Smith Commission on Devolution of Further Powers to Scotland. Submission from the Chartered Institute of Housing Scotland October 2014

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1 Consultation response Smith Commission on Devolution of Further Powers to Scotland Submission from the Chartered Institute of Housing Scotland October

2 P a g e 2 Introduction The Chartered Institute of Housing in Scotland welcomes this opportunity to make a submission to the Smith Commission on Devolution of Further Powers to Scotland. The Chartered Institute of Housing (CIH) is the independent voice for housing and the home of professional standards. Our goal is simple to provide housing professionals with the advice, support and knowledge they need to be brilliant. CIH is a registered charity and not-for-profit organisation. This means that the money we make is put back into the organisation and funds the activities we carry out to support the housing sector. We have a diverse and growing membership of more than 22,000 people who work in both the public and private sectors, in 20 countries on five continents across the world. Further information is available at: For more information on the contents of this paper, please contact the Policy and Practice Team: Chartered Institute of Housing Scotland 4th Floor 125 Princes Street Edinburgh EH2 4AD scotland.policy@cih.org

3 P a g e 3 Chartered Institute of Housing submission to the Smith Commission on the devolution of further powers to Scotland General overview The Smith Commission on Devolution of Powers to Scotland has been tasked to arrive at a set of proposals that command cross-party support, are evidence-based and are not detrimental to other parts of the UK. The Chartered Institute of Housing is the professional body for people who work in housing. As the independent voice for housing, and the home of professional standards, Chartered Institute of Housing s main ambition for the Smith Commission is to seize the opportunity, through the transfer of relevant additional powers to Scotland, to realise a housing system that works for everyone. Our diagram (p.4) outlines the key elements of that vision. We believe there is a positive case for granting Scotland a range of further fiscal, borrowing, welfare and energy market powers which, when put together with existing devolved powers, could enhance the operation of the Scottish housing system and take us closer to that stated objective. Further devolution of selected fiscal, welfare and energy market powers to Scotland would build on its existing powers on housing policy and housing investment, enable Scotland to have a social security policy that complements its own devolved housing policy priorities and a tax policy that enables and supports a successful housing market. We do not assume that the transfer of such powers will necessarily be easy, straightforward or fast. Indeed, the transfer of new powers may actually generate significant new or additional challenges, both in the interim period of transition and over the longer term, once powers have been transferred. But these additional powers will at least allow Scotland to have much greater control of the key policy levers which could deliver on our vision of a housing system that works for everyone.

4 P a g e 4 Key principles underpinning our proposals 1. A key principle for the Smith Commission must be administrative devolution to ensure that the legislative and policy framework which applies in Scotland delivers the optimum approach to the governance of public policy - and from a CIH perspective, the realisation of a housing system that works for all. Different parts of the country experience different challenges which vary in their scale and nature and therefore require different solutions. Consequently in turn those areas, and the challenges they face, require a different mix of powers in order to deliver the right solutions locally. 2. The governance and delivery of public services is at its most effective when decisions can be taken in a coordinated manner, at an appropriate local level. However, the UK has one of the most centralised models of government in western Europe. The old Westminsterled, centralised, command and control model of government has arguably failed to serve large parts of the UK very well, and has left housing markets in many parts of the UK dysfunctional. This is true not just in post-industrial Scotland but in England too. 3. While devolved government has allowed Scotland to pursue a different direction in terms of public and social policy; the current framework in which policy is designed and delivered is subject to critical constraints, particularly around the financial and fiscal aspects of policy implementation. For Scotland to have the greatest possible influence over its housing system and to ensure an adequate supply of houses at different price points which are affordable to various groups of people, at various stages in their lives, we need greater control of the fiscal and financial levers required to direct the housing system.

