There is a perfectly good argument for the devolution of air passenger duty. The Calman commission recommended that. In that context, the only issue that requires to be addressed is whether there is scope for predatory tax competition with the north of England airports. Subject to that, I do not see why air passenger duty should not be devolved.
Excise duties create a problem. As the committee will be aware, Scotland is a big contributor to excise duties, because we smoke and drink too much, but we would face the same difficulty as the UK faces with white vans going back and forward across the Channel—white vans might well go up and down the M74. In respect of excise duties on tobacco and alcohol, there are real avoidance risks whether Scotland taxes more or less.
Personally, I favour the devolution of vehicle excise duty because, although cars move about, registered keepers do not. That is a substantial tax that could be devolved. It is decentralised in some countries such as France, for example. However, there is a price to be paid, which is that owners of fleets of vehicles tend to register in the lowest tax jurisdiction, so some sort of anti-avoidance rule to deal with that problem might have to be devised. However, that excise duty could be devolved.
In principle, I have no difficulty with the devolution of capital gains tax, which is a personal tax very like income tax, but I wonder whether the game is worth the candle, because that tax does not raise very much money and is highly complex. One would think that the same would be true of inheritance tax. International experience suggests that devolution can create distortions, because rich people try to die in the lowest tax jurisdiction, as Australian history shows. The devolution of death duties in Queensland is an interesting example.
Okay. I thought that you accepted them.
Is it not the case that, because we are dealing with a devolved function, we cannot seek to hold HMRC to account, as it is not a creature of statute that emanated from this place in the way that Revenue Scotland is? Could that be an issue?
You have touched on one of my obsessions, so I hope that you have a while. Your earlier evidence session was on stamp duty land tax. Virtually all—all but one—of the taxes that affect real property in Scotland are now devolved to the Scottish Parliament. There are only three such taxes: stamp duty land tax, which is a transaction tax on property; non-domestic rates, which are a tax on the enjoyment of non-domestic property; and council tax, which is a tax on the enjoyment of domestic property. You have them all. The only tax that affects real property that has not been decentralised is capital gains tax on transactions involving property, which is tied up with capital gains tax more generally.
I think that the Scottish Government’s proposals on stamp duty land tax are a step forward, but I am disappointed that it did not take the opportunity to look at the taxation of land and property in the round. All those powers are here today, and that seems to have been a wee bit of a failure of imagination. I would move in gradual steps towards a land value tax.
The first thing that I would do is assess the extent to which the existing property taxes approximate to it. Non-domestic rates are not that far away from a land value tax and they are paid every year. Council tax is pretty hopeless; I cannot think how many years it is since anyone revalued. It was in 1991.
12:15
From a theoretical point of view, a number of witnesses have said that we should look carefully at that because, whether the figure is 50, 40 or 60, some of it will be made up of tax that is truly devolved, some could be made up of tax that is partially devolved and some may well involve assignation, where we have to share the risk but we cannot control the rates.
Those witnesses were saying that there is an extra dimension that we have to think about instead of just looking at the pure percentage. You mentioned the OECD, and they said that although we might think that there is a lot of control in Germany, for example, there is not much control over the rates.
Do you have a view on how that 50:50 split should be made up? If it was theoretically made up only of taxes that were assigned and none that were devolved, that would be different from—
One way of looking at the answer to that question, my reaction to which is not wholly negative, is to realise that support comes in different forms today. The way in which we have divided the welfare state in this country post-devolution is that what would be called redistributive forms of welfare, that is to say, cash benefits, are largely reserved, but distributive forms of welfare—the provision of services—are largely devolved. In all those cases, there is a boundary at which a choice can be made between the provision of a service and the provision of cash.
The Scottish Parliament already has many powers that, in effect, enable it to supplement UK benefits. I will give an example of that before I come back to the detail of your specific point. Attendance allowance is a cash benefit that is intended to enable an elderly person who needs help at home to pay for attendance, whereas the Scottish Parliament already provides personal care free. The principle of allowing this institution to provide supplements is not absolutely wrong. I would not wholly rule out the idea that the supplementation could be in the form of an addition that is not simply an alteration to the rate of an existing benefit.
There are two challenges, however. One is administrative. Creating a whole new bureaucracy for such a measure would obviously be daft. However, the challenge of inviting the Department for Work and Pensions to create a whole new set of beneficiaries only for Scotland might be administratively very expensive for the DWP, and therefore for the Parliament.
The short answer is that that might be conceivable in principle, but it is not wholly straightforward.
12:00
Jean Urquhart is right to locate the question of further powers for the Parliament in the wider constitutional space. The promises that were made to the voters during the referendum campaign can be summarised crudely as pensions and Barnett. Let me tell you what I mean by that. They are both questions of social solidarity. The first promise made to the voters was that, if they remained in the UK, they would have the benefit or security of a common social security system with pooled risk, notably in relation to old age pensions, and that stands as a symbol of a principle of social solidarity in respect of what I earlier called redistributive benefits. The second promise was that there would be a Barnett formula, and that stands in the same way as a symbol for saying that there would be social solidarity in the provision of public services, including those public services that are devolved to this Parliament, notably health and education.
As I explained to the convener, my view is that the Parliament’s budget should not be solely dependent on Scottish revenues but should be partly dependent on Scottish revenues and partly dependent on a share of UK revenues. That is why, as a matter of principle, the question of full fiscal autonomy—either, as I put it in my paper, in the guise of all public spending in Scotland being determined by Scottish revenues only or in the guise of all the Parliament’s budget being funded solely by Scottish revenues—is inconsistent with what was offered to the voters.
Yes, in principle. One has to be quite careful and work one’s way through the long list. The obvious benefit in this context is universal credit, which is what most people would consider for supplementation.
Benefits can be divided helpfully into two classes: those that are cyclical, which include universal credit, and those that are not cyclical, which include attendance allowance and disability living allowance. It would be easier to devolve the second category into the Scottish budget, because the Scottish budget typically does not include cyclical items.
My preference would be to devolve a big benefit such as housing benefit, because that would enable the Scottish Parliament to play tunes, as it were, particularly in respect of housing. Housing benefit is so big because, in the 1980s, the Government decided to transfer resources from the provision of bricks-and-mortar housing to the provision of cash housing support. The complete devolution of housing benefit would give the Parliament the opportunity to take a different view and say, if it wished to, that for some people, it would be better to provide houses rather than rental support.
On the other hand, I can see the argument that a wider power of supplementation is simpler to operate and would enable the Parliament to say collectively, if the people of Scotland believed it, that it would rather that poor people in our society were better supported and that people who pay taxes paid a bit more tax. If that were the Parliament’s policy, it could make that decision.
Let me deal with rates, bands and thresholds first.
Can you suggest any taxes that the Scottish Parliament might ask to have devolved that would allow it to genuinely make a difference? What would be the Scottish Parliament’s position in terms of raising taxes that would not affect the Barnett formula and that would not be levelled out as the taxes that are currently devolved are? Other than what you mention in your paper, which is largely about tax, what powers could the Scottish Government be given, in your opinion? Do you have any suggestions of powers that the Scottish Government could take?
In your enthusiasm for devolution, do you see an opportunity for Scotland to design a different kind of tax collection system?
Could you expand on what you mean by “equal”? It could mean that we get 50 per cent and England gets 50 per cent, or it could mean something else.
12:30
They might be happier in that circumstance, but the question is counterfactual and I do not have the answer to it. However, if one looks at the voting patterns, it is pretty plain that, of all the issues that were around during the campaign, securing a continued UK pensions system was pretty near the top of the agenda. If you ask somebody whether they would like a bigger pension, they would probably say yes, and if you ask them whether they would like it to be less, the answer would probably be no. As a matter of pragmatism, if you look at the age structure of the Scottish population, you will see that it is prudent to pool that risk at a UK level.
