Paul Hutcheon: the Smith Commission has been bad for Scotland

Dishevelled frontrunner Boris Johnson, who always looks like a man who has been helping police with their enquiries, floated a tax plan last week that agitated his Scottish Tory colleagues.

Johnson, a long-term sceptic of what he regards as the Scotland’s generous funding arrangements, said he would raise the 40p income tax threshold from £50,000 to £80,000 - a £9bn tax cut for the better-off. His spinners said it would be funded by rises to national insurance (NI).

Cue howls of outrage from the Scottish Parliament, where income tax is devolved but NI is reserved to Westminster. Critics claimed that Scots would be paying for a tax cut in England, a charge that was later challenged by David Phillips at the Institute for Fiscal Studies. He argued that the Johnson tax cut could boost Holyrood’s coffers.

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However, the Johnson plan does shine a harsh and unforgiving light on the mishmash of powers held by Holyrood and the botched process that led us here.

In the heat of the independence referendum, when Yes took a narrow lead, the pro-UK parties issued a joint declaration - the “Vow” - backing a significant transfer of powers to the devolved Parliament, which was then fleshed out by the Smith Commission. The end result was Holyrood controlling income tax and NI remaining in the hands of Westminster.

These inter-linked taxes were once in sync, but the diverging policy choices made in Edinburgh and London have broken the system. NI rises by the UK Government, coupled with the SNP rejecting income tax cuts, have led to a 53% marginal rate of tax for individuals earning around £45,000 a year. Johnson’s proposals would have the likely effect of extending the 53% rate to a much bigger pool of income. Such an outcome was never anticipated by the architects of devolution 2.0.

The recent admission by the SNP Government of a looming £1bn budget black hole (actual tax revenues are out of line with the forecasts) is another worry. Advocates of equipping Holyrood with extra financial powers believed it would result in greater fiscal and political responsibility, where MSPs would have to find the money to increase spending. Fair enough, but the reality is Scotland does not have enough high earners and cuts, not spending rises, look to be on the horizon. Our new settlement is also underpinned by a set of rules - the “fiscal framework” - so complicated it would have baffled Stephen Hawking.

The other signature recommendation of the Smith Commission - devolving some social security benefits - will also put huge pressure on the public purse. Scots already pay towards the running costs of the Department for Work and Pensions, which administers UK-wide benefits. The Scottish Government last year estimated that the devolved social security powers alone will cost £308 million to implement over four years. Paying twice is not an efficient use of funds.

Footing the bill for devolved benefits will also put a strain on tight budgets. In 2017/18, around 4,000 UK Government Sure Start Maternity Grants were paid north of the border. The SNP Government replacement attracted the same number of payments on day one. In the short to medium term, Holyrood will be defined by a fragile tax base and a rising demand for social security.

In retrospect, everything about the Smith Commission and its implementation was rushed. Announced on the day after the referendum, its cross-party members reported within two months and the package was in law by Spring 2016. By contrast, the Constitutional Convention, which produced the blueprint for devolution, was established in 1989 and saw the broad outline of its work voted through by MPs around a decade later.

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Some pro-UK politicians concede privately that the “Vow” was a mistake. It was understandable, given the Yes surge in September 2014, that the Unionist parties would try to change the conversation, but it reeked of panic and short-termism. The vote should have been about independence, rather than a dog-eared version of devolution that will struggle to cope with meeting the demands of modern society.

MSPs, it could have been argued with some justification, did not deserve extra powers, given their track record on areas already devolved. NHS targets have been suspended and the educational attainment gap refuses to close. No new powers were needed to transform our creaking public services.

The Smith Commission was symbolic of the failure of devolved Scottish politics since 1999: the obsession with powers instead than outcomes; and the absence of public service reform. First Minister Nicola Sturgeon wants the power to set the minimum wage, but she does not commit her administration to raising the floor to £10 an hour. Devolution is always a process and never an event.