguably fails to meet the conditions set by the Calman report, that any new tax regime should increase accountability, transparency and fairness. However, the nationalists are wrong to reject Calman out of hand. Any new system is bound to have anomalies, and there is plenty of time for these to be ironed out before the scheduled implementation date of 2015.
The UK government has also given an assurance that any new system would be revenue neutral, at least in the medium term, so that Scotland wouldn’t lose out financially. This is in Westminster’s interests too as the only people who would benefit from Scots’ spending cuts would be the SNP, who could claim that London was impoverishing Scotland.
The Scottish Parliament still has to endorse the Bill and MSPs are quite capable of arguing for a coherent federal arrangement, with a new equalisation formula, and greater borrowing powers.
The Calman Commission report was in many ways a landmark that made the case for fiscal accountability unanswerable. All the Scottish opposition parties have supported the case for fiscal autonomy. It is now up to the Scottish political classes to find a system that does the job.
Iain Macwhirter is political commentator on the Sunday Herald
