Borrowing key, not Corporation Tax

This piece on a “Federal UK” requires some more thought on the fiscal issues. Frankly, I am no expert on these!

However, I am increasingly of the view that the only two taxes really in play for devolution are duties (on drinks or flights or whatever) and income tax. 

Listening to interviews with the key decision makers on this issue, the relevant point here is that corporation tax is always assumed to be remaining UK-wide (except, naturally, by Northern Ireland’s First Minister in the Assembly yesterday). There is an understandable wariness to devolve this (at least in totality), partly because it is complex (for example, you have to stop Tesco, BP or HSBC just moving its office of registration) but mainly because it would simply encourage a “race to the bottom”.

There is just about the possibility now that Corporation Tax powers could be devolved to Northern Ireland alone as part of a “scatter gun approach”. This would be an error – the fundamental lesson must be that each of the four countries should have the same powers exactly (whether they choose to use them is up to them). However, the strong probability is that Corporation Tax powers will in fact be taken off the table – possibly replaced by income tax powers.

With regard to VAT, I should emphasise that, despite the First Minister’s positivity, I never saw it as a candidate for devolution either (again, just too complex). However, I do see scope to enable any growth in VAT receipts in a particular region to be retained b the region delivering the growth – potentially that even includes City Regions, not just devolved countries.

Note that the likeliest thing is that income tax will be set at 10 percentage points below the current rate, with each country then entitled to raise the remainder as it sees fit.

For all that, the very biggest fiscal requirement for me is one which is never mentioned – borrowing powers. There are two aspects to this:

  • each devolved country should be able to retain any under-spend at the end of each financial year to put into its own pot the following year (currently, except where specifically negotiated, any money left over is returned to the Treasury; the result of this is the mad February/March spending sprees we see to get the money spent, which means it is often spent in a very short-termist and ineffective way – on programmes which don’t help or pavements which don’t need repaired);
  • each devolved country should be able to borrow money, probably from the Treasury (which would need a contingency of its own), or to bid jointly for money from a “Federal Programme Fund” (say for cross-border roads, ferry subsidies or whatever).

It is these borrowing powers, combined with a non-requirement to return under-spends, which would probably make the biggest practical difference – boringly technocratic though they sound!


9 thoughts on “Borrowing key, not Corporation Tax

  1. Scots Anorak says:

    “However, I am increasingly of the view that the only two taxes really in play for devolution are duties (on drinks or flights or whatever) and income tax.”

    The key question here is what that little word “whatever” might mean. As matters stand, there is a real danger that simply forcing Scotland to set its own income-tax rate, even if it sets the same one as England, will actually reduce the amount of money that it has to spend, since what is raised will be less than the Barnett formula funding that it replaces (quite apart from the fact that running Revenue Scotland will itself cost money). Scotland has a larger per-head tax take than the UK as a whole, but only if one includes whisky and oil. For that reason, it would be more practical to devolve everything and have Scotland pay Westminster for defence, embassies, etc. Provided Scotland’s contribution covers a per capita share of actual spending in those areas, there is no reason why a proportional share of national debt should not be devolved too (indeed, there would be problems down the line were that not the case, since Scotland might well come to feel that it is paying for the profligacy of other parts of the UK). From a Unionist perspective, if national debt were devolved now, it would have the benefit that Scotland would not be able to threaten to accept a share of UK debt when we get on to round two of the referendum campaign.

    Now it could be argued that the Barnett formula is a fudge, since it delivers substantially higher funding per head than the UK average, but substantially lower funding than is actually raised in Scotland (much of the rest going on debt interest). It might be possible to devolve a basket of taxes to Scotland that more or less adds up to the same as Barnett. However, I suspect that this would merely draw attention to the fact that Scotland is sending more to Westminster than it gets back in return, since the missing taxes would be relatively few and relatively easy to identify. I don’t think it would be poltically feasible for a UK Government to act as the Prime Minister appears to have suggested and just devolve income tax. Apart from anything else, as the link above shows, people have noticed.

    The Labour Party is currently humming and hawing about the knock-on effect that devo max might have on the voting rights of its contingent in Westminster, their number, and their future chances of becoming Chancellor or Prime Minister, but it is what a large majority of Scots are comfortable with. It is possible that the party will pay a high electoral price if it refuses to countenance it. SNP membership has now hit 60,000. Quite apart from the prospect of a second referendum at some stage, it is possible that the party might even hold the balance of power in the next Parliament. You are absolutely right that federalism makes sense, but I can’t see that happening. British political culture is usually only willing to change what it absolutely needs to change, and because it doesn’t do long-term planning, in most cases it doesn’t even change that. Limiting Scots MPs’ voting rights is a price most Scots are willing to pay.

    By the way, my understanding of VAT is that, while it could be devolved theoretically, as happens in the US, it cannot be devolved under EU law.

  2. Chris Roche says:

    To look the corporation tax question straight in the eye and neatly proceed to go off on a tangent __ why is it that when the Republic of Southeast England’s economy prospers the Republic of Ireland’s economy benefits enormously, but that of England-worshipping NI continues to stagnate away as ever?

  3. Ed says:

    If we are going to have a federal UK, let’s do it properly. In my opinion the devolved assemblies (including one or more in England) should fund their own policy areas of responsibility entirely from their own taxes. There should be no question of any local under-spend going to the federal treasury, similarly any borrowings they make should be directly from the market with no bailouts or guarantees from either another devolved assembly or the federal UK budget. This strict compartmentalisation of decision making, costs and responsibilities is the only way to ensure accountablity of both the politicans and the different electorates, and to prevent any free-loading on other polities that would breed resentment.

    • I’m highly highly sympathetic to that.

      I would stop just short, in that I think one clear advantage of the UK is that if something goes terribly wrong in one region (say, a key industry collapses), there is an economy of scale to help that region out. Krugman made that clear during the Referendum debate when he compared Florida and Spain. For the Union to mean anything, the a Florida option has to be possible in the UK too. This means I would have *some* element of a Federal Consolidated Fund used to assist poorer regions.

      But to be clear, I’m more or less with you and there are two specific further differences (in addition to devolution of income tax and duties) I would have – first, regions keep any growth in VAT they preside over; and second, much of the Federal Consolidated Fund would be allocated through bids for Capital projects. In other words, it would not exist primarily to bail out consistently poor regions.

  4. What is wrong with a taxation race to the bottom? Taxation is little more than government sponsored theft.

  5. I doubt if we’d get 10% of the income tax never mind everything above 10 percentage points.

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