Inheritance tax (IHT to its friends) is an odd tax. It doesn’t raise a lot of money; £2.7 billion in 2010-11 according to HM Revenue and Customs, which sounds like a lot of money but was only 0.65 per cent of total UK tax revenues. It also has plenty of loopholes. The most important are the seven-year rule (it doesn’t catch anything given away more than seven years before the death of the donor), an exemption on transfers between spouses, and the nil-rate band which taxes at 0 per cent anything up to a specified threshold, currently £325,000 per individual. The combination of the seven-year rule and the nil-rate band mean that it’s largely an optional tax, hitting the well- and comfortably-off who are disorganised; indeed, the joke in tax classes is that it’s a charge on those who hate their relations more than the Revenue.
So – if the news that IHT is to bear the burden of increasing resources to pay for the new ‘social care cap’ in England is right (see BBC News here, and Sunday’s Telegraph here) – the upshot is rather confusing. An additional tax burden will be imposed on residents of all parts of the UK, including Scotland, Wales and Northern Ireland as well as England – to pay for a benefit only to be experienced in England. That is anomalous.
There are two ways to resolve this problem. One is to allocate shares of the extra tax revenues so generated to devolved governments in Scotland, Wales and Northern Ireland, since social care for the elderly is a devolved function. That is attractive, and would be the sort of approach sought by Quebec, where the long-standing demand of the provincial government has been to call for an ‘opt out with compensation’ from expansions of the Canadian federal government’s social programmes. However, that might not be in devolved governments’ best interests – the tax base that supports inheritance tax revenues is driven by property values, and so hugely skewed toward southern England. (In Scotland, according to GERS, it only generated 0.4 per cent of total tax revenues in 2010-11. It’s only 0.37 per cent in Wales according to the Silk Commission report, and 0.33 per cent in Northern Ireland, according to the Northern Ireland Net Fiscal Balance Report.) Getting those extra tax revenues from the tax base in Scotland, Wales or Northern Ireland would in fact mean a larger share of a smaller cake. That’s all the worse for Scotland and Northern Ireland given their ageing populations.
The alternative approach would be to let the Barnett formula take the strain, and allocate to devolved governments their consequential share of increased UK Government spending in England. This is what Barnett is meant to do, after all – allocate consequential shares of spending on ‘comparable’ functions in England to devolved governments. It appears that the increased IHT revenue will only bear part of the cost of increasing resources for the care cap, so the rest will presumably come from general taxation anyway. Using Barnett would in fact put rather more funds into the hands of devolved governments, albeit at the expense of English taxpayers, but in a way that accomplishes a form of equity in distributing shares of the cost of the English policy across the UK.
If the latter is the approach to be taken, it should form part of the Department of Health’s formal announcement. The pre-announcement briefings have suggested a UK-wide tax to fund a purely English policy, which may make electoral sense for the Conservatives but not much constitutional sense (and that’s without judging whether this policy approach is in fact right or not – given that it has been criticised by Andrew Dilnot as well as Labour spokespeople). It looks rather like the sort of high-handed approach from Whitehall that has been all too common in the past – and which in the present context strengthens arguments for independence in Scotland. (Of course, it also sits on top of the UK Government’s exclusion of claims for attendance allowance from beneficiaries of that policy after free long-term care for the elderly was introduced.) It also suggests that a more nuanced approach to welfare devolution may be hard to implement, because doing so is beyond Whitehall’s habitual ways of working.
What this is not is a case for devolving inheritance tax. IHT is one of few taxes emphatically not suitable for devolution on fiscal grounds. Experience in both Canada and Australia of transferring the death/estates duty tax base to the provinces/states was that within a decade, tax competition between the various governments drove the rate of tax to zero across the whole country. There are few cases where the evidence of fiscal competition cannibalising a tax base is so clear.
Thinking about social care costs is actually a tricky challenge. It involves redistribution across time as well as space. At present, devolved governments have the responsibility for providing care, but not the policy or legal instruments to secure its funding. The way the UK Government has ploughed ahead making policy for England with so little regard for the position of devolved governments has done it few favours.
UPDATE: This post was written just before Jeremy Hunt made his statement in the Commons (which is available here) or the Department of Health published its white paper Caring For Our Future: Reforming care and support, Cm 8378 (available here). There’s no mention in the white paper of the use of changes in inheritance tax (or NICs transferred from the soon-to-be-discontinued second state pension) to fund the new policy. Indeed, for that matter there’s no mention of devolved governments or institutions at all.
