Scotland Bill

Lord Eatwell Excerpts

Wednesday 28th March 2012 Lords Chamber

[Lord Forsyth of Drumlean]

My Lords, the amendment seeks to outlaw the practice, which my noble friend laid bare before us at an earlier stage of the Bill, whereby the Scottish Parliament is able to raise 10p in income tax but, if the tax base is narrowed, the Treasury sends it a cheque.

The current Budget, quite rightly, raised the threshold at which people pay income tax, which will be very beneficial to people in Scotland. If this system were in operation today, not only would everyone enjoy a lower tax on their income in Scotland but the Treasury would send a cheque for the equivalent amount in the reduction in the tax base to add to the block grant—which drives a coach and horses through the whole idea behind this Bill, of bringing accountability to the spending practices of the Scottish Parliament. It should not be compensated for a reduction in the tax base that arises from a reduction in income tax in the rest of the United Kingdom. It is an absurd proposal.

I am very nervous that my noble friend may accept this amendment, because it extends the powers of the Scottish Parliament very considerably, in a constructive way. I know my noble friend, at an earlier stage in the Bill, said that the Scottish Parliament cannot change the allowances, and therefore the reduction in revenue would be as a result of something that was done in the United Kingdom. The amendment provides for the Scottish Parliament to be able to change the allowances and gives it more power. I listened to the noble Lord, Lord Kerr, and can see the logic of that.

My noble friend may not like that at all, because it adds to the complexity of the devolution of income tax. I noticed he said earlier that the block grant would be about 60 per cent of the expenditure. We keep hearing that the Parliament will be raising 35 per cent of its own expenditure through tax—but that is a dishonest figure. The amount that will be raised by the 10p on income tax is about £4.5 billion. We are looking forward to discussing this later today, but it just so happens that when the Barnett committee, which was established as a result of the efforts of the noble Lord, Lord Barnett, looked at this, the estimates of the additional grant that Scotland had over and above what would be based on needs was about £4.5 billion. That is what 10p on income tax, broadly speaking, will raise. It is about 15 per cent of the block grant and it has all the problems that we have with local government finance, where a small increase in expenditure needs a large increase in income, because of the gearing effect. Therefore, it may be sensible to broaden the tax base, which is another reason for having additional sources of revenue other than income tax, such as the aggregates tax and so on and so forth. I can see myself being sucked into this process of additional tax-raising powers. It is the slippery slope that my noble friend Lord Lang referred to.

The purpose of this amendment is to deliver what all those advocates of this Bill, whom I have spent most of my life opposing, say that the Bill is about and to remove this extraordinary idea that Scotland should benefit both ways—and no self-respecting Scot would want this—by getting both the reduction in the tax and the additional grant. It is very straightforward and because the hour is late, I will not elaborate on it any further. I beg to move.

[Lord Eatwell]

My Lords, in the enforced absence of my noble and learned friend Lord Davidson, I rise with considerable trepidation to speak on these clauses. Having spent some time reading myself into the debates that your Lordships have had on this Bill, I cannot feel that they have been entirely enlightening.

With respect to the amendment proposed by the noble Lord, Lord Forsyth, I am afraid that he shot his own fox in his remarks, when he pointed out that by varying the tax base as well as tax rates he will increase enormously the complexity of any tax changes that might affect Scotland. On top of that, when you increase complexity you reduce transparency and accountability. To have proper accountability we need to have clarity. By changing both the tax base and tax rates or putting both into play, within a very short period of time we could have enormous complexity in the Scottish tax system relative to that in the reset of the United Kingdom. The notion of accountability would be lost.

[Lord Forsyth of Drumlean]

I am grateful to the noble Lord and I sympathise with him if he has had to read all our proceedings, but this is not my fox. I am opposed to having these tax powers for the very reason that, to make it work, it would be excessively complicated. It is the fox of his noble friend Lord Browne, not mine.

[Lord Eatwell]

By introducing tax allowances, the noble Lord seems to be adding to the creature to be chased.

