Peter Jones: Taxes powerplay could see unexpected results

Lord Smiths Commission report, the basis of talks between the governments, now appear to divide them. Picture: Alex Hewitt

Political rules these days have a habit of being completely up-ended. Are we about to see the reversal of the usual Scotland-demands-but-Westminster-refuses tug-of-war with the UK Conservative government’s offer to devolve big new tax powers to Holyrood being effectively refused by the Nationalist government in Edinburgh? That could well happen, according to what SNP First Minister Nicola Sturgeon was saying at the  weekend.

If this wasn’t unusual enough, there is the background of a weekend opinion poll being interpreted, somewhat excitedly I thought, as portending the possibility that Labour could be pushed into third place in the up-coming Scottish elections by the Conservatives, who could become the principal opposition to the Nationalists.

And there is more. Now we have a commission set up by the Scottish Tories which has published a highly intelligent discussion of how devolved taxes – something which the Tories historically argued were devil’s spawn destined to break up the British union – might be used to foster a more dynamic Scottish economy thereby, presumably, strengthening the Union.

We should not, I suppose, be surprised by these strange events. Politics all over the western world, from the bizarre onward march of Donald Trump in the US presidential hustings to the upsurge of previously fringe Left and Right politics in Europe, is in an extraordinary state of flux. There is no reason why Scotland should be untouched by these currents of change.

The first consequence that I mentioned – the growing impasse over how to implement greater tax devolution – was perhaps predictable. It arises from the oddities in the hastily cobbled together Smith Commission agreement on tax devolution. I thought, and said, at the time that it was a bad agreement, flawed both in principle and in detail.

The mistake in principle is that it is not capable of being replicated in other parts of Britain without undermining the foundations of the Union. The error in detail is that there seems to be no way of designing the framework in which the tax machinery can operate without eventually creating unfairnesses which will also erode the Union.

This latter problem of the fiscal framework is where the negotiations between the Scottish and UK governments are foundering. Although the legislation giving the Scottish Parliament powers over income and other taxes is expected to be passed by this May’s Holyrood elections, no use can be made of those powers until the machinery governing their use is in place.

So, if the fiscal machinery is not agreed soon – by mid-February says Ms Sturgeon – use of the new tax powers by the Scottish Government elected in May will be postponed for at least a year. While that is the technical effect of failing to reach agreement, the political effects will be a huge political slanging match between the SNP and the Tories over who is to blame.

Such a furore will dominate the Scottish elections. That may be Ms Sturgeon’s intention, her reckoning perhaps being that she is bound to win that argument and thereby strengthen her post-election negotiating position. Irrespective of the political fall-out, however, the problem will still remain.

The fiscal framework sounds dull and dry but really does matter. The political aim is that the Scottish Government should raise more of what it spends from taxes it controls and get correspondingly less money in Treasury block grant so that its overall budget total remains the same and taxpayers on either side of the Border suffer no detriment.

This is simple to say but fiendishly difficult to put into practice, especially as the Smith proposals decreed that taxpayers on one side of the Border should not lose out as a result of fiscal decisions on the other side, not just in the first year of the new tax system, but in every year thereafter.

One big difficulty is that Smith also said that the population-based Barnett formula for deciding the annual and reduced Treasury block grant to Scotland, which will still be around half of Scottish Government spending, should stay. The problem is that taxes which get raised in the rest of the UK (but not in Scotland) should only pay for higher spending in the rest of the UK.

Again, that sounds simple and fair, but it needs an annual adjustment to the Barnett formula to prevent English-only tax revenue leaking into Scottish public spending. Academics led by David Bell, professor of economics at Stirling University, examined how this might work under all sorts of scenarios of different population growth. They concluded “it is impossible to design a block grant adjustment system that satisfies the spirit of the ‘no detriment to devolve’ principle at the same time as achieving the ‘taxpayer fairness’ principle, at least while the Barnett formula remains in place.”

They found it all too easy to model scenarios of differing population and economic growth rates in which Scottish public spending would be unfairly affected, both adversely and beneficially, whatever mechanism was adopted for adjusting the annual block grant element of the Scottish budget.

This, I imagine, is where the talks on a practical fiscal framework for the Smith tax package have got bogged down, and is also where Ms Sturgeon faces a difficult decision. She said quite clearly at the weekend that “we will need to see more movement from the UK government than we have seen so far and if we don’t get that – I repeat again – I will not sign up to something that is unfair to Scotland.”

If it comes to that, the May Holyrood elections will have a wholly unexpected background. On the one side there will be a UK Conservative government offering a big tax devolution package complete with a Scottish Conservative party equipped with a fully-fledged set of ideas, as set out by its commission, for using the tax powers. On the other, a Nationalist government saying it doesn’t want the powers. It would be saying that they are unfair but, since the argument is based on technical matters, it may prove a difficult message to sell.

A Scottish Tory party pro-more tax powers versus an SNP anti-more powers would be a fascinating role reversal.

Somehow, I doubt it will come to that, or that if it did that there would be a huge Tory revival, but it would be a lot of fun.