I think that, as a matter of principle, it would possible to devolve that tax; I just wonder whether it would be worth all the bother. Capital gains tax has a very small yield; I do not have the number at the front of my mind, but I think that it is about £100 million. I see that Gavin Brown is looking for the figure.
That is helpful, convener. Perhaps I should say in introduction that anything that I say here today is purely what I think. I have advised all sorts of people over the years, and none of them is to blame for what I have to say today.
You were right to preface your question by trying to state what the purpose of further devolution is. In my view, the purpose of further devolution is to give this Parliament the range of powers and responsibilities that will enable it to reflect a different set of preferences in Scotland for, among other things, the mixture of taxation and spending; and if Scotland takes a different view from the rest of the UK on that, the Scottish Parliament should be able to implement that in a way that preserves the risk-sharing benefits of being part of the UK, which is important in understanding the nature of the devolution settlement.
The obvious argument for the devolution of income tax is that, first, the Parliament even today has some influence over it, although it has never exercised it; and, secondly, it will be required to set a Scottish rate of income tax under the Calman scheme, with which I was associated. There is certainly scope to go further than that.
11:15The challenges to going further are as follows. First, income tax is a redistributive tax. It is the only substantial part of the taxation system that is redistributive across income groups. Rich people pay the most of the income tax; I cannot remember whether I quoted the numbers in my evidence, but it is well known that the vast majority of income tax receipts come from higher-rate taxpayers. That means that the tax is redistributive across social groups and is, therefore, also redistributive across geography because rich folk tend to live in one place and less well-off folk tend to live in another. At the moment, when income tax is shared across the UK, the pooling of income tax is redistributive across the UK.
Therefore, the first and most interesting question is whether, over the long run, the complete devolution of income tax would be to Scotland’s fiscal benefit. That is the first question that requires to be asked. The view may be taken that it is sufficiently important to devolve income tax that Scotland would be willing to give up any potential upside—or, if there were any, any potential downside—to sharing income tax. However, if it does so, it should do so with its eyes open and with an understanding that what it is doing is ceasing to pool and share that salient element of taxation resource across the entire UK.
The second challenge is more complex and perhaps more amenable to technical solutions, although it would nevertheless require to be addressed properly before a wise Parliament would argue for the complete devolution of income tax. The question is not a partisan question, although it is often presented as such. If income tax is devolved in Scotland, what happens to income tax in the rest of the UK and who makes that decision? Let us use England to mean the rest of the UK—I intend no offence to people in Wales and Northern Ireland, where the principle is the same, by omitting them from this example. If income tax became a Scottish tax, would it also become an English tax? If it was an English tax, which members of Parliament should decide on it and why? Unless that question is properly answered, I do not see that a sensible scheme for the devolution of income tax can be devised.
The third question that requires to be answered is this: what would be the effect on the Barnett formula? Let us imagine, for the sake of argument, that the Barnett formula remained unchanged from what it is today and that income tax was devolved. If the UK Government decided to increase income tax in the UK to spend on a reserved service such as social security, Scots would get the benefit of that tax rise through additional social security payments without paying any contribution. Equally, if the UK Government decided to increase income tax to increase the national health service budget in England, Scotland would get a commensurate benefit in the form of a consequential based on its population share without paying the commensurate tax rise. This is perhaps a technical challenge, but how can one devolve income tax and preserve the Barnett formula as it is currently constructed?
Those are the challenges that would have to be addressed if the whole of income tax were to be devolved, but those challenges do not require to be addressed under the scheme of the Scotland Act 2012, which is due to be implemented in 2016.
Thank you.
Under the heading “Financing Welfare Devolution”, you talk about devolving individual benefits such as housing benefit and attendance allowance. Will you say more about your thinking as to why some should be devolved and others should not?
A minimum wage policy is pursued to create fairness. Do you have any concerns about devolving the setting of a minimum wage?
I am sorry; perhaps I misunderstood you. I thought from your paper that you were talking about housing benefit when you went on to talk about the Northern Ireland system. I assumed that you were slightly cagey about having full devolution.
If I remember rightly, we addressed that in the Calman commission report. Under the Scotland Act 2012, HMRC collects the Scottish income tax and remits it here. I have not looked at the legislation recently, but I think that there is a line of direct accountability from HMRC for its performance in collecting Scottish income tax in the same way as there is a line of accountability for its collection of UK taxes. I recollect that the revenue commissioners designated one of their number as the Scottish commissioner for that purpose, but I could be wrong about that, as it is a wee while since I looked at the matter.
Given that there are sub-state jurisdictions that have control over their natural resources, and given that there are countries of a similar size to Scotland that seem to cope well with that burden—I use the term “burden” in a somewhat obtuse way, as I do not happen to view oil and gas as a burden—why could Scotland not do so? What is the Scottish exceptionalism here?
Okay. With regard to benefits, which we have touched on a bit, I think that you have suggested that the Scottish Parliament could supplement benefits.
So you are suggesting that any new powers that may be devolved as a result of the Smith commission deliberation should not be implemented in 2016.
I certainly would not buy that deal.
Okay. You have clearly made that point. Thank you very much for your straightforward answers.
On borrowing powers, you state in your submission that
“a good case can be made that all Scottish government capital spending should be funded by borrowing from the markets, neither subject to the control of nor underwritten by the UK government.”
The Scottish Futures Trust said something similar in its paper. Can you elaborate on your thinking in that respect?
On balance, I am disinclined to assign, but there are people—including some committee members—who take the view that maximising the number of Scotland’s own resources is an objective in itself. If that is regarded as an objective, it could be achieved by assigning a share of VAT revenue.
I will remind you of the risks that are involved in that, because this is all a balance of risk and reward. The risk involved in assigning a share of VAT is that we would take the revenue fluctuations—VAT goes up and down as the economy goes up and down—but we would not have, because we cannot have, any of the tax rate tools to manage those fluctuations. If VAT fell, the Parliament would be unable to increase the rate to increase its income. I would rather give the Parliament a power to rely on a tax that it could influence than have a tax on which it was simply a price taker.
No. I take the view that, if supplementation is gone for, it will involve universal credit—either all of universal credit or the housing element of it. I suppose that, if you were going for supplementation, you should have all of universal credit. I certainly would not take that approach to pensions, because they are a key element of UK social solidarity.
I observe that, where functions have been devolved thus far, albeit on a very limited basis, the Parliament and the Government have chosen not to go via the DWP; they have primarily worked in partnership with local authorities. There is a model that could work.
Sorry—I am not sure that I follow your question. Do you mean powers other than tax powers?
It was a pleasure.
The UK Government could also raise income tax to spend on Trident, which Scotland might not want.
I do not think that you answered my question, so I will ask it again. Given the caveats that you have introduced, to what extent should income tax be devolved? What is your view on the devolution of rates, bands and thresholds?
The Scottish exceptionalism is quite simple. If your objective is to tie devolved spending to a revenue source that is in long-term decline and therefore puts spending in long-term decline, that is, if I may say so, an ideological rather than a practical view.
Oil and gas revenues hit their peak some years ago. Typically, a good year for oil had £11 billion or £12 billion of revenue, of which probably 85 or 90 per cent fell within what would become Scottish territorial waters. At the moment, oil revenue is around £3 billion a year, with oil prices being low. It is volatile, of course, and it depends on how oil prices go up and down, but it is, on any view, in long-term decline. Let us suppose that we decided today to devolve oil tax revenue, and let us say that it financed £3 billion of the Parliament’s present budget, in 20 years’ time either we would have to find another source of tax revenue equal to £3 billion or we would have to cut this Parliament’s budget by £3 billion. That is just the arithmetic of it. It is not actually an economic question; it is a practical one.
