Eddie Barnes: devolution 2.0 - golden opporunity for a new era or economic disaster?

Published on Friday 26 November 2010 21:56

JOHN Swinney was getting the political equivalent of a lynching on the floor of the Scottish Parliament. But arguably the more important event in Scottish politics last Wednesday afternoon was being played out quietly in a nondescript upstairs room in an office in Whitehall.

At Holyrood, the row was over the parliament's limited tax powers. Granted in the referendum of 1997, MSPs have always had the right to raise or lower income tax by 3p in the pound; now Swinney was being lambasted for failing to inform his parliamentary colleagues that those powers had - for complex administrative reasons - been rendered unusable. But down at the offices of Dover House, Whitehall, home to the UK Government's tiny Scotland Office, a small team of civil servants was putting the finishing touches to a bill which will make all this history anyway.

On Tuesday their work will be published as the Scotland Bill. The "Tartan Tax" from 1997 has never been used and has long been deemed pretty pointless anyway. But under the new 2010 Scotland Bill, MSPs are about to get some serious clout. It had its genesis exactly three years ago when Wendy Alexander, the former Scottish Labour leader, declared that, a decade on from the referendum it was time to review Scotland's constitutional settlement. Her call was overshadowed that day by the growing scandal over some of her dodgy campaign donations. But her call for a parliament with more oomph has had the more lasting impact.

A commission, led by Sir Kenneth Calman, followed. This week his recommendations are likely to make up the bulk of the new bill. At the centre is a radical step: the decision to allow MSPs to decide on billions of pounds worth of Scots' income tax receipts. Other taxes too, including stamp duty and land tax, will go to Edinburgh as well. For supporters, it is a major moment. "You are carving a federal relationship out of a unitary state," says Alexander of the relationship between England and Scotland she says the bill will create.

This week, her party, the Liberal Democrats and the Tories will lay aside differences to back the plans together. But for opponents - and there are many - the publication of the bill this week will give them a chance to see something they view, at best, as a mess and, at worse, as an impending economic disaster. Politically, the stakes are high. This is either the moment when Scottish Nationalism is pushed to the margins, as the UK settles into a more comfortable, less-centralised posture.

Or - if it goes badly - it could be the moment when Scottish independence becomes a more attractive and simpler alternative. Which way will it go?

FRONT and centre in the bill this week are the plans on tax. A new rate of "Scottish income tax" is to be created. Income tax rates on the bills of all Scots will be cut by 10p. The cash sum this cut equates to will then be removed from the grant Scottish ministers receive from Whitehall. Then, every year, those ministers will then have to decide whether they put the rate back up by 10p, and so equalise their spending pot, or raise or lower it compared with the UK. The aim is simple. Under the current system, Scottish ministers at Holyrood can do what they like, and it makes no difference to the cheque that comes up from London. Under the new plans, it is argued that there will be more accountability, with MSPs knowing that their decisions will have a direct impact on the amount of money, via income tax receipts, they have to spend.

Along with other new and existing tax powers, the reforms will ensure that around a third of the Scottish Government's money will come from taxes the Scottish Parliament levies, with the remaining two-thirds still allotted from a Westminster block grant. The balance is deliberate: the parties want responsibility for Holyrood without fracturing the Union.

Politically, the three Unionist parties are on the front foot this week as they seek to show a united, pan-UK front. For the first time, a Westminster bill will be debated first at Holyrood. Scottish Secretary Michael Moore, a Lib Dem, will front the plans alongside his deputy, the Tory David Mundell. He will also be alongside Labour's Scottish leader Iain Gray, Scottish Lib Dem leader Tavish Scott and Scots Tory Annabel Goldie. Politically, they hope to set a trap for the SNP. Despite arguing for more powers, the Nationalists have laid out their vehement opposition to the Calman proposals. Now the Unionist parties are to ask the Nationalist government to provide time for the bill, hoping that, in their opposition, they can portray the SNP as anti-Scottish.

A joint statement today from Goldie, Gray and Scott declares how the bill is "an opportunity for Scotland's two Parliaments to work together for the good of Scotland". They go on: "Three of the four major Scottish parties are prepared to make that happen. We hope that the SNP is up to the challenge and it will respect the will of the Scottish Parliament and put Scotland first." Five mentions of the word "Scotland" or "Scottish" in a short sentence; that's good going.

