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More Powers for the Scottish Parliament: Scottish Government Proposals

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CHAPTER 4

SCOTLAND'S ECONOMY AND PUBLIC FINANCES

With significant additional economic and fiscal responsibilities the Scottish Parliament and Scottish Government would have more opportunities to create jobs, reduce inequality and establish a more successful, prosperous and fairer country.

Greater fiscal self-government would make the Scottish Parliament and Scottish Government responsible for both sides of our national balance sheet - expenditure and taxation - providing proper democratic and financial accountability, and providing Scotland with the incentive to promote economic growth and boost its tax revenues, and the opportunity to invest further in public services. These elements of the proposals are complementary, so it is essential that further taxation powers provide the Scottish Parliament with fiscal levers to encourage growth and are accompanied by other economic powers, such as employment rights and measures to grow the working age population.

Taxation and public finances

It is widely agreed that the Scottish Parliament and Government should have greater fiscal responsibility, that is the Parliament should be responsible for raising a greater proportion of the money that it spends on public services. Such proposals are central to the Scotland Act 2012 and form the main recommendations of the Commissions on further devolution set up by each of the main UK parties.

Greater fiscal responsibility both increases the accountability of the Parliament to the people of Scotland, financially and democratically, and allows the Parliament to use its fiscal powers to pursue policy objectives. For example, the Parliament would be able to set the overall level of public expenditure, reform individual taxes (as the Scottish Government is doing on the land transaction tax), or introduce taxes to encourage particular forms of behaviour (like environmental taxes, or tax reliefs to encourage research).

Currently, the Scottish Parliament is responsible for around 7.5% of taxes raised in Scotland, and these cover around 10% of devolved expenditure and 6% of total public expenditure in Scotland. Even after the changes being introduced by the Scotland Act 2012, the Scottish Parliament will still only be responsible for raising around 16% of tax receipts in Scotland, amounting to around 22% of devolved expenditure and 13% of total public expenditure. The 2012 Act therefore does little to enhance democratic and financial accountability.

The Scottish Government believes that the design of a framework for greater fiscal accountability for the Scottish Parliament should take a clear and principled approach. The Government believes that all taxes raised in Scotland should be the responsibility of the Scottish Parliament unless there are overriding reasons for them to be specifically reserved (in line with the general approach of the Scotland Act 1998, and the principles outlined in Chapter 2).

Our proposal is therefore for a transition to full domestic economic and fiscal autonomy.

This would mean that all onshore and offshore taxes would be designed and set in Scotland, including tax rates, allowances, thresholds and the tax bases. An exception might be VAT - and potentially some excise duties - because EU rules require them to be largely uniform across the United Kingdom. For any reserved taxes, revenues would be assigned to the Scottish budget.

At the same time, the Scottish Parliament would also take responsibility for key elements of domestic expenditure, including welfare.

From the tax revenue raised in Scotland, a direct payment would be made for the services Scotland receives from being part of the UK. These would include agreed amounts for defence, security, foreign policy and servicing of historic debt interest.

It is also essential to full fiscal responsibility that the Scottish Parliament has access to economic levers beyond the tax system, such as employment rights and aspects of migration. Overall economic performance drives the level of taxation that the Scottish Parliament will receive through its tax powers, and flexibility to encourage economic growth through these measures is necessary for the Scottish Parliament to take proper responsibility for Scotland's public finances.

The Scottish Government believes that this framework would provide the maximum financial and democratic accountability within the United Kingdom, incentivising the Scottish Government to increase economic growth while allowing Scotland to contribute to the United Kingdom as a whole. Responsibility for almost all taxes within Scotland will allow the Scottish Parliament maximum flexibility to adjust its tax policy to reflect Scottish circumstances and policy objectives.

By contrast, it is neither sufficient nor desirable to increase the financial accountability of the Scottish Parliament in a piecemeal way by devolving one or two limited tax powers on an ad hoc or partial basis. To provide proper accountability and real policy choices, in any model short of the full fiscal responsibility, the Scottish Parliament will need effective responsibility for a substantial range of taxes and other economic levers to form a coherent framework for funding devolved public services and growing the economy.

