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.
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.
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…
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.
Guy Lodge of IPPR and I have an article in today’s Scotsman, about the right lessons to learn for devolution finance from the problems of sub-state borrowing in southern Europe. The article can be found here. Below is the original copy we filed, with some hyperlinks added.
DEBT AND FISCAL DEVOLUTION: LEARNING FROM CLUB MED
It was inevitable that the eurozone crisis would cast a shadow over the debates about Scotland’s constitutional future. The SNP have already been forced to rethink their commitment to take an independent Scotland into the euro, opting instead to stick with sterling for the foreseeable future. Developments in Italy and Spain mean the spotlight has now turned on those who support further enhancing the powers of the Scottish Parliament instead of independence. For many the case for handing Scotland greater tax and borrowing powers has been badly damaged by the sight of Valencia, Catalonia and most lately Andalucia – Spain’s indebted autonomous communities – queuing up for bail-outs from the Spanish government. Does the UK really want to replicate the situation in Italy where the central government has been forced to take over the finances of a fiscally autonomous but bankrupt Sicily?
The Treasury – which has just ended a consultation on Scottish borrowing – is clearly looking hard at Club Med’s problems. It no doubt thinks the UK has dodged a bullet by ensuring that devolved governments cannot run up similar debts. But that would be to draw the wrong lesson, getting both the politics and the economics wrong.
In fact, there are two lessons that can be better learned from southern Europe’s current travails. The first is that hard budget constraints – that devolved budgets cannot be open to politically convenient top-ups from central government – are vital. The problem with the Spanish regime for financing the autonomous communities is that regional and central state finances are hopelessly entangled, which means that bailouts are regarded as being on offer, and (outside the Basque Country) powers to set tax rates have never been used to depart from the rates set years ago before the taxes were devolved. Spanish fiscal devolution has involved a slow, incremental deconcentration of tax powers, without ever fully separating the finances or tax powers of each government. Worse, overlaps in functions and political choices by the central government may have driven up borrowing. Catalonia regularly complains that the central state has deliberately under-invested in central government infrastructure functions in Catalonia, using the money saved (much of it generated by Catalan taxpayers) to spend elsewhere. Consequently some Catalan regional spending is needed to fill that gap (it is therefore over-simplistic to regard the problem as ‘regional overspending’ – the central state is also partly responsible for the perilous state of the autonomous communities’ finances).
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.
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.
I haven’t properly posted about the Welsh Government’s consultation on the idea of establishing a separate Welsh legal jurisdiction. They launched this in late March and it’s reputedly a concern close to Carwyn Jones’s heart. Details are here, the consultation paper itself is available here, and the closing date for responses is 19 June. The consultation paper is open-ended (or open-minded) in the extreme. In essence, the paper is a set of exam questions about whether there should be a separate legal jurisdiction for Wales and what form it should take. Examinees, sorry respondents, are required to ‘give reasons’ for all their answers.
One important point about legal jurisdictions is that, in the common-law world, they invariably coincide with the existence of a legislature. Thus, in Canada, even a tiny province like Prince Edward Island has its own legal jurisdiction – as well as a provincial legislature. In federal systems, there will also be a legal jurisdiction attached to the federal order/level; so PEI is both a jurisdiction of its own, in relation to exclusively provincial matters, and part of the jurisdiction of Canada in relation to federal ones. The civil-law world works differently, and can more easily accommodate multiple legislatures passing laws for particular territories within a single legal jurisdiction. Thus, there is a single German or Swiss jurisdiction, despite the existence of federal and Land or cantonal parliaments that can both pass laws.
Through the Cardiff seminar on ‘A separate Welsh Legal jurisdiction’, (see post above) I learned that the Wales Office has now quietly published two new Devolution Guidance Notes concerning the new legislative arrangements.
Devolution Guidance Notes are rather important parts of the knitting that make the devolved UK work. Collectively, they can now be found on the Cabinet Office’s website here. Although they are only internal guidance to UK Government departments, they lay down important procedures for how Whitehall should in fact deal with the devolved governments and legislatures. They also result from discussions with the devolved government concerned, so although they should not be regarded as agreed documents, they do take into account some devolved concerns.
The new DGNs are Devolution Guidance Note 9, Post Devolution Primary Legislation affecting Wales, and Devolution Guidance Note 17, Modifying the Legislative Competence of the National Assembly for Wales. DGN 9 has been through repeated editions, following the various legislative dispensations for Wales; the new one replaces one designed for Part 3 of the Government of Wales Act 2006, which was issued in November 2005. DGN 17 is wholly new, and deals with the possible (indeed, likely) need to amend the legislative powers set out in Schedule 7 to the 2006 Act under section 109 of the Act. (Unlike legislative competence orders made under section 95, there are no defined procedures for such orders – or any formal way for the National Assembly to seek to obtain one.
It’s not clear when the new DGNs were actually made or published. There was no announcement of their publication on either the Cabinet Office or Wales Office websites (so one would have to be very vigilant to have spotted their publication), and the new notes bear no date – but they are pretty new. The new DGN 9 can be found here, and DGN 17 is here.