Category Archives: Devolution finance

Wales and the 2015 Spending Review

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. 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.

This does not mean that income tax devolution will automatically take place. Not only will it still need support from the Assembly to make the necessary changes, but the Assembly’s approval of the removal of the requirement for a referendum is also needed under the Sewel convention. The powers for the Welsh Government to trigger a referendum vote and for the Assembly to approve its calling by a two-thirds majority which it now has can’t be removed without the Assembly’s legislative consent.  So that means Labour needs to support it in the Assembly too.

The other side of the equation is the Welsh Government’s pursuit of ‘fair funding’ in the form of a ‘Barnett floor’ to the block grant and the overall envelope of funding. This has been a nostrum of Welsh political debate for years now. There have been offers of a mechanism with a process to follow (from Peter Hain in 2009), a mechanism with a vague promise of possible action but no clear outcome (from the Conservative-Lib Dem Coalition in 2012), and now a ‘floor’ with no indication of how it will work. Despite the 2012 commitment to ‘a joint review of the pattern of convergence by the two Governments’, it is far from clear if that actually took place – if it did, no-one is talking about it in public.  Moreover, slightly oddly, the floor is to be set a little below where Welsh Government funding presently is (at 115 per cent of per capita spending on comparable functions in England, while the Welsh Government appears to get 116 per cent at the moment). What we get now is simply a guarantee of an outcome, without any indication of how that will be achieved.

(As an aside, there are other ways of securing a ‘fair funding’ arrangement which are much simpler, now that Wales is pretty much at its needs-related figure. The best is not to worry about fiddling with the baseline of funding or the outcome of the sum, but to adjust the multiplier used – so that instead of the Barnett formula giving the Welsh Government 100 per cent of a per capita change in comparable spending for England, it gives it a needs-adjusted 115 per cent. This is scarcely a novel idea – the Holtham Commission discussed and recommended it in 2010, in chapter 3 of its final report. It has some advantages in the present circumstances, discussed below.)

All this looks like the beginnings of a political horse-trade, which is unsurprising for a highly political Chancellor who no doubt is trying to help his party colleagues in the May 2016 election. Indeed, the Welsh Conservatives have already committed to a cut in the standard and top rates of income tax.  The Welsh Government gets ‘fair’ funding – which, given the impact of austerity, may well not result in any extra money for it (so it gets ‘fairness’ compared to England but that’s all). In return, it’s expected to endorse income tax devolution. However, that not be enough as there’s no real sweetener for the Welsh Government to swallow this pill on offer publicly as yet, and the most that can be said is that the Welsh Government will be in a degree of political difficulty if it chooses not to move.  It can probably survive that political difficulty, which is pretty limited as matters stand.

What makes the Welsh Government’s life more straightforward is the Treasury’s ongoing silence about how the reduction in the block grant as a consequence of tax devolution will be calculated. This is the key issue in considering the ‘fiscal framework’ for Scotland, of which the Spending Review merely says discussions are ‘ongoing’. (In which context, this paper from David Bell and colleagues published by the Institute for Fiscal Studies is well worth reading.)  It is also a vital issue for devolution of corporation tax to Northern Ireland. There is a serious tension between a commitment to a Barnett floor and a reduction in the block grant, at least if the system is to be introduced with any degree of transparency and accountability. The Barnett floor is an invitation to governments to do a political deal. The problem with the reduction in the block grant is that unless the methodology is clear and agreed it will do the same thing. At least adding a needs-adjusted factor to the Barnett calculation would make the calculations simpler, more robust and more transparent.

It is also worth noting that the Treasury appears to have adopted the figure of 115 per cent for Wales’s per capita relative needs without any analysis of its own, let alone a needs review.  It has simply taken that figure, which was more or less the mid-point of those the Holtham Commission published in 2010 without any published analysis of it at all.  This is not just a unilateral action, but one for which the only evidence base is a review conducted more than five years ago for a different government.  That compounds the degree to which these moves should be seen as first and foremost political in nature.

