If the Scotland Bill is a fiscal trap, why has the Scottish Government walked into it?

If the Scotland Bill is a fiscal trap, why has the Scottish Government walked into it?
Barclay McBain, The Herald
10.11.15

And so the Scotland Bill, the most blatant fiscal trap in 300 years, has passed its Commons stages. There can still be amendments in the House of Lords, but since the SNP doesn’t sit there, they can’t table any.

But why is it a trap, and why has the canny SNP fallen into it?

Well, as Tory MPs keep reminding us, the Scottish Government is being given the powers to increase, or “top up”, welfare benefits in Scotland. But it will have to pay for this, effectively, through increasing income taxes. It gets no powers to change the benefits themselves.

Income tax is the toxic tax. Governments avoid using it like the plague. Indeed, the UK Conservatives promised at the General Election to make it illegal to raise income tax in England before 2020.

Governments now raise revenues through less visible measures such as National Insurance,VAT, corporation tax, excise duties on alcohol, Petroleum Revenue Tax and so on. These will not be devolved.

Nor will Holyrood have power to raise taxes on unearned income from savings or share dividends, which is how many wealthy people "earn" their golden crust.

Since 1999, Holyrood has had powers to raise the basic rate of income tax by 3p in the pound, but no party has gone near the Scottish Variable Rate (SVR). It would be political suicide to raise the taxes of ordinary people alone. Holyrood has powers to vary all rates and bands and, therefore, less excuse not to use them.

There is another problem with income tax. Scotland has a shrinking tax base. As the Institute for Fiscal Studies noted repeatedly during the referendum, Scotland has an ageing population. Meanwhile, younger workers are continuing to drift south where most of the good jobs are.

This has created a fiscal vice in which Scotland has more older people to look after but with fewer workers around to pay the taxes necessary to support them. This is why Scotland needs more immigration. Its tax base is shrinking just at the moment when the Barnett formula is being phased out.

So why on earth, if this is a fiscal trap, has the SNP fallen into it? Well, it signed up to the Smith Commission, on which the Scotland Bill is based, in the aftermath of the 2014 referendum defeat. It was looking for consolation prizes, perhaps.

The SNP has a gradualist approach to independence, so it finds it very difficult to say no to new powers. Some Nationalists also hoped that the tax powers would, like the SVR, never be applied because all Scotland’s parties would tacitly agree not to use them.

That was before Kezia Dugdale’s "back of an envelope" plan to restore tax credit losses to low- income families by effectively increasing income taxes on “middle earners” and not cutting Air Passenger Duty. Labour isn’t really a contender for the Holyrood elections so it had nothing to lose.

But the Scottish Government has a lot to lose and it has now been forced to agree to compensate families for tax-credit losses. This will be difficult. Especially now George Osborne is pushing through 30 per cent reductions in departmental spending which will further squeeze Scottish departmental budgets.

There is a “no-detriment” provision in the Scotland Bill to ensure that Scotland doesn’t lose out by the partial abolition of the current Barnett Formula. But it’s difficult to see how a new “fiscal framework” as it’s called could be devised that would compensate the Scottish Government for a political decision to have higher welfare benefits in Scotland than in England.

And so, the Tory trap has been sprung. Perhaps John Swinney – who is no slouch when it comes to fiscal juggling – has some master plan to step, Houdini-like, from the Unionist chains.

He’s done pretty well up to now, mitigating elements such as the bedroom tax. But to release cash he has had to squeeze other areas of spending such as health. The sneaky Tories have spotted this and will be hammering at the Scottish Government for risking the health of the nation just to support all those skivers on benefits. They want to be the low-tax party.

It’s a tough call. But the SNP may have the last laugh. It may be that Scottish voters are prepared to pay just a little extra tax in order to live in a more humane society. Now that really would shock the Chancellor.

Source: The Herald