Be Careful What You Wish For

Iain Macwhirter writes:

The Scotland bill, which passed its second reading this week, will bring the greatest transfer of taxation powers to Scotland since the Act of Union in 1707. It will hand the Scottish parliament in Edinburgh the power to raise nearly half of all income taxes, plus stamp duty and landfill tax. You might think this dramatic extension of Holyrood's powers would be welcomed by the Scottish National party, which has long campaigned for fiscal autonomy. But you would be wrong. The nationalists argue that the tax powers are inadequate, would be deflationary and would reduce the level of public spending in Scotland.

You might also have thought that the Scottish Conservatives, who spent 30 years opposing devolution, would be deeply concerned at this diminution of Westminster's influence on Scotland. But once again you would be wrong. The Conservatives support the Scotland bill's tax powers, having been part of the cross-party Calman Commission whose report in 2009 called for the tax reforms now enshrined in the bill. Well, not every Conservative politician is on side. The former Scottish secretary, Michael Forsyth, now Lord Forsyth of Drumlean, has warned that the Calman reforms will inevitably lead to calls for further fiscal independence and will only help the SNP. He intends to table an amendment to the bill in the Lords calling for a referendum before the new tax powers are implemented.

Yes, it's all very confusing, but Scottish politics is a bit like that. Labour, which actually started the whole Calman process, hardly ever talks about it and seems vaguely embarrassed by the whole process. Some Labour MPs have opposed measures in the bill to hand powers over speed limits and drink-driving to Holyrood. But Labour politicians have historically been cool on devolution, even though it was a Labour government that created the Holyrood parliament in 1999. Many Labour MPs resisted home rule in the 1970s on the ground that giving Scotland a parliament would only benefit the hated nationalists. Some Labour politicians privately fear that the new tax powers will also benefit the SNP, who are in power in Holyrood; that giving some taxation powers will only drive demand for more.

They're probably right on this. The Calman Commission recommendations have been criticised by a number of Scottish economists on the grounds that they don't really make sense. If, as Calman affirmed, it is necessary to make the Scottish parliament accountable by giving it responsibility for raising the tax money it spends, why make it only half responsible? There are likely to be anomalies in the new tax regime which could lead to the reduction in public spending in Scotland – which might force Holyrood to increase income taxes to a higher level than the rest of the UK. This is essentially because more is spent in Scotland, through the Barnett Formula, than is raised in tax revenues (excluding oil revenue) so replacing part of Barnett with 10p on income tax would lead to a fiscal crisis in Holyrood. At the very least, they argue that half and half taxation could be deflationary.

The SNP says Scotland needs the full range of economic "levers", including oil revenues and corporation tax, if the Scottish government is to have any power to influence the trajectory of the Scottish economy. But that would be independence, say the Liberal Democrats, who are the only truly enthusiastic supporters of the Scotland bill. Calman is a halfway house, but a rather comfortable one, which gives Scotland a bit more latitude and a bit more control over its affairs, while still keeping the fiscal lifeline to London. The Lib Dems hope that Calman will be their own electoral lifeline in Scotland, where they risk being wiped out in the Holyrood elections in May because of their Westminster coalition with the hated Tories.

My own view is that, like Scottish devolution itself which was introduced by Labour – and opposed by the SNP in the 1980s – the new tax powers will almost certainly lead to a new constitutional settlement. Once you start disaggregating fiscal powers, there is only one destination: federalism. Some form of fiscal autonomy is the only coherent solution to stabilising relations within multinational states such as Britain. But there will be a lot of argument before we get there.

"10p On Income Tax": no one would read beyond that headline. Ed Miliband is missing a trick here, and it will be interesting to see if he continues to do all the way through this Bill's parliamentary progress. It makes perfect sense for the party that created the present situation to oppose any change to it, especially when it knows that, given the procedural opportunity, the Tory Right will now vote against the Government on pretty much anything, never mind on a genuine point of principle such as this. And Miliband would be cheered on by his own MPs from Scotland, who never much cared for devolution even when it provided somewhere to put their below par office staff or the rentagobs in their Constituency Labour Parties, never mind since it became a platform for Alex Salmond to present himself as some sort of alternative Prime Minister.