Observations

Scotland would gain significant new powers under SNP plans for further devolution

Date: 22 April 2015
Authors:
Publisher: Institute for Fiscal Studies

The SNP manifesto sets out plans to prioritise the devolution of powers over national insurance contributions (NICs), corporation tax and welfare policy, among other areas, as a stepping stone to full fiscal responsibility.

In this Observation, we assess these plans as part of the IFS' election analysis, funded by the Nuffield Foundation. (An earlier, companion Observation looked at how the plans fit into moves towards full fiscal responsibility.)

So what can be said about the plans for devolving these specific areas? 

First, devolving NICs to Scotland could be seen as a natural next step, given that the Smith Commission has recommended devolving income tax on non-savings income.

NICs are in many ways just another income tax on earned income, and devolving the two together may allow the Scottish Government to move towards closer integration of the two taxes, if it so wished. This is something recommended by the IFS’s Mirrlees Review of the tax system. In a rational world, NICs should be treated like income tax. However, there are notional links between NICs and entitlements to contributory benefits such as pensions, and so devolving NICs could involve some tricky administrative issues. Who would pay for the pensions of people who had worked in England and retired to Scotland, for instance?

Second, the plans for the devolution of welfare in its entirety would give the Scottish Government significant new powers – not only to increase or reduce benefit rates but also to restructure the whole system.

This may result in a system better suited to Scotland’s particular needs and preferences. And devolution of the budget for welfare would allow synergies between public service spending and benefit spending to be better exploited (dealing with concerns, for instance, that the Scottish Government doesn’t benefit from the savings on benefits that result from investment in housing, education, or healthcare, say).

But as we discussed in the run up to last year’s independence referendum, any radical reform inevitably involves difficult trade-offs. Major changes benefitting some individuals would either create significant numbers of losers, many of whom would probably have low incomes, or else involve a substantial increase in overall benefit spending. The Scottish Government may also face the budget risk of benefit spending in Scotland rising more or less rapidly than in the rest of the UK – a risk currently borne by the UK government. Agreeing the block grant adjustment mechanism for welfare may be particularly tricky.

The manifesto’s proposals for changes to the benefit system might provide a guide to the type of reforms that an SNP Scottish Government would prioritise, if welfare were fully devolved. These include halting and reversing the replacement of disability living allowance (DLA) with personal independence payments (PIP), and increases to carer’s allowance and universal credit (UC) work allowances.

The first two of these are deliverable under the Smith Commission’s proposals (as disability benefits are being fully devolved), although the latter is not – and does not look like it would be possible under Labour’s proposals for more general benefit ‘top up’ powers. It is notable that each of these reforms would increase the generosity of the system, and would therefore cost money – money that would have to be found from within the Scottish budget if welfare were devolved and the plans were not adopted UK-wide.

Third, corporation tax is not a natural candidate for devolution. Relative to most other tax bases, corporate profits are particularly sensitive to differences in tax rates across jurisdictions – companies shift investment and profits between jurisdictions to take advantage of the lowest rates.

Corporation tax is therefore particularly prone to tax competition. While one might think that devolution of corporation tax would provide Scotland with a significant new lever with which to attract additional investment and profits, the lever may be less effective than hoped if the UK government responded to any reduction in tax rates in Scotland by cutting tax rates in the rest of the UK.

Instead, tax rates and revenues may be lower in both Scotland and the rest of the UK than if rates were set centrally for the whole of the UK. Furthermore, allocating profits between Scotland and the rest of the UK would entail significant administrative complexity, even if tax rates were the same and companies had no incentive to game the system.

Of course, the UK government has agreed in principle to devolve rate-setting powers (but not the tax base) for corporation tax to Northern Ireland. It says that this is justified by the particular circumstances of Northern Ireland – a land border with the Republic of Ireland, where corporation tax is just 12.5%, and a relatively weak private sector. Whether this reasoning is valid or not, it is not surprising that the SNP is asking for similar powers for Scotland.  

The proposals listed as ‘priorities’ would therefore give Scotland significant new powers which the Scottish Government may be able to use to design improved benefit and tax systems. But they would also entail additional spending and revenue risk, and involve a number of complex technical and administrative issues.