The SNP's pre-emptive attack began last week as First Minister Alex Salmond deliberately let slip that he had requested an urgent meeting with coalition Prime Minister David Cameron to discuss the plans. The Nationalist case against is firstly that the plans don't go far enough, and secondly that they actually make things worse. The two critiques are actually linked.

Because income tax is one of the few taxes being devolved to Scottish hands, there is a danger, say critics, that Scotland's future budget becomes over-reliant on income tax receipts, and is therefore buffeted uncontrollably by the country's regular falls and rises in income.

Those backing the SNP case include influential think-tank Reform Scotland. Director Geoff Mawdsley warns: "It's too narrow. You would be better off with a range of proposals but Calman just sticks with income tax. There are huge fluctuations in income tax receipts; it has fluctuated more than oil revenues." This might be good in the good times, say critical economists. But in the bad times, argues the SNP, the Scottish budget could suddenly see its income crash. Figures provided by the Scottish Government's economics team go as far as to claim that, had the plans been in place over the recent recession, the Scottish budget would have been 900 million lower in 2009-10 than under the current system.Baloney, say UK ministers. It is expected that a command paper alongside the bill this week will spell out how it intends to iron out any wild fluctuations by allowing surplus receipts gained in the good time to be stored up so they can top up any deficit in the bad times. There are also likely to be "stabilisers" put on the laws in the first few years to ensure that unpleasant unintended consequences are avoided.

That's not the end of the critique, however. The bill is also expected to prevent Scottish ministers from varying income tax rates, so that if MSPs chose to increase the Scottish rate by 9p, the basic rate (at current levels) would have to be 19p at the lower rate and 39p at the higher rate. The power to change those rates remains at Westminster, preventing Holyrood from - for example - loading more of the pain on to higher rate taxpayers. And if changes are made to tax thresholds - as they soon will be when the coalition government raises the income tax floor to income over 10,000, what happens then? The SNP claims that this could cut Scottish income tax receipts by 1m.

A lot of this may end up being resolved by annual negotiation between the Treasury and the Scottish Government as to how much the top-up block grant should be, in order to compensate. This makes many observers wince. Mawdsley says: "It all leads inevitably to an argument on how much the block grant should be. And that is a potential recipe for future conflict."

Other Unionist critics of the plan say that the Scottish parties are walking straight into a Treasury trap.

The Treasury, they warn, will use the new powers as an excuse for cutting further the sums sent up to Scotland, and by eventually ending the Barnett Formula - the system of funding which, historically, has given Scotland way more money per head of population than Wales. "I'm afraid the poor devils at the Scottish Parliament are going to get stung by all this.

The Treasury has been wanting to get rid of Barnett for years," says one seasoned Westminster hand.

It may trouble those Scottish residents who feel they are already paying enough tax, but even proponents concede that the reforms are taking the country into the unknown. One leading figure admits: "As soon as you have more responsibility, you might have less money." A Scotland Office source goes on: "It does open up the potential of volatility."

But then, isn't adding an element of risk into Scotland's cosy political consensus not what is required? Officials behind the scheme are scornful of the SNP's critique, noting that the Nationalists' own alternative for full fiscal autonomy is risk with bells on. The new Scotland Bill, they argue, offers a balance. For balance, read fudge, say the Nats.What families and households will want to know, however, is whether their tax bills will go up or down. Sceptics will argue that, with a centre-left consensus holding sway at Holyrood, taxes will only go one way. Green MSP Patrick Harvie is currently arguing that social democratic Scotland should put its money where its mouth is, and pay up to maintain our services.

Looking ahead to the new powers, Harvie says: "The question is do we want to defend services by raising revenue as fairly as possible to reduce the scale of the cuts coming our way?" It may be only a matter of time before it is Pennies for Scotland.

Against that, however, business leaders note how both the Lib Dems and the Conservatives favour a cut in Scottish income tax. As for the economy as a whole, one notes approvingly: "There will be an incentive on the Scottish Government to grow the income tax base."

It won't be 2015 until the plans are implemented - a clear sign of just how complex the process will be. That complexity alone will be enough for many to feel sceptical about Devolution 2.0. But a new era dawns for Scotland's parliament this week. And just like the journey so far, the destination is still unknown.