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Supporting Business and Enterprise - Taking forward our National Conversation

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3 The Recommendations of the Commission on Scottish Devolution

Chapter Summary

  • In terms of support for business and enterprise in Scotland, the Commission on Scottish Devolution's report featured recommendations on: tax and borrowing, including Air Passenger Duty; employment policy and industrial relations including health and safety and migration policy; and trade and commerce.
  • Most recommendations, although well-intentioned, continue to constrain the Scottish Government, businesses and economic growth. Others have the potential to damage Scotland's fiscal position.
  • We believe the Commission has failed to recognise or address the comparative under-performance of the Scottish economy within the UK.

3.1. The Commission on Scottish Devolution was set up by the Scottish Parliament and the United Kingdom Government to "review the provisions of the Scotland Act 1998 in the light of experience and to recommend any changes to the present constitutional arrangements that would enable the Scottish Parliament to serve the people of Scotland better, improve the financial accountability of the Scottish Parliament, and continue to secure the position of Scotland within the United Kingdom".

3.2. The Commission's final report "Serving Scotland Better: Scotland and the United Kingdom in the 21st Century" was published in June 2009 and concluded that:

"the UK is an economic Union with a very integrated economy, with goods and services traded within it all the time. We are absolutely clear that this economic Union is to Scotland's advantage and in considering how devolution should develop we have been very careful not to make recommendations that will undermine it. Many devolved responsibilities are important for economic growth, and are most effectively run by the devolved bodies, but the Scottish Parliament and Government cannot run a separate macro-economic policy without threatening the benefits of this economic Union. This is also important for taxation, because the scope to have different rates of tax inside a single economy is limited."

3.3. A key recommendation (in turn underpinned by a set of operational recommendations) proposed that part of the Budget of the Scottish Parliament should in future be found from devolved taxation, rather than from the grant from the UK Parliament. The main means of achieving this would be through the UK and Scottish Parliaments sharing the yield of income tax, alongside devolution of a small number of taxes (Air Passenger Duty, Aggregates Levy, Landfill tax and Stamp Duty land tax). However, the Commission's recommendations amount to little real improvement in the degree of autonomy afforded to Scotland. As set out in The Scottish Government's response to the recommendations of the Commission on Scottish Devolution they would still result in 80% of Scottish tax revenue being reserved to the UK Government. In addition, a number of risks to the Scottish Government Budget have been identified with the proposal 1,2,3. In particular, it is possible that the Commission's proposals could expose the Scottish Budget to a significant degree of volatility, but would not provide the appropriate policy levers or administrative procedures to mitigate these effects.

Transport infrastructure

3.4. The Commission also recommended that the Scottish Government should be given greater autonomy to borrow to fund capital investment. In relation to transport infrastructure this additional borrowing capacity would provide the Scottish Government with greater flexibility over the pace and priorities of major transport investment projects. They would also bring the Scottish Government into line with other tiers of government in the UK including local authorities and the devolved administration in Northern Ireland, which have greater borrowing autonomy than are currently available to the Scottish Government. However, Scottish Ministers would only be able to borrow on a prudential basis from HM Treasury, through the National Loans Fund or the Public Works Loan Board. The Scottish Government would also be unable to borrow to offset cyclical fluctuations in tax receipts, or to provide a fiscal stimulus at a time of economic need. The Treasury would therefore retain the ability to set conditions and cap the amount of borrowing. Substantive constraints would therefore remain on the Scottish Government's ability to effectively manage its finances and capital investment programme. It is estimated that every £100 million borrowed for infrastructure investment in Scotland could support 1,500 jobs in a period of suppressed demand in the construction sector. The ability to borrow is therefore of great importance to Scotland as we emerge from the recession but still face the challenge of growing unemployment.

3.5. Chapter 3D of the Commission's report also set out the rationale for the Air Passenger Duty ( APD) element of recommendation 3.2:

Stamp Duty, Land Tax, Aggregates Levy, Landfill Tax and Air Passenger Duty should be devolved to the Scottish Parliament with a corresponding reduction in the block grant.

Air Passenger Duty ( APD) is an excise duty which is charged on the carriage, from a UK airport, of chargeable passengers on chargeable aircraft. It is paid by the aircraft operator. Presently, there are four rates of duty, depending on the destination of the flight and the class of travel ranging from £10 to £80 per passenger… with destinations categorised on the distance from London to the capital city of the destination country or territory. APD is not payable on flights departing from airports in the Scottish Highlands and Islands. Assuming the devolution, and thus the potential application of different rates in Scotland than elsewhere in the UK, did not conflict with EU law, we think the devolution of APD would not be associated with administrative or economic inefficiencies and is therefore potentially achievable.

3.6. This is potentially a very positive development although the creation of a devolved framework for these taxes would not be straightforward. If implemented by the UK Government this would provide the Scottish Government with the ability to reform the tax to better reflect the Scottish Government's core objective of sustainable economic growth. For example, reducing the rate of duty would lower the cost of air travel from Scotland and would provide an incentive for airlines to retain and expand international air links. This could help reduce the need to undertake air travel connections within the UK and would help support Scottish importers and exporters, the Scottish tourist industry and the economy more widely.

