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Let’s get fiscal: the implications of the Smith Commission Agreement

The next step for devolution.

Yesterday’s publication of the Smith Commission Agreement marked an important step in the next phase of devolution to Scotland. The five parties that took part in the Commission have achieved a remarkable feat in agreeing a wide-ranging package of new powers to be devolved.

Before the referendum we published a paper that analysed 16 future constitutional scenarios for Scotland, Wales and Northern Ireland. One way we differentiated between these scenarios was by applying a fiscal lens that asks two questions:

  • How much public spending in each territory is under the control of the devolved institutions?
  • How much revenue raised in each territory is the responsibility of the devolved bodies?

This approach allows you to see that the current devolution settlements within the UK are deeply asymmetric. So while the Scottish Parliament controls around 60% of total public spending in Scotland, it is only responsible for raising around 7.5% of revenues there. Now that the Smith Commission has reported we’ve updated this analysis so that we can compare the position that has been reached by the five parties through the Smith process to the proposals that they put forward before the referendum.

The first thing to note is that these are somewhat ‘rough and ready’ calculations. There are several recommendations in the agreement that would undoubtedly have spending implications, but for which we do not have reliable estimates, so they have been excluded from our calculations. Similarly, it is not always clear how to treat different types of ‘devolved’ revenue – this explains why the Smith Commission Agreement and SNP proposals each appear twice, one time counting assigned VAT receipts as ‘devolved’ and another treating VAT revenue more like a transfer to the Scottish Parliament that remains under UK-wide control. Those caveats aside, this analysis is nevertheless striking in a number of ways. First, it demonstrates that the Smith Commission Agreement goes further than any of the Unionist parties’ pre-referendum pledges in terms of the total spending powers that will be given to the Scottish Parliament. This agreement, when implemented, will mark the first major incursion into the previously reserved area of welfare and employment policy. The most notable elements of this package are:

  • A number of benefits that closely relate to already devolved policy areas (such as health and social care) will be devolved. These include Attendance Allowance, Disability Living Allowance (and its replacement Personal Independence Payments), and Carer’s Allowance.
  • A number of smaller benefits that are currently grouped within the Social Fund will be devolved, including Winter Fuel payments.
  • Powers over support for unemployed people through back-to-work programmes will be devolved.
  • Despite some speculation to the contrary, constituent benefits of the new Universal Credit will not be devolved. However Scotland will receive a number of administrative and rate setting powers, particularly relating to the already devolved area of housing policy.

Because of the asymmetry in Scotland’s devolved fiscal powers, the big shift in the phase of devolution was never going be about greater spending control, but about increasing the levers available to the Scottish Parliament to raise its own revenue. Our analysis shows that, particularly if assigned VAT receipts are counted as ‘devolved’, the measures agreed in the Smith process move quite some way in this respect. The most notable revenue-raising elements of the package are:

  • The devolution of the rates and thresholds at which Scottish taxpayers pay income tax. It should be noted though that ‘full control’ over income tax will not be devolved. Westminster will retain the power to: define ‘income’; set rates and receive taxes paid on investments, dividends and savings; set a uniform personal allowance and control reliefs across the whole of the UK.
  • The full devolution of two smaller taxes – Air Passenger Duty, and the Aggregates Levy.
  • The assignment to the Scottish Budget of the receipts raised in Scotland by the first 10 percentage points of Value Added Tax.

Although the package of measures agreed by the Smith Commission goes further than any of the Unionist parties’ pre-referendum pledges on revenue and spending, the Agreement remains well short of the ‘full fiscal responsibility’ model advocated by the Scottish Government/SNP in its submission to the Smith Commission. Beyond the fiscal arithmetic, the important questions from the perspective of the Institute for Government are how the proposed new devolution settlement will work in practice and what challenges lie ahead in implementing the new arrangements. As far as these effectiveness questions are concerned, we would make three points. First, that an overall devolution package that reduces rather than increases the ‘jagged edges’ between policy under reserved and devolved control is more likely to produce coherent policy and to reduce conflict between the UK and Scottish governments. The Smith Agreement appears to adhere to this principle in many respects by including welfare and employment powers that closely align to policy areas already controlled by the Scottish Parliament. But, perhaps inevitably in this complex field, there are other areas such as the administration of Universal Credit and the operation of previously reserved tribunals, where some of these jagged edges may creep back in. Second, the precise effects of the agreement on the fiscal position of the Scottish Government are yet to be fully clarified. As we have learned from the implementation of the tax measures in the Scotland Act 2012, there are many more significant decisions still to be made. Not least of these is the mechanism by which the block grant will be reduced to compensate for increased revenue the Scottish Government is able to raise through the newly devolved taxes. Even for the fairly small-scale fiscal devolution in the Scotland Act, negotiations between the two governments over these adjustments have proven somewhat difficult, particularly for the two smaller fully devolved taxes. Third, the Smith Agreement implies a degree of joint working between UK and Scottish governments of a kind not yet seen. Whether it is between the Scottish Government and the DWP over the new shared administration powers relating to Universal Credit, or the ever closer relationship between the Scottish Government and HMRC – a UK department that will be operating the almost fully-devolved income tax regime on their behalf – the two sides will need to work together to ensure that stable and effective government continues.

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