Scotland could face higher public spending and lower revenues if some SNP priorities for new powers for Holyrood were put into place, a leading thank-tank has warned.
The Institute for Fiscal Studies (IFS) said that devolving control over national insurance contributions, corporation tax and welfare policy – as set out in the SNP election manifesto – would transfer “significant powers” north.
But it went on to state that devolving full control over the welfare system could potentially see a “substantial increase in overall benefit spending” while giving Scotland control over corporation tax could see tax rates and revenues reduced across the UK if Scotland cut the levy and the rest of the country then followed suit.
The SNP manifesto, published on Monday, pledged to “prioritise devolution of powers over employment policy, including the minimum wage, welfare, business taxes, national insurance and equality policy – the powers we need to create jobs, grow revenues and lift people out of poverty” to boost Holyrood’s powers beyond what has already been proposed.
The IFS considered the impact of handing control over welfare, national insurance contributions and corporation tax, and said these would “give Scotland significant new powers which the Scottish Government may be able to use to design improved benefit and tax systems”, but added: “They would also entail additional spending and revenue risk, and involve a number of complex technical and administrative issues.”
David Phillips, a senior research economist with the IFS, said that “plans for the devolution of welfare in its entirety would give the Scottish Government significant new powers – not only to increase or reduce benefit rates but also to restructure the whole system”.
While he said this “may result in a system better suited to Scotland’s particular needs and preferences”, he warned that “any radical reform” of benefits would inevitably create both winners and losers, which could leave many people on low incomes potentially worse off.
SNP proposals such as halting and reversing the replacement of disability living allowance with personal independence payments and increasing the carer’s allowance would also “increase the generosity of the system, and would therefore cost money”, he said.
Mr Phillips added this was “money that would have to be found from within the Scottish budget if welfare were devolved and the plans were not adopted UK-wide”.
Devolving power over national insurance contributions could be “seen as a natural next step” from current plans to hand more control over income tax to MSPs, but Mr Philips argued there were “notional links” between the payments and entitlement to some contributory benefits such as pensions, which could result in “tricky administrative issues” such as “who would pay for the pensions of people who had worked in England and retired to Scotland”.
Corporation tax is “not a natural candidate for devolution”, Mr Phillips said, as companies would shift their investments and profits between regions in a bid to take advantage of the lowest rates.
Former first minister Alex Salmond had pledged to cut corporation to 3p below the rate in England if Scotland had voted for independence, although his successor Nicola Sturgeon has backed away from this, favouring instead “targeted changes” rather than a “blanket approach”.
Mr Phillips commented: “While one might think that devolution of corporation tax would provide Scotland with a significant new lever with which to attract additional investment and profits, the lever may be less effective than hoped if the UK government responded to any reduction in tax rates in Scotland by cutting tax rates in the rest of the UK.
“Instead, tax rates and revenues may be lower in both Scotland and the rest of the UK than if rates were set centrally for the whole of the country.”
The comments from the IFS come the day after the think-tank warned SNP plans to move to full fiscal autonomy for Scotland over a number of years would not address the”fiscal gap”, with projections suggesting it would increase rather than shrink over the next few years.