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The Smith Report isn’t devo max or federalism. It is a fiscal trap.

READ IAIN TUESDAYS, THURSDAYS AND SUNDAYS ONLY IN THE HERALD AND SUNDAY HERALD.

Scotland now has “the most powerful devolved parliament on the planet”, according to Lord Smith of Vow, who unveiled the latest package of new powers for Holyrood last week.

It may also become one of the most impoverished if his scheme is ever implemented as it stands.

What the Smith Commission has produced isn’t remotely ­devolution max or federalism. It is an exercise in control-freak ­minimalism that will serve to lock Scotland in economic decline. The proposals to hand control of income taxes to Scotland, but not the full range of taxes like national insurance, wealth taxes, oil and gas revenues and so on, is a transparent fiscal trap.

Labour will now dare the SNP to live up to its social democratic principles and “tax the rich”, knowing full well that the burden will fall on the diminishing pool of younger, middle-earning voters. Future Scottish governments will be forced to finance their policies by increases solely in income tax, which is the most politically sensitive, inflexible and above all avoidable tax in the fiscal armoury.

Scotland will be cut adrift from growth in income wealth south of the Border, where wealth capital and income are overwhelmingly concentrated in our finance capital-based economy. Meanwhile, Scotland will have to make do with a declining tax base.

Younger tax-paying Scots will continue to leave Scotland for the south, where the jobs, capital and opportunities lie, leaving the ageing Scottish population to be financed by a declining tax base in which income taxes may have to rise just for the Scottish ­Government to stand still.

For generations, Scotland’s curse has been outmigration, which denudes the economy of its most productive, educated and wealthy citizens. They go abroad, they go to the south of England, wherever. Every professional and skilled Scot faces this problem at some time in their careers.

As they relocate, they take their taxes with them. What is left behind are the older citizens, the unemployed and the impoverished, who tend to be the most ­expensive to be provided for and who do not generate tax revenue. Without a compensating factor – such as inward migration from Europe, growth policies or hydrocarbon revenues – the Scottish Government is caught in a spiral of decline

This is not a nationalist fantasy. This is exactly the scenario repeatedly outlined before the referendum by the Institute for Fiscal Studies, which used it as an argument for Scotland staying in the Union. It never was. It was an argument for Scotland to have the economic powers to reverse the relentless overcentralisation of economic and financial life in London and the southeast. Smith will magnify this imbalance, not reverse it.

Just look at property values. You don’t need a mansion tax in Scotland because there are hardly any houses here worth £2 million. There are only about 10,000 houses worth more than £1m. And as for the wealthy income-earners, there are estimated to be about 16,000 who would be eligible to pay for any 50p tax band.

This cohort could theoretically contribute about £250m, but in practice the tax yield would be worth less than £100m a year because of tax avoidance.

If any Scottish government was daft enough to apply the 50p band, many of its targets would simply buy a house over the Border and avoid it. With all the wealthy taxpayers high-tailing it to the south, a Scottish government would have no alternative but to impose higher taxes on middle-income earners.

This would be politically highly damaging, but future Scottish governments – Labour or SNP – may be forced to do this, not to enhance social justice, but simply in order to maintain spending levels at their present rates.

The Tories didn’t propose income-tax devolution by accident. It is a scorched earth policy that they believe will kill social democracy in Scotland. And they may well be right. They have at least a credible response to the situation, which is to cut income taxes radically to attract more taxpayers back to Scotland.

They know this would also slash public spending, but they think there is too much of that anyway and want to see a small state. Many middle-income voters may find this an attractive alternative to what will be called “the death spiral of tax-and-spend socialism”.

The decline in the number of taxpayers could also be aggravated by the collapse of residual revenues through the Barnett Formula. This will remain in truncated form after the Smith reforms, but will be worth much less as the UK Government steps up austerity after 2015.

The Chancellor has pencilled in £25 billion in cuts after 2015, but the Financial Times claims this will have to be doubled because UK borrowing has been growing faster than expected. Scotland should perhaps heave a sigh of relief that welfare has not been devolved, because that would have made the fiscal crisis of Scotland even worse.

Supporters of the Smith reforms, like Professor Alan Trench, say the ­Scottish Parliament should jolly well introduce policies that increase the incomes of its citizens and therefore increase the tax base. Boosting economic activity will also boost VAT revenues, a proportion of which have been assigned to Holyrood.

But without access to borrowing powers and the full range of taxation, this is extremely difficult to achieve. The Scottish Government cannot even allow increased immigration from Europe to fill the tax gap now that the UK Government is trying to choke off free movement within the EU and halt immigration from outside it.

David Cameron says controlling immigration is the paramount issue in UK politics. Not in Scotland it isn’t. We need more immigration. The Scottish Government could be forced into the kind of retrenchment we see in Eastern European countries under right-wing governments. Without borrowing powers it will have to run balanced budgets with little to spare.

As the Scottish Government tries to maintain decent ­standards for the elderly and the poor, as the young and able leave it will have to increase income taxes on those economically active citizens who remain. That will only ­encourage more of them to leave.

Hysterical? Well, wait and see. Most of the advances achieved by the Scottish Government – prescription charges, personal care – were financed not by tax rises but by Barnett consequential. Those compensated Scotland to a minimal degree for the huge hydrocarbon wealth that has been flowing out of the country for 30 years.

Now the oil is gone, the deal is over. Scotland gets to clear up the mess. So much for pooling and sharing. This is more like extracting and dumping. Resources and skilled ­workers will continue to go south while the costs of decline are all repatriated to Scotland.

However, the Scottish voters are not stupid. They will not buy the inflated claims in the UK press that the Smith reforms represent a huge transfer of wealth and power to Holyrood.

Scottish voters can see that this is not devolution max or federalism or anything other than a transparent fix designed to consolidate the gains of the south.

Scotland is now on a ­trajectory that can only end, I believe, in independence. The Smith Commission will have hastened the day when ­Scotland achieves full economic self-government.

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About iain2macwhirter

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