Wednesday, 11 November 2015

Tax Credits and the Scotland Bill

The SNP introduced a proposed amendment to the Scotland Bill. It would have made the subject matter of the Tax Credits Act 2002 an exception to the general reservation of Social Security schemes. To understand what this means, we need to look at the way the Scotland Act works.

The Scotland Act

Under Schedule 5 of the Scotland Act, certain policy areas are designated as "reserved matters", which means Holyrood, in general, has no say over those issues, what the law is in relation to them, and how government agencies give effect to those schemes. In most instances, Westminster Government departments will have direct control over the way those matters operate, but sometimes the Scottish Government or Scottish local authorities will have a role in administration or implementation.

At the inception of the Scottish Parliament, welfare was a reserved matter, as was taxation, save for a specific income tax power. This means that social security has been legislated for across the UK in a fairly uniform way, and welfare schemes, tax credits, and tax has remained largely the same across the different nations.

What's New

The Scotland Bill changes this. A wide array of "exceptions" are being made to this general reservation. This will give the Holyrood Parliament the freedom to change, replace and create social security benefits in certain areas, and to top-up and change the way certain benefits that remain reserved, especially the housing component of Universal Credit, operate. This means, for example, more flexibility in mitigating the "bedroom tax".

For the benefits that are being fully devolved to Scotland, the funding for those will come from money that Westminster currently spends: it will be hived off into a separate fund, in much the same way as spending is for other areas at Holyrood at the moment, from which the Scottish Parliament can draw resources to pay for those benefits in Scotland. If the Scottish Parliament wishes to top-up a benefit or to create a new one, it can do so from its own resources.

It can pay for those new or top-up benefits in one of two ways: it can re-allocate spending from other parts of the Scottish Government's budget; or it can exercise Scotland's new tax powers to increase revenue that way.

The SNP's Amendment

Eilidh Whiteford is responsible for the amendment
Eilidh Whiteford's amendment to the Act sought to make Tax Credits an exception. Quite how they envisaged this would operate is far from clear. The exceptions the UK Government has introduced for specific welfare benefit areas are a lot more detailed than this amendment was (see especially proposed ss20-28).

With each of the benefits that is already being devolved, considerable thought has been put into the mechanics of allowing Scotland to diverge from the rest of the UK. Questions like who is going to be responsible for the administration and the structure of those benefits, DWP, the Scottish Government, local authorities, have been examined at length to ensure the schemes are workable.

It does not appear that the same thought has been given to the devolution of tax credits. For one thing, and unlike most social security and welfare, tax credits are functionally administered through HMRC rather than the Department for Work and Pensions. It is not clear whether this amendment envisages that the Scottish Government would now administer and set the rules for tax credits in Scotland, or merely legislate variations on the UK scheme and ask HMRC to administer it for them. What role, if any, would Revenue Scotland have in the interplay between these taxes and the soon to be devolved personal income tax powers? It isn't clear.

It also is not clear how the SNP proposes the Scottish block grant is to be altered to take account of the fact that tax credits in Scotland would be different from those in the rest of the UK. This is where the nature of tax credits being different from other welfare could take on an added importance. It is not as straightforward as splitting rUK "spending" from Scottish "spending" with respect to tax credits as it is for other welfare payments. Would we decide what is "Barnettable" in this context?

This proposal, it should be clear, does not involve protecting the amount of money available in tax credits for Scottish workers and families. It merely proposes to devolve the subject matter. If the Scottish Government wanted to protect Scotland from George Osborne's cuts to tax credits, therefore, it would need to find the money from elsewhere: within its own budget. This change cannot force George Osborne to spend more money. At most it can ring-fence Scotland's share of what he decides he wants to spend on tax credits. Unless the SNP have an alternative proposal to the Barnett formula, that is the necessary effect of their amendment.

The Alternative

Understanding those implications is important, because it serves to show how little things would change compared with what the SNP could do regardless of whether or not tax credits are devolved. It is not necessary, as Alex Neil admitted in a Holyrood debate only a week ago, for Holyrood to have legislative control over tax credits in order to protect those who would be affected by tax credits cuts.

The "power to supplement" or to "create" new benefits, targetted at the families and workers affected, could fill that gap and would put the Scottish Government in no worse a position as to finding the money to pay for it. If anything, they would benefit from administrative clarity that tax credit devolution would not, as there would be no need to complicate the fiscal framework even further.

One of the major criticisms that the SNP have been directing towards the Secretary of State for Scotland is that the Scotland Bill's new fiscal framework is taking longer than anticipated to agree between the UK and Scottish Governments. What seems perplexing to me is why the SNP are therefore advocating amendments to the Scotland Bill, which do not give them any greater power to protect Scotland from tax credit cuts than they have already, which would serve to complicate and delay the fiscal framework negotiations. No doubt if that did happen, they would then complain to the press that the UK Government was breaking its promises to deliver new powers promptly to Holyrood.

The only policy decision that the SNP would be able to make with the devolution of tax credits that they could not make with their other welfare powers would be to cut the tax credits of people by more than George Osborne has. I doubt they plan to do this. If we were to be charitable, they may wish to taper tax credits more aggressively at the top of the income scale to protect those lower down. This would be a potentially welcome change, but the cynic in me suggests that is not their intention at all.


What this is endemic of is a desire by the SNP to keep the public debate in Scotland away from actual politics and policy decisions and into the realm of constitutional politics. Any situation where the SNP could mitigate the worst excesses of Westminster policy, but at a price, is distracted from by saying Scotland wouldn't have these tough decisions to make if only we had more powers.

The problem is, with powers comes responsibility. There may be perfectly sound reasons for saying that Scotland should control its own tax credits system. What is needed beyond that, though, is a government that is super clear on the detail about which winners and losers they would pick instead of the approach of the Westminster Government. The SNP want Scots to believe that they can fix all of the problems of Osborne's cuts without any of the drawbacks.

It speaks to a more fundamental characteristic of the way the SNP have governed Scotland in the last 8 years. They seem afraid to actually use Scotland's powers to try new things when it comes to deciding how we spend our money. Where they have made public sector reform, it's been to centralise, rather than to look under the hood. The danger is that if they use the powers and it works well, it risks showing Scotland that it literally can have the best of both worlds: policy better suited to its own needs while sharing resources and schemes where it is expedient to do so with the rest of the UK. Using the powers now also risks exposing the fact that the SNP have let a lot of things stagnate in Scottish society where they had the power to be radical. That rather undermines the rhetoric and rose-tinted vision of the utopian independence-based alternative.

The debate has to move on now. The Scottish Parliament has extensive powers. Sure it's not as powerful as I'd like it to be. But it has more than enough to get started. If the SNP really are right and these powers don't help Scotland: prove it. Try something new and then come back if it doesn't work. But this Scottish Government and many of its supporters are increasingly sounding like the petulant child that complains they got a red Power Ranger instead of a green one. You've got a Power Ranger. You can play with it or you can sulk.