FINANCING DEVO MORE Alan Trench Edinburgh, 25 January 2013

The problem No clear model for enhanced devolution –But unionist parties need one for offer of more devolution after a No vote to be credible Clear preferences of Scottish voters are for more devolution within the Union –Beyond Calman/Scotland Act 2012 –And relating principally to taxation and welfare A huge mismatch between devolved spending responsibi- lities and revenue-raising ones –Scottish Govt is responsible for c. 70 per cent of public spending in Scotland –Even after SA12 is fully in effect, it will only raise about 30 per cent –That has no comparative parallel Lack of revenue-raising powers limits devolved policy autonomy

The constraints Fiscal good sense and good practice – including lessons from federal systems Practicalities of decentralisation of a fiscally very centralised state Implications for compliance costs (borne by taxpayers) and administrative costs (borne by government) Legal constraints (EU law, also Treaty of Union) Revenue volatility: the finance ministers worry –And stability and predictability too What works in the interest of the UK as a whole –What about Wales, N Ireland, English taxpayers? What are you financing? 1998-model devolution, or something more?

Major taxes and their revenues 2010/11

So … Land taxes can easily be devolved, and should be –Largely already in SA12 –Treasury should take a permissive approach to introduction of new taxes –But not a major revenue source Alcohol and tobacco duties have close relations with devolved policy functions –Are usually consumed close to where theyre bought –And are useful if modest sources of revenue –But there are major legal problems with devolving excise duties –Charges for premises licenses may be the closest one can get

So … II Personal income tax is a devolvable major revenue source, and should be: outright – rates, thresholds, exemptions etc –A significant revenue source: around 25 per cent of tax revenues in Scotland, or 1/3 of SG spending Sales taxes are often regional-govt level taxes – but you cant devolve VAT –You can assign its revenues, though –Assignment of 10 points gives a large chunk of revenues – around 13 per cent of SG spending A package like that would put around 60 per cent of Scottish devolved spending directly into SG hands, and about 42 per cent of its spending from taxes wholly under its control –And is relatively stable and predictable; volatility is low

Some taxes you shouldnt devolve Fuel duties –Very mobile, likely to trigger competition/purchasing in low-tax jurisdiction Inheritance tax –Small source of revenue –Danger of race to the bottom (happened in Canada and Australia) Oil & gas tax revenues –Can only be assigned, but highly volatile (both for price & extraction rate) Corporation tax –Volatile revenues – not good for funding stable/inflationary services –Best way to devolve it is administratively cumbersome –High and capricious compliance costs for smaller businesses already – worse if devolved

If you want to devolve more tax The best bet is probably employers National Insurance contributions A payroll tax, levied at regional level in some other systems (and central in others) Significant source of revenue, not hugely volatile More closely related to devolved functions (especially if expanded into welfare) But would require significant administrative adjustments, to NI Fund Employees NICs should remain UK-level tax in any event

The advantages of this approach Gives Scottish Govt (and other devolved govts) much more policy autonomy –Reduces impact of implicit tie to English model of public services through the Barnett formula Gives it meaningful policy levers to shape policy through tax levers –Including (if employers NICs are included) access to 3 of 4 business tax bases Means Scotland would also bear costs of additional public spending –Undermining English resentment of subsidising better services for Scots

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