Barnett formula ‘harder to defend’ post-tax move

Proposals to give Holyrood more powers on income tax may make the Barnett formula harder to defend, an economist has told MSPs. Picture: Donald Macleod
Proposals to give Holyrood more powers on income tax may make the Barnett formula harder to defend, an economist has told MSPs. Picture: Donald Macleod
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SCOTLAND’S £30 billion annual budget deal will come “under pressure” to be cut if the country is handed sweeping new tax powers in line with referendum pledges from pro-union leaders, MSPs have heard.

It will become increasingly difficult to “defend the existence” of the Barnett formula which determines Scotland’s share of public spending, economist Professor David Bell told Holyrood’s finance committee today.

“I would have thought it might come under some pressure if there is a substantially greater cake in terms of income tax in Scotland,” he said.

“I suspect there will be pressure from outside Scotland because it’s unpopular outside Scotland.”

Labour, the Tories and Lib Dems have all pledged that significant new powers will be coming to Scotland after the country voted No to independence - but insisted the Barnett formula will be protected. The Smith Commission has been established to broker a deal on more powers by the end of the month.

But Scotland is already poised to get new controls over income tax which come into effect next year, when the income tax rate is effectively cut by 10p and MSPs become responsible for raising it back up to the required level in line with need.

Scotland’s block grant, the funding settlement it gets from Westminster, is calculated as usual. But a slice is then deducted to account for the effective 10p in Scotland’s tax rate which the country will be raising for itself.

“Once you start to increase very substantially the amount that is being taken away from the Barnett allocation , then it becomes less easy to defend it’s existence,” Prof Bell went on.

“I was present at a meeting on Monday when very strong arguments were being made from a representative from Wales about how the Welsh Government feels perhaps with some justification that Wales has done badly out of the Barnett formula for some time.”

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