More powers

 BORDERS GROUP

 By Russell Bruce

The following submission was lodged with The Smith Commission on Friday 31st October

It is proposed in this submission to make the connection between powers and responsibility by drawing attention to the Government and Expenditure and Revenue Scotland accounts (GERS) that have been produced since 1990.

Scotland’s revenue contribution and expenditure is thus documented over a period of time. Whilst there are a number of issues that some see as an obstacle to further devolution there is general agreement that a parliament should have responsibility for raising and accounting for the money it spends. How to do this within a unitary state may be a challenge but it is not insoluble. Accordingly in this submission it is argued that a maximum transfer of powers is compatible with a fiscally sustainable solution and the exercise of responsibility.

Where there may be implications for the present governance and parliamentary structures at UK level is for others to consider and for inter regional and inter nation dialogue to take forward.

Before detailing the powers argued for, it is useful to set out the background of the variety of governance models that add to the present complexity.

Governance models in the British Isles

Westminster has considerable experience in helping set up governance models around the world. It has done so for ex colonies and former Dominion states. It also set up the federal system for the former West Germany in the post war years. Federal systems can provide a stable basis for allocating tax powers at state or region level with federal taxes added for centralised expenditure e.g. defence.

The British Isles has changed over time with different solutions to deal with different parts of what can only loosely be described as a unitary state. These islands have three crown island dependencies – Jersey, Guernsey and Man with their own governments, full tax raising powers and an unclear relationship over defence, foreign affairs and contributions for these costs. They are also not part of the EU.

Scotland, Wales and Northern Ireland have devolved governments with different powers allocated. We therefore require for Scotland a model that meets the aspirations of the Scottish people and is understood in UK/England context as Scotland not being unfairly advantaged, and in Scotland as Scotland not being unfairly disadvantaged.

Government Expenditure and Revenue Scotland

As all income and expenditure is already allocated to Scotland we have a clear basis for moving forward. It is the view of this submission that all taxes should move towards direct collection in Scotland. We already have tax offices and staff that deal on a UK wide basis that can be switched towards tax administration of all taxes falling due in Scotland. It may be, by agreement, that some e.g. Vehicle Excise Duty (VED) will continue to be administered in Swansea with receipts transferred/credited to Scotland for tax collected from vehicle owners in Scotland.

Tax variation and changes may be considered an issue but the real issue is the requirement that Scotland continue to pay for a fair share of joint expenditure on defence and foreign affairs and meet the cost of its proportion of national debt and pass such shares due to UK central government. The one tax that cannot be varied is VAT. It may be that heads of agreement might be arrived at on the degree of variation on some other taxes e.g. corporation tax whilst there should be no variation limit on others e.g. Air Passenger Duty.

We propose that all welfare and benefits become the responsibility of the Scottish Parliament including pensions. It may be a phased transfer operates, with pensions following slightly later, due to the complexity of state pension contributions being historically regarded as income with a promise to pay at a later date from future tax receipts.

The importance of transferring all welfare expenditure is because of the linkage with responsibility. Should a Scottish government believe that a change in how it allocates welfare payments will bring an advantage to tax revenues then it should gain the credit for such success or have to deal with the consequences should its calculation of increased tax revenues and reduced welfare costs not be met.

Devolution has always been about doing things differently. To suggest in a phase of further devolution those differences should be diminished would be considered an anathema to people in Scotland and a betrayal of the overwhelming demand in 1999 for a Scottish Parliament, and the overwhelming support the parliament continues to have. Within the wider context of the UK it would be justifiable to consider differential corporation tax levels in some English regions to grow employment and economic activity as long as it was linked to substantial regional employment increases. The more policy is strategically developed to growing prosperity across all parts of the UK the more the whole will benefit. Opportunities exist for all of the UK with new thinking to address the underperforming regions of England. Such ideas are perhaps beyond the role of the Smith Commission as it is for people in England to work through the present and persistent inequalities due to the continuing dominance of London and the South East. Some ideas in parts of this submission indicate possibilities of variations that might equally benefit some of England’s less prosperous regions.

Tax Revenues

           UK tax revenue summaries 2012-2013

This chart from publicspending.co.uk shows the contribution of different taxes to the total at UK level and is included here as there is not a wide understanding of the proportion raised by specific tax measures. That NI raises two-thirds as much as income tax is a surprise to most people.

INCOME TAX AND NATIONAL INSURANCE

All income tax bands and rates to be set by the Scottish Government who must set revenue targets to raise broadly similar revenue levels from income tax as a proportion of total revenues to the historic pattern – inflation adjusted. National insurance contributions to be collected by the Scottish Government and records maintained, as is presently the case. The scope for reform and possible integration of Tax and NI is noted and could be the subject of future inter-government discussions.

