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Lord Molyneaux of Killead: I was originally opposed to the idea of tax-raising powers for any of the

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new devolved administrations. But I am inclined now to give some favourable consideration to the words of the noble Lord, Lord Steel.

The members of the assembly in Northern Ireland have already been elected. I have noted that in the few months since they were elected they have come under pressure and have sometimes yielded to the pressure and individually are making promises to keep all hospitals open, with no more rationalisation of the health service, and considering new roads where new roads have never been considered before. They will find it difficult, I think, to deliver on all those undertakings if they are dependent on and restricted solely to the block grant.

Although the Conservative Front Bench may think that I am somersaulting on this issue, it is again a question of experience. I fear that the representatives, the elected members of the Scottish parliament, will find themselves in the same trap: being expected to deliver that which cannot be delivered by Scottish members of parliament.

Lord Sewel: The Committee is indeed back, and in terms of the arguments we are addressing we have not been away. The point that the noble Lord, Lord Mackay of Ardbrecknish, sought to make today is one that he sought to make at the referendum debate, on Second Reading of the Bill, and on earlier amendments as the Committee considered the Bill before the Recess. I shall deal with his point yet again, but it may sound repetitious at least to some members of the Committee.

I return specifically in detail to the amendments. Amendment No. 279B would replace Clause 69(2) with a subsection with somewhat different wording but, as I think the noble Lord accepts, with substantially the same effect. Notwithstanding what the noble Lord said, I am not persuaded that the wording in the amendment offers any improvement over the clause as drafted. Indeed, there is a weakness in the way in which the amendment is worded because potentially it introduces a degree of ambiguity about whether Scottish taxpayers who pay tax at the higher rate would be liable for the Scottish variable rate. Therefore, rather than adding greater clarity, the amendment introduces a dangerous degree of ambiguity.

The purpose of Clause 69(2) is simple. It provides that where Clause 69 applies, the basic rate of income tax determined by the UK Parliament for any tax year, as it applies to the income of Scottish taxpayers, shall be varied by the amount specified in any tax resolution passed by the Scottish parliament. This is an important, yet essentially technical provision. The words currently in the Bill achieve precisely the intended effect and should not be replaced by a provision that is certainly no better and which is possibly flawed.

Amendments Nos. 281A and 281C are also unnecessary. The provisions of Clauses 69 and 70 are already drafted in such a way--I believe that these are the words the noble Lord, Lord Mackay of Ardbrecknish, is waiting to hear--as to ensure that the Scottish parliament can only vary the basic rate of income tax. I repeat: it can only vary the basic rate of

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income tax. I have made that point several times during debates on the referendum, the White Paper, Second Reading of the Bill, and earlier in Committee. Therefore I think that we can now draw a veil across this issue. I hope that it is clear.

Lord Fraser of Carmyllie: Before the noble Lord finally draws a veil over the matter, perhaps I may say that I disagree with my noble friend Lord Mackay and agree with the noble Lord, Lord Steel. I understood his position to be correct at the time of the campaign. It was then our understanding that a Scottish parliament would be able--I am not saying that it would do so--to impose, for example, a tourist tax. It could, for example, impose a bed and breakfast tax. It could, for example, completely unstitch the basis of local taxation and introduce a wide range of changes, including a local income tax which did not have a single rate but a range of bands, much the same as we experience in the United Kingdom for income tax.

I am sure that the noble Lord, Lord Sewel, intended to be as reassuring as possible, therefore I shall repeat for the last time that the Scottish parliament can vary only the basic rate of income tax. Of course, we take him at his word on that. The emphasis is on the restriction to the basic rate of income tax, but we want to understand the range of potential taxation for the Scottish parliament.

Clearly, I am not one who would favour an increase in taxation in Scotland, for the reasons put forward by my noble friend Lord Mackay. But if we are to have a grown-up debate on the issue, it would seem desirable to be able to understand the range of taxation that might be introduced by the Scottish parliament. As all political parties in Scotland are beginning to gear up for the election campaign, we want to understand what is at issue so that we can address our respective arguments. For example, we would never wish to see the introduction of a bed and breakfast tax, a tourist tax, and so forth.