There remain strong arguments for tax devolution for Wales – not to advantage any political party or even to make the Welsh Government ‘financially accountable’, but to give the Welsh Government and the National Assembly the power to make real choices about policy and the relationship between spending and revenues in Wales.  To make that work, one needs to go much further than merely devolving 10 points of income tax, which just does not provide the room for manoeuvre that is needed.  It needs much more tax devolution, particularly in a place with a weak tax base like Wales, and that means a sequence of further changes.  We looked at this in our Devo More work for IPPR and that model still stands, for Wales as well as Scotland (where the tax proposals but not the other changes are largely being enacted in the Scotland bill).  Those changes include the administrative apparatus for managing finances, the calculation of the block grant, and the reduction from it, and all of them are more than the Treasury seems willing to contemplate.  What is on offer is no more than a modest half-step in the direction of a UK that combines meaningful fiscal devolution with state-wide equity.

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Spending Review 2015: a test the Treasury flunked

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:

1. publishing its proposals for how reductions in block grant allocations are to be made as tax powers are devolved and the wider ‘fiscal framework’ for devolved taxation – an issue now for all three devolved governments, with high political stakes in Scotland and the need to comply with EU state aid rules in Northern Ireland emphasising its importance. This appears to be the subject of behind-the-scenes negotiations between governments but is of such fundamental importance that it needs to be in the public domain.
2. establishing an independent body to keep devolution finance under review, considering changes to the Statement of Funding Policy, the application of the Barnett formula to changes in public spending, and the working of the system more generally – a form of UK Finance Commission.
3. establishing an effective way of resolving disagreements and disputes, rather than trying to provide for informal resolution by inter-ministerial discussion followed by use of the (clearly ineffective) ‘disputes resolution’ format of the Joint Ministerial Committee. Some sort of impartial mediation is my preference, rather than an attempt at binding arbitration – but the important point is that it should be impartial and independent of all governments involved, and be able to impose some sort of meaningful sanction on the UK Government, even if that is only publication of an adverse finding.
4. Publication of better, more coherent data about how the UK’s territorial finances work – what taxes are raised where, how much is spent and where, and how that changes from year to year. This information is mostly available, but the data about tax collection are variable and scattered across various publication and documents.

For a government that has embraced devolution and is extending its scope, this is a major missed opportunity.  And it preserves the contradiction about the financial implications of English spending decisions that is the worm eating at the heart of the UK Government’s now-adopted proposals for English Votes for English Laws.

The new Statement of Funding Policy contains a number of intriguing if minor changes in comparability percentages (that is, the calculation of how much a UK Department’s spending is for the benefit of England versus for the benefit of the UK as a whole). Of the big spending departments, Work & Pensions remains almost wholly a UK-wide department with spending now being 1.4 per cent ‘comparable’ for Wales and Scotland (compared to 0 per cent in 2010). Health spending is now 99.4 per cent devolved (for all three governments) compared to 99.1 per cent in 2010, and Education remains 100 per cent comparable. Both Education (schools) and health spending have been sheltered from austerity in England, of course, which also has the effect of protecting devolved budgets compared to overall spending in England.

The interesting shifts have come in departments that are ‘mixed’ and which have not been protected from austerity since 2010. At first glance, these mostly reflect protection of ‘UK-wide’ functions at the expense of ‘English’ domestic spending. Energy and climate spending was about 20.6 per cent comparable for all three governments in 2010; it’s now 1.8 per cent for Scotland and Wales, 15.3 per cent for Northern Ireland. Business, Innovation and Skills (which includes universities and the science budget) was 78-79 per cent comparable in 2010; it’s now around 66.5 per cent. Culture, Media and Sport was 96 per cent comparable for Scotland and Northern Ireland and 90.2 per cent for Wales in 2010; now it is 76.9 per cent for Scotland and Wales, 77.6 per cent for Northern Ireland. An exception (probably due to protection of police spending) is the Home Office, where spending is now 91.7 per cent ‘comparable’ for both Scotland and Northern Ireland, compared to 76 per cent in the 2010 Statement. (It was and remains 0 per cent for Wales.)

