It is easy to forget that the referendum on Scottish independence took place only a little over two months ago. The whirlwind of activity since that day has now culminated in an agreement which is, by any measure, remarkable. Lord Smith of Kelvin was able to bring together five political parties which were, on some issues, diametrically opposed, and create an agreement.
The additional powers proposed are not to be sniffed at, and will impact heavily on Scottish people and on Scotland’s business community.
The headline is, of course, the devolution of income tax including rates and bands. Income tax collected from Scots amounts to over £10 billion, so in the context of the £40-ish billion spent by the Scottish Parliament it will go a long way to reducing what some see as a gap in Holyrood’s responsibility and accountability. It will also allow the political parties to perform some much-needed differentiation, should they so wish. Labour, for instance, might be expected to outflank the SNP on the left by proposing an increase in the tax, whilst the Conservatives may attempt to give themselves more relevance by promising a reduction.
For the business community it may bring a headache in terms of system change, on top of the one many companies are already progressing to cope with the previous Calman recommendations, but I’m afraid system change is something we’re going to have to get used to (of which more later).
Air Passenger Duty
The devolution of Air Passenger Duty (though tiny in terms of the overall budget) is something for our tourism sector – which is worth over £4bn to Scotland – to cheer, and is a victory for the diligent campaigners on the issue.
Interestingly, though, rumours are circulating that George Osborne may abolish APD altogether in his Autumn Statement (probably in response to the concerns of airports in the north of England that they might suffer from reduction/abolition in Scotland), which would effectively neutralise this act of devolution.
The devolution of a reported £3bn of welfare expenditure was desired by all parties, although the oft-promoted concept of devolving Housing Benefit (which was, effectively, a tool to enable both sides pre-referendum to say they would scrap the so-called bedroom tax) seems to have fallen victim to the practicalities of the Universal Credit.
The ability to create new benefits, which Lord Smith proposed this morning, will likely lead to a race-to-the-left ahead of the double election in 2015 and 2016.
As expected, there was no mention of Corporation Tax today, but with rumours circulating of the tax being devolved to Northern Ireland (in order for it to match the Republic of Ireland’s lower rate) we have likely not heard the last of this. We can expect a backlash of substantial proportions by the Scottish Government if the decision is made to offer Northern Ireland devolution over what it sees as a key wealth creator, whilst ‘denying’ it to Scotland.
Corporation tax is an example of where today’s Smith report may start to come away at the seams. Corporation Tax is one pressure point which may erupt fairly soon. Another is VAT. Today’s announcement recommended that a proportion of the revenue of VAT be assigned to Scotland.
It would be reasonable to expect this move to prove irrelevant, at best. Assigning revenues is not devolving taxation, because its level cannot be changed. In any case, since the EU does not allow intra-state differentiation in sales tax, it seems an odd proposal. That is, of course, until one looks at the numbers, upon which we realise that this is simply a tool to over-inflate the proportion of Holyrood expenditure to be raised by Holyrood. It is Potemkin devolution, and it surely will not be long before it is revealed as such.
The key question for Scotland’s (and indeed the UK’s) business community, though, is will this agreement stand the test of time in a way that the original devolution settlement, and more clearly the Calman report, failed to do? The answer, I fear, is no.
Before the referendum, Unionist politicians were lining up to tell the Scottish people that they’d be given a “federal-like state”, the “maximum devolution possible”, and “home rule”. What is clear is that the reality of the Smith report falls well short of that rhetoric. The SNP has been quick to make this point, and it will not stop doing so. With the likelihood of strong SNP performances at the 2015/2016 election double-header, their complaints will continue to carry significant weight.
There was always a whiff of over-promise about the last week of the ‘No’ campaign in September. That has been followed, as is so often the case, with under-delivery (Holyrood will still raise less than 40% of what it spends).
So for those in the business community who think that this will draw a line under ‘the Scottish issue’, think again. This has a long way to run.