Written evidence submitted by the Scottish
Council for Development and Industry (SCDI)
INTRODUCTION
1. SCDI is an independent membership network
that strengthens Scotland's competitiveness by influencing Government
policies to encourage sustainable economic prosperity. SCDI's
membership includes businesses, trades unions, local authorities,
educational institutions, the voluntary sector and faith groups.
2. SCDI welcomes the opportunity to contribute
to the Scottish Affairs Committee's inquiry on the Scotland Bill,
which will have a considerable impact on the operations of the
Scottish Parliament, the devolution settlement and future direction
of Scotland.
EXECUTIVE SUMMARY
3. SCDI's submission to the Scottish Affairs
Committee's inquiry highlights the following areas:
— SCDI's
history of engagement on the future of the devolution settlement
(paragraph 5).
— The
priority economic issues for the Scottish Parliament (paragraph
6).
— SCDI's
budget principles (paragraph 8).
— The
requirement for economic modelling of the proposes taxation system
(paragraph 12).
— The
creation of a Scottish Office for Budgetary Responsibility (paragraph
14).
— Sufficient
borrowing limits needed to manage the capital investment programme
(paragraph 15).
— Concerns
raised at the High Level Implementation Group (paragraph 16).
— Possibility
of underestimating the number of tax-payers in Scotland and ease
of transferring country of taxation (paragraph 19).
— Proposals
for further changes to the Parliament's powers (paragraphs 23-27).
BACKGROUND
4. In SCDI's Blueprint for Scotland[3],
published in June 2010, we call for the strengthening of the Scottish
Parliament's responsibility for tax and spending decisions which
promote sustainable economic growth. Following the announcement
from the coalition Government that it would legislate on the Calman
Commission's proposals, SCDI has continued to be involved in the
debate, holding discussion forums for our members and participating
in the Scotland Office's High Level Implementation Group for the
Scotland Bill.
5. SCDI's contribution to the debate reflects
recommendations which were agreed by members after discussion
of the report Scotland's Economy: The Fiscal Debate[4]
which was commissioned by SCDI and published in 2007. These included
the following:
— The
current financial arrangements do not provide sufficient incentive
or discipline on the Scottish Parliament regarding spending decisions,
due to its lack of responsibility for raising substantial revenue.
— The
current arrangements, as represented by the "Barnett"
process, are unsustainable in the long term, and an evidence base
must be built to ensure good quality information is ready and
available to feed into consideration of any new system which may
be established.
— Any
new funding mechanism must provide benefit to Scotland.
— The
Scottish Parliament should commission an independent, comprehensive
review of Scotland's fiscal arrangements, which should aim to
identify a small number of key fiscal policy measures that would
promote sustainable economic growth in Scotland and address some
of the weaknesses in accountability and transparency present in
the existing arrangements:
— It
should be conducted by a panel of independent academics, including
members from outside the UK who have not previously engaged in
the Scottish debate.
— It
should consider Scotland as a discrete economy within the larger
UK and EU economies, but should not assume either independence
or continued membership of the UK. Instead, where Scotland's political
status is a key factor in assessing a particular fiscal measure,
the options with and without independence should be set out.
— The
review should also pay close attention to the implications of
recent European Commission and ECJ decisions on the legality of
different proposals for fiscal autonomy within Member States.
— A new
comprehensive needs assessment for the regions of the UK, identifying
appropriate English regions for comparison with the territories
of Scotland, Wales and Northern Ireland is required.
— There
is mixed evidence that devolving greater powers to sub-national
governments to raise and spend their own public funds is in itself
enough to promote economic growth.
— The
majority of SCDI members that participated in consultation discussions
regarding the fiscal debate were not convinced by the arguments
either for the status quo or for different models of either fiscal
autonomy or further devolution. The key problem is the lack of
independent evidence which might help inform the decision. There
is a strong case for more independent research into the pros and
cons for small countries like Scotland of adopting different fiscal
powers.
6. SCDI has a broad membership which has no single
position on the Scotland Bill or wider fiscal proposals. However,
members believe that the economy and Scotland's global competitiveness
should be central to the fiscal debate and the possible impact
of the Scotland Bill on these issues should be uppermost in the
Committee's deliberations. However, feedback from SCDI members
indicates that, in their view, the highest priority economic issues
for the Scottish Parliament continue to be:
— Improving
the skills of the workforce and increasing productivity.
— Encouraging
greater private sector research and development.
— Ensuring
an effective contribution from the public sector in support of
growth.
— Improving
transport and IT infrastructure to help attract and stimulate
growth.
— Attracting
inward investment and increasing Scotland's exports.
