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Tax and rend

8 September 2014 By George Hay

The UK government is getting desperate. Polls ahead of Scotland’s landmark vote on secession from the United Kingdom suggest those who favour independence are, for the first time, in the lead. To convince Scots to vote No to independence, UK Chancellor George Osborne is to reveal a set of devolved powers. The gambit is not without risks.

Giving more autonomy to Scotland within the union is an obvious concession for the UK parliament to make. Edinburgh decides over half of Scottish spending but only around a tenth of tax-raising calls that pay for them. Scots therefore subsist on Westminster handouts, and cannot redistribute wealth via taxation if the incumbent UK government doesn’t want to as well.

If Osborne formally pledged to hand over responsibility for income tax, which raised 10.9 billion pounds in 2012/13, it would mean significant change. This arrangement, similar to what has become known as “devo-plus,” could, if fully implemented, make Scots responsible for 56 percent of all revenue raised and 65 percent of spending decisions, according to Stirling University academics David Eiser and David Bell. It could be enough to sway voters alarmed by the independence campaign’s lack of clarity on what currency an independent Scotland would use, and what would happen if North Sea oil declines at projected rates.

The catch is that two of the three main Westminster political parties have already pledged a sort of devo-plus. Osborne could struggle to go much further: a quarter of Scotland’s 65 billion pounds of spending in 2012/13 was benefits set by Westminster and mostly covered by value-added taxes and national insurance contributions. European law would probably prevent VAT being devolved to Edinburgh anyway.

Even if a form of devo-plus is enough to secure a No vote to independence, it could cause political headaches in the rest of the UK. Other regions such as Wales and Northern Ireland, but also the north of England, are well aware that Scotland already receives more public funding per head than the UK average. If a Scotland with more devolved power decided to lower its income- or corporate-tax rates, it could incentivise individuals and businesses to head north, hurting their regional economies. Osborne needs to balance keeping Scots in with not prompting others to head out.

 

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