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fiscal autonomy, indepednence, politics

Detrimental Education: How Smith reforms gave Scots enough rope to hang themselves.

The Smith reforms have been almost universally derided by academics and economists as incoherent, piecemeal and contradictory. It was born of panic before the referendum: something must be done to halt the Nats in their tracks.

Throw the Scots a few more concessions: a bit more tax here, a bit of welfare there (not too much), crown estate (what is it anyway?), air passenger duty (yah), bedroom tax (um). The idea on welfare, if there was one, was to give Scots enough rope to hang themselves. If they want to start paying more in benefits above UK levels, well let ’em pay for it..

Except that the Treasury, and the DWP, said that this could not be allowed to happen without their agreement. The Barnett Formula doesn’t work that way. There would have to be at least a “no detriment” clause to prevent England paying for higher spending in Scotland.

But what if the income tax reforms themselves turn out to be a “detriment” to Scottish spending? What is more worrying than the lack of movement on welfare is the lack of clarity on how the devolution of income tax rates will work. Truth is, no-one knows.

As the enlightened Unionist tax expert, Richard Murphy, has pointed out, income tax is a toxic tax. Most governments avoid raising it for a number of reasons, not least because people hate paying it. Income tax is now a relatively small part of the tax cake, bringing in less than a third of total revenue.

There is a populist demand for higher taxes which is understandable and morally compelling in an age when the top 1% own more than the other 99% combined according to Oxfam last week. But raising income taxation in small countries and regions can have perverse consequences.

If Scots raise tax on the top taxpayers, they can simply hop over the Border to avoid it, thus denying the Scottish exchequer any tax at all. They might take their businesses with them. Their employees might then find they are contributing income taxes to Westminster not Holyrood.

Then there is the tax base issue. Scotland’s population is ageing. This is because of improvements in longevity and out-migration of skilled workers. Fewer young workers means lower tax revenues and a shrinking income tax base.

As the Institute for Fiscal Studies said repeatedly during the referendum campaign, this relative ageing means there could be a serious fiscal shortfall for Scotland because older people consume public spending but don’t contribute much in income tax. Would the UK Government compensate Scotland under the “no detriment” clause within the draft legislation? Hardly. They’d surely say: that’s the risk you take.

The other detrimental implication of tax devolution could be political. As George Osborne has made clear, Scots may not be allowed to vote on “English” income tax. This will fundamentally diminish the influence of Scottish MPs in Westminster.

David Cameron has promised to curb Scottish MPs’ voting on matters like health, education criminal justice environment and other areas that are devolved to Scotland. There is a clear logic to this, but not in a unitary parliament, which is what Westminster remains.

The Government of the UK is drawn from the House of Commons, which means that Ed Miliband could become prime minister on a majority made up of Scottish MPs. However, under the Tory proposals, he could find himself in office but not in power.

His cabinet would be composed of secretaries of state for health, housing, education etc who do not have the power to have Government policies implemented over 85% of the UK because they lack a majority of English votes in the Commons. The implications for cabinet government was always the real problem with Evel. Cynics say this was the Conservative game plan all along, but if so, it is a dangerous one, for it is playing into the hands of the SNP.

Now, I’m very uncomfortable with the way the SNP has abandoned its previous self-denying ordinance on voting on nominally English bills. It looks unprincipled, opportunist and more than a little confused. But the SNP is on such a roll right now that they don’t seem to care any more about consistency. Or how English voters view their decision to play king-makers in the government of a country, the United Kingdom, they want to leave.

The latest opinion polls suggest that the SNP is still in line to win 40 or 50 seats at the General Election. Nicola Sturgeon’s personal popularity ratings are sky high. The Murphy bounce appeared to happen for precisely 24 hours last Sunday as the press gave wide prominence to a Panelbase poll suggesting the SNP lead had been cut to “only” around 10%. But that was followed in quick succession by Survation and Ipso/Mori polls showing the SNP lead over Labour back to over 20%.

This is all pointing to an extraordinary election result that will almost certainly bring further changes to the constitution. If the SNP hold the balance of power, they will demand greater powers for Holyrood as part of any deal with Ed Miliband. I think this is why no-one seemed to take the draft legislation entirely seriously last week. There was an air of going through the motions.

Like the Scotland Act in 2012, the Smith reforms have become obsolete even before they’ve become law. Scotland is on a trajectory that seems to be accelerating out of the UK. Smith looks like another unstable half-way house on the road, if not to independence, then to radical home rule.

I don’t fully understand how this has happened so soon after Scots voted in the referendum to stay in the Union. Something, somewhere, snapped in the Scottish electorate after September 18. Nationalism has gripped the imagination of voters as never before in Scottish history.

There are only 10 weeks to go before the General Election. If Jim Murphy doesn’t start to claw back some of the ground lost to Nicola Sturgeon in the very near future, then Scotland could become independent sooner than anyone expected.

The Prime Minister inadvertently put his finger on it in his speech on Thursday when he said that the Smith legislation would be the “final resting place” for the constitution of the UK. Indeed. Six feet under, looks like.

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About iain2macwhirter

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