The government has put the finances of the Union and of local government into play. It is time to think of how they can be remodelled in line with the promises made. It is also time to think of England.
The government has pledged to Scotland the right to collect and spend its own Income tax along with its property tax, Air Passenger duty and a portion of its VAT revenues. Northern Ireland now has control of its own Corporation Tax and is cutting the rate. English local government is being offered control of its own business rates.
None of this is easy to mix into the present complex arrangements for transferring large sums of money from the richer to the poorer parts of the country, whilst assuring common levels of service and benefit payments around the Union. It starts to undermine the proposition that most tax revenue wherever collected is a national resource, to be allocated according to need. As the government allows Scotland to collect and spend much more of its own revenue it will have to reduce the block grant it normally pays to allow for the extra revenues. It needs a system of adjustment which leaves Scotland with an incentive to grow its revenues, and with some risks to spending if it misjudges the level of tax the Scottish economy can withstand. After the adjustments Scotland will still be part of the UK and will expect some underlying insurance to its revenues from the rest of the Union. The rest of the UK will expect Scotland to take some of the risks once it is responsible for more of the revenues. The government’s illustrative projections stress the mechanism has not yet been finalised. Scotland needs to benefit from changes of tax policy which produced more revenue, and to have less to spend if they chose to collect less. The aim is not, however, to make Scotland worse off than the current settlement by withdrawing a disproportionate amount of UK grant.
So what of England? Once again England misses out on the devolution that Scotland will enjoy. English MPs need to be a collective voice for England, so that we do not end up with a situation where Scotland enjoys the benefits of any extra revenue it raises, but is insured against all revenue loss by the taxpayers of England. More independence must mean some loosening of the financial guarantee.
The English business rate also poses big problems over transfers. Not even the most optimistic Council supporter thinks each Council can collect and spend all its business rates. The City of London Corporation would have a huge endowment of income which would far exceed what it wishes to spend on its limited number of inhabitants. Councils outside London and the South East would not be willing to cut their services to the level that their business rate revenue allowed. There will have to be some new system of removing some business rate from the places and areas with substantial business rate income and sending the money under a formula to the areas not so endowed.
One of the binding ties of the Union is the pooling of revenues and the pattern of spending based on need. It is the UK’s unwillingness to enter similar arrangements with the rest of the EU that lies behind our wise judgement to stay out of the Euro. We now have to answer some difficult questions nearer to home. In the sterling union how much money do we need to continue to transfer from rich to poor? How far can we go in rowing back from pooled revenues? The more each part of our Union looks at its own revenue, the more there is likely to be argument between the different countries of the UK over the fairness and balance of spending and revenue.