It would be different from having 50 per cent devolved taxes. Do you have a view on the balance that there should be? How ought we to weigh that up?
At the moment, social protection—that is, pensions and benefits together—represents much the same proportion of tax income or gross domestic product in Scotland as it does in England and Wales. Therefore, at the moment, there is really no pooling going on. Are you arguing that there is a risk in future, which is why we want to be able to pool the risk?
Yes.
Sure.
I take the view that the deal that the Scottish people signed up to in the referendum campaign was one in which there is social solidarity and risk sharing across the UK. The principal but not only element of risk sharing is the social security system. Therefore, I take the view that the core of the social security system should not be devolved.
Old-age pensions are at the core of the system—they are the largest single benefit—and they certainly should not be devolved. There are good principled reasons for that and, of course, it is in Scotland’s interest, because of our differential age structure as projected over the next several decades. It would cost us a lot more, because we will have more old people.
To go back to where I started, there is at least a perception—and it is perhaps the reality—that the Scottish people would be willing to pay more taxes for a more generous welfare system. In principle, there are two ways in which that could be achieved, which takes me on to the substance of welfare devolution before we talk about the financing of it.
One way is to devolve certain individual benefits and enable the Scottish Parliament to take decisions about them. The most obvious one in that context is housing benefit, which is received by most poor people. It is a large benefit that is already administered by local authorities, although it is to be folded into universal credit. In my view, it is entirely possible to devolve that benefit, and it would give the Scottish Parliament real choices about the level of support that poor people receive from the state.
The alternative way is to give the Scottish Parliament power to alter the rates of UK benefits. That could be universal credit or perhaps simply the housing element of universal credit. That approach would have the same net effect as the first way, but it might be administratively easier.
In either event, the fiscal challenge or burden that falls on the Scottish Parliament and that affects the Scottish devolved budget should be the difference between what the UK pays its citizens and what the Scottish Parliament chooses to pay, if it is more. That would avoid the problem of widening the so-called vertical fiscal gap between the Parliament’s resources and its budget.
11:30
You have two choices. One is to go with the 2016 bundle, under the Scotland Act 2012, and implement the Smith proposals after that. The second is to amend the 2016 bundle, in the light of whatever Smith recommends. In either case, it would be prudent to undertake the process in stages.
I favour a UK-wide minimum wage, because there is always a risk of a race to the bottom between one region and another. Were the minimum wage not UK wide, the pressure in the south-east for a higher wage might put Scotland at a disadvantage.
I suppose that “accountability” might have been the wrong term to use. What I had in mind was that, if we as a Parliament identified a need for legislative change on tax collection, we could not implement that for HMRC, whereas we could for a devolved body such as Revenue Scotland.
It is 23 years.
I gave my view on that earlier. There is a strong argument for a single UK administrative system for income tax, for the benefit of employers and employees.
It is £292 million.
12:45
There is a strong argument for the maintenance of a single definition of income—what constitutes income and what does not—for income tax purposes, not least because that relates to other taxes, such as capital gains tax, but also because it is absolutely critical for the operation of a sensible pension system across the UK.
It is right to say that the threshold at which income tax becomes payable—the personal allowance—should be retained on a UK basis, because it relates very closely to social security benefits and notably to tax credits, which are paid through the income tax system but are, strictly speaking, social security benefits.
To be honest, one can make an argument either way for the variation of the bounds of the higher and top-rate bands. There are arguments in both directions. However, it seems to me that, in any view, one should regard the UK tax rates and bands as the benchmark, because that is the reality of how the financial system works; indeed, that is also the political reality. Subject to that, I would be entirely relaxed about the Scottish Parliament having the power to vary them.
Thank you. I will open up the session now. Michael McMahon will go first, followed by Malcolm Chisholm.
If a tax is devolved completely, as happened with stamp duty, it is possible for the Scottish Parliament to change the structure completely; the Parliament can whip Revenue Scotland if it does not do a good job and can change its powers. My view is that, for the reasons that I explained to the convener, employers and employees benefit from a single UK income tax framework.
The committee might well have taken evidence from representatives of HMRC; if it has, I am sure that they will have made my next point, so forgive me if I repeat it. It is important to remember that income tax is unusual among taxes in that the state does not collect most of it; employers collect it. As any changes to income tax impact heavily on employers, many of which are cross-border employers, maximum coherence in the tax base and tax administration is desirable, if it can be achieved.
Yes, there is. Those powers already exist. Under the Social Work (Scotland) Act 1968, local authorities already have the power to give cash payments in a welfare mode. If you had the money and the imagination, you could probably use those powers in many of the ways in which I suspect you might like to use them.
Or powers to raise taxes other than those that are currently raised across the union.
Thank you. That is quite a while, is it not? There might well be a case for revaluation or another look at council tax. This Parliament already has the powers to look at the taxation of land and real property and it should take a deep breath and think very hard about it. It does not need any new powers to do that.
If I may say so, that goes back to Mr Hepburn’s question. The point that you make is true only if you include in the GDP the offshore numbers and, of course, those offshore numbers have two characteristics: as a proportion of GDP, they produce a lot less tax than the rest of GDP, and they are going to decline over the long term. Therefore, I think that the comparison that you make is the wrong one.
Yes. As you will know, the Scottish Government has very limited borrowing powers at present. It has some small capital borrowing powers under the Calman scheme, and a short-term borrowing facility that it has so far never had to use.
I will go back to first principles. The principle to which we are seeking to give effect is that the Scottish Parliament should have the ability to have a bigger or smaller budget if that is what the Scottish people want, subject to the risk-sharing arrangements. Taxation powers have given Scotland that ability in relation to revenue spending, and borrowing powers would give it the capacity in relation to capital spending.
The Scottish Parliament’s budget for capital is approximately £3 billion a year. At present, that is financed not by borrowing but directly by the Treasury as part of the block grant. If we are—as we should be—in the borrowing powers business, borrowing should apply to all the Scottish Parliament’s capital expenditure. The Scottish Parliament would then bear the interest costs of the Scottish budget, which seems right.
If those borrowing powers are to be widened, that can happen if—and only if—the Parliament’s tax powers are widened. If the tax powers are widened, the scope of the Scottish Parliament to borrow, and of course to pay back, should be widened too.
It seems that there is little actual need for the UK to set a cash limit on that borrowing, because the markets will set the limit anyway. The borrowing by the Scottish Parliament should bear a first charge on devolved tax revenue, as legally that is for local authorities at present. The markets will swiftly take a view on how much borrowing it is prudent for the Scottish Parliament or the Scottish Government to undertake.
That is clear.
There is a traditional argument for devolving housing benefit, which I have supported for a long time. However, shifting the spend to housing supply from housing benefit support would require much more fundamental changes.
The point that I am making is that surely the challenge is not unique to Scotland, so what makes us the exception? Why can other jurisdictions manage it and we cannot?
That is quite an interesting question. I agree that pure assignment is all risk and no power. If VAT is assigned, your revenue goes up and down, and—short of long-term investment to build the Scottish economy—there is not a lot that you can do about it. Therefore, a deal that is pure assignment would be the purest presentation and I would not recommend it.
I can understand why people take the view—although it is a slightly superficial view—that the number really matters and that we should therefore put in some assignment to get to that number. I can genuinely see the presentational argument for that. In the end, my view on the 50:50 or 60:40 question is really about the amount of risk that you import. I would be unhappy with importing 75 per cent risk into the budget, particularly as the only way I can see of importing that would involve a lot of assignment, which may put additional powers at risk.
