Smith Contributions - Tax and Spend - and Borrow

The devolution of income tax has received considerable attention in the discussion surrounding the Smith Commission. In the fourth of the extracts from our recent e-book, Dr Angus Armstrong argues that devolving taxation without borrowing powers will leave nobody happy.
As things stand, of the public funds deployed in Scotland, the vast bulk of the spending is done by devolved and local government but virtually none of the revenues are raised by Scottish authorities. The difference between devolved spending and local revenue raising is made up by the block grant from the UK government to the Scottish government. Even had the ‘new’ taxes due to be devolved as of the Scotland Act 2012 – a replacement for Landfill Tax and the existing Stamp Duty, followed by the Scottish Rate of Income Tax – already come on stream, they would only amount to 15% of identified spending in Scotland. By contrast 69% of identified spending is controlled by either the Scottish Government or local authorities (SGLA). 
There are a number of problems with this disparity, not least the lack of accountability entailed in politicians spending money when they have not been directly involved in raising it. Because the bulk of the Scottish government’s resources are set by the size of the block grant, with very limited borrowing powers, the Scottish Government has to operate a balanced budget  whether it likes it or not. Funding the Scottish Parliament by means of a block grant has various benefits in terms of avoiding wasteful tax competition and ensuring a uniform macroeconomic policy and maximal sharing of risk. However, it also means that the Scottish Government is not accountable for raising or lowering taxes or changing borrowing to pay for its spending decisions. It is mostly tasked with spending an allocated amount of funding. The Scottish Parliament essentially operates within a balanced budget construction.
The suggestion of devolving income tax has been widely discussed and seems to have taken on a totemic significance in terms of determining politicians’ commitment to devolution. However, devolving income tax without borrowing will do little to enhance the accountability of the parliament to the public. If income taxes fall short of spending plans, perhaps due to a recession, the Scottish government will have to either cut spending or raise taxes which would weaken the economy further, or borrow. And for any significant amount, this remains a Treasury decision.   The only way for Scotland’s politicians to be accountable is for them to be able to take decisions on which they can succeed or fail. This requires fundamentally changing the Parliament’s near total dependence on a block grant decided by the Treasury which in turn means the ability to borrow. If Scotland has to borrow from capital markets then this would introduce some market discipline rather than negotiation with the Treasury. .
Attempting to resolve that purely by devolving income tax, however eye-catching such an act would be, would violate at least three economic principles and possibly undermine the integrity of the union. First, high income earners are particularly mobile and there is a real risk of creating inefficient tax competition. Second, income tax yield is highly dependent on the local economy. This may introduce macroeconomic stability problems. An adverse shock leading to a sudden fall in taxes would require fiscal tightening perhaps leading to a deeper downturn. If higher earners migrate then this could worsen the outcome further. Third is the issue of equity. Is it reasonable that Scots would pay no income tax towards central UK government services? And can Scottish politicians expect to decide Scottish income taxes and also have a say on income taxes in the rest of the Union?
Devolving income tax on its own – without borrowing powers – would amount to attempting to impose a symmetric solution on an asymmetric problem. If borrowing powers are not extended along with the income taxes, the real economic power will remain with the UK government despite the headlines.

Comments policy

All comments posted on the site via Disqus are automatically published. Additionally comments are sent to moderators for checking and removal if necessary. We encourage open debate and real time commenting on the website. The Centre on Constitutional Change cannot be held responsible for any content posted by users. Any complaints about comments on the site should be sent to

Angus Armstrong's picture
post by Angus Armstrong
National Institute of Economic and Social Research
26th November 2014

Latest blogs

  • 19th February 2019

    Over the course of the UK’s preparations for withdrawing from the EU, the issue of the UK’s own internal market has emerged as an issue of concern, and one that has the potentially significant consequences for devolution. Dr Jo Hunt of Cardiff University examines the implications.

  • 12th February 2019

    CCC Fellow Professor Daniel Wincott of Cardiff University examines how Brexit processes have already reshaped territorial politics in the UK and changed its territorial constitution.

  • 7th February 2019

    The future of agriculture policy across the United Kingdom after Brexit is uncertain and risky, according to a new paper by Professor Michael Keating of the Centre on Constitutional Change. Reforms of the EU’s Common Agricultural Policy over recent years have shifted the emphasis from farming to the broader concept of rural policy. As member states have gained more discretion in applying policy, the nations of the UK have also diverged, according to local conditions and preferences.

  • 4th February 2019

    In our latest report for the "Repatriation of Competences: Implications for Devolution" project, Professor Nicola McEwen and Dr Alexandra Remond examine how, in the longer term, Brexit poses significant risks for the climate and energy ambitions of the devolved nations. These include the loss of European Structural and Investment Funds targeted at climate and low carbon energy policies, from which the devolved territories have benefited disproportionately. European Investment Bank loan funding, which has financed high risk renewables projects, especially in Scotland, may also no longer be as accessible, while future access to research and innovation funding remains uncertain. The removal of the EU policy framework, which has incentivised the low carbon ambitions of the devolved nations may also result in lost opportunities.

  • 1st February 2019

    The outcome of the various Commons votes this week left certain only that the Government would either secure an amended deal and put it to a meaningful vote on Wednesday 13 February, or in the overwhelmingly likely absence of this make a further statement that day and table another amendable motion for the following day, the Groundhog Day that may lead to a ‘St Valentine’s Day Massacre’ for one side or the other. Richard Parry assesses the further two-week pause in parliamentary action on Brexit

Read More Posts