Enlightening the Constitutional Debate: Further powers for Scotland
- Lectures and events
- Publication Date
- 03/03/2015
Since the Scottish Independence Referendum in September 2014, which resulted in a vote to reject independence, additional powers have been proposed to extend devolution, first under Lord Smith’s Commission and then in draft legislation, published in January 2015.
This public discussion, involving three experts from relevant fields, explored the practical impacts, as well as the policy and constitutional consequences, of the proposed legislation.
Introduction
Since the Scottish Independence Referendum in September 2014, which resulted in a vote to reject independence, additional powers have been proposed to extend devolution, first under Lord Smith’s Commission and then in draft legislation, published in January 2015.
This public discussion, involving three experts from relevant fields, explored the practical impacts, as well as the policy and constitutional consequences, of the proposed legislation.
Chair:
Professor Gavin McCrone CB FRSE, Former Chief Economic Adviser, Scottish Office, 1970–92
Speakers:
Jo Armstrong, Co-Director & Founder, Fiscal Affairs Scotland;
Professor John Kay CBE FBA FRSE, Visiting Professor, London School of Economics;
Professor Nicola McEwen, Professor of Territorial Politics; Associate Director, ESRC Centre on Constitutional Change, University of Edinburgh
This report provides a summary of the speakers’ contributions, and of the subsequent discussion.
Jo Armstrong focused on tax powers, explaining the proposed changes in tax-raising powers, starting with the powers already laid out in the Scotland Act 2012, and then pointing out the complications ahead, including tax competition. She concluded that one of the critical factors would be how the Scottish and UK Governments negotiated the settlement on an ongoing basis – for example, to reach agreement on annual adjustments to the Barnett block grant.
Before the Referendum, there was uncertainty about the powers of a future Scottish Government to deal with finance and taxes, already described in the Scotland Act 2012, and what might be possible under a ‘Yes’ vote. Most people thought the situation would become much clearer after the Referendum, but the Referendum and negotiations since then have thrown up more uncertainty and challenges than if there had been a ‘Yes’ vote.
First, it is important to review the powers of the Scotland Act 2012, not least because they have not yet been put into effect and also because they have serious implications for the implementation of the powers recommended by the Smith Commission.
The new Land and Buildings Transaction tax (LBTT) is expected to raise about £440–£460 million a year. This will come into force in April 2015, but even before it is implemented, there have been changes to what the Scottish Government expects of it and how it will be applied. This could be the same with other taxes implemented differently in Scotland and the rest of the UK, because it could lead to tax competition as the Scottish and UK Governments react to each other’s new tax legislation. The same applies to the new Landfill Tax, which is expected to raise another £100 million, based on the most recent economic data we have from GERS (Government Expenditure and Revenue Scotland), for the year 2012/13.
Another consequence of the 2012 Scotland Act is the Scottish Rate of Income Tax (SRIT), to be introduced in April 2016. The UK Treasury will cut the tax rate paid by Scottish taxpayers by 10% – effectively cutting it in half. As a result, the Barnett block grant will be adjusted accordingly, forcing the Scottish Government to levy its own income tax to compensate.
The proposals of the Smith Commission were to extend SRIT so that the Scottish Government could set its own taxes and thresholds, while the UK Government retained control over the personal allowance, tax reliefs and taxes on dividends and savings. For the Scottish Government, this is a significant increase in tax-raising powers.
Fifty per cent of the Value Added Tax (VAT) raised in Scotland will be given to the Scottish Government, and the Barnett block grant will be adjusted accordingly. This will provide an estimated £4.5 billion to £5 billion, but we do not have accurate data on VAT paid in Scotland, so this will need to be verified by the Scottish and UK Governments. The Scottish Government will also have no control over the VAT rate, currently 20%.
Air Passenger Duty will also become the responsibility of the Scottish Government. This is expected to raise about £455 million. The Scottish Government will be able to vary this duty or even abolish it, but if it cuts the duty, it will have to find the revenue elsewhere – and reimburse the UK Government accordingly. The same applies to the Aggregates Levy, which raises about £50 million.
