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  • Ian Ritchie : Scottish Business Insider

Time to ditch the outmoded Barnett Formula

WE ALL KNOW that the link between representation and taxation is a key one. After all, “no taxation without representation” was the famous cry at the Boston Tea Party which ultimately led to the split of the USA from the British Empire.

And the link between political and fiscal autonomy continues to cause strain today. Recent skirmishes between Holyrood and Westminster about the funding of the new Forth Road Bridge - which everybody agrees is urgently required - demonstrates this starkly.

The Scottish Government may be in control of spending a devolved budget of nearly £30bn a year but having no borrowing powers, it is unable to make a start on this key piece of infrastructure without permission, and some kind of funding allowance, from their masters at the UK Treasury.

And the stresses go both ways. The current method that decides the funding for Scotland is the ‘Barnett Formula’, by which Scotland, Wales and Northern Ireland get allocated a percentage share of the UK’s budget. This calculation - devised some 30 years ago by Joel Barnett, the then Chief Secretary to the Treasury - has survived intact over the years.

Even (the now Lord) Barnett has agreed that this system has outlived its usefulness and has campaigned to have it scrapped. But it persists, and has the effect that every time UK public expenditure is raised, Scotland gets its 10% share, without any reference to any specific needs. This leads Scottish politicians to become relatively disinterested in the performance of our own economy. After all, if the money keeps rolling in, why worry about where it comes from.

And it causes friction within the UK; the English wonder why Scots should have free care for the elderly, free student tuition, free prescriptions, free bridge tolls, and free school meals, when they have to pay for all these things out of their own pocket. Even worse, they suspect that it is their taxes that are actually funding all these benefits.

It is this issue that has led the think tank Reform Scotland to come up with a more sensible solution.

It proposes that 60% of the money raised by taxes in Scotland - including personal, corporate, VAT and oil revenue taxes - be allocated to a new Scottish Treasury under the control of the Scottish Government, with 40% going to Westminster to pay for UK-wide responsibilities such as Defence, Foreign Affairs and Social Protection.

National Insurance would be collected and social benefits dispersed at a UK level. With the exception of VAT, the Scottish Government would have the power to vary the other taxes, and would gain the power to borrow money.

If this was done today, by Reform Scotland’s calculations, Scotland would raise and spend £28bn and the UK Government would raise and spend just over £19bn in Scotland, very similar to today’s allocation under the Barnett formula.

Corporation tax could then be lowered to encourage multi-national corporations to establish HQs here, a policy that has been so successful in Ireland.

Personal taxation, capital gains tax, and stamp duty, could be set in Scotland to suit our own needs, and not the requirements of the economic conditions of London and the South-East as is done at present.

Air transport duty could be specially lowered for socially important routes such as to the Scottish islands, or tax could be raised on alcohol and tobacco in order to pay for improved health services.

Of course our Scottish politicians would have to become more responsible, but that would be good – wouldn’t it?

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