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Page last updated at 20:29 GMT, Sunday, 11 April 2010 21:29 UK

More tax powers could boost growth says Reform Scotland

Scottish Parliament building

By Douglas Fraser
Business and economy editor, BBC Scotland

More power over taxation at Holyrood could deliver major benefits to Scotland's economic growth rates, according to a new economic study.

The think tank Reform Scotland has commissioned two of Scotland's leading academics to study the case for more fiscal powers, and they have put forward a detailed case for Scotland to hold almost all the taxation powers.

Prof Andrew Hughes-Hallett, an economist at the University of St Andrews and George Mason University near Washington DC, and Prof Drew Scott, a legal expert at Edinburgh University, concluded Scotland should have power over all its taxes, and should send a portion of them to Westminster.

It is argued this would provide accountability for money raised at Holyrood, along with the powers to boost the growth rate in Scotland, while retaining stability.

The amount of money the professors said should have been handed to the Treasury in 2007-08 would have been £5.3bn.

They have proposed this should be through a share of VAT revenue.

Scotland would need its own tax collection agency, with the report pointing out smaller countries, such as Finland, could run these more efficiently than Britain

Assuming the VAT rate stays at 17.5%, they said 11.5 percentage points of that should be handed over to Westminster, as "rent" for services provided by the UK government.

In 2007-08, ahead of the financial crisis, it would have meant handing over £6bn for defence, international services and debt payments, and another £5.7bn for pensions.

This share of VAT is a similar arrangement to the grant from Westminster to the European Commission, which runs at 1 percentage point of VAT receipts.

The report said pensions should be shifted to a UK-wide fund, similar to those used in continental Europe, while Scotland would take charge of the rest of its own welfare programme.

There would have to be extensive new institutions to manage the new relationship, including a Scottish Treasury, a body to resolve disputes, and another to ensure the Scottish government was stopped from harming wider UK economic interests through risky borrowing.

The Bank of England would have to take on a clearer Scottish representation.

Scotland would need its own tax collection agency, with the report pointing out smaller countries, such as Finland, could run these more efficiently than Britain.

Increase in growth

Scots working in other parts of the UK would be taxed by the Scottish authorities, and English people working in Scotland would not.

This is reckoned to give Scotland a £900m advantage, as more Scots earned money in other parts of the UK than the other way round.

The model was based on lessons drawn mainly from Canada, but also from Australia, Spain and Switzerland.

Scottish budget
Economic development
Arts/sports funding
Local government
Public transport/roads

Wider economy including tax
Foreign affairs
EU negotiations
Abortion and embryology
Rail/aviation/shipping regulation

The calculation of the economic impact of shifting economic powers from the UK Treasury to Holyrood was based on experience of other developed nations with de-centralised tax systems.

It is reckoned that, for every 1% increase in the share of taxation controlled from Edinburgh, there could be an increase in growth, after five years, of between 0.6% and 1.3%.

Using figures from 2007-08, the Reform Scotland study suggested that could mean a £350 increase in income per head in Scotland, or £690m more in government revenue and spending.

At present, Holyrood only controls the tax-raising levers for around 11% of its spending, through business rates and council tax, so the implications of a shift to more than 50% are very considerable.

However, the authors of the report warned the figures they used were illustrative and "are in the best traditions of back-of-the-envelope calculations, but they give us a fair idea of orders of magnitude involved".

They said the benefits would become clear in the medium- to long-term, and pointed out some countries - mainly developing economies - had instead seen income drop when taxation power was devolved.

In the economic analysis, it was reckoned the Scottish budget in 2007-08 could have run a 0.8% deficit, while the UK one was running a deficit of nearly 3% that year.

Population share

That would allocate Scotland most of the revenue from North Sea oil and gas.

It is also controversial in allocating Scotland a share of defence costs well below its population share.

The Reform Scotland report argued the Calman Commission proposals, drawn up to inform reforms for the main parties at Westminster, were "unworkable".

They did not go far enough, the professors argued, and they left the Scottish Parliament too dependent on block grants without proper accountability.

The authors stated: "One of the defects in the current debate is the understandable focus on the financial accountability of the Scottish Parliament has resulted in us losing sight of the key role fiscal policy plays in stimulating economic growth, and that Scotland's government needs to have substantial competence over tax and spending policies in order to maximise Scotland's growth rate - particularly in a period of economic downswing whose legacy could last for a great many years."

Professor Hughes-Hallett is a member of the Council of Economic Advisers to the Scottish government, and was an economic adviser to the Calman Commission.

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