I pose a couple of questions about this issue, which comes under the general heading of “no detriment”. As I understand it, the whole concept of no detriment is to require all government departments—and, in this case, the UK Government with respect to the devolved powers in Scotland—to take account in their decisions of any detriment that they might impose on the Scottish Parliament and its revenues.

As I understand it, any proposal of this sort would be intra-budget in the sense that it is within a budgetary year. In a letter from the noble Lord, Lord Sassoon, to the noble Lord, Lord Forsyth, dated 19 March, he stated that,

“it is highly unlikely that a UK Budget would announce a change in income tax policy to be implemented within the same fiscal year”.

I understand that he is referring to something within a budgetary period—in other words, not from one budget to the next, when the negotiated taxes, allowances and block grant are made clear—but to some amendment that takes place within a budgetary period. Perhaps he could clarify exactly what he meant by that part of his letter.

On another element of clarification, I turn to the Written Statement made by the noble and learned Lord, Lord Wallace, on the Scotland Bill, on 21 March, when he referred to the application of the model recommended to the Welsh Assembly in the Holtham report on the tax and budgetary arrangements between the UK and the Scottish Government. I would be grateful if he could clarify exactly what is meant by the Statement that it,

“will help protect the Scottish Government’s budget from wider macroeconomic shocks”.—[Official Report, 21/3/12; col. 62WS.]

Given that in the face of a macroeconomic shock any change is unlikely to be reflected in the tax base, because that takes so long to implement, what does this actually mean? Could he give us an example of how a macroeconomic shock would in some way lead to a change in the tax base affecting Scotland within a fiscal year? I am completely puzzled by that; it does not seem to make any sense at all.

There is one other area of puzzlement that I have with respect to this question, in the reference to the OBR, which appears in the amendment from the noble Lord, Lord Forsyth, and in government statements about the assessment of the impact of a change in taxation. In the report published on 21 March, the OBR said:

“We are therefore not able to produce a Scottish macroeconomic forecast to drive the Scottish tax forecast. Instead the methodologies we intend to use … are generally based on Scotland’s historic share of the relevant UK tax stream. We then generally assume that this share will be maintained at the recent average level in the future”.

However, if there is a change in allowances that assumption is invalidated, and therefore the OBR is not competent because it does not have the information it needs to perform the task which both the noble Lord, Lord Forsyth, and the Government wish it to perform.

In those circumstances the OBR says that, in due course and with a long lag, it can assess this. If the block grant is changed in the way that the Government have suggested, in response to a change in tax base—I agree with the Minister that that is how it should be done and not with the noble Lord, Lord Forsyth—and if the OBR finds that its preliminary assessment was misguided, will that be adjusted in future years or will we proceed with a methodology which the OBR admits is imperfect?

--- Later in debate ---

[Lord Sassoon]

My Lords, I do not want to prolong this but I resent the suggestion that we have not tried to be accommodating on this issue. We have all been considerably inconvenienced by the difficulties of the parliamentary timetable. I merely want to make the point that that timetable has been difficult and we have all sat around waiting for things to happen. I am sorry that we have not had an opportunity to take some of that time to discuss the details of this very technical series of adjustments under these arrangements. I say at the start of my response to this discussion that it is simply not possible to go through the adjustment line by line, but I shall make some points on it.

For those who have looked through the adjustment carefully—the noble Lord, Lord Eatwell, clearly has, as he does at such things—I believe that the way that the adjustment works means that the block grant is protected in the way that it should be. Scotland is exposed to the effect of decisions that are taken by any variation in the 10p rate, and that is all it should be exposed to in this case. That is entirely as it should be.

I turn to some of the questions about how the adjustment will operate. The first point related to when announcements are made and in-year adjustments or adjustments within the fiscal period. It is consistent with the Government’s approach to tax policy-making that we would seek normally to make any relevant tax adjustments and announcements well in advance. For example, the adjustments to the personal allowances that were announced in the Budget this year come into effect in just over a year’s time, giving time for any adjustments of a sort that will be needed to be worked up in future. So there is nothing more behind this than simply confirming that we are conscious that an adjustment will need to be made and it will be better if it can be made in advance. That is consistent with the normal approach that we now have to tax-making.

