We Should Welcome Tax Competition Between Scotland And England

Scottish Bank Notes - Scotland Tax Rates

Finally, the chance for variety in the United Kingdom’s fiscal policy

There is good news this week for all those who want the United Kingdom to ultimately move in a more federal direction and reconstitute itself as a country where broad swathes of powers are devolved to the four home nations, with only those critical central powers being reserved by Westminster.

The first tentative step on that journey could be about to begin, as Scottish Labour announce that they intend (if elected) to exercise Scotland’s right to vary their income tax rates from the standard UK rates set by the Treasury.

Of course, being Scotland, any divergence will be in an upward direction, as LabourList reports:

Scottish Labour would use devolved powers to raise income tax while ensuring compensation for low paid workers, Kezia Dugdale will reveal today.

In a major speech in Edinburgh this morning, the Scottish Labour leader will set out a clear position to the left of the SNP, by pledging to increase the Scottish rate of income tax to 11p – 1p higher than that proposed by George Osborne and John Swinney. Given the powers mean that income tax rates at each level have to be raised in the same manner, Dugdale will also announce a payment scheme that will boost the salaries of those earning under £20,000 by £100.

Good. It is about time that the United Kingdom saw a greater variety of fiscal policy, and this relatively modest proposal is a good way to start.

However, there are obvious shortcomings. The present mechanism for varying rates is clunky and deliberately difficult to use, with that awkward rule which states that all bands of income tax have to be increased or decreased in lock-step with each other, so that raising the top rate of tax by 1p would also require raising the basic and upper rates by the same degree. This restriction is wrong and unnecessary, and almost worthy of Gordon Brown in its devious childishness.

Why should the Scottish government not have the power to cut the basic rate of income tax but raise the top rate if it so chose? Or why should Scotland be prevented from taking measures to make income tax flatter, if hell froze over and they wanted to move in that direction? There is no just reason for denying Scotland this additional flexibility.

Scottish Rate of Income Tax - Scotland - UK - Fiscal Policy

And yet we should still be glad for this more limited proposal from Scottish Labour, constrained though it is by current laws. Firstly, we should be glad because it will inject an element of real democratic choice into the Scottish elections, and give voters a meaty, substantial policy argument to mull over instead of the endless independence question.

The Spectator celebrates:

Those of you who live in the rest of the UK will have no idea what a relief it is for us Scots to have some real politics to deal with at last. Scottish Labour’s announcement today that it wants to raise income tax for everybody in Scotland is terrific – simply because it means that this year’s election will be a real contest about real policies.

For the first time in years we are going to get an election which is not about the constitution.

[..] So, at last, Scots will face a real, political choice this May. Labour and the Liberal Democrats are on the left, promising to put up taxes and spend more on public services, the SNP is in the middle, promising to do nothing while the Tories are on the right, pledging to reduce taxes, if they can.

Secondly, we should be glad because although the impact of this policy debate will only be felt in Scotland, it may start a debate in the rest of the UK about the advantages of a more federal approach to governance of our union, allowing for variations in key policies to reflect local priorities and sentiments.

Of course, Scotland already has broad powers over healthcare, transport and many other areas of policy – a fact which the Scottish National Party was noticeably quiet about during the referendum campaign, preferring to falsely pretend that the root of all Scotland’s ills lay in Westminster. But such is the prominence of tax policy, felt by nearly everyone, that it is bound to be noticed. And perhaps when people in England, Wales and Northern Ireland see Scotland making adjustments in fiscal policy in line with their local priorities, they will start to make similar demands for fiscal autonomy.

And thirdly, this could be another potentially great opportunity to discredit left-wing orthodoxy on taxation, and begin to cure Scotland of the misguided but prominent notion that steeper taxes and a more harshly redistributive tax regime are the pathway to Utopian social democracy.

The sanctimonious glee with which Scottish Labour yearn to raise taxes is betrayed when Kezia Dugdale says:

We will tear up this SNP budget that simply manages Tory cuts and instead use the power we have to set the Scottish rate of income tax one pence higher than the rate set by George Osborne. This will provide an extra half a billion pounds a year to invest in the future.

It all sounds so wonderful until it actually happens. And then, lo and behold, everybody’s pay packet takes a hit, but any additional revenue which finds its way to government coffers fails to make much of an impact.

In this case, Scottish Labour’s generous estimation is that the move would raise £500 million pounds every year – though one strongly doubts they modelled the likely behavioural impact of this tax change when cooking up their numbers. But even in the unlikely event that this prediction proves to be solid, if all of the proceeds went to bolster education alone (and they won’t), by my calculation it would amount to little more than £700 per child, per year once measures to compensate lower earners hit by the higher tax rate are factored in – hardly the kind of bold spending increase to justify Dugdale’s crusading rhetoric about investing in the future.

Meanwhile, if Scotland raises income tax rates by 1p, the marginal person will decide not to take that job offer and relocate from Manchester to Edinburgh. The marginal person will think again about moving their family or small business north of the border. And since Scottish consumers will have less disposable income in their pockets, the marginal business will go bankrupt or close down. Their numbers may not be great, at first. But Scotland will have become a slightly less competitive place. And northern England will have become slightly more appealing.

