This is a guest post by Gerald Holtham, who chaired the Welsh Government’s Independent Commission on Funding and Finance in Wales and is adviser on finance to the Welsh Government. The question he addresses – of how to manage a reduction in the block grant to allow for tax devolution while maintaining the Barnett formula – is a highly timely one, given the ongoing discussions about the ‘fiscal framework’ for Scotland (for which this is the key issue) as well as corporation tax devolution for Northern Ireland and moves on income tax devolution for Wales announced in the Spending Review. (My own comment on this post can be found here.)
In all the discussions about tax devolution for all parts of the UK, a key issue has not been clarified. That issue is how to reduce block grants when a tax is devolved. Indeed there still appears to be no general agreement between the devolved governments and the UK Government about how to proceed. It is a particularly knotty question in discussions about income tax but also VAT and it has the capacity to delay devolution to Scotland and to stall it altogether for Wales.
There is little problem in the first year of devolution. An estimate can be made of the revenue foregone by the Westminster government, given prevailing tax rates, and that can be deducted from the block grant. Subsequently the deduction can be revised when actual revenues differ from the estimate. The difficulty comes for subsequent years when the deduction must be expected to grow with the economy and its tax base but must not be affected by changes in tax rates by the devolved administration – otherwise devolution of tax powers is not real.
The 2015 Spending Review makes two significant changes to the Welsh Government’s finances: it removes the requirement for a referendum before introducing the partial devolution of income tax, enacted in the Wales Act 2014, and it proposes to introduce a ‘Barnett floor’ for the overall envelope of devolved funding.
The referendum on the Welsh rate of income tax was a way of ensuring that devolution did not happen automatically (as is the case for Scotland) – a rare case of common ground between David Jones and Carwyn Jones. It never made much sense intellectually; if the rationale for income tax devolution was ‘financial accountability’, why should that be optional? And why should the body that would be made accountable get to choose whether it should be accountable? It made even less sense politically, if the aim was to make income tax devolution happen rather than ensure it could not. A referendum campaign would be hard to stage and harder to win. It would mean asking voters to vote for potentially higher taxes, with no guarantee that they would even enjoy additional spending as a result given the lack of clarity about the mechanism for reducing the block grant as a result. There would be little chance of a cross-party consensus, so while Conservatives had a strong interest in seeing income tax devolution since it would enable them to offer a tax cut, they would struggle to find allies for a referendum campaign (unlike 2011). Abandoning the referendum had become the only way to create even a possibility of income tax devolution, and now has support from not just Conservatives but Plaid Cymru.
The welter of responses to yesterday’s UK Spending Review and Autumn Statement have overlooked an important set of things the review did not do when it comes to managing the devolved UK. Despite proposals on the table for tax devolution for all three devolved governments (if not the English city-regions), we learned nothing about how this fiscally devolved UK will work. We got a new, updated edition of the Statement of Funding Policy (the seventh in all and the first since 2010) , but that remains essentially the operations manual for the Barnett formula it always was. Nothing substantial about the framework for managing devolved finances has been altered, despite recommendations for this from a variety of bodies including the Bingham Centre Constitutional Review, the Lords Economic Affairs Committee’s recent report on The Implications of Financial Devolution to Scotland and committees in all the devolved legislatures. The devolved governments remain as entangled in the UK system of public finance as they ever were.
What the Treasury could and should have done was put the basis for devolution finance under the Conservatives on a clear and transparent footing, in particular by:
This post also appears as a guest post on the Centre on Constitutional Change blog here, the LSE’s British Politics and Policy blog here, and the Institute of Welsh Affairs blog ClickonWales here.
The impact of the Scottish independence referendum has been wide-ranging. It raises a number of questions about how the UK works as a whole and its territorial constitution, as well as ones about Scotland. But for all the importance and urgency of these issues, they have not yet been subject to any wide-ranging or sustained scrutiny. A new report from the Bingham Centre for the Rule of Law, available here, seeks to change that and look at what issues the UK as a whole will need to address in the coming months and years. The review commission has been chaired by Sir Jeffrey Jowell QC, and its membership is here and remit is set out here.
The Commission’s starting point was to consider the implications of the piecemeal, ad hoc approach to devolution taken so far. Its view is that this has reached the end of its road. The knock-on effects of the Smith Commission proposals for Scotland mean that this now creates serious constitutional difficulties beyond Scotland. A more systematic view, considering the UK as a whole, is badly needed.