Yet the white paper notes, without irony, ‘Fragmented health, housing, care and support are letting people down. A failure to join up also means that taxpayers’ money is not used as effectively as possible, and can lead to increased costs for the NHS’ (p. 16). Moreover, the DH statement says, ‘A national minimum eligibility will make access to care more consistent around the country, and carers will have a legal right to an assessment for care for the first time.’ All that is true, but applies as much to policy across the UK as that within England. When directly asked about the devolution implications in the Commons, by Willie McCrea from South Antrim, Hunt stalled, saying ‘different approaches are being tried in all four constituent parts of the United Kingdom and we must look at what is happening in the different parts and all learn from each other.’
The UK Government has set out a policy only for England, which affects devolved governments and their policy functions quite significantly – but without there being any apparent assessment of its impact on them, or the fact that the UK Government possesses and is using policy levers that are not available to them despite their similar responsibilities. This is simply confused policy-making; and the fact that the financing was discussed in the press and Commons statement, but does not appear in the published documents, suggests it was made rather late in the day too.
On Friday, IPPR published my paper Funding Devo More, the fruit of a long period of reflection about devolution finance and how the UK might do it differently and better (that’s available here). It also marks the start of my involvement in IPPR’s ‘Devo More’ project.
The aim of this project is to consider how devolution for Scotland, Wales and Northern Ireland might be enhanced; how to make a devolved UK work better. That means increasing the scope of devolved powers and responsibilities, but also looking at the Union as a whole and how to improve that. Effective devolution means more self-government, but it also means ‘more Union’; a more effective tier of government that delivers certain functions that devolved governments are unable to, in a way that makes it clear what the Union does for citizens as well as what devolved governments do. That is a far cry from the vestigial sort of entity it has often become in many of the Scottish debates. It’s also a step beyond the current thinking that suggests ‘more powers for Scotland (or Wales) means less for Westminster’; this need not be zero-sum game, if the thinking about what is involved is careful enough. If we are to continue to live in one decentralised country, we will all need to be clearer about which government does what and why.
I’ve explained separately some of the ideas underpinning my financing paper, which will be carried through into the project as a whole.
The ‘Devo More’ project will necessarily be a wide-ranging one, and our next big piece of work is to look at how devolution of aspects of welfare and social security might be accomplished, and what the implications of that will be. Another strand will be the sort of changes needed at the centre of government for is rather different sort of union to work. There is a good deal involved in the project, and those interested should keep an eye on the project’s webpage, which is here.
I’m very glad to be working with the Institute for Public Policy Research, and particularly Guy Lodge, on this project. IPPR have long taken a serious interest in debates about devolution and its implications, including the work they have done recently on developing public attitudes about national identity in England, their ‘Borderland’ project on the implications of change for Scotland for northern England, and how ‘English votes for English laws’ at Westminster might work. (The same can’t be said for most of the other London think-tanks.) For my part, working with IPPR isn’t a reflection of any political views; as well as formal committees, I’ve advised parties and politicians from across the political spectrum in the past (including Conservatives, Lib Dems, Labour, the SNP and Plaid Cymru), and hope to continue to do so. It is simply a pragmatic judgment about who has the willingness and the resources to do serious, policy-oriented thinking about the future of the UK. In this respect, IPPR have stolen a march on their rivals.
One reason why this blog has been so quiet for the last few weeks is that I’ve been trying to finalise work I’ve had underway for some time on what I call the ‘more or less federal model’ for devolution finance. The idea behind this project was to see what sort of lessons could usefully be learned from the financing arrangements in federal systems for financing devolution in Scotland, Wales and Northern Ireland; how to extend devolved tax-setting powers in a workable way, and reconcile these with securing an equitable distribution of resources across the UK. That work is now completed, and the paper is due for publication by the Institute for Public Policy Research next week. It’s a detailed and chunky piece of work, drawing on data published in GERS, the Northern Ireland Net Fiscal Balance Reports, and by the Silk Commission, and I hope it will be a valuable contribution to the current debates in Scotland and elsewhere about the future of devolution.
