Treasury Committee

Oral evidence: Proposals for further Fiscal and Economic Devolution to Scotland, HC 760
Tuesday 28 October 2014

Ordered by the House of Commons to be published on 28 October 2014

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Members present: Andrew Tyrie (Chair); Steve Baker, Stewart Hosie, Jesse Norman, Mr David Ruffley, John Thurso, Alok Sharma.

Questions 1-121

Witnesses: Patrick Stevens, Tax Policy Director, Chartered Institute of Taxation, Chas Roy-Chowdhury, Head of Taxation, Association of Chartered Certified Accountants, and Frank Haskew, Head of Tax, Institute of Chartered Accountants in England and Wales, gave evidence.

Q1   Chair: Good morning. Thank you very much for coming to give evidence this morning. We have quite a bit to get through and we are going to be seeing the IFS in a second session shortly.

Mr Roy-Chowdhury, the Scots have told us in one way or another for many years that they feel they should have more say over the revenues from North Sea oil. Do you think that there is merit in considering ways in which, at the very least, that could be assigned—perhaps more than assigned; that control could be given to Scotland for it? There are two questions there.

Chas Roy-Chowdhury: I think if PRT, petroleum revenue tax, were to be assigned to Scotland, it should be along with devolving corporation tax, so the short answer is they should not just be sliced and diced out of corporation tax and sent to Scotland. I think there is an issue around the administration of it—do the Scottish Revenue authorities round Scotland have the capability of administering the tax?—and also about the longevity of that tax with North Sea oil revenues going down. While it sounds enticing, the reality is that PRT is only a part of the tax that the oil companies are paying—part of that is corporation tax, part of it is PRT and PRT is a part of corporation tax—so I think it just creates complexity and uncertainty around revenue streams for the future and working out in terms of administration how much tax is due by the oil companies. So I would say no, unless corporation tax were being devolved at the same time.

Q2   Chair: Is there any aspect of devolution of tax that is going to reduce uncertainty as opposed to increase it? Any tax? In other words, is your objection not an objection to almost any tax to fiscal devolution?

Chas Roy-Chowdhury: I think there will be complexity, there could be uncertainty. We have had devolution of tax already where the Scots have been entitled to vary the income tax rate, although they haven’t done that. To the extent that there is going to be devolution with a change in the tax itself, I think that could create uncertainty or complexity and avoidance.

Q3   Chair: Avoidance? You think that we may end up with less revenue overall?

Chas Roy-Chowdhury: Anti-avoidance measures need to be taken around it, yes.

Q4   Chair: Is there evidence that is already going on with respect to the fact that the shelf contains two fiscal regimes already—well, more than two, but two main ones: one for the UK and one for Norway?

Chas Roy-Chowdhury: I don’t know the answer to that. I am not sure.

Q5   Chair: I am only making the observation that it strikes me this is something we have been dealing with for some time, is it not?

Chas Roy-Chowdhury: Yes.

Q6   Chair: Is there anything either of the other two witnesses wants to add on this before I pass over to Mr Sharma?

Patrick Stevens: Only as an addition. I am wholly with what Chas is saying here. To a certain extent, what we are most interested in is the practicalities of the administration of the taxes, and to that extent PRT probably is quite a good candidate for devolution in that the whole of PRT administration is looked after by one rather self-contained unit within HMRC, based in London. They would probably need to be shipped out or replaced, which is another aspect of the whole administration thing. Regarding the interaction with corporation tax, of course, I absolutely agree. It is just that, in pure practical terms for HMRC, they could see quite easily all the people who do PRT.

Frank Haskew: I would certainly agree with that, Chairman. I think PRT is certainly a tax that should be looked at in terms of devolution because it does have at least one attribute that is quite important: effectively you can physically identify where the oil or gas is coming from, so to that extent you have an ability to identify the thing you are going to tax—although that is of course subject to the fact that the boundary of the shelf would need to be split between Scotland and the rest of the UK, and that in itself could be problematic.

Q7   Chair: The argument for it is: given the heap of politics that has surrounded it for so long, if the administrative and fiscal issues can be addressed, there might be merit in it. You seem to be saying those can be addressed.

Frank Haskew: I think they certainly could be addressed, but again we shouldn’t underestimate, as Patrick and Chas were saying.

Q8   Chair: The first point was made—the corporation tax point.

Frank Haskew: Yes.

Chas Roy-Chowdhury: I think for none of these taxes that could be devolved the administration or practicalities are insurmountable; it is really about how far you want to go to incur additional costs and complexity.

Q9   Alok Sharma: Good morning, gentlemen. Mr Roy-Chowdhury, I think you have made it pretty clear you think devolution is going to lead to a more complex system, it is going to encourage avoidance—basically you are saying to us it is going to turn the tax code into even more of a dog’s dinner than it is right now. Having said that, though, is not greater complexity effectively the price we will have to pay for devolution?

Chas Roy-Chowdhury: Yes. As I said, income tax has already been devolved in terms of powers the Scottish administration had, but they have never varied that. I think that to the extent that taxes are going to be varied, that is where the complexity will arise. There will be different rules around those, and if there is the opportunity to arbitrage between tax rates, then clearly there needs to be anti-avoidance around that, so greater complexity. I think there will be issues, but at the end of the day it probably comes down to a political decision and how much complexity we are willing to accept for the political decision. It is the politics around it rather than the actual complexity that is going to drive the agenda.

Patrick Stevens: I absolutely agree that the more tax that is devolved—by the way, can we use the word “devolved”, because simply devolving power makes no difference at all to the administration of the tax system? It is only when that power is made use of, so that you have more than one tax system in the same United Kingdom, that the administration kicks in, but the more that is devolved, the greater the complexity that arises. It is obvious. Indeed, the way I have been looking at it is the first and most obvious thing that will be devolved—I know we are not going there yet—is income tax on employment income. You can look at it and think about it and see how it is going to be done. Then, when you add the other bits of tax system, each one will add more complexity. That is not suggesting for a second those things should not be devolved. It is just something for the politicians to decide.

Q10   Alok Sharma: One of the things often talked about is basically aligning national insurance and income tax. Are you saying that under devolution this is going to be impossible?

Frank Haskew: If I could just come in there, there has been quite a lot of discussion about merging income tax and national insurance. We are working up a paper on it at the moment that we would be happy to share with you. The fact is that national insurance has its origins in effectively a state insurance system. That is where it started—you put money in and you had benefits coming out, and it still has a lot of those characteristics, so it is not income tax and merging the two is fraught with difficulty at the UK level. Trying also to devolve national insurance, which is intrinsically linked with the state benefits and expenses side and benefits paid out to people, is quite a difficult task.

Chas Roy-Chowdhury: If there is going to be devolution of income tax rates and allowances, then any alignment that may have happened, which is probably sidelined now but may happen in the future, would be very difficult.

Alok Sharma: It would be impossible.

Chas Roy-Chowdhury: Yes, that is right. It would be nearly impossible, because you could have a UK policy but the Scots could decide what they want to.

Patrick Stevens: Unless, of course, you devolve national insurance as well. If benefits—I use that word in a rather vague way—are going to be devolved, then at least there is some kind of argument for looking at whether you should devolve national insurance also, in which case you are back to the same question but twice over, because there would be two entities.

Q11   Alok Sharma: Can I ask you collectively: if you were making these decisions, what would you devolve to ensure that the tax system overall became less complex?

Chas Roy-Chowdhury: If you want simplicity, then clearly the less you devolve the better, but the status quo is not acceptable as things stand. Where stamp duty has been devolved, landfill tax has been devolved, so those two areas probably will not make that much difference. There are possibly signs of some avoidance measures being undertaken, tax planning going on, but I think the less there is devolved, the better in terms of the integrity and simplicity of the tax system. It depends, as Patrick said. You can devolve a lot; it depends on how far a Scottish administration wants to change that tax. Today we are starting off with the same tax, but tomorrow, if income tax were dramatically different to a devolved Scotland, Scottish income tax could be very different and corporation tax could be very different, so it depends on that.

Q12   Alok Sharma: I am sure my colleagues will take up the issue on differential rates of income tax. Basically you are saying the less devolution, the better in terms of reducing complexity in the tax system. Would you argue that in terms of making sure there is not a huge amount of tax avoidance taking place, we should just be decentralising taxes on tangibles that cannot be moved, and when it comes to intangibles that should be administered as it is now by HMRC and effectively central government in London?

Frank Haskew: I think there is an increasing level of difficulty in devolving taxes, isn’t there? That comes into both the legislative and the practical, and the ability of HMRC to administer it. You start with land taxes so SDLT is an obvious one, business rates, that sort of area—PRT potentially is in that category, probably slightly further down—and then you are moving further and further away from taxes you can physically levy into transaction taxes. Then it becomes slowly harder and I think you could almost have—we have been working up a little scorecard if you like, but there is an increasing order in which devolution of taxes gets harder.

Patrick Stevens: I agree entirely with that. You can easily work down the list of things and powers within, for example, income tax, because whether it is just rates and thresholds and so on or whether it is the amount to be taxed, each time it gets more complicated. The administration increases and in my view you just watch out for avoidance as you go along. I don’t think there is a big avoidance question here. You just try to write it in the right sort of way.

Q13   Alok Sharma: The final question from me at this point is how confident are you that when these changes are made in the timeframe being talked about, HMRC and Revenue Scotland will get this right and we are not going to end up with a total disaster in terms of administering the tax system?

Chas Roy-Chowdhury: We are looking at 2016 as a timeframe for the change in terms of the income tax devolution, so if we are now looking at much more than that, we need to perhaps extending that timeframe. There is nothing worse than having a dysfunctional tax system, the administrative burden going up, and therefore knee-jerk reactions introducing anti-avoidance measures. It needs to take the time it needs to take, because clearly there is going to be greater devolution that just what was being proposed for 2016, so we need to look at extending that timetable to make sure we get it right.

