Analysis of the Smith Commission, and how the UK Government is using it to line up a £5.8bn budget cut for Scotland
As we move into 2015 the Smith Commission remains nothing more than a recommendation to the UK Government, and as noted previously it took 7 years for a selection of the recommendations from the equivalent Calman Commission to be implemented. However it seems highly likely that each of the main UK parties will include ratification of the Smith Commission proposals in their 2015 election manifestos. There will be different flavours of implementation I would imagine, so diligence from the electorate is highly recommended! The UK Government’s financial Autumn Statement gave an indication of the precarious position that Scotland finds itself post-No vote.
The Smith Commission report is worth a read – with only 8,000 words it isn’t a heavy document. Some of it is all too easy to read unfortunately:
There are some significant points in the report that will hopefully lead to progress in the democratic representation of Scotland’s citizens. The most notable points are really aimed at formalising and improving the relations between the UK and Scottish Governments (points 28-30 on pages 14 & 15) and also Scottish Government representation of the UK to the European Union (point 31 on pages 15 & 16). The mechanics of inter-governmental relations and representation have not sufficiently been addressed since devolution was established in 1999 and the Smith Commission represents a key opportunity to address these matters which are fundamental to the current constitutional arrangement.
Significant Additional Powers for Scotland?
In addressing aspects like inter-governmental relations, the Smith Commission could be considered worthwhile (assuming those recommendations aren’t ignored) but the expectations were there for some significant additional powers so more was needed to allow some loose association to Gordon Brown’s promise of a ‘federal solution’ following a No vote. Federalism itself is a fairly loose term, but the No campaign itself stated that the Scottish parliament needed more tax raising powers to ‘make it more accountable’. Indeed Johann Lamont, leader of the Scottish Labour Party at the time, wrote an article just weeks ahead of the referendum stating that ‘it is undeniable that the success of devolution has created a thirst for more, and the people of Scotland want a parliament which has greater power, accountability and flexibility.’
She went on to write that Labour ‘concluded that taxation is they key area for further devolution which can bring about a more accountable parliament and a more mature politics in Scotland. We decided not to devolve all of income tax. While we want more authority for Holyrood, we did not want to break our links with the UK income tax system because we believe Scotland, which raises proportionately less in income tax than England, would lose out.’
Alastair Darling wrote an article in the Financial Times after the referendum outlining his views on the dangers of full devolution of income tax, and Gordon Brown was clear that such a move was a ‘Tory trap’.
The Smith Commission report ultimately recommended that Income Tax should be fully devolved to the Scottish Parliament (points 75-79 on page 23). However, if the Scottish Parliament alters the rates from those set at Westminster, ‘the Scottish Government will reimburse the UK Government for additional costs arising as a result of the implementation and administration of the Income Tax powers described’. There is no indication in the report what these costs may amount to.
Since devolution was introduced the funding for the Scottish Parliament has been based on the Barnett Formula – a formula where the parameters are fundamentally set by all taxation being centrally collected in Westminster.
In addition to the Smith Commission recommending the full devolution of Income Tax, it also recommends that the first 10% of VAT is assigned to the Scottish Government’s budget. The last Government Expenditure & Revenue Scotland (GERS) report, released March 2014, provides an overview of the total tax receipts and government spending under the existing arrangement. Table 3.1 in the report details the current revenue generated by the existing taxation system and during the financial year of 2012-13 income tax revenue was £10.87bn (7.4% of the UK total) and the VAT revenue was £9.3bn (8.3% of the UK total). The UK VAT rate was 20% for this period, so if the Smith recommendations on VAT were in place £4.67bn would be pre-allocated to the Scottish Government. Therefore if the Smith Commission recommendations had been in place at this time, and the income tax rates were not changed, the Scottish Government would have £15.5bn allocated ahead of the revised Barnett Formula allocation.
The nature of the Barnett Formula revision becomes critical to whether Scotland’s budget is affected from this direct allocation of income tax and VAT. The Smith Commission attempts to address this with the following statement on page 4 of the report:
The Barnett Formula will continue to be used to determine the remaining block grant. New rules to define how it will be adjusted at the point when powers are transferred and thereafter will be agreed by the Scottish and UK Governments and put in place prior to the powers coming into force. These rules will ensure that neither the Scottish nor UK Governments will lose or gain financially from the act of transferring a power.
Following the logic here the pre-allocated £15.5bn would be deducted from the existing Barnett Formula, ensuring that neither the Scottish nor UK Governments are financially impacted by this new constitutional arrangement. You could rightly ask what on earth the point is then!?
The Autumn Statement: The Westminster trapdoor opens
Unfortunately the point of devolving the allocation of these taxes was revealed (briefly) when George Osborne gave his Autumn Statement, just 6 days after the Smith Commission report was made public.
Given the lengths that the Unionist parties have been going to in an effort to claim that the Barnett Formula will be preserved following the No vote, I was surprised to find the headline ‘Autumn statement: Scotland’s Barnett block grant ‘less important’ to Scotland’ on the BBC. As you’ll see from the image below, the leading story was that the UK government block grant to Scotland will fall by two-thirds when Holyrood is given control over income tax.
The corresponding text in the Autumn Statement can be found on page 31 of the report:
Given that the block grant currently apportioned to Scotland via the Barnett Formula is roughly £32bn, a cut of 66.67% would equate to £21.3bn being removed from the Barnett block – significantly more than the £15.5bn generated via the Smith Commission recommendations. Assuming the tax rates remain unchanged, this essentially announces a £5.8bn budget cut for Scotland (going further than the £4bn cut to Scotland’s budget that was recommended by the Westminster ‘All Parliamentary Taxation Group’ near the end of 2013).
The BBC website team must have been quickly informed that the headline on Barnett would result in alarmed readers about the impact of the Smith Commission to Scotland’s budget, and so the headline ‘Autumn statement: Scotland’s Barnett block grant ‘less important’ to Scotland’ was quickly changed to ‘Autumn statement: Extra £125m to be spent on NHS, Swinney confirms’ (see below and check the URL on both images).
This is the equivalent of your bank phoning to let you know that they are changing your bank account and will apply a changeover fee of £5,800 but that the new account comes with a £125 Amazon voucher. If 100 people received such a phone call, I’d hope that 100 people would say ‘No thanks’ to the bank’s offer. Perhaps it wouldn’t be so compelling if the BBC ran a promotion of the new account with the focus placed firmly on the £125 Amazon voucher though…
The Scottish electorate’s opportunity to influence the budget that is allocated to Scotland’s public services will come in May’s General Election. With the Conservatives and Labour both set on a consistent plan of austerity the SNP are standing against the attack on our public services, with a joint commitment from the Greens in England and Plaid Cymru in Wales (with the 3 parties also sharing the common ground of opposition to the next generation nuclear weapons program).
The Autumn Statement gives an indication of how the mechanism for funding Scotland’s public services could be manipulated in the years ahead. The referendum may be over, but the need for democratic vigilance remains – it strikes me that only transparent and accountable solution that can be delivered for Scotland within the UK will be to devolve all taxes to the Scottish Government and establish a process for funding UK projects.
Note: the circumstances that led to Smith Commission and my own submission are available in my previous blog post.