More Powers for the Scottish Parliament – Scottish Government Proposals

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First published by The Scottish Government, October 2014
ISBN: 978-1-78412-850-0 (web only)

E-book in EPUB format first published by The Scottish Government, October 2014
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ISBN: 978-1-78412-857-9 (MOBI)

The Scottish Government
St Andrew’s House
Edinburgh
EH1 3DG

Produced for The Scottish Government by APS Group Scotland, 21 Tennant Street, Edinburgh EH6 5NA
PPDAS38354 (10/14)

Published by The Scottish Government, October 2014

Contents

Foreword By the Deputy First Minister

Summary

Chapter 1 The Need for More Powers for Scotland's Parliament

Chapter 2 Delivering Progress Through Self-Government

Chapter 3 The Opportunities of Self-Government for Scotland

Chapter 4 Scotland's Economy and Public Finances

Chapter 5 Fairness, Equality and Social Policy

Chapter 6 Scotland's Constitution, Governance and Democracy

Chapter 7 Scotland's Place in the World

Chapter 8 The Way Forward

FOREWORD

By the Deputy First Minister

The Scottish Government believes that Scotland should be – and will be, in the future – an independent country. However, we accept that independence was not the choice of a majority of the Scottish people in the referendum on 18 September.

For Scotland to become independent, the people of Scotland must choose this future at the ballot box in a referendum. Independence will not be the outcome of the Commission led by Lord Smith of Kelvin. It follows that our proposals for further devolution are not, and cannot, be an attempt to achieve independence "by the back door".

In this paper we describe proposals for self-government driven by four over-riding and inter-connected objectives. These objectives will also inform our approach to the discussions that will follow.

Firstly, the outcome of this process must meet the expectations of the Scottish people as expressed in the referendum – which is for a package of reform that lives up to the rhetoric of 'Home Rule', 'near federalism' and 'devo-max'.

Secondly, we must significantly enhance the financial and democratic accountability of the Scottish Parliament and Government to the people we serve.

Thirdly, we must transform the ability of the Scottish Parliament to create jobs and economic growth, tackle inequality and represent our interests in the EU and international community on matters within our devolved responsibility.

Fourthly, we must ensure that the overall funding arrangements for the Scottish Parliament are equitable and allow it and the Scottish people to enjoy the financial and economic rewards of sound and sensible decision-making, as well as having the tools to manage the risks of our new responsibilities.

On the first of these, we consider it beyond argument that there is a powerful majority for change in Scotland. This is comprised of the 45% of the Scottish people who voted Yes in the referendum and those who were persuaded to vote No on the basis of the Vow to deliver significant new powers for the Scottish Parliament.

The language used during the campaign serves as a measure of the change that people now have a right to expect. The Prime Minister said: "[t]he status quo is gone. This campaign has swept it away". Both Gordon Brown and Danny Alexander talked of "Home Rule", and Gordon Brown also referred to "a federal state". In their Vow of 16 September, the Prime Minister, Ed Miliband and Nick Clegg said: "[t]he Scottish Parliament is permanent and extensive new powers for the Parliament will be delivered".

In a recent poll (Panelbase, 5 October 2014), 66% of respondents answered Yes to the question, "Should extensive new powers include control of all areas of government policy except for defence and foreign affairs, which is sometimes referred to as 'devo max'?". 71% backed "control of all taxation raised in Scotland", 68% backed "control of oil and gas tax revenue generated in Scottish waters", 75% backed "control of the welfare and benefits system", and 65% backed "control of policy regarding the state pension".

These findings are in line with previous polls and the findings over time of the Scottish Social Attitudes Survey.

We therefore believe that the proposals we put forward for maximum self-government have majority support in Scotland and that if the outcome of this process falls significantly short of that, it will not be living up to the expectations of the Scottish people.

Our second objective is strengthened financial and democratic accountability of the Scottish Parliament and Government to the people we serve.

Following the full implementation of the Scotland Act 2012, the Scottish Parliament will be responsible for around 16% of all taxes raised in Scotland and the revenue raised by taxes under our control will pay for around 22% of our spending.[1]

The Scottish Government believes the principle should be that all taxes raised in Scotland should be the responsibility of the Scottish Parliament unless there are good reasons for them being reserved. This achieves in financial terms the principle that Donald Dewar enshrined in legislative terms in the Scotland Act 1998 – that all matters are devolved unless expressly reserved.

The Scottish Parliament should also be responsible for all domestic spending, including welfare, and make agreed payments to the UK Government for reserved services.

Our third objective is the transformation of the Scottish Parliament's ability to create jobs and economic growth, tackle inequality and represent our interests on matters within our devolved responsibility in the EU and international community.

This means that consideration of new powers must be a discussion driven by what the people want the Scottish Parliament to be able to do. It should be about 'powers for a purpose'. For the Scottish Parliament to be able to create jobs and tackle inequality, it needs more than control over one or two taxes. It needs control over the range of taxes, both personal and business. It needs control of key economic levers like employment policy. It needs control of welfare policy and the minimum wage. And the package of powers that is agreed needs to reflect the fact that interactions between different powers matter as much as the individual powers themselves. Therefore, the final package needs to be coherent and meaningful and avoid unintended consequences. For example, the level of the minimum wage, the tapering of benefits to reflect income, and support to sustain employment all need to be considered together.

Our fourth objective relates to the overall funding arrangements people want for the Scottish Parliament. Our starting point is that the Scottish Parliament should raise all of its own revenue and make payment to Westminster for reserved services. However, any final package that falls short of this, and requires an allocation of resource from Westminster to the Scottish Parliament must ensure equity. Any allocation of grant funding should continue to be based on the Barnett formula. Adjustments to the block grant to take account of the revenue that the Scottish Parliament will raise directly must be transparent and fair. It is vital that the Scottish Parliament reaps the rewards of sound decision-making. For example, if by investing in child care, the Scottish Government enables more parents with children to enter employment, the revenues from the tax they pay should flow to Scotland, not to the Westminster Treasury.

These, therefore, are the principles and objectives that inform our proposals and that will guide us in the discussions that follow.

The Scottish Government aims to secure the best deal possible for Scotland – by which we mean a package that will both live up to the clear demand for real change expressed in the referendum, and promised by all sides, and transform the ability of the Scottish Parliament to meet the challenges we face as a country.

We call on all participants in the Smith Commission to take the same approach – to recognise, as we have, that we will not achieve all that we want, but that there is a duty to think beyond party interest to secure the best that we can for Scotland. For us, that means accepting that independence will not be the outcome of the process. For others, it must mean embracing an outcome that goes radically and significantly beyond the limited proposals published so far towards a position that reflects statements made and Vows delivered during the referendum campaign.

If all participants approach this process in that spirit, and in line with promises made to the Scottish people, then it should be possible to secure agreement to a package of proposals that will significantly strengthen the Scottish Parliament and transform its ability to deliver real change for Scotland.

We look forward to discussing our proposals in the weeks ahead with the Smith Commission and with the Scottish people who, of course, will be the final judge of what is delivered.

Nicola Sturgeon MSP

Summary

Chapter 1 of this paper discusses the need for more powers for Scotland's Parliament.

Since the Scottish Parliament was re-convened in 1999, responsibility for governing Scotland has been divided between Edinburgh and London.

At Westminster, the UK Parliament and Government exercise powers and bear responsibilities 'reserved' by the Scotland Act 1998 (as later amended). These include defence, foreign affairs, monetary policy, the welfare system, financial and business regulation and most aspects of taxation.

The Scottish Parliament and Government in Edinburgh are responsible for everything that is not reserved. These matters include the National Health Service, education, justice, social services, housing, the environment, farming, fisheries and aspects of transport.

The Scottish Government believes that decisions about Scotland are best taken here, close to the people they affect and with their participation and consent.

The Scottish Government continues to believe that Scotland should, and will in the future, be independent. However, we accept both the result of the referendum on 18 September, and that independence will not be the outcome of the Smith Commission.

What is beyond doubt is that the people of Scotland expect early and substantial change – change that will give the Scottish Parliament the further powers and responsibilities it needs to tackle the challenges facing Scotland in a way that responds to the views and votes of people in Scotland. That is what was promised in the referendum campaign and it is what people now expect to be delivered.

Chapter 2 sets out the Scottish Government's approach to delivering progress through self government. We propose maximum self-government within the Union. Others would describe this as 'devo-max', 'home rule' or 'federalism'.

We argue that further devolution should be underpinned by clear principles. It must:

- respect the sovereignty of the people of Scotland and enhance financial and democratic accountability to them. As part of this, the Scottish Parliament should have the power to devolve power further, to local authorities and communities

- transform the ability of the Scottish Parliament and Government to meet the challenges we face as a country, in particular to enable Scotland to be a more prosperous country, a fairer and more equal society and have a stronger voice in the EU and internationally on matters within devolved competence

- be equitable and transparent in its approach to resources, risks and rewards including arrangements for Scotland to have access to taxes raised in Scotland and transitional or residual transfers of resources based on the current Barnett formula

Chapter 2 also argues that any package of further devolution should be assessed against criteria of coherence, effectiveness and transparency. To tackle issues such as inequality, for example, the Scottish Parliament requires a coherent and effective set of powers covering welfare, taxation, employment and equality.

