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Lord Mackay of Ardbrecknish: I am grateful to the Minister for the explanation of the £420 million, although I must say that I am a little puzzled. As regards income to the Treasury from taxation, I thought that that included income taxation, that it was actually quite buoyant and was better than had been forecast. That is one of the advantages that the Chancellor of the Exchequer has had from the golden legacy bequeathed to him by the previous government. In that case, I would have expected the income tax from Scottish taxpayers to be equally buoyant. If the Minister had told me that it was being revalued "up the way" I would not have been in the least surprised. But to revalue it "down the way", when I think the total income tax taken in the UK is being revalued "up the way", seems to me to be puzzling.

I wonder if there is more to it than that; for example, was the original calculation perhaps wrong because it was lp on all the rates of tax or only on basic rate taxpayers, without taking into account the basic rate that higher rate taxpayers would pay? There is a little

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uncertainty in my mind about it. It is possible that the Minister will be unable to clear up the matter this evening. I should be grateful if he could, but, if not, perhaps I may suggest that he looks into the matter and sends me another erudite letter.

Lord Lyell: Before the Minister replies, perhaps he will be kind enough to read on from that paragraph in the White Paper. I have the document with me. Of course, the Minister did a brilliant job; but he stopped. If he looks at the last sentence of paragraph 7.13, he will see that it reads:

    "In these circumstances, the Parliament's ability to raise or forgo up to £450m through the tax system will be preserved. This sum will be index linked to maintain its real value".

That does not quite equate with the first words that the Minister used. Therefore, with the advice of his noble and learned friend--indeed, we also have the noble and learned Lord, Lord Hope, with us--can he advise me whether that "sum" is the flexible sum of £420, or whatever might be coming out as a result of the process? The noble Lord said we would obtain a slightly more accurate projection as to what lp on the standard rate, as laid out in further amendments, will be. However, which sum will be index linked? It is mentioned in the White Paper. Has anything changed?

Lord Sewel: The "sum" to be index linked is only there if in fact there is a fundamental and radical change in the tax structure, which means that the basic rate calculation can no longer be made because we would no longer have a basic rate. If the tax structure were to change to that degree, we would then have to go back historically to work from--

Lord Lyell: That is not what it says--

Lord Sewel: That is exactly what it says. I am sorry. It says:

    "It is of course possible that future changes to the UK income tax structure might reduce the value of the product of the Scottish Parliament's tax varying power. In these circumstances, the Parliament's ability to raise or forgo up to £450m through the tax system will be preserved. This sum will be index linked to maintain its real value".

That index linking is dependent upon a fundamental and radical change in the tax structure, so we would then have to go back to see what was the value in 1996-97 of the lp and the 3p amounts. The measure is couched in terms of 3p, which would raise around £450 million. In 1996-97 the accurate calculation was a figure of £420 million. If there is a radical change in the tax structure at some time in the future, the base reference would be the £420 million.

Lord Lyell: I shall return to this matter.

Lord Sewel: Let us proceed. I understand that the amendment seeks a guaranteed additional revenue figure rather than a penny rate, but it is unworkable because one cannot calculate at the beginning of the tax year what the guaranteed additional revenue figure will be because during the course of the tax year factors come into play such as the number of people in work, the

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population of Scotland either rising or falling, and general prosperity, and that affects the tax take. Therefore one does not know at what level one has to set the tax to get the income that is specified in terms of the guaranteed additional revenue figure. There is the danger under that system that one could breach the 3p barrier because there is a reduction in the tax take that forces one through the 3p ceiling because of, for example, a reduction in the population of Scotland, a general slow down in the economy or something like that. Having fought the referendum on the clear understanding that 3p would be the ceiling, it would be difficult to say to the people of Scotland, "We said 3p but we were referring to a guaranteed additional revenue figure and because of that we have gone through the 3p ceiling". I think that would be a breach of faith with the people of Scotland.

Lord Mackay of Ardbrecknish: I am grateful to the Minister for giving way. If the parliament cannot raise the £420 million from the 3p rate, as I understand it the Treasury will find some clever way of meeting the shortfall out of income tax. The parliament may not breach the 3p on the basic rate of income tax, but it will surely have to meet the discrepancy from somewhere else within the income tax system.

This is a difficult issue and perhaps it is too late at night to discuss it, but if the parliament is not to break the 3p ceiling, the only logical conclusion is that if that does not deliver the £420 million, one does not get it. I appreciate that the referendum was fought on the 3p ceiling. I suspect that that 3p ceiling will probably never need to be altered unless something dramatic happens to the basic rate, and then it may have to go up, or it may conceivably come down if the basic rate were widened and not narrowed. I am not with the Minister completely on this matter. I think he is defending the 3p and the £420 million at the same time. I do not think that is possible.

Baroness Carnegy of Lour: I apologise to the noble Lord for intervening but he did say it would not be possible to know what the 3p would bring in. How on earth is the parliament to budget if it does not know what the 3p will bring in? When local government sets a budget, it knows exactly what its council tax will bring in, as the Minister well knows. It allows for unpaid debts and so on, but it knows. The Scottish parliament will not know. How is it to do the precise budgeting which is to be audited and looked after so carefully? This is the money that will be raised at the margin, and it will not know, because of all the circumstances described, what that will be. It seems that the Government have got themselves into a position--and I understand why--which is not sustainable. It will not work. They ought to contemplate my noble friend's proposal.

10.45 p.m.

Lord Sewel: We have contemplated and given great thought to the proposal from the Front Bench opposite, and we believe that it is unworkable. That is why we are not proceeding with it. I am not defending both the 3p and the £420 million; I am defending the 3p. The

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£420 million--or £450 million, to return to the White Paper--was an attempt based on estimates to give an indication of what 3p actually meant. People to whom I spoke and who were relatively well-informed before we were able to include the £450 million figure had no idea what 3p in the pound meant in terms of a variation to Scottish income tax. The £420 million, which is now the best estimate, only comes into play in terms of the legislation when and if there is a major change in the tax structure. That is the base reference point. Following a change in the tax structure, that is the amount, index-linked, that the post-structural change position has to raise.

Lord Lyell: The index-linked sum is 3p, not this variable figure. The Minister started with £450 million. I understand that; but we should temporarily put that aside. I quite understand 3p on the standard rate. But the Minister has talked about major "earthquake" changes in the standard rate. I think that he is slightly over-egging the position. I understand, and I am with the Minister in this, that it is difficult to know what 3p in the pound on the standard rate for Scottish taxpayers, under the terms of Clause 71, will raise. It might be £420 million; it might be less than that.

If it is less, then that is the point that my noble friend on the Front Bench is driving at. I accept what the Minister says about the 3p being index-linked. In his previous remarks the Minister said: let us put aside the multiple of what will be raised because the tax structure and income tax for Scottish taxpayers may vary from year to year. But the Minister is moving onto dangerous ground if he says that a sum of money, 3p, multiplied by whatever will raise a sum of money and that should be index-linked. Is there not a method by which, at the outset of the tax year, the Scottish parliament can say: we shall have the Scottish variable rate; it will be 3p in the pound; it will be at the start of the year. It could easily refer to the previous year, so that one would know the exact amount that had been raised by levying the 3p rate. I appreciate that the multiple of 3p and the standard rate band paid by all taxpayers in Scotland will make it very difficult, as mentioned by my noble friend Lady Carnegy, for the Scottish parliament to know exactly what it will receive. If we stick with the idea of 3p being index-linked, then at least my noble friends and myself, and the specialists--the chartered accountants and others who will have to put this provision into practice--would be a lot happier.

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