Good morning and welcome to the 27th meeting in 2014 of the Scottish Parliament’s Finance Committee. I ask everyone present to turn off any mobile phones or other electronic devices, please.
We have received apologies from Malcolm Chisholm and Jean Urquhart, so there will be only five members of the committee today. That will allow a lot more flexibility for members to ask questions of our distinguished guests.
Our first item of business is to take evidence on further fiscal devolution from Professor David Heald from the University of Aberdeen, Professor John Kay from the London School of Economics and Professor Ronald MacDonald from the University of Glasgow. I have been informed that Professor Kay needs to catch a train from Waverley at 11.28, so we will aim to conclude the session by around 11.00, to allow him to get to the station on time.
Thank you.
We have received written submissions from each of our witnesses, so we will go straight to questions. I will start, but not in an obvious place—I will start somewhere a wee bit unexpected. You all have divergent views on this issue, so it will get a wee bit of interaction going.
Professor MacDonald, on page 3 of your paper you say:
“The remaining smaller taxes that I would recommend devolving are: air passenger duty, capital gains tax and inheritance tax.”
For the record, will you explain why you support devolution of those taxes? After that, I would like your colleagues to give their views on that, if they so wish.
In broad terms, in the piece that I wrote, I was trying to address vertical fiscal imbalance, which is a big issue and which has been a big issue for the Scottish Government and the Scottish Parliament since their inception. My main focus is on the bigger taxes—income tax, VAT and so on—which I am sure we will come back to later. As you will see, I have a table in which I try to apportion different amounts from the taxes. The bigger taxes are straightforward. You focused on the smaller ones.
There has been a big discussion about the environment in Scotland—the Greens are particularly interested in those issues—so it is natural that control of air passenger duty would or could be devolved.
Inheritance tax and capital gains tax are rather small taxes, so I am not going to go to the stake on them, as it were. Basically, I am saying that I do not have any issue with devolving those taxes. If you look at the evidence in Switzerland, which has devolution of those kinds of taxes within the cantons, you see that that has not created any particular issues for the overall federal structure. I do not see a particular problem with devolving those taxes to the Scottish Parliament.
I would make two points about the smaller taxes. One has to be very careful about devolving taxes that people only want to reduce or abolish, because that will not resolve funding issues, and smaller taxes introduce questions of volatility, because it is more difficult to work out what the block grant deduction would be.
Capital gains tax probably fits alongside income tax. What one does about income tax might well affect what one decides about capital gains tax. There are considerable opportunities for people to convert income into capital gains, which is one reason why those taxes sit beside each other.
I suspect that you would probably get a race to the bottom with inheritance tax, with people trying to attract high-income, high-wealth taxpayers into their jurisdiction.
I agree with Professor Heald—I am sure that we will come back to this point—that there is a danger in devolving taxes simply because people wish that they could be lower; it is not going to be the case that all, or perhaps very many, taxes can be lower. However, with that caveat, devolving air passenger duty seems to me unproblematic. However, devolving inheritance tax and capital gains tax seems to me another matter altogether. For inheritance tax, if there are material differences, we would have to think hard about the implications of residence rules and people taking advantage of them. For capital gains tax, that problem seems to me to arise in spades.
Devolving income tax on savings is a different ball game from devolving income tax on earnings. However, if one wanted to devolve income tax on savings, one would start to think about devolving capital gains tax. Again, though, we get into issues of what are Scottish assets and what are Scottish residents, and we get into the interaction between capital gains tax in Scotland and capital gains tax in England. In quite a lot of cases, if there are material differences, capital gains tax is probably a can of worms that one would prefer not to open.
Okay. Thank you. Obviously, the biggie is income tax. Professor MacDonald, you said in your written submission:
“I have sympathy for proposals that involve the full devolution of income tax.”
Professor Kay, you said in your submission:
“Obviously it would make sense initially to take over the existing UK income tax code in its entirety, but over time this could be changed.”
However, Professor Heald, you seem to have a lot more caveats about devolving income tax. Can you tell us what your concerns are about the full devolution of income tax and where you think the boundary should go? I realise that you talked about that in your submission, but I am keen to hear your views directly for the record. I invite Professor Kay and Professor MacDonald to comment, too, if they wish.
Much depends on what people mean by full devolution of income tax. In the political parties’ submissions to the Smith commission, the differences in substance are not actually as big as the rhetorical differences. If you mean by the full devolution of income tax that you start again and have a completely different Scottish income tax system from the United Kingdom system, that is quite different from Scotland deciding on the rate bands and the thresholds.
I was at a conference last week that was organised by the UK Public Accounts Committee at which I was told that the UK tax system had 1,140 reliefs and allowances, so there is massive complexity in the income tax system. To go back a long time, I proposed in 1976 what became the tartan tax. I think that the reason why that was not used is that, when there was a chance to use it, the Scottish Parliament had too much money because of increases in health and education expenditure in England, and because politicians were warned that, if the tax was used in the downwards direction, the Treasury would exploit the lack of transparency of the block grant to punish Scotland indirectly.
That is right.
I can understand that politically after the referendum there is a window of opportunity in which there might be substantial devolution of tax powers that would otherwise have been difficult to get or would have been got in the very long term. However, one has to think carefully about the capacity to run a Scottish income tax and exactly what is meant by it. For example, does the definition of income remain the same? Does the personal allowance remain the same? What happens to tax bands and tax rates?
One of the points that I make in my paper is that, to some extent, because of the switch between direct tax and VAT and the increases in the personal allowance for income tax, one is increasing the concentration of income tax revenues from a small proportion of income tax payers. The numbers that I quote in my submission show that 42,000 Scottish income tax payers pay 22 per cent of Scottish income tax. There is a concentration on a very small number of people.
Clearly, both the actual behavioural response to differentials between Scotland and England and the expectations of differentials could have significant effect. In the past, it has not mattered whether one had a Scottish residence or not. Under the tartan tax, the difference it could make whether one was or was not a Scottish resident was capped, because the tax applied only to the basic rate. Under the Calman tax, the potential cost for a very high-income person is much higher. If Scottish income tax were to be completely separate—by that I mean the definition of income and so on—there could be significant issues about residence and mobility of population. That would include people pretending to move when they have not, such as people who have residences in Scotland and England.
How does it work in Europe, where there is a vast array of tax jurisdictions? Germany, Holland, Belgium and Luxembourg are all within an hour’s drive of each other. Surely there are systems that have been developed over time by many other countries.