Chapter 3 sets out an overview of our proposals for extending self-government in Scotland consistent with the principles set out in Chapter 2.

- Full fiscal responsibility for the Scottish Parliament: all tax revenues should be retained in Scotland. The Scottish Parliament should have policy responsibility for all taxes unless there is a specific reason for a continued reservation. In particular, the Scottish Parliament should have full autonomy for income tax, national insurance, corporation tax, capital gains tax, fuel duty, air passenger duty and inheritance tax

- The Scottish Parliament should be responsible for all domestic expenditure – including welfare – and make payments to the UK Government for reserved services

- The Scottish Parliament should have a sustainable framework for public finances including the necessary borrowing powers, and an agreement with the UK Government on the overall approach to public finances

- As part of any agreement, the Barnett formula should continue to be used to determine Scotland's resources during any transitional period and if the Scottish Parliament's financial powers fall short of full fiscal responsibility. Scotland should get any financial benefits, as well as having the tools to manage the risks, of its new responsibilities

- Responsibility for all welfare policy and administration should be devolved. As a priority this should involve all working age benefits. In the meantime, roll out of Universal Credit and Personal Independence Payments in Scotland should be halted to ensure that the practical ability to devolve individual benefits is not compromised

- Employment and employability policy, including responsibility for setting the minimum wage, and all employability programmes should be devolved

- Equal opportunities and equality policy should be devolved

- Other key economic levers, including competition, energy and broadcasting policy, responsibility for the Crown Estate, transport policy not currently the responsibility of the Scottish Parliament (including rail) and aspects of immigration policy, such as the post study work visa, should be devolved

- The sovereign right of the people of Scotland to determine their form of government should be enshrined in law

- The Scottish Parliament should become responsible for its own elections, rules and procedures and the Sewel Convention should be given statutory force

- Scotland should have the opportunity to establish its own constitutional framework, including human rights, equalities and the place of local government

- The Scottish Parliament should have the ability to directly represent its interests on devolved matters in the EU and internationally

Our proposals would leave the following under the control of the UK Parliament and Government at Westminster:

- aspects of the constitution of the United Kingdom as a whole, such as the monarchy and the Westminster Parliament

- monetary policy, including the currency and the Bank of England

- aspects of citizenship, including nationality and passports

- defence

- intelligence and security including borders

- many aspects of foreign affairs

These are developed further in Chapter 4 on Scotland's economy, Chapter 5 on welfare and social policy, Chapter 6 on Scotland's democracy and Chapter 7 on Scotland's place in the world. In each policy area, we explain how maximum self-government will enhance decision-making in Scotland. We believe that, taken together, these proposals are practical ways of achieving meaningful self-government within the Union.

We set out our view of the way forward in Chapter 8. Some of our proposals can be implemented quickly and simply through order-making powers already available under the Scotland Act. For example, the UK Parliament and Government could devolve to the Scottish Parliament now control of Scottish elections, in time to allow 16 and 17 year olds to vote in the Scottish Parliament elections in 2016. There are also well developed and long standing proposals to devolve responsibility for the Crown Estate.

It is vital, however, that proposals for further devolution are put before the people of Scotland in a way that engages their full participation in the democratic process, building on the unprecedented level of participatory democracy seen in Scotland in recent months. This paper is therefore part of the Scottish Government's own conversation with the people of Scotland on the future governance of our country.

CHAPTER 1

THE NEED FOR MORE POWERS FOR SCOTLAND'S PARLIAMENT

The need for constitutional change in Scotland is widely accepted on both sides of the referendum debate. As the Prime Minister said towards the end of the referendum campaign:

"'Business as usual' is not on the ballot paper. The status quo is gone. This campaign has swept it away. There is no going back to the way things were. A vote for No means real change." (15 September 2014)

The Scottish Government remains of the view that independence is the best long-term constitutional future for Scotland. However, we accept that a majority of people did not choose that option on 18 September. If Scotland is to become independent in future – as we believe it should and will – this will be as a result of the people of Scotland choosing this option in a referendum.

The Scottish Government has agreed to support the process led by Lord Smith of Kelvin to produce recommendations for further devolution of powers to the Scottish Parliament. We do so in good faith with the intention of reaching agreement on a set of proposals that in due course we can recommend to the Scottish Parliament for agreement. In line with the Edinburgh Agreement, we will also work constructively with the UK Government in the best interests of the people of Scotland and of the rest of the United Kingdom.

The Smith Commission will not deliver independence – we accept that. The Scottish Government recognises that there are significant functions of a state, such as defence, citizenship, the currency and financial stability, monetary policy and many aspects of foreign affairs, that could not be the subject of devolution while Scotland remains within the United Kingdom.[2] However, we believe that if the promises made to the Scottish people are to be honoured in substance, not just in rhetoric, then the Westminster parties must agree maximum self-government.

The Vow for change

The necessity of change was acknowledged by those campaigning against independence throughout the referendum campaign. The three main UK parties each set up a commission to produce proposals for further devolution. The parties did not agree on a single package of further powers and responsibilities, but offered the public a process that would develop proposals to an accelerated timetable, with legislation then following the 2015 UK General Election. The three parties published a joint declaration, signed by the Prime Minister, the Deputy Prime Minister and the Leader of the Opposition, setting out the steps they would take jointly after a No vote, and supporting a timetable for action proposed by the former Prime Minister Gordon Brown. And in the Vow published by David Cameron, Nick Clegg and Ed Miliband on 16 September the three party leaders said:

"We are agreed that: The Scottish Parliament is permanent, and extensive new powers for the Parliament will be delivered by the process and to the timetable agreed and announced by our three parties, starting on 19th September."

They concluded:

"People want to see change. A No vote will deliver faster, safer and better change than separation."

The language used by leading figures in all three parties to describe the change required has created an expectation that the new powers will be substantial:

"The plan for a stronger Scottish Parliament we seek agreement on is for nothing else than a modern form of Scottish Home Rule within the United Kingdom."
(Gordon Brown, 8 September 2014)

"We're going to be, within a year or two, as close to a federal state as you can be in a country where one nation is 85% of the population."
(Gordon Brown, 14 August 2014)

"Scotland will have more powers over its finances, more responsibility for raising taxation and more control over parts of the welfare system – effective Home Rule but within the security and stability of our successful United Kingdom."
(Danny Alexander, Liberal Democrat Chief Secretary to the Treasury, 13 September 2014)

"If we get a No vote on Thursday, that will trigger a major, unprecedented programme of devolution with additional powers for the Scottish Parliament."
(David Cameron, 15 September 2014)

Polling and research evidence shows that public opinion supports extensive further powers for the Scottish Parliament. For example, a poll conducted after the referendum showed that 66% of people supported giving the Scottish Parliament control of all areas of government policy other than defence and foreign affairs; 71% of people supported full powers over taxation raised in Scotland and 75% full powers over welfare and benefits.[3] Other polls and the Scottish Social Attitudes Survey from before the referendum have similarly shown that a majority of people think that the Scottish Government should make the decisions in these areas.[4]

The proposals published so far by the UK parties meet neither this public demand nor the expectations raised during the referendum campaign. Their proposals would provide the Scottish Parliament with responsibility for only between 20% (Labour) and 30% (Conservatives and Liberal Democrats) of taxes raised in Scotland and would leave the Scottish Parliament responsible for raising less than half of the revenue it spends. Proposals for devolved control of welfare are restricted to housing benefit and attendance allowance, which together represent only 13% of the welfare budget. These are not "extensive new powers".

Proposals that leave Westminster responsible for most of the taxes raised in Scotland and for most of the revenue to fund public services in Scotland, even devolved services, do not amount to a meaningful commitment to home rule.

Lord Smith has invited all participants to refresh their proposals for more devolution. The Scottish Government believes that a much more substantial proposal is needed to deliver the practical and democratic benefits of self-government.

The practical and democratic benefits of self-government

The Scottish Government supports extending the powers and responsibilities of the Scottish Parliament to bring the benefits of self-government to the widest range of government activity in Scotland. Since the re-establishment of the Parliament in 1999, devolution has shown us the benefits of self-government: ground-breaking legislation on smoking and climate change, and protection of the principle of free education, a distinctive Scottish approach to the National Health Service and care for older people. It has also enabled our confidence as a nation, communities and individuals to grow, as was seen most recently in the unprecedented resurgence of democratic participation in the referendum.

