George Kerevan: Labour fantasy of how Union works

The Scottish Parliament. Picture: Ian Rutherford

First we had the 1998 blueprint that set up a Scottish Parliament with the right – so far unused – to vary the standard rate of income tax by 3p up or down. In retrospect, this fiscal power was a non-starter. Raising the rate would only lead to the UK Treasury cutting its block grant to Holyrood. Lower taxes might grow the Scottish economy but there was nothing in the rules to guarantee the UK Treasury would hand over any revenues gained thereby.

Following the SNP’s victory in 2007, the Calman Commission was hastily convened, resulting in the 2012 Scotland Act. Under this complicated reform, Holyrood can’t avoid setting an income tax rate. Effectively, the Scottish Parliament will set up to 10 percentage points (plus or minus) of the 20 per cent, 40 per cent and 45 per cent tax bands. Holyrood isn’t allowed to interfere with thresholds, and it must apply the same percentage change to all bands, so no soaking the rich while cutting taxes for the poor.

Calman comes into force in 2016. For my money, it has serious deficiencies beyond the lack of control over business taxes to promote growth. Under Calman, only 35 per cent of Scottish public spending is funded from cash raised directly by the Scottish Parliament. That leaves Scotland a financial ward of the UK Treasury and at the mercy of Westminster’s obsession with austerity.

Calman was supposed to lay the devolution ghost, especially calls for full fiscal autonomy. But then came the referendum. Hence Labour’s new proposals, which are contingent on Ed Miliband winning next year’s UK general election. They boil down to an extension of Calman. Instead of varying the tax bands by 10 percentage points, Holyrood will get to vary them by 15 points. Corporation Tax, VAT and Air Passenger Duty remain at Westminster.

This represents a significant watering down from the interim proposals that came from Labour’s Fiscal Commission last April. The earlier version gave Scotland full control over income tax, including rates, thresholds and bands. In the new iteration, Holyrood would raise only 40 per cent of its own needs – a very modest upgrade of the 35 per cent provided by the 2012 Act.

Labour’s internal wrangling over just how much of income tax to devolve to Holyrood should be a warning: it guarantees alterations to the existing Barnett Formula, which shares out public funds between the UK nations. Carwyn Jones, Labour First Minister in Wales, claims the existing settlement is over-generous to Scotland. He wants a new assessment of the social needs on which the Barnett payout is based. He says Wales is due another  £300 million per annum – money that will certainly be deducted  from Holyrood.

This brings us to the central theoretical weakness of Labour’s approach to fiscal devolution: its view that the Union is the best guarantor that resources can be pooled to insure against economic and social stress in different parts of these islands, and safeguard the welfare state.

I still think there is opportunism in the continuing opposition of its Westminster backbenchers to devolution and independence. Nevertheless, there are enlightened people in the Labour Party who – post the triumph of neo-liberalism and post the 2008 meltdown – believe the Union can be made into a progressive force. If we are generous, you can see this vision in Labour’s fiscal proposals. Hence the disavowal of devolved business taxes, lest they eat into economic solidarity between the constituent nations of the UK. If you accept this premise, then full fiscal autonomy (aka devo-max) is out because you need to pool taxes.

However, there is no evidence the Union acts as this social shield. Gordon Brown, as chancellor, connived in the de-industrialisation of Scotland and the north of England while he pandered to the City bankers. Since 2010, cuts to public sector employment have been far higher (as a proportion of the regional total) in Scotland and the English north than in London or the south-east.

The welfare state is already being dismantled south of the Border. The English NHS has switched to contracting out everything from mental health services to diagnostics such as blood tests. Around 70 per cent of NHS contracts now go to private operators. The result is a potential for conflicts of interest that makes the banking sector look virginal. Circle Health, a private care firm, has already won £1.4 billion of English NHS contracts. Amazingly, Circle Health is owned by hedge funds whose investors are big Tory party donors.

Scottish Labour’s notion of how the Union works is a mixture of fantasy and nostalgia. If Labour is elected at the next Westminster elections, its parliamentary leadership will capitulate to the City bankers and metropolitan elite – as it always does. By then it will be impossible to reverse English NHS contracts.The next Westminster parliament – even under Labour – faces another £25bn in cuts to balance the books.

Tinkering with the existing 2012 Scotland Act – all Labour is now suggesting – adds little to the powers Holyrood inherits anyway in 2016.

Labour’s justification for being so pusillanimous is that we must not imperil the social union through tax competition. But if the welfare state model is already in crisis south of the Border, a better approach is to let Scotland – independent or with full fiscal autonomy – create a new model of social democracy. A model that will actually reinforce and reinvigorate progressive opinion throughout the British Isles.

Come 18 September, the choice is clear. Gamble on Labour finding the will and money to build Jerusalem – which it’s never done before. Or rely on independent Scotland’s natural social democratic majority to safeguard the welfare state.