Category Archives: Wales

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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‘Devo More and Welfare’ in ‘Scotland on Sunday’

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.

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The Silk Commission’s Part 2 report

If ever a report deserved careful consideration rather than an immediate response, it’s the Silk Commission’s Part 2 report.  The product of more than 15 months’ evidence-taking and deliberation, it is a carefully framed, principles-based blueprint for the next step for Welsh devolution.  The full report is available here, and the executive summary (which I must admit to having relied on for this post) is here.  There’s BBC News coverage here, here and here, and from Wales Online here.

The key recommendations are:

  1. devolution of policing to the National Assembly
  2. devolution of responsibility for youth justice, but not the courts or the legal system generally
  3. devolution of planning powers to approve energy projects of up to 350 megawatts, of powers relating to sewerage and the regulation of some aspects of water supply within Wales, and for there to be a Welsh Crown Estate Commissioner.
  4. some further devolution of powers in relation to rail franchising, bus and taxi regulation, and speed limits and drink-driving
  5. appointment of a Welsh member of the BBC Trust (something already in place for Scotland), and control for the Assembly over public funding for S4C
  6. an increase in the size of the National Assembly, noting many calls for 80 members but leaving the issue for further consideration
  7. an enhanced approach to the conduct of intergovernmental relations and the machinery for that. The Secretary of State for Wales would also lose his seat in the National Assembly, his right to receive its papers and obligation to present the UK Government’s legislative programme each Parliamentary session.
  8. perhaps most importantly, a move to a ‘reserved powers’ model for the National Assembly’s legislative powers, away from the current ‘conferred powers’ one, along with a removal of the current and problematic protection of pre-devolution powers of UK ministers.

There are also calls for further study of a number of matters – not just the size of the Assembly and the number of AMs, but also the possible devolution of prisons and the court system.  It sees no need for a further referendum on any of these proposals.

What is notable about this is how cautious it is.  The recommendations eschew a number of more radical calls – for the establishment of a separate legal jurisdiction, or for devolution of the civil or criminal courts, the civil or criminal law, or of welfare.  I argued in my own submission that it would be very hard to establish a ‘reserved powers’ model without establishing a separate legal jurisdiction, and that this could be done without losing many of the advantages of the current shared arrangement.  (See also THIS EARLIER POST on the relationship between a legal jurisdiction and legislative powers.)   I suggested as well that the Welsh Government’s proposals for a reserved powers model would imply a devolved power to legislate for areas like land or contract law (these are omitted from the Welsh Government’s proposed list of reserved matters).  This would achieve the substantive outcome of a separate legal jurisdiction without formally calling it such –which may be the worst of all worlds.

Welfare devolution is another area which would create a number of administrative problems but offers scope for major gains for both governments and for citizens – as we’ll be arguing shortly through the Devo More project.

The Silk proposals are, in essence, an attempt to make sure the division of powers between Welsh and UK institution catches up with reality.  They’re not actually very radical; they don’t take account, for example, of the impact of the September referendum on Scottish independence (whether there’s a Yes vote leading to Scottish independence and a restructuring of the remainder of the United Kingdom, or a No vote resulting in further devolution for Scotland).  Rather like Holtham before it, this is an exercise in bringing Welsh devolution up to date not making far-reaching plans for the future.

However, the proposals do represent a clear consensus across the Welsh political parties about what should happen next.  I’ll shortly be putting up a post about the problems arising from the way the UK Government approached Silk Part 1, and its profound misreading of the political and economic situation in Wales compared with Scotland.  The gravest mistake the UK Government could make would be to cherry-pick these proposals.  The second gravest would be to take a year to decide what to do, especially given that it has a legislative slot in the next Parliamentary session and not using that would mean a significant wait for any action – even though, from his initial reaction (saying a response would be for the next UK Parliament not the current one), that’s just what the Secretary of State seems to intend.

UPDATE, 4 March: Carwyn Jones’s response to the Silk Part 2 report, here, is interesting.  Although Jones calls for a substantial expansion of the powers of the National Assembly and Welsh Government, he appears unwilling to accept the logical implication that greater self-government means no longer being in a privileged position when it comes to UK-wide institutions.  He seeks to maintain the office of the Secretary of State (despite his well-publicised difficulties with both Conservative holders of that post), and the present number of Welsh MPs.  Both cases are poor. For a discussion of the Secretary of State, see HERE.  The latter case is if anything weaker.  Wales is presently over-represented at Westminster; if MPs were allocated to Wales on a similar basis to England, it would have around 32, not its present 40.  Scotland was similarly over-represented in the Commons before devolution, and the creation of the Scottish Parliament saw the number of Scottish MPs reduced to the English ‘quota’.  That meant a reduction from 72 to 59.  This was provided for in the Scotland Act 1998, and (to avoid  a reduction in the size of the Scottish Parliament as well) required further legislation to ‘decouple’ the number of MSPs from the number of MPs.  (Decoupling has already happened for Wales, as part of the abortive plans to reduce the size of the Commons.)

Wales cannot expect to maintain a privileged position at UK level if devolved powers are to be extended.  Carwyn Jones is trying to have his cake and east it.

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Filed under Courts and legal issues, Wales, Westminster, Whitehall

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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Filed under Calman Commission/Scotland bill, Devolution finance, Lib Dems, Referendums, Wales, Westminster, Whitehall

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

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

Evidence to Part 2 of the Silk Commission’s inquiry

A little while ago I submitted a formal memorandum of evidence to the Silk Commission, for part 2 of their inquiry into constitutional matters relating to Welsh devolution.  It is concerned with constitutional issues – not what might be devolved, but how, in structural terms.  In particular, I discuss the relationship between a separate Welsh legal jurisdiction and the ‘reserved powers’ model of legislative power for the National Assembly, and what such a legal jurisdiction needs to involve (rather than what it might involve).

My memorandum is now available on the Commission’s website here, and can also be found HERE.

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Filed under Comparisons from abroad, Courts and legal issues, Publications and projects, Wales

Inheritance tax, ‘care caps’ for the elderly, and devolution

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.

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Filed under Conservatives, Devolution finance, Intergovernmental relations, Northern Ireland, Policy issues, Scotland, Wales, Whitehall

My involvement in the IPPR’s Devo More project

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.

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Filed under Devolution finance, Intergovernmental relations, Northern Ireland, Publications and projects, Referendums, Scotland, Wales

Extending devolution: ‘Funding Devo More’ and what it is trying to do

On Friday, IPPR publishedFinancing Devo More cover 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

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