The paper Guy Lodge and I have written on Devo More and Welfare as part of the wider Devo More project is published on Tuesday. There’s extensive coverage of it in today’s Scotland on Sunday to whom we’ve given a preview of the paper, including a news article here and a comment piece by Guy and me here.
Category Archives: 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.)
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.
On Friday, IPPR published Funding Devo More, a major paper of mine setting out an approach to enhanced financial devolution (available here). It is intended first of all to offer a meaningful option for extended devolution in Scotland, where all three unionist parties have said that further devolution will be on offer if there is a vote to stay in the Union in the 2014 referendum. That is not all it does, though; it is also intended to work for Wales and Northern Ireland as well, if they wish to go down the path of further fiscal devolution.
This paper draws on work on both devolution finance and the working of federal systems that I have been doing for many years now, starting with my time at the Constitution Unit in the early 2000s working on its Leverhulme-funded programme ‘Nations and Regions: the dynamics of devolution’, as well as work on Brazil and Switzerland I carried out at Edinburgh University. If nothing else, this indicates how academic research often takes a long time to pay off, and can do so in ways that were unexpected at the outset.
An option like this is badly needed, for two reasons. First, there is clear evidence that it is what the people of Scotland want. They like devolution and want more of it; in particular, they want devolution to affect control of taxation and welfare. That has been shown clearly in numerous opinion surveys, particularly the Scottish Social Attitudes ones, and their 2012 findings just released confirm the point. Outright devolution of those is very difficult within the Union – it would only be possible with some sort of ‘devo max’ approach, which is emphatically not what I am proposing. Apart from anything else, it would not be viable for Wales or Northern Ireland. Significant control of those is, however, possible, and that is what this paper (and the wider ‘Devo More’ project of which it forms the first output) is investigating. Finding practicable ways to ensure devolved control of these functions is part of making sure that Scottish devolution (and devolution elsewhere) matches the aspirations of the Scottish people, a basic democratic goal. It also serves a more constitutionally fundamental purpose; it ensures that government in Scotland (and elsewhere) is, and should remain, legitimate. Devolution in 1998 was, after all, a response to similar problems that arose both Wales and Scotland in the 1980s and 1990s.
Second, it relates to the 2014 independence referendum. An ‘enhanced devolution’ scheme is not on the ballot paper, of course. That is probably right; it would be hard (though not impossible) for a referendum to offer multiple choices to the voters in such a way that it would also establish a clear mandate for independence, if that were the choice of the electorate. Once the SNP committed itself to having a single referendum on independence, it effectively ruled out putting an ‘extra devolution’ option to the voters in the same poll, even though it dangled the prospect of that in front of Scottish voters after the 2011 election. (The situation might be different if the SNP had embraced a two-referendums strategy, as the first poll would be a way of identifying the preferred options not making a conclusive decision. That was the SNP’s choice; by trying to bring a third option into a ‘decisive’ referendum, they muddied the waters so much it was off the cards.)
There are good practical reasons why more devolution could not have been on offer in any event. There was no such scheme on the table, and still is not. You could not prepare for a referendum in which one of the options was essentially undefined until the last minute. (The Welsh referendum on legislative powers in 2011 shows how badly such polls can go if an expected player doesn’t show up.) Such a scheme would need to have agreement across the unionist parties to be viable, as the Calman proposals had. It’s fair to say that before now the unionist parties where in no mood to consider such an option, and many (such as Joyce McMillan, here) question whether they are now. This is only a proposal for a scheme which is meant to work for all the unionist parties; we shall see whether they embrace it, and how enthusiastically they do so. But defining such an option plays into the wider referendum debates by enabling the offer of ‘more powers after a referendum’ to be a credible one. The battle-ground in the referendum campaign is voters who support that; if they do want more devolution but do not believe that promises of it will be delivered after a poll, the risk increases that a referendum will be lost.