Conversely, I entirely accept that the Parliament raising 25 per cent of its own resources does not really give it the power to do what I think the objective of all this is. While Scotland remains inside the UK, with the risk-sharing benefits—and, indeed, the economic benefits—that that brings, the Parliament should nevertheless be given the opportunity to reflect a different approach to public services and taxation, if that is what the people of Scotland want.
Only by experimenting will you find out if that is indeed what the people of Scotland want, because it is very easy to be in favour of increased public spending when you know that you are not going to pay any increased taxes or have to make the choice to increase taxes. It would be good for the Parliament and for the people of Scotland to have that choice and then make it one way or another. I am not sure what choice they would make—you will have to try it and see. Is that helpful?
The next agenda item is to take evidence on further fiscal devolution. I welcome to the meeting Professor Jim Gallagher, member of Nuffield College, University of Oxford, and visiting professor at the University of Glasgow. Members have copies of a paper from the witness, so we will go straight to questions.
Professor Gallagher, the way things work here, as I am sure they do in most committees, is that I, as convener, will ask opening questions.
Is there an argument for having a mix of taxes? Something that did not occur to me until recently is that, if we had all or a substantial part of income tax but none of VAT, there would be a risk from the UK Government’s behaviour. My party has pledged not to increase VAT but, in the past, the Conservative Party has increased VAT in order to keep income tax down. If the UK Parliament raised VAT and cut income tax, would that create a difficulty for the Scottish Parliament? We could not cut income tax without affecting our public services, so Scottish taxpayers would have the disadvantage of having to pay the higher rate of income tax plus the higher rate of VAT.
I am a Chartist in this respect. I think that everyone’s vote should have an equal effect—
Two of the key problems that we currently face are sanctions and work capability assessments. Some of us feel that people’s benefits are being stopped for reasons that are not good and that some people are being assessed as fit for work, even though they are not. We could not deal with such issues with just a supplementary system, because that would require a change in the fundamental way in which the DWP works.
We have kept you for 100 minutes already, but do you have any final points?
Surely not.
Thank you—that is helpful. I have one last question before I open up the session to colleagues at the table. It concerns proceeding in stages. The Calman process was agreed in December 2007 and the recommendations will not be implemented until 2016, but you are talking about major changes that carry high risks in implementation and should be implemented in a phased way.
Throughout your paper you have mentioned what the people of Scotland voted for, but there is obviously quite a head of steam building up among the electorate in Scotland with regard to ensuring that the proposals that are agreed are implemented sooner rather than later. Can you talk us through that particular aspect of your paper, and tell us what sort of time period you are talking about in relation to phasing in any additional devolved powers?
That is quite a hard question. Let us start with the understanding that the spending powers of the Scottish Parliament are, by international standards, unusually wide. If you look at federal systems worldwide, you will see that the proportion of spending that is devolved to Scotland is higher than the proportion of spending that is devolved to state-level Governments in most federal systems. People tend to blink when I say that, but the data from the Organisation for Economic Co-operation and Development tell us that very clearly. The reason for that is that the Parliament was built on a long history of decentralisation and administrative devolution, and—to go back to your first question—that is one of the reasons why I have always supported devolution. The scope for decentralising additional chunks of spending is therefore, in my view, quite limited. That takes us back to the question of welfare, which seems—to return to my earlier point—to be primarily about UK social solidarity.
Might there be relatively small additional powers? Yes, there might be. I am in favour of finding some way of decentralising at least some of the powers of the Crown Estate Commissioners, for example—to refer to an area that I know you are interested in. As far as taxes are concerned, Governments worldwide are looking for things to tax and have probably found most of the things that can be taxed. If there were more, they would find them. Nevertheless, I think that the Scottish Parliament should have the power to tax additional things if it wants to, subject to such taxation not completely distorting the economy of the rest of the UK.
That is as much as I can say in answer to your question.
I do not know the answer to that, Mr Mason, because I have not studied the issue. You might be right, but I would like to think about that question before I answered it.
Thank you, convener. It is good to have been here. We are in a very interesting period. As Ms Urquhart and I were saying, we are in a time when we have an opportunity to create a long-term, stable and well-functioning devolution settlement for this Parliament, but we will do that if—and only if—we address the questions on their merits. I hope that that is what I have been doing, and I am sure that the committee, too, will do the same when it reports on the matter.
Okay. To what extent should income tax be devolved? What is your personal view on that particular issue?
I was interested in all of your submission but particularly in page 2, on which you said that the balance of resources from taxation and grants
“should in my view be one of broad equivalence.”
How flexible are you on that? A lot of the discussion is about how much revenue we should be responsible for. You dismissed the idea that we should be responsible for it all. Would you take a hard line on 50 per cent? What about 75 per cent? What would be the objection to that?
I do not think that that would be the case, but that depends on the grant mechanism. As it is currently operated and as I would envisage it operating, it would not carry that risk.
There is an interesting question. VAT is a UK tax; it must be a UK tax under EU law, and there are good economic arguments why that should be so, because it is all about tax competition. If VAT were increased, UK tax revenue would increase. That would feed through to this Parliament’s share of UK tax revenue through the Barnett formula. It would therefore be open to this Parliament to maintain or decrease its devolved taxes.
Indeed.
I turn to a related issue, referring to something that came up at the Welfare Reform Committee. Mr McMahon has explored this. Perhaps I did not hear you correctly, or I have perhaps written this down wrongly, but I thought that I heard you say that, if the minimum wage were devolved, the pressure for a higher minimum wage in the south-east of England could put Scotland at a disadvantage. I do not understand that.
Of course, it is a challenge for the UK. UK oil revenue is declining, and in 20, 30 or even 40 years’ time it will be vanishingly close to zero. The UK is more easily able to manage that, because £3 billion in revenue is a relatively small part of the total UK tax revenues, which are—off the top of my head—£600 billion or £700 billion. However, £3 billion is about 5 per cent of total Scottish spending and 10 per cent of the budget of this Parliament. It is just a question of scale and arithmetic, so I repeat that if your objective is to cut Scottish public spending, by all means tie the budget of this Parliament to oil revenues.
You do not see any issue with that in terms of the endless debate about not wanting to upset any apple cart by creating competition or movement of business. You cited competition in relation to the minimum wage, although I disagree with you about that, but you have no issue with that here.
That is helpful.
By the person—
When you say that they are going to decline, you are assuming that the oil price will not go up dramatically.
Thank you very much. To devolve that tax would be quite disruptive. Few people pay it, and most of those who do use smart tax management schemes, because they are using up their capital gains allowance rather than their income. If you like, you can look at payment of capital gains as a way of minimising income tax.
I would worry a little bit about the risk of avoidance. I would not rule out the devolution of capital gains tax as a matter of principle but, to be frank, I wonder whether it is worth the bother.
The challenge in all this is twofold. First, we have not had substantial tax devolution, except in respect of local taxes, since the Parliament was created. The Scottish Government does not as yet have a substantial treasury capability—it has Revenue Scotland, which is a very small organisation. It has yet to learn the skill set for managing a budget that has an income that might go up or down depending on what the economy does, and for dealing with a world in which it has to manage cash flow through borrowing. That is not a criticism, just an expression of how the world is.
Leaping to a situation in which half of the Government’s budget is subject to that constraint seems to be quite risky. At present, if we implement the Scotland Act 2012 and the Calman scheme, that will mean that approximately 30 per cent of the Parliament’s revenue budget is subject to that kind of challenge. The 2012 act is on schedule to be implemented in 2016, so that seems to be a sensible place to start.
