Taking it to the max?

24 Apr 14
As the polls in Scotland’s referendum race narrow, all the parties are offering radical fiscal changes that could have a big impact throughout the UK

By Iain Macwhirter | 25 April 2014 

As the polls in Scotland’s referendum race narrow, all the parties are offering radical fiscal changes that could have a big impact throughout the UK

George Osborne_May 2014

The unionist campaign against Scottish independence isn’t going to plan. George Osborne’s rejection of the Scottish National Party’s plan for monetary union with an independent Scotland may even have backfired. In a Yougov/Times opinion poll at the end of March, nearly half of Scots voters said they didn’t believe him. 

Support for a Yes vote to independence actually rose in the weeks after the chancellor’s declaration on February 13 that: ‘If Scotland walks away from the UK it walks away from the pound sterling.’ In the most recent polls, the No campaign is only about six or seven points ahead, which means there is new urgency to come up with an attractive alternative to independence that will keep Scots in the Union.

All the opinion polls indicate that a parliament with more powers – essentially federalism – is the option most Scots would vote for. But this is the one option that will not be on the ballot paper on September 18. When he agreed to a referendum in 2012, David Cameron insisted that the choice should be a binary one and not give First Minister Alex Salmond a second best – an each way bet on a two-horse race, as one unionist put it. Now it looks like that second best may be back in the race, put there by the Conservatives of all people – the party that bitterly opposed devolution in the 1980s and 90s. 

There have been persistent rumours that the Scottish Conservatives are about to propose that the Scottish parliament should be given all income tax raising powers, s well as a range of other taxes. Holyrood has always had the power to raise the basic rate of income tax by 3p, but this has never been used – mainly because it would be seen as politically unacceptable to increase the basic rate alone. Now, under plans that are expected to be announced this month by the senior Conservative Lord Strathclyde, the Scottish Parliament may be given the right to raise or lower all bands of income tax. 

Scottish Tories believe they may be able to return from the wilderness by seizing the crown of devolution max and offering to cut taxes across the board in Scotland. The Conservatives believe, probably correctly, that Scotland is not immune to Tory politics, and that it has been their opposition to home rule that destroyed the party that dominated Scottish politics in the 1950s. The only problem with this is that a number of very senior Conservatives in Westminster bitterly oppose devo max. 

At least two former Scottish secretaries, Lord Forsyth of Drumlean and Lord Lang of Monkton, believe fiscal autonomy could be tantamount to independence. Lord Forsyth has called the more-powers plan ‘foolish’. However, now that speculation has been running for weeks, it will be a massive anti-climax if the Conservatives back down from fiscal autonomy. They are jostling for attention with other parties who are tempting Scots with promises of great things to come if they vote No.

The Liberal Democrats are offering full-scale federalism – all income tax powers plus a formal declaration of sovereignty for Scotland that would, in theory, lead to a constitutional revolution in the UK. Their devolution commission, convened by the party’s former leader Sir Menzies Campbell, produced a report – Federalism: the best future for Scotland – that proposed giving Holyrood the powers to raise at least 60% of the £35bn or so it spends annually. It would also involve a guarantee that the devolved Holyrood parliament could never be abolished or overruled by Westminster. This may seem a rather academic point, since no one is proposing to shut down the Scottish Parliament. However, if enacted it would require major changes to the UK constitution, which is based on the principle of Westminster sovereignty. Under federalism, Scotland would become an autonomous state in a new United Kingdom along with England and Wales, while a new federal level of government would be set up in Westminster to be responsible for defence, foreign affairs, currency stability, VAT and pensions. 

The LibDem scheme is actually a reworking of the home-rule-all-round that Liberals have been advocating since before the First World War. In 1913, Liberal statesman David Lloyd George sought to bring the British Isles together by devolution to Scotland, Ireland and Wales – and, who knows, if he had succeeded Ireland might still be part of the UK. 

However, the problem then, as now, is not the Scottish Question but the English Question. The LibDems envisage the setting up of an English parliament within Westminster that would have responsibility for uniquely English legislation. But there is no demand for such a body among the other unionist parties – though ironically the SNP recognise the need for one by withdrawing their Westminster MPs from votes on English legislation.

Opinion polls often suggest that English voters would like a parliament of their own, and some Conservative backbench MPs think the same, if only to deal with the West Lothian Question – the anomaly of Scottish MPs voting on things like health and education in England when English MPs have no say on devolved matters in Scotland. However, neither Ed Miliband nor David Cameron is keen on the idea because it would break up the unitary UK, and because they do not believe that English voters would want a new federal level of government. Labour has a particular problem with an English parliament that, as things stand, would be dominated by the Conservatives. Which means that, if Labour were to win office, Ed Miliband could be in No 10 without having power over education, justice, health and social legislation for nine-tenths of the UK.

Indeed, the Liberal Democrat plan is in some ways more radical than that of the SNP. The Scottish Government’s white paper, published last year, proposes a very limited form of independence, in which the Queen would remain head of state, Scotland would keep the pound, the Bank of England, Nato, European Union membership, UK pensions, the BBC and a raft of further continuing unions including energy generation and citizenship. Scotland could achieve ‘independence lite’, as it is called, without there being any big upheaval in Westminster. Scotland would still be part of the UK, though it would be a different union in which Scotland raised all its taxes, rejected nuclear weapons and no longer sent MPs to Westminster.

