Scotland

New devolved tax deal 'may not be feasible or fair'

smith commission Image copyright PA

The cross-party agreement on devolving more tax powers to Holyrood may not be feasible or fair, it has been claimed.

The Institute of Fiscal Studies (IFS) has published its assessment of the Smith Commission's plans, saying that "big issues have yet to be resolved".

Its main concern is with the calculation of the UK Treasury's block grant to the Scottish Parliament.

As more powers are devolved to Holyrood, it means the grant funding formula will have to be adjusted.

The IFS calculates the share of taxation under Holyrood control or assigned to it as a share of UK tax take would rise from 13% to more than 50% under the plans.

It says the changes to the block grant should be "relatively easy" in the first year. But in subsequent years it becomes more difficult to calculate what should happen if Westminster raises tax to pay for shared provision, such as UK debt reduction, but Scotland does not.

Sudden shocks

"Inflation and economic growth mean that the amount raised from a tax or spent on a particular area tends to grow over time," according to David Phillips, author of the IFS report.

"The Smith Commission recognises this, by stating that these block grant reductions or additions should be 'indexed appropriately'. But what does this rather cryptic phrase mean?"

One challenge it identifies is to find a balance between giving Scottish ministers the autonomy to adjust tax rates and benefit from growth in the tax base, while also providing UK protection against sudden shocks.

Another problem the IFS sees with the Smith Commission plans, published last month, is that there is supposed to be compensation between Westminster and Holyrood when a taxation decision has an impact on each other. This could be to compensate for loss to each other's treasuries, or as a penalty for harming one another.

But this is seen as very hard to calculate, and also hard to get to a common understanding of how this should be calculated.

Difficult issues

"The Smith Commission has provided a set of proposals for further devolution of taxes and spending, agreed by the five main Scottish parties. This is a significant achievement," reports the Institute.

"But many difficult issues remain to be addressed - not least, how the block grant will be adjusted to account for the additional revenues and spending areas that will come under Holyrood's control.

"No system will be perfect. There is an inherent trade-off between providing incentives to the Scottish government, and the degree of risk-sharing between Scotland and the rest of the UK.

"And it will not be practical to devise a system where the UK and Scottish governments compensate each other for all the knock-on effects of their policies as the Smith Commission recommends."

The IFS analysis goes on to say that there is a problem where income tax powers are devolved, but not tax on savings and dividends. That could give an incentive, if there are different tax rates in Scotland and south of the border, for high earners to move earnings to dividends to reduce their tax bills.

The Smith Commission was set up after the referendum in September, chaired by businessman Lord Smith of Kelvin, and including two representatives from each of the five main parties.

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