Devo more, devo plus and so on: extending devolution in the UK, and financing it Presentation by Alan Trench for PSA Territorial Politics Group conference, Brussels, September 2012

Where we are regarding Scotland Scotland Act 2012 – Limited tax devolution, no significant change in functions Independence referendum – October 2014? – Almost certainly one question: ‘independence yes or no’ – no ‘3 rd option’; and must be ‘decisive’ Scottish voters want more devolution – particularly for tax and welfare functions Unionist parties say they are willing to consider greater devolution – But only after ‘No’ vote in independence referendum Proliferation of attempts to work out what ‘enhanced devolution’ might be

Scotland is not the only show in town Wales: Silk Commission. A Calman-like approach to fiscal accountability? – Won’t work without restructuring the block grant, which is off Silk agenda N Ireland: been seeking corporation tax devolution, increasingly realising what a bad idea it is – Project of former Sec of State (Paterson), not the new one (Villiers) – Seeking a graceful way out? England: increasingly antsy Still no overall UK Govt strategy

Devolving additional functions What other functions might ‘enhanced devolution’ for Scotland (and perhaps Wales and N Ireland) devolve? – Calman struggled to find ones (though perhaps didn’t look that hard) Immigration? (nb Fresh Talent hardly a striking success) Broadcasting (Scottish Broadcasting Commission rather a unionist blueprint) What others? None of these are expensive, in public spending terms Welfare is really the key – and that is hard to do financially

Making meaningful fiscal devolution work Easier said than done! UK a highly fiscally centralised state (and has been for hundreds of years) Both HM Treasury and HM Revenue & Customs are pretty blinkered in outlook, don’t recognise political imperative of delivering fiscal devolution – Serious capacity issues for HMRC as well Questions about what taxes to devolve And the practical and political problems of the current fiscal balances within the UK – as well as wider debt and deficit problems But the way the Barnett formula ties the model of devolved public services to those in England provides a formidable constitutional reason to change the system

What is the purpose of fiscal devolution? SNP seek it for control over the Scottish economy – a different vision from unionist parties (committed to an integrated UK economy) Another starting point is funding devolved public services – Health, education and local govt already devolved – Welfare benefits the major possible addition – Costs (probably) slightly countercyclical welfare costs spike in recession, demand for health & education goes up a bit – Which means you want stable revenue sources – And to fund that (largely) from own-source revenues, that means devolving some big taxes

My model, for devolution as it is Devolve all personal income tax, outright Also taxes relating to land (CGT now the main extra one) – Not much revenue, but proper control ‘Sin taxes’: alcohol & tobacco duties – Overlap with devolved policy functions more than revenue And assign 10 points of VAT (as can’t devolve) This puts around 50 % of Scottish Govt current spending under devolved control, and 60% goes straight to SG without any other involvement Seems to work reasonably well for NI and Wales too And a grant element (which can assure significant measure of equity)

My model II: Grant The grant element is undeniably difficult Basis: resource equalisation or fiscal equalisation? Resource equalisation could look like the simple needs based grant recommended by Holtham Commission etc – But question of reference point – ties dev govts to ‘English’ model of public services, which could be very difficult Fiscal equalisation is less ‘helpful’ to poorer areas (higher demand for/costs of services not caught) – But reference point is a UK-average measure of fiscal capacity – no implicit tie to ‘English’ levels Scotland gets a small grant on either measure – Slightly higher level of needs than UK average, slightly lower revenues/fiscal capacity

How much fiscal power do you need to spend if you devolve welfare? In , the devolved budgets were Scotland: around £30.7 bn N Ireland: around £10 bn Wales: £16.1 bn ‘Social protection’ spending was Scotland £18.3 bn(68% of devolved budget) NI £6.825 bn (76%) Wales £11.3 bn (70%) Outright devolution of welfare implies large-scale fiscal decentralisation – as well as creating huge problems for Wales & NI because of their fiscal deficits (Spending data from PESA, tables 1.9 and 9.14)

Major taxes and what they generate ( data) United KingdomScotlandNorthern Ireland Revenue ( £ million) As % of revenues Revenue ( £ million) As % of revenues Revenue ( £ million) As % of revenues Personal income tax144, , , VAT 85, , , Corporation tax 32, , Employee ’ s NI contributions 52, , , Employers ’ NI contributions 44, , Fuel duties 24, , Alcohol & tobacco duties 16, , Local taxation (council tax and NDR) 46, , These taxes as percentage of overall current revenue

Welfare devolution Funding welfare devolution – finding additional tax revenues to underpin if not wholly pay for outright devolution of welfare (even excluding old age pensions) – is very hard Even if it were politically viable (which it isn’t), only ‘full fiscal autonomy’ could deliver enough tax room to make that work Only possible for Scotland, not Wales or N Ireland (which run huge fiscal deficits) – How ‘unionist’ a solution is that? UK Govt welfare reform, and structure of the Universal Credit, messes up another option: – devolving smaller benefits with interface with devolved services (e.g. attendance allowance & long term care; HB) – leaving big redistributive ones (JSA, old age pensions) at UK level

Welfare devolution II So creating a system that allows for meaningful differentiation of (redistributive) welfare by devolved govts will involve something less than outright devolution 2 possible models, both involving adding to UK (= de facto English) levels of welfare by devolved govts, which are given meaningful tax room so they have headroom and flexibility to do so – Either by a ‘top up’ of benefits administered by DWP – Or by giving dev govts power and resources to supplement UK benefits, but have to administer that themselves That probably achieves its constitutional objective, but will it work politically?

Can one go further than that? If you want to devolve more revenue (and you have to, if additional functions are devolved), how do you do it? 3 options: National insurance contributions – Employer’s NICs – a payroll tax. Practical problems? – Employees’ NICs – how to pay for UK welfare? North Sea oil & gas – Geographical share or per capita share? (Per capita share not very – Volatility, driven by oil price & extraction rate – no control possible Corporation tax – Fragmentation of UK economy and tax competition – Administrative difficulties (esp for companies) – Volatility

Volatility is a real issue A finance minister needs to have stable and predic- table funding for stable or countercyclical services – Stability and predictability are things that Barnett delivers rather well (not all grant systems do) Between and , at UK level – Personal income tax receipts: - 7.1% – VAT receipts: -7.0% – Corporation tax: -25.1% – North Sea oil & gas: % CT and NS receipts are difficult taxes to rely on, especially if not accompanied by taxes to balance possible downswings Starts to look like an argument for devolving employers’ NICs, which are the UK’s payroll tax

Some conclusions Practicalities make seriously enhanced devolution within the Union rather less-far reaching than one might think (or hope), especially if goal is to ensure some degree of UK-wide ‘equity’ – Though the end product of meaningful policy differentiation is possible Working out what spending functions are to be devolved is key to thinking about finance, and finding ‘extra’ taxes to devolve is tough Especially if one wants to go about it in a coherent way, drawing (for example) on lessons of the fiscal federalism literature (Devo Plus & Reform Scotland’s ‘grab-bags’)

Some conclusions 2 And all that means that in reality the gulf between ‘independence’ and ‘greater self-government’ for Scotland within the Union is greater than many think This also explains why a ‘3 rd option’ is very hard to include in a ‘decisive’ referendum – when no-one yet knows what it might actually be

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