VAT

Under EU rules there could be no variation in VAT rates and VAT collected in Scotland would be on the same basis as in the rest of the UK.

CORPORATION TAX

We should not be afraid of small variations in different parts of the UK. Devolving CT to N Ireland has been considered due to competition from the low rates in Ireland. Scotland would not, it is suggested, make substantial variation but perhaps target corporations with a significant presence in Scotland, but who do not pay CT in Scotland or the UK. By offering credits against CT, instead of NI, for moving employees from the minimum wage to the living wage could result in an increase in CT collection rates through gaining tax revenues currently paid in other countries. This would also reduce the need for many of the lower paid to rely on tax credits to achieve a sustainable level of household income.

OIL REVENUES

As 90% of oil and gas revenues are a result of activity in Scottish waters this submission argues that stable and consistent tax rules are agreed between UK and Scottish Governments. All revenues to be collected by the Scottish government and that proportion due to the UK would be paid over to the UK Treasury in line with other agreements on transfers. Such an arrangement would be consistent with some minor taxes continuing to be collected by a UK facility e.g. Vehicle Excise Duty (VED), MOT recording and insurance verification currently carried out in Swansea. (North Sea Oil revenues represent 2% of UK tax revenues and VED about 1% 2011/12.)

Giving evidence to the Scottish Parliament Finance Committee Iain McLean, Professor of Politics at Oxford University, said: “Devolving the whole of North Sea tax is perfectly feasible – as well as desirable – on the grounds which Adam Smith gave”. And he added it would ‘make sense’ for the licensing regime to be devolved to the Scottish Parliament, along with tax.

“It would make sense that the one should go with the other as part of the overriding picture that tax and spend responsibilities should go together,” said Prof. McLean.

OTHER TAXES

This submission seeks to establish the principal that all taxes are collected in Scotland with some pragmatism on some minor taxes, as evaluated at UK level, thereby permitting expertise in existence to develop and maintain government employment in the different regions and nations of the UK.

Air passenger duty (APD) raises £2.6bn or 0.46% of UK taxes. In Scotland it raises £213m or 0.035% of Scottish tax revenues. As Scotland lacks ideal connectivity, a reduction would greatly increase the potential to increase direct flights to and from Scotland. The transfer of APD is supported by Scottish airport operators. The economic return from improved international connections has considerable advantages for employment, productivity, inward investment, exports and other tax revenue streams.

Welfare

The Social protection budget for Scotland was £21.6bn for 2011-12. Opinion in Scotland has long favoured the transfer of all social and welfare policy to the Scottish Parliament. In a recent poll 75% of respondents thought welfare and benefits should be under the control of the Scottish Parliament.

The rolling out of Universal Credit by the UK government has been pitifully slow as reported by Channel 4. Only 14,000 have been transferred to the new system against a target of 1,000,000 for 2014. An early transfer of welfare policy to the Scottish Parliament would allow a more sympathetic simplification of benefits in line with Scottish attitudes towards the protection of the more vulnerable members of society and avoid the hard line and punitive systems, introduced by the present UK government, that have been so controversial. It is absurd that the Scottish Government should have to dig into its budget to ameliorate the events of the ‘bedroom tax’ at the expense of other priorities. If it can set its own priorities for welfare then a Scottish Government responsibility for the cost by allocating resources from taxation revenues it has not previously had access to.

With limited space in this submission the importance of a direct connection between devolving maximum economic and welfare policies is explored in the following sections. Compartmentalising these policy functions across different governments works against the maximisation of economic and social gain and budgetary advantage.

Employment

Scotland has outperformed the UK in the levels of employment of the 16-64 working age population over the last 7 years and achieved higher levels of employment than England in 27 of the last 32 quarterly reports to 2014 Q1.

Historically Scotland, for most of the 20th century, was one of the first parts of the UK to feel the draughts of recurring recessions and always at the tail end in gaining advantage during periods of economic upturn. The pattern of change in employment levels over 15 years since the establishment of the Scottish Parliament and the devolution of a range of economic powers this submission suggests is not unconnected.

This submission proposes that all aspects of employment policy and law are passed to the Scottish Government. By connecting social and welfare policy with economic targets it is possible to achieve much more and get more people into work. Within the UK we have two entirely different approaches to reducing pressure on social policy budgets. The UK government is cutting levels of support with an objective of cutting the annual deficit. The Scottish Government has pursued policies to help people into work without obtaining the direct advantage of higher tax revenues from a working population with increasing, if modest, levels of disposable income.

Two policy objectives of the present Scottish Government are showing positive results in the recent labour market statistics that, combined with trends in recent years, provide indicative causality evidence between economic direction and the limited social policy powers of the parliament.

