If there was a twinkle in the eye of Alex Salmond last week, as he scoffed at the new tax powers being offered in the Scotland Bill , it may be because, under the table, he was pinching himself. I’m pinching myself. I still can’t quite believe that a Tory-led coalition government in London is introducing the widest and deepest extension of Scottish constitutional powers since devolution, even if they are flawed.
The new Scotland Bill, and its curious fifty-fifty income tax division, was greeted with howls of protest at unionist perfidy: not enough! the wrong kind of tax! deflationary! Scotland will lose out! But this misses the point. Dismantling the Barnett apparatus and ending Scotland’s fiscal dependency was never going to happen over night. It will be a process of negotiation and compromise. Only a minority of Scots ever wanted full fiscal separation, or independence, and a lot fewer do following the 2008 financial crash. The SNP more or less accept this now, which is why they unceremoniously dumped the independence referendum bill, rather than have the indignity of seeing it mauled in the Scottish parliament.
And the truth is that what has happened this week is in line with the long term Nationalist game plan. It is a significant incremental extension of the Scottish parliament’s powers in a way that can only imply further autonomy in future. Hardly has the ink dried on the Scotland Bill than the debate has begun about what happens next. And notice that some of the most trenchant criticisms have come not from the Nationalists, but from businessmen like Ben Thompson of Reform Scotland who want the tax powers extended. Changed days.
The SNP win even when they lose. Just when the steam had gone from the independence debate, with the SNP facing defeat in May, along comes the Coalition to keep the constitutional pot boiling nicely. At the very least, by accepting the moral and economic case for tax raising powers for the Scottish Parliament, the unionist parties have opened the biggest can of fiscal worms since the creation of the Barnett Formula. There’s enough here to keep columnists like me in business for decades. I almost wonder if the LibDems intentionally devised this rickety compromise in order to hasten the progress toward federal tax sharing. I’m not a tax expert, but Scotland is getting a half way house on income tax which is certainly looks half baked,. And even I can see that it’s only be a matter of time before it’s extended.
The UK government has accepted that the new tax regime must be revenue neutral for the next decade or so – in other words, Scotland must not be seen to lose out on what it might have received had the Barnett Formula still been in operation. Well, ten years is a long time – easily long enough to refashion this settlement. The UK government has further accepted that the Scottish parliament should have borrowing powers to accompany the taxes it raises. This is only reasonable. When there is an economic downturn, tax revenues slump, as we have seen in the last two years, and governments have to compensate by borrowing to keep economic activity up. The Scotland Bill is offering £2.7bn – which is being derided as not enough, wrong kind of borrowing, unionist trap etc.. But again, I am pinching myself in disbelief that the UK Treasury and the Bank of England have conceded this at all, because it could lead to the creation of a Scottish National Debt. In future, were a Scottish government to argue convincingly for extending responsible borrowing beyond these arbitrary limits, I don’t see how the UK could reasonably refuse it.
Of course, there is no oil fund or share of hydrocarbon taxes. That was always the most serious omission from the Calman Commission’s. Scotland remains the only region, principality, state or nation in the world to have discovered oil and received no direct benefit from it. Nor will the Scottish parliament be able to vary VAT or corporation tax. The Scottish government rightly argues that a region like Scotland, with chronic low growth, needs business taxation to reverse the tendency for capital and skilled employees to migrate south. But remember, the EU is pressing Ireland to give up its low corporation taxes on the grounds that “fiscal dumping” as it is called, is incompatible with membership of the union. Brussels may bar corporation tax, not London
If the Scottish government (and thanks to the Scotland Bill it is now officially recognised as a government) sets up the apparatus of a Scottish treasury, and attracts some clever people to work in it, I suspect they could mount a convincing case that oil and aspects of business taxation cannot be left out of account indefinitely. This week’s bill allows Scotland to create new taxes on top of stamp duty on homes. (Aye, but they’ll all be the wrong new taxes, not enough new taxes, unionist plot etc…) In theory, Holyrood could seek to develop its own tax base – and not just a plastic bags tax, but local sales taxes, tourist tax or any number of revenue raisers. It could even restore the 18th Century window tax – though I suspect this might meet with some resistance.
Mind you, in creating new taxes, the Scottish parliament will have to answer to the Scottish people, who may not be very keen on paying them. And here’s the rub. The challenge this bill poses is for the Scottish Parliament not only to be offered fiscal responsibility but to take it. Holyrood will now have to vote regularly on whether or not to vary its new taxes. It may be that the Scottish parties will choose not to use them at all, just as they have declined to use the parliament’s existing tax raising powers. But that would be feeble and hypocritical: Holyrood politicians can’t go on blaming London cuts when they have the means to counter them at home.
No, this is not going to be as easy as meekly accepting Barnett handouts. Scotland has to learn to walk, fiscally speaking, before it can run. Calman is baby steps, certainly, and may cause Holyrood to stagger about a bit before it find its feet. But one it is up and running, I can’t see what will stop it.