By Professors Andrew Hughes Hallett and Drew Scott
No one can expect to escape the effect of the huge cuts in UK Government spending set in train by last week’s emergency Budget. But in
The cuts will certainly result in a significant reduction in the block grant that finances devolved spending in
It is against this rather bleak economic backdrop that
If speculation is correct however, the new
In addition to this problem, last week’s budget demonstrated yet another costly defect in Calman’s proposals. The UK Government’s decision to raise the income tax threshold for those paying the basic rate by £1000 is estimated by the Institute for Fiscal Studies to reduce income tax revenues UK-wide by £3.5 billion. This implies an annual reduction in income tax revenues in Scotland of £297 million, one half of which will be raised by the levy of the Scottish segment of income tax. Accordingly the effect purely of the UK Government’s decision to raise the income tax threshold will be to reduce Scotland’s budget by £150 million. At the UK level this tax concession will be paid for by the higher rate of VAT. But, of course, under Calman Scotland does not receive any share of that additional revenue. Scotland alone will have to fund the full cost of the UK tax cut out of current spending or higher income tax – and still pay the higher VAT rate into the bargain. Needless to say any decision by the UK Government to increase income tax thresholds above the new level – and we are promised a further increase of £2300 – inevitably will reduce revenues flowing from income tax to the devolved administration.
It is therefore irrefutably the case that, should the Calman recommendations be implemented, and should Scotland’s economy fail to grow extraordinarily quickly out of the current downturn, Scotland will suffer an unavoidable and very tough spending squeeze in addition to that already forecast in the Chancellor’s budget statement and the impending Comprehensive Spending Review. This would represent a very serious financial “double whammy”, and one that we consider is likely to damage further Scotland’s economic prospects and ability to emerge from recession.
Surprisingly thus far there has been no comment on these vital issues from those supporting Calman’s financial proposals. To be sure there will be some who argue that public spending in Scotland presently is much too high and that the financial shock therapy to Scotland’s public sector implicit in the Calman model is to be welcomed. However regardless of the position one takes on that question, and the economic evidence is certainly contestable, it is difficult to believe that Scotland’s politicians and business community is ready to endorse a financing arrangement that is virtually certain to impose on Scotland a scale of fiscal cuts that no other part of the UK will experience. But that is the very real implication of legislating the Calman proposals as they stand.
Under greater fiscal responsibility, on the other hand, a Scottish administration will have at its disposal the economic policy levers necessary to encourage economic growth, support job creation, and therefore contribute more to resolving the “black hole” in UK public finances than otherwise it will be in a position to do.
Moreover it will be able to do so by adopting policies that continue to respect the economic and social needs of the most vulnerable in our society – those we believe to be most at risk from Sir Kenneth Calman’s flawed proposals.
Andrew Hughes Hallett
University of St Andrews
University of Edinburgh