Category Archives: Devolution finance

‘Devo More’ seminar in Cardiff, 11 June 2013

I’m giving a seminar on Devo More and what it would mean for Wales in Cardiff on the morning of Wednesday 11 June. The full title is ‘Devo More: How fiscal and welfare devolution can benefit Wales and strengthen the Union’, and it is part of the UK Changing Union programme based by the Wales Governance Centre at Cardiff University, under the aegis of the National Assembly’s Cross Party Group on the Changing Union. (Those who haven’t seen them can find the Devo More and Welfare paper here, and Funding Devo More here.)
The seminar will take place at 8.30 am in conference room 24 in Tŷ Hywel, with tea, coffee and pastries provided. To book a place, please email info@ukchangingunion.org.uk.

UPDATE, 12 June: The slides from Tuesday’s talk are now available HERE.

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Unlocking the lockstep?

There are interesting changes to the ‘Calman’ model of income tax in the Wales bill (which had its Commons second reading on Monday) and the Finance bill (which had its Commons second reading on Tuesday).

The ‘Calman’ model applies a ‘lockstep’ to the devolved income tax rate, which has to be the same for all three tax bands (basic, higher and additional or 45 per cent). That rate can be 0 per cent, 10 per cent (as it is at present) or some other figure but it must be the same for all three bands – so if the devolved rate were nine per cent, you would have tax rates of 19, 39 and 44 per cent. While this question did not attract particular attention when the Scotland Act 2012 was going through the UK and Scottish Parliaments, it has been controversial in Wales. It was not recommended by either the Holtham or Silk Commissions, and has attracted criticism from the Commons Welsh Affairs Committee, the First Minister (who called the power with the lockstep ‘pretty useless’) and the Plaid Cymru and Welsh Conservative leaders.

The provisions in the Wales bill mark a change from the draft bill published before Christmas. Instead of providing for a single ‘Welsh rate of income tax’ across all three bands, the key operational clause now provides for Welsh basic, higher and additional rates and defines each of them separately (see clause 9 of the bill). Clause 289 and Schedule 34 of the Finance (No 2) bill make similar changes to the finance provisions of the Scotland Act 2012. (Both bills also provide for beefed-up arrangements for reports on devolved tax powers by the Comptroller and Auditor General, something that was conspicuously missing from the Scotland bill.)

The substantive policy behind the devolved rate of tax remains the same; the lockstep is still in place, and UK Government policy backs it strongly. But this change creates the legal basis for having different rates of tax for each band, if that policy decision were taken later, by altering the rule regarding what a ‘Welsh’ (or ‘Scottish’) ‘rate resolution’ would be.

The application to Scotland appears to be an inversion of the position that ‘Wales gets what Scotland gets’, which is apparent throughout the finance provisions of the Wales bill. Since what Scotland has is proving politically very difficult in a Welsh context, creating a framework for a possible different approach is an interesting move. In the light of ongoing debates about fiscal devolution to Scotland, though, including the Scottish Labour Party’s proposals to increase the devolved rate of income tax from 10 to 15 points and to allow the Scottish Parliament to vary higher and additional rates upward, there are obvious potential uses on the table in Scotland as well.

UPDATE: There’s coverage of this issue – quoting me extensively – here, which appeared on the front page of Wednesday’s Scotsman, and a cartoon and comment, here.  It’s interesting to note a firm denial of the idea that there is any plan to break the lockstep from HM Treasury, reported in the Scotsman story.  Ben Riley-Smith of the Telegraph has also tweeted a denial from No. 10.  I don’t doubt the policy remains to maintain the lockstep, but also that this creates a smoother path to break it if the policy were to change.

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Filed under Calman Commission/Scotland bill, Devolution finance, Legislation, Scotland, Wales

Implementing Silk in Wales: an update

The UK Government has now published its proposals for the implementation of the Silk Commission’s Part 1 report, following its announcement at the beginning of November (and so managed to get its response in just before the anniversary of the publication of the Commission’s report).  The Wales Office’s news release is here and the paper itself, Empowerment and responsibility: devolving financial powers to Wales, is here. (Note for government documentation trainspotters: this isn’t a Command paper to be formally laid before Parliament, and certainly not a white paper or even green paper.  This contrasts with both Labour and Coalition responses to Calman, and again suggests either that the UK is not taking Wales as seriously as it did Scotland, or that this is a response framed in some haste.)

Unsurprisingly, the paper largely confirms the key elements of the deal announced by the UK Prime Minister and Deputy Prime Minister, previously discussed HERE: devolution of two small land taxes, devolution of 10 points of income tax, but only after a referendum.  It confirms that, as for Scotland, aggregates levy may be devolved, but only once outstanding EU state aids issues are resolved, and that air passenger duty will not be. Continue reading

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An emerging fiscal debate in Northern Ireland

It has been quite easy to miss from Great Britain, but over the last few months there have been the beginnings of a serious debate about devolution finance in Northern Ireland.  Until now, this debate has been largely absent there, with the (major) exception of the debate about devolving corporation tax.