The case for extending the benefits of devolution rests on two fundamental arguments that are widely accepted:

- People who live and work in Scotland will do the best job of running our country, because we understand our culture, resources, strengths and needs better than anyone else. This is the practical and principled argument in favour of self- government, and is reflected in a range of successful policies for Scotland such as the smoking ban, free personal care for older people and free higher education

- Greater self-government will extend democratic and financial accountability of the Scottish Government and Parliament to the people of Scotland. This is the democratic argument for recognising, as the existence of the Scottish Parliament already does, that Scotland is a distinct political community with different views and voting patterns than other parts of the UK. The Scottish Parliament has given people, businesses and organisations in Scotland access to decision-making to a degree that Westminster never could

The record of the UK Government shows how centralised decision-making at Westminster fails to take account of the practical needs or democratic rights of the Scottish people. For example:

- The 'bedroom tax' took no account of the reality of Scotland's housing stock – the smaller homes to which people were apparently expected to move simply do not exist in the numbers required – and was imposed despite the opposition of a majority of Scottish MPs

- Immigration policy is driven by circumstances elsewhere in the United Kingdom, regardless of the needs of Scotland

- Economic growth is still primarily focused on London and the South East creating an unbalanced UK economy

In our view the Scottish Parliament is better placed than Westminster to reflect Scottish priorities and preferences and the views of the people of Scotland. The proposals for maximum self-government set out in this paper are designed to give the Parliament responsibility for wide areas of social policy and the economic powers to ensure Scotland's prosperity.

Effective government across the UK

The Scottish Government believes that a particular policy area being reserved does not mean policy has to be uniform across the UK.[5] Neither does devolution mean policy has necessarily to be different in Scotland from the rest of the UK if there are common interests.

In many areas of existing devolved competence, the Scottish and UK Governments have worked together to benefit the people of Scotland and the rest of the UK. For example, there is close co-operation on issues relating to policing, security and intelligence across a range of devolved and reserved responsibilities. Similarly there is close co-operation in matters of research and innovation that should be preserved and enhanced.

With a significant extension of self-government in Scotland, there are likely to be a number of further areas where such co-operation agreements are wanted or needed. We would be open to discussing areas where such frameworks may be of benefit.

Equally, the fact that a particular area remains reserved to Westminster should not mean that the Scottish Parliament and Scottish Government should have no formal role in decision-making. The Scottish Government proposes that, in reserved areas, new procedures and structures are established to allow the Scottish Parliament and Government a formal role in key decisions affecting Scotland directly. This is especially important when the UK Government's proposals do not have popular or Parliamentary support in Scotland. The Scottish Government and Scottish Parliament could also have a formal mechanism to make positive proposals for the exercise of reserved functions in Scotland, which the UK Government would be obliged to consider.[6] Similar arrangements could be put in place for all the administrations and legislatures in the United Kingdom for certain decisions affecting the future direction of the United Kingdom as a whole.

CHAPTER 2

DELIVERING PROGRESS THROUGH SELF-GOVERNMENT

The success of the next stage of self-government should be judged by the degree to which it improves the lives of the people of Scotland. With that aim in mind, in this chapter we propose principles against which any proposal for enhanced powers should be tested.

We believe that there is scope for substantial agreement about the objectives of further devolution, and the Scottish Government has already initiated discussions with a range of interested groups representing key sectors of Scottish society on our approach. Agreement amongst the participants in the Smith Commission process on a set of principles of the sort set out here would provide a strong basis for taking forward discussion of the detail of further powers for the Scottish Parliament.

We propose that further powers and responsibilities should be underpinned by three principles.

1. Further devolution should respect the sovereignty of the people of Scotland and enhance financial and democratic accountability to them.

In Chapter 4 we argue that this should include making the Scottish Government accountable to the Scottish Parliament for raising all taxation in Scotland, with a very few exceptions.

Enhanced powers should also allow decisions to be taken closer to the people affected and should promote public and civic engagement, building on the success of the Scottish Parliament and the extraordinary level of participation seen in the referendum debate.

The Scottish Parliament should also have the power to devolve further, to local authorities and communities, responsibility for decision-making as well as administration. The enhanced settlement should provide for the permanence of the Scottish Parliament and give it the ability to make its own rules.

2. Further powers must transform the ability of the Scottish Parliament and Government to meet the challenges we face as a country, in particular to enable Scotland to be a more prosperous country, a fairer and more equal society and have a stronger voice in the EU and internationally on matters within devolved responsibility.

To achieve this, enhanced powers should:

- enable Scotland to become a more prosperous country. The Scottish Parliament should have the powers to develop an economic policy matched to the needs and circumstances of people and businesses in Scotland. The Parliament should be able to harness Scotland's natural and human resources to invest in policies that promote growth and create jobs

- allow Scotland to build a fairer society. The Scottish Parliament needs to be able to address the deep-lying causes of inequality in Scottish society. It should be empowered to tackle poverty, including in-work poverty, taking account of the specific circumstances of people and communities in Scotland and reflecting Scottish values. Devolved powers should enable Scotland to take a progressive approach to human rights and ensure that everyone gets a fair chance regardless of age, gender, race, religion, disability, gender reassignment or sexual orientation

- strengthen Scotland's place in the world, not only culturally and economically, but by giving Scotland a stronger and more clearly articulated voice on the international stage on matters within our devolved competence, reflecting our internationalist tradition and outward-looking democracy

3. Further devolution should be equitable and transparent in its approach to resources, risks and rewards.

It should:

- ensure that the overall funding arrangements for the Scottish Parliament are equitable, including Scotland retaining taxes raised here, and any transfers being based on the current Barnett formula during a transition period, and if the Scottish Parliament's financial powers fall short of full fiscal responsibility

- allow the Scottish Parliament to reinvest the financial and economic rewards of sound and sensible decision-making in Scotland, as well as having the tools to manage any risks from its increased responsibilities

- be transparent so that it is clear which aspects are under the control of the Scottish Government and which remain with the UK Government

As well as the three principles, any package of further devolution should be assessed against three 'good government' criteria:

- Coherence. So far as possible the Scottish Government and Parliament should have a coherent set of powers to tackle a particular problem, rather than leaving some relevant powers in the control of one government and others in that of the other. Effective 'clusters' of powers covering, for example, support into employment – including training and benefits – and support in sustaining employment are required

- Effectiveness. The package should provide levers that can be used to address social and economic challenges, and not simply be a transfer of funding or delivery accountability with little or no practical scope for taking innovative policy initiatives to meet Scottish needs

- Transparency. Citizens should know who to hold accountable for decisions. For example we believe that complete control of Income Tax and National Insurance would be far simpler and more effective than a complex system of joint control, with the Scottish Parliament setting some aspects of Income Tax and other elements being decided by Westminster

How should these principles be applied in practice?

The legislation that established the Scottish Parliament took the approach of devolving everything except a list of specified reserved matters.

The Scottish Government believes the default assumption should be that all matters – with the exception of those that could not be the subject of devolution while Scotland remains within the United Kingdom – are for the Scottish Parliament and Scottish Government. It is for those who are arguing that a matter should remain reserved to demonstrate their case. The principles above, and the good government criteria, should be used to test the arguments for continued reservation, as well as to test packages for extended powers that have been produced by the UK parties and others in this debate. This is effectively the principle that was enshrined in the first Scotland Act – that everything should be devolved unless it is expressly reserved.

The Scottish Government believes that a combination of these principles, the criteria above, and the underlying assumption that matters should be the responsibility of the Scottish Parliament, provides a robust basis to examine proposals for further powers and responsibilities.

CHAPTER 3

THE OPPORTUNITIES OF SELF-GOVERNMENT FOR SCOTLAND

This chapter sets out an overview of proposals for maximum self-government for Scotland within the United Kingdom. The Scottish Government believes these offer Scotland significant opportunities to benefit from self-government, and the following chapters set these out in more detail in the key areas of the economy, fairness and equality, democracy and Scotland's place in the world.

These proposals have been developed by the Scottish Government in dialogue with a range of key interest groups in Scotland. We believe there will be widespread support for both the overall approach and for the detailed suggestions within each section.

However, the Scottish Government recognises that there will be a need for discussion and negotiation within the Commission, and between the Commission and wider Scottish society, before it reaches its conclusions.

The Scottish Government will also be engaging in a wide-ranging conversation with organisations, stakeholders and the people of Scotland, encouraging full participation in the Smith Commission, and the discussion and debates that will follow its conclusions.

