The pellet with the poison’s in the vessel with the pestle; the chalice from the palace has the brew that is true
Fury, outrage and righteous indignation are the everyday currency of politics in Scotland, especially among the opposition political parties. The result is daily politics is now conducted by a mixture of bombast and accusation. The problem for the opposition leaders is that it is difficult to raise the standard level of hysteria, if something really important turns up. Even worse, this general atmosphere of constant Unionist opposition outrage at everything, means the considered debate on the technicalities of serious fiscal issues is simply evaded wholesale. Take VAT.
VAT has become an important and illuminating issue in the funding of Scotland (assignment of VAT is slowly being transferred from Westminster to Scotland, to be wholly implemented by 2021). Assignment of the tax will become part of the Scottish Budget, but it must be made clear that this transfer of taxation does not include the transfer from Westminster of the right to control or amend the tax. In a neat finesse by Westminster it intends to pass the poison vessel, while retaining for itself the brew that is true (words appropriate for such a plan, spoken by Danny Kaye in ‘The Court Jester’, Paramount, 1955). The responsibility for VAT is being transferred, but not the rights that go with it. Westminster cannot lose; it is win-win, for they can rest complacent in the knowledge that the Scottish electorate will become more and more confused about who is responsible for what. The constitution is slowly being hybridised by Westminster, guaranteeing that confusion and frustration alone will thrive, in the hope that Holyrood suffers the backlash; ensuring a routine political future of bombast, overblown outrage and faux righteous indignation for us all.
The First Minister has rejected the Westminster version of a VAT transfer plan. She informed MSPs (8th May) that the VAT proposal “has enormous risk attached to it”. The reason for that is the method Westminster, presumably deliberately, has used to identify the Scottish element of the tax. The FM went on: “The concern here comes from the methodology that’s being proposed for that. There was never intended to be any real out-turn data that will guide the decision – it’s based on estimates”. Based on estimates, and risky: where have we heard that concern before on the matter of government revenues or expenditures in Scotland? I will leave that here.
The change in VAT came about through proposals from the multi-party Smith Commission and were incorporated in the Scotland Act (2016). The (Unionist Party) participants to the Smith Commission were unfortunately reluctant to release Westminster central control over fiscal policy to the devolved Scottish Parliament without firmly retaining Westminster’s predominant grip on the purse strings; Westminster seems incapable of thinking of the UK as other than an incorporating, highly centralised, top-down State. Thus the devolution of VAT was intended to give the appearance of devolving power, by (grudgingly) passing the obligation to spend the tax to Holyrood, and identifying the quantum as part of the Scottish Budget through making some broad estimates, rather than identifying the facts rigorously: while retaining Westminster control over raising VAT. This was much like the origins of GERS in Ian Lang’s original, political smoke-and-mirrors confection; first designed and then retained, as much as a political trap for Holyrood to fall into, as it was a reform for the sake of good government in Scotland: and so it has now proved, with the VAT problem.
The Fraser of Allander Institute (FAI) produced a Blog on the problem the VAT transfer created, in December, 2018: ’VAT Assignment – A bridge too far for fiscal devolution?’, which provides the independent evidence for the shortcomings of the Westminster proposal. The FAI begins by establishing the background and outlining the failure:
“Working out how much VAT is raised in Scotland is exceptionally difficult. Unfortunately, a paper published recently by the UK Government on how it plans to do this suggests that little progress has been made in finding a robust way forward after over 3 years of trying.”
The FAI goes on to identify the nature of the underlying problem:
“There is one big challenge with assigning or devolving VAT to Scotland. Businesses are not required to report separate VAT returns for sales made in Scotland. Unlike income tax, which is based upon where a worker resides, VAT is much more complex to identify.”