I’ve argued before that the corporation tax debate has been rather an unreal one, rooted in a serious absence of basic information and misapprehensions about both the benefits and problems of tax devolution (see HERE and HERE).  With the UK Government’s decision in March 2013 to put the issue on hold at least until after the Scottish independence referendum, that debate has at least paused. There still seems to be a belief there, however, that corporation tax devolution is not only viable and practicable but some sort of holy grail for the invigoration of the Northern Ireland economy.  (A separate part of the Northern Ireland debate has led to devolution of air passenger duty for long-haul flights, set at a lower level for 2012-13 and passing APD to Stormont’s control from the start of 2013.  In practice, there’s only one such flight – a daily one from Belfast International to Newark, New Jersey, in the US.)

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Wales’s new fiscal package: the UK Government response to Silk

Friday’s news had ample coverage of the UK Government’s decision about financing Welsh devolved government, following the Silk Commission’s Part 1 report from last November.  No doubt the looming anniversary of the publication of the Silk report triggered a certain sense of urgency.  Despite promises that the UK Government would produce its response in ‘the spring’ (and strong hints this would be earlier in the spring rather than later), that has been delayed and delayed.  At the end of June, Secretary of State David Jones said it had been postponed until after the summer, and now pretty late in the autumn it has finally materialised.

There has been wide coverage of the UK response.  The Western Mail’s article by David Cameron and Nick Clegg is here, and their news coverage is here, here and here.  BBC News coverage is here, and analysis here.  The Guardian’s story is here.  The official Wales Office press release is here, and the written ministerial statement is here.

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Filed under Calman Commission/Scotland bill, Conservatives, Devolution finance, Intergovernmental relations, Labour, Lib Dems, Wales

Devolution literacy and party conference policies

The party conference season always produces a crop of policy announcements that are meant to be eye-catching.  The extent to which these are thought through is often doubtful, though – these are announcements for political purposes, not necessarily to work in the real world. That also means how their devolution implications is addressed is often rather sketchy.   Regular readers of this blog will know that concern about ‘devolution literacy’ is a long-standing one of mine, and one which I find has slowly but materially improved over the courts of the 2000s and 2010s.

Either devolution has bedded itself into party-policy framers’ consciousness, or something has changed.  When he made his announcement about free school meals for 5-7 year olds in England, Nick Clegg was keen to point out that funding would be given to the devolved administrations to decide whether to follow suit.  (The political pressure to do so will be considerable, of course – a lot of parents’ and poverty groups will be asking pointed questions about it.)  And that’s all well and good; the Treasury’s Statement of Funding Policy provides that spending on the schools budget has a 100 per cent comparability percentage for Scotland, Wales and Northern Ireland – so any extra spending on that budget automatically triggers a full population-related comparable payment.

Ed Miliband’s widely-trailed announcement about cancelling a cut in corporation tax and instead making one in business rates (strictly, non-domestic rate or NDR) is more problematic.  The aim is to favour smaller businesses, which may not be incorporated (or have profits), but which necessarily occupy business premises.  Like Clegg, Multiband will apparently announce a change for England, with funding for devolved governments to make a similar cut.  The problem is that this is not what the Statement of Funding Policy says.  NDR is only 100 per cent comparable for Wales, where a complex England and Wales pooling mechanism currently exists.  Even there, there are plans for change following the Morgan Review last year (BBC News summary here, full documentation here).  In Scotland and Northern Ireland, NDR is 0 per cent comparable – because it’s regarded as fully devolved.  So any decision for England would not automatically trigger comparables for Scotland or Northern Ireland.

There are ways to resolve this, of course.  The easiest is probably the messiest – a one-off concession relating to adding a specific block of money to the devolved governments’ budgetary baselines.  (If the comparability percentage were changed, it would lead to further complications in future.)  Even then, though, there is no guarantee whatever that devolved governments will use the extra money in the way UK Government might desire.  (Indeed, the Scottish Government has been imaginative in making use of NDR as an instrument of local economic policy – extra charges for out of town superstores, for example.)  But the point is that Miliband’s attempt to make an impression by reshaping where the burden of business taxation falls has run into the practical realities of how the post-devolution, fiscally decentralised UK functions.  While Miliband deserves 8/10 for effort in thinking about the problem, it’s only 4/10 for success in doing so.

