Scotland special 1: Scottish devolution enters new phase

The Scotland Act, which provides the Scottish Parliament with new tax and borrowing powers, was signed into law last week after an extraordinary journey. The legislation survived two general elections, one UK and one for the Scottish Parliament. It has been the policy of two UK governments, three political parties, and four Scottish Secretaries. It has been scrutinised in committee on the floor of the Commons and Lords, as well as by two Scottish Parliament committees. Ironically, the one constant has been the SNP administration in Edinburgh – opposing it, but dutifully voting to support the Bill every time it has had to. This is not just a monument to bull-headed persistence. It tells us quite a lot more.

Tomorrow Manoeuvres ahead of the independence referendum: Isobel Lindsay suggests that Scottish developments could open up unforeseen opportunities for Wales

First, the UK has now invented a procedure for amending its constitution, or at least the bit relating to devolution. The devolved bodies have to agree any changes to their powers. That’s a bit of a surprise for those who think Westminster is sovereign and so can just do what it likes – as well as those who say that, since we do not have a written constitution, Westminster can change it on a whim. It can’t. The UK government went out of its way to agree these changes with Holyrood at each stage. Of course, the SNP administration did not get all it wanted, but that’s what happens in a negotiation. That tells us the Scottish Parliament is now firmly entrenched in the constitution, and sets a precedent for the Welsh and Northern Irish assemblies.

Second, it tells us something about the resilience of the original proposals. It’s hard to imagine a more painstaking process of scrutiny, including some pretty hostile challenges. Some were supported by the full analytical resources of the Scottish Government, though the probing of the House of Lords was more pungent. The objections to the proposals have rather melted away, leaving only the claim that they are not enough.

The members of the Calman Commission, who drew up the proposals, could be forgiven for feeling a bit smug. So can the tiny team in the Scotland Office that turned them into law. Neither centralists in London nor Nationalists in Edinburgh have been able to find real fault with their plans. The Scotland Act will be the next phase of devolution; and it will shape any future developments.

It is worth looking in some detail at the tax powers. The new Scottish rate of income tax will be a single rate, levied on all taxable income, less allowances. So it is a slightly progressive tax (because of the personal allowance, the better off pay proportionately more) and it becomes a bit more progressive if the rate increases.

That tax income will give a Scottish Government real choices about the level of spending – 1p on or off the income tax amounts to £500 million, serious money by any standard. It is certainly enough to allow room for a distinct social policy, say keeping more services free. There is even some scope for a low spend/low tax option. Let’s not pretend a low tax/high spend option exists.

The other tax powers deserve more attention than they have received. The largest is Stamp Duty on property. This tax is ripe for reform. There are big problems of avoidance at the top end: rich people transfer houses into companies to sell them. And the steps and stairs of tax liability distort the property market. More importantly, the Scottish Parliament will now have control over all property taxes – rates and council tax as well as Stamp Duty. That is a real opportunity. There’s a strong argument that the UK under-taxes property, maybe driven by that peculiarly English obsession with house ownership and prices. That seriously distorts the economy – and pushes up those very house prices. Scotland now has the chance to remodel property taxation. Which political party will have the courage to take a lead?

But what about the criticism that the powers are not enough? Certainly from a nationalist view they are not: if you think devolution should be a stepping stone to full independence, the Scotland Act will disappoint you. It is very clearly intended as devolution within the UK. Sharing income tax between Holyrood and Westminster, for example, explicitly recognises that decisions about redistribution through taxes and benefits lie at a UK level, even when the balance of tax and spend on devolved services lies more in Holyrood. And of course for real nationalists, nothing short of full separation can ever be enough: and the people will say Yes or No to that in a referendum.

But if your aim is a better balance between different levels of government, reflecting what voters want, then this Act is, at the very least, a step in the right direction.

At the moment the Scottish Parliament controls nearly half Scotland’s public spending, but only about 4 per cent of its taxes. Under the Scotland Act that will increase to 15 or 16 per cent. Of course, some supporters of devolution point out there is still a mismatch between the spending and the tax. Surely, they say, what the Scottish Parliament spends should be matched by what it raises in tax? They have a point: but nothing like a plan.

Scottish devolved spending is high by international standards. On tax devolution, the Scotland Act moves us from near the bottom into the pack, but there still a big gap between the two. Obviously, one way to close the gap would be to devolve less spending, but no-one is suggesting that. More tax devolution, as the Scottish Government found when it tried to draw up some plans for it, isn’t as simple as all that.

There are three big domestic taxes. Income tax is now to be shared. VAT cannot be devolved under European Union law. Some of its proceeds could be assigned to Holyrood, but that imports risk without giving any tools to manage it. National Insurance could be devolved, but only if some or all of the benefit system were devolved with it: after all it is paying National Insurance “stamps” that entitles people to old age pensions. And that widens the gap again.

For most other taxes the problems are what the economists call “spillovers”: the effects of having different Scottish taxes on the rest of the UK. Different rates of alcohol duty would lead to a thriving cross Border flow of drink, and a loss of tax revenues overall. Interestingly, the Scottish Government did not even suggest that during the Scotland Bill. Similar problems could arise with corporation tax as companies booked their profits in the lower tax jurisdiction.

But difficult need not mean impossible. Like the Calman Commission, the government says that there may well be scope to devolve more. In a significant addition to the Calman plans, little commented on, the Scotland Act makes this possible. There are powers to devolve additional taxes without needing further Acts of Parliament, and if Scotland votes to stay in the UK, they can be used provide more devolution.

Understandably, the Scottish Government, in full Basil Fawlty mode, does not mention the Scotland Act: it wants to talk about independence. But if the people reject that, as they well might, we will find this careful piece of policy-making has put in place the next phase of devolution.