5 P a g e 5 4. In addition, Scotland needs to have further fiscal and borrowing powers so that Scotland can have greater flexibility with regards to both capital and revenue borrowing in order to have fuller control over devolved policy objectives. Following on from this, we also need greater control over welfare policy and a greater say in the regulation of the energy markets, to ensure the various anti-poverty targets set out by the Scottish Parliament can actually be met. The fiscal and financial levers required to drive an effective housing system 5. One of the key obstacles to delivering an effective housing system in Scotland is the disjunction between the imperatives of UK fiscal and economic policy, the characteristics and needs of the Scottish housing system and the policy direction and intent of the Scottish Government. 6. Our submission takes a broad perspective on the whole of the Scottish housing system i.e. the need to improve the efficacy of the housing system across all tenures. This means increasing the supply of housing across all tenures: homes for private ownership, intermediate tenures such as shared ownership, mid-market rent, low cost home ownership, private sector rent, and affordable rent. Our general view is that the relationship between the UK tax system and the Scottish housing system is currently imbalanced and should be reviewed. We need a tax system which supports and maintains balanced housing markets which work for everyone in Scotland, yet we are currently far from that objective. 7. We recognise that it is no simple task to design and implement a tax system which supports and enhances the sound and effective operation of a housing system. The Mirrlees Review (2011) 2 described aspects of the current UK tax system as an opaque jumble of different effective rates as a result of tapered allowances and a separate National Insurance system and criticised Council Tax for not being proportional to current property values. For example, stamp duty inevitably distorts the market; Council Tax urgently requires a revaluation of its various bandings to restore fairness to the current system; and the failure to tax investment returns in the sector arguably needs to end and be integrated across tenures Most key elements of housing taxation Capital Gains, Income Tax, VAT, inheritance tax, tax breaks etc. are currently reserved to the UK Government, on the basis that budget allocation is done centrally via HM Treasury in accordance with the Barnett formula. The only current exceptions to this arrangement are Council Tax and the new Land and Buildings Transaction Tax (LBTT). Although Scotland already has powers over transaction taxes, such as those which have recently been used to create the new LBTT, it is currently limited in terms of other fiscal levers it can bring to bear upon the Scottish housing system, either to stimulate areas where the housing market is underperforming or to redress areas where the housing market is overly buoyant. 2 Institute for Fiscal Studies (2011) Tax by Design: The Mirrlees Review 3 CIH Scotland (2014) Housing Taxation Reform and the Scottish Constitutional Question available at

6 P a g e 6 9. The delivery of affordable housing supply (over which Scotland obviously already has legislative capacity) is fundamentally tied up with the welfare and tax system (which remains under the aegis of the UK Government). It is difficult to see how Scotland could ever deliver a devolved housing system that works for everyone, when it is dependent upon and impacted by UK Government fiscal and welfare policies which have been designed to address key policy targets for geographies which require a very different response to that needed in a Scottish context. 10. The Scotland Act 2012 transfers a significant range of fiscal powers to the Scottish Parliament, particularly in respect of some land taxes, setting a Scottish rate of income tax, and extended borrowing powers. The Act also gives the Scottish Parliament the power for existing UK-wide taxes to be devolved and/or new taxes to be created using the ordermaking process in both the UK and Scottish Parliaments. On the basis that it would result in no substantive detriment to other parts of the United Kingdom, it might therefore be appropriate to devolve further powers relating to property and land (e.g. elements of inheritance tax and capital gains tax) and more powers in respect of income tax, i.e. the power to set rates, bands, reliefs and personal allowances. This would afford the Scottish Government a much improved range of levers with which to influence and direct the housing system in Scotland. 11. We recognise that the Smith Commission is required to ensure that any proposals are not detrimental to other parts of the UK. While there may be demonstrable benefits in devolving further fiscal and welfare powers to Scotland, due regard must also be given to the potential impacts on the housing system in neighbouring parts of the UK. The Smith Commission will obviously be awake to the challenges and opportunities that exist around the prospect of introducing tax competition between the constituent UK nations. We do not contend that tax competition across different parts of the UK is in itself necessarily a bad idea. Indeed there is an argument that some degree of inter-regional tax competition might help provide a vital economic stimulus to parts of Scotland where there is surplus or hard to let housing stock and could possibly see that stock more readily brought back into effective use. 12. One example where limited devolution of fiscal powers could make a significant difference to the delivery of Scottish housing policy is around VAT on housing improvements. With the power to vary/reduce the VAT rate on repairs and improvements, a future Scottish Government could make a significant difference to housing quality (and public health) right across Scotland, incentivise contractors to offer apprenticeships and other employment opportunities, create much needed employment and boost construction sector capacity. It might also encourage homeowners and private landlords to undertake energy efficiency and other essential home improvements work, contributing to meeting the Scottish Government s climate change and fuel poverty targets. 13. Another example of why Scotland requires greater fiscal powers is in terms of supporting the Scottish Government s desire to promote growth in the Private Rented Sector (PRS). Since 2013, Scotland has had a national PRS strategy with three aims: to improve the quality of property management, condition and service; to deliver for tenants and landlords, meeting the needs of the people living in the sector; consumers seeking accommodation; and landlords committed to continuous improvement; and