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Implementing the Silk Commission’s proposals, and the Welsh block grant

This post also appears on the Institute of Welsh Affairs’ ‘Click on Wales’ blog under the title ‘Havering over Welsh taxation’, here.  I was on BBC Radio Wales’s ‘Sunday Supplement’ programme to talk about it at around 8.30 am on Sunday 21 July, available to listen again here or as a podcast here.

While the Silk Commission carries on work on Part 2 of its inquiry, the UK Government has been deliberating slowly on the Part 1 report.  Promises of an ‘early’ response vanished, as did the commitment to one in the ‘Spring’. The summer solstice came and went, with no response from the Secretary of State other than a note that ‘good, positive progress’ had been made, ‘many issues’ resolved, but some remained outstanding. The rumour mill abounds with explanations of what the unresolved issues might be (see, for example, David Cornock here and here). If what happens to the Welsh Government’s Block Grant is not one of them, it should be.

The approach for dealing with the reduction in the block grant recommended by the Silk Commission sounds comparatively straightforward in principle, though it is rather harder to apply in practice. In the first year the new arrangements are in operation, the block grant is cut by an amount corresponding to the yield of the devolved tax ‘space’ – 10 points of personal income tax in the case of Silk (and Calman/Scotland Act 2012) for Scotland.  That cut is then adjusted ‘proportionately’ in subsequent years. What ‘proportionately’ means here is not clear. The Holtham Commission did sterling work in identifying what that might mean in practical terms, recommending what it called the ‘indexed deduction’ approach for personal income tax.  The same approach applies in principle to other devolved taxes, but the yields of those are modest so the issue is not so vital there.

The ‘indexed deduction’ method would involve taking the Welsh proportion of the overall UK revenues from that tax, and reducing the block grant by that proportion.  So, if devolved income tax in Wales generates 1.75 per cent of total UK personal income tax revenues in year one, the reduction in the block grant would be 1.75 per cent of UK personal income tax in each subsequent year – whatever the change in overall UK personal income tax revenues. The amount of the deduction would go down if overall tax revenues went down, and be increased if revenues went up. The result would be that the Welsh Government would gain if its use of its powers increased tax revenues in Wales ahead of the UK as a whole, and lose out if they declined more than the UK as a whole.  This approach has been agreed between the UK and Scottish Governments for the working of the Scotland Act 2012, but work on what it means in practice is ongoing in the ‘Joint Exchequer Committee’ established by the two governments. There has still not been any published attempt to show what the impact of making the cut and adjusting it by that method would be.

Applying the ‘indexed deduction’ method is comparatively easy for Scotland. The Barnett formula means that the Scottish block grant is comparatively generous. One can argue about how generous it is, but it is clear that the Scottish Government’s block grant exceeds by some distance any reasonable estimate of Scottish relative needs. Holtham estimated Scottish needs at 104 or 105 per cent of English ones, but depending on how one cuts the numbers (which is tricky) Scotland gets around 118-120 per cent of English spending for services covered by the block grant.

A further quirk is that the public spending boom of the 2,000s should have led to quite rapid convergence in devolved spending on the ‘English’ level – but, for Scotland, it did not. It appears that Scotland’s declining population cancelled out the convergence effect in the block grant, since convergence relates to per capita levels of spending, while the block itself is calculated as a lump sum and updated population numbers only affect incremental changes to that. So if the application of the reduction in the block grant affects the overall resources available to Scotland, it will only eat into that ‘cushion’ of the Barnett bonus – and it will not make a difficult situation significantly worse as time goes by.

Wales would love to have Scotland’s problems. It is clear that Wales is somewhat ‘underfunded’ given its present relative needs. At present, the block grant provides 113 per cent of the English level of spending on devolved services – while Holtham found Wales’s relative needs were between 114 and 117 per cent. That creates a different set of difficulties. If the block grant fails to produce a ‘fair’ level of funding relative to need at the outset, any cut in that grant – however it is adjusted – will probably make matters worse, as convergence happens. As a result, it becomes very hard to reconcile devolved fiscal accountability with reasonable UK-wide equity in public spending.

Matters needs not necessarily get worse, if the grant were adjusted to compensate for unfairness in funding before any reduction is made to allow for devolved income tax. The demand for a ‘fair’, needs-based grant – as articulated by Holtham – would be the simplest and most effective way of doing that. But a needs-based grant looks to be pretty clearly off the cards at present. The effects of introducing that for Scotland, particularly in the run-up to the 2014 independence referendum, are frightening enough to send politicians running in the opposite direction.

By pursuing its bilateral discussions about the block grant with the UK Government – and excluding it from the Silk Commission’s remit – the Welsh Government minimised its influence over securing ‘fair funding’, as well as preventing the Silk Commission from taking a comprehensive view on Welsh devolved funding. What it got instead – the deal announced last October – was promise of some undefined action if convergence appeared to become a material issue, though it isn’t at present because of the restraints on public spending at Westminster.  (My discussion of that on Devolution Matters is HERE.)

