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Adjusting the Scottish Government’s Block Grant: taking the wider perspective

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 As the negotiations between the Holyrood and Westminster governments over the fiscal settlement for Scotland continue and inch closer to some kind of deal, leading independent economist, Jim Cuthbert, argues there are ways to avoid Scotland falling into the ‘fiscal trap’ in a new policy paper for the Jimmy Reid Foundation called ‘Adjusting the Scottish Government’s Block Grant: taking a wider perspective’.

In noting the possibility of Scotland falling into ‘fiscal trap’, Cuthbert critiques the recent IFS report, ‘Adjusting Scotland’s Block Grant for Tax and welfare Powers; Assessing the Options’, and then lays outs the strategic alternative options.

Each option varies in its nature of method of indexation used for the block grant adjustment and outcomes of taxpayer fairness (see Appendix 1). The four options are Option A – Tax Revenue automatic; Option B – Tax Base manual; Option C – Fixed increment manual; and Option D – Fixed increment hybrid. For the purposes of comparison, Option A was based on the aforementioned IFS report.

Although not without their challenges, Cuthbert argues that Options C and D are by far the more meritorious. Option C indexes the block grant adjustment by a fixed low real percentage each year but faces potential problems of future, on-going adjustments. Option D goes a step further, addressing the problem of Scotland losing control over its own income tax rate when Westminster changes rUK income tax to fund reserved services. Thus, Option D restricts Westminster so that it could only change income tax in relation to ‘devolved’ services.

Turning to the political terrain for implementing either options C or D, Cuthbert argues 

‘While Option D solves the problem of Scotland losing control of its income tax rate in the event rUK changes income tax to fund devolved services, mechanisms for implementing Option D would involve something akin to federalism. Consequently, there would need to be an over-arching chamber setting a block grant for each of the parts of the UK, and making decisions on reserved services. Westminster (or that part of it which would be akin to an English parliament) would be responsible for topping up its block grant through income tax, and other devolved taxes, to fund its spending on ‘devolved’ services. This would obviously be a major constitutional step’.

Concluding the paper, Cuthbert states:

‘Options A and B are unacceptable, on the grounds that both options involve Scotland engaging in an economic race with rUK, when the risks and penalties are out of kilter with the limited economic powers available to Scotland. They are unacceptable to those Scots interested in implementing a more progressive tax system, now we know that elements on the unionist side regard these options as requiring Scotland to do precisely the opposite, and introduce more regressive taxation. Option D is probably a step too far, given public attitudes in England – which means there may be room for compromise around Option C’.

Download the Policy Paper JRFCuthbertSmithpaper Jan 2016