Q14   Jesse Norman: Mr Roy-Chowdhury, the Scottish variable rate of income tax is going to be levied on individuals resident in this country if they meet one of several tests. One is if they have a “close connection with Scotland” in a given year; another is if, even if they do not have a close connection, they spend more days of the year in Scotland; and the third is if they represent a Scottish constituency—a small number of people; that is the limitation. The question is how easy is it in practice going to be for HMRC to identify Scottish taxpayers?

Chas Roy-Chowdhury: Discussions we have had with HMRC on this group suggest that they don’t seem to think there is a huge problem; they need to just get employers to flag up the situation with their employees. But I think there are instances—for example, lorry drivers going to and fro, or people living in England and working in Scotland; there must be a lot of those—where I think there are more difficulties than perhaps we are thinking of at the moment. Once we start, we will start seeing some of those problem areas coming in if it starts as planned in 2016. In reality, it also means where you have pensioners, because the idea is to tax earned income in that way but not unearned income. So there could be a real mishmash of different areas that could cause problems. While simplicity is the word and the idea is not to cause businesses any greater administration and HMRC not much more administration, I think the individual will have to be aware and it will cost employers in administrative time in terms of trying to inform employees.

Q15   Jesse Norman: This is going to affect English resident companies that have Scottish employees, is it not?

Chas Roy-Chowdhury: Absolutely, yes.

Q16   Jesse Norman: The potential for increased paperwork and pain is significantly wider than just people who happen to be resident in Scotland.

Chas Roy-Chowdhury: I think that is right, yes.

Q17   Jesse Norman: Presumably PAYE reconciliations will go up at the end of the year, because there will be people who will be unclear because of the lack of clarity in the rules.

Patrick Stevens: Can I just come in on that one, just for one second? PAYE reconciliations will go up, but depending on how far the devolution goes I would certainly anticipate there would be far more self-assessment tax returns required from people who had a mishmash of different sorts of income. Up until now HMRC has been gamely taking people off doing tax returns and dealing with it all through PAYE. This must lead to a rapid reversal of that.

Q18   Jesse Norman: It is going to be quite onerous because more people will be pushed into putting in self-assessment tax returns and you will find lots of other people having to count these even if they are not necessarily affected by it. Is that right?

Chas Roy-Chowdhury: Yes, and you could have employment and your pension taxed in different ways, so you could have a person on a pension and working who has different status.

Jesse Norman: Sure, so that is another level of complexity.

Chas Roy-Chowdhury: As well as savings.

Q19   Jesse Norman: Presumably, if the rates tend to be higher than they are in England—that may well be true; that is a political decision obviously, but if it is—then the issues will get worse, because there will be tax arbitrage, with people coming over to England trying to fudge the numbers in some way et cetera to make themselves look better from a tax perspective, or indeed potentially moving their domicile.

Chas Roy-Chowdhury: Yes.

Patrick Stevens: Any changes in tax system where you have two different countries with a border that is very easy to cross will always lead to changes of behaviour.

Q20   Jesse Norman: This is a classic example, is it not, where the tax system cuts against the desire—it relies on people’s honesty but it also gives them an incentive to be dishonest.

Patrick Stevens: I’m not talking about dishonest. I’m sorry, just as clarification I was simply talking about people choosing where to live.

Q21   Jesse Norman: I agree. I am making a further point that is it puts pressure on. We want a tax system that exploits not merely people’s honesty but their self-interest and has them pointing in the same direction; what we are actually getting is a situation where their self-interest is tweaked by the tax system and will cut against the honesty required to fill the thing in properly. Is that right? I just want to be clear that is the effect.

Chas Roy-Chowdhury: Yes.

Frank Haskew: Whenever you create a boundary in tax, you create opportunities for potentially arbitrage or, as you say, the potential people for misreporting, say, income. That boundary doesn’t exist at the moment. If we move to a system whereby we have all these boundaries, then you will increase the pressure on taxpayers.

Q22   Jesse Norman: Presumably we can also expect to see increase in anti-avoidance measures, increase in compliance, those kinds of things that were the natural counterparts of people trying to fudge the system. Do you think we will also see an increase in HMRC’s use of investigatory so-called RIPA powers—RIPA being the Regulation of Investigatory Powers Act—where they try to go into people’s personal circumstances in order to work out whether they are complying with this or not? Would you see an increase in that likely?

Chas Roy-Chowdhury: It all depends how big the problem becomes and yes, I can see that happening. I can also see that Revenue Scotland may have to be involved much more, so there could be duplication of their effort even though HMRC as things stand is meant to be administering the tax code. If there is serious arbitrage going on, then I think there could be much greater resources needed to be brought to bear.

Q23   Jesse Norman: Much greater resources, I agree. But the reason I mentioned RIPA is because if people are at risk of fudging the number of days they have been in Scotland, then the instinct to try to put them under surveillance will go up for those marginal cases, high-yielding cases as well.

Frank Haskew: HMRC will presumably be looking to adopt a risk-based assessment to this. If there is fairly minimal differences in the rates, the risk may be fairly low, but obviously if that rises and you have potentially considerable amounts of revenue differences, then the risk will rise and HMRC will be looking to check that things have been properly reported.

Q24   Steve Baker: I was not exactly surprised to learn that we do not know exactly how many Scottish taxpayers there are or how much tax they are paying. To what extent do you think this is material to the discussion of whether or not further income taxation can be devolved?

Chas Roy-Chowdhury: It will be very much in terms of how much the pot going to Scotland will be. We very much do need to know how much of the tax take is going to be allocated to the Scottish Government—they need to know for their own budgeting purposes. It is something that needs to be cleared up before the implementation of the devolution of powers happens, because clearly a part of the proposed devolution as it stands in 2016 is there will be a certain amount going to Scotland, and they will then have to decide how they spend it and how they put up or put down the income tax rate. That needs to be very much bottomed out.

Q25   Steve Baker: Do you have a sense of the margin of error that is in the current information?

Frank Haskew: Not that I’m aware of.

Chas Roy-Chowdhury: No, I don’t.

Q26   Steve Baker: How far can the design and structure of income tax be devolved to Scotland while it is still being administered by HMRC?

Patrick Stevens: I would certainly have thought that if it were simply rates of tax, thresholds, bands, then continuing with one PAYE system but a more complicated PAYE system, because you will have the S prefix and the non-S prefix—Scottish taxpayers or otherwise—would most logically continue with HMRC. Simply from looking at it from outside that would be a logical thing to do. While the changes are all around, or mainly around, that employment earned income area, even with pension deductions and benefits obviously, still leaving it in one PAYE system, which is quite sophisticated and you can work out how it can be done, would make most sense. As soon as you get into other taxes as well, leading to substantially more self-assessment tax returns being required, then you need to enter into the discussion as to whether you need to ramp up the whole of Revenue Scotland in order to deal with Scottish self-assessment tax returns. It is more of an obvious cut-off area I would have thought. Is that a preliminary answer?

Q27   Steve Baker: It is. I was just thinking a bit more concretely. Labour has proposed to increase the limit by which the Scottish variable rate can be increased and to introduce progressive rates. We have wider ranging proposals from my own party and the Liberal Democrats. Do you think all these complexities have been properly understood by the politicians?

Chas Roy-Chowdhury: I don’t think so. I think all those promises that have been made before the referendum, I have no idea where they really stand. I think there was talk about devolving benefits and all the taxes, and the Smith Commission is now trying to make sense of all that, so I don’t know what is on the table. The locked-in banding system is currently on the table, and if Labour came to power and had their way they have the 15% changes and unlocking the bands, and I think the Liberal Democrats are looking at other taxes being devolved—I don’t know where we stand and I think that is why I say no. I think it should take as long as it takes for devolution to happen that politicians decide they want to make.

Patrick Stevens: Do remember that there are various elements that we can ask whether the politicians have fully thought through. There is the economics of it, what it is going to do to people and their behaviours and how much money is going to different regions. We are primarily interested in the administration of it. With absolute respect we would probably not expect any politicians to have fully thought that through.

Q28   Steve Baker: It is quite a few years since I had anything to do with the IT at HMRC. I did have some experience of it as a contractor, though I might be out of date. We did do quite a good job compared to the big boys but that is my point. You are much more au fait with the current state of IT at HMRC. How confident are you that HMRC will be able to deliver the necessary IT?

Frank Haskew: We have to recognise straight away here that even if you have a different rate of income tax, you effectively have two tax systems and the more you change those rates and, say, change personal allowances and have progressive rates, the more you move away from one single, coherent system—

Q29   Steve Baker: Sorry to interrupt you, but I am conscious of the chairman’s strictures to make progress. Do you foresee there being duplicate IT systems at HMRC?

Frank Haskew: HMRC has a huge investment in IT, and its lead time for making changes to IT is generally a couple of years ahead. It is a major task even to make one change on the tax return, so making multiple changes will be a major task.

Patrick Stevens: If one is simply talking about employment income—sorry to keep coming back to that but there’s the “you can see how it is going to work” and there’s the “that will be more of a challenge” division. At the moment, HMRC is investing heavily in its whole RTI system, their Real Time Information for PAYE purposes, which is on a journey at the moment, and the journey has not yet been completed. To throw into that two separate tax systems, each with its own rates and bands and thresholds, if you don’t let the one settle down first before hitting it with the other one, maybe there will be some more IT help required.

Q30   Steve Baker: Having fleshed out some of those issues of HMRC administering it what do you think would be the consequences of asking Revenue Scotland to take over the income tax system?

