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Supporting Business and Enterprise - Taking forward our National Conversation


4 Enhancing and maximising devolution

Chapter Summary

  • The Scottish Government is keen to examine how the existing devolution model might be enhanced to include full fiscal autonomy and the transfer of a range of other responsibilities vested in the UK Government - and believes doing so would provide real business benefits for Scotland.
  • The Scottish Government is committed to making Scotland one of the best places to do business in Europe, by for example reducing the rate of corporation tax to significantly below the UK level.
  • However, under any enhanced devolution model, a range of rules and commitments imposed by the UK would continue to constrain the policy levers available to the Scottish Government, thereby sustaining factors which have historically impaired Scotland's growth performance and competitiveness.

4.1. The concept of "devolution max" was defined in "Fiscal Autonomy in Scotland: The case for change and options for reform" as full fiscal autonomy within the UK, making the Scottish Parliament and Scottish Government responsible for raising, collecting and administering all (or the vast majority of) revenues in Scotland and the vast majority of spending for Scotland. This option broadly reflects the system in Spain for the Basque Country and Navarre where the autonomous communities have responsibility for raising and collecting all direct taxes, including corporation tax. However to conform to EU legislation and retain a largely harmonised social security system, indirect taxes and payroll taxes remain centralised. In addition, the Basque and Navarre Governments pay a contribution to Madrid (the 'cupo') for centralised services such as defence and foreign affairs. The two areas have used their greater autonomy to put forward distinct policy solutions, including creating a more competitive tax regime relative to the rest of Spain.

4.2. While this represents the maximum form of fiscal and policy devolution short of an independent Scotland, several factors would continue to constrain fiscal policy:

  • Intra-national rules and guidelines - notably EU laws governing taxation policy both between and within Member States (including EU State Aid Laws). For example, EU directives on harmonisation of sales taxes would require that Scotland did not diverge from UKVAT policy (including rates, allowances and derogations).
  • Rules/agreements with UK Government - even with apparently full fiscal autonomy a range of rules and commitments are likely to constrain the Scottish Government, limiting Scotland's ability to pursue a fiscal policy that was significantly different from elsewhere in the UK.

4.3. In addition, unless specifically negotiated, key aspects of economic policy would remain reserved. For example, financial regulation, employment and competition law would be likely to remain centralised at the UK level.

4.4. However, the major potential benefits associated with the devolution max option - in a business and enterprise context - relate to the capacity that the Scottish Government would have to take account of Scotland's needs and ambitions and act accordingly in relation to key areas of fiscal policy, by for example introducing a more appropriate rate of corporation tax.

4.5. Alongside other important economic policy levers, competitive corporation tax rates have been used by many countries as a means of fostering economic growth. Many organisations have argued for a more competitive corporation tax system to be introduced in the UK. For example, politicians and business leaders in Northern Ireland have repeatedly called for the country's corporation tax rate to be cut to bring it in line with the Republic of Ireland. The Economic Research Institute of Northern Ireland estimate that the boost to investment, competitiveness and productivity such a policy could provide, may double Northern Ireland's growth rate over the long term and create over 180,000 jobs 5. The GES makes clear that the Scottish Government believes in making the "case for Scotland to have fuller, and eventually full, responsibility for tax raising and public spending, utilising this to make Scotland the lowest taxed part of the UK, dropping corporation tax significantly below the UK level."

Box 2: Corporation Tax in the Basque Country

The Basque Country enjoys considerable fiscal autonomy, with wide ranging responsibilities over the collection of tax receipts and government expenditure, while remaining part of Spain. Its GDP per capita is approximately 30% higher than the Spanish average, and at the start of 2009 the Basque Country Government enjoyed a higher credit rating than the Spanish Federal Government.

The fiscal relationship between Spain and the Basque Country is governed by the Concierto Económico, or Economic Agreement consistent with the Statute of Autonomy (1977). Under this agreement, the Basque Country Government has the authority to vary most forms of direct taxation including income tax, corporation tax and taxation on wealth and capital gains and has introduced a headline corporation tax rate of 32.5%, compared to the Spanish rate of 35%. However, the Economic Agreement also contains a number of general principles which are designed to ensure a degree of harmonisation between the Basque tax system and that in the rest of Spain. Constraints therefore remain on the policy levers available to the Basque government. This serves to limit the degree of effective autonomy.

The Basque Country Government is responsible for collecting and managing all corporate tax revenues raised within the Basque Country. Companies operating in both the Basque Country and the rest of Spain are liable to corporation tax from both. Cooperation between the Spanish and Basque governments' ensures measures are in place to reduce the administrative burden.

4.6. Whilst the UK's statutory rate of corporation tax is comparable to the other G7 economies, a number of European countries of comparable size to Scotland have introduced significantly more competitive rates.