The Scottish Government recognises the importance of a sustainable overall fiscal position for public finances within Scotland and the UK. The framework for Scottish fiscal responsibility would need to include sufficient borrowing powers to ensure budgetary stability and safeguards to maintain Scottish public spending.

As part of this, the inter-government management of public finances will require a new code of practice that reflects the level of fiscal responsibility and autonomy that rests with Scotland.

To ensure overall stability, the framework would also include a set of fiscal rules and mechanisms to manage and administer devolved borrowing within a United Kingdom context. The Scottish Government would seek an overall agreement with the UK Government which set out arrangements for economic cooperation, protecting monetary stability, promoting the single market and safeguarding fiscal sustainability.

Crucial to that agreement would be the principle that there should be an equitable and transparent approach to resources, risks and rewards. In essence, full fiscal responsibility means that Scotland retains taxes raised in the country, including assignment of revenues of any taxes not devolved such as VAT. Any arrangement for Scotland's taxes short of full fiscal responsibility would need the Barnett formula to be retained for any block grant to Scotland, adjusted appropriately according to the actual degree of fiscal responsibility. The transition to full fiscal responsibility will take some years to complete, as implementation of the Scotland Act 2012 has demonstrated. During that transition period the Barnett formula will also need to be retained to ensure that Scotland's public finances remain predictable and sustainable as the Scottish Parliament assumes responsibility for raising a greater proportion of its own revenues, and begins to benefit from measures to improve Scotland's economic performance.

The other key element of the agreement with the UK Government and the framework for Scottish fiscal responsibility would be that Scotland retained the benefits of successful policies that increase the tax revenue in the country, as well as having the tools to manage the risks of increased responsibilities. This is essential for the Scottish Parliament to be able to assume proper fiscal responsibility through both tax and other economic policies. This would mean that, for example, any increased tax revenues from parents with young children entering the workplace through investment in childcare would be retained by the Scottish Government and would be available to increase investment in childcare, or in other public services.

Specific proposals and opportunities

  • All taxes and relevant thresholds, rates and allowances - including Income Tax, National Insurance and corporation tax would be designed and set in Scotland. Exceptions - for example VAT and certain excise duties - would be set at the UK level with the revenues assigned to the Scottish budget
  • All domestic expenditures, including the welfare state, would be managed by the Scottish Parliament and Government

Monetary stability

The Scottish Government supports effective co-ordination of policy where it provides benefits across all four nations of the United Kingdom. However, the Scottish Government believes the Scottish Parliament should have a much greater role in decision-making on economic policy. The Scottish Government proposals therefore provide a significantly greater level of economic and fiscal autonomy for Scotland, but as part of a system that remains consistent with a sustainable monetary system for the United Kingdom as a whole.

The most important purpose of such a common framework would be to provide monetary stability and maintain UK-wide and EU single market arrangements.

A common system would mean that:

  • Issues of overall monetary stability - such as the currency and the Bank of England - would remain reserved
  • Interest rates would continue to be set by the Bank of England, as part of its responsibilities for setting monetary policy
  • Financial stability would also continue to be delivered across the United Kingdom by the Bank of England
  • Scotland would use its greater tax, spending and borrowing powers within a sustainable overall fiscal envelope guaranteed by clear rules and procedures to ensure affordability

Rebalancing and reindustrialising Scotland

There are significant divergences in economic performance, structures and competitive advantages across the United Kingdom. Geographical imbalances have led to a concentration of jobs and investment in London and the South East of England. There has also been a weakening of economic resilience, for example by the decline in manufacturing's contribution to the economy being more pronounced in the United Kingdom than in many other developed economies.

Within the devolved powers currently available, successive Scottish Governments have pursued policies to support sustainable economic growth and higher quality jobs, and have succeeded in narrowing a historic gap in economic performance with the UK. This Government has introduced the Small Business Bonus Scheme and established the Scottish Investment Bank, invested in infrastructure and maintained Scotland's record in attracting international investment.

Significant economic and taxation powers would give Scotland much greater ability to support local competitive advantages and tackle comparative disadvantages in order to deliver more sustainable and balanced growth in Scotland. Such an approach could also enhance the overall competitiveness of the United Kingdom.