Our proposals in summary:

- Full fiscal responsibility for the Scottish Parliament: all tax revenues should be retained in Scotland. The Scottish Parliament should have policy responsibility for all taxes unless there is a specific reason for a continued reservation. In particular, the Scottish Parliament should have full autonomy for income tax, national insurance, corporation tax, capital gains tax, fuel duty, air passenger duty and inheritance tax

- The Scottish Parliament should be responsible for all domestic expenditure – including welfare – and make payments to the UK government for reserved services

- The Scottish Parliament should have a sustainable framework for public finances including the necessary borrowing powers, and an agreement with the UK Government on the overall approach to public finances

- As part of any agreement, the Barnett formula should continue to be used to determine Scotland's resources during any transitional period and if the Scottish Parliament's financial powers fall short of full fiscal responsibility. Scotland should get any financial benefits, as well as having the tools to manage the risks, of its new responsibilities

- Responsibility for all welfare policy and administration should be devolved. As a priority this should involve all working age benefits. In the meantime, roll out of Universal Credit and Personal Independence Payments, in Scotland should be halted to ensure that the practical ability to devolve individual benefits is not compromised

- Employment and employability policy, including responsibility for setting the minimum wage, and all employability programmes should be devolved

- Equal opportunities and equality policy should be devolved

- Other key economic levers, including competition, energy and broadcasting policy, responsibility for the Crown Estate, transport policy not currently the responsibility of the Scottish Parliament (including rail) and aspects of immigration policy, such as the post study work visa, should be devolved

- The sovereign right of the people of Scotland to determine their form of government should be enshrined in law

- The Scottish Parliament should become responsible for its own elections, rules and procedures and the Sewel Convention should be given statutory force

- Scotland should have the opportunity to establish its own constitutional framework including human rights, equalities and the place of local government

- The Scottish Parliament should have the ability to directly represent its interests on devolved matters in the EU and internationally

Our proposals would leave the following under the control of the UK Parliament and Government at Westminster:

- aspects of the constitution of the United Kingdom as a whole, such as the monarchy and the Westminster Parliament

- monetary policy, including the currency and the Bank of England

- aspects of citizenship, including nationality and passports

- defence

- intelligence and security including borders

- many aspects of foreign affairs

We believe that, taken together, the proposals meet the criteria and tests set out in Chapter 2:

- Democratic accountability will be enhanced by putting responsibility for much of domestic policy into the hands of the Scottish Parliament, bringing decisions on those issues closer to the Scottish people

- Financial accountability will be significantly strengthened by giving the Scottish Parliament full responsibility for taxes raised in Scotland and how they are spent

- Powers over tax, welfare and economic development will transform the Scottish Parliament's ability to support jobs and growth in Scotland, allowing it to tailor policy to the specific strengths and needs of individuals and businesses in Scotland

- Powers over social protection and equalities will give the Scottish Parliament more of the tools it needs to tackle the deep-seated inequalities in Scottish society

- The ability to represent Scottish interests on devolved matters in international affairs will benefit business and exports

- The package as a whole would mean that the Scottish Parliament would have strong incentives for effective decision-making by ensuring that it would reap the benefits and carry the risks of the policies it chooses

Meeting the aspirations of the people of Scotland

The Scottish Government believes that these proposals bring the greatest possible benefit to Scotland, while at the same time providing a coherent and logical division of responsibilities between Westminster and Holyrood.

It is right that our proposals should be discussed and tested. We recognise that others may share many of our objectives but argue for more evolutionary change. The Scottish Government stands ready to discuss any and all proposals for improving outcomes for the people of Scotland with the Smith Commission.

Those discussions must, however, reflect the aspirations of the people of Scotland.

The Scottish Government sees a number of elements as being fundamental to fulfilling those aspirations and meeting the tests outlined in Chapter 2. For example:

- There must be a much closer relationship between the revenue the Scottish Parliament raises and its expenditure. It is difficult to see how a large gap between expenditure and revenue powers can create meaningful democratic or financial accountability

- Those elements of tax and social protection most closely aligned to employment and equality should be the priorities to bring within the responsibility of the Scottish Parliament. These must allow for the redesign of the system to address Scottish priorities on jobs and fairness

- The Scottish Parliament should have responsibility for the shape of democracy within Scotland

- Scotland must have a stronger voice within the EU, particularly on issues of primary relevance to Scotland

- Most remaining elements of domestic affairs should be devolved to make real the commitments to 'Home Rule'

CHAPTER 4

SCOTLAND'S ECONOMY AND PUBLIC FINANCES

With significant additional economic and fiscal responsibilities the Scottish Parliament and Scottish Government would have more opportunities to create jobs, reduce inequality and establish a more successful, prosperous and fairer country.

Greater fiscal self-government would make the Scottish Parliament and Scottish Government responsible for both sides of our national balance sheet – expenditure and taxation – providing proper democratic and financial accountability, and providing Scotland with the incentive to promote economic growth and boost its tax revenues, and the opportunity to invest further in public services. These elements of the proposals are complementary, so it is essential that further taxation powers provide the Scottish Parliament with fiscal levers to encourage growth and are accompanied by other economic powers, such as employment rights and measures to grow the working age population.

Taxation and public finances

It is widely agreed that the Scottish Parliament and Government should have greater fiscal responsibility, that is the Parliament should be responsible for raising a greater proportion of the money that it spends on public services. Such proposals are central to the Scotland Act 2012 and form the main recommendations of the Commissions on further devolution set up by each of the main UK parties.

Greater fiscal responsibility both increases the accountability of the Parliament to the people of Scotland, financially and democratically, and allows the Parliament to use its fiscal powers to pursue policy objectives. For example, the Parliament would be able to set the overall level of public expenditure, reform individual taxes (as the Scottish Government is doing on the land transaction tax), or introduce taxes to encourage particular forms of behaviour (like environmental taxes, or tax reliefs to encourage research).

Currently, the Scottish Parliament is responsible for around 7.5% of taxes raised in Scotland, and these cover around 10% of devolved expenditure and 6% of total public expenditure in Scotland. Even after the changes being introduced by the Scotland Act 2012, the Scottish Parliament will still only be responsible for raising around 16% of tax receipts in Scotland, amounting to around 22% of devolved expenditure and 13% of total public expenditure. The 2012 Act therefore does little to enhance democratic and financial accountability.

The Scottish Government believes that the design of a framework for greater fiscal accountability for the Scottish Parliament should take a clear and principled approach. The Government believes that all taxes raised in Scotland should be the responsibility of the Scottish Parliament unless there are overriding reasons for them to be specifically reserved (in line with the general approach of the Scotland Act 1998, and the principles outlined in Chapter 2).

Our proposal is therefore for a transition to full domestic economic and fiscal autonomy.

This would mean that all onshore and offshore taxes would be designed and set in Scotland, including tax rates, allowances, thresholds and the tax bases. An exception might be VAT – and potentially some excise duties – because EU rules require them to be largely uniform across the United Kingdom. For any reserved taxes, revenues would be assigned to the Scottish budget.

At the same time, the Scottish Parliament would also take responsibility for key elements of domestic expenditure, including welfare.

From the tax revenue raised in Scotland, a direct payment would be made for the services Scotland receives from being part of the UK. These would include agreed amounts for defence, security, foreign policy and servicing of historic debt interest.

It is also essential to full fiscal responsibility that the Scottish Parliament has access to economic levers beyond the tax system, such as employment rights and aspects of migration. Overall economic performance drives the level of taxation that the Scottish Parliament will receive through its tax powers, and flexibility to encourage economic growth through these measures is necessary for the Scottish Parliament to take proper responsibility for Scotland's public finances.

The Scottish Government believes that this framework would provide the maximum financial and democratic accountability within the United Kingdom, incentivising the Scottish Government to increase economic growth while allowing Scotland to contribute to the United Kingdom as a whole. Responsibility for almost all taxes within Scotland will allow the Scottish Parliament maximum flexibility to adjust its tax policy to reflect Scottish circumstances and policy objectives.

By contrast, it is neither sufficient nor desirable to increase the financial accountability of the Scottish Parliament in a piecemeal way by devolving one or two limited tax powers on an ad hoc or partial basis. To provide proper accountability and real policy choices, in any model short of the full fiscal responsibility, the Scottish Parliament will need effective responsibility for a substantial range of taxes and other economic levers to form a coherent framework for funding devolved public services and growing the economy.

The Scottish Government recognises the importance of a sustainable overall fiscal position for public finances within Scotland and the UK. The framework for Scottish fiscal responsibility would need to include sufficient borrowing powers to ensure budgetary stability and safeguards to maintain Scottish public spending.

As part of this, the inter-government management of public finances will require a new code of practice that reflects the level of fiscal responsibility and autonomy that rests with Scotland.

To ensure overall stability, the framework would also include a set of fiscal rules and mechanisms to manage and administer devolved borrowing within a United Kingdom context. The Scottish Government would seek an overall agreement with the UK Government which set out arrangements for economic cooperation, protecting monetary stability, promoting the single market and safeguarding fiscal sustainability.

Crucial to that agreement would be the principle that there should be an equitable and transparent approach to resources, risks and rewards. In essence, full fiscal responsibility means that Scotland retains taxes raised in the country, including assignment of revenues of any taxes not devolved such as VAT. Any arrangement for Scotland's taxes short of full fiscal responsibility would need the Barnett formula to be retained for any block grant to Scotland, adjusted appropriately according to the actual degree of fiscal responsibility. The transition to full fiscal responsibility will take some years to complete, as implementation of the Scotland Act 2012 has demonstrated. During that transition period the Barnett formula will also need to be retained to ensure that Scotland's public finances remain predictable and sustainable as the Scottish Parliament assumes responsibility for raising a greater proportion of its own revenues, and begins to benefit from measures to improve Scotland's economic performance.