Adding this together, including non-domestic rates income (about £2.5 billion) and Council Tax (£2 billion), the Scottish Government will have control over 40% of its revenues, excluding taxes raised from North Sea oil. But is that enough? Some people argue that the Smith Commission has ‘undersold’ Scotland, and that North Sea oil revenues should be included, but it is a significant change. The additional powers will also mean new challenges. Up till now, the Scottish Government has not had many economic levers, and the changes also raise the question, are the right constitutional arrangements in place? It is hard to establish exactly how much revenue is currently raised in Scotland, but we do know that the Barnett block grant will be affected to reflect the new powers. The Office for Budget Responsibility (OBR) has done projections on the likely revenue raised by SRIT, Landfill tax and LBTT. It would be extraordinary if its remit was not extended to cover these new taxes, but this has still to be agreed.
We will have to rely on a neutral third party to establish the revenue figures, but would the OBR be neutral enough to prevent a falling out between the Governments, especially if the Barnett block grant was reduced? A body based in London could also come under fire if it produced “a set of figures that Scotland doesn’t like.”
In view of the new powers of the Scotland Act and the recommendations of the Smith Commission, the other big issue is how to adjust the Barnett formula, as taxes raised in Scotland increase or decrease. The key principle in the proposals of the Smith Commission is “no benefit, no detriment.” If Scotland levies a tax, then the Barnett block grant will be adjusted accordingly, and this will have to be “fair” for both Scotland and the UK. That sounds simple but applying this key principle will be extraordinarily difficult, not only on Day One but on an ongoing basis, and we may need an “army of economists” to manage the process. “Do we have the expert bodies, comprising suitably qualified personnel, to ensure a timely, accurate and transparent process to minimise the need for dispute and negotiation?”
Another major question is how this feeds through to budget uncertainties, and how these will be managed – especially now that we have these new tax-raising powers. If we don’t know how much revenue we’re going to raise, how can we plan public spending? Under the powers of the Scotland Act, the Scottish Government can borrow up to £500 million to cover any shortfall in its revenues. Perhaps this figure should be higher, but the existing borrowing powers have not been used yet and we have no experience of using them in Scotland. It is absolutely fundamental to be able to ensure that all our public services are fully covered because we already know what our public services are costing and what they are likely to cost in the future.
How will this affect Scotland’s borrowing capacity as set out by the Scotland Act (currently £2.2 billion, to cover infrastructure investments)? Rather than a fixed cap, it has also been proposed to use the “prudential borrowing code,” a more dynamic mechanism currently used by local authorities, but to work out borrowing requirements, you have to be able to calculate how much you’ll raise from taxes, and this raises the question how it would work in view of revenue uncertainties. A fixed cap may the solution.
None of these issues is insurmountable, Ms Armstrong concluded, and a negotiated settlement is likely. The First Minister, Nicola Sturgeon, recently referred to the fact that her Government’s forecasts for Stamp Duty Land tax had been endorsed by an independent fiscal commission, and the OBR had done the same for the UK. It was then agreed to use the average of the two figures. This suggests we will end up with a negotiated settlement over such matters, but it will not be simple or easy. Tax-raising powers beyond the Referendum were “probably relatively easily secured,” but the debate remains whether this was enough. Ms Armstrong also said she hoped and believed that the implementation of the new powers needs to be undertaken under a much more detailed evaluation of the implications, to make sure we get the right mechanisms in place “before we launch forth.” And the notion that we might introduce the enhanced SRIT in April next year is “fraught with difficulty” and may be a dangerous road to go down.
Professor John Kay used currently available revenue figures to demonstrate the possible impact of additional tax-raising powers, including consequential adjustments to the Barnett formula. He argued that the impact is likely to be smaller than widely anticipated – and also warned that people should be “frightened” of what they wish for.
The Barnett Consequential is not a phrase that easily trips off the tongue, but it is a major feature of the constitutional changes proposed. Rather than discussing the technical details, however, Professor Kay said he would focus on what it means for people in general, particularly if the Scottish Government can vary rates of income tax, and the impact of this on public spending. How much more or less will people pay in income tax as a result of the changes?
Before discussing possible changes in tax rates, he then provided details of current revenues and Government expenditure. The Scottish Government is currently responsible for £38.5 billion out of a total expenditure of about £65 billion, while taxes raised in Scotland add up to about £48 billion, including £10.9 billion in income tax and £9.3 billion in VAT, which account for about 20% of the total, plus an estimated £5.5 billion from North Sea oil revenues, which vary widely year to year. Other taxes such as Air Passenger Duty, Landfill Tax, the Aggregates Levy and stamp duties or their replacements are “almost inconsequential.” The prime issue will be income tax rates.