There is a psychological issue in the UK, which, for example, does not apply in the US. Distance is a factor. The last time that I checked, 23 US states had income tax powers and the others did not. Psychologically, partly because of the domination of UK politics by Westminster and the centralisation of the UK media, we can imagine the kind of difficulty there would be politically with even small differences in income tax.
The more general point that I would make on tax devolution is that you have to be careful that you do not take on lots of fiscal risks without having policy control. It is all right to say that the Scottish Parliament should be funded by its own revenues, but the crucial question is whether one means genuinely devolved taxes, where the Parliament controls the tax base and the rate, or whether one means an assignment of revenues. Professor Kay describes such assignment as “cosmetic”.
Within the United Kingdom, how much fiscal risk do you want to take on when you do not have the policy levers? For independent countries such as the Netherlands and Belgium—or Scotland if it had voted yes in the referendum—it is a different ball game. However, in the context of the United Kingdom, when Scotland does not have control over monetary policy or the stance on fiscal policy, I hesitate about how much fiscal risk one should take on.
What is your view on control of rates, bands and thresholds?
The big issue will be the definitions of income and personal allowance. Scotland has congratulated itself on the maturity of its referendum campaign, but I found the debate incredibly depressing, because people seemed to think that getting tax powers would mean that Scotland could spend more. Within the context of the UK and Scottish fiscal position, and with what the former head of the International Monetary Fund fiscal affairs department Vito Tanzi called “fiscal termites”, Governments are going to find it very difficult to maintain their tax base.
My worry about too much devolution of income tax would be that one would get lots of arbitrage. Differences would be exploited in a way that would force down tax revenues. If one wants to protect the tax base, one has to be careful.
One only has to look at what is happening with corporation tax. At the Public Accounts Committee conference last week, one speaker predicted the demise of corporation tax within 10 years. That is probably fanciful, but it is not impossible, considering the downward movement of rates and the fact that, even though the UK subscribes to the Organisation for Economic Co-operation and Development’s base erosion and profit shifting project, it is using the patent box.
There is a downward pressure on tax rates. If you want a smaller state, that is a good thing. If you do not want a smaller state, you should be very careful.
09:45
There are a couple of important points. One is—as Professor Heald has, in effect, said—that with increasing mobility of labour, capital and economic activity more generally, and with the growth of activities to which it is difficult to attach a place, the ease of collecting tax is being undermined. Corporation tax is the worst example of that problem, but it arises for a number of other taxes as well. Those are not insuperable problems, either currently or in the foreseeable future. If we want to run wildly different taxes in Scotland, people will make the systems work in the end.
There is a difference, however, between the situation that we would face in Scotland under independence—in which we would just have to sit down and make those things work, and work out Scottish solutions to the problems—and the situation that we face with devolution in the unitary state, in which we have to ask the question: are the additional levers that we would get from things that are going to be very complicated actually worth the bother of getting?
As far as income tax is concerned, it seems to me that what is likely to emerge from the Smith commission discussions is that Scotland will be given control over the rates while banding will be left pretty much as it is. That would give Scotland a lot of freedom to determine additional revenue from income tax, if it wanted to.
When one starts to ask whether we in Scotland want to take on responsibility for the detail of the tax structure, one then has to ask whether there are advantages to doing so that offset the very considerable administrative problems and the negotiating issues that would have to be resolved vis-à-vis England in particular, but also other countries. It is not obvious to me what the balance of that advantage is.
As I say in my submission, I come at the issue as a macroeconomist rather than someone who looks at the microeconomics of tax rates.
To summarise Professor Heald’s position, which is on an issue at the heart of the debate, the question is whether we try to retain stability of revenue through continuing with a block grant providing the main revenue for the Scottish Parliament, or whether the Scottish Parliament is prepared to accept more risk. As Professor Heald said, if we have control over tax thresholds, we could end up, for example, punishing those who pay higher marginal tax rates. Labour mobility is very high within the UK so, as Professor Heald’s argument implies, in such a scenario those people would move south of the border. Of course, the main disciplining effect of devolving taxes is that the Government knows that that can happen, so presumably it will take that possibility into account when making its decisions. Therefore, I would not rule out further devolution of taxes simply because labour and capital are mobile.
I would come at the issue from a different perspective. To pick up on what Professor Heald said about the referendum, I think that there is a fundamental misconception among the polity and the electorate about what fiscal autonomy means. People think that, if Scotland gets more fiscal autonomy—devo max, or more revenue devolved—it automatically means more spending. Of course it does not; it means much more risk. The kernel of the problem is how to handle that risk. As I wrote in my submission, I am keen for the Scottish Government to handle the risk in as optimal a way as possible while recognising that, as part of the UK, we have very clearly voted for a social protection mechanism that is based on resource pooling and risk sharing.
Those are the kinds of balances that I would like to see. I hope that that sheds light on what I have said in my submission.
Thank you. We are nearly 20 minutes in and I have not let my colleagues in yet. Before I do so, I am just going to ask one further question.
You talked a wee bit about not having the opportunity to spend more through the various taxation routes and the high risks involved in that. The Scottish Futures Trust, which will give evidence under the next agenda item, has suggested borrowing as a possibility. Its submission to the Smith commission states:
“Scotland should have the power to be able to determine the right level of infrastructure investment to affordably meet its economic and social objectives, and how this investment is both funded and financed.”
Basically, it suggests that constraints on borrowing powers be removed entirely, pointing out that local authorities do not have the same restrictions as the Scottish Parliament has. It states:
“It appears inequitable that Scottish Government should have a cash value borrowing limit imposed as a reserved matter, whereas local authorities are essentially self-controlling under a codification of ability to repay.”
It believes that what it suggests would allow the Scottish Government considerable freedom in how it invests in infrastructure, enhancing Scotland’s asset base and creating jobs along the way. I ask each of you to comment on that and to give your views on the issue.
I begin by emphasising what both Professor MacDonald and Professor Heald said about the widespread idea that fiscal devolution means that Scotland has more money. It does not mean that. There is a great deal of discussion about people wanting more powers in Scotland, when what they really want is more money for the powers that Scotland, in large part, already has. To be blunt, that money does not come either from a block grant or from taxes. That is an issue in relation to additional infrastructure spending.
Borrowing powers for Scotland would appear in the first instance to be a way of giving the Scottish Government more money. Indeed, that is in large part the way in which borrowing has been discussed over the past few years. Scotland ought to have more borrowing powers, but it ought to implement them rather carefully and slowly, and in the present situation, given the level of the UK national debt, it should probably not implement them at all.