In Reindustrialising Scotland for the 21st Century[7] the Scottish Government set out how access to additional economic powers could be used - for example, through an industrial strategy focused on strengthening manufacturing, promoting innovation and boosting international trade and investment - to reindustrialise Scotland and build a more resilient economy with better job opportunities.

A stronger manufacturing sector has the potential to increase innovation, tackle geographic inequalities, support internationalisation and create high-value and well- paid jobs.

Competition policy is a key driver of productivity, exports and consumer value and choice. The Scottish Government could simplify the consumer protection system to ensure that Scottish consumers would have more trust in businesses and, in turn, encourage further economic activity. Scotland could implement an improved and streamlined consumer protection and regulatory regime to reduce duplication and promote consistency.

To improve pay levels and flexibility, taking responsibility for business taxation and employment law would allow the Scottish Parliament to incentivise businesses to invest in skills and innovation, to work with business to improve childcare provision and family-friendly policies, and thereby increase the supply of well-paid, more flexible jobs throughout the economy. It would also have the power to set the minimum wage at a level which would help protect workers in Scotland from living below the poverty line (see Chapter 5).

The Scottish Government could improve participation in the labour market, for example by providing high quality early learning and childcare to match the best in Europe. Access to the tax revenues and benefits savings arising from increased labour market participation (under the fiscal framework and agreement with the UK Government described above) would contribute to the costs of achieving a transformational change in provision, making a more ambitious package of measures more affordable than would be possible under current arrangements.

Responsibility for tax and benefits would allow a comprehensive and coherent package of support including Statutory Maternity Pay, Child Benefit, Child Tax Credits, Maternity Allowance and Child Maintenance alongside investment in provision of childcare.

Specific proposals and opportunities

  • Full responsibility for corporation tax, which would allow the Scottish Government to target tax incentives carefully to encourage the rebalancing and reindustrialisation of the Scottish economy - for example, through more effective capital allowances or to encourage innovation and investment in research and development
  • Full responsibility for Income Tax and National Insurance, including the ability to set and vary allowances, which could be used to create tax incentives
  • Responsibility for Air Passenger Duty could be used to boost international connectivity and boost tourism in Scotland
  • The Scottish Government should have formal joint oversight of the competition and regulatory system to ensure that Scottish issues are reflected. Our model for a Combined Economic Regulator could be developed within the overall regulatory landscape
  • Responsibility for consumer protection would allow the Scottish Government to work with the UK Government on a Scottish Consumer Ombudsman, covering both public and private sectors, and possibly extending across the United Kingdom

Energy, oil and gas

Currently, there is a complex landscape for energy policy across the UK. For example, the Scottish Government exercises devolved responsibilities over economic development in Scotland but UK institutions have overall policy responsibility for oil and gas and energy generation and supply.

The Scottish Government believes that the Scottish Parliament should have greater responsibility for all energy policy and regulation, including all oil and gas. This would deliver a streamlined approach and allow Scotland to design a regulatory and fiscal landscape which maximises the return from the energy sector, encouraging a sustainable industry for the benefit of the people of Scotland. This would include joint oversight of UK-wide bodies such as OFGEM, and an arrangement of shared competence in relation to the new Oil and Gas Authority proposed for Aberdeen, to ensure Scottish interests are fully taken into account.

With additional responsibilities, Scotland could also capitalise more fully on its comparative advantages in the energy field. The Scottish Government could advance community and local ownership of energy; and better address societal inequalities through tackling fuel poverty. The connection of the islands to the national grid could also be prioritised.