The UK’s basic rate of income tax (20% on taxable income from just over £10,000 to just under £42,000 per annum) is paid by 23 million people (9.1% of whom are resident in Scotland), while the Higher Rate (40% on taxable income over £42,000) is paid by 4.5 million people (8.2% from Scotland) and the additional rate (45% on taxable income over £150,000) is paid by about 280,000 people, including 15,000–18,000 people in Scotland (6.5% of the total), “a fair proportion of whom can be seen at the business departure lounge in Edinburgh Airport.” The proportion of people in Scotland paying the basic rate is higher than the proportion of the population of Scotland relative to the UK, but for those who pay the higher rate and the additional rate, it is lower.
How much is paid by different taxpayers can be broken down as follows: people who pay at the Basic Rate contribute £53.9 billion; those who pay at the Higher Rate contribute a total of £58.5 billion, including £26.1 billion at the Basic Rate; and people who pay at the Additional Rate contribute a total of £42.9 billion. The total amount raised is about £150 billion. Some people look at the Additional Rate and conclude that it raises much more than it actually does. Most tax (80%) is paid at the Basic Rate – if the higher rates were abolished, this would only cut the total revenues by 20%. Most of the tax paid by those who pay at the Additional Rate is actually paid at the Basic Rate, and this is important when we measure the effects of changing the various rates. The amount which is actually paid at the Additional Rate is only £2.9 billion – this is how much we would lose if the additional rate was abolished.
Professor Kay then examined the possible impact of the draft legislation in light of these figures. One measure proposed by both major parties in Scotland (the Scottish National Party and the Scottish Labour Party) is an increase in the Additional Rate from 45% to 50%, but this would raise only an additional £100 million, based on Additional Rate payers living in Scotland (18,000 people) paying 5% more in taxes at the Additional Rate – assuming that behaviour didn’t change.
But would behaviour remain unchanged? In Professor Kay’s opinion, tax competition (between Scotland and the rest of the UK) would not lead to an exodus of people from wherever the taxes are higher. On the other hand, he said he is “willing to bet” that most of the people in Scotland who pay at the Additional Rate also have homes outside Scotland, and would find it very easy to register for tax purposes where they enjoyed the advantage and this could have a very large impact on overall tax revenues by reducing not only the amount paid at the Additional Rate but also the amount paid at the Basic Rate and Higher Rate by those same people. In other words, they may pay no taxes at all if they declare they are not resident in Scotland. So, by raising the Additional Rate of income tax from 45% to 50%, Professor Kay is “fairly certain” this would lead to a net loss in revenues rather than raising more money.
The “no detriment” proposal described in the Smith Commission deals with action by the rest of the UK which would have a negative effect on the revenues levied to Scotland, which would be compensated for by an increase in the Barnett Consequential, but the paradoxical effect of Scotland raising the Additional Rate of income tax could lead to an increase in revenues in England. And Professor Kay said that if England was asked to compensate Scotland for the negative consequences of Scotland increasing tax rates in Scotland, there would be little chance of England complying. To sort these complications out according to the Barnett Consequential would therefore lead to a dispute and the need for more negotiations.
Next, Professor Kay examined the possible effects of variations in tax rates, including a 1% increase in the Basic Rate (from 20% to 21%), and the same increase in the Higher Rate and the Additional Rate. A 1% increase in the Basic Rate would raise an extra £500 million, he said, while a 1% increase in the Higher Rate (from 40% to 41%) would raise an extra £100 million, and raising the Higher Rate from 40% to 45% would raise an extra £500 million. However, a 5% increase in the Additional Rate would raise no extra revenue and may even lead to a decrease, according to the previous analysis. To put this in context, halving the rate of Air Passenger Duty instead of complete abolition would save £130 million per annum. Technically, the Scottish Government would not have the powers to increase the Personal Allowance (currently about £10,000), but it could introduce a zero rate and a new rate of 10% (e.g. 10% on the first £2,000 of taxable income) to have the equivalent impact. However, to raise the personal threshold in this way by the equivalent of £1,000, or to introduce a new 10% rate, would mean a loss of revenues of about £500 million. If the Government needed to raise extra taxes to compensate for this, it may then have to introduce a new rate of tax – for example, a 30% rate for incomes over £32,000, while retaining the 40% rate for incomes from £42,000–£150,000, which would also raise an additional £500 million. This would bring a significant number of people into the 30% band, he said, repeating his view that increasing the Additional Rate to 50% would have a negative impact.