7 P a g e 7 to enable growth, investment and help increase overall housing supply. 14. One of the most vital failures of the current housing system is housing supply a fact which extends across all forms of tenure. In much the same way as we wish to see growth in the availability of affordable social rented housing across Scotland, we also want to see more new homes for ownership, and greater availability of intermediate tenures and increased capacity within the private rented sector, to create the fullest range of choice available. In terms of delivering the desired growth and investment in the private rented sector, we believe that it is most likely to underpinned by pursuing a favourable tax regime and a regulatory framework which supports growth (such as the approach taken in Germany). By extension then, the Scottish Government requires greater leeway to influence the fiscal environment for private rented sector development and provision. Welfare/Social Security 15. There is a clear appetite, especially within various parts of the housing profession, for Scotland to be granted more power over aspects of social security which directly impact upon the sound operation of Scotland s housing system. However, the issue of precisely which parts of social security should be devolved is complex and requires careful consideration. Any further devolution of social security powers to Scotland must acknowledge that the housing and social security systems are mutually interdependent, but also recognise the real risk that if Housing Benefit is devolved in isolation - without powers to determine policy on other related social security benefits it could potentially be to the detriment of both those systems. We would therefore be concerned if the only area of welfare policy to be devolved was Housing Benefit. The 2012 SFHA/CIH Scotland commissioned report by University of Glasgow 4 showed quite clearly that devolving Housing Benefit alone (without control over other related benefits e.g. no ability to moderate/modify the Universal Credit proposals) would be extremely problematic. 16. In our view, in terms of ensuring a well-functioning housing system in Scotland, it does not matter so much whether that money comes from Westminster or from the Scottish Parliament/Government; what is more important is that the overall level of entitlement that the Scottish people get with which to pay their housing costs is sufficient. Recent changes to Housing Benefit (particularly the introduction of the Social Sector Size Criteria regulations, sometimes described as the bedroom tax ) have highlighted the disjunction between UK Government priorities and those of the devolved Scottish Government. 17. Quite apart from the fact that it is a policy which has failed in its own terms - i.e. having failed to deliver the financial savings that HM Treasury had anticipated, as well as having been demonstrably unfair in its retrospective application and the fact that there was no option for many people to downsize - this policy has also served to frustrate or undermine various aspects of devolved Scottish Government housing, homelessness or housing support policy. Quite understandably then, the experience of the bedroom tax has led many in the Scottish social housing sector to conclude that Scotland should have the power to shape fiscal and welfare policy in a way which complements policy objectives for devolved areas of housing, health and wellbeing. 4 CIH Scotland/SFHA (2012) Devolving Housing Benefit: A Discussion Paper available at

8 P a g e If the devolution of further powers was to be confined solely to the delivery of specified benefits such as those mentioned by some of the main political parties (i.e. Housing Benefit and Attendance Allowance), the power of the Scottish Government to alter those benefits would be limited. In effect, all that would be achieved would be the the transfer from Westminster to Holyrood of powers to administer the UK benefits scheme, with the concomitant expectation that Westminster priorities and policies would continue to be implemented. Recent experience in Northern Ireland which has long had powers over welfare provision, but is currently being fined by the UK Government for failing to introduce or delaying implementation of various aspects of the UK Government s welfare reform programme attests to this scenario being the likely outcome for Scotland too, if Housing Benefit was devolved in isolation. 19. Without the fiscal powers required to vary the size of the social security envelope, Scotland would inevitably be left facing a serious opportunity cost dilemma: having either to implement UK Government policy on a like for like basis, or facing significant challenges in having to identify where the required gap funding to deliver Scottish Government welfare priorities would come from. 20. Therefore, we would suggest that the best outcome might be for Scotland to continue to take the baseline social security system from Westminster (including those elements of policy which we might consider unhelpful to the operation of the Scottish housing system, such as the so-called bedroom tax etc.) but be given the power to top up Housing Benefit with Scottish-raised revenue to enhance the baseline in a way which aligns with Scottish public policy objectives. This would be a simple and clear model which would permit Scotland to vary the level of support for housing costs in alignment with the needs of the Scottish housing system, but equally would not be a cause for resentment south of the border (which is important for stability of the whole system). 21. As far as Housing Benefit (or the housing costs element of Universal Credit) is concerned, all Scotland would need is a power to enhance the Westminster baseline benefit up to the level of the full eligible rent (which would then of course wipe out any bedroom tax or the impact of other caps on housing benefit or local housing allowance). This would have the advantage of maintaining a UK wide social security system. If you start taking other individual benefits out then the whole system gets messy; GB allowances and Scottish allowances would fall out of alignment causing the kinds of gaps and better off problems that caused the downfall of the pre-1988 scheme. There is precedence for a Westminster top-up style scheme: the pre-1988 Housing Benefit scheme allowed local authorities to top up housing benefit schemes from their own tax base (the rates as it then was). This would not cause misalignment because the post housing benefit scheme is based on 100% of the rent (whereas the pre-1988 was based on proportion of the rent for standard cases and 100% for passport cases). It would also solve the quandaries currently faced by Northern Irish Assembly, which is seeing them being fined for not maintaining a UK wide system (as circumscribed by section 87 of the Northern Ireland Act 1998). 22. Finally, with regards to welfare powers, we would wish to highlight the currently inequitable nature of arrangements with regards to the Scottish Government not having a general power to promote welfare as they see fit, which English local authorities have long held

