Associate Feature: The give and take of tax devolution

Getting and spending are two core functions of government, but our politicians usually prefer to talk about the pleasures of spending, not the pain of getting via taxation.  An exception to this rule was a joint conference of the Royal Society of Edinburgh, Scotland’s national academy, and the Scottish Parliament’s Futures Forum, where the Finance and Constitution committee engaged with tax experts from across the UK to look at devolved taxation.

Holyrood remains mostly a spending machine, controlling nearly two-thirds of Scotland’s public expenditure, while about two-thirds of taxes are reserved to Westminster.  But that still means significant devolved tax decisions, including income tax and property taxation.  A message of the conference was that this was a neglected policy area.

The big choice offered by tax devolution is the ability to set a different balance between taxation and public spending from the rest of the UK, perhaps reflecting different public preferences.  But despite a number of tax changes, overall this has not happened to a significant extent. Recent increases in income tax for the higher paid increase revenue. On the other hand, revenue was lost earlier from a 10-year freeze on council tax, which in practice benefited the better-off most. 

Reforming property taxation, which primarily supports council spending, remains a missed opportunity.  The council tax has not been abolished as promised by the SNP, who wanted to replace it with a local income tax. Indeed, it is still operating, indefensibly, on 1991 property values.  But Holyrood has responsibility for almost the full suite of land and property taxation: non-domestic rates, council tax and Land and Buildings Transaction Tax, allowing scope for a comprehensive look at them together, both to raise revenue and offer the right incentives for property use.  

Income tax is the one everyone notices, and the Scottish Government recently tilted the system to raise more from above average earners. The forecasts on which it was based are now known to have assumed a lot more higher rate taxpayers than there actually were.  The resultant underfunded spending commitments are still making their way through the budget system.

This illustrates very clearly how tax devolution comes with risks.  Indeed, the relative underperformance of the Scottish economy over the last decade has significantly impacted Scottish revenue, so that even with higher rates, the Scottish budget is little, if at all, bigger than if income tax had remained reserved to Westminster.  I doubt, however, you will find many MSPs willing to move back in that direction.  Nor, necessarily, should they – but they now have an even keener incentive to develop policies to grow the Scottish economy relative to the rest of the UK, as it did in previous decades. 

Scottish tax devolution is more advanced than in Wales or Northern Ireland, which have  weaker economies and tax bases.  Wales has income tax devolution roughly as Scotland’s in 2012, but has cautiously stuck to UK rates.  There is however a Welsh land transactions tax and some appetite for council tax reform.  Inevitably, Northern Ireland is different.  The land border with the Republic creates challenges e.g. on corporation tax, and a recent Fiscal Commission made quite radical recommendations, including possibly devolving excise duties.  (The cross-border issues are obviously different in Wales and Scotland.)  But change in Belfast depends first of all on re-establishing devolution, and no new Executive will be ready to take on tax powers any time soon. 

Setting taxes is famously thought to increase the accountability of politicians to their electors.  But we know from local government experience there is plenty of room for shifting blame in a system of multi-level government.  Nevertheless, tax devolution is here to stay and will be an increasingly important part of Holyrood’s agenda.  If we want those public services, we need to find ways of paying for them, bringing in the revenue fairly and efficiently.  There is significant expertise in the academic world and elsewhere to help with this.  Time to focus on getting, as well as spending.

Professor Jim Gallagher CB is a Council Member of the Royal Society of Edinburgh

This article is sponsored by the RSE.