Transport spending has become somewhat less ‘comparable’ for Scotland and Northern Ireland, but more comparable for Wales; it has moved from being 73.1 per cent comparable in 2010 to 80.9 per cent. The main items that are not ‘comparable’ for Wales (but are for Scotland and Northern Ireland) are HS2 and Rail Projects generally. ‘Capital rail projects’ were treated as wholly comparable for all three governments in the 2010 version – so this has been reclassified to the Welsh Government’s disadvantage, although Wales now gets a larger overall share of changes to Transport spending (and those ‘Rail Projects’ will include electrification of the Great Western mainline to Swansea).

Overall and in structural terms, the Spending Review delivers a profoundly (small-c) conservative approach that maintains the Treasury’s dominance of tax and financial allocation decisions, even as it seeks to devolve aspects of both spending and tax-raising. Except for that maintenance of Treasury power, there is no attempt to take a UK-wide view of how the UK’s fiscal arrangements work. At the centre of these is a new version of the Statement of Funding Policy that in its essentials is very similar to its predecessors dating back to 1999. Ultimately (and probably sooner rather than later) the contradiction between purporting to devolve power and Treasury retention of it will prove unsustainable.



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

The Bingham Centre devolution review: the UK at a constitutional crossroads

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.

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Filed under Conservatives, Devolution finance, English questions, Northern Ireland, Publications and projects, Scotland, Wales, Westminster

How Labour messed up 1998-model devolution

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.)
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Bingham Centre review of devolution in the UK

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] 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.

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Filed under Devolution finance, English questions, General, Northern Ireland, Publications and projects, Scotland, Wales

An ‘English rate of income tax’: six questions in search of an answer

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.

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Filed under Conservatives, Devolution finance, N Ireland corporation tax devolution, Northern Ireland, Scotland, Wales

Devo Max and Devo More

There are two myths going around about what happens following a No vote in the Scottish referendum.

First, it’s said that plans for ‘more devolution’ are unclear. They are not. The three pro-UK parties have different schemes for them, it’s true, but there is a substantial degree of common ground between them. All involve devolution of most or all of personal income tax to the Scottish Parliament. Labour and Conservatives both support forms of welfare devolution, which – among other things – would have enabled Scotland to opt out of the Housing Benefit change that led to the ‘bedroom tax’. The differences do need to be resolved, but there is also a clear route for that, endorsed by the UK Prime Minister in his Aberdeen speech as well as other party leaders: an early process of cross-party negotiations, leading to a white paper by November 2014, publication of draft legislation in early 2015, followed by incorporation into manifestoes for the May 2015 general election, which will give the mandate for delivery of them.  That level of political commitment is not easily ducked – and ironically it is perhaps the Conservatives who have the greatest short-term political interest in securing their delivery.

It’s also untrue that these are last-minute proposals All these schemes have drawn on the work I have done with IPPR, and particularly Guy Lodge, through the Devo More project since late 2012. They reflect many months of work and careful analysis of the implications of further devolution, not just for Scotland but for other parts of the UK as well – they haven’t been suddenly ‘pulled out of a hat’.

Details of the key publications from Devo More can be found here, here and here (and there are posts about the financing paper here, the welfare one here and how the programme fits various political traditions here).

Second, it’s suggested that these proposals amount to ‘Devo max’. They don’t. This is usually a rather lazy shorthand from journalists or politicians who haven’t understood what is actually on the table. The extra-devolution schemes, or scheme, will substantially enhance the autonomy of a devolved Scotland within the UK. But the Scottish Parliament is already responsible for about 70 per cent of all public spending in Scotland. The Devo More proposals will take Scotland as close to home rule as is possible in a single state.  They will deliver what Scots had clearly shown they’ve wanted for a decade or more – greater self-government in the Union – in a way that works with the interests of people in other parts of the UK, rather than against them.


Filed under Devolution finance, Publications and projects, Referendums, Scotland, Scottish independence, Westminster