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Serious Criticism of Smith Commision Tax Proposals

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Leading independent economist submits critical evidence to the Finance Committee of the Scottish Parliament on the implementation of the Smith Commission proposals.  

Dr Jim Cuthbert has submitted critical evidence on Scotland’s Fiscal Framework in response to the Scottish Parliament’s Finance Committee’s call for evidence on the implementation of the Smith Commission proposals. The submission was made on behalf of the Jimmy Reid Foundation.

The evidence took the form of written responses to specific questions in the Finance Committee’s call for evidence. The common theme running through the responses is that it is difficult to envisage how the Smith Commission proposals can be implemented in a fair and equitable way, and without adverse unintended consequences, unless deep-rooted reforms in the constitutional and funding arrangements for Westminster are also implemented.

Commenting on this, Dr Cuthbert said: ‘This problem arises because of the implications of what is known as ‘the gearing problem’. It arises if changes in income tax rates in the rest of the UK (rUK) are allowed to affect not just ‘devolved’ services in rUK, but also reserved services for the whole of the UK’.

Dr Cuthbert continued, saying: ‘The proposed way in which the ‘no detriment’ principles in Smith are to be implemented does not provide a satisfactory answer to the gearing problem: instead, it leads to a situation where, if Westminster decides to change rUK income tax to fund a reserved service like defence, then this will force the Scottish government to increase the Scottish rate of income tax, or to cut Scottish devolved services like health or education’.

Dr Cuthbert’s evidence also discussed a number of problems which will arise in the implementation of the Smith proposals such as the operation of the proposed method for indexing the abatement to the Scottish Block Grant, and the need to index the adjustments to the Block Grant which will be required in the light of decisions to change rUK income tax.

In concluding, Dr Cuthbert proposed to the Finance Committee that the most appropriate way to resolve the issues in a satisfactory manner would be to have a rUK chamber responsible for taking the rUK Block Grant, setting the rUK income tax rate, and determining spending priorities on health, education, etc., from the resulting budget. There would also need to an over-arching body setting the whole UK budget, and determining the allocation of UK resources, (excluding income tax and other devolved taxes), between reserved functions and the territorial Block Grants.

The full submission is available here Finance Cttee submission