9 P a g e 9 themselves. We would recommend that Schedule 5 of the Scotland Act 1998 is revised to grant the Scottish Government (and by extension any local authorities as required) a general power to promote welfare as they see fit. This would seem to be a relatively simple issue for the Smith Commission to resolve and could when conjoined with additional revenue borrowing powers permit the Scottish Government the required flexibility to operate any such top up welfare scheme as may (or may not) be required in Scotland. Housing Supply/Investment 23. Although housing is already a devolved function in Scotland, its capacity to determine the full scale of housing investment and supply-side interventions is constrained by the lack of borrowing or taxation powers. Scottish Government data suggests that there are currently around 180,000 people on local authority housing waiting lists across Scotland 5. However, the Scottish Government s current target is to complete just 6,000 new affordable homes a year, of which just 4,000 are to be social rent. To meet the backlog of housing need in Scotland, we need to see a significant increase in terms of investment in affordable housing, but this is made difficult by the fact the Scottish Government has to work within the parameters of the Departmental Expenditure Limit (DEL). 24. We would certainly welcome any measures which might assist Scotland to increase its investment in housing. Investing in housing supports the building industry: jobs in manufacturing, construction and local economies. Housing investment both in new build and in existing stock, including privately owned housing creates and maintains jobs. As well as the obvious impact of new build activity on the construction industry, more houses built means more houses to maintain in the future. 25. Different multiplier estimates vary but most suggest that for every 1 million spent on housing investment generates a 2-3 million increase in gross output across the economy as a whole. Housing can also reduce economic performance if a scarcity of it impedes labour mobility, or scarcity or quality factors mean housing fails to contribute to the attractiveness of regions and cities as places to locate new economic activity. Over the longer run, the quality of Scotland s housing has important implications for health, education and other outcomes that directly affect the acquisition of human capital and, through this, impact national productivity, competitiveness and economic growth. 6 Energy Markets/Tackling Fuel Poverty 26. The UK Government s changes to the Energy Company Obligation (ECO) scheme last year are a stark example of how sudden changes in Westminster-led policy in reserved matters can have a detrimental impact on the Scottish Government s ability to meet its own objectives on energy efficiency, climate change and fuel poverty, effectively leaving them high and dry. Because Scotland has a greater proportion of difficult to treat and off-gas properties, it has therefore been disproportionately affected by ECO cuts. Such properties involve greater capital investment which energy companies are now avoiding. In the context of a limited fixed budget, it is incredibly difficult to see how the Scottish Government can achieve its objectives on climate change and tackling fuel poverty. 5 Housing Statistics for Scotland - Housing lists These issues are explored in detail in CIH Scotland s 2011 publication Raising the Game the Economic Case for Housing by Tony O Sullivan and Duncan MacLennan.

10 P a g e The development of alternative funding approaches is made more difficult by the lack of devolution within the taxation system. If income tax alone is devolved, as is currently proposed by some, then it would not be possible to design tax incentives and obligations for the energy sector which are consistent with Scottish Government policy objectives concerning fuel poverty, energy conservation and climate change. Whilst we recognise that no government has control over all the activities of the energy companies, maximising the devolution of powers over energy and climate change, including regulation and energy supplier obligations, would enable a much more co-ordinated approach to improving energy efficiency and tackling fuel poverty. Health and wellbeing 28. The taxation point made in relation to energy (see above) also applies to other sectors which disproportionately impact on social housing, for example the drink and tobacco industries: it does not seem right that the Scottish Government is responsible for the health of the nation, but is unable to exercise powers which could dramatically improve the health outcomes for the most disadvantaged in our communities. Final Comments 29. Despite demonstrating (in the guise of Scottish Governments of various complexions) over the past 15 years a positive bias towards investing and recognising the broader value of housing in terms of its impact on the economy in terms of job creation, reducing health inequalities, meeting climate change objectives and building a fairer society the fact is that Scotland is currently constrained when it comes to delivering a housing system that works for everyone. 30. We trust that the Smith Commission will take on board our key message that devolving a range of further fiscal, financial and regulatory powers relating to various aspects of the housing system in Scotland will not only improve the operation and functionality of the housing system in Scotland, but will also without detriment to the rest of the UK - be of broader general benefit to the delivery of sound government, good public health and the wellbeing of the people of Scotland.