Tom Griffin (London, OK): Is there a fundamental flaw at the heart of the Calman Commission's proposals for devolution of tax powers to Scotland?
Economists Jim and Margaret Cuthbert believe the plans would have some perverse effects that could leave Scotland caught in a deflationary trap, as The Scotsman reports:
the Cuthberts warn that under Calman – set up by Labour, the Conservatives and the Liberal Democrats – growth in Scotland's economy could also disproportionately benefit the Treasury, rather than the Scottish Government, because Holyrood would get to keep only 10p out of every tax band. For every 1p cut in income tax, Scotland would need to raise an extra 5 per cent income from the basic tax payer, an extra 7.5 per cent from those in the 40p bracket and an additional 8 per cent from those in the top 50p bracket, which will be brought in next year.
The Herald carries a Labour reaction:
"This is Alice in Wonderland economics. It is right that if the Scottish Parliament used tax-varying powers that would have consequences for the budget of the Scottish Government - that is the point. It's barmy to argue that the Treasury should make up the shortfall."
All the major parties in Scotland would agree that part of the point of devolving tax-raising powers is to strengthen the incentive for the Scottish Government to manage public spending responsibly and to grow the Scottish economy. If the Cuthberts are right, Calman may not achieve this. They foresee circumstances where tax cuts could boost the Scottish economy and swell UK Treasury receipts yet leave Scottish finances worse off. Conversely, they think Holyrood might well be forced to raise taxes at the expense of economic growth to maintain revenues.
The Cuthberts argue that these effects can be avoided if the Scottish Government receives a fixed percentage of all income tax in Scotland, on the model of a revenue-sharing system currently used in Canada.
That would mean that while decisions made at Westminster would continue to affect Holyrood's revenue, Holyrood's decisions would also start to have an impact on Westminster's revenue from Scotland:
Successful operation of such a system would require that the UK and devolved governments are willing to operate in a collegiate manner – being appreciative of, and respecting, the impact that their own actions will have on the revenues of the other parties. The implication is that a successful tax sharing system would have to involve a more federal way of working than is the current practice in the UK. It would be very unfortunate if the Calman Commission had been forced towards its flawed proposals on tax sharing because it was unwilling to countenance the implication that a proper system of tax sharing would inevitably involve a more federal aspect to the operation of the UK constitution. The Cuthbert's open letter to the Calman Commission is available as a word file, along with some other very interesting papers, from their website.