But this is good. It is all part of the healthy competition of ideas, which for too long has been suppressed in the United Kingdom by our vastly over-centralised Westminster government. One of the reasons that the SNP have gotten away with their sanctimonious but ineffectual howling at the Evil English Tories for so long has been the absence of any meaningful counterfactual to Conservative policies. With no counterfactual, Labour and the SNP have been able to accuse the Tories of all manner of missteps and claim that their own policies would have been far more beneficial, without any need (or mechanism) to prove their claims.

That time could now be at an end. If the political parties in Scotland become more willing to use the powers of the Scotland Act 2012 to make the kind of biting tax increases that the Scottish people apparently yearn for, we will soon find out whether merrily cranking up the size of the state really does result in a happy population holding hands and singing under a social democratic rainbow, or if it actually leads to something else – the reluctant realisation that there might just be something to conservative fiscal policy after all.

My money is on the latter.

Scotland Income Tax

Chart: Scottish Parliament

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Let’s Unleash Britain’s Great Cities

newcastle

London may be the centre of the universe, but that is no longer any reason for the British government to ignore the provinces and our other major cities.

Thus far, recognition of this important fact has come mostly from London envy and the desire to drag the capital city down a peg or two – not a very sensible policy as far as the national interest is concerned. But the debate is gradually coming to be seen in terms of helping the UK’s other cities to grow and to prosper. In essence, the debate is moving away from a Labour-style “let’s drag everyone down to the same mediocre parity” argument and towards a “let’s create opportunities for innovation and growth and see what happens” proposal. This is most welcome.

The economist Jim O’Neill, writing in The Telegraph, has half of a good idea when he proposes merging northern cities and devolving fiscal powers to them in order to spur economic growth:

After considerable discussion, and for primarily practical reasons, we settled on what we are describing as the 15 largest “metro regions”. This is not to downplay the importance of other cities, towns or villages, but to emphasise – as many experts have concluded – that it is the largest urban areas that usually generate the most economic activity. We need to concentrate our efforts there; evidence from other countries shows that the biggest urban areas matter most when it comes to unleashing a step-change in national economic activity.

In this context, I raised a delicate topic with the last of three panels: namely whether the Greater Manchester area is, in fact, big enough. If you look at a list of the world’s largest cities by population size, you have to go a long way down from London before any other UK city appears. Some argue that in the absence of another city with anything like the population and diversity of London then attempts to boost growth, however smart, won’t lead to much.

This is good stuff. Greater Manchester is certainly prime for devolution of fiscal powers under a unitary authority and an elected mayor, along the lines of London. Manchester is a large, globally recognised city. Granting it more power to alter local taxes, services and policies would be a great example of localism at work.

This blog has long advocated wholesale constitutional reform for the United Kingdom, in which England would gain its own Assembly to debate matters relating to England only, and powers of taxation and policymaking would be equalised between the assemblies of the four home nations under the UK Parliament.

Basing this new English assembly in one of the great northern cities would be a boon to the host city and would help to reduce the London-centricity of political and media focus in the UK without taking anything away from London, which remains the goose that lays the golden egg.

Unfortunately, after proposing the devolution of powers to major cities, O’Neill follows a somewhat different train of thought and his economist brain takes charge to the detriment of what was otherwise an intriguing proposal:

In the spirit of trying to keep an open mind, I quizzed the group further. What did they think of the notion of “ManPool”, where Liverpool and Manchester might bring together their populations and resources to create a “supercity” in the north? Many Telegraph readers might be familiar with the depth of history between Liverpool and Manchester, even if they are not followers of a team from either city. Football allegiances aside, the reaction I received made it pretty clear the prospect was highly unlikely from an administrative perspective.

Sometimes, things that make perfect sense when viewed on a chart or an Excel spreadsheet are self-evidently ludicrous when you consider the human beings that the numbers represent.

While devolution of greater powers to the UK’s major cities is to be welcomed, the power must be devolved to recognised levels. People know what Manchester is, and at a push they could get behind the idea of the Greater Manchester conurbation. The same can probably be said for Birmingham. But ‘Manpool’ or the West Midlands Conurbation are places that exist only in the minds of civil servants and economists.

This is where a politician’s mind is required in addition to that of an economist. Great cities need more than the perfect mix of investment, local skills and natural resources. There is an element of civic identity, the fact that being a Londoner or a Mancunian or a Brummie is a clearly identifiable term and means something, which must be considered as well as the cold hard calculations as to what makes an ‘optimal’ self-governing urban unit.

Unfortunately, this fact seems lost on O’Neill, who takes his consolidation proposal to even more objectionable extremes:

One could easily apply the same logic to other cities close to each other, such as Derby and Nottingham, or Newcastle and Sunderland.

Following this logic to its ultimate conclusion, we would be better off if we treated the entire United Kingdom as one giant conurbation, a single vast city-state. The UK could devolve power to itself, and under unified authority it would enjoy better coordination of projects and higher economic growth. This is clearly preposterous.

Nonetheless, Jim O’Neill has proposed half of a good idea. The UK’s major cities need to strengthen their individual identities and improve their economic vibrancy. Devolving more power to them could only be a good thing, if only the seemingly inbuilt British resistance to variety and fear of the dreaded ‘postcode lottery’ could be overcome.

But rather than wasting fruitless hours in committee trying to come up with a catchy, memorable name for the new NorIpsCamWich Urban Region, let’s just use those handy city names conveniently handed down to us by history and actually recognised by the people who live in them.

After all, there’s no point in creating extra work.