Summarising the possible package of changes ahead, Professor Kay predicted that the result of the proposals of the Smith Commission would be the creation of 10%, 20%, 30%, 40% and 50% tax bands, within the next five years. This may look like a “progressive schedule” but it would also be “revenue neutral,” he added.
None of these possible changes would have a significant impact on the total revenues raised, in relation to the total Scottish budget, but the most ”draconian” change would be an increase in the Basic Rate from 20% to 25%, which would raise an extra £3 billion. Because this would lead to potential tax competition, he added, this level of increase “would be as much as you could do without provoking a significant exodus of people from Scotland.” And the extra amount raised would be the equivalent to the extra sum Scotland already receives from the Barnett arrangement – significantly less than 10% of what the Scottish Government currently spends and less than 5% of total public spending in Scotland.
That is what would be involved in Scotland moving to a Scandinavian-style tax and spending regime. When it comes to additional powers, “be frightened of what you wish for,” he concluded. “The title of the white paper published in February – an Enduring Settlement – seems to me a declaration of quite extraordinary optimism.”
Professor Nicola McEwen traced the road from the Smith Commission to the draft legislation and discussed how it will affect the welfare system in Scotland, suggesting that some of the recommendations of the Smith Commission may have got “lost in translation” en route. She also addressed the need for closer inter-governmental collaboration, to deal with the complex effects of the new powers proposed.
Professor McEwen began by saying that she would talk about the problems and disincentives of using some of the powers proposed – for example, welfare – where it was almost guaranteed there could be no enduring settlement. “Will the clauses of the Scotland Bill honour in full the spirit of the Smith Report, or will they be lost in translation?” she asked. “And what will be the implications of governing what will become a new and much more complex devolution settlement to emerge from this process?”
When it comes to welfare, the Smith Commission recommended full devolution or “complete autonomy” for a range of welfare benefits including those that cover disability and non-contributory benefits for the elderly, adding up to about £2.5 billion or 14% of social security spending in Scotland. The winter fuel allowance was not mentioned in the draft legislation, but this may be an oversight, she added. The Smith proposals which have gone into the draft legislation are subject to significant restrictions and specific exceptions, and this challenges the notion of “complete autonomy” envisaged by Smith. For example, clauses relating to discretionary housing benefits are defined very strictly, and carers’ benefit is also restricted, making it difficult for a future Scottish Government to make significant changes. There are also significant constraints relating to administration of welfare. The Scottish Government will have to decide how much “complete autonomy” it wishes to have, and how much of the welfare system will remain the responsibility of the Department of Work and Pensions (DWP). Universal Credit is a new approach to welfare which is currently being rolled out UK-wide, merging various benefits, and the Smith Commission recommended that this should remain a reserved matter. There are good reasons for this but the Scottish Government will be able to negotiate how Universal Credit is delivered in Scotland, and vary the housing cost element, including links to the Under-occupancy Charge, better known as the “bedroom tax.”
Public spending on welfare is a volatile part of the budget, dependent on the economic cycle and hard to predict. Professor McEwen also said that within the draft clauses, some of the provisions are “subject to consultation and agreement,” and there has been some criticism that this amounts to a veto over the new devolved powers for the relevant UK Secretary of
State, who would have to be consulted regarding the practicability and “reasonable time frame” of any new arrangements, something which would be very hard to define in constitutional terms. As long as universal credit remains a reserved matter, any changes where the Scottish Government has discretionary powers will be implemented only through negotiations between the two Governments. So it’s legitimate to ask whether you need any restrictions within the legislation itself as to whether there is a constitutional requirement to come to agreement.
The other area of welfare affected by the draft legislation is employment support, where there are also restrictions. The Smith Commission recommended that all powers for support for people facing unemployment that are currently contracted out by the DWP should be devolved to the Scottish Government, but the draft legislation restricts this to dealing with “long-term employment” and does not refer to “contracted provision,” which opens up new possibilities regarding future changes in contracts. Professor McEwen said: “The spirit of Smith is more dimly reflected in the proposals to create new welfare powers.” The Smith commission had proposed “new powers to create new benefits in areas of devolved responsibility.” This was “an ambiguous proposal” but it was widely interpreted as paving the way to new and potentially more innovative welfare benefits in Scotland, subject to available finance. This was a general power which was also intended to be combined with the “top-up” of reserved benefits, but none of this was spelled out in the report of the Smith Commission and it doesn’t appear in the draft legislation, which talks about “the power to replace the benefits identified as being specific for devolution this time around rather than a more general power.” And no top-up power is mentioned.