We should be careful about saying that there would be benefits from infrastructure spending. We need a lot more infrastructure spending in Scotland and the UK, but it needs to be well targeted. We are sitting in Edinburgh, where we can watch going along Princes Street every day what must be one of the worst infrastructure projects in the history of the world in terms of the capacity for useful infrastructure and revenue generation that it provides.
Okay. I will not touch on which political parties supported that and which opposed it, but I think you are aware of that.
I have no idea, actually. [Laughter.]
Professor MacDonald, do you want to comment on the borrowing issue?
Yes. I echo what Professor Kay said about the infrastructure issues. He is absolutely right about that.
As I say in my submission, if you are going to say to the Scottish Parliament, “You have to take on more fiscal risk if we’re going to devolve more powers,” you have to allow it to borrow. That fits in with my notion of the hard budget constraint.
If this is to work, it cannot just be about taxing at the margins. You have to move away from being what I and others have called a pocket-money Parliament—sorry—to being a Parliament that raises a substantial amount of revenue itself, and if it does that, it will face risks. If there is a recession, it will not have the same risk pooling and risk sharing that it would have if it did not have devolved or assigned revenue, and it will therefore have to have some way of making it up.
I argue that the Scottish Parliament should be allowed to borrow for that reason as well, and it should borrow on the open market, because that is the only clean and effective way to bring market discipline and be consistent with the hard budget constraint.
There are ways of doing that through the Treasury, but that would bring in all manner of stability pacts and so on, which I do not think are as clean as simply allowing the Scottish Parliament to borrow on the marketplace. The market will ultimately discipline the Scottish Government’s borrowing, so we should get an optimal outcome in that sense.
I will pick up on something that Professor MacDonald said. I get worried when people start talking about 54 per cent of the Scottish Parliament’s budget being funded by its own revenue without making it clear that a lot of that revenue is outside policy control.
I do not really accept the way in which Professor MacDonald uses the idea of the hard budget constraint if we are talking about revenue that you do not control. On assigned VAT revenues, for example, Scotland might get either a VAT revenue bonus or the opposite, depending on UK Government decisions.
We should return to the question whether we should consider the capacity to raise revenue at the margin, or the average percentage of your spending that you finance.
I agree with what has been said about borrowing. If you have more tax responsibilities, you require more borrowing power simply for smoothing purposes.
On the question of infrastructure spending, for quite a long time I have made a good academic living out of public-private partnerships. I am worried that, because fiscal control will be very tight, there will be a moving on from public-private partnerships to guarantees. One sees that in the United Kingdom in the context of Hinkley Point C power station: the UK Government is effectively, but not transparently, contracting to take the output for the lifetime of the project.
There is a question around borrowing for capital purposes and borrowing for revenue smoothing purposes. There is also an issue about the constraints that are imposed by membership of the European Union—while the UK remains part of the European Union—simply because the UK Government has overall responsibility for UK public borrowing.
I have two points to add. The first is that, realistically, the UK Treasury is not going to allow the Scottish Government what would be substantive borrowing powers. There are red lines as far as such things are concerned, and I am pretty confident that that is one of them.
The second point also relates to the UK Treasury, and has been referred to by Professor Heald: the amount of off-balance-sheet financing of various kinds that has been engaged in and is increasingly being engaged in so as to pretend that the Government is not borrowing as much money as it is. We have been doing that in Scotland, too. I am very keen that, if and when we have a beefed-up fiscal commission in Scotland, a large part of its responsibility should be to police that activity, so that we do not land future generations with liabilities that we have taken off balance sheet and shoved under the carpet for a period of years.
I will pick up on the important issue of hard budget constraint relative to taxing at the margin. I will give you an example. If the Scottish Parliament were responsible for 90 per cent of its revenue generation—even if that comes from assigned taxes and the Scottish Parliament knows that the revenue that it obtains in the next period will be conditional on how it spends its funding—that will give you a very different outcome, and a more accountable one, in my view, compared with a situation where the Parliament has to raise only 2 per cent of its funding, with the rest coming from the block grant, so that it relies on the block grant to fund its spending over the next period.
Those are two very different scenarios and, even if you are assigning taxes without having control over the tax in terms of devolution, the magnitude of the budget that is actually devolved, in some sense, to the Parliament still makes a big difference.
10:00
I will use Professor MacDonald’s submission to get me into an area in which I have a particular interest. My question relates to the continuation of the block grant in terms of what you call the “social protection system”. Northern Ireland currently has a devolved welfare system, but it has maintained parity with the rest of the UK. Is what you describe similar to what happens in Northern Ireland? Alternatively, are you concerned about the relationship as it currently exists between the devolved welfare system in Northern Ireland and the system in the rest of the UK?
To be candid, I have not really focused on the situation in Northern Ireland. My point is that if you go for a purely fiscal autonomy-type set-up, you are not engaged in what I refer to as
“risk sharing and revenue pooling.”
I believe that the outcome of the referendum was that people want to be part of that risk sharing and revenue pooling mechanism and that that is largely because they want what I call the social protection—or welfare—budget to be at the centre. Of course, that issue is open for discussion, and I discuss it in my submission in terms of some marginal changes to the welfare budget spend.
As I see it at the moment, rather than focusing on whether to devolve more powers on the spend side, we really have to focus on getting the existing fiscal gap into shape before we start talking about yet further spending devolution to the Scottish Parliament. That is where I am coming from as a macroeconomist. As I say in my submission, and as everyone concedes, the Scottish Parliament already has a significant chunk of the spending—depending on how you define it, it is between 50 and 60 per cent—but very little in the way of compensating tax revenues. That means that the Government is not properly accountable. The question is how we address that.
I would answer your question by saying that I would rather focus more on the revenue side until we get that balance right before we think about more major spending devolution.
Thank you—that is helpful.
Professor Kay also touches on the issue. You raise the question of whether it is possible to “‘unpick’ the benefit system”. You also mention the arguments for having a connection between income tax and benefits policy. Can you expand a bit on what you mean by the dangers of unpicking the system?
There are two issues. First, you have described the situation in Northern Ireland in relation to benefits, where there is power to change things but in fact nothing has changed. There is what I think is a devolution paradox, particularly given that the UK has traditionally been a rather centralised state. As politicians, you will find that your constituents will allow you to make things better than in the rest of the UK, but they will not allow you to make anything worse. The only thing that you can do in a budget constraint situation is leave things unchanged, so we get the situation that you described in Northern Ireland and which we have had in Scotland in relation to the tartan tax: you have the power to change things but you do not use it.
