The fiscal trap

Lots of people have been writing about how the new powers for Holyrood effectively constitute a fiscal trap. As Alistair Davidson said:

The Scotland Bill is terrible. We are being given the power to top-up existing benefits, but not control of the benefits system. That means we don’t save money by getting people into work, and we can’t change the system to make it more humane or more efficient. Top up benefits will be expensive or in some cases impossible to administer.

Oh and taxes – we are getting more power to vary taxes, but not power to define them. Rich people can choose to take their income through shares or capital gains, taxes not devolved, so we can tax the middle class more but we can’t tax the rich. And the Tories will still be cutting the Scottish block grant every year. A well-constructed trap, all round.

In the old days — before the advent of austerity — being able to vary a variety of taxes and benefits might have been moderately useful. However, I’m starting to think it’s going to be an even bigger disaster than people realise because the powers are insufficient to maintain a welfare state in Scotland if the Tories abolish it in England.

Imagine the Tories decided to cut public spending drastically, for instance by getting rid of tax credits altogether, and to use the money saved on something that didn’t affect Scotland directly, for instance on lowering property taxes in England. Because tax credits aren’t devolved, Scotland wouldn’t get anything out of abolishing them (the block grant is based on English spending in devolved areas, so this wouldn’t change anything), and property taxation is devolved, so Scotland would to some extent be expected to mirror this move. A majority of Scots might want to introduce Scottish tax credits to keep things unchanged up here, but there wouldn’t be any money to pay for it. To make things worse, if Scotland decided to reduce property taxes here, too, that would cost even more money. As a result, Scotland would be facing two new expenses and no new income. It’d be an absolute nightmare.

Of course Scottish Labour are making things even worse by pretending the new powers are sufficient to allow Scotland to maintain the welfare state. And why shouldn’t they? After all, they have practically no chance of getting into power in Scotland any time soon, so it’s all just a game to them now.

I just don’t understand why the Scottish Government isn’t doing more to show that it’s all a trap. I guess the hope is that people will suddenly realise what the problem is in a few years’ time, and hopefully they’ll then turn to independence. I just fear that a lot of the welfare state will be irrevocably damaged before the scales finally fall from the voters’ eyes.