The other key element of the agreement with the UK Government and the framework for Scottish fiscal responsibility would be that Scotland retained the benefits of successful policies that increase the tax revenue in the country, as well as having the tools to manage the risks of increased responsibilities. This is essential for the Scottish Parliament to be able to assume proper fiscal responsibility through both tax and other economic policies. This would mean that, for example, any increased tax revenues from parents with young children entering the workplace through investment in childcare would be retained by the Scottish Government and would be available to increase investment in childcare, or in other public services.

Specific proposals and opportunities

- All taxes and relevant thresholds, rates and allowances – including Income Tax, National Insurance and corporation tax would be designed and set in Scotland. Exceptions – for example VAT and certain excise duties – would be set at the UK level with the revenues assigned to the Scottish budget

- All domestic expenditures, including the welfare state, would be managed by the Scottish Parliament and Government

Monetary stability

The Scottish Government supports effective co-ordination of policy where it provides benefits across all four nations of the United Kingdom. However, the Scottish Government believes the Scottish Parliament should have a much greater role in decision-making on economic policy. The Scottish Government proposals therefore provide a significantly greater level of economic and fiscal autonomy for Scotland, but as part of a system that remains consistent with a sustainable monetary system for the United Kingdom as a whole.

The most important purpose of such a common framework would be to provide monetary stability and maintain UK-wide and EU single market arrangements.

A common system would mean that:

- Issues of overall monetary stability – such as the currency and the Bank of England – would remain reserved

- Interest rates would continue to be set by the Bank of England, as part of its responsibilities for setting monetary policy

- Financial stability would also continue to be delivered across the United Kingdom by the Bank of England

- Scotland would use its greater tax, spending and borrowing powers within a sustainable overall fiscal envelope guaranteed by clear rules and procedures to ensure affordability

Rebalancing and reindustrialising Scotland

There are significant divergences in economic performance, structures and competitive advantages across the United Kingdom. Geographical imbalances have led to a concentration of jobs and investment in London and the South East of England. There has also been a weakening of economic resilience, for example by the decline in manufacturing's contribution to the economy being more pronounced in the United Kingdom than in many other developed economies.

Within the devolved powers currently available, successive Scottish Governments have pursued policies to support sustainable economic growth and higher quality jobs, and have succeeded in narrowing a historic gap in economic performance with the UK. This Government has introduced the Small Business Bonus Scheme and established the Scottish Investment Bank, invested in infrastructure and maintained Scotland's record in attracting international investment.

Significant economic and taxation powers would give Scotland much greater ability to support local competitive advantages and tackle comparative disadvantages in order to deliver more sustainable and balanced growth in Scotland. Such an approach could also enhance the overall competitiveness of the United Kingdom.

In Reindustrialising Scotland for the 21st Century[7] the Scottish Government set out how access to additional economic powers could be used – for example, through an industrial strategy focused on strengthening manufacturing, promoting innovation and boosting international trade and investment – to reindustrialise Scotland and build a more resilient economy with better job opportunities.

A stronger manufacturing sector has the potential to increase innovation, tackle geographic inequalities, support internationalisation and create high-value and well- paid jobs.

Competition policy is a key driver of productivity, exports and consumer value and choice. The Scottish Government could simplify the consumer protection system to ensure that Scottish consumers would have more trust in businesses and, in turn, encourage further economic activity. Scotland could implement an improved and streamlined consumer protection and regulatory regime to reduce duplication and promote consistency.

To improve pay levels and flexibility, taking responsibility for business taxation and employment law would allow the Scottish Parliament to incentivise businesses to invest in skills and innovation, to work with business to improve childcare provision and family-friendly policies, and thereby increase the supply of well-paid, more flexible jobs throughout the economy. It would also have the power to set the minimum wage at a level which would help protect workers in Scotland from living below the poverty line (see Chapter 5).

The Scottish Government could improve participation in the labour market, for example by providing high quality early learning and childcare to match the best in Europe. Access to the tax revenues and benefits savings arising from increased labour market participation (under the fiscal framework and agreement with the UK Government described above) would contribute to the costs of achieving a transformational change in provision, making a more ambitious package of measures more affordable than would be possible under current arrangements.

Responsibility for tax and benefits would allow a comprehensive and coherent package of support including Statutory Maternity Pay, Child Benefit, Child Tax Credits, Maternity Allowance and Child Maintenance alongside investment in provision of childcare.

Specific proposals and opportunities

- Full responsibility for corporation tax, which would allow the Scottish Government to target tax incentives carefully to encourage the rebalancing and reindustrialisation of the Scottish economy – for example, through more effective capital allowances or to encourage innovation and investment in research and development

- Full responsibility for Income Tax and National Insurance, including the ability to set and vary allowances, which could be used to create tax incentives

- Responsibility for Air Passenger Duty could be used to boost international connectivity and boost tourism in Scotland

- The Scottish Government should have formal joint oversight of the competition and regulatory system to ensure that Scottish issues are reflected. Our model for a Combined Economic Regulator could be developed within the overall regulatory landscape

- Responsibility for consumer protection would allow the Scottish Government to work with the UK Government on a Scottish Consumer Ombudsman, covering both public and private sectors, and possibly extending across the United Kingdom

Energy, oil and gas

Currently, there is a complex landscape for energy policy across the UK. For example, the Scottish Government exercises devolved responsibilities over economic development in Scotland but UK institutions have overall policy responsibility for oil and gas and energy generation and supply.

The Scottish Government believes that the Scottish Parliament should have greater responsibility for all energy policy and regulation, including all oil and gas. This would deliver a streamlined approach and allow Scotland to design a regulatory and fiscal landscape which maximises the return from the energy sector, encouraging a sustainable industry for the benefit of the people of Scotland. This would include joint oversight of UK-wide bodies such as OFGEM, and an arrangement of shared competence in relation to the new Oil and Gas Authority proposed for Aberdeen, to ensure Scottish interests are fully taken into account.

With additional responsibilities, Scotland could also capitalise more fully on its comparative advantages in the energy field. The Scottish Government could advance community and local ownership of energy; and better address societal inequalities through tackling fuel poverty. The connection of the islands to the national grid could also be prioritised.

Specific proposals and opportunities

- Responsibility for energy policy would give Scotland a formal role in network regulation and setting reliability standards, including planning, ownership and operation of energy infrastructure, and fairer grid charges to ensure secure energy supplies

- A Scottish economic development agency for the oil and gas sector as a whole, in collaboration with UK departments and the OGA, would maximise opportunities to raise productivity and generate sustainable jobs

- Responsibility for the Oil and Gas Fiscal Regime would maximise the economic return from North Sea resources and capture the full economic benefits of this activity. An oil stability and savings fund could be established to manage revenues over the long term

- To capitalise on Scotland's abundant renewable resources the Scottish Government should have additional powers to tailor support for low carbon and renewables generation in Scotland, where this was considered a necessary and cost-effective means of delivering Scottish priorities

- Control over the full scope of regulation relating to energy efficiency would enable Scottish Government to tailor policies to the specific needs of Scottish households and businesses; particularly to tackle fuel poverty and help address climate change emissions, consistent with a single GB energy market and energy regulator

Rural affairs, food and environment

The proposals in this paper for the devolution of a coherent suite of fiscal, economic and social policy responsibilities will benefit rural Scotland. Full power to make decisions about how to manage the natural environment would enable the benefits flowing from Scotland's natural resources, and food and drink sector, to be retained in Scotland, strengthening Scotland's economy. Further responsibilities would also strengthen Scotland's place in the world as a leader in climate justice and sustainability. Scotland should therefore have full responsibility for all aspects of environmental legislation and regulation including functions in currently reserved areas that impact upon environmental matters.

Specific proposals and opportunities

- Full control of environmental policy, including taxation, would allow for a more coherent approach including environmental aspects of energy, marine nature conservation and planning, and marine renewables. These powers should extend to 200 nautical miles or the limit of UK competence for marine environment management and regulation, including environmental aspects of shipping

- Responsibility for wealth and land taxes would allow a fairer overall regime. Competence for an Aggregates Levy would provide opportunities for the integration of waste and other environmental policies

- Formal shared responsibility for regulation would ensure that services such as mobile telecoms, broadband and postal services can be delivered in a way that properly supports the rural economy

- Scotland should be able to act directly in the European Union on fisheries, marine environment and food and drink exports, given their importance within the Scottish economy and the distinctive policy positions in Scotland. In areas such as fisheries, where Scotland has the predominant interest within the UK, Scotland should have the lead role at Council, where appropriate

- Scotland should be able to take its own decisions on the collection and use of agricultural and seafood levies. Similarly, Scotland's share of fishing quota should be inalienably held in Scotland

- The food and drink industry is of greater importance to the Scottish economy than it is at UK level. Formal responsibility for policies such as food labelling, applications for protected food names and all aspects of export certification would enable Scotland to better integrate measures to support the industry's continued growth

- Scotland should have the power to manage and benefit from its own natural resources including full devolution of the management of and revenues from all Crown Estate assets in Scotland, including the foreshore, seabed and Exclusive Economic Zone assets (with consequent benefits to local communities, especially in the islands).