There will be a launch of the event at the Royal Society of Edinburgh on George Street in Edinburgh at 8.30 am on Friday 25 January. Speakers will include me, Guy Lodge of IPPR, Willie Rennie MSP, leader of the Scottish Lib Dems, and a Labour speaker. There’s information about it on the IPPR website here, and anyone would like to attend should email Glenn Gottfried of IPPR at G.Gottfried@ippr,org to book a place.
I gave evidence last Thursday to the Scottish Parliament’s Referendum (Scotland) Bill Committee, which is considering the section 30 order that forms part of the ‘Edinburgh Agreement’ between the UK and Scottish Governments as a preliminary to the Referendum Bill proper. (My earlier post on that is HERE.) I appeared with Professor Aileen McHarg from Strathclyde University; Michael Moore, the Secretary of State, followed us.
My appearance, and remarks about the role of the Electoral Commission, led to coverage in the Herald on Thursday here, and in the Scotsman, leading page 1 on Friday, here. The other slightly surprising issues to come up in questioning were the role of the Civil Service and the Read more…
The agreement between the UK and Welsh Governments on borrowing powers and finance announced on Wednesday has been much trumpeted by the Welsh Government. In truth, it’s hard to see that it adds up to a great deal, and it raises more questions than it answers.
The press statement relating to the agreement can be found on the Wales Office’s here and the Welsh Government’s here. The Agreement itself is on HM Treasury’s website here, and the ‘technical annex’ (which considers the operation of the Barnett formula in relation to Wales) is here. My own earlier posts on these negotiations, and the Welsh Government’s approach to them, can be found HERE and HERE.
It’s worth remembering that this ‘intergovernmental’ process was adopted by choice of the Welsh Government, which sought to ensure that these issues were kept out of the remit of the Silk Commission. That of course makes the work of the Silk Commission all the harder, as matters which relate to how devolved government in Wales is funded are excluded from its remit. That was the subject of particular criticism in a Lords debate on the subject back in July. In effect, Silk can only consider half the subject. A Welsh Government official defended this to me on the ground that the issues regarding both borrowing and the block grant were now clear, thanks to the Holtham Commission, and what was left was the political matter of resolving them. Implicitly, the Welsh Government bet that it could get a better deal by negotiating them directly with the UK Government, rather than letting them form part of the remit of the cross-party Silk Commission.
I’ve a piece in today’s Guardian Comment is Free following the close vote at the SNP’s conference in Perth in favour of an independent Scotland joining NATO. The text of the resolution proposed by Angus Robertson MP and Angus MacNeil MP is here (but not, it seems, on the SNP’s own website). The vote has been accompanied by declarations – by Alex Salmond on the Andrew Marr Show, and by a vote due at the party’s next National Council meeting – that not only would an independent Scotland be non-nuclear, it would positively outlaw nuclear weapons. This is a problematic policy for the SNP, as NATO is innately a nuclear alliance. Its ‘strategic concept’ emphasises that, ‘as long as there are nuclear weapons in the world, NATO will remain a nuclear Alliance.’ Membership of NATO would necessarily mean sheltering under the Alliance’s nuclear umbrella, through its mutual defence guarantees, and that would mean those weapons would be on NATO vessels that might sail in Scottish waters (or perhaps fly in Scottish airspace) even if they were never based in Scotland. Then, of course, there are the issues relating to the UK’s nuclear bases on the Clyde.
The Guardian piece – available here - discusses the vote at Perth and wider issues about nuclear weapons, both for an independent Scotland and in relation to referendum campaign strategies.
It’s also worth noting that the Royal United Services Institute published a paper A’the Blue Bonnets: Defending an Independent Scotland by Stewart Crawford (a former British Army officer and SNP candidate) and Richard Marsh, an economist, last week. The paper considers the defence needs of an independent Scotland, and what its defence policy might look like. There’s a news release here, and the paper itself can be found here. It’s part of a wider programme of work by RUSI on Scotland and defence, which can be found here.
The agreement publicly reached between David Cameron and Alex Salmond for the holding of a Scottish referendum on independence in 2014 marks the end of a long, and unduly protracted, process. (There’s an account of the latter stages of that by Alan Cochrane of the Telegraph here which strikes me as well-informed if incomplete.) The agreement itself (with the draft section 30 order at the end) is here. The news story about it from Number 10 is here, and that from the Scottish Government is here.
The deal itself is a good and necessary one, if not particularly surprising in its content given the various leaks and rumours about it over the last few weeks. It is also one which delivers each government its key requirements, so in that sense it is a good deal for both sides. And, of course, it confirms that a referendum will indeed happen.