3.7. In terms of more general support for business and enterprise in Scotland, the Commission's report featured recommendations on two issues: employment policy and industrial relations including health and safety and migration policy; and trade and commerce. Details of the recommendations and an analysis of the implications for business in Scotland are set out in order in the following sub-sections:

Employment policy and industry relations

3.8. Chapter 5D of the Commission's report is predicated on the view that Scotland derives considerable benefits from being part of a wider economic and social Union. The viability of this economic union is dependent on the free flow of capital, goods and labour throughout the UK. The Commission therefore did not recommend changes to the current reservation of employment and industrial relations.

3.9. The Commission did, however, consider in greater detail the issues of health and safety and migration policy in so far as this concerns the labour market, recommending that:

In recognition of the close interaction of the HSE's reserved functions with areas of devolved policy, a closer relationship between the HSE in Scotland and the Scottish Parliament should be developed.

The Commission recognised that there is no reason in principle why health and safety (or elements of enforcement) could not be devolved. Nevertheless, the Commission questions whether this would appreciably improve matters for the people of Scotland. The Scottish Government believes there is no reason in principle not to devolve health and safety. This would enable the development of a health and safety regime most suited to Scottish workplaces and business needs.

Whilst retaining the current reservation of immigration, active consideration (supported by inter-governmental machinery) should be given to agreeing sustainable local variations to reflect the particular skills and demographic needs of Scotland.

The Commission's rationale for this was that the nature of the UK and the freedom of movement and employability that its citizens enjoy mean that changes in the law in one part of the UK could have a significant and unintended impact elsewhere.

However the majority of submissions the Commission received on this issue called for greater flexibility and more responsibility for the Scottish Parliament and Government within an overall UK framework on immigration. A sub-Nation State migration policy has been established successfully in a number of countries, including Australia and Canada. The Scottish Government's view is that the proposal is little more than a variation on existing arrangements and that the Scottish Parliament should have more immigration powers. We question whether it is right to forego more substantive benefits for Scotland - in terms of potential access to key skills which will underpin economic and social growth - in order to give greater priority to the needs of other parts of the UK. Equally, devolving responsibility for immigration need not necessarily have a negative impact on the rest of the UK as suggested by the Commission, as experience elsewhere shows.

3.10. The free flow of capital, goods and labour throughout the UK is not dependent on the viability of the political union that is the United Kingdom. As a committed member of the European Union, the free flow of goods, services and people would continue to exist, just as it currently does between Scotland and other Member States, such as Ireland.

Trade and commerce

3.11. Chapter 5M of the Commission's report is predicated on the view that Scotland benefits from being part of a wider economic entity, contributing to and sharing in the benefits in times of prosperity and pooling resources and risk in times of financial uncertainty. The Commission considered that the effective operation of the UK as a successful, modern economy is underpinned by a complex set of laws relating to business associations, financial services and consumer protection. As such the Commission did not recommend any alteration to the reservation of company law, competition policy, financial services regulation and consumer protection which it considers are vital safeguards for the single market and wider economic Union. The sole recommendation - which the Scottish Government does not accept 4 - relates to the technicalities of corporate insolvency.

3.12. The Scottish Government remains firmly committed to Scotland's continuing, and indeed enhanced, inter-connectedness with wider UK, European and global markets. This outcome is not dependent on the existing set of constitutional arrangements within the UK. Indeed, the current arrangements have, for many years, failed to enable Scotland to match the economic performance of the UK as a whole. The Commission appears to have failed to consider alternative models, which would enable Scotland's business community to fare better in international trade and to act within a regulatory and competitive environment which suits their needs rather than that of the UK as a whole.

3.13. Notwithstanding the positive working relations between the Scottish Government and the main economic regulators, there remains scope for closer working based on, and drawing out, the connections between economic regulation and the economic development functions which are already devolved to the Scottish Parliament. The distinctive nature of energy, transport, telecommunications and financial services markets in Scotland are not only important in their own right, but have much wider implications for Scottish business. For example, the market for banking services is now even more sharply distinct in Scotland than elsewhere in the UK. Given the importance of an effective supply of finance to Scottish businesses, it is increasingly important to ensure that the distinctive Scottish issues are addressed by regulators in the UK. Overall, there is an opportunity - indeed an imperative - to ensure that policies toward business in Scotland are designed to meet Scottish circumstances and to aid businesses based in Scotland to compete internationally.

3.14 When viewed strategically, or in the context of the current global economic downturn and the actions being taken by the European Union and governments around the world to review financial regulation and to promote economic recovery, it is clear that the Commission delivers little - if any - substantive benefit for the business community in Scotland. It provides no new tools or policy levers which would help the Scottish Government support business and enterprise. It preserves the status quo, leaving the UK Government with the capacity to prioritise UK interests over Scottish interests in relation to economic and business development and support.

3.15. In essence, therefore, the Scottish Government view is that the Commission has failed to recognise or address the comparative under-performance of the Scottish economy within the UK. In so doing it has failed to consider the full range of policies which could improve Scotland's long-term competitiveness. It has therefore missed a major opportunity to align policies with the distinctive needs and ambition of Scottish businesses and with the overarching economic purpose of the Scottish Government. The Commission effectively sustains the conditions which have underpinned lower economic growth in Scotland compared to the UK as a whole.