Lord Forsyth: The Scotland Bill is a timebomb at the heart of the Union

Michael Forsyth is a former Secretary of State for Scotland.

During the second reading debate on the Scotland Bill, the Secretary of State for Scotland described the legislation as the largest transfer of fiscal powers from central government since the creation of the United Kingdom. He was right and it is being done with almost no one outside the political class aware of it. This is an appalling state of affairs as the Bill threatens Scotland’s living standards, her public services and the Union itself. It will certainly result in Scotland becoming the highest taxed part of the United Kingdom, and at the same time having less money for schools, hospitals and social services. It is the progeny of a deal put together by Wendy  Alexander, who panicked when Alex Salmond called for a referendum on independence, and Gordon Brown, who was afraid to meet the challenge. Ken Calman was a fine civil servant and my Medical Officer of Health when I was Secretary of State, but his report, which the Scotland Bill implements, is deeply flawed - and may yet prove to be the midwife which delivers independence.

There has been no real public debate about the impact of the tax proposals, and the Calman consultations involved less than a thousand people and a few leaflets. As Conservatives we shamed Labour in 1996 into changing their policy, to allow the Scottish people their say on a tartan tax of up to 3p.  They voted for it, but no party has used it. That was a power to levy a limited increase in just the basic rate of income tax in order to top up the block grant, determined by the Barnett formula. This Scotland Bill is a wholly different proposition. It requires the Scottish Parliament to set its own independent Scottish income tax, at basic and top rates to fund its expenditure after receiving a cut in its funding under the Barnett formula. It gives the Scottish Parliament the power to levy taxes on land transactions and landfill sites. It even allows the Parliament to invent new taxes and clears the way for the introduction of a local income tax.  Any new taxes will not require primary legislation at Westminster.

Calman acknowledged that the Barnet formula was not sustainable in the long term, and would need to be replaced by a needs based system for determining the grant. The Secretary of State put it like this in Parliament during the 2nd Reading debate -

"As a consequence of increasing the financial freedom and accountability of the Scottish Parliament to raise its own revenues there will be a reduction to the existing block grant. We do not intend to alter it or review its arrangements at this time. Nothing in the Bill however prejudges future changes to the funding formula.  Rather the Bill’s effect will be to make the Scottish Parliament more reliant on its own revenues and less reliant on the block grant to fund public spending in Scotland"

 - and -

"The Government have set out their position on the Barnett formula in their programme for government. While recognising the need to review the arrangements in time, our overriding priority is to tackle the deficit, and we will not consider a review until the public finances are returned to good health."

One hopes that the public finances will be returned to good health by 2015 when the tax raising powers come in. The truth is that this is a time bomb at the heart of the Union. Independent academic research tells us that if the Barnett formula were replaced, as Calman suggested, by an assessment based on need like that employed by the Scottish Parliament to distribute its own funds to Health Boards and our local councils the grant would be cut by around £4.5 billion.  To replace even half that sum by putting up income tax would be impossible and intolerable.  It is the height of irresponsibility to introduce a Scottish income tax system without having secured and agreed the future acceptability and stability of the block grant. Of course Barnett needs to be replaced by a needs based system but this must be phased over a long period and  administered by an independent body as recommended unanimously by the special House of Lords Select Committee on the Barnett formula. Imagine the politics of Westminster changing Barnett and Scotland having to pay huge increases in income tax in order to maintain existing services.  It is the rock upon which Britain will founder.

As with Council tax because the tax raising powers are a small proportion of the total expenditure  large increases in tax are required to replace modest reductions in central Government support.  The very possibility of a tax gradient between Scotland and the rest of the United Kingdom will impose a blight discouraging investment and encouraging the flight of talent south. To be doing this now, in the teeth of an economic crisis , to a country so highly dependent on the public sector and in desperate need of more private enterprise, beggars belief. The impact of higher rates of Tax will fall on those who work hardest. The Bill narrows the tax base by preventing the Scottish income tax being applied to savings income and dividend income. These will be taxed at English rates. So the message is clear. Scotland will be great for retirement but less welcoming for enterprise and hard work.

The Bill should be amended to prevent the Scottish tax proposals being implemented until they have been approved by the Scottish people in a referendum following a public information campaign and widespread debate.  As Conservatives we are committed to forcing local councils to hold a referendum if they wish to increase the Council Tax by more than inflation or have an elected Provost in local government.  Given the Secretary of State’s claim that he is proposing  he biggest transfer of fiscal powers since 1707 it is hard to see why there is no requirement for a referendum in the Scotland Bill. There does seem to be some double standards in the treatment of local government by the Scottish Parliament and Westminster. The justification for the tax powers is that the Parliament must be accountable for raising the money as well as spending it. A fine theory but why does that not apply to local councils. Their tax raising powers are frozen in the interests of the hard working taxpayer and future real increases are to be approved in referendum. Both sensible policies but what is sauce for the goose should be sauce for the gander.

Of course some people will say I am wrong to assume that the Scottish tax rate will not be used to reduce tax.  Pigs might fly. George Osborne gave Alex Salmond a free ride this year on making reductions in expenditure to reduce the deficit. The Scottish budget is about £30 billion, and £3 billion of savings need to be found for deficit reduction alone. Then there are the consequences of tackling Barnett to consider. Even assuming the status quo, and without getting too technical, if the proposed system in the Scotland Bill had been in place at the creation of the Scottish Parliament the block grant would have been very considerably less as the rate of growth of public expenditure has been far higher than the increased yield from income tax. The new funding system makes Scotland more reliant on the latter. Of course the Scotland Bill gives the Parliament power to borrow up to £2.7 billion. Borrowing, as we are learning to our cos,t is just taxation deferred. At a time when our country is on the rack because of excessive taxation and borrowing it does seem an odd moment to propose powers for more tax and more debt.

Of course the cost of setting all this up with the Inland Revenue is enormous, and a waste of money. The Government's estimate is £45 million. Coincidentally the previous Labour Government came up with that same figure for the costs of building the Scottish Parliament, and as we all know the actual amount was ten times larger. In addition to this there are the costs of collection and administration which have been estimated at more than 1p in the pound. These costs are one of the reasons given for not having used the existing Tartan Tax powers.  So Scotland will need to put up tax just to maintain the staus quo by 5% on the basic rate.  Then there is the yet unresolved question of what is a Scottish Taxpayer. If you live in Scotland and work in England and have homes in both countries you will have to count the number of days in each country each year to find the answer to that question. It is difficult to see how this will help  to rebuild the financial services industry in Scotland and attract head offices and key decision makers to be based north of the border rather than in London.

I do not believe these tax powers are in Scotland’s interests but as with Devolution and the Tartan Tax I am happy to trust the people and accept their decision. The Government should do the same.