How we got here
It’s worth remembering how we got to this point. The SNP fought the 2007 election on a manifesto commitment to hold an independence referendum if elected, and to publish a white paper on independence before then. That commitment meant that a vote for the SNP would not necessarily be a vote for independence as such, which helped boost support for the SNP so it was able narrowly to win a plurality of votes and seats at that poll, because the election turned into one about ‘valence’ and competence not high-level ideology. In other words, the Read more…
There have been indications – leaks, rumours and even official statements – for some time now that agreement on the section 30 order to confer power on Holyrood to call a referendum on independence was near (see BBC News from the last few days here and here, or Severin Carrell in the Guardian in early September here and on Wednesday here). Indeed, I was on BBC Radio Wales’s phone-in yesterday to talk about the supposed agreement, to find that the latest news was that Alex Salmond was keen to emphasise that a deal had not yet been done, which led to the over-reaction that the deal was off. In any event, there is to be a meeting between Salmond and David Cameron on Monday, supposedly to sign off the section 30 order. (The SNP seem to have won a protocol struggle here, with Salmond succeeding in putting himself on the same footing as Cameron, while more junior ministers such as Nicola Sturgeon and Michael Moore do much of the sherpa-ing for the premiers’ summit.)
The order will, apparently, permit a single-question referendum, to be held not later than 2014, and regulated by the Electoral Commission. The single question and the regulation are points on which the UK Government (and Labour) have been determined since May 2011, and have been conceded by the Scottish Government; the date has been chosen by the SNP, but was initially resisted by the Unionist side. However, the question of who can vote in the poll has now become an area of controversy, because of the SNP’s desire to ensure that under-18s can vote. This was a focus of the debate around a private notice question in the Lords on Wednesday, asked by Lord Forsyth of Drumlean (and available here), and again on Radio 4’s ‘Today’ programme on Thursday morning.
The Welsh Government has released a good deal of correspondence regarding the progress of the Byelaws bill and the legal problem that has led to it being referred to the UK Supreme Court, which I discussed earlier HERE. It is interesting that they have chosen to do this (and it is a choice), as section 28 of the Freedom of Information Act 2000 provides a broad exception to the Act if ‘disclosure under this Act would, or would be likely to, prejudice relations between any administration in the United Kingdom and any other such administration.’ Clearly the Welsh Government do not think it would, and it is encouraging that the Welsh Government has been willing to put this material in the public domain, although it has used the public interest exemptions in section 36 to exclude some internal notes and material. (Just in case anyone was wondering, I was not involved in the FoI application.) The hearing before the UK Supreme Court is due to begin next Tuesday, 9 October.
The letter explaining the disclosure can be found here, and the documents disclosed are at the bottom of that page. They include the formal reference by the Attorney General to the Supreme Court, setting out the detailed legal grounds for the reference and drafted for him by Counsel, which is also here.
At the end of July, we learned that the UK Attorney-General has referred the first Act of the National Assembly passed since the March 2011 referendum to the UK Supreme Court. There’s news coverage of this from the BBC here, and a good analysis from Toby Mason of BBC Wales here. This is the first time that any devolved legislation has been referred to the Supreme Court before receiving royal assent; it is the first time the UK Government’s law officers have challenged the legal competence of devolved legislation; and it is the first time that legal challenges involving Welsh legislation have been brought. Any one of those would make it a noteworthy event indeed. To find all three of them in one place – coupled with a significant legal issue – makes it a case of rare interest. The latest information is that there will be a hearing in early October.
This post will discuss what the case is about, how it comes before the court and what the constitutional political issues at stake are, as well as the black-letter legal ones. It is a case of interest that goes far beyond Wales, because although there are significant differences between the Welsh arrangements and those for Scotland or Northern Ireland, the case also raises some rather broader questions about the legal working of devolution.
This is not the first time Wales has broken new ground in challenging how devolution works, of course. Most notably, Wales was the first jurisdiction to refuse consent to Westminster legislation affecting a devolved function under the Sewel convention – aspects of the Police Reform and Social Responsibility Act 2011. Perhaps the more provisional, evolutionary nature of the Welsh arrangements mean that it is more prone to test the legal aspects of its devolution arrangements than Scotland or Northern Ireland, where they are more clearly established.