Will there be a new and distinctive Scottish tax and spending system?

Published: 17 July 2015
Author: Paul Cairney
Much has been made of the new powers and responsibilities moving from London to Edinburgh but, asks Paul Cairney, will anyone notice a difference?
The prospect of greater taxation and spending responsibility for the Scottish Government allows us to revisit the idea that further Scottish devolution provides the ‘best of both worlds’: the financial stability of the Union coupled with the autonomy to make, and be accountable for, its own fiscal framework. There is also the prospect for the more vague notion of a ‘Scottish style’ of fiscal policymaking, which perhaps involves making policy in close cooperation with key actors in the union, business and third sectors to produce something akin to ‘corporatism’ – or some arrangement in which the government and both sides of an issue, such as labour-management relations within an industry, adopt formal, long-term processes to agree outcomes
Yet, I think we should be cautious about expecting too much from the new arrangements, for three main reasons. First, this was a politically-driven settlement. It was not a technical exercise to determine the best mix of tax and spending options. Indeed, at no point in the history of Scottish devolution can we point to a well-thought-out devolution design from first principles. Instead, the new Scotland Act represents the same messy mix of inheritance, incrementalism, and compromise that has summed up each new devolved settlement. 
Second, it is misleading to think of the fiscal settlement as part of a linear spectrum, or journey, in which any devolution of power takes you further down the path to autonomy. Instead, we might imagine someone bending a thick wooden ruler, to give the impression that a certain amount of extra weight can produce little effect until suddenly there is a clear tipping point. A large-enough devolution of fiscal responsibility may produce the ‘window of opportunity’ and incentive to completely reform the Scottish tax and spending regime, while a smaller settlement may produce almost no incentive to do things differently (particularly with some taxes, such as income tax, which are electorally toxic). Although there may be exceptions, such as the Scottish Government reforms to stamp duty, it is possible that we may be some distance from that tipping point.
“More autonomy may encourage Scotland to pursue economic growth (since this would raise its income) without providing sufficient ‘levers’ to produce it.”
Third, many of the usually stated advantages of ‘fiscal autonomy’ will not apply to the new settlement.  There is some discretion to choose who to tax (e.g. individuals or businesses) and how to tax (e.g. the balance between taxation and charging for services), but not the autonomy to decide the overall mix. It is difficult to see a clear enough link between spending and taxes to enhance accountability and make the Scottish Government more responsive to public reactions. Instead, tax decisions will be made at more than one level of government and it will remain unclear who to reward or blame. More autonomy may encourage Scotland to pursue economic growth (since this would raise its income) without providing sufficient ‘levers’ to produce it. Local taxation allows a greater knowledge about the preferences of the population, but some powers are actually just assigned revenues from taxes determined centrally. There is also limited potential to compete with other regions by varying (lowering) key taxes.
So, there may be some genuine attempts by the Scottish Government to consult widely to generate ideas about how to use new taxes in an innovative way. However, its social partners will have to be very imaginative indeed to come up with new ways to tax and spend within the constraints of a new and more complicated multi-level fiscal regime.

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