Introduction

The outcome of the referendum on Scottish independence held on 18 September 2014 implies that Scotland remains a member of the UK for the foreseeable future. However, while complete fiscal autonomy is ruled out for now, significant changes in the Scottish fiscal system have occurred since the referendum. First, some tax changes embodied in the Scotland Act, 2012 were implemented in April 2015 and 2016. Second, further tax powers were devolved under the Scotland Act 2016. Third, a new fiscal framework for the Scottish Government was agreed, with a new formula for calculating the block grant from Westminster in the light of the new tax powers.

In this chapter, we briefly review the tax and spending powers introduced by the Scotland Acts of 2012 and 2016. We consider each of these changes in turn and seek to identify those that have the potential to exert significant macroeconomic or system-wide effects on the Scottish economy. Then we provide a first attempt to analyse the likely consequences of changes in those taxes that either are devolved, or could be devolved in future, and that could exert a significant system-wide impact on the Scottish economy. While there has been extensive debate around the issue of which powers should be devolved, there has been much less consideration of how these powers should be used, and their likely impacts on the Scottish economy.

We then reflect on the wider lessons of our analysis for two key aspects of the debate on further devolution of fiscal powers: the link between Scottish economic activity and Scottish Government revenues; and fairness, well-being and inequality in Scotland. The conclusion outlines the further research that would enable us better to understand Scotland's future fiscal choices and their likely consequences.

Fiscal powers for the Scottish Parliament

When the Scottish Parliament was established in 1999, its spending powers were wide but its taxation powers very limited. The most important was the ability to raise or lower the rate on income tax by one percentage point, a power that was never actually used. Important changes were introduced in the Scotland Act (2012) (and implemented in April 2015 and 2016) and in the Scotland Act (2016).