George Kerevan: The tax time bomb ticking away under Holyrood

Published on Wednesday 3 June 2009 21:45

ON Friday, the Commission on the future of devolution, chaired by Sir Kenneth Calman, is due to reveal its thinking on giving the Scottish Parliament greater fiscal responsibility.

The Commission being an exceedingly leaky ship, The Scotsman has already published the gist of Calman's recommendations.

Out goes the Barnett Formula, whereby Scotland automatically gets whatever new money is spent in England pro rata to its population. Instead, Holyrood will be assigned all the revenues raised in Scotland from a series of designated taxes. They would include, for instance, income tax and excise duties but not oil revenues or corporation tax. In addition, Holyrood is to get modest capital borrowing powers, which will be capped and subject to Treasury approval.

Before we judge this fiscal package, it is as well to point it out the chances of the Calman proposals being legislated for are diminishing by the day. Calman was a knee jerk reaction from the three main unionist parties to the SNP victory at Holyrood in 2007. But with the Labour government in meltdown at Westminster and a general election brewing, the London parties now have other constitutional fish to fry. Any future Tory government will be more concerned with cleaning up the cesspool at the Palace of Westminster than finding parliamentary time to tinker with the devolution settlement.

The only conceivable reason for David Cameron to implement the Calman fiscal proposals – or something like them – is because he thinks it will play well in that part of Middle England where they believe (wrongly) that Scotland is being subsidised with English taxes. Faced with the national debt mountain bequeathed by Gordon Brown and Alistair Darling, a Machiavellian Mr Cameron may also calculate that by scrapping the Barnet Formula he can force a non-Tory administration in Scotland into making savage cuts in public spending, thereby avoiding any blame himself.

For these reasons, we need to examine the Calman proposals very closely indeed. Instead of being a devolutionary gift horse, Calman could be a ticking bomb that will actually put Holyrood in a fiscal straightjacket.

The toxic heart of the Calman recommendations involves a perverted notion of assigned taxes. In federal systems it is common for regional administrations to keep some or all of the taxes raised in their jurisdictions apart from a cut for the national government to run defence and other common services. There is usually also a federal pooling system whereby the richer regions subsidise the poorer one.

However, the key point about such a system is that a marginal rate of tax that is levied is decided by the regional government itself, or is co-determined by the national and regional governments acting in concert. Thus in Germany, the rate of income tax is co-determined by Berlin and the regional governments – not just imposed by the party in power nationally.

Calman, however, seems to be proposing that Holyrood is assigned tax revenues raised in Scotland without the Scottish Parliament having any say over the marginal rates applied. Such a set-up would be pernicious. Any revenues spent in Scotland would be based on taxes raised locally. Superficially, this system would seem to force politicians and voters to be fiscally more responsible rather than rely on outside "subsidy".

But if Holyrood can't set tax rates it will have no control over economic growth and so be unable to grow more tax revenues. Westminster, by controlling the rate of tax, will still be in charge of what Holyrood can spend.

Such a system of assigned taxes controlled from London would be a retrograde step compared with the present Barnett Formula. Barnett, whatever its many faults, has the merit of transparency and a crude "fairness" in that Scotland, Wales and Northern Ireland get (relative to their population size) what England gets, when public spending increases or decreases.

Admittedly, in recent years, the Treasury has been bending the Barnett rules and re-calibrating the base figure on which additional funds are calculated, in order to make disguised spending cuts in Scotland. But replacing Barnett with assigned taxes set only by Westminster is a recipe for even more outrageous Treasury manipulation. And it would do nothing in practice to ensure greater fiscal responsibility in the devolved parliaments and assemblies.

So why is Calman going down this awkward road rather than simply proposing that Scotland set and collect designated taxes; e.g. excise duties? Because, at every stage, devolution has been designed to leave as much power at Westminster as is politically possible. And the heart of power is control over the money.

Consider: Calman has chosen to leave oil and gas revenues with Westminster? Why such an arbitrary choice? The ostensible reason is that oil revenues fluctuate too much and so would destabilise Scottish budgets. But wait a minute – it is the London Treasury which is daft enough to use oil and gas revenues to support its revenue budget and frequently gets its sums wrong because of that. By Calman's logic it is the dysfunctional UK Treasury that should lose control of oil taxes.

In Canada and Australia, the state governments get to keep revenues from taxes on oil and mining. The true reason why the Calman Commission left oil revenues outside of its assigned taxation system is because it knew the Treasury would laugh at the idea of giving up control over taxing natural resources.

Which brings us to the very modest borrowing powers Calman concedes to Holyrood. They are roughly on a par with those of your nearest town council because that is how the Treasury sees the Scottish Parliament.

As a nationalist (and SNP candidate) I might be expected to arrive at these conclusions. But I've never been averse to transferring genuine power to Scotland on a case by case basis. It's just that I don't think this is what Calman is offering. I've shaken the parcel and I can hear it ticking.