The second constraint is purely electoral. If an Administration is to be formed in this Parliament after an election, it is only reasonable that the people who are being elected to it have a manifesto that says how they are going to use the powers that they have. It is quite neat that, in the 2016 elections, all the parties that are elected to the Scottish Parliament will have to take a view on what they will do with the Scottish income tax.
It is arguable that we should undertake the process in two chunks, in 2016 and 2020. I could be persuaded that it could be done more quickly than that, but the price would be that, halfway through a session of Parliament, big new tax powers would come in and the Administration—whoever it was—would exercise them without necessarily having the manifesto authority to do so.
Could that work with supplementation?
Thank you, Professor Gallagher, for persisting through all this.
No, I am assuming that, at some point, a finite resource will come to zero. Oil will run out one day—unless, perhaps, you think that it will not.
Thank you for that.
Finally, on the Scottish rate of income tax, should the annual indexation of the block grant adjustment take into account population growth at a UK level relative to Scotland?
Thank you very much. As that was the last item on the agenda, I close the meeting.
Meeting closed at 12:50.
I do not think that the first of the problems that I identified—the lack of sharing and redistribution—can be solved if income tax is devolved. One can simply say that sharing resource is so important and so much in Scotland’s interest that not all income tax should be devolved. The argument can go either way on that, but I am personally on the side of going for it, subject only to the other problems that I described being able to be addressed and the way in which income tax is devolved being such that those problems are solved.
I am not sure whether that is the case. Surely it is the total tax that matters. The UK Parliament could keep its taxation at the same level but change the balance between VAT and income tax.
One potential tax might be a land tax.
My fundamental question is: do we just want to top up the current system or do we really want to change it? Many of us would like to change it.
Yes. I could just put my feet up and pass it to the deputy convener, but I do not think that that would be appropriate. I will ask some opening questions, trying not to hog all the juicy ones, and then I will open up the session to colleagues’ questions.
First, I will quote directly from your paper. On the second page, under the heading “What further devolution is seeking to achieve”, you state:
“The objective of widening the powers of the Scottish Parliament is to enable it to deliver a different combination of taxes and public services from the UK as a whole, while still sustaining the risk sharing benefits of being part of the UK. Increased tax powers play their part in this by giving the Parliament the opportunity to spend more, or less.”
You conclude the section by saying:
“Whatever balance is set must, if the promises made in the campaign are to be kept, be consistent with retaining the Barnett formula.”
On the next page, you refer to income tax, which you say
“is the most obvious tax to devolve ... It is certainly possible to extend that.”
Your view is that
“it would continue to be set by the UK Parliament.”
To what extent—for example, rates, bands and thresholds—should income tax be devolved?
There is no magic number, but some numbers are clearly out of order. First, the figure depends on the scale of spending. If the Parliament’s budget was increased substantially for it to take on a new responsibility, it would be a lot harder to get to 75 per cent than it would be if the budget was at its present level.
The principled issue on which we must focus—I am glad that you have raised the matter, because it seems to have been neglected in the Scottish debate—is that, in the United Kingdom, we are in a system in which there is risk sharing and social solidarity. Those apply entirely to reserved services—notably social security—and partly to devolved services. As a principle, the Parliament’s budget should be partly met from resources that are shared across the UK and partly met from resources that are under this institution’s control.
That is entirely common worldwide. Across federal systems, one sees almost without exception the so-called vertical fiscal gap. There are good economic and social reasons for that; it is not simply an accident of history or foot dragging by central Government.
What is the right number? A 90:10 split in either direction would not be right because, were Scotland to be 90 per cent grant funded, the United Kingdom Government would essentially be determining this Parliament’s budget. Conversely, were that figure to be 10 per cent, the public services on which Scots rely would depend almost wholly on Scottish tax revenue, which would be risky and, in the long run, disadvantageous to Scotland.
A split that involves a figure anywhere between 60 and 40 per cent seems reasonable. As a matter of judgment, 75 per cent is pushing it a bit. Were the fiscal transfer from the UK Parliament to be 20 or 30 per cent of this institution’s total budget, it would become swiftly evident that the relative spending lead that Scotland currently enjoys for devolved services was met almost entirely by the grant from the Westminster Government. That would be tactically unwise.
If there was a geographically variable minimum wage, the economic pressure would be for it to be higher in areas where wages are higher in general.
Did you think that devolution was a good idea?
Not in relation to land tax, no, because land does not move around.
—in electoral districts. At the moment, we have almost got that. By an accident of history, Scotland is slightly overrepresented in Westminster.
When people said that they wanted to remain part of the UK, the presenting question was one of political union. Political union is linked to two other forms of union, both of which were heavily debated during the campaign. The first is what I would call economic union, and the big symbolic issue in the campaign concerned whether we would have a single currency after independence. It seems to me that the argument was made and accepted that the maintenance of a single currency outside of a political union was, at best, perilous. It therefore seems to me that the voters have voted for an economic union.
It also seems to me—
What about the opportunity to design a more efficient tax system? For example, Her Majesty’s Revenue and Customs advised members that some £34 billion or 6.8 per cent of the income tax take was not collected in 2011-12. Is there an opportunity in devolving income tax to develop a more effective and efficient system of collection, given all the difficulties of the UK system?
Yes.
I was talking about other developments. Our earlier witnesses talked about 0.5 per cent making a difference.
It is nice to see you again.
I am sorry to interrupt, but would you accept that there is a range in there? Clearly, you either have a single currency or you do not, but, with regard to the word “union”, you are either more united or you are less united, but you are probably never completely one union or completely not one union.
First, things might be different if one went for a system that involved the whole devolution of income tax or the assignment of all income tax processes. As a result, what I have to say relates only to the scheme in the Scotland Act 2012. That is important, because different considerations apply in different circumstances.
Under that scheme, there are various risks in what you might call the revenue stream to the Scottish Parliament, some of which should be allocated to this Parliament and some to the United Kingdom Parliament. This Parliament should primarily bear the risk of its own taxation decision; in other words, if it cuts the tax it gets less money, and if it increases the tax, it gets more. Secondly—and this is the easy one—the United Kingdom Parliament should bear the risk of any changes to the tax base’s structure. In other words, if the UK changes the personal allowance, it should make a compensating change to the Barnett formula grant one way or another.
Those two scenarios are relatively straightforward. The interesting one, which is the one that you have suggested, convener, is about relative growth in the tax base. That might happen as a result of growth in relative population or income—the cause does not matter—but in any case this Parliament should bear the risk. After all, greater fiscal autonomy is exactly what you and some of your colleagues are arguing for. That is right in principle both in this case and certainly in the case of the Scotland Act 2012, because it gives the Scottish Parliament the benefit of the upside of greater growth in the Scottish economy and incentivises it to ensure that that happens and that it uses its powers in that way.
As for the own resources element under the Scotland Act 2012, this Parliament should bear the risk—both the upside and the downside—of relative growth in Scottish income tax compared to English income tax. If that does not happen, the act is not doing what we had intended it to do.
You made the interesting point at the end of your submission that the risk from shortfalls is your main concern.
Indeed. You are right to raise that point, which I made when I began to talk about the conditions for the devolution of income tax. They include ensuring that the Barnett formula can continue, but appropriately, so that those risks do not emerge. There are ways of doing that, but they would require a bit of algebra, which I cannot write in the air for you.
No. It would not work with supplementation, which is an alternative. The idea would involve carving housing benefit out of universal credit, making it the Parliament’s responsibility and having a funding arrangement under which the UK guaranteed to provide an annually managed expenditure for what housing benefit would have cost, which is a slightly technical calculation.
