The Smith Commission proposals will tax the smartest brains and could leave the rest of us even more puzzled, writes Peter Jones
How many ways are there not to implement the Smith Commission agreement? Dozens, if not hundreds, I suspect. Which is why I also suspect that Nicola Sturgeon and the SNP hierarchy are, despite their complaints of the inadequacy of the proposed devolved powers, privately extremely pleased with the outcome. And also why the unionist parties have a much tougher task on their hands selling this to the electorate than they imagine.
Much of the problem is in interpreting the meaning of the agreement. Take for example, paragraph 75. Its first sentence reads: “Income tax will remain a shared tax and both the UK and Scottish parliaments will share control of income tax.”
The meaning of the word “share” here is already pretty lopsided. As far as we Scottish income tax payers are concerned, the UK Chancellor will set the personal tax-free income allowance we get, any tax reliefs (such as for pension contributions), and the tax we pay on savings and any company dividends. But that’s it.
For most folk, most of their tax bill will be set by the Scottish finance secretary, who will have the power to determine the rates of tax to be paid and at what levels of income (bands) those rates will apply. So, I guess, for most people the UK Chancellor will become a pretty insignificant player in determining tax bills.
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But what about the second sentence of Paragraph 75? It reads: “MPs representing constituencies across the whole of the UK will continue to decide the UK’s Budget, including income tax.”
Interpreted literally, it means that MPs from Scotland will continue to vote on the Budget; literally the total volumes of public spending, tax revenues, and borrowing to cover any gap. So that must include the income tax (because it singles that out specifically) paid by everybody in England?
Apparently not. According to what David Cameron’s and Nick Clegg’s spokespeople were saying last week, they are both determined to apply the “English votes for English laws” principle to the determination of income tax paid by everybody but Scots.
Presumably, if income tax also gets devolved to the Welsh and Northern Irish assemblies, then their MPs will not determine income tax in the UK Budget either. So in some way or other, English MPs will come to determine income tax in England.
And I think most English voters will regard that as only fair and right.
Let’s leave aside the political issue of whether this is a deliberate time-bomb being flung at Labour here. Rather more important is the question of whether barring Scots MPs from voting on UK income tax rates and bands is a breach of the Smith Commission agreement.
While there is an argument that Scottish MPs joining in votes in the tax-free allowance, reliefs, and tax on savings and dividends fulfils the agreement, it is a pretty thin one. Most reasonable people would conclude that excluding Scottish MPs from votes on tax bands and rates, which raise about a quarter of the revenue side of the UK Budget, constitutes a breach of paragraph 75, albeit for very good reasons.
Here’s another interesting paragraph, right at the back of the agreement and expanding on the financial provisions. It says: “UK economic shocks: the UK government should continue to manage risks and economic shocks that affect the whole of the UK.”
That’s sensible, because all the major fiscal, monetary, and welfare levers for managing shocks will remain with the UK government. The next sentence expands a little on that: “The fiscal framework should therefore ensure that the UK government retains the levers to do that, and that the automatic stabilisers continue to work across the UK.”
“Fiscal framework … levers” mean tax powers and “automatic stabilisers” mean welfare functions, such as paying unemployment benefit. The third sentence is the really interesting one: “The UK parliament would continue to have a reserved power to levy an additional UK-wide tax if it felt it was in the UK national interest.”
What this does is deal with an objection that I and others raised to the proposals as they were tabled to the Smith Commission. The near-complete devolution of income tax meant, especially if it extended to the rest of the UK, that the UK government could have lost control of income tax.
That would have been serious in a situation such as the last financial crisis and subsequent recession because the ability to raise taxes is critical if a government wants to get the lowest rates it can when borrowing money. With no control over income tax, lenders would question a government’s ability to raise the revenue to repay loans, causing interest rates to rise to everyone’s detriment.
This paragraph deals with the problem. It means that if there was a crisis, the UK government could levy a special income tax, only on a UK-wide basis, which Scots would have to pay alongside their Scottish Government-controlled income tax.
How would that play with Scottish voters? If people had come to believe that the Scottish Government was responsible for their income tax bill, would they not be liable to think that some unexpected increase imposed on them by the UK government broke the agreement?
The UK parties will have to play this very carefully. The SNP is already denouncing the agreement as a betrayal of the vow and nowhere near the “federalism” or “home rule” labels that had been gaily attached to the famous “vow”. The slightest sign of back-sliding will provoke a great volley of sell-out accusations.
That will become an accusation that will stick if any of the unionist parties also start accusing each other of abandoning the terms of the agreement. But of course, we are now, especially after tomorrow’s autumn statement, well into election season.
Not only does the SNP have an unprecedented lead in the polls, the referendum has created an electoral mood which has never been so distrustful of Westminster with, rather extraordinarily, a large portion of voters seeing little difference between the Tories, Labour and the LibDems.
Thus, if any of the unionist parties try to use alleged back-sliding on Smith by other parties to try to win the election, they could lose Scotland completely to the SNP.
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