Chas Roy-Chowdhury: I don’t think they are geared up or prepared at the moment. Things get a lot bigger, more sophisticated. I think it would just be not something they could handle as things stand, unless they fast-track migrating a lot of the HMRC employees into Revenue Scotland. I just don’t see that could happen very easily or very quickly.

Frank Haskew: There would have to be quite a lengthy transitional period to have a smooth changeover of this, that will probably be five or 10 years.

Q31   Chair: That is what we are talking about, is it not? We are talking about working out how to absorb these changes over a period of time. None of you are saying this cannot be done.

Patrick Stevens: Yes. Just as a follow-up point on taking some of HMRC’s people and using that to ramp up Revenue Scotland if that is where it goes, of course HMRC staff currently working in Scotland may well not be the ones required to ramp up Revenue Scotland. There will need to be mixing and matching.

Q32   John Thurso: Can I just quickly come back first of all to the question Mr Norman asked about the question of the current definition, which is the 1998 Act definition, of who is and who is not a Scottish taxpayer, and ask the simple question: is that a sufficient definition, or in the light of the requirement to devolve more should we start to redefine the Scottish taxpayer for the purposes of this exercise?

Patrick Stevens: I am assuming Mr Norman was quoting from the HMRC document on Scottish rate of income tax issued in, I believe, May 2012—I may be wrong.

Q33   John Thurso: The Scotland Act 1998 sets out very precisely the conditions and definitions of a Scottish taxpayer. If we go to the first principle that it is the legislation—notwithstanding HMRC’s great powers; we actually decide what they can think—and we go back to that definition, is it sufficient or should we be re-looking at it?

Patrick Stevens: I think it is inevitable that you re-look at it. I am not suggesting for a moment it is not fit for purpose, but if you are going to devolve, then surely which taxpayers are involved has to be a part of it.

Frank Haskew: As you rightly say, there was that original definition in 1998. Since then, we have had major changes to the UK definition of statutory residence, which has gone through a lengthy consultation process. Given that was 1998 and we have had a fundamental revisitation of the residency rules, I think it would probably be inevitable that 1998 definition needs to be—

Q34   John Thurso: If I remember correctly, because I had the joy of doing a great deal on the 1998 Act in another place, as I recall it the 1998 Act starts from the premise that you have been defined as a UK taxpayer; that is taken as read, and it then defines within that what makes you a Scottish taxpayer. From memory, there are three or maybe even four sets of conditions, one of which is that being a Member for a Scottish constituency makes you a Scottish taxpayer. Are those four conditions correct, given the very different approach to devolution of taxation we are looking at now as opposed to what is envisaged in the 1998 Act?

Frank Haskew: I think they will have to be revisited, I would suggest. I accept your point that the definition of the UK is the starting point, but it does seem rather odd to have a certain set of principles for whether you are a UK taxpayer and then a very different set of principles to whether you are, say, an English or a Scottish taxpayer.

Q35   John Thurso: The actual test principles need to be revisited?

Frank Haskew: Yes. Effectively you now have different principles applying, which will certainly add to complexity.

Q36   John Thurso: Unless anybody wants to add to that, can I come onto a different question? I am going to ask you to accept an objective; you may wish to comment on it, but you are here as experts, so if you do not wish to comment that is absolutely fine. If the objective of what we are seeking to do is to achieve as full a fiscal responsibility for the devolved countries as is consistent with maintaining a functioning and properly funded United Kingdom, what should be the first principles we should be looking at to achieve that? Who would like to go first?

Chas Roy-Chowdhury: That is a very wide ranging question if I may say so.

Frank Haskew: It certainly is a wide ranging question. The Treasury Committee itself came up with six principles.

John Thurso: That was for taxation, absolutely.

Frank Haskew: Yes. But in terms of a sustainable tax system one needs to start with some fundamental principles.

Q37   Chair: What did you think about the six principles?

John Thurso: Outstanding.

Chair: You can mark them out of 10, Mr Haskew.

Patrick Stevens: We like the six principles and we make use of them when making submissions to you from time to time.

Q38   John Thurso: What I am driving at is that we are all having a discussion about a start point that is an existing UK tax system in HMRC, and what bits do we pick out and how do we do this? What if you were starting from scratch? Suppose that instead of having gone through a question as to whether the UK should break up and deciding it should not, you had started from having this exercise in 1707 and we were joining together and saying, “We have two separate tax systems. What are we going to put together?” In other words what is a set of first principles that says, “How do you fund a properly devolved country and what is appropriate to put to the United Kingdom?” Are we looking at the first principles properly, or are we designing the ship from the bits that are available without thinking about how it is meant to go through the sea?

Frank Haskew: I think one of the difficulties with tax, and we have heard this comment many times, is, “I wouldn’t start from here.” There is this problem that we have unfortunately 200 years or more of adding and adding to the tax complexity in the UK and then trying to strip that back to fundamental principles, which in principle would be a wonderful starting point, but is very difficult to achieve because we are where we are, and at the end of the day Governments need revenue and the one thing you cannot afford to do is put your revenue streams at risk. I think there is always a “safety first” view that you cannot afford to make too many major changes because you don’t know what effect it is going to have on your revenues and how you are funding your services. So there is a “safety first” element to it, and I suspect that starting again from fundamental principles is not going to be an option that people can start with, because the revenue risks are going to be substantial.

Q39   John Thurso: The point I am driving at is if you look at the United States you have income tax, you have a state tax and you often have a city tax, a state tax and a federal tax and these are three rates of income tax and each level is allowed to vary. Now, my party in the UK as a whole has, for example, often put forward the concept of local income tax. I am not going to ask you whether you would be in favour or against that, but it seems to me it is not beyond the wit of man to decide that each level of a Government can have its own level of tax in the way that you have in the States and some other countries. The first principle is you work out what you are spending your money on and then how to fund it, rather than starting from: we have all these taxes and how do we chop them up? My fundamental question is: are we, as politicians, looking at this the wrong way round? Would it be easier for good-quality tax and good-quality compliance to be looking at it the other way round?

Chas Roy-Chowdhury: In terms of the theoretical exercise, it would be fantastic if we could, as Frank was saying, start with a blank sheet of paper and then you would decide what the spending priorities are and, therefore, this is the amount of tax we need, but I think, where we are, we just do not have that luxury, unfortunately. I entirely agree with you that we should do that.

Q40   John Thurso: Could you comment on the difference between the power to collect a tax as opposed to the power to vary its rate? In other words, with devolution it is possible to devolve a tax. You may devolve entirely and say you can have whatever rate you like and you collect it. Is it not equally possible to say it is preferable to have one rate across the UK but all that bit that is collected in your country you keep? Can you comment on that differential?

Chas Roy-Chowdhury: I think there is an issue in terms of some of the discussions. Say the Scottish rate was lower for income tax or corporation tax and, therefore, the overall UK tax take went up because of that. Then I guess you would allocate according to formula. The Scots would not therefore win where they are taking a hit in terms of their tax rates; they would not necessarily get the benefit of that. The whole of the UK would. If you like, they would be the loss leader. Therefore, there is an issue around how that works.

Patrick Stevens: I think your proposition was that there should be one rate of tax and bands of threshold across the UK.

Q41   John Thurso: Supposing you decided that the rate of VAT had to be UK-wide, end of story, but equally you said any VAT that is paid in Scotland or England or Wales or Northern Ireland could be paid to that country.

Patrick Stevens: Of course that is equally possible. I would point out that, in order to make the division of the taxes between the two Governments, you still need to know what is coming from which Scottish taxpayers.

Q42   Stewart Hosie: Mr Haskew, you said earlier that having a boundary would potentially lead to arbitrage. You could equally make the case, of course, that having a boundary and devolving a significant number of taxes could lead to very healthy tax competition—not the quick hit on arbitrage but long-term, sustainable tax competition. That would be an equally valid argument, would it not?

Frank Haskew: That certainly would be a valid argument. Clearly there is a lot of concern about tax competition worldwide. We currently have the OECD looking at the BEPS project. There is lots of pressure on the Republic of Ireland at the moment in terms of its corporation tax rate, which we have seen. That is certainly one approach to it but, again, that brings its own problems as well.

Q43   Stewart Hosie: Indeed, it would mean that the Scottish Government would have to take the risk as well as any reward from tax changes. I think we all appreciate that. Mr Roy-Chowdhury, in terms of people that had pension and command perhaps work income, you said they would have two statuses. Having had the discussion with John Thurso, that is not right, is it? They would simply be a Scottish taxpayer or not, irrespective of that.

Chas Roy-Chowdhury: Just in terms of the way the rates would operate, there would be one rate for pension and one for income tax.

Q44   Stewart Hosie: Indeed, but just for clarity in terms of the status, they would either be a Scottish taxpayer or they would not.

Chas Roy-Chowdhury: Yes.

Q45   Stewart Hosie: The three main parties in Westminster are not proposing that taxation of dividends or savings income be devolved due to what they claim is administrative complexity. This raises the possibility that Scottish taxpayers may routinely deal with two revenue authorities, one for savings income and one for employment income.

Chas Roy-Chowdhury: I think pensions as well.

Stewart Hosie: Indeed. I will come to that later, but would that then lead to a doubling in the compliance burden for individuals?

Chas Roy-Chowdhury: I do not think it would be doubling but it would clearly mean there could be the possibility of two tax returns, or there could be separate compliance regimes that the taxpayer has to deal with.

Q46   Stewart Hosie: I suppose the question then is, given most people have perhaps earned income, savings income, dividend income or pension income, by and large, the more that was devolved to the Scottish Government the more the number of people that were facing two jurisdictions would be reduced, isn’t that so?

Chas Roy-Chowdhury: Yes, I think that could potentially be the case. Unless there is full devolution and full powers and then I think there would still be a crossover, but, yes, certainly if there two totally separate regimes and potentially there could be simplification by taking devolution—

Q47   Stewart Hosie: That is very helpful. Mr Stevens, did you want to come in?

