 | 'Labour must explain why it put at risk the consensus that took six years to build. We hold to the position that the referendum is unnecessary and a second question on tax is dangerous.' Paddy Ashdown in the Scotsman, 10 th March 1997. |  |
| 'Labour must explain why it put at risk the consensus that took six years to build. We hold to the position that the referendum is unnecessary and a second question on tax is dangerous.' Paddy Ashdown in the Scotsman, 10 th March 1997. | |
On Thursday 24 th July the government will publish the long-awaited white paper on devolution for Scotland. In the first article in a series examining the key issues which the white paper will address Scottish Political Editor, Peter MacMahon, looks at the controversial tax powers proposed for the Scottish Parliament.
Money is the root of all evil, then the devil of the devolution proposals will be in the detail of the plans to finance the devolved parliament.
The grand rhetoric and noble aspirations of the home rule cause will founder if they are not based on firm financial foundations.
To this end, the Scottish Secretary, Donald Dewar, has been embroiled in long and detailed negotiations in the Cabinet subcommittee on devolution.
The most controversial and high-profile aspect of the financial plans will be the proposals to give the parliament the limited tax powers which Labour promised before the election and which will be the subject of a separate question in the forthcoming referendum.
Although in the long-term the funding which Westminster gives the parliament will be of greater significance, it has been the "tartan tax" - made famous by the former Scottish secretary Michael Forsyth - which has attracted more attention.
The tax issue has proved one of the trickiest ones which the subcommittee had to resolve over the past three months.
Labour has always said that its devolution plans would be based on the blueprint drawn up by the cross-party Constitutional Convention in which the party played a leading role.
The convention's final document, Scotland's Parliament, Scotland's Right, stated that the parliament would have the discretion to raise or lower the basic rate of income tax by three pence in the pound.
This was a formulation agreed as the "least worse" option for levying the tax which those in favour of home rule believed was necessary to give the parliament a limited degree of accountability. If the parliament was to levy the three pence in its entirety it was calculated that this would raise around £450 million a year.
This not a large amount compared to the overall budget of £14 billion which will come centrally from the UK Exchequer, but nonetheless it is a sum of money which could make a noticeable difference if it was spent on, say, education or the health service.
However, the convention plan did not take into account the effect of changes to the tax system which the new Government is now committed to. The Chancellor, Gordon Brown, has promised to introduce a 10p in the pound starting rate and has not ruled out other changes to the tax system, though he has ruled out income tax rises.
Ministers are reluctant to disclose the precise details of what will appear in the white paper, and became extremely agitated when The Scotsman disclosed they were moving away from the original convention plan, but there are clues as the likely new formulation.
In a paper published by the Institute for Public Policy Research, a left-of-centre think- tank, a management consultant, Wendy Alexander, and an academic, James McCormick, looked at ways around this problem.
The authors warned: "This issue of the unforeseen impact of five years of UK tax reform is one reason we caution against attempting to set in stone the precise nature of the revenue powers and so preclude appropriate refinement of the financing arrangements."
Any subsequent review of the financing arrangement should consider "how further refinements could strengthen the element of buoyancy to allow a Scottish parliament to benefit directly from any improvements in Scotland's relative economic performance".
This thesis is interesting enough in itself but has an additional intriguing element: Ms Alexander is now one of the special political aides employed in the Scottish Office by Mr Dewar to advise him on constitutional change.
It is therefore highly likely that there will be some mechanism which takes the "tartan tax" beyond the boundaries of the basic rate while sticking to the objective of raising the equivalent of the three pence on the basic rate - around £500 million.
That option would fit in with the carefully-chosen words of the Labour leader, Tony Blair, when he spoke in Edinburgh in June of last year after his decision to hold the devolution referendum. Mr Blair told his audience in the Playfair Library that "we want to see revenue powers at the margin: the ability to vary tax up or down with a defined limit amounting to less than five per cent of the annual Scottish Office budget".
Labour's Scottish manifesto was equally careful to avoid a commitment to use income tax, giving the new Government flexibility in its choice by stating that the parliament would be given "defined and limited financial powers to vary revenue".
So all the indications are that there will be two phases promised in the white paper, with the second, long-term option holding out the prospect of some completely different kind of tax, possibly on pollution rather than income.
In the short term, Ms Alexander and Mr McCormick also give a hint of a way of presenting income tax plans in a way which gets around Labour's - and Mr Blair's in particular - aversion to being seen as a tax-raising party. They raise the possibility, long-debated in Labour circles but never adopted because of the fiscal orthodoxy of succeeding shadow chancellors, of hypothecation of taxation.
Hypothecation, or earmarking, as the authors explain, means defining how taxes would be spent before they are raised.
Under this plan, the parliament would specify how it would spend the amount it proposed to spend from the "tartan tax" before it used the money, a move which could even be put to the public in a referendum.
Though this mechanism is unlikely to appear in the Devolution Bill which will follow the referendum it is probable that the white paper will raise the issue to stimulate what the Government hopes is a more positive debate about tax.
The thrust of this new approach was confirmed by Mr Dewar in a recent interview with the Daily Record. He said that he would only see the tax powers being used for specified projects "let us say for a particularly important health project or education project".
The whole exercise, which will bear fruit on Thursday, has proved that turning manifesto commitments into proposals which form the basis of law is a long, hard, gruelling process.
In the debates in the cabinet sub-committee Mr Dewar has faced the forces of devo-sceptical English Labour, led by the Home Secretary, Jack Straw.
Mr Straw and his colleagues have used the opportunity to raise some probing questions about the higher levels of public expenditure per head in Scotland compared to south of the Border.
The Scottish Secretary, it is said, has managed to fight off Mr Straw's attempts to unpick Scotland's funding arrangements, though the Home Secretary has reserved the right to return to the issue in future Cabinet debates.
In the long run it will be the transparency in the funding process - which the public negotiations on funding with Westminster that the establishment of a parliament will inevitably bring - which is likely to cause more problems for Scotland than the limited power to raise additional funds from the taxpayers.
But when the white paper is finally made public we can be sure that the "tartan tax" will attract more than its share of attention. Michael Forsyth will be watching with a certain wry amusement.
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