Gavin McCrone: Shaping life after No vote

Scots enjoy a higher level of public spending than south of the Border where pressure is growing for a change. Picture: Robert Perry

Surveys have shown that there is considerable support in Scotland for more devolution; indeed in recent polls perhaps more support than for independence. Although it is not an option in the forthcoming referendum, a number of proposals have been put forward and to a varying extent it is under consideration by the political parties. It is possible, therefore, that Scotland may end up with some kind of enhanced devolution.

The present constitutional arrangement will not continue in any event. The Scotland Act 2012, which followed the report of the Calman Commission, gives significantly increased powers that will come into effect in 2017. Many people may still be unaware of these changes. The most notable is the requirement for the Scottish Government to raise approximately half of income tax and with the block grant cut accordingly. It will, however, still leave the Scottish Parliament and local authorities dependent on Westminster for 65 per cent of their total expenditure.

There are two main reasons for wanting increased powers. The first is that, with a very different political balance in Scotland from the rest of the UK, there are those who would like to see greater power to vary policies. At present, for example, although most domestic functions are devolved, responsibility for the largest – social security – remains predominantly with central government. The second is that with so much expenditure devolved and much more limited power to raise revenue, there is a problem of accountability.

Several schemes of increased devolution have been put forward. But any scheme must take account of what would be acceptable to the other countries and regions of the UK. To my mind, this rules out some of what has been proposed under the heading of devo-max, if that is taken to mean that Scotland would raise all its own taxes and be responsible for all of its expenditure except defence, foreign affairs and the Royal Family. I do not see a system that would enable Scotland to set taxes so as to undercut other parts of the UK in attracting investment as likely to be acceptable, while big differences in personal tax, especially in the structure of such taxes, could give people an incentive to move. Nor do I think different rates of state pension within what would still be one country would be seen as fair.

Various schemes have, however, been put forward under the heading of devo-plus or devo-more. These include proposals from a committee set up by the Liberal Democrats under Sir Menzies Campbell, proposals from Reform Scotland set out by a committee under Jeremy Purvis and a report for the Institute of Public Policy Research by Professor Alan Trench. The Liberal Democrats and the Purvis Group both propose entrenching the Scottish Parliament so it could not be abolished by Westminster, and the Liberal Democrats see their scheme as a step towards a fully federal UK. All three sets of proposals include the devolution of the whole of income tax, apart from, in the Liberal Democrats’ case, tax on savings and investments. This would be hard to devolve for practical reasons, but could be assigned. They would also keep a UK-wide system of reliefs and allowances. Only the Purvis Group envisages eventual devolution of a geographical share of North Sea revenues.

What is one to make of all this? I set out in my book Scottish Independence: Weighing Up the Economics what seems to me practical and with a reasonable chance of being acceptable. I think three-quarters rather than the whole of income tax could be devolved, because I think the UK government has to retain some power to raise this tax. Without this, should a major emergency arise, it would be left heavily dependent on VAT, and circumstances might well arise where it wanted, for example, to ease the burden on poorer people by altering the balance between VAT and income tax. EU rules preclude different rates of VAT in one country but the proceeds could be assigned to the Scottish Parliament. Some people will argue that there is no point in assigning a tax if one cannot alter the rates. I disagree. If the Scottish Government succeeded in getting the Scottish economy to grow faster, it would receive some benefit in increased revenue. It would also greatly reduce the size of the block grant, which could make the whole system more acceptable to people in other parts of the UK. Together with the minor taxes devolved under the Scotland Act 2012, this would mean that over half of the Scottish Government’s expenditure – 57 per cent – was financed directly by taxes paid by people in Scotland.

Social security is the one major domestic responsibility that is not devolved to the Scottish Parliament. Yet it costs more than the expenditure on health and education combined. I suggest some parts of welfare spending, amounting to about 25 per cent of the Department of Work and Pensions’ expenditure, that might, and probably should, be transferred to Scotland. Some of these would fit with the Scottish Government’s existing responsibilities for health and education. Another is housing benefit; this seems to me an obvious case, since the Scottish Parliament has responsibility for housing policy. But under any acceptable devolution scheme, the greater part of welfare expenditure seems bound to remain a UK responsibility. This includes the state pension, which accounts for nearly half of the total expenditure, and several of the benefits where different rates in Scotland would be regarded as unfair.

Enhancing devolution on the lines set out above would be likely to make a revision in the way the block grant is calculated unavoidable. The Barnett formula was expected to eventually narrow the difference between expenditure per head in Scotland and the average for the UK. But over some 30 years it has failed to do so and Scottish public expenditure, according to the Scottish Government’s own figures, is still over £1,000 per head higher in Scotland than in England. It is hardly surprising that there is pressure in England to end what is seen by people there as an unfair system. In the long run, differences in public expenditure per head between the various countries of the UK and regions of England ought to be justified on the basis of need. But no such needs assessment has been carried out for Scotland in recent years. If it were, it might show that special needs in Scotland, such as sparsity of population or urban deprivation, did justify extra expenditure, but those who have studied the matter doubt if it would justify the difference that presently exists.

If the referendum vote goes against independence there is a danger that those advising Government in London may simply heave a sigh of relief and put the files away. That could lead to disillusion and anticlimax in Scotland. So an alternative is needed. It would help if the three unionist parties that oppose independence could agree on what they would offer in its stead, because the absence of this is a major cause of the Better Together campaign’s inability to project something positive for the 2014 referendum.

• Gavin McCrone’s book Scottish Independence: Weighing Up the Economics is published by Birlinn at £7.99p and is available from tomorrow.

• Professor Gavin McCrone is a former chief economic adviser to the Scottish Office. .