Patrick Stevens: I was only going to say it depends what revenue authority is dealing with each range of tax. I believe there was something in your question that suggested that Revenue Scotland would deal with some of them and HMRC others. It is whether you would do that or whether there would be very close working relationships or something that would be the main thing that would lead to complexity or otherwise in administration.

Frank Haskew: I think it would have to be a given that Revenue Scotland would have to deal with the devolved taxes.

Q48   Stewart Hosie: That is exactly the point. Also, the Calman Commission previously rejected the idea of devolving inheritance and capital gains tax largely on the grounds, again, they claimed that it would increase the scope for tax avoidance. Mr Stevens, do you agree that, if there were different IHT and capital gains tax regimes in Scotland, opportunities for avoidance would increase?

Patrick Stevens: I would not immediately go to worries about tax avoidance. I would certainly go to concerns about additional complexity. Just to state the obvious, inheritance tax is based on somebody’s domicile and, at the moment, while in law there are separate domiciles for the various countries in the UK, none of us have ever bothered to look at that because it is all the UK. We would suddenly get very interested in whether someone had a domicile in England or Scotland or Wales or whatever. That would increase the complexity substantially. Capital gains tax would also lead to “where is your taxpayer and where is the asset?” because there would obviously be people in one with assets in the other and the offset of tax liabilities and where they went to would all open up as well.

Q49   Stewart Hosie: But that is the case right now, is it not, for some 800,000 UK citizens who own property in, say, Spain?

Patrick Stevens: Absolutely.

Q50   Stewart Hosie: In that sense, there is no additional complexity. It is already faced by many people who happen to have assets. Is there anyone who is concerned about the risk of avoidance if inheritance tax or capital gains tax was devolved to the Scottish Government?

Frank Haskew: It is like all these things: it depends on what settlement we have here as to what might happen in practice and we do not know that at the moment. If the differences in rates and treatment are fairly small, I suspect the scope and the willingness to look at tax avoidable will be quite low, but it will obviously increase if the stakes are higher. Picking back up on the inheritance tax point, there was a special commissioner’s case because, in fact, there can be a bit of a difference as to whether you are domiciled in Scotland or the UK because of the way the Scottish law devolves things like personal assets and chattels. So we already have some experience, for instance, of whether you are domiciled in England or Scotland making a difference to inheritance tax.

Q51   Stewart Hosie: Mr Roy-Chowdhury, a lot of the discussion around devolution of tax has been the concept of risk or complexity and possibly avoidance, not just for the taxpayer but for the Scottish Government or the UK Government potentially losing income. Do you agree the philosophical basis of this that it would be for the Scottish Government, irrespective of what was devolved, not just to take the risk of that if they made a policy change but also to be able to benefit from the reward if they made a policy change in terms of tax? Just that general philosophical question: is that not a good starting point for devolution of taxes?

Chas Roy-Chowdhury: Yes, I think that was what I was trying to get at. I think that is right. As I understand it, the apportionment would be based on a type of formula, depending on which tax. Therefore, maybe where Scotland cut its rate of corporation tax or income tax below the rest of the UK it would not necessarily get the full benefit. Yes, I think it should take the benefits and it should take the risks or the loss on its decisions.

Chair: Thank you very much for coming to give evidence to us this morning, very interesting. There were one or two surprising replies, but quite a few I think we were all expecting. We would like to go straight on to the second panel, if we may, with the IFS. We are running 10 minutes late.

Examination of Witnesses

Witnesses: Paul Johnson, Director, Institute for Fiscal Studies, and David Phillips, Senior Research Economist, Institute for Fiscal Studies, gave evidence.

Q52   Chair: Thank you very much for coming to give evidence. It is very familiar for the Committee to have the IFS in front of them. Mr Johnson, do you think anything has been ruled out of the discussions on devolution that it would have been wise to include?

Paul Johnson: I am not entirely familiar with what has been ruled out, but I presume you are referring to some extent to the Barnett formula. There are clearly issues about the degree to which the Barnett formula redistributes between England the rest of the UK in principle, but there are also quite a lot of detailed issues with the way that the Barnett formula works, for example with respect to the extent to which changes in the relative importance of business rates can make a difference of hundreds of millions of pounds with respect to how much income Scotland receives. I am not sure exactly what some of these commitments mean in terms of the principles, or whether they refer to the detailed operation of things like the Barnett formula, but certainly the detailed operation feels like something that should be open to consideration at the very least.

Q53   Chair: You think Barnett, or at least the administration of Barnett, should be looked at in tandem with the fiscal process?

Paul Johnson: In the end that is a political decision about the amount of money that the rest of the UK wants to see going to Scotland and how they achieve it over time.

Q54   Chair: You are discussing administration rather than overall amounts?

Paul Johnson: Detailed elements of the way it works, which I think inadvertently make quite a big difference to the actual results of money that flows between the constituent nations.

Q55   Chair: Lord Strathclyde, among others, has suggested there needs to be some kind of quadripartite commission of all the nations to consider the long-term future of Barnett. Given what you have just said, is that the sort of approach that you think might be appropriate?

Paul Johnson: I think the important thing is probably to spend appropriate time thinking about getting it right. In the end we are still living with the consequences of the Goschen formula of 1888, made in haste at that time. I think it would be a shame if in 100 years’ time we were living with consequences of choices made very hastily now that turn out not to achieve what you want to over the long run. I think being pretty clear that we get things sorted in a way that works for a long period is going to be quite important.

Q56   Chair: Have you done any of the number-crunching on the effects that fiscal devolution will have on assuaging English concerns about Barnett?

Paul Johnson: There is not much number-crunching that is possible to do at the moment, given the lack of information about what might happen. We will be putting out something in a couple of weeks looking in some detail at the impact of the way that the Barnett formula works, but more broadly looking at the whole issue of fiscal devolution, there is no adequately-defined question for us to answer.

Q57   Chair: But are you looking at what type of fiscal devolution can do most to assuage English concerns over what is seen as excess spending?

Paul Johnson: We are not looking at answering the question like that, no.

Q58   Chair: It strikes me that it is one that the IFS could run some options on or some sensitivity analysis on.

David Phillips: Devolving taxation variance to Scotland does not address the level of funding that Scotland gets, because what you do is work out how much revenues are coming from that tax in the first year you devolve it—for instance with income tax under the Scotland Act about £4 billion, and you reduce the block grant by £4 billion a year. Then there is a question about how we uprate that block grant reduction in years going forward, and the way they are doing it for income tax under the Scotland Act is that that looks like it will be going up in line with what happens to income tax revenues in the rest of the United Kingdom. If Scottish revenues go up by more than that, the Scottish Government gets to gain money. If they go up by less, the Scottish Government loses out.

What you will notice there is that the actual devolution of tax does not change. If Scottish tax revenues just perform in line with UK tax revenues, devolving taxes does not affect the Scottish Government’s budget at all. The process of devolving taxes to Scotland need not lead to Scotland getting less money than it gets now relative to England. In fact, if the Scottish economy does better, it could get more money than it does now relative to England.

Q59   Chair: You have answered both parts of the question. In a sense you have given the riposte to your own point because clearly it is possible to think of quite sensible ways of devising fiscal devolution, isn’t it, which will reduce the net contributions through Barnett?

David Phillips: You could devolve a tax that has a slowly growing tax base and, therefore, slowly growing revenues and decide to increase the block grant reduction more rapidly than that. For instance, if you had a tax like fuel duty, which in the long run is probably on the decline, but you decided to increase the block grant reduction over time in line with the GDP, say, that would lead to a reduction in the variance going to Scotland. Similarly, if you were to devolve oil revenues to Scotland and have a block grant reduction that does not take account of the fact that oil revenues are going to fall in the long run, that will also put a squeeze on the Scottish Government’s budget and reduce this relatively high level of spending in Scotland. That is not the way in which taxes are being devolved so far under the Scotland Act, and I think it would be quite difficult in terms of negotiations to get the Scottish Government to agree to a way of devolving taxes that leads to a long-term squeeze on its budget.

Q60   Chair: You describe it as a squeeze on its budget. It could equally be described as a more equitable distribution of spending.

David Phillips: That is for politicians to decide.

Paul Johnson: That is for politicians to work out, I think.

Q61   Jesse Norman: I am just enjoying the irony that “a squeeze on the budget” is not a political remark but “more equitable distribution” is a political remark, you are implying. As you just implied, Mr Phillips, the tax settlement and the funding settlement are logically distinct entities. It is possible to have one tax settlement and one funding settlement and there is no necessary relationship between the two. In devolving tax you are not, ipso facto, saying anything about the budgetary settlement. It is a further step then to assume that the distribution of cash from the block grant would be adjusted. Is that right?

David Phillips: How I would put it is that the choice is about how you adjust the block grant or the funding settlement when you devolve taxes, but the way in which you do adjust the block grant or the funding regime is very intimately linked to the aims and objectives or what you are trying to get out of tax devolution—for instance, what type of risks you want the Scottish Government to be bearing in its budget. Let us imagine that we devolve taxes in the way they have done so far for income tax under the Scotland Act. The way they have decided to make the block grant reduction is to reduce the block grant in years ahead in line with what happens to tax revenues in the rest of the UK. That means that if revenues go up by more in Scotland, they gain, and if they go up by less, they lose. That means Scotland is bearing what is called the relative risk of its tax take. If its tax take grows relative to England, it benefits. If it falls relative to England, it loses.

