By Alasdair Galloway

Once Scotland took powers over income tax a settlement with the UK became necessary for several practical reasons

1. There would be a diminution of income tax coming from Scotland to the UK. Which would require a cut in the block grant to reflect the revenue collected by the Scottish Government itself with Scottish income tax.
2. The problem is that settling the amount of income tax raised is not possible by the end of the tax year. Thus there has to be an estimate for any year as the actual figure won’t be known.
3. This is done by, starting from a nominated year, working out what the size of the Scottish economy would be if it performed as well as the rest of the UK, and using the income tax that this should yield.

However leaving boring practicalities to one side, this arrangement offers political opportunities to Westminster. For one thing it puts the risk entirely on to Scotland because if the Scottish economy operates less well than the UK average, the income tax allowed for in calculating the block grant will be greater than what is actually raised by the Scottish Government. If, on the other hand, Scotland does outperform the UK average, then there will be a windfall for the Scottish Government, for what it collects in income tax will be more than what has been deducted from the block grant. The former though historically is more likely, as while Scotland features well among the 14 UK regions, two or three regions, including in particular London and the South East, are so far ahead that they distort any notion of a UK average having much application to the UK as a whole.

Many of these points are made by former Government statto, Jim Cuthbert, characterised in his very neutral titled report “The Turkey That Voted For Christmas (Twice): How Poor Negotiation Of The Fiscal Settlement Has Failed Scotland”. For instance, as in 2016, the Scottish Government has taken to itself all the risks associated with tax devolution. Consequently, Cuthbert argues,

“A standard feature of monetary unions is that the one-size-fits-all monetary policy implicit in a monetary union will not be optimal for all areas within the union at the same time. This means that fluctuations in relative economic performance between different parts of the union are a virtually inescapable feature.” In short a national average inevitably exposes Scotland to risk.

The size of the block grant takes into account the amount of income tax that should be collected in Scotland if our economic performance is at the same level as the rest of the UK, and it is this – expected growth of income tax – that is used to determine the block grant. Fine if Scotland does even better (despite policy focusing on the UK as a whole, However, if Scotland falls behind the UK average then there will be the sort of “black hole” much loved by the media – the level of the block includes a deduction of what should be rather than what is.  and in particular the financial services sector) than the reminder of the UK, as we get to keep the surplus.

So, from Westminster’s point of view, this is a no lose. If Scotland performs better than average then its spending can increase – though, as at Westminster may go to tax cuts – but at no cost to Westminster. However, if it falls behind, Scotland picks up the full tab, even if we are allowed no more than limited policy powers. Sort of “heads we don’t lose, tails they do”.

Given that only three of the UK’s regions/ nations regularly perform at or above UK economic average (eg growth, wealth, tax revenue etc) and that Scotland isn’t one of them, we do do better than most of the other regions and often much better – for instance better than Wales or Northern Ireland, However, it’s easy to see that a deduction is much the more likely, and as and when government spending declines, or income tax rates are increased, the consequence could be a cycle of cumulative economic decline.

As Cuthbert argues

“As such, Scotland could find its tax receipts and economic performance lower than expected due to no policy of its own – but will still be expected to foot the bill.”

Thus the likelihood Scotland will lose out is very high, but Cuthbert goes on to make the point that this is because it has economic powers so limited as to be virtually non-existent – ie the Scottish Government has no powers over factors which determine revenues at its disposal.

But there is further political advantage for the Unionist parties because they can – and do – argue that such a cut in the block grant is down to the Scottish Government not using its devolved powers, and/or not using them well.

No less serious is that the governments in London and Edinburgh are don’t just diverge on policy on public sector spending in general, and social spending in particular, but are arguably the opposites of each other – for instance the social targets of the Scottish Government, have their counterpart in Westminster’s austerity.

There are, therefore, two potential responses by the Scottish Government. It can

1. accept being constrained by Westminster, or
2. it can add to the Scottish rate of income tax.

How did this happen? Why was there no resistance? One reason is that the whole process was carried out behind “closed doors [rather than] in the full view of public scrutiny.” It can be said that the Scottish Government must have agreed to this, and so they did. But how much choice did they have for, lest you forget, Westminster is sovereign. Holyrood is its creature. If the Scottish Government had refused to agree – or even worse to even participate – then Westminster could simply have acted unilaterally. It’s not great politics (unless you consider the Scottish Government to be ‘the enemy’ and so there will be some those who consider it good politics) but in law there is no reason for that not to happen. Therefore the Scottish Government could agree to work under this system, or work under this system.  Those were its options.

Thus, it is critical that responsibility is placed where it belongs, and when it originates in the devolution settlement that point needs to be made robustly and often. While it’s important to recognise that the Scottish Government has shortcomings, it is no less important, to show when and iin what regards responsibility lies at Westminster. Defending one side (eg Holyrood) to the nth degree when that is unjustified is corrosive of public debate and trust. Much better to fess up, or accept some of the responsibility when justified. Then when responsibility lies with Westminster the critique carries much more trust because that has been earned.