The Parliament would then have the opportunity to use that income flow to provide direct cash or bricks and mortar. I do not think that we will move into a world in which we go back to mass provision of housing, because that would cost a great deal more. However, more direct provision of housing would be a much better option for some groups of people who receive housing benefit.
Yes. Of course, that is already within the Parliament’s powers.
Well, I think that there is more to find under the Atlantic, but that is a separate question.
Yes.
Of course, many people would like to change the current system at the UK level, too.
Your submission seems cautious about the devolution of income tax. However, did I pick you up right when you said to the convener that, subject to some of the issues being ironed out, you are in favour of that devolution?
There are a number of ways of analysing the concept of union.
I am going to sound a bit professor-like for a moment, but the academic literature on the subject shows that there is quite a well-defined concept of a union state, which is a state that has been formed by the union of pre-existing countries but which retains in its form some of the institutional inheritance of those pre-existing countries.
The union between Scotland and England in 1707 is precisely of that kind. Although that was a political union, through the creation of a single Parliament, something was maintained that actually mattered more to most people than the Parliament, which was a separate church. There was also a separate legal system, which was, at the time, the only domestic instrument of the state. That is the form of union state that we have, and have always had, in the United Kingdom. Scotland has always had a separate, distinct and continuing institutional identity. That was not invented in 1998 when this Parliament was created. What this Parliament did was give that institutional identity and that historical continuity a democratic aspect that was wholly appropriate in the 20th century—it was perhaps appropriate in the 19th century, but was clearly not relevant in the 16th, 17th or, indeed, 18th centuries.
That is one way of looking at union. The other involves the respects in which the union operates. One respect is political. The second is economic, and the nature of the economic union is, essentially, a single domestic market—free trade. That is what people were after in 1707.
The Scots were in trouble in 1707 for two reasons. One is that they were bankrupted because of the Darien scheme, and the other is that they were being frozen out of English markets by tariffs. The union in 1707 created what the Europeans would call a single market, and what has been created since then is a domestic market. Capital, goods, labour, investment and trade all flow across the Scottish-English border without any let or hindrance. There is a real contrast between that and the European market. That is what makes a single currency sustainable, along with the fiscal framework that involves a sharing of resources. That sharing of resources is economically necessary.
A fiscal union is necessary to make a currency union work and it is also what gives effect to the third aspect of union, which is the social aspect. That involves social solidarity and the sharing of resources, first and foremost in relation to pensions and benefits and so on, but also in relation to the securing of common social rights such as health and education through a funding system that enables this Parliament to do that, even if Scottish tax revenue falls through the floor.
That is in the south-east.
So, you would see that as—
In the long run, taxation on land influences the value of land.
That is undoubtedly true, but do you think that it is infinite?
Indeed, but what if the population of England were to grow at a higher rate than that of Scotland? As you will probably know, the recent per capita figures show that there has not been much GDP growth. A lot of the growth has happened because of the increase in population.
There is no reason to suppose that a Scottish income tax would be any more or less efficient in addressing its problem of collection than a UK income tax. My view is that it would be entirely unwise to create a separate Scottish collection system and that Scotland should rely on HMRC to do the tax collection for two reasons: the economies of scale and because it is much easier for employers and employees to deal with a single tax authority, as employers have employees in more than one part of the UK and employees might move from one part of the UK to another.
I do not dispute—in fact, I am sure that it is entirely the case—that HMRC could, if it had the resources and the power, collect more of the tax that is due, but there is no reason to assume that devolution to Scotland would make that any more or less likely. Therefore, I favour an integrated tax collection system.
Indeed. We are talking about risk sharing, which includes public services and notably—but not only—health and education services. Services such as those, on which people depend and which are—rightly—regarded as social rights, should not be wholly at risk from long-term or short-term fluctuations in Scottish tax and revenue. That is a question of balance.
I will move on to welfare and the general power of supplementation, which you illustrated with the example of housing benefit. Are you open minded or positive about that being extended to a wider range of social security benefits, although it will not be extended to pensions?
Good. When you talk in your paper about full fiscal autonomy and what that means, you state:
“This too is inconsistent with the promises made to the voters”.
What were the promises made to the voters, in your opinion?
In the introductory remarks in your submission, you talk quite a lot about different kinds of union—political and economic—and about respecting the outcome of the vote. I am not entirely clear about why different people voted no—or yes, for that matter. I will concentrate on the no side. One or two people do not even want the Scottish Parliament to be here, so they voted no; some people want things to carry on as they are, so they voted no; some people want a little bit more power; and some people want a lot more power. It is quite difficult within that mix, is it not, to discern what the public want?
Yes. Is that not likely to happen?
I said in the submission that there is a list of serious issues that would require to be properly addressed before all income tax could be devolved. To be honest, I think that one of them—the question of redistribution and sharing—is unfixable. I said to the convener that, if the Parliament wanted to argue for the complete devolution of income tax, it should do so with its eyes open and not, to be blunt, simply for ideological reasons, as in saying, “Whatever power we can get, we should grab.”
I do not know. Can you tell me the result of the next election?
If there was a principles-based system, rather than a rules-based system like the system that the UK has, would that be more effective?
You mentioned in passing in your submission that
“VAT cannot be devolved, but a share of its yield could be assigned.”
It does not sound as if you have a strong view on that.
11:45
But it is already the case that wages are higher there.
On your final point about social union, there is again a range of meanings there. As we have said, there are already differences in relation to personal care, free home care and so on, which means that the systems are not exactly the same across the union. Do you think that, if people voted for the social union, they were saying that, for all time, their pensions should be the same as those down south, or do you think that they were actually worried that their pensions might be poorer than those down south and that they would have been quite happy if their pensions were better here?
I do not think that anyone is suggesting that.
Finally, I want to ask you about the business of tax collection. Your submission refers to national insurance contributions. Collecting national insurance contributions is really just collecting income tax, is it not?
It was not my idea to have a referendum. You got a result and that result was that you remain inside the UK. The best way of answering your question is to look at what the campaigners offered, but, in the end, who knows why people vote a certain way? Voters are a bit like students—they like to answer the question that they wish they had been asked. Lots of people voted yes for reasons other than the question on the exam paper. We know that from other referendums, such as those on the European constitution in France and Ireland, where people answered a different question from the one that was asked. That is one of the risks of having a referendum. Nevertheless, the question was asked, and it has now been answered.
If you look at the promises and commitments that were made about what people would get if they voted no, it is perfectly plain that, by definition, they were voting for a political union; in my view, they were voting for having equal Scottish representation in the Parliament at Westminster.
Oh yes—absolutely.
That is right.
No, for two reasons. National insurance falls into two halves. One is a payroll tax or an employer’s tax. I have forgotten the numbers and I do not have them with me, but the committee will have access to them. The payroll tax is one part of it.
Secondly, it is not like income tax because it is not a progressive tax. It is a regressive tax. It is a payment, as it were, for membership of a social security system—
Okay. That is fine.
I have a couple more questions. We have talked about housing grants versus housing benefit, and I think that you talked about supporting the capital building of houses or paying people cash to pay perhaps a higher rent. Currently, we are a bit unbalanced in that respect, because we are trying to support the building of houses. I presume that that will bring down the housing benefit bill, but that is a Westminster thing. Would joining up the two issues make sense?
I would not claim to be an expert on the different methods of tax collection, but in another part of my life I deal with a principles-based system in the regulation of the financial services industry, and I can tell you that, as a matter of practice, it defaults into a rules-based system.
I got that—it came through in your submission. However, I thought that you said to the convener that you are in favour of the devolution of income tax.
Good—that is progress.
If England’s population continues to grow, will that disadvantage Scotland in relation to the block grant adjustment?