Professor McEwen said that this was a result of the approach taken by the Smith Commission, which had focused on allocating or identifying new powers rather than re-examining the powers reserved under the original devolution settlement, including social security and pensions. The draft legislation does not alter that but it does add a “complex array” of exceptions to the general reservation, she added, and as long as the reserved powers described in the 1998 Scotland Act remain in force, it will be hard to incorporate a general power to create new benefits in devolved areas or top up reserved benefits as the Smith report – arguably – intended.
The complexity of the draft clauses reveals the need for a system of much closer co-operation between the Scottish and the UK Governments, not just to implement the new powers that emerged from the settlement but to manage the interdependencies that the new settlement will create, on an ongoing basis. The Smith Commission recognised this by recommending the scaling up of inter-governmental relations, both bilaterally and involving all the different administrations, especially in areas such as welfare where some benefits could be deemed “passports” to subsequent benefits – for example, housing benefit and universal credit.
The ability of the Governments to work together is also central to the application of “no detriment.” The Smith Commission formulated a financial framework which stated that no Government should be adversely affected by the devolution of further powers or the policy decisions taken after devolution. Any actions by one Government which would have a detrimental effect on the other would require compensation. For example, if the Scottish Government halved Air Passenger Duty, there would be a cost involved – about £230 million lost in revenues – but would it also have to pay compensation to airports in the north of England which would be adversely affected by the policy decision? If unemployment support programmes designed by the Scottish Government failed to meet their targets, would the Scottish Government be expected to foot the bill for the extra costs incurred, or vice versa?
“In any multi-level federal system,” said Professor McEwen, “there are always going to be policy overspills, when the actions of one government have a detrimental effect on another.” We need to establish a system to manage these overspills by means of financial compensation, but it will be difficult to manage and difficult to satisfy both Governments – and could generate new grievances. These new interdependencies point to the need for a more effective government machinery to “nurture cooperation and coordination between ministers, as well as officials charged with developing and implementing policy,” she added. Unless that mechanism operates on the basis of equality of status, as well as power and mutual respect, with a fair mechanism to resolve any future disputes, we will be returning to the settlement sooner than many people hope.
Professor Kay’s figures are “very seriously scary,” suggesting that if the Scottish Government goes for a tax-raising strategy at the upper income levels, this would leave a large hole in its budget which could only be filled by an increase in business tax or council tax, or serious cuts in public expenditure – which was not what Scottish people thought they were voting for in the Referendum, whether they are unionists or pro-independence.
The message from the speakers seems to be that it is “all very difficult, and perhaps we shouldn’t have bothered.” Surely this is the wrong tone to adopt. There is widespread demand for greater autonomy for the Scottish parliament, so we should not be defeatist – all governments must face up to the challenge of working together in a multi-level arrangement and all federal states have to cope with tax competition. And none of these things is impossible. Two of the speakers had “fun” discussing the “no detriment” principle, but these were simply two “throwaway” words in the Smith report. In 2012, it was taken to mean that if the UK Government altered the income tax base, it would compensate the Scottish Government for any shortfall, or vice versa. If you took this literally, you could come up with all sorts of “daft” propositions, but there will be practical boundaries, and the only question is how far down the chain of causation will these boundaries be?
Can we have more detail on the Barnett consequential? And more detail on expenditure?
