By Jim and Margaret Cuthbert
Like many others, we put in our submission to the Smith Commission last week, in our case on behalf of the Jimmy Reid Foundation. Many submissions have rightly focused on what they saw as the important powers that Scotland ought to have. Ours was different: we concentrated on the fundamental problems with the proposals put forward by the Conservative and Labour parties. The reason we did this is that these two parties between them command the bulk of the seats at Westminster: so if these two parties arrive at some sort of consensus, there is every danger that a blend of their proposals will be foisted on us by Westminster.
We argue that there are real dangers in following the Conservative and Labour proposals by choosing income tax as the primary means for delivering increased fiscal responsibility to Scotland. Moreover, these dangers are compounded by the failure to deliver adequate economic powers to Scotland to enable the Scottish government to grow the economy and its tax base. But our submission is in no sense just negative: we make positive suggestions both about taxes and increased powers.
As avowed supporters of independence, we found it difficult to make the mental jump to operating within the spirit of the Smith Commission: that is, to put forward proposals which are consistent with the successful operation of a continuing political and monetary union. Nevertheless, we have made an honest effort to make this jump: so the Jimmy Reid Foundation submission does not consist of a wish list of everything which would have been possible under independence.
The approach we adopted was to develop a number of criteria against which any proposal for delivering increased fiscal responsibility to Scotland within the union should be judged. These criteria cover questions like:
- Are the right taxes being chosen.
- Will the Scottish government have appropriate powers so that it has a reasonable chance of growing its tax base.
- Do the proposals measure up to the promises made before the referendum:
and so on.
The full set of criteria are set out in the JRF submission, which can be accessed on our website at www.cuthbert1.pwp.blueyonder.co.uk under Theme 6, or directly at the link below.
As we have already noted, we spent a lot of time analysing the Conservative and Labour proposals in detail. Fundamental to both sets of proposals is the idea that the Scottish government should have greater responsibility for income tax in Scotland. The Conservatives propose that Scotland should have full control of Scottish income tax, (other than tax on savings income), with the exception that Westminster would still set the tax free allowance. The Labour proposal on income tax is more modest: it would involve extending the Scottish rate of tax being introduced under Calman from 10p to 15p, together with giving the Scottish government the ability to increase tax in the higher rate bands above tax rates in the rest of the UK.
Income tax is not a good choice for this kind of increased fiscal responsibility. As we show in the JRF submission, the distribution of taxable income in Scotland is very different from that in the UK as a whole, with Scotland having a markedly smaller proportion of tax payers at the high end of the income distribution. This reflects, primarily, the unbalanced nature of the UK economy, with its extreme concentration of very high earners in the City of London. We are certainly not arguing that Scotland should mimic the excesses of the City: there is absolutely nothing wrong, and a lot right, with the fact that Scotland has a different distribution of taxable incomes. However, what this difference does mean is that, if there were a further period of finance based expansion in the City, then the income tax base in Scotland is highly unlikely to grow as fast as that in the UK as a whole. Given the way the Barnett formula would be adjusted under the Conservative and Labour proposals, (there are more details in the full JRF submission), this would impose a squeeze on the finances of the Scottish government – which would put a future Scottish government under pressure either to raise the Scottish rate of income tax, or to cut services, or both.
This danger is compounded because, under both sets of proposals, the Scottish government would have very few increased economic powers: so there is actually very little it could do to grow the Scottish economy, and hence increase the Scottish income tax base. In effect, the fundamental flaw in the Conservative and Labour proposals is that they deliver responsibility without power. They deliver the responsibility for managing our affairs within an unstable and probably relatively declining tax base, without delivering the economic powers to evade this trap by growing the Scottish economy. The likely outcome would be a scenario of increasing Scottish tax rates, shrinking public services, and continued relative economic decline.
While this is the main danger with these proposals, there are other problems as well. In particular, both sets of proposals pay inadequate attention to a whole range of technical problems which should have been addressed. For a discussion of the technical issues, see the JRF submission.
There are also implicit economic assumptions underlying both sets of proposals which need to be made explicit. These seem to us to include, for example, the assumptions that the UK is a largely self-regulating optimal currency area: or that the best way of achieving economic growth is by reducing taxes. Unless such assumptions are clearly brought out, the Scottish people are effectively being lumbered with a neo-liberal economic agenda without being asked whether this is what they want to sign up to.
And on top of all this, both sets of proposals made by the Conservative and Labour parties fall far short of what was promised in the run up to the referendum, namely, to deliver something that would be a modern day home rule, or as close to federalism as it is possible to get.
The Conservative and Labour proposals are poorly thought out and fundamentally flawed – both conceptually, and in terms of their technical aspects. Ultimately, one could speculate that these flaws are driven by the mindsets of the respective parties involved. The Conservatives by a mindset fixated on low taxes, the desirability of a small state sector, and the smack of discipline for the Scots implied by a balanced budget: Labour by the desire to concede the minimum possible power to Scotland, so as to preserve the status of their Westminster Scottish Labour MPs.
As an alternative, the JRF submission puts forward positive proposals, specifically:
- The two areas we recommend for increased tax responsibility are national insurance, and taxation of land.
- In terms of powers, the critical thing is that, in those areas where the exercise of reserved powers is currently failing Scotland, powers should either be devolved, or appropriate steps taken to ensure that the relevant powers are exercised properly, in the joint interests of Scotland and the union. Candidates for direct transfer of powers, we suggest, are fisheries, the crown estate, and aspects of representation in Europe. In other areas, what is required is something like a micro-federal solution, where power is shared between Scotland and Westminster, but in a quasi-federal manner which means that the numerical preponderance of England does not simply dominate: these areas include monetary policy, oil and gas policy and taxation, utilities regulation, corporation tax, competition policy, and research and development and support for innovative industries.
We emphasise again that these proposals are made in the spirit of the Smith Commission. It would be a much cleaner solution if Scotland had gained these powers with a full transition to independence.
Overall, Scotland faces grave dangers if anything like a blend of the Conservative and Labour proposals emerges from the current Smith Commission deliberations. This puts a heavy responsibility on the negotiators in this process who are representing us from the other parties – and particularly on the SNP. Our negotiators will need to hold fast, and refuse to have anything to do with proposals which are as fundamentally flawed as those currently on the table from Conservatives and Labour. Unfortunately, a note of caution is required here. On a previous, but less critical, occasion, when the details of the Calman income tax reforms were being negotiated, the SNP meekly acquiesced to a set of proposals which themselves had basic flaws – much, (it now turns out), to the surprise of the unionist negotiators. The SNP will need to be a good deal firmer this time around.