Calman: an exercise in window-dressing

Published on Sunday 14 June 2009 21:59

TODAY, the Calman Commission will publish its report into what changes it thinks are needed to improve the ten-year-old devolution settlement. If the leaked details from newspapers are to be believed, then unfortunately the Commission might miss the mark entirely by focusing on accounting changes to the Scotland Act rather than the transference of actual economic levers at a time when Scotland needs them more than ever.

Perhaps this stems from the group's original remit – how to strengthen Scotland's place within the Union – rather than the much more crucial question for today, which is how to strengthen Scotland's economy.

The fundamental defect of the current arrangements is their lack of financial accountability. No matter how the Scottish Government manages the economy, its revenues will be unaffected: the same old block grant will roll in every year from Whitehall. And if the Scottish Government succeeds in promoting economic growth, the resulting increases in tax revenues will all flow to the Treasury in London.

The tax-raising powers of the Scottish Parliament are currently limited to control over local authority taxes (council tax and business rates), and the ability to raise or lower the basic rate of income tax by up to 3p in the pound. In effect, the Scottish Parliament has control over taxes which raise only 13 per cent of the money spent at a Scottish level. This means that it has even less control over raising its own income than do local councils.

A range of proposals have been put forward to remedy this situation. One solution would be financial independence – known as fiscal autonomy – where the taxation powers of the Scottish Government would be limited only by the constraints of those international treaties it chooses to sign. However, the Calman Commission's terms of reference prevented it from even considering this option.

The latest suggestion is that Calman will propose that Scotland is given greater ability to vary its income tax rate. The trouble with that is income tax is one of the last taxes you would choose in isolation to affect your economy. If you raise it, you become a high tax economy. If you lower it, you might have to cut vital front-line services, which is particularly ill-advised during a recession. As part of a mix of taxation, you would want this tool, but on its own, it's just not that useful – which is why no Scottish government has yet used it.

There is another part of the debate we should watch closely: the language around assigned revenues. This proposal sounds as if it transfers responsibility from London to Edinburgh, but in fact it does not. This is because, while giving the appearance of being in harmony with the spirit of greater devolution of political powers, it is simply a covert way of maintaining the status quo.

The proposal is that all taxation revenues collected in Scotland (plus some balancing amount) would be assigned to Holyrood, the argument being that this would create a link between the state of the economy and the budget available to the Scottish Government. While that is true, there would be no way in which the Scottish Government could use the tax system to influence the state of the Scottish economy. It would not be able to pursue an effective programme for promoting economic growth, which requires a simpler tax system with lower rates of taxation designed to produce faster economic growth and thus higher tax revenues to fund essential public services.

The truth is that the "assigned revenues" proposal represents a change only in the methods of accounting and tax collection. Worse still, the proposal would leave Scotland in a more vulnerable position than under existing arrangements.

For example, when the UK economy is mismanaged so UK tax revenues suddenly collapse, as is now happening, the Scottish Government would not have the power to respond by altering tax rates or the tax base or by increasing borrowing. Without such powers, the continuing delivery of public services in Scotland would be at risk.

The difficulty of avoiding technical terms in the discussion of different kinds of taxes can lead many people to believe that these are just boring technical issues for accountants and economists to worry about. In fact, the discussion about the transfer of powers over taxation from Westminster to Holyrood is a wholly political question, with huge economic implications.

It is all about transferring political responsibility – and with it financial accountability – from London to Edinburgh. The more political leaders are forced to focus on both sides of the accounting sheet, the more they will concern themselves with raising revenues as much as with spending them.

With no ability to change rates on the taxes that most affect economic growth (such as corporation tax) and the ill-conceived idea of assigned revenues still on the horizon, it looks as though the Calman Commission may not suggest any meaningful ways that a Scottish Government could pursue policies that were different from the rest of the UK.

Perhaps that is what the Commission preferred all along. When it began its consultation, it did so knowing that the UK is one of the most centralised fiscal regimes in the developed world. Sadly, it may be this is just how the Calman Commission would like to keep it.

&#149 David Simpson is a former economic adviser to Standard Life