One of the problems with constitutional reforms is that it can – indeed, usually does – take a while for the consequences to be felt. Recent announcements by the Government have once again put this in the spotlight.
The decision to cut the 45p rate of income tax has, whatever its other effects, posed a problem for Nicola Sturgeon and the Scottish Government. They have no intention of offering a similar reduction, and as a result there is some danger of higher-rate taxpayers relocating.
In the short term, this danger is probably overstated. In this particular case, Labour is committed to reversing the policy and could well take office in two years. The odds of people upending their lives for two years of 5p in the pound are surely long.
But it is a taste of things to come. Imagine if instead such a policy were being enacted in the more common political circumstances for so bold a shift in course: by an incoming government at the start of a new parliament. In that case, the prospect would be of perhaps ten years of tax divergence. A greater lure to relocation. Moreover, if tax policy continues to diverge over time – and the long term is precisely the lens through which to mull constitutional issues – then the effect of various changes will be cumulative.
This will put even more pressure on the Scottish National Party, which has already contrived to use higher tax rates to deliver lower revenues. According to the Institute for Fiscal Studies, Scottish Government revenues are £200 million less than had it stuck to Treasury tax bands.
Yet they seem set to do the same thing again, clinging to the top rate even as the respected Fraser of Allander Institute reports that it raises very little revenue anyway.
However, the tax cut might not be the biggest shock to the devolutionary system. If Kwasi Kwarteng does follow up his announcement with a programme of spending cuts, that will further squeeze the Scottish Government’s budget.
Under New Labour’s devolution settlement, funds are distributed around the UK according to the Barnett Formula. This means that whenever the Government announces spending in England, it hands a proportional allotment of cash to the devolved governments to do with as they please.
This is a very bad system, not least because it means money is raised on a British basis and distributed by the centre without any accountability to the centre, or the British taxpayer, for how it is spent. But it may also precipitate a more immediate political problem if the Government does embark on steep spending cuts, because that means big reductions in the budgets of the devolved administrations as well.
Few Conservatives will be inclined to shed many tears for Sturgeon or Mark Drakeford, especially in light of the SNP’s actively revenue-hostile approach to tax policy. But it will give both administrations the chance to blame all their various shortcomings on the Government in Westminster, again – and make life difficult for MPs defending Scottish and Welsh seats in 2024.