On the question about the OBR’s description of where it is at, the important point is that the OBR will use the period between this year, 2012, and the time when the new tax powers are transferred to refine its approach, including moving from historic to actual data, so that the impact from UK policy decisions will be refined and the methodology will evolve in the periods between 2012 and 2016. I am sure that, as it has done to date, the OBR assessments will set out transparently in successive reports how its methodology is changing. In the spirit of that—although I think this anticipates a situation that we are not remotely in—notwithstanding that there are four years to refine the methodology, if we get to a position where the OBR data are used to make some block grant adjustment and it subsequently discovers that it was misguided, something has changed and it refines that adjustment, I am sure that that will be taken into account. The more important question for the moment is the time period that it has to refine its methodology over the next few years before any question of block grant adjustments comes in.

On the question of macroeconomic shocks—

[Lord Eatwell]

I do not understand what that has to do with income tax and tax allowances. When you have a shock, you do not deal with it through the allowances or tax rates, because they take too long to have an effect; you deal with it through VAT or some other measure which has immediate effect in responding to a shock.

--- Later in debate ---

[Lord Lyell]

My Lords, having waited for seven hours, I am delighted that I am allowed to speak. I thank my noble and learned friend the Minister for the kind letter that he wrote to me about the Scottish taxpayer. I was very relieved to read what he wrote. I had intended to speak on an earlier amendment that was not moved. I thank him for what he wrote about the Scottish taxpayer. I hope that I may write to him about the military because he referred to their residence and what they might be doing. I thank him for that. I am delighted to see that my noble friend Lord Bates is present. He will remember what I had to say at an earlier stage about the mouse that roared; after the Titans who have been speaking, this is the one who spoke.

[Lord Eatwell]

My Lords, when I spoke on an earlier amendment, I said that I was participating in this debate with considerable trepidation. Having listened to this discussion, my trepidation has turned into a state of serious anxiety. However, I will attempt to proceed. My anxiety is raised particularly by the respect in which I hold my noble friend Lord Barnett and the power of the arguments that he put forward. However, as I listened to the debate, any support which I might have had for these amendments slowly drained away for three major reasons. The first is that there is a debate which centres round the need to devise a scheme to abolish the existing Barnett formula. However, that is not an argument in favour of the amendment; it simply identifies a public policy problem which needs to be dealt with, but which I suggest is not necessarily dealt with by this amendment. As those arguments multiplied, my support for my noble friend’s position started to fade away, as I said.

I put down a warning marker for those who have talked about a needs basis for the funding allocations to different parts of the UK. The noble Lord, Lord Lang, is absolutely right that the calculation of need can be done on a clear and objective basis. It could indeed be done by a commission looking at matters such as the number of people under a certain age and the number of people living in poverty according to a certain definition. However, when you start to attach monetary valuations to those needs, you create a policy because you are then weighting them in monetary terms. By weighting them in monetary terms, you are defining a particular policy which you wish to apply uniformly throughout the UK. If you wish to follow the purely unionist line enunciated by the noble Lord, Lord Deben, that may be a reasonable position. However, if you wish to devolve some elements of social policy to the constituent nations of the United Kingdom, you impose policy on them through the needs-based weighting of the funding associated with the underlying formula—and not only that, this amendment would impose the policy through an independent commission. Therefore, an independent commission would vary the policy. Therefore, for example, if one decided that one did not very much care about, say, care for children between the ages of five and 10, but cared very much about children from birth to the age of five, and changed the financial weighting in those two areas, you would be changing the policy because you would be changing the funding available. Handing out this sort of important policy choice to an independent commission would deny what policy-making is all about.