The Scottish Government has pursued an ambitious policy of reducing Youth unemployment. As the latest statistics show Scotland has a higher rate of youth employment than the UK as a whole, by a margin of 4.4%. It also has lower levels of youth unemployment and inactivity compared to the UK as a whole.

The second identified policy objective is to maintain and increase female market participation comparative to the UK. Scotland has consistent higher levels of women in employment compared with the UK as a whole. Current differentials are relatively marginal but with full control of welfare policy more ambitious investment in pre-school and childcare policies are likely to enable more women to enter the labour market thereby increasing household income, particularly in the two lowest quintile groups. Improving income for the poorest households addresses inequality and provides a corresponding increase in expenditure circulating in the economy with resulting rises in both direct and indirect tax revenues.

Using data on female market participation across 6 European countries provides evidence that the UK underperforms in providing employment opportunity for women.

 

This table supplies useful data on labour market gender equality. Finland easily comes out in the lead with a positive score of 5.25 with Norway in second place scoring 3.05. Both countries invest heavily in pre-school education and childcare policies. The other four countries in this sample produce a negative score with the UK showing the greatest disparity in levels of female employment with potentially significant consequences for the maximisation of economic activity.

Comparative expenditure on pre-school education and childcare shows that it is not just the amount that is spent but that policy development is integrated and not delivered on an ad hoc basis. Norwegian policy stems from the ‘women’s governments’ of Gro Harlem Brundtland in the 1980s and 1990s. “Some observers have noted that Norway is moving beyond the dual breadwinner model by attempting not only to change the behaviour of women, but also that of men. The ideal family practice promoted by Norwegian policy-makers, it can be argued, is the dual earner/ dual carer model” (Skevik, 2003).

It is only by having control of economic development, employment, social and welfare powers that integrated policy direction can deliver objectives that are designed to work with one another.

Comparing the amount of paid work undertaken by women in the UK and Norway in 1971 and in 2000 shows that Norway lagged behind the UK in 1971 but by 2000 female labour participation in Norway outstripped that of the UK.

Source: Multinational Time Use Study (MTUS), University of Oxford

Energy

We have already made the case for Oil and Gas revenues to be collected in Scotland. As the continuing opportunities for new fields and employment of new technologies are in Scottish waters it is imperative that the Scottish Parliament should have full control over energy production and development in Scotland including licensing. Split responsibilities add a layer of complication that can only continue to hinder development in waters on the west coast. Support services to the oil and gas industry are a major source of employment in Scotland and a number of companies have grown to become global players. The skills base now in existence is a valuable resource for new generation renewable energy technologies in the early stages of development. The value of integrating long-term energy strategies cannot be over emphasised. This vast potential will also benefit companies in other parts of the UK who are also engaged and active in a sector with global significance and opportunity.

Equality and Inequality

Growing inequality affects most western countries but it can be tempered by the integration of economic and social welfare policies as promoted in this submission. It may be something that is easier to achieve in small countries even when part of a larger unit.

“Small countries are more homogeneous and homogeneity plays an important role in determining the success of a country.”  “Increased specialization helps small countries be more successful in an increasingly competitive environment”

Source: Credit Swiss Research Institute, The Success of Small Countries

The UN Human Development Index (HDI 2014) records higher levels of high HDI along with low levels of low HDI across income groups in small countries.

Examining Gini coefficients in the same six countries previously contrasted shows patterns of inequality are greater in the three larger countries than in the three countries with a small population.

Source: data from UN Divided We Stand Chapter 8 Table 8.2

Household income inequality (Gini coefficients: produce a score between 0, indicating complete equality, and 1, complete inequality)

The lower the Gini score the more equal a country is and this diagram shows the UK the most unequal of the six countries in the sample. The influence of public services in the result is significant given the importance that is attached in Scotland to investment in health, education and employment opportunity through skills acquisition. This emphasis is about investing in people as a country’s greatest asset rather than viewing such expenditure as a cost ripe for pruning. Economic success is closely linked to the health, skills and aspiration of people and not to cost cutting to provide tax cuts to the already wealthy.

Barnet and allocation of resources to different parts of the UK

Barnet has been a means of allocating resources on the basis of need. It would not be unrealistic to acknowledge that Scotland is now, in economic performance, one of the more prosperous of the nations and regions of the UK. There is considerable irritation created in England by politicians who think Scotland benefits unfairly in having a higher cost per capita of public expenditure. The cost of delivering services in Scotland is higher for a number of reasons, but the most significant is the lower population density in Scotland compared to other parts of the UK and the scale and complexity of Scotland’s geographic footprint in relation to its population size.