Transport

Full responsibility for Scotland over currently reserved transport powers would ensure that policy decisions are more coherent and take full account of Scotland's particular transport needs and geography. Together with shared governance and partnership working at the UK level, decisions about transport infrastructure, management and investment could create jobs and connect communities within and outwith Scotland.

Specific proposals and opportunities

- Full responsibility for rail transport would enable public sector bids and not-for- profit models, more integrated railway services and services designed to meet local needs

- Full responsibility for air transport would include competence over Air Passenger Duty, and would facilitate more effective route development and promotion of associated business and inbound tourism

- Full responsibility for maritime transport would enable Scotland to shape the future role of the Maritime and Coastguard Agency and take responsibility for coastguard functions in Scotland to reflect our distinctive seas and coastline. Along with responsibilities for the operation of the Northern Lighthouse Board, it would provide a joined-up approach to shipping and harbours policies and enhance confidence and job creation incentives in sectors such as renewables, fishing and oil and gas

- Full responsibility would advance social equality through decisions on investment in local infrastructure, business development, associated employment opportunities and access to public transport. Scotland should also have a formal role in existing UK bodies, and also in associated EU and international forums, to ensure that our interests are represented

Culture and heritage

Only with further powers can Scotland fulfil its cultural ambitions and build upon its international reputation for culture, heritage and creativity. Responsibility for taxation and lotteries would give the Scottish Parliament a coherent suite of powers in relation to the screen sector and culture and heritage.

Devolution of broadcasting would provide the leverage needed to enhance job creation through increased production; contribute to a fairer society through programming aimed at promoting wider access to culture; and enable Scotland to better express its place in the world.

CHAPTER 5

FAIRNESS, EQUALITY AND SOCIAL POLICY

Currently, responsibility for social policy, including employment services and welfare, is split between the Scottish Government and the UK Government. Matters such as health and education are largely devolved, as are aspects of employability training. However, the welfare system is largely reserved to the UK Government, and the DWP also runs reserved employability programmes. Inequalities in health and education are driven by a range of underlying economic factors, which cannot be addressed by existing devolved powers alone.

The UK Government's programme of changes to the welfare system has not taken account of Scottish circumstances and preferences. There are also very close connections between aspects of reserved welfare policy, notably housing benefits, and devolved responsibilities. The policy choices made by the UK Government are also working against Scottish Government objectives – for example, they are increasing the number of children living in poverty in Scotland. Bringing all of the powers that impact on inequality, poverty and employability in the Scottish Parliament would enable coherent policy approaches.

In-work poverty is a worsening problem in Scotland that UK policies have also failed to address. With responsibility for the minimum wage the Scottish Parliament could ensure that it increased at least in line with inflation and could consider increasing it further to match the living wage (as recommended by the Expert Working Group on Welfare).[8]

Increasing the Scottish Parliament's responsibility for social policy and welfare would allow Scotland to become a fairer and more prosperous country, with a coherent approach to welfare and employment. The Scottish Parliament would have the ability to address Scottish priorities, including creating jobs and addressing child poverty. With full fiscal responsibility, the financial benefits of successful initiatives by the Scottish Government – in the form of reduced welfare payments and increased tax revenues – would be retained in Scotland rather than being passed to the UK Treasury.

Specific additional responsibilities could include:

- Responsibility for the welfare system as a whole, to ensure the system meets Scotland's needs and priorities, and stopping the roll out of Universal Credit and Personal Independence Payments

- Responsibility for employability and employment law, including all the employability programmes currently delivered by DWP

- Responsibility for the minimum and living wage

- Responsibility for all Scotland's tax revenues and public spending which would enable the Scottish Parliament to determine the level of resources devoted to public services such as the NHS and education

Social protection and welfare

Most welfare benefits are currently reserved. However, for too many people in Scotland the current welfare system does not work. Due to UK Government welfare changes, it is estimated that Scottish welfare expenditure could be reduced by around £6 billion in the six years to 2015-16. Almost 70% of this reduction, will be felt in 2014-15 and 2015-16.[9] There are estimates that up to 100,000 additional children could be forced into poverty by the UK Government's policies.[10] We have also seen Westminster take decisions, such as the introduction of the 'bedroom tax' which do not reflect Scottish circumstances and which were opposed by a majority of Scottish MPs.

The Scottish Government believes that Scotland should have full responsibility for its welfare system, to design a system based on Scottish priorities and preferences, and to fit with the delivery of services in Scotland, based on early intervention and responding to individual needs. Such a system could also ensure greater coherence across measures to tackle in-work poverty as well as better alignment across childcare, child benefit and other measures to tackle child poverty.

Prior to responsibility for welfare, or aspects of welfare, being transferred to the Scottish Parliament, the roll out of Universal Credit and Personal Independence Payments in Scotland should be halted to ensure that the practical ability to devolve individual benefits is not compromised, and that the Scottish Parliament has the scope to design a system suitable for Scotland's needs.

Specific proposals and opportunities

- The Scottish Parliament should take responsibility, over time, for social protection in its entirety. Any financial consequences would be absorbed by Scottish revenues and policy divergence managed within the Scottish budget. This would encompass the full range of benefits and include full operational and policy control

- Core to any extension of the Scottish Parliament's responsibilities are those which have the greatest impact on promoting jobs and equality. This must allow for the redesign of the system to address Scottish priorities. The key elements are:

- Working age benefits, including for those out of work, for ill or disabled people, and for those on low incomes

- Benefits for children and families

- Welfare payments for older people (e.g. Winter Fuel Payments) that complement the state pension and related benefits

Employment and employability

Employment policy is crucial in co-ordinating and delivering our ambitions for economic growth and social justice. A coherent employment policy requires powers over not only the transitions people make when moving into work, but also how they sustain employment and progress once in work. Ensuring individuals can fulfil their potential while enhancing our productivity requires the capacity within the labour market to respond to distinctly Scottish business and economic demands. Full control over employment law and employment relations would enable the Scottish Government to develop a fairer, more diverse and prosperous Scottish labour market environment that improved the quality of work and more fairly rewarded an increasingly skilled and motivated workforce.

Responsibility for employment policy must enable the delivery of employment services which create a more progressive journey towards work, while mitigating the social and economic risks created by long-term unemployment. It would allow us to meet Scotland's needs on issues such as: tribunal fees and rules; zero hour contracts and gangmaster regulation. Devolving all aspects of employment rights would enable the Scottish Government to develop an employment climate that sits well alongside economic and social welfare aspirations.

The Working Together Review: Progressive Workplace Policies in Scotland[11] found that the economic and social challenges and opportunities in Scotland are more likely to be addressed successfully in an environment where unions, employees and employers work together with an ethos of modern, cooperative employment relations.

Responsibility for employment and welfare would allow the Scottish Government to better address the issue of in-work poverty. More than half (52%) of working age adults in poverty, and an even higher proportion (59%) of children in poverty, live in households where someone is in work.

Coherent powers across a number of areas would help to improve the position of the in-work poor, addressing low pay, a lack of work flexibility and high marginal tax rates within the tax and welfare system.

With control of the minimum wage the Scottish Parliament could increase the Scottish minimum wage annually at least in line with inflation, immediately improving the situation of people in Scotland who currently receive the minimum wage. This would directly support the lowest paid individuals and over time reduce reliance on in-work benefits. The Scottish Parliament could also consider the recommendation of the Expert Working Group on Welfare that the minimum wage should begin to rise (in phased amounts) to equal the living wage.

With responsibility for designing our welfare system, the Scottish Parliament could also change the rate at which benefits are withdrawn and people pay taxes so that lower- income households can keep a greater proportion of the increases in earned income. For example, for a couple with children and one parent in work, increasing the hours worked from 50% to full-time will result in 82% of additional earned income being lost through tax and loss of benefits. This unfairly penalises those who see (and are encouraged to see) employment as a route out of poverty.

Again, the fiscal benefits of any changes to the Scottish minimum wage – in terms of savings in tax credits and benefits – should accrue to the Scottish Parliament and be available, for example, to assist with the costs to business. Otherwise, Scottish employers would be paying for a fiscal saving for the UK Government and there would, in effect, be no incentive for the Scottish Parliament to raise the minimum wage in Scotland. This illustrates why the powers extended to the Scottish Parliament must work together in a coherent way.

Specific proposals and opportunities

- Responsibility for the minimum wage would allow it to be increased at least in line with inflation, enable consideration of the link to the living wage, and would allow co-ordination with benefits policy

- The devolution of responsibility for the nature and content of the Work Programme and all other employability programmes currently run by the DWP would provide much needed coherence in Scotland, complementing the training opportunities provided through Skills Development Scotland

Health

Responsibility for health policy is already substantially devolved. The proposals in this paper for enhanced fiscal autonomy for the Scottish Parliament would give Scottish governments greater control over NHS funding. Further powers would offer opportunities to make use of consumer protection and tax powers to advance public health aims and increase consumer protection.