Part of what has to define an ‘enhanced devolution’ scheme is what works in the interest of the UK as a whole. This scheme is meant to do that; it is intended to work for Wales and Northern Ireland as well, if they wish to go down the path of fiscal devolution. It is also designed to be ‘union-reinforcing’ rather than ‘union-weakening’, as ‘devo max’ would be, and as devolution of taxes like corporation tax, inheritance tax or fuel duties would be likely to be.
It also offers benefits for England, chiefly because the transfer of fiscal capacity to Scotland and other devolved governments will both enable and require them to finance spending on better services than those in England out of their own resources. Free university tuition in Scotland has become a politically toxic symbol of supposedly generous financing of Scotland. Some of this anger is misplaced, and is to do with choices made by devolved governments – funding, say, free prescriptions at the cost of other functions. But some of it has a point. Transferring a significant degree of fiscal capacity means that, if the Scottish Government wishes to provide an overall higher level of public services, it can do so – but Scottish taxpayers will have to pay for it, and the Scottish Government will have to make the case to its voters for that. That is what autonomy means.
Fiscal devolution does not stop the UK Government undertaking redistribution across the UK, if it wishes. A ‘vertical fiscal imbalance’ – a gap between the revenues a regional-level government can raise using its own tax powers, and its spending obligations – is common in federal systems. In the UK it is unavoidable. There are many taxes which are not suitable for devolution, either because the administrative costs of doing so would be disproportionate, or because of the character of the taxes themselves. Take fuel duties as an example. These are a useful source of revenue (they account for about 5 per cent of total UK tax revenues, proportionally more in Wales and Northern Ireland). However, devolving something so obviously and necessarily mobile would trigger widespread avoidance, tax competition or both, and even then would incur considerable compliance costs, even though the burden of them falls heavily on people who live or work in sparsely-populated areas like the Scottish Highlands or mid-Wales. The same applies to a good many other taxes, which are best left in UK Government hands. Scottish, Welsh and Northern Ireland taxpayers will continue to contribute to the UK as a whole, through a wide range of non-devolved taxes, and it is for the UK Government to decide how to use those.
The recipe I have come up with involves handing over four sets of revenues to devolved governments:
- All personal income tax, including decisions about rates, thresholds, exemptions and relief. There will need to be some practical restrictions on this, if HM Revenue & Customs are to continue to collect income tax across the UK (and there are good reasons why they should), but those should be as minimal as possible for administrative reasons.
- All land taxes. This should be uncontroversial; to a large degree, it has already been accomplished for Scotland through the Scotland Act 2012, and is recommended for Wales by the Silk Commission (and supported by the Welsh Government). Land taxes are not a major source of revenue, but they are a secure and easily devolvable tax base, and are an important instrument of policy as well.
- ‘Sin taxes’, meaning duties on alcohol and tobacco. This faces serious legal problems, but there is such a close relationship between the harm these products can do and other devolved functions, notably public health, that devolved governments should have control over tax levers as well as regulatory mechanisms when dealing with them. They are also quite useful as sources of revenue.
- Assign a large proportion – 10 points, of the 20 currently levied – of Value Added Tax. EU law prevents devolution of VAT, although sales taxes are commonly levied by state or regional-level governments in federal systems. Assigning it – passing the revenues directly to a devolved government, which does not have control of the rate of tax or what the tax is levied on – was considered and dismissed by the Calman Commission for Scotland, and the Holtham and Silk Commissions for Wales. But, if we are looking at going meaningfully beyond that model of fiscal devolution, we have to think again. VAT is a major source of revenue, and in the hunt for ‘devolvable’ taxes the choice of good taxes to devolve is a very limited one. A major consumption tax is an attractive proposition for regional-level governments, and assigning it is the best one can do.
