Osborne hits out over SNP ‘balance of power’

George Osborne answers questions in front of the Treasury Select Committee. Picture: PA

The Chancellor, who confirmed that draft legislation on the devolution of extra powers to Holyrood will be published tomorrow, said restrictions on the voting powers of Scottish MPs would “have to apply on areas connected with the Budget” after most of income tax is devolved to Scotland.

With recent polls suggesting the SNP could win more than 40 seats, First Minister Nicola Sturgeon has already declared her party would only consider a deal to form a coalition government with Labour and would seek to keep the Conservatives out of office.

Mr Osborne told the Treasury select committee at Westminster yesterday that, once powers to set income tax have been devolved, Scotland would have to “live with the consequences” of its decisions – including if wealthy individuals flee across the Border to escape “punitive” rates.

The Chancellor said proposals for “English votes for English laws” would be published before the general election, but he insisted that Scottish MPs should have their ability to vote on aspects of future Budgets curbed if powers have been devolved.

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The cross-party Smith Commission on devolution has said Scottish MPs should be allowed to continue to vote on the UK’s Budget, including income tax.

He said: “I think it would be very unfair to the whole UK if we had a Chancellor of the Exchequer who was beholden on Scottish Nationalist votes in the next Parliament.

“I think that would not be fair for the rest of the UK and I think those who aspire to hold this office should make it very clear before the election that they would not be beholden on Scottish Nationalist votes.”

Mr Osborne also suggested that Holyrood will need to operate under strict rules when it is handed more powers over benefits and income tax, and that some form of “balanced budget” rule may be needed to ensure the Scottish Government does not use the new powers to live beyond its means.

He said: “Of course we wouldn’t allow Scotland to go bust, but in order for that not to arise we would have to agree fiscal rules, independently verified, to make sure that doesn’t happen, so that we never actually reach that situation where the sovereign backstop has to be deployed.”

A form of balanced budget rule that would not necessarily require a balance every year was “something that will operate and will be very solid and robust”, he said.

Mr Osborne also warned that creating a second “top-up pension” in Scotland would “go against the spirit of the Smith Commission”, although Lib Dem Chief Secretary to the Treasury Danny Alexander has said Holyrood would have that power.

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Mr Osborne said there could be some impact of further devolution on regional airports in England if Holyrood lowered its air passenger duty, citing HMRC research that predicts Manchester would lose around 3 per cent of its traffic and Newcastle around 10 per cent.

“I think these are manageable but I think [the Conservatives and Labour] could work to try and find a solution,” he added.

After the hearing, SNP MP Stewart Hosie said: “It seems incredible that the Chancellor wants to ban Scottish MPs voting on parts of the entire UK Budget simply because of the incomplete devolution of income tax rates and bands.

“Until income tax is devolved in full, and with it responsibility for savings and investment income, it is illogical and wrong for the Chancellor to carve Scottish MPs out.

“The admission from George Osborne today is the strongest argument for full fiscal devolution with home rule, and not this halfway house which offers minimal economic powers while resulting in a loss of voting rights.”

Shadow chancellor Ed Balls insisted decisions over income tax should be made by MPs from all across the UK. He said the Smith Commission “makes absolutely clear that tax matters that are reserved to the UK are a matter for all MPs to vote on”.

Accusing Mr Osborne of adopting “short-term, divisive petty politics”, Mr Balls said: “I think there is a principled way forward on devolution, and politicians of principle should stick to it.

“The Smith Commission sets a way forward and it makes it clear that it is a UK income tax system, within which there is some important devolution for Scotland, and it would be for all MPs to vote for the UK tax system.

“That’s the agreement that was reached and I think it is important we all commit to do everything we can to deliver it. It’s not sensible to try to unpick that now.”

Mr Balls also insisted that Labour was “not planning a coalition” with the SNP after May’s general election, adding: “We’re planning on winning a majority and that means we need people all across the UK to think very hard about the choices we’ve got ahead of us.”

Meanwhile,Tory committee chairman Andrew Tyrie welcomed Mr Osborne’s comments that the rest of the UK would not underwrite decisions made by the Scottish Parliament.

He said: “The Smith Commission proposed a ‘no detriment’ principle, by which the UK and Scottish governments should reimburse each other for the consequences of policy decisions.

“Taken at face value, there appears to be a flat contradiction between that and what the Chancellor told the Treasury committee in evidence – namely that following devolution, the Scottish and UK governments should bear the fiscal and economic consequences of their policy decisions.

“The Chancellor’s interpretation holds out the prospect of meaningful choices and benefits from devolution, missing from the Smith Commission report.”

ANALYSIS

David Bell: Impact of tax competition remains a great unknown

Yesterday, the Treasury select committee quizzed George Osborne about Scotland’s new tax powers. His main argument was that the granting of these powers could lead to UK-wide tax competition. Most economists would find his argument unsurprising.

Scotland already competes with other parts of the UK for inward investment using a variety of inducements – improved infrastructure, subsidised accommodation etc. So if Scotland gains the power to use another inducement – lower taxes – why would it not do so? Lower tax rates might attract more business to Scotland and increase the supply of talented workers.

The case for such tax competition was made in the White Paper, which argued that cutting corporation tax relative to the rest of the UK would lead to increased investment and growth in the Scottish economy.

The trouble with this argument is that it runs exactly counter to the belief that Scotland should use new tax powers to increase tax rates. Commentators slip into the beguiling assumption that increased tax rates lead to increased tax revenue and suggest myriad ways these extra revenues could be used to expand public services.

The trouble is we do not know how firms and workers will respond to differences in tax rates between Scotland and the rest of the UK. When tax rates are increased, tax revenues are likely to rise, but by how much and for how long is deeply uncertain. Punitive taxation will have a negative effect on economic performance and therefore on the ability of the state to fund public services.

We also do not know how much businesses value lower taxes relative to better public services, a skilled workforce, good infrastructure etc. So the setting of tax rates becomes an exercise in informed guesswork. It is also deeply political. Just this week, Scottish finance secretary John Swinney said he intends to re-examine his proposed land and buildings transaction tax in the light of unexpected changes to the block grant from the UK government.

It is hard to imagine this re-examination had nothing to do with the Chancellor’s announcement that rates of duty on house transactions south of the Border would differ markedly from those the Scottish Government had announced in the draft budget. There is now going to be a rethink: such are the realities of tax competition.

• David Bell is professor of economics at Stirling University

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