Now, we can think of other ways in which Scotland bears more of the risk. Let us say that, rather than uprating this block grant adjustment in line with tax revenues in England, it was uprated in line with prices or GDP or just potential GDP—the long run rate of growth of the economy. In that case Scotland would bear additional risks due to the fluctuations in income tax over the economic cycle or the risk maybe income tax was on a long-term decline or long-term increase, depending on what is happening to the economy, fiscal drag or more tax avoidance. I think there needs to be careful consideration about how the block grant adjustment and the funding regimes interact with the tax powers, because that has big implications for just what risk it is bearing and what type of tax devolution and what type of responsibility you are giving to the Scottish Government.

Q62   Jesse Norman: That is extremely interesting. What you are saying is, yes, there is no formal link between the two; it is essentially a political decision as to how the two are tied together. There were a series of assumptions, either explicit or inexplicit or shared or not shared, as to the terms under which more devolution was promised and as to the way it would interact with the block grant. By implication, there is all kinds of potential for free rides or for unattractive, unexpected outcomes if you get the interplay between the two wrong, because you could be incentivising the wrong kind of behaviour or behaviour that might give someone a one-way bet on future outcomes. I hope I am not misrepresenting what you are saying. That seems to be what you are saying. Can you just give me a sense then as to whether you think any one of these alternative risk-sharing arrangements would be economically preferable to the United Kingdom as a whole?

David Phillips: I will address it thinking about Scotland and the UK’s position. The answer to that question depends on the extent to which taxes are devolved. Clearly, if you move a system of full tax devolution, where Scotland gets to keep all of its revenues and to decide all tax policy and fund its own spending, in that case you can see the case for Scotland bearing the full risk of its tax revenues. There is no sharing arrangement across the UK, so there should be no risk-sharing arrangements either.

Q63   Jesse Norman: And by implication, no block grant.

David Phillips: Potentially no block grant. Although, of course, at the moment with Scotland’s fiscal position as it is, where the tax onus in Scotland is below than that of Government spending in Scotland, as you move towards full fiscal devolution in Scotland you would have a bigger budget deficit in Scotland, which would be difficult to deal with. If, as seems more likely, there is some intermediate form of devolution where some taxes are devolved and some taxes are not, it seems to me that it is more sensible for Scotland to bear only the relative risks of its tax revenues doing less well or more well than the UK.

There are several reasons for that. First, doing that gives Scotland the right incentives. If it grows the economy more quickly or makes its tax policies in a way that allows the economy to grow more quickly and tax revenues to grow more quickly, it keeps those because it keeps the relative improvement in its budgetary position in its own budget. However, it does not bear the risks of big recessions that affect the whole of the UK and it does not have to bear the risk that the UK Government makes a policy decision that affects tax revenues in Scotland and the rest of the UK.

Q64   Jesse Norman: But that might not be preferable from a UK perspective.

David Phillips: When you have a union, there is a question about how much sharing you think should be going on in the union. One position is that if there is still some element of fiscal union or still some element of equalisation of resources—the Barnett formula is still in place for instance—there should also be equalisation of risk to some extent. A shock that hits the whole UK, not just Scotland, should be borne by the UK Government, which has more scope to borrow on the markets.

Q65   Jesse Norman: But there might be a UK concern that the terms of the deal as between the balance of risk allocated and the level of the block grant was sufficiently favourable to Scotland as to be removing a budget constraint that might be beneficial for them, and indirectly for the UK as a whole. That is a possible position, is it not?

David Phillips: It is possible that UK politicians could decide that they think that Scotland should bear some of the risk.

Q66   Jesse Norman: I am conscious of the time, so let me just ask a question, if I may, of Mr Johnson. Wave a magic wand. You are sitting there advising the Strathclyde Commission on quadripartite allocation of block grant. Is there a case, based on considerations of equity and equality across the country—the UK as a whole—for significant changes between the different devolved administrations and England?

Paul Johnson: If you look at the way that it works at present, it is pretty clear that starting from a blank sheet and basing an allocation on the basis of population and relative deprivation, which are by far the two most important elements of any formula, but if you take account of other issues as well, you would probably—

Q67   Jesse Norman: Ageing, presumably.

Paul Johnson: Indeed, or sparsity or whatever, you would almost certainly end up with a different distribution from what you have at the moment, which might be somewhat more favourable, for example, to Wales and somewhat less favourable, for example, to Scotland. Where we are is based on historic population shares and historic agreements that do not bear much resemblance to the way that we allocate across local authorities within England.

Q68   Chair: That work has been done, has it not, for the Welsh?

David Phillips: The Holtham Commission reported in 2010 on this.

Q69   Jesse Norman: But is there any work that you at the IFS are planning to do to assist such a process of evaluation with a parallel to a Mirrlees-type review of the situation?

Paul Johnson: We are not planning that, no.

Q70   Jesse Norman: I think you should. I think it is an important question. There are issues of equity across the country that demand expert assistance and informed comment.

Paul Johnson: We would be pleased to do that with—

Jesse Norman: —suitable grant from us, yes.

Paul Johnson: —demand and suitable funding, indeed.

Jesse Norman: I would support that. Thank you, Mr Johnson.

Q71   Chair: We are back where we started, Mr Johnson. Would it not be a good idea if you have an initial go and see what the numbers might look like based on a reasonable assessment of need? You have just come out with what you think the main drivers of need should be.

Paul Johnson: It would certainly be an interesting thing to do.

Q72   Chair: Isn’t that what the IFS spends much of its life thinking about and writing about?

Paul Johnson: Absolutely.

Chair: Perhaps you would like to consider it, Mr Johnson.

Q73   Steve Baker: Turning to tax design, Mr Norman mentioned the Mirrlees review, which set out to design a tax system that minimised economic and administrative inefficiency, maximised simplicity and transparency and avoided arbitrary differentiation between different people and economic activities. Is a deviation from the Mirrlees review and its principles the necessary price to be paid for further fiscal devolution?

Paul Johnson: I think the key thing there is what the differences are between individuals that you want to take into account—clearly, being Scottish may well be one that you want to take into account, which we do not at present—and what are the principles by which you might think about devolving taxes? There are a lot of things you might think about, but I think there are three big ones.

You have talked about administrative simplicity and complexity. That is clearly one. The second is associated with the extent to which behavioural change might result. One reason why we currently devolve taxes on property is that property is fixed. You are not going to get too much movement across the board as you are not going to create too much in the way of either complexity or behavioural change. Business rates and stamp duty and so on—perfectly sensible.

The next level down, you might think consumption and income taxes. There is some risk there if you have big differences between the countries, but you can probably design that and many countries have designed different consumption and income tax regimes across states within a unitary state. You would probably put corporation tax and other capital taxes at the bottom of that list because the capacity to change behaviour or change apparent behaviour is more significant.

The third thing I think is important is to do with the scale and the volatility of the tax that you are talking about. You started off asking about oil taxation and petroleum revenue tax. That fits pretty well on the first two. You could probably separate it from corporation tax and you could probably administer it separately. It is pretty clear where the oil is, but for a nation like Scotland, to have petroleum revenue tax devolved would create an enormous amount of complexity in terms of what we were talking about earlier, in terms of how you adjust the block grant. This is an extraordinarily volatile revenue stream and it is one that is probably falling over time.

Scotland is very much smaller than the rest of the UK. The UK as a whole can cope with that volatility a lot easier than Scotland could. You would probably need some staggeringly complex mechanism for creating equalisation for compensation through the block grants. I think that issue about scale and volatility is the third important leg of how you might think about devolution of tax powers.

Steve Baker: Is there anything you would like to add, Mr Phillips?

David Phillips: No, I think that covered the issues there. One thing I would add is on corporation tax. As well as thinking about what taxes are devolved, an important issue to think about is the way in which the tax is devolved. This is not in terms of how it interacts with the block grant but the way in which the tax bases are argued between countries. For instance, on corporation tax you can think of the way it is traditionally done across countries, which is on things like transfer pricing, where companies determine prices for cross-country transactions; or you could do what is done in many countries, like the United States and potentially Germany as well, where they have a variation in corporation taxes across states. They use a formula that is based on things like how much salaries are paid in a different region and where the physical capital is. The idea is that is less easy to shift around than—

Q74   Steve Baker: With that very much in mind, you have given a very clear explanation of your hierarchy of concerns, I think it would be fair to say, with different taxes. To what extent do you think taxes can diverge in Scotland from the rest of the UK before there are important material effects?

Paul Johnson: We do not have terribly good evidence on that, of course. You would not be allowed to do this very much with consumption taxes but one would imagine that some small changes in consumption taxes would not be a great problem. Fuel duty would be an obvious one. You do have this advantage of a fairly sparsely populated border for things like fuel tax. You could imagine that being different and you can imagine there are quite good economic reasons for thinking it ought to be lower in Scotland, because there is less congestion, and if you are thinking about externalities that driving creates, you might think that there is a case for that. Basically I cannot imagine that varying the income tax by two or three pence would make an enormous amount of difference. If you had a variation of five pence at the top, you might create some change in actual or apparent domicile. We have very little in parochial evidence. My usual instinct in these things is that small changes will make not very much difference except for some groups who we know are particularly sensitive to these things.

David Phillips: Again, to go back to corporation tax, how much you could vary the tax rates by would depend on the arrangements which they are devolved by. You could probably have greater variation in corporation tax if it was done on a formula basis than if it was done on a transfer pricing basis just because of the scope for tax avoidance being less.

Q75   Steve Baker: Where around the world do you think the Government would be best advised to look to see the lessons in this regard: the United States, European Union, somewhere else?

Paul Johnson: In general?

Steve Baker: In general, yes, in comparing countries and the economic impact of different types—

David Phillips: Countries with federal systems of taxation. There are countries that have much more decentralised tax system than the UK—for instance Denmark has local income taxes; I think Sweden has that system as well, and Switzerland. There is lots of experience internationally you can look at to see how countries manage having different tax rates in different parts of the country and how they try to reduce the scope for avoidance and evasion.