GREATER FINANCIAL
RESPONSIBILITY LEADING
TO ECONOMIC
GROWTH
7. SCDI members have expressed the view that
greater financial responsibility for the Scottish Parliament should
be considered within the context of policies for sustainable increases
in Scotland's comparatively sluggish long-term economic growth
rate. Information gathered by SCDI does not show a clear and consistent
link between taxation and expenditure decisions following devolution
and this over-arching economic priority. The interest of SCDI's
members is principally in whether new financial powers and accountability
will further encourage and enable increasing sustainable economic
growth via a competitive and stable environment for business growth
and more closely aligning Scotland's economic performance with
the Scottish Parliament's revenues.
8. The outlook for public spending in Scotland
is the most challenging since devolution. SCDI has recently published
six Budget principles[5]
and urged that these are applied to current and future decision-making
by the Scottish Government and Parliament:
(1) Increasing sustainable economic growth is
now an even higher priority for the Scottish Government and public
services.
(2) Scottish budgets should ring-fence priority
outcomes, rather than departmental budgets.
(3) The core functions of public sector bodies
must be identified and resourced. This represents an opportunity
to develop new models and partnerships for public service delivery.
(4) Public spending should be subject to a "Scottish
Exports Test".
(5) The capital investment programme is a high
priority, but business cases should be re-evaluated rapidly to
ensure that projects are prioritised with current economic opportunities.
(6) Scotland's public spending should be reviewed
to ensure inter-generational equity and funding to create new
education, training and job opportunities for young people.
9. A number of questions arising from these principles
should be considered by the Scottish Affairs Committee when reviewing
the Scotland Bill:
— Do
the proposals encourage and better enable the Scottish Government
and Parliament to prioritise increasing sustainable economic growth?
— Will
the proposals safeguard and/ or create a more competitive economy,
which supports higher business investment and net exports?
— Will
the Scottish Parliament's revenues and grant allow for resourcing
of priority outcomes, and long-term planning in and reforms to
public service delivery?
— Will
they support a higher level of investment in enhancing Scotland's
infrastructural assets?
10. In relation to the Second Principle, SCDI
has also suggested that, in view of the rising cost-pressures
on public services, demographic changes and increasing public
expectations of services, a national debate should be encouraged
on the public priority outcomes and on the overall level and form
of taxes which could deliver them.
11. SCDI would be very concerned if future changes
in the rate of income tax in Scotland were to have the effect
of discouraging entrepreneurs or companies from opening, retaining
or expanding a presence in Scotland or make it harder to retain
and attract people. We would, of course, discuss these issues
with future Scottish administrations.
PERFORMANCE OF
THE PROPOSED
SYSTEM
12. The original Calman Commission proposals,
on which the Scotland Bill is based, were developed prior to the
recent global economic downturn. SCDI seeks reassurance, through
economic modelling, including Scottish and UK Government facilitation
for independent economic modelling, that the proposed taxation
system would support the Scottish economy through a period of
economic volatility and/ or fiscal contraction.
13. SCDI members strongly believe there is a
need for more evidence of how the Scotland Bill would impact on
the economy and public spending, particularly in the event of
a future economic downturn, where stability of public spending
is essential.
14. In an operating environment of greater fiscal
powers, it will be of increasing importance for Scotland to have
greater independent analysis of public spending. SCDI proposes
the establishment of a Scottish Office for Budgetary Responsibility.
A Scottish OBR could take a lead role in making an independent
yet informed assessment of the public sector balance sheets, have
control over forecasting and inform spending decisions.
15. SCDI broadly supports increased borrowing
powers for the Scottish Parliament. As a result of the UK Comprehensive
Spending Review, capital expenditure is due to fall in real terms
by 35.9% from 2010-11 to 2014-15. SCDI is deeply concerned about
the impact on plans to improve Scotland's infrastructure, particularly
its connectivity, and the vital construction sector, especially
when the need for a new Forth Crossing and Southern General Hospital
will account for the vast majority of its capital budget. SCDI
believes that borrowing limits must be sufficient for the Scottish
Government to manage its capital investment programme effectively
and flexibly, and fluctuations in revenue arising from the substitution
of a portion of the block grant with income tax revenues, within
acceptable UK debt levels.
IMPLEMENTATION
16. Despite being re-assured through our participation
in the High Level Implementation group, we would like the Scottish
Affairs Committee to be aware of the concerns raised there throughout
the deliberation process on the Scotland Bill. These concerns
mainly relate to the definition of a Scottish tax-payer, and the
additional burden to companies, individuals and the Scottish Government
through the potential need to establish a Scottish Treasury function.
17. In particular, SCDI is keen to ensure that
the Scotland Bill is implemented as smoothly as possible. This
requires the publication and promotion of a full timetable of
implementation, including achievable deadlines for Scottish businesses
to adapt their systems and processes and an outline of all the
changes large and small businesses and individuals on Self Assessment
are required to make.
18. To minimise any extra burden on employers,
the impact must be kept under constant review as the changes are
implemented, and SCDI will offer regular input to HMRC from members.
The Scottish and Westminster Governments should work closely together
as the Scotland Bill is implemented and provide sufficient resource
to HMRC and business advice agencies to ensure a seamless transition.
