Not Devo-Max Yet

Published: 27 November 2014

Is the Smith Report devo-max? Not according to Michael Keating, who says that the proposals are neither devo-max nor the 'near federalism' suggested by Gordon Brown.

The Smith commission report provides the minimum amount of extra devolution required to meet the expectations raised by the famous ‘vow’ from the three UK party leaders in the last week of the referendum campaign. Most of the spending of the Scottish Parliament will henceforth be raised in Scotland, but does this really allow Scotland to design its own economic and social policies and to diverge significantly from what is happening in England?

Not very much. This is not, by any definition, devo-max nor what Gordon Brown described as being close to federalism. The approach, like that of the earlier Calman Commission, has been to take existing items of taxation and spending and examine the case for devolving each. This contrasts with the approach taken in 1999, to decide on what powers to reserve to Westminster, while leaving large swathes of public policy to the devolved institutions. What would be needed now to allow Scotland to forge its own economic and social settlement would be broadly-defined powers and a range of taxes.

Scotland is to get new powers to set the rates and bands of income tax but the tax itself is not devolved. Taxation of investment income, National Insurance, inheritance tax and capital gains tax will be reserved to Westminster. Scotland will thus have some discretion within a tax that successive UK governments have not raised since the 1970s apart from the post-crisis 50 per cent (now 45 per cent) rate for the very wealthy.  Corporation tax is to be reserved. Air Passenger Duty is to be devolved but the SNP intends to abolish it. Fuel and alcohol duties are still reserved (there are European complications here).

Similarly, devolution of welfare is limited to bits of existing programmes. Universal Credit, whose roll-out has proved so problematic, is now locked in as a UK programme, precluding local variation. Elements of housing benefit are to be disentangled from it, which could complicate matters further. The administration of the Work Programme is to be given to the Scottish Government but not the power to link welfare, labour market and economic development policies together effectively.

Under European rules, VAT cannot vary within a state but half the proceeds in Scotland are to be assigned to the Scottish Parliament. This should give the Parliament a stable source of income independent of the UK and broaden the tax base. It is interesting that this will be on the base of the share of tax collected in Scotland; distributing it on the basis of population might have been a better way of territorializing VAT, as it could be extended to other parts of the UK and helped to equalize spending.

Once again, the parties have failed to address the Barnett Formula, without which any discussion of taxation is incomplete. This will be challenged by English and Welsh MPs when the legislation comes before the House of Commons.

A different announcement this week, from the First Minister, could have even more important implications for Scottish public finances. There is to be a review of local government finances, with a broad remit. If Scottish local authorities were to raise more of their own revenues, and not by a local income tax, then the tax base could be broadened and made more progressive, and accountability for public spending improved.

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