By Keith Aitken in Edinburgh | 5 November 2014
New tax powers for the Scottish Parliament could improve efficiency and accountability, provided they abide by a suite of key principles, CIPFA has told Lord Smith of Kelvin’s Commission on devolution.
CIPFA recommends that the Scottish Government be permitted to hold reserves rather than, as at present, having to spend or return its budget each year. This, it says, would allow better financial planning, enable it to deal more effectively with contingencies such as exceptionally harsh weather, and help it respond to fiscal volatility as the share of spending raised from its own taxes increases.
The submission also urges the Smith Commission to consider replacing the Barnett formula for allocating block grant to the devolved administrations with a revised, needs-based mechanism.
Though careful of the intense political sensitivities surrounding the Smith process, the CIPFA paper is broadly supportive of Holyrood gaining significant new fiscal powers, provided that they are accompanied by proper accountability.
It says: ‘Evidence from the OECD suggests that the greater the share of taxes which forms part of the funding of sub-national (or devolved) governments the more efficiency and democratic accountability are enhanced. It will also provide greater incentive for developing the economic and tax revenue base.
‘There is also a growing body of literature which suggests that decentralisation and greater tax autonomy may be conducive to “social capital” by encouraging participation in devolved government decisions and strengthening accountability.’
CIPFA says that 15 years of devolution has brought significant policy divergence, but that this is not reflected in Holyrood’s finances, which are still largely governed, through Barnett consequentials, by Westminster policy priorities.
OECD research, the paper notes, says that the taxes best suited to being devolved are so-called ‘benefit taxation’, where there is a direct and evident link between taxes paid and public services delivered. CIPFA endorses this principle.
But, it says, new tax-raising and borrowing powers, either under the 2012 Scotland Act or through any further legislation flowing from the Smith Commission, need to be tested against CIPFA’s six key principles: accountability; fairness; stability & predictability; buoyancy of the tax base; transparency & clarity; and ease of collection and administration.
The paper also recommends that the Scottish Government be required annually to publish a Public Sector Balance Sheet, which would provide audited details of Scotland’s assets and liabilities, and so help market lenders assess interest on borrowing, support long-term financial planning, and make for better-informed asset management planning.
‘Devolution has led to significant divergence in policy choices between Scotland and the rest of the UK but the current UK financial framework does not enable the financial position of a devolved Scotland’s public sector to be separately reported,’ the paper says.
Don Peebles, head of CIPFA Scotland, said: ‘The present control framework does not provide the devolved Scottish government with all the necessary financial levers for optimum financial management and accountability.
‘Any new powers should include powers to enable the Scottish government to hold reserves and with enhanced powers to borrow for capital purposes, based on affordability.’
The Smith Commission, which was established following September’s independence referendum, is due to report later this month with a view to publishing draft legislation in late January.