It will not do for the noble Lord simply to say that he gives an absolute categoric assurance that the only income tax on a UK basis which can be varied by the Scottish parliament will be the basic rate. There is a far wider and potentially far more damaging issue. In spite of the referendum Bill and the fact that we are a long way into the Committee stage of this Bill, I am not sure that we have had a clear and comprehensive answer to what is the potential range of taxation.

Lord Sewel: I am happy to clarify the position and again I refer to points I made earlier in our consideration of the Bill. There is a fair distinction between the tax-raising powers of the parliament in terms of the taxes it can raise by its own hand. That refers specifically and is limited to the power to vary the basic rate of income tax upwards or downwards.

It is possible for the Scottish parliament to change the structure and nature of local government finance. We have been clear and explicit about that and I referred to it in earlier debates. It would be possible to change the system of local government finance, were it so ill advised, to what we called with great affection "the poll

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tax" or to introduce a totally different system of local government taxation. But that would not be in terms of the tax-raising powers of the parliament. Parliament would legislate to change the structure of local taxation for local authorities, giving local authorities a power to introduce, say, a tourist tax or something similar. But it is not the tax-raising power of the parliament at its own hand. That is limited.

Lord Fraser of Carmyllie: That really will not do as an argument. In respect of the block grant which the Scottish parliament will receive from Westminster, it would be open to the Scottish executive to save not only the £4.8 billion contributed towards the National Health Service in Scotland but to say that it shall be £6 billion or £8 billion. That could be achieved only by cutting back severely on local government expenditure. While it might be some luckless local authority which would impose the taxation, it would follow as a direct consequence of the actions of the Scottish parliament that such taxes were imposed.

Lord Sewel: No, and we dealt with the issue at an earlier stage. In those circumstances, if the UK Government, specifically the Treasury, took the view that public expenditure in Scotland was rising at a level which endangered the overall public expenditure figures or was having an impact on macro-economic policy, it would then be available to the Treasury to reduce the grant to the Scottish parliament accordingly. That check and balance is built into the system to deal with a potential abuse of the powers of the parliament. That situation is foreseen in the Bill and the Bill makes provision for it. I hope that the noble and learned Lord is reassured.

3.45 p.m.

Baroness Hogg: Without testing the Minister's patience even further, I wish to be clear about what he is saying. When saying that the Scottish parliament can alter only the basic rate of income tax he could be saying one of two things. He could be saying that in dealing with a system of income tax the only element that the parliament may vary is the basic rate. Alternatively, he could be saying that in dealing with our entire structure of taxation the only element that the Scottish parliament may vary is the basic rate of income tax.

I understand him now to say that in dealing with our entire system of taxation the only element that the Scottish parliament may vary is the basic rate of income tax, except that it may then give to Scottish local authorities the right to vary any element of our taxation system in order to raise finance for local government. Am I right in that belief?

Lord Sewel: I welcome the noble Baroness to our debates on the Bill and I thank her for her contribution. Perhaps I may build up the case. First, the whole Bill rests on the idea of reserved and devolved matters. As the noble Lord, Lord Steel of Aikwood, said as regards taxation, one can start making correspondence between elements of taxation and the reserved and devolved matters. As the noble Lord indicated, corporation tax

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and VAT clearly fall under the reserved category and the parliament is in no position to change them one way or the other. Income tax is broadly reserved, but there is a specific power to the parliament to make a variation upwards or downwards equivalent to 3p on the basic rate.

However, local government and local government finance are devolved issues. Clearly, it would then be appropriate for the Scottish parliament to legislate so as to change the system and structure of local government finance in Scotland. One would not need to change the system in order for local authorities to increase their expenditure levels. They could do so within the present structure and system of local government finance. However, if local authorities increase their expenditure levels fundamentally to distort the overall level of public expenditure in the United Kingdom and to upset that balance, or to act in a way which impacted upon macro-economic policy, or if basically they abuse their power, it is open to the UK Government to counter that by reducing the block grant which goes to the Scottish parliament. I hope that that offers some clarification to the noble Baroness.

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