Specific proposals and opportunities

  • Responsibility for energy policy would give Scotland a formal role in network regulation and setting reliability standards, including planning, ownership and operation of energy infrastructure, and fairer grid charges to ensure secure energy supplies
  • A Scottish economic development agency for the oil and gas sector as a whole, in collaboration with UK departments and the OGA, would maximise opportunities to raise productivity and generate sustainable jobs
  • Responsibility for the Oil and Gas Fiscal Regime would maximise the economic return from North Sea resources and capture the full economic benefits of this activity. An oil stability and savings fund could be established to manage revenues over the long term
  • To capitalise on Scotland's abundant renewable resources the Scottish Government should have additional powers to tailor support for low carbon and renewables generation in Scotland, where this was considered a necessary and cost-effective means of delivering Scottish priorities
  • Control over the full scope of regulation relating to energy efficiency would enable Scottish Government to tailor policies to the specific needs of Scottish households and businesses; particularly to tackle fuel poverty and help address climate change emissions, consistent with a single GB energy market and energy regulator

Rural affairs, food and environment

The proposals in this paper for the devolution of a coherent suite of fiscal, economic and social policy responsibilities will benefit rural Scotland. Full power to make decisions about how to manage the natural environment would enable the benefits flowing from Scotland's natural resources, and food and drink sector, to be retained in Scotland, strengthening Scotland's economy. Further responsibilities would also strengthen Scotland's place in the world as a leader in climate justice and sustainability. Scotland should therefore have full responsibility for all aspects of environmental legislation and regulation including functions in currently reserved areas that impact upon environmental matters.

Specific proposals and opportunities

  • Full control of environmental policy, including taxation, would allow for a more coherent approach including environmental aspects of energy, marine nature conservation and planning, and marine renewables. These powers should extend to 200 nautical miles or the limit of UK competence for marine environment management and regulation, including environmental aspects of shipping
  • Responsibility for wealth and land taxes would allow a fairer overall regime. Competence for an Aggregates Levy would provide opportunities for the integration of waste and other environmental policies
  • Formal shared responsibility for regulation would ensure that services such as mobile telecoms, broadband and postal services can be delivered in a way that properly supports the rural economy
  • Scotland should be able to act directly in the European Union on fisheries, marine environment and food and drink exports, given their importance within the Scottish economy and the distinctive policy positions in Scotland. In areas such as fisheries, where Scotland has the predominant interest within the UK, Scotland should have the lead role at Council, where appropriate
  • Scotland should be able to take its own decisions on the collection and use of agricultural and seafood levies. Similarly, Scotland's share of fishing quota should be inalienably held in Scotland
  • The food and drink industry is of greater importance to the Scottish economy than it is at UK level. Formal responsibility for policies such as food labelling, applications for protected food names and all aspects of export certification would enable Scotland to better integrate measures to support the industry's continued growth
  • Scotland should have the power to manage and benefit from its own natural resources including full devolution of the management of and revenues from all Crown Estate assets in Scotland, including the foreshore, seabed and Exclusive Economic Zone assets (with consequent benefits to local communities, especially in the islands).

Transport

Full responsibility for Scotland over currently reserved transport powers would ensure that policy decisions are more coherent and take full account of Scotland's particular transport needs and geography. Together with shared governance and partnership working at the UK level, decisions about transport infrastructure, management and investment could create jobs and connect communities within and outwith Scotland.

Specific proposals and opportunities

  • Full responsibility for rail transport would enable public sector bids and not-for- profit models, more integrated railway services and services designed to meet local needs
  • Full responsibility for air transport would include competence over Air Passenger Duty, and would facilitate more effective route development and promotion of associated business and inbound tourism
  • Full responsibility for maritime transport would enable Scotland to shape the future role of the Maritime and Coastguard Agency and take responsibility for coastguard functions in Scotland to reflect our distinctive seas and coastline. Along with responsibilities for the operation of the Northern Lighthouse Board, it would provide a joined-up approach to shipping and harbours policies and enhance confidence and job creation incentives in sectors such as renewables, fishing and oil and gas
  • Full responsibility would advance social equality through decisions on investment in local infrastructure, business development, associated employment opportunities and access to public transport. Scotland should also have a formal role in existing UK bodies, and also in associated EU and international forums, to ensure that our interests are represented

Culture and heritage

Only with further powers can Scotland fulfil its cultural ambitions and build upon its international reputation for culture, heritage and creativity. Responsibility for taxation and lotteries would give the Scottish Parliament a coherent suite of powers in relation to the screen sector and culture and heritage.

Devolution of broadcasting would provide the leverage needed to enhance job creation through increased production; contribute to a fairer society through programming aimed at promoting wider access to culture; and enable Scotland to better express its place in the world.