Q76   Alok Sharma: Can I just turn to corporation tax and potentially devolution of corporation tax. It has been reported that in the autumn statement we may have powers set out for corporation tax rates in Northern Ireland to be devolved to the Assembly. We will see what happens, but how does that then fit in the context of devolving corporation tax to Scotland? If you do it for Northern Ireland, do you think it is then going to be impossible to refuse it for Scotland?

David Phillips: Ultimately that is a political question again. Northern Ireland says it has special circumstances with the border with the Republic of Ireland and the need to compete with the lower tax rate there. I know that the Scottish Government says that it wants corporation tax anyway and I am sure that if Northern Ireland gets it, it will definitely want it. Wales has also said that it does not think it should be devolved, but if it does—

Q77   Alok Sharma: The Scottish Government makes the argument that being in London and the south-east you have a competitive advantage, so to redress this and to increase investment in more start-ups they need to be able to vary their corporation tax rate. Is that a compelling argument for you?

Paul Johnson: It is a plausible argument. Again, we do not know the sensitivity of real investment to small changes in corporation tax. It is right to say that London and the south-east has some kind of competitive advantage to some kinds of business relative to Scotland. If you look at California, they have a very high level of taxes and a very complicated tax system, but everyone wants to go to Silicon Valley however rubbish the tax system. I would not say we are quite in the same position in London relative to Scotland, but there are cases for having different systems for that reason. We struggle, don’t we, in managing different corporation tax systems across different countries at the moment. You would clearly add a layer of complexity by devolving to Scotland and Northern Ireland. I do not know how this might happen in Northern Ireland, but there are ways it might happen that would make it very unattractive for the Northern Irish to make use of it.

Alok Sharma: Mr Johnson, could you just repeat that? You said it would be unattractive to use that?

Paul Johnson: There are ways you could do it that would make it unattractive, depending on how much additional revenue they could keep.

David Phillips: For instance, when Northern Ireland cuts its rate, you would need to reduce the amount of money that Northern Ireland gets. There are ways you can do that. One is it just bears the cost in Northern Ireland of the reduction of the tax rate. I am aware the Treasury has also been considering whether Northern Ireland should also bear the profit shifting that is taking place from the rest of the UK, so it bears some of the cost on the rest of the United Kingdom. If you expect a lot of the behavioural response to a lower corporation tax in Northern Ireland or Scotland to be shifts from the rest of the UK—

Q78   Alok Sharma: They could be given corporation tax devolved to them, but what you are arguing for is setting up a system where there is net benefit of doing it and that is not the argument that is made in either Northern Ireland or indeed Scotland. The whole point for them of devolution is to be more competitive, so have a 12% tax rate as opposed to 20%.

David Phillips: Yes. I am not saying I am in favour of this way of doing things. All I am saying is that a key issue is what costs—

Q79   Alok Sharma: You talked about the Treasury. Are you suggesting this is the way the Treasury is thinking currently?

David Phillips: I know it has been one of the things that has been discussed by people looking at the issue of: how do we adjust the block grant to Northern Ireland and do we need to take into account the fact that a lot of the extra revenue they are going to be getting if they manage to become more competitive will be coming from the rest of the UK?

Q80   Alok Sharma: Let us say that either Northern Ireland or Scotland get the opportunity to basically set their own corporation tax rate and they make them materially lower than that in the rest of the UK. In your view, is this going to encourage lots of corporates to headquarter there? Have you done any analysis on what the impact of this could be?

Paul Johnson: Putting a number on that is almost impossible because we simply do not have the experience on which to base it. We do not know that that clearly is a result of the southern Irish tax system. Some multinationals, some corporates, have headquartered there. How that would relate to what would happen in Northern Ireland or Scotland, for example, it is just not possible to say, but it is clear that that could happen.

Q81   Alok Sharma: If there was to be a change in terms of devolving corporation tax, how long do you think that process would take in terms of the transfer and setting up the systems and all the rest of it? Is this feasible within a few years, or is this something that is so complex that, in your view, it would take many years to implement?

David Phillips: I fear that is a question you might have better directed to the previous panel.

Alok Sharma: I understand that, but I am asking what your thought is.

David Phillips: The process for devolving taxes under the Scotland Act and the Wales Bill envisaged several years. I would imagine that the challenges for corporation tax would be at least as hard as for income tax, and I would say that they would want to give real consideration to the way to do it. Rather than going for the default option of transfer pricing, spend the time to think about how we can do this in a way that still gives incentives for the devolved countries to improve their economy but does not give huge opportunities for tax competition and avoidance across countries. I think it would take some time and it should take some time so it is done right.

Q82   Mr Ruffley: Mr Phillips, returning to the trenchant answer you gave to Mr Norman, you said that if the yield from income tax were to outperform the rest of the UK, then they could, all other things being equal, be winners, and Mr Norman suggested there might be some potential inequity in this. Just thinking for a moment about income tax—not something volatile like taxing North Sea oil, just income tax—what work has been done that would get round this problem of inequity, as Mr Norman hinted at, by clawing back some of the block grant in the event of the income tax yield in Scotland outperforming the average for the rest of the UK?

David Phillips: There is a number of ways to think about this. As with many things in economics, it is a question of, to some extent, equity versus efficiency. Scotland getting to keep its revenues if it outperforms the UK means it has more incentives to grow the economy. Of course, that could mean you have less revenue utilisation across the country. I have not thought in detail about the mechanisms by which you could allow this to happen for several years and then stop it but—

Q83   Mr Ruffley: That is behind my question. I am asking has any work, not necessarily by you, been done—

David Phillips: I am not aware of any work specifically on income tax being done on this. However, something similar is happening with business rates where they have localised business rates partially to local government in England; they are allowed to keep the increments in business rates for 10 years and then, after that, the calculations are reassessed and that gets taken out. The fact that we have done it is not quite right because at the very end of the 10 years, you have no incentives to postpone growth until after the 10 years is up, but there could be some lessons to be learned from what has been done with business rates. It might also be worthwhile looking at countries that do have quite explicit devolved tax rates but also revenue equalisation—I think Canada and Australia do that—to see what they do in that regard, to see whether they have ways in which some of the growth is kept but some of it is not. One option would be to say Scotland keeps a proportion of its relative growth but not all of it. That would still provide some incentive, a weaker incentive, but would also have some equalisation as well.

Q84   Mr Ruffley: But there is the risk that if you reduce the incentive too much, they will not set tax policies to grow their revenues. They will just think it is a zero sum game and what is the point?

David Phillips: Indeed.

Q85   Mr Ruffley: I understand that, but there is a halfway house where they would not. You mentioned business rates in this country, which is an imperfect analogy, but you think there might be an analogy there?

David Phillips: Yes, because the idea was they wanted to give incentives but did not want to allow an equalisation.

Q86   Mr Ruffley: To your knowledge, is any work being done on this along these lines in Government?

David Phillips: To my knowledge, there is no specific work looking at it, but you can spend some time thinking about them. As I said, an obvious solution would be, rather than keeping all of the relative growth, they keep half the relative growth or half the relative loss for that matter.

Q87   Mr Ruffley: Because it is more likely than some of the other options—bigger devolution of income tax—it is rather surprising that this does not seem to be a piece of work that is going on. Could I invite you to look at this in the same way that the Chairman has asked you to look at other things or at least be in contact with the Treasury about it?

David Phillips: As always, we will consider it in the light of our resource constraints.

Q88   Mr Ruffley: Thank you. That was all to do with the question of income tax. The widespread assumption from the majority of parties is that savings taxation and VAT probably will not change. Working on that basis—that there will not be devolution of VAT and there will not be devolution of tax on investment income—it has been suggested that a proportion of revenues from those taxes be assigned to the Scottish Government. Mr Johnson, how easy would it be to determine a fair share of that set of tax revenues?

Paul Johnson: As a rule, it would depend on what you were trying to achieve. It would not be in the least bit difficult to say Scotland should get x% of the VAT revenues, and offset the appropriate block grant as a result. That might not be a bad revenue to do it with, because VAT revenues are relatively non-volatile so it would not be quite so sensitive to some of the decisions that you would make about how equalisation would happen in the future. You could probably set that fixed for two or three years and then reassess—but you would still have this choice, as David was describing, about whether you were offering Scotland the relative risk or the absolute risk. If the Scottish VAT revenues continued to rise relative to the rest of the UK, would they get all of that, would they get some of it, as you were describing earlier, or would they face an absolute risk such that if their absolute level went down and the rest of the UK’s went down, their total revenues would go down more than proportionately to the change in the VAT? The choices remain the same. I think VAT has the big advantage of being one of the least volatile of the big taxes.

Q89   Mr Ruffley: Referring to Mr Phillips’s reply in relation to income tax, it would be possible, potentially, to do the same kind of exercise of clawback if the revenues from VAT and the revenues from taxation on investment income and related taxes outperformed the UK average?

Paul Johnson: Or underperformed, yes, absolutely. You can play whatever tune you want, in a sense. You can give Scotland all of the upside and downside or half of it, or whatever you want to achieve.

Q90   Mr Ruffley: Sure. We have talked about income tax. We talked about tax on investment income. We talked about VAT. I think we can all agree from your earlier answers that something like North Sea oil taxation would be potentially too volatile.

David Phillips: I think it would be the most difficult of all in many ways because of volatility.

Mr Ruffley: It would be the most difficult. What other taxes would be susceptible to the theoretical possibility of a clawback along the lines Mr Phillips has hinted at?

