NEW powers handed over to Holyrood could create tax competition in the UK, Chancellor George Osborne has told MPs.
Draft clauses are set to be laid down in the Commons tomorrow which will allow Holyrood to take control of rates and bands of income tax in Scotland.
Giving evidence to the Treasury select committee on the new fiscal powers – part of the recommendations agreed by the commission chaired by Lord Smith of Kelvin – Mr Osborne said the prospect of the Scottish Parliament being able to take responsibility for raising much of the money it spends was “exciting”.
Mr Osborne was pressed on the prospect of Scotland starting tax competition within the UK, with the Scottish Tories wanting to use the new powers to cut income tax.
He said: “Ultimately that is a decision primarily for the Scottish Parliament and the Scottish Government as to whether they pursue that or not.”
But he added: “I think it is quite interesting that off the back of the changes we announced at the Autumn Statement to stamp duty that then led to the Scottish Government saying it would revisit its proposals on stamp duty.
“You could say that that is a bit of tax competition in action.”
But he warned cutting taxes aggressively could lead to pressure on the Scottish budget.
He said: “If the Scottish Government were to pursue an aggressive policy of lowering taxes, under this agreement they would have to bear the first round impact of that because in the first instance they would potentially forgo revenue.
“But this would be assessed under the system I would envisage by independent fiscal councils. If over time they gained money as a result of a stronger more entrepreneurial economy then they should see the benefits of that decision.”
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However, he also suggested a decision to raise taxes on the rich, proposed by Scottish Labour leader Jim Murphy, could see higher rate tax earners fleeing south of the Border.
Asked about the “no detriment” clause in the Smith Commission proposals to protect Scotland from shortfalls, he said: “The UK government will negotiate this in detail after the general election.
“My interpretation of no detriment is that in the example you give, Scotland would live within the consequences of having imposed a punitive rate of income tax.
“So, if it imposed a punitive rate and as a result people left Scotland, to the rest of the UK and other parts of the world, Scotland would live with the consequences – it would take responsibility for that action.”
Committee chairman Andrew Tyrie said: “The Smith Commission proposed a ‘no detriment’ principle, by which the UK and Scottish governments should reimburse each other for the consequences of their policy decisions.
“The Chancellor’s interpretation holds out the prospect of meaningful choices and benefits from devolution, missing from the Smith Commission report.”
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