Specific proposals and opportunities

- Devolution of the remaining reserved health matters in the Scotland Act 1998

- The transfer of consumer protection powers would provide the opportunity to tackle advertising of, for example, alcohol as well as food labelling and packaging

- As part of a wider extension of fiscal powers, Scotland should have a say over setting UK excise duties on alcohol and tobacco

- Full responsibility for health and safety would allow for a more coherent system in Scotland

Education

Responsibility for education is almost entirely devolved but there are still stark inequalities in educational outcomes across Scotland. Giving the Scottish Parliament greater responsibility for tax and welfare would provide the opportunity to address the underlying issues of poverty and deprivation which are the root cause of much of this inequality. The proposals for enhanced fiscal autonomy for the Scottish Parliament would give Scottish Governments greater control over education funding.

A specific issue of concern to Scotland's higher education establishments is post-study work visas, which were abolished by the UK Government in 2012. These visas allowed recent graduates to work or set up businesses in the UK for 24 months, which retained skilled and educated graduates as part of our labour force. The post-study work visa also encouraged individuals to come to Scotland to study, as we know that the ability to stay and work is a factor in the minds of international students when they are choosing a place to study. The Scottish Government believes that reductions in migration to Scotland for formal study have been at least partly caused by the end of the post-study work visa.

Responsibility for some immigration powers would give Scotland the opportunity to reintroduce the post-study work visa and attract talented individuals from around the world to Scotland.

Justice and security

Making the most of devolved powers, Scotland's justice system has been reformed and modernised. Crime is now at a 39 year low, with more than 1000 extra officers compared to 2007. However, Scotland's most deprived communities suffer most from the impact of crime. Full responsibility for the law on firearms, proceeds of crime, road traffic offences, gambling and drugs would enable further progress to be made that would benefit these communities: taking guns off our streets, preventing harm caused by drug dealing, and tackling drink driving. It would allow an integrated and coherent approach to issues that affect Scotland's communities and contribute to tackling inequality. It would also address the current anomalies in the boundaries between reserved and devolved areas.

Statutory responsibility for the administration, organisation and judicial leadership of currently reserved tribunals deciding cases for users in Scotland should be devolved. This includes employment, social security and immigration tribunals amongst others. Devolving powers to legislate would achieve coherence with other powers as it would, for example allow Scottish Ministers to alter existing rules of procedure for appeals and fees for appeals for any welfare benefits which are wholly devolved.

Now that there is a single Police Service for Scotland, the staff and powers of the British Transport Police and Civil Nuclear Constabulary should be brought within its remit to improve coherence and operational flexibility.

The Scottish Government should retain in full the value of court imposed fines and financial penalties. It should also be able to retain the full value of the proceeds of crime, allowing these proceeds to be reinvested in a way that benefits the communities most blighted by crime, helping to provide positive opportunities for our young people and build community cohesion.

Third Sector and equality

The Third Sector plays a major role in Scotland's economy and in the delivery of services to Scottish communities. Scotland should have further powers to support the sector in terms of growth, effectiveness and sustainability. Responsibility for the legal framework for charities is already devolved, but other policy areas and legislation which impact on charities and Third Sector organisations are reserved, such as taxation policy to enhance opportunities for charitable giving, and to alter the tax regimes for Third Sector organisations which are not charities.

Scotland has a strong record in protecting and promoting equality and human rights, and with additional powers would be able to further strengthen this framework. Equal opportunities and equality policy should be devolved. The full transfer of competence for equal opportunities would enable the Scottish Parliament to promote measures that will contribute to making Scotland a fairer, more prosperous and more democratic country.

Specific proposals and opportunities

- As part of a wider extension of fiscal responsibilities, responsibility for income and corporation tax exemptions, reliefs for charities, tax relief on Gift Aid, investment income, trading profits and Capital Gains Tax would allow the Scottish Parliament to support a capable, sustainable and enterprising Third Sector

- Scotland should have full devolved responsibility for equalities and be empowered to design and implement equality legislation. This would guarantee the strength of existing legislation and provide the power to make reasoned choices about the use and extension of measures in combination with other devolved responsibilities. More specifically, it will create opportunities to address gender balance on boards and to strengthen the representation and voice of under-represented communities in Scotland's civic institutions and public life

CHAPTER 6

SCOTLAND'S CONSTITUTION, GOVERNANCE AND DEMOCRACY

It is vital to create a lasting legacy from the overwhelming public engagement in the referendum debate and vote, and secure Scotland's democracy, good governance, human rights and citizen engagement.

The Scottish Government agrees strongly with the view expressed by the UK and Scottish leaders of the UK parties during the referendum campaign:

"Power lies with the Scottish people and we believe it is for the Scottish people to decide how we are governed."

We therefore propose that any future Scotland Act should give statutory force to the right of the Scottish people, in the words of the Claim of Right of 1989, "to determine the form of Government best suited to their needs" as they did in the referendum.

The Scottish Parliament

The Scottish Parliament, as an institution, has come of age and is trusted and respected by the people of Scotland as their democratic voice. The existence of the Parliament as an institution should be legally entrenched and made permanent, so it could not be abolished without the agreement of the Parliament itself and preferably the people of Scotland in a referendum.

The Parliament should have control of its own affairs, including its electoral system and procedural rules – matters which are currently reserved to Westminster. The Scotland Act 2012 transferred some limited administrative responsibilities and regulation- making powers for Scottish Parliament elections. But this falls far short of full legislative responsibility for its own elections. The Westminster Parliament legislates about its franchise and procedures. The Scottish Parliament should do the same. The Scottish Parliament legislated for the franchise and rules for the independence referendum, including highly successful measures to enable 16 and 17 year olds to vote. The rules for the referendum were made in Scotland and reflected Scottish choices. The Scottish Parliament should be able to do the same for Scottish Parliament and local elections.

The UK Parliament at Westminster would still retain responsibility for other aspects of the UK's constitution that are currently reserved, including the monarchy, the UK Parliament itself and its procedures, membership and elections.

Empowering communities and local government

It is also important that enhanced devolution enables decisions to be taken closer to the people affected. A significant transfer of additional responsibilities to the Scottish Parliament will provide the opportunity to devolve these powers further to councils and communities, in a way that transfers decision-making and real power as well as administrative responsibility.

Local government is an essential element of the overall good governance of Scotland. It delivers a range of services that form the bedrock of our society, whilst responding to local circumstances and aspirations. The Scottish Government continues to work in partnership with local government – a way of working highlighted for its success by the Council of Europe earlier this year – as we seek to implement and build on the findings of the Christie Commission and a shared vision of strengthened community planning, involvement and empowerment.

The publication of Empowering Scotland's Island Communities in June 2014 saw the first steps towards implementing the First Minister's Lerwick Declaration that confirmed the Scottish Government's commitment to subsidiarity. The Community Empowerment Bill, introduced to Parliament in June, will help shift the balance of power more towards communities. The extension of the powers of the Scottish Parliament would create a new opportunity to consider the right level for decisions to be made across Scottish society.

Securing rights and equalities

The Scottish Government's proposals for independence would have provided a platform to establish a written constitution. Scotland has an opportunity to develop a distinct constitutional framework covering the structures of government, including local government, and the human rights of the people of Scotland. The constitutional framework could also strengthen Scotland's record in protecting and promoting equality and human rights.

That framework should be made and implemented in Scotland by the Scottish people under the authority of the Scottish Parliament. There should not be moves to put any aspect of the framework beyond the powers of the Scottish Parliament by reserving them to Westminster, which would be counter to the right of the people of Scotland to determine these matters.

The Supreme Court

Scotland has a long-established autonomous legal system. The Scottish Government believes that appeals from courts in Scotland should be heard by the highest courts in Scotland, and should not be appealed to the UK Supreme Court. The jurisdiction of the UK Supreme Court should be excluded in respect of any case originating in Scotland. The Inner House of the Court of Session and the High Court of Justiciary, sitting as the Court of Criminal Appeal, would collectively become Scotland's Supreme Court. The European Court of Justice and the European Court of Human Rights would continue to have the same jurisdiction in Scotland as at present.