In the 21st century, with Big Tech, and very usable, even personal, modern accounting systems this should not be as expensive or difficult to do, at least for the major contributors to the tax, as some critics claim, if there was the least political will to do it; although the FAI in passing makes an issue of the cost, without providing any evidence of insuperable difficulty. In any case, the FAI continues:
“Previous approaches have looked to regionalise this model to come up with a Scottish share for VAT. This has been done by using the Living Costs and Food Survey (LCFS) to produce estimates of the expenditure on different goods in Scotland (and rUK). An assumption is then made that the VAT gap is proportionately the same across the UK.
In some instances, other methods are used – e.g. for government and the exempt sectors – but the majority of revenues estimated hinge on the LCFS data.
But there are a number of issues with this approach. Chief amongst them is the robustness of the underlying statistics. The LCFS has a small sample size: prior to 2017-18, it was only 500 households per year. This means that the confidence intervals are significant – see Table 1 from GERS which shows that for 2017/18 the confidence interval was plus/minus £223m. In other words, we can be 95% confident that the ‘true’ value for VAT revenues in Scotland could lie anywhere between £9.9bn and £10.4bn. These are obviously significant fluctuations – arguably acceptable when the purpose is a statistical publication of Scotland’s overall public finances, but much less so when it comes to marginal changes in day-to-day Scottish budget lines.”
Notice the reference to GERS, and the statement that the chief among the “issues” with the approach is “the robustness of the underlying statistics”. Who knew? Actually, the list of GERS critics provides a starting point. I will pass over the rather strange and casually dismissive wording, that these estimates are “arguably acceptable when the purpose is a statistical publication of Scotland’s overall public finances”. What that Delphic observation actually means is challenging to parse. In any case the FAI argument proceeds from there as follows:
“Recognising that earlier estimates were weak in the context of the new tax powers, both governments started working on a better way to assigning such receipts to Scotland. Presumably, many approaches have been examined.”
The FAI Conclusions on these approaches is worth repeating:
“The amount of detail published on VAT assignment leaves a lot of questions unanswered. But from what we can tell, the method appears similar to previous approaches. This should cause concern for Scottish Ministers and MSPs. Given the reliance on survey based estimates, this has the potential to introduce significant fluctuations into the amount of VAT assigned year-on year, and therefore potentially into the Scottish Budget. A key aim of the Smith Commission was to improve accountability and make Scotland’s politicians responsible for the money that they spent. Unfortunately rather than helping to deliver this aim, the current proposals for VAT assignment risk undermining that principle. Perhaps it is wise to pause and think again.”
The FAI is a leading institution specifically analysing the Scottish economy, and its judgement on the Westminster plan for the management of a major Scottish tax begins with the qualification “from what we can tell”. From what I can tell, this is not a comforting starting point to understand or accept that British Government policy for Scottish taxation is well judged or has been wisely considered; in other words, that our fiscal policy is in good hands. The Scottish Parliament has been in existence for twenty years; it is not as if there has been no time to give the issues at stake ample consideration, for review and satisfactory resolution; to all parties who are sincerely involved or intend there to be fruitful outcomes.
The Scottish Government has not accepted the Westminster VAT proposal because of the inherent defects: a response that political opponents are hastily now attempting to ‘spin’ as Scottish Government incompetence, or proof that Scotland is basically incapable. This is the kind of vulgar party political juvenility, the slapstick politics of opposition that we have to endure in Scotland. No wonder we can’t fix on a solution for VAT.
For me, this strange approach by Westminster to serious matters of fiscal policy in Scotland provides an interesting, and rare insight into the deeply woolly, even casual nature of the approach to Scotland’s finances that Westminster is prepared to accept, and even promote in the 21st century: but everyone else really should wonder why this is still the case. GERS has generally and casually been accepted without sufficient consideration of the underlying problems it disguises, in spite of fair-minded warnings of the limitations: but as soon as a major tax is about to be used to transfer some of the responsibility directly to Scotland, that is based on the conventional Westminster approach to the sourcing of estimates of their yields (for example using surveys, or other relatively indeterminate or uncertain solutions), rather than providing accurate and robust data; the reliability of the proposed revenue or cost data relating to the tax suddenly collapses in a heap – for very good reason.