The second question is the one that I raised about whether we can unpick the benefits system. Can we find parts of the benefits system that we can devolve to Scotland in meaningful ways that would give it the power and possibly the desire to change them, without devolving everything to do with the benefits system? To my mind, the desirability of having an integrated benefits system—and, indeed, a benefits system that not only integrates all benefits but is integrated with other parts of social policy and which also takes account of the structure of income tax—means that it is quite difficult to satisfactorily unpick bits of such a package. I therefore tend towards the view that in the current situation you really are faced with a choice of all or nothing: you either want to devolve everything or you do not want to devolve very much.
Professor Heald, do you want to comment?
I want to pick up on a couple of points. Northern Ireland has, essentially, administrative control of the social security system. The UK funding depends on Northern Ireland following UK policy, and there is currently a major political argument in Northern Ireland about the so-called bedroom tax, which has not been implemented there, so there are arguments between the Northern Ireland Executive and the Treasury about that. You have to be careful about language. In practice, there is no devolution, because the willingness of the UK Exchequer to fund benefits in Northern Ireland depends on Northern Ireland doing basically the same things.
The situation in Northern Ireland raises another issue. If you want to devolve income tax, you can forget about tax base equalisation because Scotland is sufficiently close to the UK average on almost everything. You cannot do that in Wales or Northern Ireland, because they are much poorer than Scotland and England. If you want the outcome of the process to be a stable new devolution settlement, you have to think about how the changes might in future affect Northern Ireland and Wales. Although it would be easy to go ahead with income tax devolution by saying that Scotland is sufficiently average that we will not get involved in that kind of complication, we still have to think about it because of the possible extension to Northern Ireland and Wales, which should at least have the chance to decide whether they want to go that way.
I agree with much that Professor Kay said about the question of the benefits system as a whole and the relationship between tax and benefits. UK policy over the past 25 years has gone very much in the direction of the integration of taxes and benefits. Where there seem to be policy benefits in the devolution of welfare—for example, housing benefit—you come up against the problem that the Scottish Government has set out in its submission to the Smith commission, which is that housing benefit will be rolled up into universal credit. That is an area that we have to think about carefully.
My follow-up question is for any of the witnesses who want to answer it. You have all mentioned the fact that there is a perception that devolution means more spending in certain areas. The idea that devolving benefits would therefore follow that logic suggests that benefits would be increased in Scotland. Is that your reading of the argument? What concerns do you have about benefit tourism, as it is called? If we were to have differentials between Scotland and the rest of the UK, what is the likelihood of there being benefit tourism?
You are taking me outside my comfort zone. I want to answer that question in a particular way. There is a view at the UK level that certain cash benefits should be the same across the UK. We all know that, if you live in London, an old-age pension does not buy you as many goods and services as it would in the north of England, but we stick to the idea of equal cash payments.
One of the problems with devolving welfare is that people would expect benefits to go up, which immediately raises the question of how that would be financed and what would be cut. You could argue, as people have argued in Northern Ireland, that there is a case for lower benefits, because wages are generally lower in the Northern Ireland economy, but you can see the political difficulty that that would involve.
People have two quite different attitudes: they want local, regional, national and sub-national choice, but they immediately raise the question of the postcode lottery the minute you actually suggest that. To some extent, the UK settled on a position in which you can devolve service provision in areas such as health and education without varying the level of cash benefits.
I do not see any advantage in devolving cash benefits unless you are willing to accept that they may vary. My concern is that the expectation will be that they will become more generous.
My general principle, which I try to put across in my submission, is that further devolution of powers to the sub-central Government—the Scottish Parliament in this case—is better able to reflect the preferences of the electorate in Scotland. I gave the example that in Scotland we have had a different policy on the elderly, so perhaps there is a case for devolving attendance allowance to the Scottish Parliament.
On Michael McMahon’s example, I agree with David Heald’s point. If you are talking about actual benefit payments, you will run into the same problem that you will run into with the tax side of things: if you tax differently you will get mobility, and in a similar sense you could get benefit tourism.
Some benefits policies are not related to labour mobility, such as the bedroom tax. Scottish policy on that may reflect different preferences and there may be a case for devolving benefits that are not specifically related to people’s mobility.
I cannot foresee a world in which Scotland has enough money to pay benefits at levels sufficiently superior to levels in England for benefit tourism to be a problem. It goes back to the issue that underlies all of this: the tendency to think that devolution of powers means more money to spend on those powers. It does not.
I have a question related to Barnett, but given the exchange that we have just had, I was wondering how much evidence there is, beyond what is in some of the right-wing newspapers, for such a thing as benefit tourism?
As I said a few minutes ago, you have taken me outside my comfort zone. You would have to ask a social policy expert about that.
The answer is “not very much”, but one must make the observation that it is a lot easier for someone from England to move to Scotland and feel comfortable here than it is for an unemployed person from Romania to move to England or Scotland and feel comfortable.
We know from the Scottish Government’s submission to the Smith commission that its starting point is that the Parliament should raise all of its revenue and make payments to Westminster for reserved services, but we also know that the Smith commission is working on the basis of consensus, so we do not know where the process will end. If Scottish Government’s position is not reached, I presume that there will still be allocation of resources, in which case the Barnett formula will come into play.
Professor Heald, you say in your paper:
“‘The Vow’”—
then in the best academic tradition you list the authors—
“(Cameron et al, 2014) on the front page of the Daily Record on Tuesday 16th September included the three leaders’ commitment to ‘the continuation of the Barnett allocation of resources’. Although this sounds definitive, the actual meaning is ambiguous.”
Professor Kay, you say:
“whatever commitments may appear to have been made in the last days of the referendum campaign, the Barnett Formula is now inevitably under pressure.”
Will you talk about the vow’s ambiguity, which Professor Heald speaks of, and the pressure that you speak of, Professor Kay?
The ambiguity is that, operated literally, since 1978 the Barnett formula ought to have produced substantial convergence between public spending levels in Scotland and those in the UK as a whole. It has not done so, which is a measure of the discretion that the UK Treasury has exercised, in what have not been well-articulated ways, to be relatively generous to Scotland in that settlement.
After what has happened this year we have to face the fact that the Barnett formula, which previously was understood by only a few politicians and academics—indeed only a few politicians and academics had even heard of it—is very much on the political agenda. It is quite difficult to find an objective justification for what Scotland receives and the Barnett formula’s generosity. Whether or not the Barnett formula survives in a formal sense, we in Scotland must acknowledge that it will come under pressure and generate resistance and resentment in a way that it has not done in the past.
