IT HAS now been two weeks since Scotland got control over income tax, the so-called Scottish Rate of Income Tax (or SRIT). Under this deal, Scotland has put in its own 10p rate of tax, and Westminster has reduced what it takes from Scotland by 10p. Also, Westminster has cut its funding for Scotland (the “block grant”) accordingly, given that more money is now raised locally. Ultimately, Scotland’s tax situation is thus exactly the same as it was more than a fortnight ago. Unsurprisingly, then, there has been little commentary about the SRIT since it was introduced. However, the lack of coverage of the SRIT means that an important point about Scottish fiscal devolution is being lost. It is highly beneficial for Scotland. You would be forgiven for thinking that Scotland was taking on a big fiscal risk by adopting its own income tax. But this is not the case. The reason lies in the arcane way in which Scotland’s block grant has been reduced to account for the fact that more cash is now raised locally. The upshot is that Scotland’s block grant will be reduced by an amount equivalent to the amount of tax raised in this financial year.

The consequences of this for Scotland’s fiscal risk should be fairly obvious. Were SRIT to generate precisely £0 this year, the block grant from Westminister would not be reduced. In other words, Scotland has been insulated from a poor income-tax performance. This is great news right now, given that the Scottish economy is in a tight spot. Some Scottish economists reckon that the country is nearing recession. Certainly, its GDP growth is way below Britain’s. This is probably down to the spillover effects of the fall in the oil price.

(Of course, the converse of this is that Scotland would not benefit if its economy performs really well this year, but the economic risks in Scotland this year are very much to the downside.)

So Scotland will do pretty well out of devolution this year. It will also do well in subsequent years, though through a different mechanism.

This seems confusing when you recall that from 2017 onwards, Scotland will get full control over income tax. There will be another reduction in the block grant from Westminster, to account for these new powers. The size of that reduction will be dependent on how Scottish income tax performs in this coming financial year, and that initial adjustment will be fixed thereafter. So from 2017 onwards, Scotland does not have an advantage in the same way that it has an advantage under SRIT.

But it has an advantage in another way. During the negotiations over the fiscal-devolution deal, something called “no detriment” kept coming up. Now, generally this is a very poorly defined term. Essentially it means that neither Scotland nor the rest of Britain should suffer directly as a result of the decision to devolve income-tax powers. The problem was that the Scottish and British governments interpreted “no detriment” differently. The most important disagreement centred on population growth.

Population is growing more slowly in Scotland than in the rest of Britain. Under the deal proposed by the Treasury, this would have meant that Scotland’s overall tax revenues probably grew more slowly than Britain's. To many that seems perfectly reasonable—after all, if Scotland’s population is growing slowly, its demand for public services will also grow slowly.

However, the Scottish government saw it in a different way—that their budget would “lose out” compared to what happened elsewhere in Britain. As a result, under the deal Scotland’s overall tax revenues will be dependent on what happens to Scotland’s per-person tax revenues, not the overall ones. The result, probably, is that per-person public spending in Scotland may increase further (it is already more than 10% higher than in the rest of the country).

In sum, the SNP got exactly what they wanted from the devolution deal. Income-tax revenue from the rest of Britain will be diverted to fund Scottish public services, even though Scotland is supposed to have complete control over income tax.