How this would be resolved if or when convergence comes back on the agenda would involve a good deal of bargaining and haggling between the Treasury and Welsh Government, and a good deal of reliance on subjective assessments.  Although the Welsh Government seems to have a good deal of confidence in that deal, it is not so much a sticking plaster to help a broken leg, as a fig leaf.

Even then, a ‘fair’ grant would need an adjustment mechanism. You would need to be able to adjust the Welsh block (before the deduction for the share of devolved income tax) as spending changes in the reference point – so Wales gets a consequential change as spending on health or transport in England goes up (or down).  The simplest adjustment mechanism is that used for Barnett – allocating a population share of changes in spending on ‘comparable functions’ in England.  But any formula that works in that way will have a convergence element built into it.  So the problems caused by the Welsh block grant falling below Welsh relative need will not go away.

Indeed, it is made worse because the devolved tax power transfers a degree of volatility risk to the devolved level, while devolved public services are counter-cyclical or inflationary in their cost. A devolved government needs to know as accurately as it can how much money it will have for those services, and the starting point for that figure must deliver a comparable level of spending to that in England.  The more subjective the mechanism for adjusting the numbers, the less certainty and accuracy there is in the system.

Each of these problems is capable of being fixed. It would be quite possible to build into the mechanism for implementing Silk an adjustment to the block grant to avoid convergence, and another to cut the block grant to allow for partially devolved income tax. It would even be possible to establish a system that was also robust and predictable, and pretty stable, though HM Treasury would probably baulk at the loss of control over spending policy that would entail.

But the problem is that such mechanisms will need to be applied by the Treasury, and run on Treasury estimates which will necessarily have an element of subjective estimation built into them. By contrast, the day to day, year to year, operation of Barnett is pretty automatic and clear. The most serious problems arise when it is changed at a spending review.  So ironically, there is a real prospect that the overall effect of devolving income tax while making sure other changes do not damage Wales financially will increase the extent to which Welsh public spending depends on HM Treasury’s calculations, not reduce it. Ensuring a measure of fairness may mean less clarity about how financing works.

And that is the real problem.  The goal of the Silk recommendations is to increase the National Assembly and Welsh Government’s ‘fiscal accountability’. That means establishing clear lines between what is a devolved responsibility and what is a UK responsibility. There is little point in voters being able to hold the Assembly to account for increased (or reduced) income tax if there can then be arguments that this only happened because the Treasury has allowed it. That would not add to accountability. In fact, by creating scope for extra arguments between governments and blame-shifting, it would reduce it.

There are two points here that require further consideration. The first is that the detail of any response implementing Silk needs to be looked at carefully, to see how that mechanism will work.  Steering a course that delivers the benefits of Silk – in the form of increased autonomy and accountability – is difficult, and UK Government claims of success should be treated with scepticism given the difficulties of delivering these objectives.

Second, one has to ask how long the financial system for devolution can go on being amended and patched in this way. It is increasingly looking like one of Heath Robinson’s strange jerry-rigged machines, and increasingly incapable of actually doing what is demanded of it. These problems are much worse for Wales than for Scotland, but Scotland has them too. What look like bolder approaches – such as my proposals set out as part of the IPPR’s ‘Devo More’ project – in fact resolve them much more effectively, by trying to start with a clean slate rather than perpetuating the mess that has accumulated over decades. At some point, clarity and comprehensibility need to take priority over political or administrative convenience.

As part of that, the Treasury needs to be asked a hard question: why does the same framework for financing arrangements have to apply to Wales as to Scotland and Northern Ireland? While almost every part of the three sets of devolution arrangements varies a good deal, the Treasury has insisted on a measure of symmetricality in the block grant and the Barnett formula. It is rather a superficial form of symmetry, as when one digs down there are many substantial differences between each country’s arrangements. At present it is Wales alone that is underfunded relative to need by the block grant, and therefore only Wales that is exposed to the acute problems of convergence on an English level of public spending.  Symmetry causes problems for Wales in a way that it does not for Scotland or Northern Ireland.

In his recent speech at the Wales Governance Centre in Cardiff, Welsh Secretary David Jones lauded the virtues of ‘asymmetric devolution’. Asymmetry when it comes to the operation of financing would have a direct and tangible value for Wales.  It will be interesting to see whether that was merely an attempt to defend a messy status quo, or a preparatory step for an imaginative deal to make fiscal devolution for Wales work.

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Filed under Calman Commission/Scotland bill, Devolution finance, Intergovernmental relations, Wales, Whitehall