10:15
I discussed the issues with the committee in June. I disagree with Professor Kay on one point. The reason why there has not been convergence has been less to do with Treasury generosity to Scotland and more to do with relative population change. The numbers that I want are not in the public domain and probably no longer exist in the Treasury, but the point is that the convergence has been largely offset by Scotland’s falling relative population. Jim and Margaret Cuthbert have made the point several times, particularly in the 2000s. If Scotland’s relative population had not been falling, I think that there would have been convergence.
An attraction of Barnett is its population adjustment mechanism. We have had such a mechanism for most of the time since the 1880s. An advantage of a population adjustment mechanism over a detailed needs assessment is that—leaving aside whether Scotland is overfunded or underfunded—a needs assessment involves working out how much Scotland needs to spend on health, education, social services and so on, and it becomes very much more difficult to maintain the block nature of the system.
What I would like to have—after the vow—is a serious discussion about the population adjustment mechanism versus a regular needs assessment. An obvious international example of how to do a needs assessment is the work of the Commonwealth Grants Commission in Australia. People underestimate two difficulties with a needs assessment: first, how big an exercise it will be if it is done properly; and secondly, the toxic political climate in which it will be done. There are plenty of exercises around—such as the Holtham commission exercise, which said that the Scottish block grant should be cut by £4 billion—which will automatically produce the allegation that people have decided the result before the exercise starts.
To my mind, the question about Barnett is the lack of attention that was paid to it under the Labour Government. In 2002, Alasdair McLeod and I published proposals for the Institute for Public Policy Research, on what we had to do to Barnett if we were to deal, in particular, with the problem of Wales. Nothing happened. That was partly because so much money was coming through the formula that the issue was receiving no political attention.
It is clear that the resentment against Scotland is going to grow. For example, Scotland gets blamed for the way in which the English distribution formula treats the north-east of England badly. Barnett gets blamed for all sorts of things that are nothing to do with Barnett, but we need a debate about how the block grant works. I disagree with prominent public figures who have said that Barnett does not matter because the block grant will be smaller; it matters crucially, because while the UK Government has most of the major revenue sources it affects how much public spending the UK Government is willing to underwrite in Scotland.
When you talk about ambiguity, are you saying that there could be enough leeway for the UK Government to come up with a new system that still has the “Barnett formula” tag and thereby keep to the vow?
It has certainly changed the language debate. I thought that the Barnett name would go and something similar would remain in place, but we might now be in the position that the name stays but the substance is different.
I would want to interpret the vow as meaning that the population adjustment system would remain but with periodic needs assessments. I had always expected that in due course there would be a needs assessment but without Scotland being treated as a region within the context of an English needs assessment of health and local government.
The question is this: is Barnett a system whereby the Treasury cannot get its hands on particular programmes in Scotland, Northern Ireland or Wales that it does not like, or does it mean more favourable public expenditure treatment for Scotland? I suspect that, if I was a regular reader of the Daily Record, I would take the vow to mean that Scottish public spending was being protected. However, is the mechanism itself being protected—and I should say that I think that the mechanism has been overcriticised, partly because the Labour Government did not properly maintain it and just ignored it while there was plenty of money around—or is Scotland going to keep its expenditure advantage over much of England?
We have already talked a little about the assignment of VAT, and we know that under European Union jurisdiction the setting of VAT cannot be devolved. Professor Kay and Professor Heald both mention the assignment of VAT in their submissions; indeed, Professor Heald has already referred to Professor Kay’s description of the move as “a cosmetic change”.
Three questions follow from that. The first and fundamental one is whether VAT should be assigned. Secondly, does the Scottish Parliament have the requisite levers just now or should it get other levers to influence the revenue accrued through VAT? Thirdly, although Westminster would presumably be responsible for setting the rate, should the Scottish Parliament, in the event of VAT being assigned, have some statutory role in at least being consulted on what the level should be?
I am not dogmatically against all tax assignment; what I do not like is assigned revenues being represented as your own taxes.
The most obvious case of assignment working is in Germany, but it works there because of the Bundesrat’s powers to negotiate with the Federal Government. Because of the political momentum demanding that something big must happen, I would not be surprised to see partial assignment of VAT revenues, but the policy levers will clearly remain with the UK Government. I was recently looking at the “Northern Ireland Net Fiscal Balance Report”, and I noticed that VAT has become a bigger source of revenue than income tax. On the basis of the present direction of travel, we might in a few years’ time see the same thing in the “Government Expenditure and Revenue Scotland” numbers.
What would happen is that the Scottish Government and the Scottish Parliament would start to argue with the UK Government and the UK Treasury over VAT. Compared with most European countries, the VAT base in the UK is very narrow—I think that about 55 per cent of consumer expenditure is on things that come within VAT—and that contributes to the problem of a VAT tax gap. Indeed, the Mirrlees committee recommended that the tax base be broadened. However, that would be extremely politically difficult at any time, and I think that it would be even more politically difficult in the context of austerity.
One of the consequences of assigning VAT revenues is that you and the Scottish Government will want to have a say in UK VAT policy. The question is whether the UK Government is willing to concede that.
The issue comes back to the problem of the UK being asymmetric. In the context of the symmetric federalism of Germany, it is a lot easier to see where the levers for consultation and participation are. It is much more difficult in the UK.
I cannot honestly see the Scottish Government arguing with the UK Government that VAT ought to be imposed on food and children’s clothing, even though I agree with Professor Heald and most people who have examined the VAT base in the UK fairly objectively, like Mirrlees, that it is narrower than it should be for an efficient overall system of taxation. Scotland might want to argue for some kind of say, but I do not think that it would actually want to have it or to say such things even if it were able to do so.
Professor MacDonald, I do not mean to neglect you. I know that you have said something about VAT assignment, so, if you want to say anything on the matter, go on.
Only to confirm that, as you said, VAT is a reserved tax, so we cannot devolve it. Therefore, the only way that we can do anything about it is by an assignation. As I said in my submission, I propose that a significant chunk of VAT—about 50 per cent—should be assigned to the Scottish Parliament.
Professor Heald, you say in your submission:
“If the UK Treasury does not have a financial stake in the Scottish income tax base, I would expect both malicious actions … and malign neglect”.
Will you say what you mean by that? To give a specific example, do we already see a degree of neglect—malign might be too harsh—in the process for the block grant adjustment arising out of the taxes that have been devolved? The UK Treasury has still not given any clear indication how the block grant will be adjusted in relation to those taxes.
