'Devo More' not 'Devo Max': The realistic possibilities

Alan TrenchStevenson Lecture, University of Glasgow

11 November 2014

The impact of the referendum • Not just a rejection of independence, but an

endorsement of Scotland’s future lying within the Union, with further devolution

• Devolution is not an opt-out from UK rule, but a system of combining self-rule with shared rule

• And not something Scotland can unilaterally decide: – requires negotiation, partnership with the UK

Parliament & Govt, and other devolved legislatures and govts

• Implies further devolution should be union-reinforcing, not union-undermining

What is ‘more devolution’? • Greater self-government within UK clear preference of

plurality (often majority) of Scottish voters in run-up to referendum

• Always unclear what that meant in terms of powers: Scottish Govt already responsible for c. 65% of public spending in Scotland, has extensive legislative powers

• Design of devolution preserves UK-wide social security system, UK-wide economy and internal market (macro and regulatory – some devolution of micro instruments)

• Devolved welfare functions distributive not redistribu-tive ones (and built on admin devolution to Scottish Office)

What is ‘more devolution’? II• Public are concerned about taxation and welfare – According to SSA, c. 60 per cent of voters thought these

should be devolved – around same levels as health and education

• But SG is funded by block grant from Westminster, with minimal tax powers

• And has no welfare competences • Are we talking about a fundamental redesign of

devolution, or extending it to address those issues? • Fundamental redesign raises large and complex issues– Not promised by any of the pro-UK parties – Impact on other parts of the UK? – Can’t be accomplished in Smith Commission’s timescale

‘Devolution’ brings structural constraints

1. The UK tax system UK is fiscally very centralised, system not used to

territorial differentiation Scotland Act 2012 helps a good deal

2. EU law Limits tax options – a single VAT, state aid rules.

3. The Treaty of Union Single excise duty, no customs duties

4. A UK social union Costs of old age pensions Key, UK-wide benefits – JSA, ESA (UC)

Digression 1: ‘Devo Max’• Set out most clearly in Scottish Govt 2009 white paper

Your Scotland Your Choice• Devolution of all non-sovereign functions: everything

but defence, foreign affairs, currency and macro-economy

• Implies full fiscal autonomy: Scottish Parliament respon-sible for setting and collecting all taxes in/for Scotland – End to UK welfare state – Tax competition? — VAT?

• What about - Immigration? - Business & financial regulation?

- EU matters? - Old age state pensions?

‘Devo Max’ II • So: actually problematic in many respects – not a

‘straightforward’ solution • What sort of a Union is one Scotland largely opts out

of? Is that the union 55 per cent voted for on 18 September?

• Is that acceptable to the rest of the UK? Doesn’t the rest of UK need to consent to that sort of fundamental change? – How? A UK-wide referendum? – What happens if Scotland votes Yes but rest of UK votes No?

Some other problems fiscal devolution has to face

• Must devolve major taxes – this is first and foremost about the relationship between spending commitments and revenues to fund those

• But that is hard given centralisation of the tax system • Avoid creating spillovers – where transactions take place

for tax reasons not because they were going to take place anyway

• Plus, want to avoid devolving volatile tax sources – – Devolved services are inflationary/counter-cyclical in nature,

want taxes to match that (or ideally which are counter-cyclical!)

• And think about compliance and administrative costs

Good taxes to devolve• Taxes on land – Non domestic rate and council tax already devolved – Stamp duty land tax (land and buildings transaction tax) and

landfill tax devolved from April 2015 – Aggregates levy? – Capital gains tax on land transactions

• Taxes on income– Huge tax base – often shared in federal systems – employee’s National Insurance Contributions a way to share it

• Taxes on sales – Growing tax base – But EU rules prohibit devolution of VAT

Some bad taxes to devolveTaxes on transactions, movable items, taxes

which undermine the overall tax base • Corporation tax – Declining tax base – To avoid brass-plating, limit to proportion of profits generated

in a particular area – High compliance costs, esp for small businesses

• Fuel duty, tobacco duty (mobility)

• Inheritance tax (killed in Australia and Canada)

North Sea oil and gas • Needs to go with control of the licensing regime

as well as corporation tax devolution • Which implies a huge shift in control of the UK

economy • What about other parts of the UK that formerly

had natural resources but don’t now? • The one thing worse than devolution would be

assignment! – Volatility but unable to control revenues

Major taxes and their revenues 2010/11

So …• Local taxation is c. 8.5 per cent of revenues, related to land, already

devolved • Personal income tax is c. 23 per cent of total tax receipts, suitable

for devolution • VAT is c. 18 per cent of total receipts, can’t be devolved (EU rules) • NICs total c. 18 per cent of total receipts, really two taxes – a

supplemental, not very well designed, income tax on employees, and a payroll tax on employers – Link to welfare state functions, and the old age pension – Access for UK Govt to income tax base?– Devolving employee’s NICs doesn’t make much sense. Devolving employer’s

NICs might.

• Corporation tax is c. 6 of tax revenues. Also pretty volatile, and mobile. EU state aids issues too.