Professor Kay replied that the basic problem with the Smith Commission was that the referendum campaign, especially during the final few weeks, had created expectations that could not be realised by devolution and/or independence. “What people in Scotland want is not so much new powers but more money to spend on the powers that already exist,” he said, adding that most proposals in the Scottish Government’s White Paper on independence concerned things that Scotland already has the power to do but does not have the money to do, and could not be delivered by more devolution or independence. Money could not be ‘magicked’ out of thin air. It may be possible to do things that would have a dynamic effect on the economy, raise additional revenues and alter spending over the long term, but the “elephant in the room” is that “Scotland already gets too much money as a result of the Barnett formula,” and that “political roadblock” gets in the way of discussion. The largest element of Lord Smith’s recommendations was additional income tax powers, but the Scottish Government has had the power to raise or to lower the tax rates for the last 15 years and has not come close to using them. The essential aspect of the Barnett consequential is that any change in UK income tax or spending (on devolved or reserved matters) would require an equivalent adjustment to the block grant to Scotland. For example, if England decided to abolish the NHS, and lowered income tax because it no longer needed to fund it, the block grant would also be cut to reflect the reduction in spending in England. To enable Scotland to choose whether to abolish the NHS or continue funding the service, the block grant would have to be increased, equivalent to the income tax benefit to people in England. If England raised taxes to pay for a reserved matter (for example, a war), it would have to raise taxes or reduce the money paid to Scotland under the Barnett formula to pay for it, and Scotland in turn would have to cut spending or raise taxes to make up the difference. Income tax changes in England would therefore require proportional adjustments to the block grant and this is the only way the “non-detriment” principle would operate – the idea that the “no detriment” principle could be implemented in the way the white paper implied is “unrealistic and improbable.”
Professor McCrone said that is why the “English laws for English people” proposal is flawed – because if Scots MPs are excluded from discussions, they would have no say over decisions which affect them. Professor Kay then added that there is no single item of expenditure in England which does not affect spending in Scotland.
Jo Armstrong said the groundswell of desire for more powers is a consequence of austerity, the belief that North Sea oil revenues have been “wasted”, and a desire to maintain the extra levels of spending in Scotland which many people believe is their birth right. It would be wrong to say there is a massive desire for more powers, however, when people start to weigh up the complexity and risks involved. If North Sea oil is taken out of the equation, it raises the question why does Scotland still spend more per capita than the rest of the UK – an estimated £7 billion per annum? When the benefits of North Sea oil start to wind down, can Scotland expect to continue spending more per head than the north-east and south-west of England? Also, to introduce new tax-raising powers in less than six months, without the evidence to support the rationale for it, “beggars belief,” she said, and it would be irresponsible to implement so hastily. There may be flaws in the Barnett arrangement and the Barnett Consequential, she concluded, but they do provide a degree of certainty. And even though people may want change, it may be wise to slow the process down.
Directed at Professor Kay, the next question focused on Scotland “getting more than its fair share” per head – a claim that “doesn’t stack up when revenues from North Sea oil are included.” There is a lot of enthusiasm for change in the settlement, which could explain the recent rise in popularity of the Scottish National Party (SNP). Concerning infrastructure, Scotland is a low-wage economy, so we also need more powers to increase investment in “the advanced economy,” plus more investment in science and innovation, where spending in Scotland is 20 per cent less per head than the rest of the UK. So what is possible through so-called “Devo Max?”
What will be the impact of more negotiations on administrative and staffing costs?
Would it be possible to raise more taxes at the top rate by clamping down on tax avoidance and evasion?
Professor McEwen said she made no apologies for pointing out the difficulties raised by the draft legislation. In addition, the results of the forthcoming General Election are still uncertain, so this is a live debate, and it’s important to point out the problems with the current proposals before they are implemented. Devo Max is as “fluid” as the recent independence proposals, but there is more scope for a different devolution settlement. Rather than starting at the same point as the Smith Commission, she suggested, it would have been clearer to start by re-examining the reserved powers and maintain the integrity of the reserved powers model rather than drift away from it. Administration would mean additional costs, depending on how much the Scottish Government takes on – for example, it is hard to estimate the cost of a social security bureaucracy to administer new benefits, but it would have to be paid for. Similarly, HMRC would continue to collect taxes and this would also have to be paid for. There is a cost involved but there is also a cost involved in not having the power to change legislation. There will have to be a trade-off between greater autonomy and extra costs.
Professor Kay agreed that there was a lack of clarity about what “Devo Max” means. There are lots of different proposals for devolution and the white paper does not necessarily have all the best ones.
Professor McCrone also said that there was some confusion about Devo Max – did it mean that Scotland would raise all its own taxes and control all of its spending, then give a share of revenues to pay for defence, international aid and the Queen, and share a common currency? It would be very unusual for this situation to work because it runs into all sorts of problems.