19. We seek further assurance that the rules
for designation as a Scottish tax-payer do not underestimate the
number of tax-payers in Scotland, and are sufficiently robust
to ensure individuals are not easily able to switch their home
for income tax purposes should the rate of income tax in Scotland
vary from the rest of the UK. This issue has received considerable
attention on the High Level Implementation Committee and we continue
to seek assurances that he Scottish budget would not be adversely
impacted by the Scotland Bill.
20. The designation of individuals as a Scottish/Rest
of UK tax-payer should be a matter for HMRC and The Government,
not a matter for individuals or employers.
21. Tax tables and software used by many organisations
has in many cases been updated to accommodate the Scottish Variable
Rate when the Scottish Parliament was formed. It is important
that the new Scottish Rate is compatible with these systems to
avoid the need for further investment from employers. Many small
businesses and sole traders do not have specialist software to
calculate PAYE levels. The new system should not force the many
organisations in this position to face increased accountancy costs
for payroll management.
22. Other anomalies raised at the High Level
Implementation Group include the issues of mobile workers, foreign
workers living and working in Scotland, those moving in or out
of Scotland mid-year and those gaining income from land or property
in Scotland but living elsewhere in the UK. These are all areas
where additional work is required to make certain Scotland does
not lose out on its share of the tax take, whilst ensuring that
the regulations do not prove a disincentive for people to work
in Scotland.
FURTHER CHANGES
TO THE
SCOTTISH PARLIAMENT'S
POWERS
23. The Calman Commission proposed that air passenger
duty should be devolved to the Scottish Parliament. SCDI understands
that this is on-hold due to the Coalition Government's plans to
replace air passenger duty with an aviation tax. Air connectivity
is especially important to the Scottish economy and our ambitions
to grow our exports and tourism industry. It also provides lifeline
services in the Highlands and Islands. If powers in this area
are devolved to the Scottish Parliament, the competitiveness of
Scotland in sustaining and growing its air route network must
be a priority, and the existing exemptions for air services in
the Highlands and Islands should be maintained and, potentially,
extended.
24. Scotland has a different labour market from
the rest of the UK and a demographic outlook which means our working
age population needs to expand to enable growth in key sectors
of the Scottish economy. However, as analysis by the Migration
Advisory Committee has shown, it has attracted a lower than average
share of highly skilled and skilled migrants to the UK. SCDI believes
that should support the UK Government's policy of enabling more
balanced regional economic growth. Most of the migrant workers
coming to Scotland under Tier 2 do so after meeting the resident
labour market test and Scotland has not experienced the same impacts
of migration which have been felt in parts of south-east England.
Overall, highly-skilled and skilled migrant workers in Scotland
have made a positive contribution to the Scottish economy and
its local economies, local taxation, and the delivery of public
services in communities. SCDI recommends that the UK Government
should take a flexible approach in Scotland and introduce a regional
variation which attracts skilled migrants to work in the Scottish
economy. We strongly support the call for the introduction of
a Scotland Skilled Workers Flexibility so it is provided
with a distinct annual allowance in relation to Tier 2, at a level
which is responsive to Scotland's economic needs. We also consider
that a lower qualifying salary level for Intra-Company Transfers
would be appropriate for Scotland.
25. SCDI also calls for flexibility for Scotland's
universities and colleges. These institutions are a cornerstone
of Scotland's international reputation and major export earners.
Scottish institutions should have the opportunity to succeed in
the highly competitive global market for higher education. International
students contribute nearly £188 million in fees and £231
million in spending to the Scottish economy each year, providing
diversity within the education system and promoting Scotland's
global reputation for high-quality education. Each year, a number
of international graduates choose to stay in Scotland, supporting
our population and delivering new skills essential to the success
of the Scottish economy. Scotland's different economic and demographic
circumstances require a different approach to immigration regulations.
26. In SCDI's Blueprint for Scotland,
we called for a more localised approach to support people claiming
out-of-work benefits into work and employment. This included a
call for local devolution of responsibility for delivery of New
Deal for the disabled, and greater cross-parliament work to develop
benefit and student support mechanisms that work together to take
full account of the differing student support systems in use across
the UK.
27. With greater fiscal powers, Scotland will
require independent analysis of public spending. As mentioned
previously, SCDI proposes the establishment of a Scottish Office
for Budgetary Responsibility to take a lead role in making an
independent yet informed assessment of the public sector balance
sheets, have control over forecasting and inform spending decisions.
January 2011
3 Blueprint for Scotland, www.scdi.org.uk/blueprint Back
4
Scotland's Economy: The Fiscal Debate Discussion Paper, www.scdi.org.uk/pi/2007/2584.pdf,
Statement of Findings, www.scdi.org.uk/pi/2007/2687.doc Back
5
Six Budget Principles for Scotland, http://www.scdi.org.uk/pi/2010/SCDI_Budget_Principles.pdf Back
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