Tuesday, 8 July 2014

A conspiracy of silence?

By Professor Jim Gallagher.This article first appeared in the spring 2014 edition of the RSGS's magazine, The Geographer.

The thing most ignored in the present Scottish independence debate is the thing which is most likely to happen after it. There is something of a conspiracy of silence about the new tax powers which will come to the Scottish Parliament as a result of the Scotland Act 2012. In fact, they represent a substantial addition to the powers of the Scottish Parliament, all the more remarkable in a state with such a tradition of fiscal centralisation as the United Kingdom.

When the Scottish Parliament was created in 1999, it built upon the foundation of administrative devolution which had grown up over the previous century or more. Most of the domestic functions of government in Scotland were decentralised, to a territorial Secretary of State. This in its turn was built on the preservation of the separate Scottish legal system, educational system, and church since the Act of Union in 1707.

The Scottish Office that administered the services had an immensely wide range of responsibilities: health, education, justice, transport, economic development, agriculture, and many others. Indeed, virtually the same range of responsibilities as the Scottish Parliament has today. But it was, in the jargon, a spending department of government: it disbursed monies or spent them directly, and was funded by UK taxation collected by the Treasury. The only exceptions were local taxes such as council tax and nondomestic rates.

In consequence, the Parliament created in 1999 was lopsided. It had immensely wide spending responsibilities – as wide as those in any federal state – but only vestigial taxing responsibilities. The UK is internationally unusual in that virtually all taxes are collected and gathered centrally by the Treasury. Most other countries, and certainly federal countries, have some decentralised taxation.

Against this background and in response to the election of an SNP minority government in 2007, the UK Labour Government, supported by a majority of members of the Scottish Parliament, decided to set up the Calman Commission, to review the powers of the Parliament and in particular its fiscal accountability. The analysis was thorough, setting out how the Scottish Parliament fitted into the wider UK union, and how it could be made more fiscally accountable by tax decentralisation.

The essential recommendation was that a proportion (about one third) of the Scottish Parliament’s
budget should be funded by taxes it levied itself, rather than by transfers from the UK Exchequer. A number of smaller taxes, such as stamp duty land tax, were recommended for wholesale devolution. But the main recommendation was that income tax – one of the three biggest taxes, and the most perceptible – should become a shared tax, levied on the same tax base by both the Westminster and Holyrood parliaments.

As a result, the rate of UK income tax applying in Scotland would be reduced by 10p in the pound, and the grant to the Scottish Parliament from Westminster reduced by a commensurate amount. The Scottish Parliament could then choose an income tax rate of its own, and would receive the resultant revenue. So the Parliament would be required to make a tax decision, and would control the total of its budget by setting a higher or lower rate.

These recommendations were accepted by all the main UK parties, and despite opposing it until the last moment, the SNP majority administration elected in 2011 eventually consented, and the scheme was enacted as the Scotland Act 2012. The legislation will be put into effect in 2016, so that the Scottish Parliament elected then (assuming Scotland has decided against independence) will have substantial income tax powers.

Three things are remarkable about this. First, the UK is probably the most fiscally centralised state in the Western world, and agreement to decentralise roughly half of the income tax in Scotland might not have been predicted. Second, the process of securing agreement to substantial constitutional change across two general elections (Scottish and UK) and two changes of administration (in Edinburgh and London) was without precedent. It shows a remarkable degree of careful policy-making against a background of virulent political disagreement.

The third remarkable thing is how little this is remarked upon. During the referendum debate, it obviously suits the SNP to argue that the present constitutional arrangements are inflexible and fail to give Scotland powers it might reasonably expect. So they never talk about the Scotland Act 2012. It’s perhaps less obvious that each of the pro-union parties – who should be able to take credit for a creative policy change that moves substantially in the direction of median Scottish opinion, which is in favour of more devolution – do not appear to be giving it the attention it merits, even as they consider whether there is scope for yet more change.

But if the polls are correct, and the Scottish people decide against independence, we have a very clear picture of what Scotland’s territorial constitution will be like in 2016, and this will surely set the pattern for any further development of the devolution settlement. Devolution will move on to its next phase.

Professor Jim Gallagher, Research Fellow in Politics, Nuffield College, University of Oxford