Scottish Labour’s devolution proposals: analysis

David Bell and David Eiser

The Scottish Labour Party has proposed further powers for the Scottish Parliament. They are perhaps not as radical as might have been expected, but the argument is that rights that are enshrined at UK level – such as free health and education – should be paid for from UK tax resources. This leaves around 40 per cent of spending that could be directly paid by Scottish taxes.

In terms of cash raised, the most important proposal is to extend the Scottish share of income tax from 10p to 15p of each rate band.  The 10p rate is included in the Scotland Act 2012, and will become a reality for Scottish taxpayers in 2016. The Office of Budget Responsibility is charged with forecasting the revenue from the 10p share. It does so at each budget. Its forecast in March 2013 was that the value of the 10p share to the Scottish Government would be around £4.5bn in 2014-15. Another OBR forecast for Scotland will be published alongside this week’s UK budget, but is unlikely to be substantially different, given the recent sluggishness of tax revenues. Increasing the share to 15p is likely therefore to generate around a further £2.2bn in revenues, broken down across bands as per the table below.

Revenues from the Scottish Rate of Income Tax (SRIT), £m

 

Scottish revenues from a SRIT of:

Difference between SRIT of 10p and 15p

 

10p

15p

Basic rate

£3,628

£5,441

£1,814

Upper rate

£743

£1,114

£371

Additional rate

£124

£186

£62

Total

£4,495

£6,742

£2,247

Table notes: calculations are based on 2011/12 data, when the additional rate was 50%.

Under the Scottish Labour proposals, the Scottish Parliament will thus receive 75 per cent of all income tax raised at the basic rate of 20p and 37.5 per cent of all tax raised at the higher rate. More affluent Scots will send a greater proportion of their income tax to Westminster.

So how much revenue will be under the control of Scotland? Added to revenues from council tax, non-domestic rates, stamp duty and landfill tax, the additional income tax revenue will take the total to around £11bn. This amounts to around 23 per cent of total tax revenue generated onshore in Scotland and 20 per cent if a geographical share of North Sea Oil revenues is included. This proposal does not constitute a huge increment to Scotland’s tax raising powers.

The Barnett Formula will persist. The annual grant based on the formula will be reduced to take account of the increased revenue generated in Scotland. However, the way that the reduction will be calculated is not explained. This calculation is crucial to understanding the risks and incentives that the Scottish Government will face in trying to expand its tax base and increase the revenues available to the Scottish Parliament. The reduction could be calculated so as to leave Scotland no better or worse off than if it did not have the new tax powers: in which case the whole exercise would have no effect on the resources available to the Parliament.

Negotiations between the Scottish and UK governments on how this reduction will operate under the Scotland Act 2012 have not yet been finalised. The proposal to increase the share from 10p to 15p increases the importance of ensuring a solution to this issue that genuinely gives the Scottish Government an incentive to boost its tax revenues.

The Scottish Labour Party also proposes to devolve Housing Benefit to the Scottish Parliament. Housing Benefit amounts to £1.7 billion per year in Scotland, accounting for around 15% of Scotland’s welfare bill. There is a reasonably good case for devolving it, given the linkages between Housing Benefit and various areas of devolved policy, including social housing and planning. Furthermore, Housing Benefit is a place-related benefit, with rates varying according to local conditions, and it is also a benefit that is reasonably stable over the business cycle (i.e., unlike out-of-work benefits, the Housing Benefit bill does not increase substantially during recessions).

Against these advantages however is a potential difficulty. The UK Coalition Government plans to combine Housing Benefit into Universal Credit, the new means tested benefit which will replace six existing means tested benefits and Working Tax Credits. The rationale for Universal Credit is to simplify the benefit system and avoid the current situation whereby benefit claimants sometimes face particularly high work disincentives as different benefits are withdrawn simultaneously. As well as the practical difficulties in disentangling HB from UC, raised by Nicola McEwan, devolving HB may undermine many of the supposed advantages of UC, as it will be difficult to achieve the principle goal of UC, namely that all benefit recipients face the same benefit withdrawal rates.

Another Scottish Labour proposal is that the Scottish Government should take over the administration of Attendance Allowance (AA). This makes sense because it is a benefit that is intended “to help with personal care because you’re physically or mentally disabled and you’re aged 65 or over”[1] and policies in respect of personal care now differ markedly between Scotland and the rest of the UK. In Scotland, local authorities are under a duty to provide personal care free to those assessed as being in need of such care. Around 56,000 older Scots are in receipt of local authority funded personal care at any time. Under current rules, the 9,600 of these that are resident in care homes are not eligible for AA. This is an outcome of a DWP decision in 2001 that individuals already receiving personal care from another agency would not be eligible for further support to meet their personal care needs. Confusingly, this rule was not applied to those receiving personal care at home, who therefore receive AA and free personal care (assuming that they are assessed as eligible under the different types of assessment). In 2010-11, local authority spending on free personal care was £450m.  DWP expenditure in Scotland on AA in the same fiscal year was £480m.

The case for the responsibility for AA being taken over by the Scottish Government is that there seem to be two systems working in parallel, trying to achieve the same objective – namely the support of frail older people in need of personal care. Scotland has taken a different policy decision on this issue and it is not clear that in these circumstances the “universal insurance” principle that underlies the UK benefit system continues to apply. Such a principle has to be built on consensus around the set of adverse events that the state should insure. Scotland has taken the view that personal care should be one of these: the rest of the UK has not. Another objection to such a differential approach might be that it introduces incentives for movement of people and therefore costs between the two jurisdictions. However, there is no evidence that this policy difference causes significant migration flows. This is not surprising given the nature of the event which is being insured.

About David Bell

David Bell FRSE is Professor of Economics at the University of Stirling. He graduated in economics and statistics at the University of Aberdeen and in econometrics at the London School of Economics. He has worked at the Universities of St Andrews, Strathclyde, Warwick and Glasgow. His research is mainly in labour economics, fiscal decentralization and the economics of long-term care. He has been budget adviser to the Scottish Parliament Finance Committee. He is PI for the Healthy AGing In Scotland project (HAGIS).
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