Scotsman Conference: Fiscal Powers For Scotland

The Rt Hon The Lord Wallace of Tankerness, QC, Advocate General for Scotland, addresses the Scotsman Conference: Fiscal Powers For Scotland.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon Lord Wallace of Tankerness QC

I suppose you might say I am a devolution veteran. I can recall the disappointment of the 1979 referendum and I can remember well too the campaigns and struggles of the 1980s and 1990s.

What I learned from that experience is that far-reaching reforms require consensus. I remember working with others in the Scottish Constitutional Convention, helping lay the foundations for Scotland’s first democratic Parliament.

That has also been the story with the Calman Commission and the work which that set in train towards the Scotland Bill - which implements the Calman recommendations and was launched by the Secretary of State, Michael Moore on St Andrew’s Day.

The Commission’s approach included 52 public and 27 private oral evidence sessions and reading over 300 written submissions and over 900 responses to our questionnaire. We travelled widely - from Ayr to Aberdeen, from Lerwick to Newcastle-upon-Tyne - to meet over 300 people at 12 local engagement events. There were 21 full Commission meetings and 41 meetings of different task groups where we considered and analysed the huge volume of information collected.

Our unanimous recommendations were subsequently endorsed by the Scottish Parliament and led to the Bill published two weeks ago.

I must confess that when I participated in the work of the Commission it never occurred to me that I’d be so involved in preparing the legislation, let alone being the Minister given the responsibility of taking it through the House of Lords, although I hasten to add it would not have changed the recommendations.

Devolution has brought government closer to the people of Scotland. It has delivered Scottish solutions to Scottish problems. The Scottish Parliament has become a firm fixture in Scottish public life - pioneering new forms of working and landmark legislation, subsequently adopted elsewhere.

But the devolution settlement was not cast in stone.

Indeed, even in the first decade of devolution the settlement did not stand still and Scotland has gained further powers.

But a mature Parliament, with extensive policy responsibilities, needs to go further. The imbalance between power and responsibility in the existing Scotland Act is what will be addressed by the Scotland Bill.

The Calman Commission highlighted areas for reform within the settlement to deliver better devolution for Scots.

Financial Accountability Not only was the need to improve financial accountability set out in our remit. It also emerged as a strong finding of the Commission that the Scottish Parliament’s ability to spend had to be balanced by the responsibility for raising that revenue.

This reflected the comment of my colleague David Steel, who in the 2003 Donald Dewar lecture said:

“Frankly no self respecting parliament should expect to exist permanently on 100% handouts determined by another parliament, nor should it be responsible for massive public expenditure without any responsibility for raising revenue in a manner accountable to its electorate.”

Our tax and borrowing proposals are at the heart of the Scotland Bill. Giving the Scottish Parliament £12 billion worth of new tax and borrowing powers.

Financial accountability has been our guiding principle.

Proper tax powers do come at a cost, but this system delivers financial accountability at a marginal cost.

In future, as a result of the Bill, the Scottish Parliament and Scottish Government can be held to account not only for how they spend money, but also for how they raise it. Holyrood will require to be more responsive to the needs of businesses and local concerns as it raises and spends money from Scottish employers and Scottish employees.

During devolution’s first decade, budgets have always risen. Indeed, the Scottish Government’s budget has risen by three times the rate of inflation. The block grant of £14 billion would have grown to £19 billion if it had grown in line with inflation. In reality, it rose to £29 billion.

Financial accountability will present new challenges for the Parliament and its MSPs, particularly the circumstances of the tightened budget circumstances in the coming years.

Most significantly, the Scotland Bill will lead to the creation of a Scottish rate of income tax, sitting alongside UK income tax.

We will create that tax by taking 10 pence off the basic, higher and 50 pence tax rates for Scottish taxpayers, and reducing the block grant accordingly, and empowering Holyrood to set the Scottish rate at a level of the Parliament’s choosing.

The level will be for Scotland to decide. The Scottish rate might be higher, lower or mirror the UK rate. But whatever the rate, the principle will be the same - those who set the Scottish rate will answer directly to those affected by that decision. And that power will ultimately rest with the Scottish people.

As much as 35% of Scotland’s public services budget will be generated from taxes decided upon and raised in Scotland.

The Calman Commission thought long and hard about finance. The recommendations were based on sound fiscal reasoning.

There are no inherent technical flaws in the taxation proposals contained in the Scotland Bill.

They are based on international expertise and operational experience.

The taxation principles draw upon established practices followed in other major, advanced economies - where state governments routinely share tax bases with national governments.

We are not plunging into anything overnight. Substantive fiscal changes will be introduced in a planned and in a phased way.

The Scottish Parliament can approach the exercise in 2015 secure that transition and implementation arrangements will be in place. These transitional arrangements will be put in place to ensure that there is no windfall gain or adverse shock to the Scottish budget, nor to the UK budget.

These arrangements will ensure that changes to the UK income tax structure will not have any impact on the budget for public services in Scotland. The Scotland Bill is founded on retaining the broader, unified UK tax system.

The new Scottish Income Tax will replace the existing Scottish Variable Rate, a power which you may remember was endorsed by Scottish voters but quietly allowed to lapse by the current Scottish Government. Our fiscal reforms are not limited to tax.

They extend to borrowing too.

The Calman Commission said that the Scottish Parliament needed greater borrowing powers.

The Scotland Bill will deliver them.

Holyrood will be given the tools to manage variations in revenues. With the powers to borrow £500 million to cover current spending when tax receipts are less than anticipated.