That is just a warning and is not the basis of my slowly ebbing support for my noble friend Lord Barnett’s position. What really settled it for me was the argument of my noble friend Lord Robertson, who made clear that this was an entirely inappropriate way to deal with an incredibly important question. I should therefore like to invoke the great academic principle of unripe time and suggest that we are facing an amendment that is distinctly unripe. We need a much more ripened argument to deal with this very complex matter.

[Lord Sassoon]

My Lords, this has been an interesting debate as we draw towards the end of consideration of the Bill. I am grateful to the noble Lord, Lord Eatwell, whose analysis I very much agree with. It has been a fascinating debate that has taken almost an hour. Sadly, as it has continued, more and more voices have been raised making all sorts of correct arguments that this is not the time and place for it. Many voices in this House accept the starting point of the noble Lord, Lord Barnett, which is that although his eponymous formula has stood the test of time, its time may nevertheless be coming. However, we are not at the point of having a ripe solution, and having a one-country answer within the vehicle of the Bill is not the way to address these proper concerns. I often find that noble Lords from all sides of the House are against me, but it is rare to find myself in substantial agreement with them.

Let me start by reminding noble Lords of one or two things that we should be clear about. First, one of the things that the Bill will do is devolve some of the financial management of income tax to the Scottish Government. However, it will not fix the Barnett formula in stone for the future, and we need to be clear about that, for the avoidance of doubt. It is also worth dwelling on Calman for a moment. My noble friend Lord Forsyth of Drumlean referred to the Calman report, but it is perhaps worth quoting at some length. Recommendation 3.4 states:

“The block grant, as the means of financing most associated with equity, should continue to make up the remainder of the Scottish Parliament’s Budget but it should be justified by need. Until such times as a proper assessment of relative spending need across the UK is carried out, the Barnett formula should continue to be used as the basis for calculating the proportionately reduced block grant”.

The Bill certainly does not therefore lock in the funding formula but, as a number of noble Lords, starting with my noble friend Lord Maclennan of Rogart, have pointed out, this is very much an issue for the whole United Kingdom and should be dealt with at the appropriate time.

Just before I come back to one or two more points on the broader issues, I should for completeness comment on the technical drafting of the amendments.

--- Later in debate ---

[Lord Barnett]

My Lords, I thank all noble Lords who have spoken in the debate. I am sorry that I cannot reply to them but, given the time, I am sure that they would not expect an overly long speech from me.

To say that I am disappointed with my own Front Bench is to put it mildly. My noble friends could not even go as far as the Government in saying that they recognise the concerns about needs. I imagine that my English noble friend who replied on behalf of the Opposition had been got at by the Scots, who did not want him to support the amendment. I do not know whether that is the case but, whatever they did, I find it incredible that he, as an academic, should have come up with the idea that this is an “unripe time”. He obviously had not read the excellent Richard report.

[Lord Eatwell]

I did.

[Lord Barnett]

If he had, he would not have come up with the kind of speech that he made today. As I said, to say that I am disappointed is to put it mildly. I think that it has been appalling.

The noble Lord, Lord Sassoon, did at least repeat his concern, and it is one that the Government recognise. As many noble Lords said—even those who disagreed with the amendments—the technical drafting is not an argument. If the noble Lord wants them redrafted, I will redraft them, or I will let him redraft them—I do not mind. However, the case for doing something, whether in this Bill or elsewhere, is clearly made, as basically every speaker has said. I understand that the noble Lord, Lord Sassoon, cannot go further, because he also has a brief and he is not able to go further than he has done.

We will inevitably return to this matter because this huge disparity in the allocation of money between the different parts of the country cannot go on. As has been said in this debate, this issue concerns the whole of the UK, not just Scotland, and it cannot be set aside by talking about technical amendments or by saying that they should not appear in this Bill, or that they are being brought forward in the wrong place or at the wrong time. Of course all those things can be said but they do not alter the fact that something needs to be done here about the whole of the UK. I have listened very carefully to what has been said and, for the moment, I beg leave to withdraw the amendment.