Professor Kay said that Scotland would not be able to raise extra money from higher rate taxpayers by clamping down on tax avoidance, partly because this would remain the responsibility of HMRC. Concerning revenues from North Sea oil, he also said that over the last 20-30 years, the excess per capita spending in Scotland was roughly equivalent to the amount raised in taxes on North Sea oil. He also said the nature of the Union is that everyone pools their resources, and recognises that we all have mutual needs.
Jo Armstrong raised a further point about North Sea oil. She said that during the referendum discussion a lot was made of the significant additional revenues raised over the previous 30 years but she asked two questions about this. First, what happened before 1974 when there were no North Sea tax revenues? And more importantly, what’s happening now when North Sea tax revenues are actually falling at the same time as an ageing infrastructure is becoming more expensive to maintain? North Sea revenues will still be generated but to nothing like the same extent as of the last 30 years. The last three decades have been atypical.
What lessons can we learn from the “mini devolution” of powers to Greater London and the ”northern powerhouse” of Greater Manchester (which is to get more control over regional NHS budgets). Will this create even more problems for the UK?
Professor McEwen said these were not similar cases, and in the case of Greater Manchester, it may be more a devolution of risk than a devolution of power. There are parallel processes taking place throughout the UK, which are devolution of a sort, but they are not coherent. “I have a fairly pragmatic view about this,” she said. “The UK is a pragmatic entity and if you start to try to make it coherent, that’s probably when it would fall apart.” If you change the regions around the UK, the centre must also change, but to date there has been minimal change in Whitehall, in particular, as a result of devolution.
Professor McCrone commented that the devolution of health spending to the north-west of England was a good way to “pass on the blame.” And it certainly would not increase the level of spending. He also said that spending in Scotland is 10% more per head, amounting to about £7 billion, and that without the Barnett formula, revenues from North Sea oil may have been enough in the past to sustain this, but not now when oil prices are so volatile.
Jo Armstrong said that the desire for federalism of sorts around finances (e.g. control of corporation tax powers in Northern Ireland) was motivated primarily by financial concerns, and the perception of being “short-changed” by Whitehall. In some areas, Scotland and Northern Ireland get more than England and Wales, and in other areas, less. The Barnett formula is a “black box” and as you start to unpick it, this reveals the anomalies within it. Trying to deal with these anomalies creates winners and losers. The winners are those who shout loudest and the losers are disgruntled and ask for more power. The austerity effects mean that people tend to ask for more power so perhaps Whitehall needs to treat the regions differently.
Professor Kay said that looking back to levels of public expenditure in 1978, then making a series of ad hoc adjustments, was not the way to reach an “enduring settlement.” He also said the “spirit” of the recent White Paper was that “you can have powers to do something different, so long as you don’t actually do something different.”
Several countries have attempted to solve their problems by moving the capital to a central location (e.g. Nigeria and Brazil), so should we move the capital to Liverpool, for example? Or York?
Professor McEwen replied that if recent reports were believed that the Houses of Parliament were about to collapse, maybe this would be a good idea.
No-one seems to have considered that Edinburgh may have the same effect on Scotland as “the London effect” on the UK. And that is where the trouble will come from with devolution.
Before we get too depressed by the prognostications of the experts, let’s remember Lord Kelvin, who did all his sums and declared that heavier-than-air machines would never be able to fly. Does the south-east of England get a bigger share of UK revenues than Scotland?
Is there anything in the draft legislation to encourage wealth creation and improve productivity and our economic future?
Professor McEwen said she did not mean to give the impression that the draft legislation can’t work, but thinks that the proposals “can be better.” It will also need people in Government with good intentions to make it work. But the package we have on the table today will lead to unintended consequences which we will all have to live with. There is already a debate about political centralisation in Scotland, and “lots of nonsense” talked on the subject. “Are we happy to live with big variations in Scotland?” she asked. We need a more mature debate about the consequences of more devolution, not the closed political process we have seen in the past.
Jo Armstrong said that additional borrowing powers in the draft legislation could help wealth creation, and cited a list of examples where investment could go, including a high-speed train link to Aberdeen, faster broadband, better transport links in general, more spending on schools, hospitals and road maintenance, plus more infrastructure spending by local authorities. Regarding the Edinburgh-London effect, she said we need to have a conversation about decentralisation. There is a benefit to having the central administration and key professions in Edinburgh simply because that is where the corporates are (the agglomeration effect). Despite inflated property prices, Edinburgh does benefit from centralisation but we need to study the effects on the rest of the country. We should also be careful when we talk about more money being spent in the south-east of England, because the region also generates large revenues, and investment there can benefit the rest of the country (e.g. new rail infrastructure in London). “You can use the numbers in a variety of ways to come up with a variety of answers,” she concluded.