In addition, we have gone further than the Calman recommendations, when we propose a Scottish Cash Reserve in the Bill - to bank and save money when the tax collected exceeds expectations.

These are valuable levers to smooth Scotland’s finances through fluctuations.

Alongside this, we are proposing a new capital borrowing power of up to £2.2 billion.

It will be up to the Scottish Parliament and Scottish Government to decide how much they will borrow and where they spend it.

It could be on long term capital projects, like a new Forth crossing - but in making their choices, they will be accountable to the electorate of Scotland.

I believe these are radical recommendations. They are innovative and far reaching. They are built on solid foundations, based on consultation and have been taken forward with consensus.

This is the largest transfer of financial powers out of London since the creation of the United Kingdom.

Too often this debate is portrayed as a confrontation between the UK and Scottish Governments. The fact is that the broad principles of the Calman Commission, now being taken forward by the Scotland Bill have found favour with both the UK and Scottish Parliaments and the Scottish electorate.

After 4 years of national conversations, draft referendum bills, hours and hours of officials’ time directed towards working out how to break up Britain nothing has emerged for MSPs in Holyrood to consider.

By way of contrast, I am going from this conference this morning, to give evidence to the Scottish Parliament’s committee examining the United Kingdom government’s Scotland Bill.

The bottom line is that the Scotland Bill is not only the correct set of fiscal proposals it is also the only credible set of proposals that are on the table for people and parliaments to scrutinise.

Fiscal Autonomy and the threat to stability Others have tried to put forward different ideas to the comprehensive Calman package.

Some have suggested that we have gone too far. But as I have tried to show, the proposals have been carefully worked through and above all deliver a Parliamentary accountability essential for the long term operation of our Parliament.

At the other end of the spectrum, separation has long been the preferred option for the present Scottish Government, although they have recently along with others embraced its trendy, but superficial, sibling - fiscal autonomy.

The extensive research undertaken during the Calman process only showed the dangers Scotland would be exposed to should it follow this path.

Full Fiscal Autonomy means that all of Scotland’s public services would be funded by taxes in Scotland.

But the fact is Scotland cannot afford full fiscal autonomy.

Even the Scottish Government’s own figures show that tax receipts in Scotland are not sufficient to cover all public expenditure in Scotland. Nor should we forget that public expenditure in Scotland is 18% per capita higher than south of the border.

So it is not realistic for anyone to argue that Scotland would somehow be better off or that taxes would be lower.

The evidence of a decade of devolution gives an indication of where we would be if the Scottish Parliament’s Budget had come solely from Scottish taxes.

And I do not believe it forms a credible scenario.

From the start of devolution to 2008/9 - the last year for which we have estimates of tax receipts in Scotland - the Scottish budget increased by 94% from £14 billion to £27.5 billion. But, over the same period tax receipts in Scotland rose by 47%.

In other words, the level of expenditure grew by double the rate of tax receipts. These different growth rates would suggest that a Scottish budget funded by Scottish taxes would have been £6.7 billion less in 2008/9 than it actually was.

Fiscal autonomy loses what the Scotland Bill preserves - the ability to spread economic and financial risk across the wide and diversified UK economy.

I may highlight North Sea Oil and Gas as an example.

As the industry expert, Professor Alex Kemp of the University of Aberdeen, concluded in the paper prepared for the Calman Commission by the Independent Expert Group, delivering control over oil and gas revenues would leave Scotland exposed to significant revenue fluctuations.

This volatility has been brought sharply into focus over the past two years.

From 2008/9 to 2009/10 UK Oil and Gas receipts fell by £6.4 billion- nearly a quarter of the Scottish budget. But in the context of the wider UK economy total oil and gas revenues are less than 2% of Exchequer revenues.

You cannot build a tax structure and solid economic foundations on the price of a barrel of oil.

Scotland¿s public services and welfare spending cannot be risked by rollercoaster revenues.

Similarly, when we recall the massive insurance package provided by the UK when Scotland’s two largest banks failed in 2008. The Scottish Parliament Information Centre estimate the cost of the bank rescue at £470bn. That is three times Scottish GDP.

Fiscal autonomy pulls away the safety net. It deprives Scotland of the basic principle of insurance - the ability to spread risks over as wide a base as possible.

So alongside empowerment and accountability, born out of a cross-party consensus, there is a third factor which makes the Scotland Bill, and the proposals in the Scotland Bill, the sole option.

That factor is stability - the bedrock of stability Scotland derives from being a key part of the UK - the world’s sixth largest economy. The advantages Scotland’s businesses accrue from the interdependence of the UK economy.

Where is Scotland’s biggest export market? Well it’s not a European country or the United States.

The real winner is of course much closer to home.

The rest of the UK is our most important trade partner and the destination for over two-thirds of our exports. Fiscal autonomy would mean any business or individual trading across this border would have to comply with two distinct tax systems - Scotland and UK.

That’s why in our programme for Scotland we will ensure the continued free movement of goods within the UK.

Conclusion In conclusion, once the bold reforms included in the Scotland Bill and the Command Paper are fully implemented, a historic shift in power will have been accomplished.

The Scottish Parliament and Scottish Ministers will be given more power, making them more accountable to their electorate, and more flexible and responsive to the needs of Scotland within the UK.

Building on the success of devolution, the Scotland Bill and devolution phase two offers Scotland the tangible triple benefits of empowerment, accountability and stability.

The Scottish Parliament will have a real stake in the Scottish economy.

This is a carefully calibrated and balanced package. We are setting out our plans, we are working together and we are committed to strengthening Scotland’s future.

Published 14 December 2010