Paul Johnson: I think the big taxes are all rather like that. National insurance, abstracting from the issues around whether it is or is not a contributory tax, would be in some ways relatively straightforward, because it is only charged on earnings, so you would not have this issue about different treatment of earnings and investment income. The big three—VAT, income tax and national insurance—which of course are 70% of the total tax revenue anyway, I think would all be fairly susceptible to that same kind of issue about how much you wanted to equalise.

Q91   Mr Ruffley: Is this a possibility that you think could be put into practice? Obviously a lot of work, but it is doable, do you think?

Paul Johnson: “It” being choosing the degree of compensation or risk or whatever?

Q92   Mr Ruffley: Yes. I would say clawback of grant—but it does not pose, from your expert point of view, insuperable possibilities?

Paul Johnson: No. From an economic point of view, I do not think it creates any kind of insuperable issues. In a sense, it is one of the big decisions around devolution, which is essentially about how much you want Scotland or Wales or whatever to take all of the risk and all of the upside and all of the downside of what happens, or do you want to have more equalisation within that? Once you have decided how much of that you want, it would seem perfectly possible to create what you want to achieve.

David Phillips: The only thing I would say is you need to think carefully about the mechanism, because they have tried to do with it with business rates, but because there is this fixed 10-year cut-off, one of the issues about the cut-off is it delays new developments rather than have it—

Paul Johnson: You need to get that right.

David Phillips: You need to get it right because at the moment the incentives are delayed until after the cut-off, so you get it for 10 years rather than one or two years. You would need to consider whether you are creating similar issues for income tax or national insurance or VAT. You need to think about making sure you get the mechanism for clawback or for sharing or pooling correct so you do not get these distorted incentives.

Q93   Chair: Do you not think, though, Mr Johnson, with respect to North Sea oil revenues, that it is a matter for the Scottish Government to decide whether they want to absorb the high level of volatility associated with devolution?

Paul Johnson: Sure.

Chair: They do not have to say yes.

Paul Johnson: They need to understand that. The difficulty would arise in the negotiation about what that meant for the block grant, I think. For example, if you were to devolve income tax revenues and you were to say you will reduce the block grant by the current year’s amount of income tax revenue that you are assigning to Scotland, it matters quite a lot how you then adjust the block grant over time.

Q94   Chair: We are back to where we began our discussion, you and I, about half an hour ago.

Paul Johnson: Exactly. If you do that with petroleum revenue tax, then almost the only thing that matters is how you negotiate how much the block grant is, unless you get a Scottish Government saying, “We do not care. We are willing to see our block grant fall over time.”

Q95   Chair: But, as you have said, that is basically a political decision and a political discussion that needs to be had anyway.

Paul Johnson: Technically, it will be extraordinarily difficult to come to an outcome that will be acceptable on both sides. It will be so difficult because you are dealing with three things. You are dealing with a huge amount of volatility year by year, you are dealing with a tax that is going down over time and you are dealing with not knowing what the impact of actual policy change will be. Getting to a clear agreement about how each of those would change the block grant I just think would be a very difficult thing to achieve. I am sure it is not beyond the wit of man, but it would make sorting out corporation tax look pretty easy.

David Phillips: Because North Sea revenues are overwhelmingly from Scottish waters, there is not the natural counterpart. One can look at most taxes and say, “Well, let’s change the block grant reduction in line with what is happening to the tax revenues in the rest of the UK,” but for North Sea oil, because it is nearly all in Scotland, there is not really a tax base in the rest of the UK to see what is happening. By definition, you almost have to have one of these more complicated ways of doing things because we do not have this nice simple comparator to compare to.

Q96   Chair: To be frank, listening to both those answers amounts to saying yes to me, does it not? If the political will and interest in wanting to do this in Scotland exists— All the problems you were describing are disproportionately problems for Scotland rather than England and, therefore, volatility and the decline, for example, two of the three problems you expressed—

Paul Johnson: Sort of. You need to get agreement on it. Going back to Scottish business rates, getting the agreement wrong would be disproportionately a problem for Scotland. As it has turned out, it has turned out to be a problem for England. Getting the agreement over oil taxes wrong would be a disproportionately big hit on Scotland, but it is not as if there is no hit on England if they get it wrong from the other point of view.

Q97   Chair: I do not know why you are baulking at the question I put to you. The only reason I am prolonging this set of exchanges is because you baulked at the question I put to you three or four minutes ago, which is it is a matter for the Scottish Government to decide whether they want to take those risks and have that discussion.

Paul Johnson: It is not just them that gets the risk. The point is the risk is not just for them. You might find a way of getting a perfect agreement, in the sense that you end up in the same revenue situation as the rest of the UK and Scotland as you otherwise would have in five years’ time. I think that is almost impossible to achieve. Therefore, either Scotland wins or the rest of the UK wins. It is not just an issue for Scotland.

Q98   Chair: But that is in the nature of things with devolution generally, isn’t it?

Paul Johnson: It is, but it is in spades on this one. I think it is just very hard to achieve what you are looking for and you could inadvertently lose Scotland a large chunk of its budget or lose the rest of the UK—

Q99   Chair: I am not even sure it is in spades, but each of your arguments, it seems to me, is, if I may say so, somewhat tendentious, even there. If you look at the radical end of the Strathclyde proposals for devolution, what are they worth in fiscal terms?

Paul Johnson: Sorry, say that again?

Chair: I think I know the answer, but if you look at the radical end of the Strathclyde proposals in annual fiscal effect, do you have a rough idea what they are?

David Phillips: The percentage of Scottish expenditure funded by—

Chair: In cash terms, in billions.

David Phillips: In billions of pounds. At the extreme end, if you include allocating VAT to Scotland—I think one of the things they considered was apportioning VAT to Scotland—about 60% of the Scottish budget.

Q100   Chair: If you exclude VAT?

David Phillips: About £13 billion.

Q101   Chair: I thought it was £15 billion to £16 billion, but anyway, we are using pretty much the same figures. What are oil revenues?

Paul Johnson: What are they, £10 billion?

David Phillips: It depends on who you agree with in future forecasts.

Chair: You are the IFS. I am asking you your view.

David Phillips: The OBR forecast in 2016 there will be about £3 billion. The loss to the Scottish Government is £7 billion.

Q102   Chair: Now we are looking at the comparison of these numbers, £15-ish billion against £3 billion.

David Phillips: The point is about the volatility. That £15 billion can go up and down a bit.

Q103   Chair: Of course, but one is small and one is large.

Paul Johnson: I am not sure the point you are getting at.

Chair: I think it is fairly obvious.

Paul Johnson: Not to me, I am sorry.

Chair: I am going to move the questioning on. I think Stewart Hosie has understood the problem.

Q104   Stewart Hosie: Just a general observation. There is a slight frustration, listening to this discussion, about Scotland being talked about in the third person. Paul, at one point you said, “They, the Scottish Government, have to understand the risk.” I think we should have a working assumption that the people in the Scottish Government absolutely understand the risks and the potential opportunities from all of the options that are on the table. In a paper that the IFS produced earlier about the fiscal context of independence, they said that in the long run Scotland would face stark choices over public spending, partly as a result of diminished North Sea revenues. Mr Johnson, has the IFS included in its future forecasts all of the new fields announced in the last couple of weeks?

Paul Johnson: If they have been announced in the last couple of weeks, we would not have done. That work was based on OBR projections on oil revenues.

Q105   Stewart Hosie: I simply asked that question to make a rather serious point, that volatility cuts both ways.

Paul Johnson: Of course.

Q106   Stewart Hosie: As there are new fields and prolonged life then that needs to be taken into consideration just as much as any of the downsides in this.

David Phillips: I agree. I would also add, though, that what Paul said is true; our baseline forecasts were based on the OBR’s North Sea forecasts. However, we also used a variant forecast where oil revenues were around three times as high as forecast by the OBR and, even under those scenarios, Scotland’s fiscal position still looked weaker than the UK’s as a whole in the longer term. Although we have not taken into account expressly the new findings, we did have high and low forecasts to take into account this level of volatility that you rightly point out.

Q107   Stewart Hosie: I will come back to the fiscal position later, but in terms of this volatility argument, Mr Johnson, and particularly in relation to PRT, which you mentioned specifically earlier, the Revenue tell us that Scotland’s geographic share of PRT for ’13-‘14 was £800 million; even a substantial change in that, say £200 million, against a GDP of around £150 billion or a tax yield of around £60 billion in and on behalf of Scotland—the IFS are overplaying the volatility argument in relation to PRT, are they not?

Paul Johnson: If you look at oil taxes generally, it is hard to overplay the volatility. They have moved by 200% to 300% over relatively small numbers of years and they are a very much bigger part of the budget of Scotland than they are of the UK as a whole. There is no getting away from that fact.

Q108   Stewart Hosie: There is no question that they are more significant, absolutely not, but in terms of volatility and the way price changes, particularly from the forecast, it is equally true, is it not, that when prices fall we can point to—I think Alistair Darling as Chancellor was suggesting a revenue yield for North Sea oil of £6 billion, but the outturn was £11 billion. So it cuts both ways. Is it not the case that the proposals previously put forward for an oil stability fund to manage that volatility are in fact a perfectly viable approach to dealing with that issue?

Paul Johnson: The stability fund would require money to go in it in the first place. Therefore, you would require further taxes from somewhere else or further borrowing from somewhere else in order to set it up.

Q109   Stewart Hosie: I am simply making the point that, in principle, one can put tax yield away in the good times into a stability fund to be used in the bad times. That is a perfectly viable route, irrespective of how it is populated.

Paul Johnson: Or equivalently, at the moment, you could vary the amount of borrowing that you do. We are borrowing large amounts and you could borrow more.