My adjectives were chosen to attract attention to the issue. One of the things that we have to think about is that we cannot change the system of the government of Scotland within the United Kingdom without thinking about the UK.
I spent 21 years as a specialist adviser to the Treasury Committee of the House of Commons and, at the end of those 21 years, became more and more depressed about the way that the UK runs its public finances. Budget day is a completely artificial occasion whereby the chancellor has to find some rabbit to pull out the hat to catch the Opposition off guard, and the things that catch people off guard are sometimes the ones that go spectacularly wrong in the longer term. One that I remember is Gordon Brown’s zero starter rate of corporation tax, which encouraged a lot of dubious incorporations.
If one is going to get a stable system working in which Scotland has significant policy control over income tax, the UK Government will have to bring its budget forward from March or April to November and engage the UK Parliament much more seriously in discussions about the budget. Basically, the Treasury Committee of the House of Commons does not fulfil its role as a tax and spend committee. It is heavily involved in other worthy things but does not act as a budget committee.
Under Calman, the Scottish Government has to notify by 30 November what the Scottish rate of income tax will be. In March or April, the UK Government can change rates and tax bands and control how much money will be brought in by the decisions that the Scottish Parliament took earlier. Therefore, one has to make sure that there is a basis for co-ordination of income tax. It is crucial that, once the Scottish Parliament gets beyond Calman-type income tax powers, there is some mechanism for co-ordination between the UK level and the Scottish level. As with broader issues such as monetary policy and control of the Bank of England, it is not obvious to me that the UK Government has even thought these things through.
10:30The point about malign neglect relates to the question about resourcing of HM Revenue and Customs in the context of residence. Professor Kay made the point that residence matters, and it is fundamentally more important once income tax starts to be devolved than it was before. Previously, whether somebody was a Scottish income tax payer or other UK income tax payer might have been important in certain statistical analyses but it did not affect what tax people paid. One has to be careful to ensure that the Treasury-controlled HMRC puts enough resources into making sure that people’s residence decisions are truthfully declared.
I emphasised earlier that, with 42,000 people contributing a large or at least significant proportion of Scottish income tax revenues, that tax base is at risk. The UK Government could, if it wanted, attract tax payers by making changes in UK income tax.
You talked of the need for investment in HMRC, but the trend over a long period of time from the UK Government seems to have been disinvestment from HMRC. You said that you are not confident that it is thinking these things through. It is a pretty gloomy outlook that you have there, is it not?
HMRC is going through a technological revolution in the way in which the tax system works, in terms of its IT systems. It is easy to criticise people from outside for getting it wrong. We can see why HMRC’s labour force will change as the nature of its operating systems change. However, if you are asking me whether the UK puts enough money into tax enforcement, the answer is no.
Thank you.
My first question is a narrow one for Professor Heald. You commented that VAT is a bigger deal than income tax in Northern Ireland. Is there a specific reason for that?
Over the past 20 years, the trend for the basic rate revenue has been downwards as income tax thresholds have gone up significantly, and VAT rates have gone up.
The situation is one of the accidental consequences of UK decisions. Nobody sat in London saying, “We’ll change the composition of Northern Ireland tax revenue,” but Northern Ireland is a fairly low-wage economy, so putting the threshold up will have a big effect and will change the balance of taxation between income tax and VAT.
There was no Northern Ireland content to the policy. It is just a manifestation of what happens with a relatively low-income economy and a much higher threshold.
There is a Northern Ireland content in the sense that Northern Ireland is a low-wage economy in a way that Scotland is not.
That is helpful. Thank you.
My second question is about something that we have not touched on so far but which you all comment on in your submissions—corporation tax. I would like each of you to expand on why you reached the views that you did in your submissions about the devolution or non-devolution of corporation tax, with specific reference to the legality issue. I have not encountered that issue much in discussion of the topic, but a couple of you mention it specifically. I am keen, for the record, for you to expand on your views on corporation tax.
My understanding is that, in general, the EU prevents us from having differential rates of corporation tax within a member state without a special justification, which is quite hard to construct in the case of Scotland.
On the question whether we would want to have differential rates, I think that, if we could, we probably would want to do that. In effect, because of my point about the mobility of things in the present world, you can attract not just economic activity, but the appearance of economic activity for the purposes of your tax base by having a significantly lower rate. That is why Scotland, as the smaller part of the union, might want to do that; it is also why England, as the larger part of the union, would want to prevent Scotland from doing that.
Indeed, I think that that would be the outcome of the discussion, so I do not think that the devolution of corporation tax is going to be on the agenda except, perhaps conceivably, to a small degree—but, for those reasons, the small degree is not worth doing.
I said in my submission that—basically for the same reasons that Professor Kay has given—the tax should not be devolved.
First, on European legislation, we know that in the past Ireland had much lower corporation tax, but that loophole is going to be closed and there will not be the same scope in Europe to do what Ireland did.
I was initially attracted to devolution of some taxes, such as corporation tax, for reasons of tax competition. That seems to work rather well at the margin in some federal countries, such as Canada, but, as Professor Kay said, given the UK’s asymmetric nature I doubt that it would work here because we have a much bigger partner who would probably react.
The other point against devolution would be the level of corporation tax. If we had been talking about this topic 10 years ago when corporation tax was at a much higher level, perhaps there would have been more sympathy for competition, but now that it is down to about the 20 per cent mark it is harder to see how that would work.
In my submission, I have said that I do not see any issue with assigning corporation tax, but I would not see it being devolved.
I will make a specific point related to Northern Ireland. In 2003, I wrote a paper for the Northern Ireland Economic Council when the discussion of devolved corporation tax for Northern Ireland was running strongly. The issue is still around and nothing ever happens.
There may have been a time in Northern Ireland’s political history when the European Commission might have been willing to tolerate a lower rate of corporation tax, but an issue is that, if one part of the UK has a lower rate of corporation tax than the others, there will be both the genuine diversion of economic activity and the fake diversion of profits. Therefore, we can see clearly why the UK Government is reluctant.
The UK Government probably hides behind the European Union rules about the variation of corporation tax in a member state. I have read the Azores judgment and subsequent European Court of Justice judgments but, for a detailed answer on the issue, you would need to ask a lawyer.
The corporation tax stories that one hears about Amazon, Google and Starbucks are important in the sense not only that they are a source of revenue loss but that they create the impression among the electorate that certain companies and individuals are outside the tax rules. That is a significant threat. Indeed, one of my fears is the loss of legitimacy of the tax system. Given the difficulty that large states have in protecting their tax base, having differences in corporation tax between Scotland and the rest of the UK would lead to a lot of arbitrage by very clever lawyers.