4.7. There is also evidence to suggest that there can be economic benefits from lowering corporation tax burdens on businesses. In particular, a competitive tax structure can be a positive factor in boosting private sector investment, capital formation, R&D and economic growth. It can also encourage greater foreign direct investment ( FDI) and make regions and countries more attractive for the location of headquarters and other corporate activities. These effects can be large, with many academic studies reporting that taxation is a significant determinant of economic growth. Such a policy for Scotland has been advocated by a number of economists, including Hallwood and MacDonald (2006) 6.

4.8. In addition to cutting the headline rate of corporation tax, a number of other options for reform are possible. These include adjusting the tax rate for small and medium sized companies, providing greater allowances for particular activities and simplifying the administrative process.

Box 3: Corporation Tax

As highlighted in the Government Economic Strategy, the Scottish Government is committed to making Scotland the lowest taxed part of the UK. Within the current fiscal framework, the Scottish Government has introduced the Small Business Bonus Scheme to reduce the burden on the small companies which form the majority of Scotland's business base. It has abolished all bridge tolls in Scotland to promote fairness and equity, to support business and communities and to promote sustainable economic growth.

In contrast, responsibility for corporation tax is reserved to the UK Government. In comparison to other countries, the UK (and hence Scotland) has a relatively high main corporation tax rate. This places companies in Scotland at a competitive disadvantage. Companies operating in Scotland face the eighth highest corporation rate in the EU

While corporation tax is only one element of overall competitiveness, greater devolution provides opportunities to enhance Scotland's competitiveness. Implementing the devolution max model could result in the responsibility for setting and collecting the vast majority of tax revenue in Scotland being devolved to the Scottish Parliament. This could provide an opportunity for the Scottish Government to reform the corporation tax system.

4.9. The Scottish Government is - and will remain - determined to explore all possible options for reforming corporation tax in the context of the "devolution max" model. Potentially these provide an important stimulus for investment, innovation, trade, productivity and business competitiveness. That could, in turn, have a hugely positive impact on the capacity of businesses to grow and internationalise, driving the faster and sustainable economic growth which is this Government's Economic Purpose. However, under devolution max, a range of rules and commitments may continue to impose constraints on the policy levers available to the Scottish Government. Therefore limitations would remain on the ability of the Scottish Government to introduce a corporation tax system which was significantly more competitive than elsewhere in the UK.

4.10. Subject to negotiation with the UK Government, enhanced devolution might also include other elements of the tax system, for example those taxes directly linked to transport. At present fuel duty, air passenger duty and vehicle excise duty, are all reserved to the UK Government. These taxes account for just 5% of Scottish tax revenue in 2007/08. However they are potentially important policy instruments which can have a significant impact on the behaviour of individuals and enterprises, and for achieving economic objectives.

Table 1: Transport Taxation in Scotland 2007-08 (£million)

Fuel Duties (including domestic fuel)


Air Passenger Duty


Vehicle Excise Duty




Source: Government Expenditure and Revenue Scotland ( GERS) 2007-08

4.11. Enhanced devolution could, for example, include greater autonomy over fuel duty, enabling the Scottish Government to apply to the EU for derogation for a lower rate of fuel duty in rural areas to address accessibility and price disadvantages faced by Scotland's remote and island communities. A similar system has been introduced in France and has allowed the French government to introduce a lower rate of duty in Corsica. The benefits of introducing fuel derogation were also recognised by the Commission on Scottish Devolution which stated that there was a case for the Scottish and UK Government's "to co-operate and pursue a derogation limited to the outlying parts of the Highlands and Islands". 7 However, although the Scottish Government has written to the UK Government on numerous occasions requesting that they apply for fuel derogation for rural areas the requests have been turned down.

4.12. In addition to exploring the options available within fiscal autonomy, The Scottish Government is willing to examine how the base devolution max model might be enhanced and is confident that doing so would provide real business benefits for Scotland. For example, as mentioned earlier, health and safety policy and regulation is at present a matter reserved to the UK Parliament but delivered in Scotland through both the existing UK Health and Safety Executive ( HSE) and local authority Environmental Health Officers ( EHOs). If health and safety was included in an enhanced devolution max model there would be greater scope to move from an "enforcing" to an "enabling" regulatory approach, which could:

  • Provide better clarity to employers on responsibility for enforcement,
  • Remove boundaries for responsibility and avoid gaps in coverage for enforcement; and
  • Improve consistency.

4.13. This approach would also promote the development of a health and safety regime for Scotland that is based on the Scottish Government's established commitment to build on and expand comparative advantage through the application of the key principles of better regulation: targeting; transparency; consistency; accountability; and proportionality. This would support - rather than impede business competitiveness and economic growth by reflecting the needs of employers and employees in Scotland.