Specific proposals and opportunities

- A future Scotland Act should give statutory force to the right of the Scottish people, in the words of the Claim of Right "to determine the form of government best suited to their needs", as demonstrated in the referendum

- The Scottish Parliament should be legally entrenched to guarantee its permanence

- Statutory underpinning should be given to the convention that the UK Parliament will not legislate on devolved matters, or alter the powers or duties of the Scottish Parliament or Government, without the express consent of the Scottish Parliament. This should extend to formal scrutiny by the Scottish Parliament of any UK secondary legislation containing provision falling within devolved competence

- The Scottish Parliament should take on legislative competence for Scottish Parliament elections, including the franchise, electoral system and conduct of elections; for local government elections; and for MSP vacancies, disqualification and recall. Parliament should also be responsible for its structure and operations

- The Scottish Parliament should have legislative competence over the Scottish Administration extending to procedures for all Ministerial appointments, including that of the Law Officers, and for judicial appointments and remuneration

- Scotland should have the ability to develop a distinct constitutional framework to define and protect civil, political, economic, social, cultural and environmental rights. It would ensure that Scotland's governance will continue to be underpinned by the fundamental values and principles set out in the ECHR, irrespective of developments at the UK level. The restrictions in the Scotland Act 1998 on the Scottish Parliament's ability to legislate on human rights should be removed. This constitutional framework should also cover the structures of central government and the implementation of subsidiarity, including guarantees for the autonomy of local government and recognition of the specific needs of island communities

The proposals set out here for Scotland's constitutional development do not depend on wider consideration of the UK's constitution. The governance arrangements of England, Wales and Northern Ireland are primarily a matter for the people of those countries.

CHAPTER 7

SCOTLAND'S PLACE IN THE WORLD

Scotland should be empowered to have a stronger and more clearly articulated voice on the international stage. This is essential to ensure the Scottish Parliament and Scottish Government can play a stronger role in decision-making on issues within their responsibilities or which affect their interests, and to enhance their ability to promote Scottish products and businesses internationally.

Additional powers should include specific competence for Scotland to act directly in the European Union and internationally, to:

- improve Scotland's sustainable economic performance

- maintain the integrity of Scottish Government policy in devolved areas

- make a distinctive contribution to global challenges

Within the context of the UK, Scotland should have the competence to act internationally in devolved areas and also a formal role in determining the UK's priorities, policies and positions on reserved matters that affect Scottish interests.

Scotland has always welcomed migrants. Scotland's economy needs a healthy growth in the working population and migrants boost our economic base and enrich our culture. Our welcome for migrants and asylum seekers is also an important part of international reputation. Devolved competence over aspects of immigration policies would enable Scotland to better address our economic needs.

Specific proposals and opportunities

- The EU exercises considerable influence over economic prosperity and social welfare. Scotland should have guaranteed rights to engage directly with EU institutions and EU decision-making processes in areas of devolved competence. A statutory mechanism should be put in place to enable Scotland to jointly develop, influence and represent UK policy positions on broader European matters (for example on EU reform or treaty change)

- The Scottish Government and Scottish Parliament should have a right to influence the priorities and be directly involved in the business planning of the departments, agencies, embassies, consulates and offices overseas that promote the UK's commercial and cultural interests, to ensure Scotland's distinctive interests are secured. UK agencies and overseas operations should be accountable to the Scottish Parliament for their pursuit of these interests

- Scotland should have competence to initiate, negotiate, sign and ratify international agreements that relate to devolved matters; and to work with international partners to directly promote and protect Scottish interests and make a contribution as a good global citizen. Scotland should also have a formal role in determining the UK's priorities, policies and positions on international agreements relating to reserved matters that affect Scottish interests

- Scotland should be able to work with certainty and stability for the people and countries it engages with through its current international development activity. This should be given legislative underpinning rather than relying on permission from the UK Government that can be removed at any time. A commensurate share of the UK's current international development budget for relevant countries would provide targeted, effective, efficient and innovative activity to help fight poverty worldwide

- Scotland should have the power to engage internationally to protect, enshrine and promote human rights and to act to secure equality and social justice for all, including Scotland's ongoing commitment to the fundamental principles and values set out in the ECHR. Through this Scotland can build on the work undertaken in international development, gender equality and climate justice. This could include the power to ratify optional protocols to UN human rights conventions in relation to Scotland, and for Scotland to be able to submit reports to UN human rights reporting bodies

- To establish a new partnership between the Scottish and UK Governments on international and European matters the two governments should develop a statutory Co-operation Agreement with strong bilateral inter-governmental and information-sharing arrangements, and swift dispute-resolution mechanisms. This would complement the Memorandum of Understanding that guides the way all parts of the UK should work together

- Scotland's economy needs sustained, long-term growth in the working population. Scotland should have competence over certain aspects of immigration policy – for example the post study work visa – in order to better meet our particular economic needs

CHAPTER 8

THE WAY FORWARD

In this paper the Scottish Government has set out its views on the principles which should underpin further devolution, tests that any proposals should meet and specific proposals for maximum self-government for Scotland that we believe are consistent with those principles and comply with the tests. We are publishing them to inform the discussions that are being convened by Lord Smith and to inform the people of Scotland about the Scottish Government's objectives and approach.

Scotland was changed irrevocably by the referendum last month. The level of participation in the vote and in the debates and campaign that led up to it was unprecedented. Attendance at public meetings, the spontaneous organisation of community and campaign groups, and vigorous debate on social media all demonstrated a level of engagement in our democracy not seen for decades. It is crucial to the future of Scotland that this energy, imagination and commitment is maintained and built on in the years ahead.

Against this background it is vital that proposals for further devolution are put before the people of Scotland in a way that engages their full participation. The Scottish Government therefore welcomes Lord Smith's commitment to involve civic society and the people of Scotland in an inclusive process.

The Scottish Government is determined to involve the people of Scotland fully in all our processes and policies, building on our plans for community empowerment. As part of that we welcome discussion of the proposals in this paper. Its publication is therefore the start of the Scottish Government's own conversation with the people of Scotland on the future governance of our country within the United Kingdom.

In the Edinburgh Agreement of 2012, the Scottish and UK Governments committed to continue to work together constructively in the light of the outcome of the referendum, whatever it was, in the best interests of the people of Scotland and of the rest of the United Kingdom. To that end the Scottish Government is participating in the Smith Commission process with the aim of achieving an agreement that is good not just for Scotland but for the whole of the United Kingdom. We recognise that there is an active constitutional debate in all parts of the United Kingdom and will work with our partners across these islands to further our common interests in democracy, fairness and prosperity. It would be unacceptable, however – given the promises that were made to the Scottish people during the referendum campaign – for progress on further devolution to Scotland to be delayed by consideration of wider issues such as 'English votes for English laws'.

Once the Smith Commission's conclusions have been published, it will be for the governments of Scotland and the UK to work together on proposals for further devolution and to take those to the Scottish and UK Parliaments for approval. Under the Sewel Convention, the consent of the Scottish Parliament is required for any changes to its powers or those of the Scottish Government.

There are elements of our proposals that can be implemented quickly and simply through order-making powers already available under the Scotland Act 1998. For example, the UK Parliament and Government could move immediately to devolve control to the Scottish Parliament of its own elections, in time to allow 16 and 17 year olds to vote in the Scottish Parliament elections in 2016. Proposals for devolving the Crown Estate are well developed and have attracted widespread support over a number of years.

Other aspects of the proposals set out in this paper are better implemented through an Act of Parliament at Westminster following a Legislative Consent Motion at Holyrood. We expect the UK Government to proceed with that on the timetable that it set out before the referendum and we will play our full part to enable that to happen.

The Scottish Government encourages all interested parties to take up Lord Smith's invitation to participate in his process. Details can be found at www.smith-commission.scot.

Footnotes

1. Analysis based on Scottish Government, March 2014, Government Expenditure and Revenue Scotland 2012-13, http://www.scotland.gov.uk/Resource/0044/00446179.pdf

2. See Paragraph 2.3 of Choosing Scotland's Future (2007)

3. Source: www.whatscotlandthinks.org

4. Sources: SSAS, 2013; Panelbase, Feb 2014; ICM, June 2014 and September 2014. See also
www.whatscotlandthinks.org

5. See, for example, Recommendation 5.6 of the Commission on Scottish Devolution: "Whilst retaining the current reservation of immigration, active consideration (supported by inter-governmental machinery) should be given to agreeing sustainable local variations to reflect the particular skills and demographic needs of Scotland."

6. See, for example, recommendation 5.19 of the Commission on Scottish Devolution (2009): "There should be scope for Scottish Ministers, with the agreement of the Scottish Parliament, to propose changes to the Housing Benefit and Council Tax Benefit systems (as they apply in Scotland) when these are connected to devolved policy changes, and for the UK Government – if it agrees – to make those changes by suitable regulation."

7. http://www.scotland.gov.uk/Publications/2014/06/5184/downloads

8. http://www.scotland.gov.uk/Publications/2014/06/7760

9. Scottish Government, 15 July 2014, UK Government cuts to welfare expenditure in Scotland – Budget 2014, accessed: 8/10/14, http://www.scotland.gov.uk/Topics/People/welfarereform/analysis/ukgwelfarecutsbudg2014

10.Institute for Fiscal Studies, 15 January 2014, Child and working-age poverty in Northern Ireland over the next decade: an update (Appendix Table B2), http://www.ifs.org.uk/publications/7054

11. http://www.scotland.gov.uk/Publications/2014/08/4647