Some unionists have argued that this isn’t really independence at all because allowing interest rates and budgetary discipline to be imposed by the Bank of England, and possibly the UK Treasury, leaves Scotland at the economic mercy of a foreign country. Nonsense, says the SNP. France and Germany are still independent countries while being members of the European single currency. And anyway, England would not be a foreign country under the legal definition of the term but an associated state of the British Isles, like the Republic of Ireland. It sometimes sounds as if we are all federalists now – or perhaps that should be confederalists. 

The Scottish Labour Party doesn’t support independence lite or federalism. However, it too has had to come up with some concrete proposals for extending devolution after a No vote in the referendum. Two years ago, Labour’s Scottish leader, Johann Lamont, set up a devolution commission to look into the constitutional options. Last year, its interim report inconveniently proposed the devolution of all income tax powers to Holyrood. This caused great consternation among Labour’s contingent of Scottish MPs, not least because there would be fewer of them under devolution max. Scotland is already arguably over-represented at 

Westminster with 59 MPs, of whom 41 are Labour. 

Any further transfer of powers to Holyrood would come at the cost of reducing the number of Scottish MPs in Westminster.

Gordon Brown, the former Labour Prime Minister, was called in to adjudicate, and in March he came up with a compromise under which Labour would extend from 10p to 15p the proportion of income tax that could be raised by the Scottish Parliament. Under last year’s Scotland Act, Holyrood is already set to get power to vary 10p of income tax, along with an array of subordinate measures like landfill tax. Brown upped the ante further by proposing that the top rate of tax could be raised higher than in England, opening the way for a 50% rate on incomes over £150,000. He also proposed that Housing Benefit and Attendance Allowance should be devolved to Holyrood, and endorsed the LibDems’ declaration of sovereignty. 

On March 18, Johann Lamont announced Labour’s formal proposals, of which the centrepiece was to be a top rate of income tax that could be raised but not lowered – at least not below the top rate of tax in the rest of the UK. This appeared to contradict the basic principle of taxation: that elected governments should have the power to lower as well as raise them. 

Salmond took the bait and said he would not support any tax plans that ‘put Scotland at a disadvantage’ – in other words he was not ruling out having a Scottish top rate that could be lower than the top rate in England. Lamont was therefore able to claim that the SNP were really ‘tartan Tories’ who wanted a ‘race to the bottom’ on tax to ‘benefit the rich’. 

But there were a number of further complications to Labour’s tax proposals. How, it was asked, could Housing Benefit be devolved if Scotland is to have Universal Credit which merges it with other benefits in a single payment? Since welfare is a reserved power for Westminster, Scotland will have to adopt Universal Credit, which is supported by Labour at UK level. There was also confusion about Scottish Labour’s plan for a 10p tax rate in Scotland, set out in their manifesto document Together we can. How could this be reconciled with their proposal to have a 15p variable rate? 

Ben Thomson, the chair of the Reform Scotland think-tank which has been campaigning for devolution plus, said that Labour’s plans would not raise 40% of tax as claimed, but only 26%. The suspicion is that Labour’s proposals were never intended to be a serious legislative proposition, but were designed to steal the mantle of social justice from the SNP government. Labour wanted whatever made Salmond look like a friend of the wealthy, eager to cut taxes on business and income. 

It’s not clear whether Labour succeeded in this attempt. The SNP remains remarkably popular in Scotland even after six years in office. In the most recent Survation poll in the Labour-supporting Daily Record, the SNP has a lead of nine points over Labour – almost as great a lead as they had in their 2011 Holyrood election landslide. This is the great paradox of Scottish politics: the SNP – and Salmond personally – is much more popular than its headline policy of independence. Indeed, many believe that if they lose the 2014 referendum, the SNP is still on course to be the largest party at the 2016 Scottish parliamentary elections. 

Many Scots may be minded to split their ticket: vote No to independence in the referendum, but Yes to the SNP in the Scottish parliament – if only to ensure that promises being made by the unionist parties are honoured. There is great scepticism among the Scottish electorate about promises on devolution max. They remember how, before the 1979 devolution referendum, the former Tory leader, Lord Home, called on Scots to vote No because his party would bring in a better form of devolution than that offered in the Scotland Act. That never materialised. It was another 20 years before the Scottish parliament was finally delivered. 

Now that the polls are narrowing on the referendum, the unionist parties are under pressure to come together and promise a new form of devolution that really will happen. Nothing short of a commitment to legislation will do. Vague promises of ‘more powers’ will not suffice. Which means there could be big changes ahead for Westminster, in terms of tax and representation. Indeed, if Scotland votes No, it seems highly likely that there will be some form of English parliament to redress the devolution balance. That really would be an irony.

PIain Macwhirter is political commentator on the Sunday Heraldn

This feature was first published in the May edition of Public Finance magazine


CIPFA logo

Did you enjoy this article?