The Smith commission appointed in the aftermath of the Scottish independence referendum presented its report last week, which amounted to an agreement of sorts between the leading political parties in Scotland.
Public expenditure in the country is about ￡65bn, of which the Scottish government itself spends about ￡37bn, mostly on health and education. Welfare, defence and debt interest are the largest expenditure items that remain the responsibility of the UK government. At present the Edinburgh government is almost entirely funded through a block grant from London. Under the Smith recommendations, nearly half of its expenditure would be raised by transferring control of Scotland’s income tax receipts and half of the value added tax revenues attributable to Scotland. Even though Edinburgh will have no power to vary the rate of VAT, the revenue from both sources will depend on the performance of the Scottish economy. Unless this outstrips the rest of the UK, the outcome will be a gradual reduction in the effective subsidy to Scotland, which at present receives about ￡5bn more in grants than its population share could justify.
At present there are three rates of income tax in Britain: the basic rate, payable on income above the personal allowance of ￡10,000; the higher rate, which applies to income above ￡40,000 or so; and the additional rate on income over ￡150,000. About 2.1m Scottish taxpayers pay the basic rate; 370,000 are liable at the higher rate; and 18,000 suffer the additional rate. The Edinburgh government will have the power to vary the rates and bands but not the overall structure or the personal allowance. It has had some such power since the Scottish parliament was established in 1999; the basic rate of tax can be varied by up to 3 percentage points, though the use of this power has never been seriously considered.