Fiscal sustainability, financial risk and devolution

Constitutional Futures Initiative
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What are the prospects for further fiscal devolution?

In the early years of devolution, the fiscal powers of the devolved institutions were strictly limited. Since then, increased tax, spending, and borrowing powers have given both the Scottish and Welsh Parliaments substantial control over elements of the income tax system along with a series of fully devolved taxes. Holyrood is also responsible for nearly £4 billion of social security payments. In Northern Ireland, a recent Fiscal Commission report renewed calls for tax devolution if/when the Assembly is reconvened.

Debates over greater fiscal devolution have typically been motivated by arguments over improved accountability and local policy autonomy. In contrast, the scale of risk transfer and how to manage those risks – both in the short and long-run – have been less to the fore.

A man wearing a suit and tie
Professor Graeme Roy FRSE, Dean of External Engagement and Deputy Head of College (Social Sciences College Senior Management), University of Glasgow

Fiscal devolution and risk

In a system of fiscal devolution, where should the balance of financial risk lie: with the UK government or the devolved institutions?  

  • Since tax devolution in 2016, the Scottish Government has started to face a net income tax position that has been less positive than it had hoped. A recent report by the Scottish Fiscal Commission estimates that despite seeking to raise an additional £1 billion in income tax, mainly from high earners, the boost to the Scottish Budget is projected to be much less (at ~£300 million).
  • By contrast, in Wales, the net tax position has been positive, leading to a boost in the budget.
  • In Northern Ireland, the devolved administration most dependent upon a block grant from the UK Treasury, the ‘Barnett squeeze’ on public spending is projected to lead to fewer resources per capita in the years to come, despite ‘needs’ being higher.

Are these outcomes the result of devolved policymaking, UK policy decisions, or potluck?

The Fiscal Framework for the Scottish Government is currently under review, with the Scottish Government arguing that its tools to manage day-to-day budgets (including borrowing powers and the use of reserves) are insufficient to match its new spending responsibilities.

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All three devolved administrations expressed concerns during Covid-19 about the management of risk, not least in the event of a Covid outbreak having a disproportionate impact upon one part of the UK but funds allocated based upon a share of spend only in England. Concerns over the management of the implications of the ‘cost-of-living’ crisis, and the outlook for public spending across the UK, have only added to immediate concerns over the risks facing devolved finances.

Long-term fiscal sustainability is also an important area of debate. Building on the work of the Office for Budget Responsibility at the UK level, work is being undertaken to better understand the unique challenges/opportunities within the devolved nations of the structural factors that will impact their finances in the long-term. Demographics, especially population ageing, the effects of climate change and structural economic change, all have the potential to look quite different across the UK.

Are current fiscal powers optimal for managing day-to-day and longer-term risks? And do the devolved administrations have the right tools to manage the financial risks they are likely to face now and in the future?

Professor Graeme Roy FRSE, Dean of External Engagement and Deputy Head of College (Social Sciences College Senior Management), University of Glasgow

This article is part of the Constitutional Futures Initiative.

The RSE’s blog series offers personal views on a variety of issues. These views are not those of the RSE and are intended to offer different perspectives on a range of current issues.