Third way the best option for Scotland

At SOME point before May 2016, the Scottish people will be given the opportunity to vote in a referendum on independence. Already we have started to witness unionist and nationalist politicians arguing about the various benefits of their preferred option, or, more often than not, the disadvantages of the opposing view.

I, and my colleagues at Reform Scotland, believe this referendum should offer the Scottish people a genuine choice. The Scottish Government has indicated that there may be three options put to the electorate and we would certainly support that level of choice. However, while there has been plenty of discussion about independence and the status quo, there has been little debate about what this third option should look like.

That is why, today, we are publishing a report entitled “Devolution Plus” which sets out what we think would be a credible third option in this referendum. It is also the basis of the written evidence we have submitted to the Scottish Parliament’s Scotland Bill Committee. So what would “Devolution Plus” look like? Well, for us, the starting point in all our work on the financing of the different tiers of government has been that each level, be it Westminster, Holyrood or our local authorities, should be responsible for raising the majority of the money it spends. In the case of the Scottish Government, our view is that Holyrood should have control over sufficient tax and borrowing powers to meet its spending commitments, removing the need for a block grant.

This addresses what we see as the main defect of the current devolution settlement, which is its lack of financial responsibility. In terms of revenue-raising, the UK is one of the most centralised nations in Europe and the G7. So, although Holyrood is responsible for nearly 60 per cent of public spending in Scotland, it raises only 6.4 per cent of the funding that meets this expenditure. The only other country in Europe where central government collects and sets more than 90 per cent of taxes is Greece. The centralised allocation of budgets in this way does not provide the right incentives to encourage efficient public sector spending.

One way to remedy this for Scotland would be independence. However, in “Devolution Plus”, in line with our previous papers, we have examined how this might be achieved within the framework of the United Kingdom. Unlike our earlier proposals, we have looked at whether there is a case for further areas of spending responsibility being devolved. Social protection expenditure, made up of welfare benefits and the state pension, accounts for 93 per cent of identifiable spending by the UK government in Scotland. In 2009-10, a total of £19.9 billion was spent on social protection in Scotland, of which £15bn was spent by Westminster, £4.7bn by councils and £0.1bn by Holyrood. Therefore, if any further meaningful expenditure powers were to be devolved, they would come under this heading.

Our conclusion is that control over much of this spending on social protection should be transferred to Holyrood. That is because the main aim of spending on social protection is to alleviate poverty. Yet many of the other areas associated with welfare and reducing poverty, such as social inclusion and housing, are devolved. This division between Westminster and Holyrood means policy on poverty is unfocused and inefficient. Over the past 12 years, different Scottish Governments have unveiled proposals to address poverty, but the ability of the Scottish Government to address this problem is seriously hampered because many of the main levers to address it are held by Westminster.

Under our proposals, control over £7.2bn of the £15bn spent on benefits by Westminster would be devolved to Scotland. Westminster would then primarily be left with responsibility for state pensions, as well as other areas such as statutory maternity and sickness pay, which we think are better handled at UK level. However, this devolution of aspects of welfare provision to Scotland would enable a more coherent approach to the alleviation of poverty to be adopted.

The new social protection powers we believe should be devolved would increase the amount of money that Holyrood has to raise to meet its own revenue. This would require a significant increase in its current revenue-raising powers, well beyond the proposals in the current Scotland Bill. We believe that the best way to do this is by reserving a number of UK taxes and devolving all other taxes to Scotland. Our specific proposals would leave Westminster primarily with control over VAT and National Insurance to fund its spending in Scotland. This makes sense because VAT must be constant within each EU member state and has less direct influence as an economic lever than many other taxes, while National Insurance is similar in nature to Income Tax and is historically associated with pensions and sick pay, which we have proposed should remain a Westminster responsibility.

Most other taxes would be in the remit of Holyrood, including Income Tax and Corporation Tax, which should be devolved to avoid confusion and duplication. These taxes would also give the Scottish Government the important economic levers to tailor economic stimulus to Scotland’s business strengths.

Of course, some say we cannot move in this direction because of Scotland’s budget deficit. It is true that the 2009-10 GERS figures show Scotland running a budget deficit of just over £11bn. But this deficit is smaller proportionally than the deficit for the UK. It is also worth remembering that Scotland is contributing towards paying for the interest on all UK debt that is being used to fund the UK deficit.

Under our proposals, Scotland would receive its share of deficit borrowing relevant to the rest of the UK, since it will continue to pay its share of the interest on the debt to fund this. In the event of a surplus, Scotland would contribute its share of the repayment. Therefore, in 2009-10 the deficit in the UK was £126bn or 19.7 per cent of spending, so Scotland should receive £11.6bn as its share of the borrowing. If Scotland’s deficit is larger, then it will have to borrow to fund the extra; if less, it will have a surplus. There is, at present, a very real imbalance between Scotland’s responsibility for setting and collecting income and the expenditure for which it is responsible. “Devolution Plus” would shift responsibility for raising revenue from Westminster to Holyrood, creating a much more even balance between the two centres of government. This would give both real incentive to act more responsibly within their respective areas of power.

Our proposals would completely remove the need for the block grant since each level of government would have its own powers to fund its respective Scottish spending. Westminster would have been responsible in 2009-10 for raising nearly 36 per cent of all income and, including the deficit borrowing, for funding 48.7 per cent of all Scottish expenditure. In future, as the deficit is brought under control, this would reduce, providing a real incentive for Holyrood to balance its expenditure and income.

“Devolution Plus” would both help the Scottish Parliament become more fiscally responsible and provide some meaningful additional tools to address social problems affecting Scotland. That is why we are convinced it should be one of the options presented to people in Scotland at the forthcoming referendum. lBen Thomson is chairman of Reform Scotland