Scotland Bill

Debate between Lord Forsyth of Drumlean and Lord O'Neill of Clackmannan

Thursday 15th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, depending on the nature of the scheme, it may or may not be caught by the anti-avoidance rules that already exist. Clearly HMRC, in its compliance role, will have to ensure that the issue of avoidance is fully addressed. These are complex areas and perhaps my noble friend will permit me to consider whether there is anything I can do to help where we see new areas of avoidance, if any, potentially being opened up, and what the technical thinking is about how these might be closed down. Some of the areas referred to by my noble friend sound as though they are getting precious close to artificial schemes that would be covered at present. However, let me take the matter away.

Let me address a couple of more points. On the broader question of the noble Lord, Lord Foulkes of Cumnock, of what had changed since the workshop, yes, I appreciate that the workshop raised a number of issues and I wrote to all noble Lords who were there answering the questions that arose. There have not been any changes proposed as a result of the issues that came up but it was a useful session. As noble Lords who were there will know, HMRC was there and listening hard. All the issues raised were already being thought about and, of course, this will be reflected in the guidance. It was a useful session because it will inform the drafting of the guidance. As the noble and learned Lord, Lord Davidson of Glen Clova, said, there will need to be clear guidance around this issue and therefore the more questions that are raised generally—but, please, not immediately—will help HMRC with the drafting of the guidance that will be needed.

Finally, I want to come back to this question of benefits and the universal credit, which is a very important area. The clause does not address it directly but it would be wrong to dismiss it at this point. The universal credit forms the background against which we must look at this. As noble Lords know, the universal credit is going to deliver a dramatically improved, simpler benefits system that smoothes the transition into work and improves work incentives. By 2016, when the Scottish rate of income tax is proposed to come into effect, the transition to universal credit will almost be complete, as that will be finished by April 2017. Universal credit is expected to be awarded on the basis of income net of tax, as existing income-related benefits are now. If the Scottish rate and the UK rates differ, then net incomes may of course differ depending on the amount of income tax paid, so that it is possible that there would be a difference to an individual’s universal credit entitlement as a result of the Scottish rate.

However, it is worth bearing in mind that many factors determine an individual’s net income and that a range of local factors could determine their universal credit award, such as housing or childcare costs. The Scottish rate would be another factor to be taken into the calculation. The extent of any divergence of entitlement would depend on a number of factors, including the prevailing rates in the United Kingdom, the rate set by the Scottish Government and whether an individual’s income is subject to income tax at all. I hope that gives the noble Lord some reassurance that the linkage with universal credit has been carefully considered.

[Lord O'Neill of Clackmannan]

I am grateful to the Minister for seeking to respond to this very complex issue. The kind of people who are likely to be affected by this may well be those who are currently employed in the public sector and whose wages are being considered for possibly no longer having a national rate. We could have the anomalous position of someone working for a local authority in Berwickshire being paid the same rate as someone in Northumberland—which is probably less than some other parts of the county—but ending up, because of the universal credit, getting paid more through benefit compensation than people south of the border in Cumbria or Northumberland, because they are being charged a higher rate of tax in Scotland. This kind of anomaly is going to create all kinds of difficulties. This form of taxation may not be the cause of it, but it will certainly be an exacerbating factor and have social consequences of quite a dire character.

[Lord Forsyth of Drumlean]

My Lords, I was going to follow up on the noble Lord’s point by saying that one of the consequences of this will be that the Scottish rate of income tax is higher in order to fund the Parliament’s additional commitments, but the English taxpayer is going to have to foot the Bill for the increased benefits payments that arise. Will my noble friend make arrangements so that the additional cost of the benefits that arise, because of the increased taxation being levied on benefit recipients, is taken from the Scottish block grant?

--- Later in debate ---

[Lord Forsyth of Drumlean]

My Lords, the noble Lord, Lord Barnett, left me a note saying that unfortunately he had been detained and would not be here to move his amendment, and asking me whether I might find the time to do so. As I have added my name to it, I will do so with pleasure. I know that the noble Lord was keen to discuss the issue in Committee.

We had a good preparatory discussion for the amendment when we heard from the Minister how any reduction in the tax base would be compensated for by an addition to the block grant. The fundamental flaw in the Bill is that it is presented as being about accountability, but the accountability is limited. This is partly because of the limited nature of the taxes being devolved and partly because of the compensation for changes in policy in the tax base, to which I have just referred. However, the accountability is limited mainly because the bulk of the funding in the block grant is still based on the world as it existed in the 1970s, as amended and altered by subsequent Governments, including those of which I was a member. I plead guilty to using some of the techniques to enhance the effects of the Barnett formula and to reduce the squeeze that otherwise would have occurred on Scotland’s budget.

