Devolving full income tax powers to Holyrood would unshackle the fiscal underpinning of the Union, writes Peter Jones
WHAT sort of entry in political history will Lord Smith of Kelvin merit? Will he be remembered as the man who engineered a new Scottish devolution settlement that brought lasting stability to Scotland and Britain, so benefiting the whole of the UK? Or will he be remembered for a so-called solution that turned out to be an unstable nightmare?
From the smoke signals rising, I fear it will be the latter, for the commission looks to be at risk of assuming that what Scotland wants, Scotland will get. No, the rest of Britain will have to agree to it.
Weekend reports suggest that Lord Smith’s commission is veering towards agreement that all of income tax should be devolved, which will help pay for a considerable amount of welfare spending also to be devolved.
To the unionist parties in the talks, especially the Conservatives, this will look, sound and taste like red hot radical chili peppers. The party that opposed devolution all the way, whose latest Scottish leader, Ruth Davidson, promised a firm line against any more after the Scotland Act 2012 was passed, now seems to be absolutely thrilled that it has won nothing but praise for the revolutionary nouveau devo-cuisine cooked up by its Strathclyde commission.
Labour and Liberal Democrats seem happy to go along with it as well. Without such a promised package of powers to present to voters at next May’s general election, they clearly feel that they would face annihilation from the remarkably resurgent SNP. And that, I suspect, is all that the three unionist parties care about.
Lord Smith’s prime role has been as a mediator. If he can achieve agreement between the unionists and the nationalists on the commission on the new devolution settlement, then that will be most of the job done.
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But the SNP seem to be convinced that if there was to be another independence referendum any time soon, they would win it. Therefore, they are most unlikely to agree to anything; more likely, they will brand it a sell-out and campaign on that basis next May.
So, any package that the unionist parties can agree on is the next best bet. The problem is that there is next to no evidence that this mooted package of devolving all income tax, plus lots of welfare, will work well in the real world but lots of evidence that it won’t work.
The heavyweight evidence arrived last week from the Centre for Macroeconomics. It surveyed 26 of its members, all of them highly reputable economists, asking: “Do you agree that the economic benefits of devolving full income tax powers to the Scottish Parliament and Welsh Assembly outweigh the possible costs?”
Four agreed that the benefits would outweigh the costs, one neither agreed nor disagreed, and 21 disagreed, believing that costs would outweigh any gains likely to be made. That’s a five to one majority against. All of these people cannot be talking nonsense.
A number of the economists are concerned that devolving all income tax to Scotland would break the most visible link between Scottish voters and the UK government. Income tax has a high visibility. Of all the taxes that might be changed in a UK budget, it is the one that everyone is most keenly interested in.
For example, David Cobham, of Heriot-Watt University in Edinburgh, says in his response to the Centre for Macroeconomics: “I would favour devolution of only part of income tax, plus a part of VAT proceeds. It is important to retain cross-UK arrangements which express the solidarity between the different parts of the Union and embody the risk-sharing that justifies the existence of the Union, as Gordon Brown has argued.”
But if Scottish taxpayers are no longer affected by income tax proposals, then they become a lot less interested in the UK government. Equally, a UK government may also be less interested in Scotland because it gets less of the tax revenue benefit from anything it might do to improve the economy.
Supporters of independence may well cheer such an outcome. The looser Scotland’s links with the rest of the UK, the more likely is Scottish opinion eventually to turn towards secession. This surely cannot be what the unionist parties want, nor for what Lord Smith wants to be remembered.
There are other problems, too. Suppose some crisis arises for whatever reason and the UK government needs to raise income tax to pay for resolving it. It would be unable to do so in Scotland, even though Scotland might well benefit from the resolution of the crisis.
If income tax hikes for this purpose were to occur, Scotland would get a free bonus, which taxpayers from the rest of the UK would have had to pay for. That would be another injustice to add to the unfairness which English and Welsh taxpayers believe is caused by the Barnett formula – and therefore yet more weakening of the Union.
Devolving lots of welfare power raises other issues. It weakens the risk-sharing of the Union which, when you boil it all down, is one of the prime purposes of the Union. When one part of a country suffers an economic blow, the other parts automatically step in to meet increased welfare costs and help the suffering part through the trouble.
But if much of welfare gets devolved, then those costs will have to be borne from Scottish tax revenues. Tax rates might well have to be increased, either to meet the bill directly or to pay for the borrowing costs, which could well be exactly the wrong thing to do in order to recover from the economic blow.
Finally, if this complete devolution of income tax spreads to Wales, Northern Ireland and England, the UK government will lose access to income tax which, since it is 27 per cent of its tax revenue, will severely hamper its ability to repay borrowings. As former chancellor Alistair Darling wrote yesterday: “Lenders realising that the UK might not be able to raise income tax to the required extent would charge more to lend, hitting everyone throughout the UK.”
The plans which Lord Smith looks bent on unveiling in a week’s time can only weaken the Union and make it more expensive to maintain. The SNP may privately thank him for that, but nobody else will.
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