Grants, cuts and the risks of breaking the UK’s fiscal constitution

Circus psychics may be able to see the future clearly in their crystal balls, but it’s harder for most of us.  That said, one thing is now very clear.  When it comes to public finance, very tough times are coming.  To get an idea of what the practical effects of that are, take a look at the Irish Times.  The UK’s levels of public debt per capita are now very similar to Ireland’s, though they’re about six-nine months ahead of the UK in experiencing its consequences.  Or put it another way, they’re levels of debt typical of war time, with all the austerity that implies.  That is going to mean significant cuts in public spending, no matter which party is in government in London (or anywhere else), and the devolved areas of public spending will be no exception.  The best analysis of those pressures I’ve come across is the Institute of Fiscal Studies’s briefing note on Britain’s fiscal squeeze: the choices ahead, available here.  The questions are how those constraints are imposed, by whom, and what their lasting constitutional and economic effects are.

There is no good solution to these problems.  Block grants – certainly ones underpinned by a mechanism like the Barnett formula – are very efficient mechanisms for transmitting decisions about spending in England to devolved spending (and public services) as well.  It’s changes in spending for ‘comparable functions’ for England that determine what happens to the funding of the devolved administrations.  Fiscal autonomy means devolved institutions making their own unpleasant decisions about what spending gets cut, by how much, and how that affects devolved public services and the wider economies in Scotland, Wales or Northern Ireland.  Modest forms of devolved fiscal autonomy provide fewer options than broader forms, not least because broader forms create greater scope to encourage economic growth by reducing tax rates, but none are good.  The implications of wider forms of fiscal autonomy are to fragment the UK economy, and maintaining an integrated UK economy has been one of the key principles of devolution for the UK Government so (quite apart from other considerations) it’s unlikely to be acceptable politically.

The political decision here, though, is not just about who makes what cuts and where, or even about how centralised the UK is.  It’s about how cuts are regarded on the constitutional level.  Public spending cuts in the 1980s helped fracture what been a largely unquestioned pro-unionist consensus which had existed for much of the twentieth century, that Scotland, England and Wales were part of one state sharing both good times and bad.  (Northern Ireland was always in a different position, financial as well as constitutionally. It was an argument cleverly made by Ulster Unionist politicians that as they were part of the UK, Northern Ireland should also enjoy a British-type welfare state, which could never be funded on Northern’s Ireland’s tax revenues.)  Rightly or wrongly, very large swathes of public opinion in Scotland and Wales saw themselves as being unfairly singled out in the cuts made as part of the Thatcherite programme.  That in turn gave a strong boost to a belief across much of the political spectrum that devolution was needed to prevent a recurrence.

This time, the same issues have come around again, but in more acute form.  The problem now is that a ‘national’ (UK-wide) consensus that all parts of the UK are part of the same sharing community has been fractured not just by differing national identities or the lasting memories and echoes of what happened in the 1980s, but also by the institutional structure of devolution.  Academic discussions of this have focussed on the concept of ‘social citizenship’ and how devolution affected it.  They’re most extensively discussed in this book edited by Scott Greer (and to which I contributed a chapter on intergovernmental relations).  The related concept of a UK-wide social union assuring a package of common welfare rights to all citizens no matter which part of it they live in was central to the work of the Calman Commission, and the UK Government’s white paper responding to it.  (The SNP’s understanding of ‘social union’ is very different in its meaning, and sadly wasn’t fleshed out in the Scottish Government’s white paper ending the National Conversation.)

Despite this, many UK-level and unionist politicians assume that things are still now as they were before 1999. George Osborne says, ‘We are all in this together’, without being clear who ‘we’ are – and talks about Westminster and Whitehall as though the UK-level institutions were the only ones that mattered (see his party conference speech here, his response to the UK white paper on Calman here, or the various named and unnamed Tories quoted here).  This is broadly echoed by Labour politicians – for example, look at Jim Murphy’s statement introducing the Scotland’s Future white paper here.)   Such statements are rooted in the assumption that Scots (and people in Wales) see themselves as part of a UK-wide social community in this sense, and they’re therefore willing to accept a measure of pain in public spending as part of the package.

A lot of academic opinion would disagree, though there’s not much good survey data on the issue and what there is doesn’t suggest a clear picture.  (See the data in a paper by Richard Wyn Jones and Roger Scully here, from the ‘Citizenship After the Nation-State‘ cross-national research project.)  The UK data suggest a stronger degree of attachment by people from Scotland and Wales to their ‘region’ as opposed to the state as a whole, that they think the ‘region’ is better at understanding their needs and should be the most important level of government in their lives, although it isn’t at present.  But they also think that the central state should tackle major tasks like fighting unemployment, and are far from agreed about whether the central state should help eliminate economic disparities between regions

It’s true that the financial arrangements for devolution generally support the idea of ongoing common citizenship, entailed by the Murphy/Osborne position (Barnett is predicated on such assumptions).  However, other aspects of the division of powers don’t support that.  The idea that there’s a willingness to accept shared pain as part of being citizens of the same state shouldn’t be taken for granted.  In fact, it looks rather like trying to squeeze toothpaste back into the tube.

If cuts come and are made through the Barnett formula, how will that be perceived in Scotland and Wales?  This is an important question because a lot more hinges on it now than did in the 1980s.  Further strain to the idea of a UK-wide ‘sharing community’ risks further alienating what’s now pretty much mainstream thinking in Scotland, and increasingly so in Wales, that they’re not well served or fairly treated by UK-level institutions.  As I’ve argued in earlier posts (notably this one), the opportunity to build or rebuild that community was largely missed by the UK’s response to the Calman report and by other recent statements on devolution finance.   The obvious political beneficiaries from this are the nationalist parties: the SNP and Plaid Cymru, who are at best ambivalent about the UK as a ‘sharing community’ in the first place.  From a UK point of view, the need to start to remedy what’s become a structural budget deficit means that there’s now little alternative to the Osborne/Murphy position.  Nor would it be very different if Scotland were to become independent, as Scotland’s finances would be under similar (or worse strain) and part of the process of independence would surely be to divide the UK’s national debt.  This is actually a very high-risk strategy, though, and if their judgement is wrong the consequences for unionist parties will be very grave.  A bit more humility in its presentation, at the very least, won’t come amiss.

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6 Comments

Filed under Conservatives, Devolution finance, Intergovernmental relations, Labour, Plaid Cymru, Scotland, SNP, Wales

6 responses to “Grants, cuts and the risks of breaking the UK’s fiscal constitution

  1. russell mellett

    Interesting commentary. Concerning, as you point out, that the UK government continues to miss opportunities to make needed changes to devolution fiscal arrangements. Such changes will certainly be more difficult to make in a climate of fiscal retrenchment. HM Treasury policy inaction is also a bit of a puzzle: by keeping all of the taxation and borrowing powers to itself HM Treasury will bear the brunt (political cost) of expenditure restraint or tax increases. If, on the other hand, the Devolved Governments had to raise part of their own revenues and had access to important tax fields, HM Treasury could cut their part (transfers), and leave it to the DG to adjust own taxation. So if the Devolved Government did not want to trim own spending in line with changes in transfer payments, then they could resort to increases in own taxation to pay for higher public service levels. In any event, it may be more strategic of HM Treasury to share the responsibility for raising revenues with Devolved Governments to pay for Devolved Government spending.

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