The first big recommendation to address that is a Charter of the Union, to be passed as a Westminster statute with consent from the devolved legislatures, and setting out key principles for the working of a devolved union. These draw on what already applies – they include such principles as respect for democracy, the rule of law, autonomy of each government and comity and respect for each other in their dealings with each other. Subsidiarity and social solidarity are also key principles for the Charter of the Union.
It’s intriguing to see various senior figures from the New Labour era call for a return to something much more like new Labour to revive the Labour Party. Those figures seem to overlook how responsible New Labour’s politics and legacy are for the mess Labour now finds itself in. (On the nature of that mess, I agree with quite a lot of what Paul Mason says here; it is very clearly a structural problem caused by the collapse of an electoral coalition, not just a question of policy detail or leadership.)
New Labour helped create the mess, at least in its territorial dimension, in two particular ways. First, its political economy depended on getting London to generate large tax revenues to pay for redistributive benefits and much of public services in the rest of the UK, and satisfying those already owning property in London through a property boom. This has left a lasting and damaging legacy by creating or at least magnifying huge inequalities and resentments arising from different regional economies and levels of prosperity. (In technical terms, it sought to use a huge vertical fiscal imbalance to redress horizontal inequalities. What actually happened was that those horizontal inequalities increased.)
For the last few months, I’ve been working with the Bingham Centre for the Rule of Law on a major inquiry into devolution and how it should develop, from the point of the UK as a whole. The starting point has been constitutional: what sort of constitutional system has emerged given the fragmented nature of the process of devolution in Scotland, Wales, Northern Ireland and across England. Our committee has been chaired by Professor Sir Jeffrey Jowell QC, Director of the Bingham Centre, and includes such figures as Professor Linda Colley, Gerald Holtham, Sir Maurice Kay, John Kay and Philip Stephens of the FT. (Full details of the committee are here.) Adam Tomkins and I have acted as advisers to the committee.
We’ll be publishing the report on 20 May, with a launch at Middle Temple Hall, and have a number of important recommendations for how the UK should work which we hope will shape the actions of the incoming UK Government, whatever political complexion it may have. Key to these is the need now to think about devolution as affecting the UK as a whole, and what the nature of that Union is – not unitary, but not federal either. No new government can afford to ignore these issues, or fail to try to tackle them.
UPDATE: Anyone wanting to come to the launch should email Sandra Homewood on s.homewood[at]binghamcentre.biicl.org to confirm their attendance.
UPDATE, 21 May: The report, A Constitutional Crossroads: Ways forward for the United Kingdom, can now be downloaded here as a PDF file.
In a speech on Friday launching the Conservative Party’s ‘English manifesto’, David Cameron apparently proposed an ‘English rate of income tax’, on which voting in Parliament would be limited to English (or non-Scottish) MPs. (There’s also Telegraph coverage here and BBC News coverage here.) There’s not much detail about this – Cameron’s speech isn’t available on the Conservative Party website, nor is the ‘English’ manifesto. But from what we can tell of it, this proposal raises a lot of questions.
The first question is whether this is a move beyond the Conservatives’ manifesto commitment for a veto for English MPs (or English, Welsh and Northern Ireland) MPs on non-Scottish income tax decisions, after the Smith Commission proposals are enacted. This proposal caused quite a stir when it was first announced, back in December 2014, and raises the hackles of Labour and other parties (and see also here), but it’s not actually new. This may just be a rhetorical shift, using heightened language to get news coverage for an old story, but if so it has been publicised in remarkably insensitive terms: what the Conservatives are proposing is not an ‘English rate of income tax’, but relates to Wales and Northern Ireland as well. This may be an attempt to curry favour with English voters, but England is not the only part of the UK it affects.
The second question is what this proposal relates to: the Scottish rate of income tax which is due to come into effect in April 2016, and on which a decision will need to be taken this autumn, or the Smith Commission proposals? The latter probably won’t come into effect until April 2018 at the earliest, so this will not be something that could be put in place for England very quickly, or would need to be. If the former, it implies very quick action indeed – and it’s hard to see a rationale for excluding Scottish MPs from voting when only the Scotland Act 2012 powers are in effect.