Source: ONS Regional profiles key stats Oct 2013

Scotland’s population per square kilometre is half that of N. Ireland, a bit less than half that of Wales. Population density in England is over 6 times higher than in Scotland providing economy of scale capacities for public services impossible to attain in a country that accounts for a third of the land mass of the island of Great Britain, with 790 islands stretching out from one of the most complex coastlines in the world. Scotland’s mainland coastline is 9,960 km and when the islands are included this rises to 16,500 km.

Whatever the future calculations on allocating resources or in calculating Scotland’s dues for reserved areas of responsibility, Scotland’s distinct geographical formation and low population density must be recognised.

Deficit and debt reduction

This submission argues for the maximum transfer of powers consistent within a unitary state. It is recognised that most western countries currently run a budget deficit. It is therefore essential to agree how deficit financing of annual budget expenditure is tapered to the point where national debt accumulation is eradicated. Scotland must account for its share of the cost of servicing UK national debt. If interest rates are to rise following a prolonged period of low and unusually sustained base rate levels, we have to prepare for coming increases that will impact on the cost of borrowing in the years ahead.

Despite the challenge this poses, the proposals in this submission are intended to enable Scotland to make a positive contribution to the reduction of UK accumulated national debt. The more Scotland thrives through connected policy delivery the more able it will be to help address this long-term issue.

What about England and English Votes for English Laws? 

The more radical and complete the power transfers to Scotland, the easier it will be to address this issue. It is not a question though for people in Scotland to propose a solution to the people of England. A mechanism must remain where Scotland’s interest over reserved powers continues within any revised structures. By transferring maximum powers, England can then deal with matters that pertain only to England, providing they have no consequences for Scotland, without the influence of the votes of MPs from Scottish constituencies.

There will be a continued and important role for MPs from Scotland to represent Scotland’s interests in the unitary element of the Westminster Parliament. The future job description of Scotland’s MPs is largely of interest to a number of the present 59 Scottish Westminster MPs. It is suggested that such solutions are beyond the scope of the Smith Commission to resolve and will be a matter for wider consultation with the other nations of the UK.

Inevitably and correctly the meetings and conversations between the governments of the British Isles, including at times the Republic of Ireland will play an increasing part in resolving issues of concern, as was the case with the complex and important discussions that led to the Good Friday Agreement. We have a unique asymmetrical distribution of powers to the nations of the UK that makes conventional federal solutions difficult. That does not make workable and fair solutions impossible.

A European Voice

There are areas of more concern to Scotland because of their greater importance to the Scottish economy. Fisheries, and Oil and Energy are two such examples. It is in the interest of a continuing unitary state that Scotland is able to speak directly in negotiations with the EU in such areas.

Immigration

Immigration is a constant and very live issue in England. Scotland attracts many students from overseas and would like to be able to retain their skills rather than have non-EU students forced to leave if they have a wish to remain and contribute to the Scottish economy.

Variations within federal states exist in other countries e.g. Canada. A division of responsibility that would allow the Scottish Government to grant permission to stay would not be at odds with a UK wide immigration policy that recognised variations in the needs of different parts of the UK to fill skill gaps. We propose immigration and asylum policies and detention centres in Scotland become the responsibility of the Scottish Government.

Democratic aspirations

In a remarkable turnout not seen for decades, 45% of voters voted for independence. There is no question about the result, but it is allied to consistent and continuing demand for more powers to be allocated to the Scottish Parliament, particularly all welfare expenditure. The following diagram shows the demand for the transfer of welfare to the Scottish Parliament over several years.

Source: What Scotland Thinks

Following the outcome of the Referendum and the promise of the transfer of maximum powers, Scottish opinion has moved clearly behind the delivery of a maximum transfer of powers.

Conclusion

A number of possible policy objectives have been included in this submission that could have a positive effect on national welfare and also generate higher tax revenues. These are however intended as illustrative of a continuing potential that maximum devolution would offer to do things differently in Scotland. The core arguments presented are

1.The direct linkage of responsibility for expenditure being firmly tied to responsibility to generate revenue levels to pay for all devolved expenditure, make due transfers for the cost of reserved powers and our share of UK national debt.

2. A governance unit of Scotland’s size is much more able to co-ordinate policy objectives with a fair distribution of resources to tackle inequality and significant areas of poverty that undermine society’s potential for all people to flourish.

3. Improving household sustainability over time, particularly those in the two lower quintiles, has a positive effect on productivity and well-being with higher levels of disposable income circulating in the economy.

4. Resolving these long standing issues generates higher revenue streams from direct and indirect taxes and provides an environment in which all sizes of business are able to flourish contributing to employment opportunity and economic output.

Russell Bruce, Group leader  Business for Scotland, Borders Group    30^th October 2014