This is not so much the end of my work on devolution finance as establishing a clear starting point. It is impossible to work out a scheme for devolution finance without working out what it is you are financing. I have used the current division of functions between the devolved governments and London for this work, and if there were further devolution of expensive functions (notably welfare benefits, but also policing and criminal justice in Wales) it would be necessary to look at this again. In later work in IPPR’s ‘Devo More’ project, we shall be considering those issues; that will mean returning to financial issues afterward as well. But using 2010-11 figures, this model would have put £21.7 billion directly into the hands of the Scottish Government, £9.7 billion into those of the Welsh Government, and £6.1 billion into those of the Northern Ireland Executive. That equates to 60.6 per cent of Scottish devolved spending, 62.2 per cent of Welsh devolved spending and 55.6 per cent of devolved non-social security spending in Northern Ireland. Of that, large proportions would come from wholly devolved taxes: 42.1 per cent of Scottish spending, 44.2 of that in Wales, and 34.3 per cent of that in Northern Ireland. That contrasts with the measures in the Scotland Act 2012, which would devolve taxes revenues accounting for around 30 per cent of devolved spending in Scotland, and the Silk Commission’s proposals, which would account for about 25 per cent in Wales.
Whatever form fiscal devolution takes, it is important to think about it as a package. Devolving one or two taxes on their own increases the risk of government revenues being exposed to serious shocks. That is especially the case with volatile taxes like corporation tax. Some devolved services are simply inflationary in character (notably health). Others are counter-cyclical, with demand increasing somewhat when times are bad (notably education). None of them get cheaper to provide in hard times. As there’s no such thing as a counter-cyclical major tax, stable revenues are needed to pay for them, and if the UK Government is to cease to manage the risk of fluctuations in revenue (which it does at present, through the block grant and formula system), devolved governments need tax revenues that are relatively stable, and if possible that balance the fluctuations among them. The combination of devolved income tax and assigned VAT, in particular, does that. Assigning VAT might not give devolved governments any control over policy levers, but the revenues are relatively stable, act as a counterweight to income tax ones (they shrink and grow on a different cycle), and over time it is a growth tax.
This model is an attempt to make a devolved UK work better; to enable it to be both more devolved, but also more unified. Quite a lot of work remains to be done, but it hard to see that any sort of durable and workable solution would not draw heavily on it.
The report Funding Devo More: Fiscal options for strengthening the Union was published on Friday 25 January, and is available from IPPR’s website HERE.
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.
The UK Government’s ministerial reshuffle may lead to further tensions within the Westminster Coalition, but it has been one of pretty limited change, as far as the territorial offices are concerned. Full details of all the new ministers can be found on the No 10 website, here.
There has been no change at the Scotland Office at all, with Michael Moore and David Mundell remaining in place. Lord Wallace does so too, as Advocate General for Scotland. The opportunity of putting a more ‘campaigning’ politician in charge has not been taken, even with the independence referendum looming, and although the heavy legislative work of getting what is now the Scotland Act 2012 drafted and onto the statute book is now done. The only major item of legislative business on the immediate agenda is the section 30 order regarding the referendum (which Severin Carrell suggests here is close to agreement between the two governments).
The Wales Office has seen the departure of Cheryl Gillan as Secretary of State, and the promotion of David Jones, the former junior minister, to replace her. That follows a determined lobbying campaign from Welsh Conservative MPs for the new Secretary of State to have a Welsh seat, and suggests minimal change in the UK Government’s approach. Jones has already emphasised his desire for a ‘very good business-like relationship’ with the Welsh Government. The interesting shifts of role and personnel are at the junior level. Stephen Crabb has been promoted within the Whip’s office (though he was never the ‘Welsh whip’), and also made parliamentary under-secretary of state. Baroness (Jenny) Randerson, former AM and Welsh Lib Dem Minister, has also become an (unpaid) parliamentary under-secretary, for which the Lib Dems are said to have fought hard. Given her company among colleagues who have been regarded as ‘devo-sceptics’ (though they now emphasise their support for devolution), it’s interesting that she emphasises that she is a ‘committed devolutionist’ in the Welsh Lib Dem press notice announcing her appointment.