I do not think that corporation tax devolution is on the agenda, and I would not be in favour of it if it was.
Thank you.
I know that you have all commented on this next issue, but I am keen, for the sake of the record and to allow you to expand on it, to hear your views on the devolution—or not—of national insurance. We will stick to the same format, but perhaps Professor MacDonald could go first this time.
I have advocated that we could devolve a portion of national insurance. I think that it has always been thought that national insurance is geared towards the welfare state. Obviously, that was the original intention and that was how the tax originally panned out, but with the passage of time, it has become simply a tax on income and employers. In that context, if we believe that income is the key thing to tax in the devolution context, I do not see anything against devolving a portion of national insurance tax.
I suppose that the other question is whether the employers or employees would bear the burden. Perhaps whichever of the two components is believed to be more mobile would determine that. I certainly would not rule out devolution of national insurance.
I have made the point that the devolution of benefits on the welfare side of things is probably largely an all-or-nothing area. As Professor MacDonald has said, national insurance contributions are traditionally, and to some degree formally, linked to benefit payments, but they need not be, either in whole or part. We could easily see national insurance being recast as an employment tax, in whole or part, that could be devolved. However, devolving an employment tax is not materially different from devolving income tax on earnings, so that would not, in substance, give the Scottish Government a power that it would not have as a result of devolution of income tax on earnings.
Economists tend to regard national insurance as just a second income tax. Politicians find that they can promise not to increase the basic rate of income tax, but can put up national insurance.
There is also the contested issue of the extent to which employers’ national insurance is paid for by employees. That needs urgent attention at UK level. Leaving aside the more general questions about the pooling of risks through social protection across the United Kingdom, that would get into an incredibly difficult policy area, but some of the inconsistencies—for example, in having different thresholds—are a consequence of politicians’ perception that the electorate do not think of national insurance as income tax.
The UK is by no means the only country that does that. We see many international comparisons of headline rates of income tax, but they generally do not say what the social security taxes are. One thing that would stop an individual country wanting to re-label such taxes as income tax is that their doing so would make their income tax, relative to that of other countries, seem a lot higher.
Thank you.
My final question is for Professor MacDonald—certainly in the first instance. In his paper, he talks about the vertical fiscal imbalance; other witnesses in previous weeks have done so. I am trying to get a handle on that. Obviously, if a country became an entirely independent nation state, we would say that there was no vertical fiscal imbalance there. Is there a universally agreed point short of that at which every economist—or at least a good number of them—will say that there is no vertical fiscal imbalance? At what point on the scale is there an agreed definition that there is no longer a vertical fiscal imbalance?
There is no magic number. Most people look at a simple scatter plot of the OECD experience, for example. If you do that, you will see a cluster and countries including Scotland as big outliers. It is really a question of moving somewhere into that cluster, but there is no magic point on the scale.
I did the calculations kind of on the back of the envelope. I should probably do them in a slightly different way, but I do not think that the VFI would ever come down to zero. All we can say at the moment is that Scotland is a big outlier among developed countries and countries that already have sub-central levels of devolution. We need to get tax and spend more aligned.
That is helpful.
10:45
The issue comes back to a point that has already been raised. In OECD numbers about the proportion of subnational expenditure that is financed by subnational revenues, Germany gets a high score. However, that does not mean anything, because almost all taxes are determined by the federal Government, with the Länder having a significant influence through the Bundesrat—generally speaking, the federal Government cannot do things without support in the Bundesrat. The UK might be an outlier on those numbers but, crucially, the issue depends on how we view assignment rather than tax devolution, and whether there is some kind of policy control.
Last week, Professor McLean said that the best taxes to devolve are those that are linked to land, because the land cannot move. He said that that would apply to buildings, land and oil. Those were top of his list, although possibly inheritance tax would be thrown in. None of you has argued for that, I think. Do you disagree with him?
No, I do not disagree. It is a very good economic principle to tax assets that are not moveable. However, given that, as we have said, we need a real movement in the VFI, we have to start looking at taxes on moveable assets. That is where I would be looking at the moment, although I would not rule out taxing those other things.
Are you saying that that should be done as well?
Yes.
Does either of the other gentlemen want to comment?
The Scottish Government already has legislative control of council tax and business rates. Council tax has been frozen for seven years and there has not been a domestic revaluation since the original council tax banding of 1991. Clearly, the 1991 bandings are pretty irrelevant, given the change in property prices, although it is perhaps not so great in Scotland as in parts of England. There is an important question about the willingness to take the political flak and deal with the system maintenance issues of particular taxes. If we do not deal with those issues, those taxes will erode, at least in terms of their legitimacy. At the Public Accounts Committee conference that I mentioned earlier, there was talk about the effect on business rates of online retail. The Scottish Government has to be much more proactive about the taxes that it controls.
I will just briefly underline what Professor Heald has said. We already have three taxes on land—council tax, business rates and stamp duty land tax—and on all of them we have pretty much already reached the limits of what is politically possible, so I do not think that there will be more money coming from there.
I was not suggesting that there should be more money. One of the difficulties with council tax revaluation is that people think that the Government will just get more money out of it. However, my point is that the balance of what people pay has become illogical and indefensible, certainly in parts of England, because the valuation has not been revisited. Members of the Scottish Parliament may remember the report of the Burt committee on local government finance, which the then First Minister disowned on the day of publication. I am aware of how politically sensitive such things are, but if you do not maintain the system, you can expect a loss of legitimacy in it.
The other thing—
I am sorry, but we are going on to maintaining the system. My point was about which taxes should be devolved. My question was whether the taxes should be linked to land, and we have probably covered that, if you will excuse me.
Another tax that is linked to land is oil revenue, because the oil cannot move. Professor MacDonald says on page 5 of his submission that the UK, in effect, smoothes things out. Could the same result be achieved by Scotland having an oil fund and, in effect, smoothing things out by saving up in the good years and using the money in the poorer years?
Yes, potentially. However, as we discussed in the referendum debate, it would be some time before Scotland could do that. In the full fiscal autonomy model, it would be very difficult to do that in the near term. It is certainly possible in principle to do it, but it creates additional problems in thinking about the devolution of extra powers, because it introduces the importance of an asymmetric shock. If the geographic share of oil revenues were to be devolved, it would open up Scotland to much more in the way of asymmetric shocks. Therefore, the idea that macrostabilisation would come from the centre would be brought into question. In short—to answer the question—in principle it is possible to have a stabilisation fund, but in practice I cannot see that being achieved in the near term. There would be difficulties for macrostabilisation as we could have asymmetric movements in revenue.