A Scottish Parliament has to be accountable when it pursues its different policies, whether they are on health, free care for the elderly, free tuition fees, free bus travel, extra nursery care provision or free prescriptions on the NHS—all of which are no doubt popular. Indeed, I venture to suggest that one reason why Mr Salmond did so well in the elections was because he was able to make such promises. I am not sure he will be able to keep them, but he certainly benefits from the fact that Scotland is more generously funded relative to need than the rest of the United Kingdom. That is historically the position and I do not apologise for it. When I was in office I did everything that I could to keep it that way.

However, we are going to move to a Parliament which has its own tax-raising powers. It was interesting that at the start of our discussions people tried to maintain the idea that the tax-raising powers might be used to lower taxes. That finally fell over and the debate swung toward the consequences of higher taxes. One can imagine what the consequences would be of lowering taxes while providing additional services and being funded at a rate of 20 per cent more per head—perhaps a little less—as a result of the impact of the Bill and the 10p tax-raising power. Over time it would cause great resentment and great difficulty in other parts of the United Kingdom. As the noble Lord, Lord Browne, pointed out, we should always focus our attention on what the consequences are for the United Kingdom and the union as a whole.

The noble Lord, Lord Barnett, has a habit of landing me in it on this subject. He had several goes on the Floor of the House, as he did today on the car park—and if it is in order to give advice to Black Rod, I would urge him to give in gracefully, because the noble Lord is a terrier. He tried and tried to get the House to set up a special Select Committee to look at the Barnett formula. I served on that committee, along with my noble friend Lord Lang and a number of distinguished Members of this House. We laboured long and hard, took lots of evidence and were absolutely unanimous that the funding for Scotland needed to move to a system based on need. Various arguments have been put against that. The one put by the Government is perhaps the weakest—that the time is not right and that they are concentrating on reducing the deficit. Both of those reasons seem to be difficult to understand and illogical. Surely, the right time to address this is when you are seeking to set out hugely innovative constitutional change.

[Lord O'Neill of Clackmannan]

Will the noble Lord not concede that this is probably the wrong time to change the Barnett formula, given the failure of the nationalist Administration’s economic policy in Scotland, where unemployment is rising at a faster rate and the economy is growing even more slowly than in the rest of the United Kingdom? Sadly, we need the Barnett formula to keep the show going in Scotland. I admit that there are areas of expenditure that we may well dispute—I am not happy about the priorities of the nationalist Administration—but nevertheless, the money is required to try to keep our economy limping along at this very difficult time.

[Lord Forsyth of Drumlean]

The noble Lord may be surprised to hear that I agree with him. I am deeply concerned about what is going to happen to jobs and public services in Scotland as a result of the impact of the Bill. If he is saying that this is the wrong time to fiddle around with the Barnett formula, I would say that this is absolutely the wrong time to introduce tax-raising powers in Scotland that are limited in scope, with an Administration that appear to spend money without any idea of where the resources will come from. The Scottish budget is very stretched—the promises that have been made are on a very large scale and the revenue that can be raised from the income tax provisions is very limited. Despite that, the damage that will be done will be considerable.

Earlier in our proceedings, people said that I seemed to think that politicians were just going to keep putting up taxes, even though they have to get elected. However, it is not just about tax but about preserving our public services: our schools and so on. It is a fact that spending per head on health and education is very much higher in Scotland than in England and in Wales, but that spending has not produced the same levels of productivity. The noble Lord is absolutely right that despite all the bluster, the Brigadoon economics and the Braveheart talk, the nationalist Administration have singularly failed to deliver on any of the outputs that they promised. Among the real concerns are the rising levels of unemployment and youth unemployment. The noble Lord may be surprised that I agree with him on this. I personally would take this Bill, put it on the shelf and get on with deciding whether Scotland wishes to remain part of the United Kingdom—and then have a proper look at the consequences that follow from the Bill.

This Bill is from another time. Its genesis or midwife was an attempt by the unionist parties to avoid the nationalists getting a majority. It failed, and the world has moved on; the senior civil servant in the Scottish Office writes blog posts to his colleagues saying that it is lost in the mists of time and is irrelevant. No one who spent even a quarter of an hour listening to our proceedings this afternoon—whichever side of the argument they were on—could say that the Bill is not a huge constitutional change. It is taken for granted and people do not know what is happening. If we are going to go down this track—and I certainly would not want to—and if the idea is to make the Scottish Parliament accountable, the basis on which it is funded from Westminster should be one that is fair and is seen to be fair by the rest of the United Kingdom.