I will stop you there. It is not that I do not understand the basis of calculation of the tax, but where does it end up? People used to imagine that their national insurance went to pay their pension and there was some kind of fund to which they made a contribution.
It depends what you mean by “disadvantage”. For a long period, England’s population has grown more than that of Scotland’s, primarily because it has had a lot more immigration than we have had. You are absolutely right to suggest that when people say that Scotland’s growth has lagged behind the rest of the UK and that things are bad here, they are talking nonsense. For many decades now, Scotland’s GDP growth has been higher per head than the UK; indeed, that has been the case since the numbers were calculated in 1968.
I do not understand why that would put us at a disadvantage. Presumably, if the power is devolved, we can set a minimum wage as we see fit for Scottish circumstances.
Okay. Let us move on to other taxes. In your submission, you say:
“A number of other minor taxes might be considered for devolution”.
Can you talk us through them? Can you talk us through air passenger duty, inheritance tax, capital gains tax, excise duty and vehicle tax, for example? What are your views on which, if any, of those taxes should be devolved, and why?
That is if the other issues that I mentioned are addressed. The first is dealing with the problem of English votes for English taxes and the second is retaining and sustaining the Barnett formula in a way that does not unfairly advantage or disadvantage Scotland. I gave the committee examples of how there might be an unfair advantage, but let us think for a moment about the unfair disadvantage.
Let us imagine that income tax was completely devolved but that a United Kingdom Government cut income tax because it had decided that a much better way of providing health services would be to charge 50 quid every time someone visited a general practitioner. In that case, income tax and health spending would go down. The latter going down would reduce the Barnett consequential to the Scottish Government from health spending, but income tax in Scotland would not have gone down. That would be an unacceptable consequence. That set of issues would need to be fixed before income tax could be devolved.
However, we have the answer to that in renewables.
I am not quite sure that I share all the premises, but in principle the argument for devolving housing benefit as opposed to having a supplementary system is to enable the transfer of resources between capital and revenue. That is the argument of principle and why I have suggested the devolution of housing benefit. A supplementary system will give you most, but not all, the upside of that approach. You will not get all of it, because you cannot play such tunes, as it were, at the edge between capital and revenue support.
It is worth remembering that it is very easy in these conversations to assume that, if we just devolve, there will be more of everything and that everything will be better. When, in the 1980s, the Conservative Government moved from supporting investment in public sector housing to supporting individuals through housing benefit, it saved money. Indeed, that is one of the reasons why it did so. The housing programme was substantially cut, and although the housing benefit line went up, it did not go up by as much as the programme line went down. Consequently, you should not be fooled into thinking that, if these things were simply devolved, lots more resources would become available. They would not; you would just be able to move the resources relatively at the margins—
Oh, come, come.
And that is because its population has gone up.
Well, there is a fund.
When the Conservatives took that decision, did they make a short-term saving, or was there also a long-term saving? I presume that the capital was saved in the short term, but that more benefits were paid for quite a long time.
You said that you think that it would still make sense for HMRC to be the collection body, but you also made the point that there are issues about its capacity to collect, which primarily concern resourcing.
The economic effects of that are interesting, of course.
I still take the view that there is a risk that a variable minimum wage would mean regional competition in wages in an upward direction. It might not always be you setting the minimum wage.
I think that the convener made those points.
We will not go into that just now.
Let us stick with the social union. In your submission, you say that
“NI contributions provide a gateway to the welfare system”.
I know that we have touched on this already, but is that not a bit of an outdated concept? You used the word “stamp”, which is relevant to my age group and above, but not to 20-year-olds.
That is right. The English population has gone up but, as far as growth is concerned, the GDP per head in Scotland has exceeded GDP per head in England. I do not think that relative population growth is either a good or a bad thing—it is just what it is.
We should not use the income tax system to say that, because England’s population is growing, they should send us more money. Relative population growth in the income tax base is part of the driver of relative population growth in the income tax yield, and the Scottish Parliament and its budget should bear that risk relative to England.
It probably never would be.
The benefits ran on over time. However, that was baked into the baseline, and, indeed, the Scottish Parliament’s budget reflects that ancient historic baseline.
But in fact, once collected, regardless of how the taxes are calculated or whether they are contributed by the employer or the employee, the money ends up in the same bucket.
It might never be.
My final question brings us back to the minimum wage. I am not sure that I quite understood the argument about London having a higher minimum wage. Were you suggesting that many of our people would go to London to work?
All income tax and national insurance in the end flows into the Treasury because the national insurance fund is not big enough to carry the resources. It is not a funded fund in the same sense as a company pension fund. I could give you a long story about why Lloyd George failed to do that in 1923, but I will not bore you with that.
There are three interesting things to note about national insurance with respect to its potential devolution. First, there is a real principled question about it being a payment for membership of the UK welfare state; it is a gateway into the pension. People still talk about their stamps and whether they have enough stamps to get the full pension. That is important. We ditch the contributory principle at our peril.
Secondly, we could argue that we should decentralise the payroll element or allow it to be varied in some way.
The third element is the percentage element, which is, in a sense, a substitute for income tax. It is now 2 per cent on income above a certain level, which is £40,000 for ever, as it were.
It is also worth remembering—people often forget this about national insurance—that quite a lot of people who have a substantial income do not pay it: most notably, people who are in receipt of pensions.
Perhaps; nevertheless, the contributory principle is an important one, for two reasons. One is that it demonstrates to people that they are buying into a system of common and shared risk, and the other is that it is, if you like, a fee for membership of the welfare state.
If you look at the history of the welfare state, you will see that Beveridge very much wanted to minimise the idea of a set of people who constantly receive support from general taxation. That might sound a little outdated these days, but his aim was that most social security should be funded by a kind of common pooling of resources that would be a bit like an insurance system—which is why Lloyd George called it national insurance—and that there would be a principle of putting in and taking out. I think that we have lost rather too much of that. We should have more of the contributory principle, rather than less.
My objection is slightly more general than that and brings me back to my economic union argument. There are certain guarantees from being in the United Kingdom, and it seems to me that the minimum wage is rather a good one. I am worried about the idea of different regional minimum wages in the UK because of the risk of a race to the bottom.
That is another point entirely.
I will move on to oil and gas taxation. Although you point out in your written submission that
“oil taxation is, as a natural resource rent, easy in principle to decentralise”—
Professor McLean made that point to this committee, and the Chartered Institute of Taxation has made it to the Treasury Committee down south—you seem to be against doing that. How do other countries of Scotland’s size with significant oil and gas interests—possibly even more significant—cope with that burden?
Do you think that there are areas of tax collection that could be improved generally?
You could argue that that is the way in which the tax system is applied.
For a long time, it has been suggested that tax—pay as you earn—and national insurance should be put together at a UK level. Presumably, if both elements were devolved to Scotland, we could put them together and create a simpler system that would cost a lot less to administer.
In other countries, oil taxation is grabbed, as it were, mostly, but not only, as a national resource, rather than a regional one. There are some exceptions to that, however. In some places, the resource is shared between the different levels of Government. Alberta in Canada is an example. There are different ways of dealing with it in Nigeria.
Economic theory pulls us in two different directions. Taxation theory says that we should really tax stuff that does not move around at a sub-national or sub-state level. Oil does not move around, so we should therefore tax it at a sub-state level. That is the argument that the Chartered Institute of Taxation and Professor McLean have made.
The second economic argument points in the opposite direction. You will see that it was explained by the expert group that advised the Calman commission on oil taxation. The argument is that windfall taxes have an inflationary economic effect, which should be spread over a wide area, rather than a narrow one.