Q110   Stewart Hosie: Indeed. On the economic position generally, the deficit, it is true last year that Scotland’s deficit was worse than the UK’s, mainly down to the largely tax-deductible £14 billion of investment in the North Sea, but it was substantially better the year before, on average, it was better for the previous five years and, on average, it had been better for the previous 30 years. It is not wrong to be continuing to make a case that would imply Scotland has a worse structural deficit than the UK when the last 30 years would tend to indicate that is not the case?

Paul Johnson: You are right: there was clearly a period of years in which, if you allocated all North Sea revenues to Scotland, the deficit was smaller, and we are going through a period of years now where it is larger. That is down to the volatility in the oil revenues. It seems to me the arithmetic here is extraordinarily straightforward. Excluding North Sea oil, spending per head in Scotland is 15% more than the rest of the UK, and tax per head is roughly the same, a little bit less. Over some years in the past the North Sea oil revenues have more than made that up. At the moment, and it looks like going forward, they will less than make that up. That is the arithmetic.

Q111   Stewart Hosie: Just on that point, let us be absolutely clear, because you were very clear about what was excluded, but of course if one includes the total tax yield from Scotland, including geographic share, it is also the case that tax yield per head over the last 33 years has been £1,300 a year higher than the UK average. Is that not also correct, just for the sake of clarity?

Paul Johnson: I am not familiar with that particular number, but it has certainly been the case that over a number of years, if you include North Sea revenues, they have been higher. Looking at the present and the best estimates we have of the future, even with, as David said, pretty optimistic views about tax revenues in the future, that is unlikely to be the case.

Q112   Stewart Hosie: It is just to get a balanced picture. When you said in that report that Scotland would face stark choices over public spending, that means—forgive me if I am paraphrasing this wrong—that there would either have to be tax increases or service cuts to fill what is euphemistically known as a black hole. Can I just confirm that the IFS assessment of these things for Scotland would never take into consideration the dynamic changes or the dynamic effect of policy changes, and it is basically policy as is with the numbers as you forecast them?

Paul Johnson: Sure. It is worth saying that this was all in the context of independence rather than devolution, but the numbers were a mechanical looking forward under current policy. Clearly, and as I think we stated, if you were able to do things that changed the growth of the economy, migration, tax revenues and so on, then other things change and, again, we did—

David Phillips: We did some scenarios.

Paul Johnson: We set some quite significant scenarios.

Q113   Stewart Hosie: That is extremely helpful. It is just good to get this on the record. What the argument is effectively saying is that the so-called black hole that is identified is not a picture of Scotland under independence or devo-max or any form of devolution. It is a picture of the Scottish economy under current UK policy.

Paul Johnson: It is the best estimate we have of where an independent Scotland would be under current policies.

Q114   John Thurso: I must just comment very briefly. One of the fun moments of a long and happy summer was on various referenda hustings and, for my sauce, a wonderful document that we know in Scotland as “GERS”, the “Government Expenditure Revenue in Scotland”, where there is a wonderful table of all the taxes per head in which I note that Scotland pays more tax in a considerable number of areas. We pay more tax on tobacco per head, we pay more tax on alcohol per head and we pay more tax on gambling per head, but in the area of income tax we pay less. I always wondered what that said about us, other than that we might possibly want to change policy going forward.

Can I come back to what we are looking at today? One of the things, and I think you mentioned it earlier, is the disconnect between the money raised and the money spent. You made the point that the three big taxes—income tax, national insurance and VAT, at £153 billion, £107 billion and £106 billion—taken together, are something like 73% of the total tax take and corporation tax is 9%, roughly, at some £40 billion odd of the total UK tax take; and however you cut it, the proportions would be the same at the moment in Scotland. Having the power to vary, say, corporation tax, in terms of the amount of money raised, is going to be a relatively small amount of money. The importance of it is it brings in companies, hopefully, which then have more people and you, therefore, collect the taxes in the other areas. It is a bit of a loss leader really.

That then begs the question: what are you spending the money on? It comes back to, if your objective is full fiscal responsibility—in other words broadly you are seeking to raise the money that you are going to spend on the things you are—but in parallel to what you are deciding to devolve in taxation, you have to be clear about what you are asking it to pay for, and the objective is to get as close as possible. I put that as a background to my first question.

In the paper that Stewart Hosie referred to, you did a critique of the Scottish Government White Paper in which you said there were more giveaways than takeaways, the implication being that it was perhaps not as fiscally responsible as it might have been. Would you expect the outcome of a good devolution settlement to be greater fiscal responsibility and accountability in Scotland for itself?

Paul Johnson: Yes. I think a good devolution settlement would create the kind of discipline that would mean that if you are raising less revenue that has an impact on the amount that you spend.

Q115   John Thurso: In that case, how do we set about designing it so that, rather than having lots of adjustments to a block grant, which are, as you have pointed out, extremely complicated, you are starting from the opposite end, which is to say, “This is what you are spending on and these are the ways you can raise it and, because we are in a United Kingdom, there will be a smoothing arrangement at the federal level? That is completely the opposite to how we now look at it, which is we, central government, give you the money and you go play with it.

David Phillips: We have not yet looked at the arrangements you could have for a system somewhat like Australia or Canada use, where they have a formula that determines a spending need. The states have their tax revenues and then there is a top up from the centre to top up the assessed level, or in certain rich states like Alberta in Canada, for instance, they take money off them and give it to other states. There are certainly options of how you go about doing that. We have not looked at it. Now, I am not necessarily sure that it would be simpler or it would be less controversial. These funding formulas could be incredibly controversial to set up. That is one of the objections that has been made to a needs-based formula. I am not saying you should not do it, but—

Q116   John Thurso: Can I just give you a “for instance” and ask you to comment? Just to be absolutely clear, my personal view has always been home rule for Scotland and a federal United Kingdom, which will come as a great surprise to everybody around this table. The core of that, if you were looking at proper home rule, is that you have to be responsible for the spending decisions you make. If you are going to spend more money you have to raise it and that means you go to people at an election saying, “I will do more here but you guys are going to pay for it.” That is the trade-off for every responsible level of government from local to national always has to do. When we are talking about “there is a block grant and we will take a chunk off it and you can have some flexibility on it but if you raise more we will lower the grant” then you get into a situation where—

David Phillips: That is not how it works.

Paul Johnson: I do not think that is how it works or what is proposed.

Q117   John Thurso: It is the reason why nobody has ever used the 1998 powers. The 1998 powers are unworkable because, with the variation of the income tax, whatever you vary down comes off the block grant and whatever you vary up comes off the block grant. So what on earth is the point?

David Phillips: That is not the powers under the Scotland Act of 2012.

Q118   John Thurso: Exactly, that is different. It is untested as yet.

David Phillips: This point has been raised before. What I would say is that countries do have these incentives and these responsibilities under a system of the block grant, provided you set it up in the right way so that if they do increase their tax rates, they do get to keep the revenue. Again, it is all about making sure that the devolved tax powers interact with the block grant and the Barnett formula in the correct way. It can be gotten wrong. I am not aware of how it is done in the 1998 Act, but if it is as you say that seems to be a silly way of doing things. There are better ways of doing it and, given the incredibly tight timescale with which the Smith Commission is supposedly working to, it has to be taken as given the block grant way of doing things rather than moving towards a more favourable—

Q119   John Thurso: I think the Smith Commission is going to come up with the core principles and direction of travel. I do not think anybody is suggesting that a year later everything in Smith is going to have been enacted. A lot of the 2012 Act does not come into until 2016. It has taken a lot of work to get there. I think everybody on all sides of this argument recognises that the route from decision to implementation is going to run across quite a number of years if we are going to get it right. I think that is pretty generally agreed, is it not? The point is it is more important to get the principles right than it is to do the detail, which will come once you have established the principles. Is that not the right way round?

Paul Johnson: Yes.

Q120   John Thurso: Can I just move on very briefly to a couple of technical questions? If we are all agreed that what we are seeking is as full a fiscal responsibility as possible, where the vast bulk of the money raised and spent is done in Scotland so that the majority of the responsibility lies with the Scottish electorate and the Scottish Government, do you think that there is sufficient within either the OBR or the Scottish equivalent to enable there to be sufficient data for the Scottish Government to those decisions?

David Phillips: I know the OBR is now forecasting the revenue yields for the taxes devolved under the Scotland Act. If there are substantial new taxes devolved, I am sure they would need to not only make forecasts for those new taxes but also invest more heavily in their Scottish forecasting. I know the Scottish Government has a national accounts team that has been trying to build its own estimates of GDP in Scotland. Again, I would assume that, with more powers being devolved to Scotland on taxation, there is more need to forecast additional variables, so you would need to ramp up the forecasting capabilities. So far they are looking at historic estimates of GDP rather than forecasts in Scotland, so they would need to introduce the forecasting element.

Q121   John Thurso: You have quite a number of elements in there. You want good data. You want to know that what you think you have received you have received and what you think you have spent you have spent. It is fairly simple accounting stuff, ONS stuff, and then you have all the areas of data, which have referred to, that enable forecasts to be done and so forth. The Scottish Fiscal Commission that has been set up is based at Glasgow University—I think that is where it is domiciled—but it has an OBR-like—I think it will have to work in tandem. They will have to co-operate. Have you had a chance to look at the operation of that and pass any judgment on it as to—

David Phillips: We have not yet, no.

John Thurso: You have not been able to look at that? Okay. It might be worth your while doing so because, in the same way we always ask you about the OBR’s performance when you come before us each budget, I suspect that similar questions will be raised by other people in relation to what goes on in Scotland. I will not bother asking you if you think it is fit for purpose or well contrasted or anything because you obviously have not looked at it.

Chair: Thank you very much for coming to give evidence this afternoon. Very interesting and somewhat controversial in places. Thank you very much indeed.

              Oral evidence: Proposals for further Fiscal and Economic Devolution to Scotland, HC 760                            5