Professor Kay said there was nothing in the proposals to improve productivity or create wealth because it was about a constitutional framework for policies which may have such an impact, not about determining the policies themselves. Concerning extra spending on infrastructure, we should remember that this is the country which has invested in the new Borders train line and the Edinburgh trams, which are “as bad as it gets” when it comes to “wasted expenditure on vanity infrastructure projects.” The settlement can work but it will inevitably be messy and complicated, and will need to be negotiated carefully, between “thoughtful people on both sides” – but there are a lot of people who don’t want it to work. Another problem is the title of the White Paper – it is not “an Enduring Settlement” which can be dealt with by “mechanical operation” of the formulae described in it. There is general agreement that devolution is a good thing which will help the UK to survive but the process so far has been flawed.
Is there any truth in the suggestion that the new High-Speed train link which terminates in Leeds and Manchester is an example of Westminster’s “Devo Max for England?”
What impact will the General Election have on the settlement?
Jo Armstrong described the new High-Speed train link as “pork barrel politics,” in the drive to create dynamic growth in the north of England. But will the benefits justify the costs? She feared it would suffer the same fate as the Edinburgh trams, and make many people feel left out.
Professor McEwen said she had no crystal ball to predict the result of the General Election. If the Conservatives win, we could expect the draft legislation to go forward with some minor amendments, unless the outcome in Scotland produces a major change in the political landscape (including no Conservative MPs in Scotland), which would change the dynamic between the UK and Scottish Governments, and encourage the Scottish Government to make fresh demands . The Labour Party is moving away from the draft legislation on the issue of housing, and says it is open to reconsider the recommendations in the wider context of the UK. A lot would depend on whether or not there is a majority government. Or would Labour be reliant on the SNP to form a government, which would give it more leverage? There has been a very rushed process to close down the debate, in the aftermath of the Referendum. The broader point is that a General Election could re-open some of the debate, despite attempts to close it down after the Referendum, using language such as “Enduring Settlement” and “the end of the road for the devolution journey,” which was a hopelessly optimistic outlook. Depending on the outcome, the General Election could be a “game changer.”
Professor McCrone said that he believed the proposals on housing were not satisfactory, with the UK Government reserving control over everything except social housing. It would be better to devolve control of housing completely to Scotland, but this in turn would be complicated by the introduction of universal credit, which covers housing benefits.
There is a lot of heady talk about the possibility of federalism within the UK, but I am concerned that the electoral system operating in Scotland, Northern Ireland and Wales varies from England, and that if we are to achieve delegation of powers (rather than using the word “devolution”) without a change in the electoral system in England, which favours the two major parties, there is little opportunity for sensible debate from smaller groupings. So without change in England, what hope for any settlement which even begins to smack of federation?
Professor McEwen said electoral change was less likely with the recent demise of the Liberal Democrats, but ironically the current system may produce more minority representation at the next General Election. Do we need to have a uniform electoral system throughout the UK? “We need debates. I am not sure a formal federation is a workable solution for the UK, partly because of the extraordinary asymmetry in geography and institutions, and to try to make it more symmetrical may leave a gaping hole in the centre and create new anomalies – the more you try to coordinate a coherent system, the more problems will emerge as a result.”
The Vote of thanks was given by Professor Michael Keating FBA FRSE, Chair in Scottish Politics at the University of Aberdeen. Professor Keating said the discussion had proved the debate would continue. There was a consensus that the settlement would not be simple, quick or enduring. What used to be perceived as “only a Scottish problem” is becoming a much bigger debate about the future role of government and the welfare state, which is being restructured in countries all over Europe, partly because demographics are changing and there are new social risks. Other major factors are government re-scaling, global markets and shifts in policy systems. The “territorial redistribution” of money is also becoming a much bigger issue – how do you get a formula to distribute resources that everyone accepts? The inevitable result is messy compromise. So, there may be no conclusions, but Scotland is now facing up to these issues in a highly politicised context, and the questions will be with us for very much longer.