However, I do not think that either of those arguments is the basis on which a decision should be made about the devolution of oil taxation in Scotland. The decision is quite a simple one. If your objective is to cut Scottish public spending, you should devolve oil taxation. If your objective is not to cut Scottish public spending, you should reserve oil taxation. Of course, it would be for the Parliament to argue for one choice or the other.
What if it was the other way round and Labour and the Scottish National Party desired to put the minimum wage immediately at the level of the living wage, which I think is £7.85 an hour or thereabouts? Would things not be the other way round?
I do not claim to be an expert on that. It is interesting that HMRC can put a number on the amount of tax that it does not collect. I imagine that if it had more resources and more power, it could collect more of it, but I am sure that there would be a trade-off. I do not claim to be an expert on that.
There is a difference between understanding the nature of a single administrative system and understanding the nature of the taxes. In one sense, the administration system is neither here nor there. In principle, it would be entirely possible for the UK to invite HMRC to administer the national insurance system in an integrated way with the tax system. That is not the same as saying that you would simply pool the two taxes and have a single tax rate. I go back to what I said earlier: the contributory principle, which is regressive in terms of income, is, nevertheless, important. If you accept my argument that, when income tax is devolved, there should be a single system of administering it across the UK, those opportunities would still remain.
Yes, but one of the tricks in designing constitutional systems is to ensure that they are proofed against any politician who might be in charge, not just the nice ones.
The Conservatives? Right. Okay. Thank you.
Aye, because they are going to have the levers of power in Scotland in the foreseeable future. I was going to touch on the same issue, but I think we have had enough on that for the moment.
That concludes the committee’s questions, but I would like to touch on one or two wee things to finish off. When I asked for your views on devolving a number of taxes, you mentioned inheritance tax and APD when you were rhyming them off, but I do not think that you touched on capital gains tax. What are your views on devolving that tax? Would you support that?
For the record, will you share with the committee your views on corporation tax?
I am not in favour of the devolution of corporation tax, although I can see the argument for it as an economic development tool. I can give you the long reason or the short reason why it should not be devolved. The short reason is to do with Amazon and Google. The trouble with corporation tax is that it is a tax on profits, and profits are not like land. Land does not move, but profits can be moved around at the touch of a button. Companies such as Amazon and Google that route all their profits through low-tax countries are in effect avoiding—perfectly legally but nevertheless irritatingly—a tax that would fall on them. I do not think that it would be in the interests of people in the UK as a whole or, in the long run, of people in Scotland to create such tax competition opportunities inside the UK.
In response to the convener’s questioning, you said that you are broadly in favour of air passenger duty being devolved, but you had a caveat. I cannot read my writing, but I think that it was something to do with predatory behaviour. Will you expand on what you meant by that?
Absolutely. Newcastle airport in some respects is in competition with airports in Scotland. The worry that people there have is that the Scottish Parliament could take a little bit off air passenger duty, or maybe a lot, and the few flights that Newcastle has managed to get that go outside the UK—I think that it has just secured one to New York—would immediately go to Edinburgh or Glasgow to save the 50 quid or whatever. I have a lot of sympathy with that. That is the essence of the only issue that worries me about the devolution of air passenger duty.
I take that point on board. You say that you are in favour of the devolution of APD, but with that caveat. In practice, if you do not want the Scottish Parliament to reduce air passenger duty by a percentage point, how would you devolve it and add in that caveat?
Okay—I understand the question. There are some things that might be done. As you will perhaps know, air passenger duty is already variable across the UK. In essence, the rates vary on the basis of how far away an airport is from Heathrow, and it is already zero in certain parts of Scotland, in the Highlands and Islands.
One possibility is to devolve it on the basis that there was some change in the UK rate that might benefit Newcastle. Another approach would be to do the opposite of what has happened in Ireland and devolve air passenger duty for short-haul rather than long-haul flights. Those are certainly possibilities.
Your paper states:
“VAT cannot be devolved, but a share of its yield could be assigned.”
In an earlier answer, you pointed out the risks of so doing. However, on balance, do you have a view on whether VAT should be assigned in part or in full?
As part of an overall package, I would probably sign up to the assignment of a number of percentage points of VAT. I would just be careful, in the interests of this institution and the people of Scotland, not to take on too much risk. I would be cautious—I certainly would not go above 10 per cent and I might suggest going below that.
My final question is on a more theoretical issue. Malcolm Chisholm asked about the “broad equivalence” that you mention in your paper, and you gave the useful answer that it had to be either 50:50 or 60:40—those were the ends of the spectrum
Yes—it should be somewhere around there.
Okay.
Like Michael McMahon, I am a member of the Welfare Reform Committee, which discussed the further devolution of welfare responsibilities at its meeting yesterday. The parity principle that applies in Northern Ireland was well discussed; I will not rehearse those arguments, although I point out that, in his evidence, Professor Spicker felt that, by its very nature, that would not be an appropriate model for devolution here, because he thinks that it would be incompatible with the terms of the Smith commission, which has been set up to deliver substantial devolution.
On a more specific point, Professor Spicker also raised the prospect of this Parliament being able to create new forms of support through the social security system. As you are well aware, that is a reserved matter under the Scotland Act 1998, so we cannot currently do that. He gave the example of the creation of a funeral grant—he was not advocating such a grant; he just posited it as an example—which, at the moment, we would not be able to do. If there were to be some form of devolution of social security—you are talking about the ability to supplement the existing social security system—do you think that it would be sensible for this Parliament to have the leeway to consider other forms of support that are not presently established?
I will go back to welfare devolution. The convener explored some of the issues, and you commented in your submission on the analogy with Northern Ireland. I will explore that a bit further. Northern Ireland has the principle of parity. Do you support that?
From my reading, it seems that Northern Ireland has for the first time made a change to the welfare system and is refusing to roll out universal credit and implement the bedroom tax. That has led to the UK Government having to provide the Northern Ireland Assembly with a £100 million loan that must be paid back. Is that the type of practical difficulty that could develop in Scotland if we went along with that analogy?
That is a good question, because it illustrates exactly the issue. I understand the Northern Ireland system. For reasons of history, which go back before 1923, the welfare system is devolved in Northern Ireland. The so-called principle of parity is that, as long as the Northern Ireland Administration does exactly what the UK welfare system does, the Treasury will cough up exactly the amount of money that is needed.
In a sense, that principle should underlie any welfare devolution in Scotland—that is, the UK social security net should set a floor and the Scottish Parliament should be able, if it wishes to do so and can raise the money, to supplement that. The only question is whether that money is supplementing the provision of identified benefits, such as housing benefit, or whether there is a general power of supplementation. I can see arguments in either direction.
In Northern Ireland, at least some of the parties in the Administration want to have their cake and eat it. They want to have the devolved power, but they are unwilling to find the money to exercise it. In particular, they—understandably—do not want to implement the bedroom tax, but they are unwilling to make cuts elsewhere in their budget. Of course, they do not have any meaningful tax powers that would enable them to pay for that through taxation. That illustrates the issue neatly.
This Parliament has implemented measures that will—if I have got this right—more or less completely remove the effect of the bedroom tax, but it has taken the hit elsewhere in its spending programmes. Under the proposals that I would support, it would have the choice of taking the hit elsewhere in its spending programmes or increasing its tax income to remove the effect. Does that help you?
Yes—that clarifies the position exactly and the options that would be available.
There is no free money in any of this, guys.
No—that is the bottom line. We have heard evidence from other experts who have said that we must bear it in mind that bringing devolved powers to Scotland does not necessarily mean that the system will be better or fairer.
No. The constitution is a means to an end: it produces neither more money, nor fairer outcomes, nor a greener country.
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Draft Budget Scrutiny 2015-16