Peter Jones: Paving the way for a tax ‘betrayal’

Total devolution of income tax would put the fiscal system at risk – and play into the SNP’s hands, writes Peter Jones
Lord Smith, head of table, chairs the Smith Commission for talks on devolved powers for Scotland. Picture: PALord Smith, head of table, chairs the Smith Commission for talks on devolved powers for Scotland. Picture: PA
Lord Smith, head of table, chairs the Smith Commission for talks on devolved powers for Scotland. Picture: PA

CRUDE oil prices and the tax revenues that follow from them played a big part in the independence referendum. They could also have a lot to do with influencing the recommendations of the Smith Commission on how to increase the tax and other powers of the Scottish Parliament.

This thought may seem a bit of a stretch, but I came to this conclusion after thinking about one of the recommendations of the Scottish Government’s Council of Economic Advisers.

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Readers will recall that this body was set up by Alex Salmond to give him advice on how to improve Scotland’s economy. Unionist-minded readers may be inclined to dismiss it because it was heavily loaded with people of a known nationalist inclination, but they should be a bit more broad-minded than that.

One piece of advice, summarised in a Scottish Government press release, was that it would be better if the Scottish Government had a “suite” rather than a “small basket” of taxes at its command.

The difference between “suite” and “small basket” is not easy to understand and no guidance was given in the press release. I think “suite” means a range of taxes which cover different aspects of economic activity – income (both individual and corporate), consumption (which means sales taxes such as VAT and alcohol duties), property transactions, capital gains, resource rents, etc.

The risk in a “small basket” is that one tax revenue stream can be hammered by events, which affects the revenues of a government dependent on that stream and just a few others much more adversely than it would affect the finances of a government with much more diverse, or “suite” of revenue sources.

This problem is graphically illustrated by the crude oil price collapse, now down below $80/barrel, the chances of which happening appeared to range between remote and unthinkable just a few months ago.

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Asked about this recently at Holyrood, Alex Salmond airily said it was a short-term supply issue – ie, that too much oil was being produced, so depressing the price, and it would disappear next year when prices would rise again.

Even as he said that, America’s Energy Information Administration, regarded by many in the industry as one of the more reliable forecasters, dropped its forecast price for Brent crude in 2015 by a full $18 compared to its previous monthly prediction, to a predicted $83/barrel.

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Yes, it said, the price fall was caused by oversupply, but it thought this could continue next year, adding: “There is significant uncertainty over the crude oil price forecast because of the range of potential supply responses from the Organization of the Petroleum Exporting Countries, particularly Saudi Arabia, and US tight oil producers to the new lower oil price environment.”

Translation: “We have no means of knowing whether the extra crude oil supply is likely to persist or not, so prices could go up or stay low, but at the moment we are betting on them staying low.”

Even large economies such as Russia are vulnerable to this. President Vladimir Putin depends on oil and gas revenues for 45 per cent of his administration’s tax revenues. Now that they are nose-diving, he is in big domestic trouble.

Recession looks certain and the Russian rouble is vying with the Argentinian peso for the unwanted title of the world’s worst performing currency of 2014.

The wholesale devolution of income tax, which the Conservatives and the Liberal Democrats have proposed to the Smith Commission, risks Scotland being landed with much of the same problem.

It means that the Scottish Government would rely on income tax for about one quarter of its budget, but would not have much to play with in other compensating taxes. While income tax is not as volatile as offshore revenue, it still falls in a recession. And if a lot of welfare spending is also devolved, there would also be an increase in welfare bills at the same time.

Devolution of welfare also means Scotland cutting itself off from the UK system of pooled resources for risk-sharing and therefore it could not expect to get a special handout to help with public spending on welfare payments.

Well, I know devo-max-inclined readers will scoff that these welfare payments are being hammered by austerity within the UK. But what the Council of Economic Advisers is hinting at in its observation is that the need for any such austerity could be just as bad, or even worse, in the kind of new settlement being advocated by the Tories and Lib Dems.

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Moreover, it also exposes Scotland to the long-term problem of demographic decline, where the trend is towards there being fewer income tax-payers and more elderly dependents. It’s a problem for all countries but is more acute in Scotland.

Of course, I am all in favour of Scottish politicians having to face up to these problems, but there is no need to handicap their ability to do so by giving them an unbalanced fiscal system that risks collapse when faced with the first challenge that the vagaries of the global economy fling at it.

Part of the problem the commission faces is that it seems transfixed by the idea that taxes have to be completely devolved or not at all. This just isn’t the case. There are plenty of examples around the world where devolved regional governments have substantial tax power, usually on a shared basis.

The commission should be looking at that because, after all (and it seems very strange to have to keep repeating this), the majority of Scots voted to stay in the UK. They want a stronger and better Scottish Parliament, but they also want a better Britain. Total devolution of income tax offers neither and risks making things worse.

This will suit the SNP down to the ground. From what was said at their weekend conference, there appears to be no chance that the party or the Scottish Government will welcome a Smith Commission package, however strong it might be, as a good step forward.

Party leaders appear to be preparing the way for them to denounce it as a betrayal of the Scottish people. After all, saying that the package is a big improvement by the unionist parties and will produce a better Union isn’t going to help them win seats at next May’s general election, is it?

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