I presume that, if the oil price was high to start with and we could save some money, the approach would work, but it would be hard to do if the oil price was low to start with.
The price would need to be really high, given what we know about the expenditure side of Scotland’s budget. It would need to be much higher than it is today and much higher by historical standards.
We have talked about benefits and pensions quite a lot and the word “pooling” was in some of your submissions—it was certainly in Professor MacDonald’s. I understand that what Scotland spends as a share of its gross domestic product or tax revenue on pensions and benefits is broadly similar to or slightly less than what the UK spends, so there is no pooling in that area. I presume therefore that it would be quite easy to split pensions and benefits. Is that the case?
I am not sure about the technicalities, but whether you would want to do that is a different issue. The pooling and risk sharing come through common unemployment benefits, for example. If the whole UK moves into recession, people in Scotland who become unemployed go on to common unemployment benefits, which are a shared resource across the UK. Buying into that system means putting a shared amount into the centre. If you were talking about taking that out, you would have to think about what you pay to the centre for other shared items, such as macrostabilisation. It is not entirely clear that taking pensions and benefits out of the overall system would lead to a better outcome.
I suppose that I am asking whether Scotland and England are benefiting from the pooling. They are both paying their own way. Pooling is a theoretical concept, but it is not happening at the moment, is it?
It is. If there is a downturn in the Scottish economy but not in the rest of the UK, the current system ensures that resources flow to Scotland. If the link is broken, that will not happen.
Splitting is not a nightmare in revenue and expenditure terms, but it is a nightmare in administrative terms. The splitting of pensions is one of those problems that, if one had to solve it, one would, but it would involve facing up to an unpleasant group of administrative issues.
You have mentioned the costs of setting up a separate system; I suppose that that is what you are talking about again.
It has also been mentioned today that the UK has an incredibly complex income tax system, plus we are running income tax and national insurance in parallel. Would it be possible for Scotland to have a much simpler principles-based system and to combine income tax and national insurance?
It would, although one should not exaggerate the extent to which one can have a simple income tax system. Income is an inherently complex concept. I say that because a lot of people have ideas that income tax legislation can be defined on one or two sheets of paper, and it really cannot. It does not have to be as many thousands of sheets of paper as it is, but it has to be quite a lot.
The issue is complex. I will take that point on board.
My next question is about how different taxes, such as income tax and capital gains tax, are linked to each other. It is true that income tax and corporation tax are linked, because people will incorporate or unincorporate depending on what suits them. Does that make the argument that it is better to have a bundle of taxes that are tied together, rather than just have one or two?
There is such an argument. It would become a serious argument if the structure and base of income tax in Scotland were to be materially different from that in England. If that happened, one would have to worry about the relationship between income tax and corporation tax as far as small businesses are concerned. However, I do not think that there is a large issue at the level of a few points’ difference, which is all that we could realistically be talking about.
The UK had an issue in the 2000s because of the starting rate of corporation tax. I was reading a relatively old Institute for Fiscal Studies green budget report that made the point that there was a significant rush to incorporate because of the starting rate of corporation tax. Interestingly, the level of incorporations did not fall back to the previous position when that starting rate was abolished.
I agree that, if a Scottish income tax is run, the relationship to corporation tax is significant, although that would not persuade me to want to devolve corporation tax. That is one of the difficult interfaces.
What Professor Heald referred to was a foolish policy, which one hopes no one will adopt again.
A comment was made about a possible race to the bottom—Professor Heald mentioned that in his submission—especially on air passenger duty, although inheritance tax was mentioned as well. Another argument on devolving air passenger duty is that the UK as a whole could get more tourists. It would not just be the case that more people came to Scotland and fewer to England. More people might come to the UK instead of France or Germany if it was cheaper to come here. Is that argument valid?
Traffic might be diverted and generated. It is interesting that Northern Ireland has partial devolution of air passenger duty and there is one long-haul flight out of Belfast international airport. Clearly, that does not have a significant effect on the rest of the UK. However, if Scotland significantly reduced air passenger duty, I presume that that would have some effect on north of England airports, so it would create internal political trouble in the UK.
I have no idea what the European Commission would say with regard to state aid. In relation to tax, I would not want to have too many disputes with the European Commission and the European Court of Justice about what constitutes state aid and what does not.
At the moment, tons of people go down to Manchester to fly from there.
That relates to the significance of Manchester as a hub.
The experience of the land and buildings transaction tax has been that we have made it more progressive. The land cannot move, so we hope that we will get more money from the richer and less from the poorer. Could inheritance not be used in that way as well, as most inheritance tax stuff is fixed?
I am by no means an inheritance tax expert, but I suspect that such a change would quickly enter into the tax planning calculation. If there were different inheritance tax rates in the UK that depended on the person’s residence, lots of inheritance tax schemes would be sold.
If the question is whether Scotland could raise more money by having higher inheritance tax than the rest of the UK, I would be dubious about whether it could. It would be more likely that Wales—if it had the same power—would attempt to attract into Wales those who pay high levels of income tax, as a way of attracting their current income tax as well as their future inheritance tax.
11:00
Inheritance tax liability is a slightly complicated mixture of where the property is and where the person who owns it is. That raises quite a complicated group of issues. As Professor Heald mentioned, if inheritance tax were devolved, lowering the tax would start to become more attractive—in order artificially to induce people to purport to be a resident in the country—than raising it by making it more progressive would.
That concludes questions from the committee. Time is against us, but I will ask one more question of Professor MacDonald. You talked about the assignment of VAT at 50 per cent. Why did you say 50 per cent and not 90 per cent, 20 per cent or even 100 per cent? Why would 50 per cent be appropriate?
I would not say that the calculations that I did for the committee are definitive; it was simply an illustrative exercise to show how we could get a VFI that was more respectable and more in line with those of other OECD countries. As I said in the submission, the numbers could be tweaked in different directions to get a balance that was more favourable to a particular position. I am not particularly hung up on the actual number.
The question that I want to ask is this: if there is partial assignment of VAT and VAT revenues go up significantly, is there a reduction to the block grant, and if VAT revenues go down significantly because of a UK tax policy change, is there an increase to the block grant? As soon as we get into assigning taxes, we have to ask what the grant consequences are of a UK change to the tax.
Our witnesses have no last points to make, so I thank them for their detailed answers to our questions. Professor Kay will be glad to know that he is well on time to catch his train.
11:02 Meeting suspended.Previous
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