• Fuel duties are also highly mobile

The Devo More fiscal package• All personal income tax – including rates, thresholds, exemptions

and reliefs • Assigned share of VAT (can’t devolve) – 10 points • Smaller taxes:

– Land taxes (already largely there through SA 2012/Wales bill, and council tax/NDR)

– Alcohol and tobacco duties desirable (though there are serious legal and practical difficulties)

– New taxes?

• The next least-bad tax to devolve would be employers’ National Insurance Contributions

• Plus a redistributive block grant, based on relative need– With reductions to allow for fiscal capacity for devolved tax bases, to be

reviewed periodically

The impact of tax devolution on SG budget

Digression 2: the Barnett formulaThe Barnett formula is generous to Scotland

financially, but doesn’t do it many favours in other ways

• Integration into Whitehall’s financial system is constitutionally inappropriate for governments with separate control (the ‘English model of public services’)

• Plus gives Treasury control over what triggers a consequential, control when disagreements

• In any case, convergence will start to happen in next decade if there is nominal growth in public spending

• And Calman-style tax devolution will mean an increasingly notional calculation of the block grant

Devo More and welfare Based on maintaining a UK-wide social union, treating all

citizens equally wherever they live Means key benefits that affect life chances need to remain UK-

wide: JSA, ESA, disability benefits In one country, should those really have different eligibility

criteria depending on where you live? But including devolution of benefits that overlap with

devolved services• Housing Benefit (problematic because of UC) • Attendance Allowance (only benefit where devolved govt can

remove eligibility of a claimant) • And administration of Work Programme (but not JSA/ESA

for WP participants) How to calculate funding for devolved benefits? (Proxies)

Devo More and welfare II Plus power for devolved governments to supplement UK-

level welfare payments from their own resources A spending power Gets around constitutional prohibition on providing cash

benefits (cf strange design of both long term care for elderly and anti-bedroom-tax measures)

Which could be used at the margin (help for jobseekers) Or more substantially (additional child benefit?) And would let introduction of new programmes How to use this? A new agency, or piggy-back on existing

ones eg Jobcentre Plus Impact of welfare devolution on how much of its spending

SG raises itself?

Devolved welfare and tax raising

‘More devolution’ and the parties• Lib Dems: – Devolve all personal income tax save personal allowance – Assign corporation tax revenues – No welfare devolution

• Labour– Increase devolution of income tax from 10 to 15 points – Upward but not downward differential increases of top rates – Preserve Barnett formula – Devolve Housing Benefit, Attendance Allowance, operation of

Work Programme • Conservatives – Devolve all personal income tax save personal allowance – Assign proportion of VAT revenues – Devolve HB, AA, power to supplement UK-level welfare

Comparing forms of further fiscal devolution

‘Constitutional devolution’Devolve control over the ‘devolved constitution’ • Number of deputy presiding officers, size of Parliament,

number of ministers, electoral systemNeed to ensure consensus for changes: two-thirds

majority vote?

What does ‘more devolution’ mean? • Wider control over policy levers – able to use all relevant

levers, not just ones that happened to be devolved • Power to introduce new welfare and tax policies – It’s easier to introduce new programmes than restructure existing

ones • Enabling tax and welfare to be devolved at the margin – but

it’s a very wide margin • So – Scotland could have prevented application of the bedroom tax– Could justify the costs as well as benefits of a universal child-care

scheme – No question about preserving the NHS – Could restructure long-term for elderly in more rational way

if Scottish taxpayers are willing to pay for those measures

The constitution isn’t just about Scotland

• England: English votes for English laws at Westminster Regional/city-regional devolution

• Wales: Wales bill: Calman-style tax devolution, with referen-dum,

but no lockstep Devolution of policing, criminal justice. ‘Reserved powers’

model? • Northern Ireland

Corporation tax devolution Haass process: flags/parading, historic legacies Welfare reform: un-devolution?

A UK constitutional convention? • Supporters: Carwyn Jones/Welsh Govt,

Commons PCRC, ERS, Unlock Democracy, Labour Party

• The least-bad idea in town? • Who, with what authority, chosen by him,

when, for how long, with what remit, who determines the remit, what happens to the report/outcome?

A sort-of federal future for the UK?• For Scotland and Wales, the ‘self-rule’ side of a federal

system is conceivable and not that far off • For N Ireland, it’s harder because of the consociational

elements of the Belfast Agreement, and role of UK and Irish Govts in assuring that

• England is a major obstacle to any moves toward federalism – Symmetrical regionalism has no popular support – But England is so big as a whole it would distort, perhaps

destroy any federal system • The ‘shared rule’ side is even more difficult: – Lords reform has to be a key part – And also implies changes to role of the Commons, the UK

Cabinet and civil service that have been avoided so far

Read the Funding Devo More report http://www.ippr.org/publication/55/10210/funding-devo-more-fiscal-options-for-strengthening-the-union

Read the Devo More and Welfare report http://www.ippr.org/publications/devo-more-and-welfare

Read my blog, Devolution Matters: http://devolutionmatters.wordpress.com/

Follow me on Twitter @devomatters