Revising devolution finance: what the centre is doing, and what it should do

1. Presentation for conference on ‘Financing Devolved Government: The principles and practicalities of reform’ Cardiff, 21 January 2011 Alan Trench (University of Edinburgh and the Constitution Unit, UCL; Author, ‘Devolution Matters’ blog) Revising devolution finance: what the centre is doing, and what it should do

2. The Coalition’s government commitments Bill to implement recommendations of Calman Commission for Scotland – introduced 30 November 2010 Plus review of the fossil fuel levy in Scotland Review of ways of altering rate of corporation tax in N Ireland – still underway, now broadened to study of how to ‘rebalance the NI economy’ A commission on ‘similar basis to Calman’ for Wales, but only if there is a ‘Yes’ vote in a referendum on primary legislative powers and when public finances are restored Always dumb – overlooked role of Holtham, and treated Calman as if it were a UK creation Modified at 2010 Spending Review – now a commitment to ‘consider with the Assembly Government the proposals in the final Holtham report, consistent with the Calman work being taken forward in Scotland.’

3. The implications of those commitments Bilateral approach – treats each of Scotland, Wales and N Ireland as separate and distinct. No attempt to build any common model applying across the UK-wide. Considerations of equity are playing a very limited role – avoidance of any review of Barnett, whether as to baseline, uplift mechanisms, or institutional arrangements. (That seems to be happening in English local govt finance as well.) Clear favouritism toward Scotland and fairly harsh treatment of Wales (fossil fuel levy, no Barnett review, postponement of any other action until restoration of public finances, S4C, plus loss of major UK projects like St Athans) Even though it has much more of an electoral interest in Wales than Scotland Not coherent or thought-through – a sequence of ad hoc responses to specific problems, with no underlying long-term strategy.

4. Adoption of Calman model for Scotland closes off options for Wales and NI The Calman model is predicated on tax revenues close to the UK average, which Wales and NI clearly don’t have, (and notwithstanding how a reduction from the block grant is calculated). For similar models to work, you need: To ensure that block grant at least provides funding for public services on an equal-needs basis (cf Holtham) And that it has a mechanism built in to deal with lower-than-average tax revenues, esp if the future growth rate of those should fall behind the UK average (the Holtham proposals are in difficulties here) The alternative model proposed in Scotland – ‘full fiscal autonomy’ – similarly relies on tax revenues at least close to the UK average (if not above it). It has nothing to offer Wales or N Ireland.

5. The problems with the ‘Barnett’ block grant I • The block grant is calculated by making changes depending on changes in spending on ‘comparable functions’ in England • This has the effect of tying the overall structure of devolved public services to those provided in England – if the nature of those services radically diverges from the English model, the devolved govts are in difficulties • Higher education – the English fees regime since 2004 – is an example. It expands the overall resources available to English univs without providing a consequential to the devolved govts. With removal of most of the teaching grant and raising of the fees cap, that will get worse. • Council tax benefit in Scotland, and the proposed replacement of council tax by a local income tax • What would happen if the UK Govt were to replace the NHS with an insurance-based system?

6. The problems with the ‘Barnett’ block grant II No-one has raised objections to this yet, but the structure of devolved public policy has remained pretty consistent so far ‘Policy variation’ has generally been in different ways of administering the same service or providing free or for less cost services that are charged for in England (long term care, prescriptions) How would this respond to fundamentally different approaches to making policy across the UK? (Christie Commission in Scotland) This cannot deliver the sort of variation that a Conservative UK Govt concerned with maintaining UK unity might well want … which is enabling devolved govts to provide a more or less social-democratic welfare state while England pursues something much more restricted and less dependent on public spending But that sort of widespread variation is pretty common in the more decentralised federal systems – Canada, Switzerland, US, even Brazil And that means that devolved fiscal autonomy needs to be sufficient to enable devolved governments to raise enough by way of tax to pay for those services

7. The problems with the ‘Barnett’ block grant III • There are also long-standing problems of procedural fairness surrounding the block grant • As regards its calculation and management by HM Treasury acting alone • And as regards resolution of disagreements and disputes, again in hands of HM Treasury and UK Cabinet • The 2010 protocol on dispute avoidance and resolution has done nothing to resolve those concerns – witness what happened over the 2012 Olympics (recently referred to it). • Moreover, the intergovernmental mechanisms that might help give the devolved parts of UK a say in the formulation of the English policies which they de facto have to follow are non-existent or ineffective

8. What we get instead is … • A lack of imagination in devolved policy-making (tweaking English policy at the margins) • A political agenda of ‘resistance to cuts’ with not much of a positive alternative • A financial and constitutional debate characterised by traditional UK party politics and the search for short-term party advantage • And a set of Manichean contrasts – ‘devolution v. independence’ etc • No strategic thinking or constitutional planning does • The real planning horizon for these matters is not ‘the next election’ (as at present), but 15 years or so

9. Having these debates properly requires Longer term thinking and planning A lengthy process that balances, and incorporates, political and technical judgements The New Financial Arrangement in Switzerland Paying due regard to the role of experts, and the judgements they can and can’t make Accepting that constitutional politics requires a degree of broad consensus (at both elite and popular levels) to command legitimacy Understanding that you’re writing rules to which both you and your political opponents will be subject

10. What options are there for the UK Government? In a recent paper in The Political Quarterly, I identified six: The status quo A ‘fair grant’ Calman-minus (the 2009 UK proposals) Calman-plus (building on the Calman recommenda-tions to create more extensive autonomy, and be applicable to Wales & NI) A ‘more or less federal model’ Full fiscal autonomy for Scotland I concluded that the first three of these, and the last, had no real attractions to a UK Government, and that the options revolved around 4 and 5.

11. Calman-plus • The Calman recommendations (devolve 10 points personal income tax, smaller taxes) but also • Use actual revenues, from as early a date as practicable • Devolve more tax points • And allow devolved decisions about progressively (pace Holtham) • Review of block grant, with long transition • More ample borrowing powers • Speedy transition – by 2015 • The Scotland bill does a number of these (actual revenues and transition period) but not the others

12. The ‘more or less federal model’ The objective: a financing system that corresponds to, and supports, the constitutional arrangements the wider public in Scotland and Wales clearly want – a ‘strong’ form of devolution, including control over taxes Its key elements: Substantial autonomy over personal income tax, and a reconstructed relationship between PIT and National Insurance so PIT is for ‘devolved welfare’ and NI for ‘UK welfare’ Other devolved taxes? Betting, tobacco and gaming, plus power to introduce further taxes where permitted under EU law Redistributive block grant relating to spending needs to ensure equitable level of public services and Differing tax bases and levels of income General Borrowing powers – capital spending and revenue smoothing Need to alter institutional arrangements (HM Revenue & Customs and UK Statistical Authority in particular)

13. The ‘spending’ block grant • Strong support for a block grant based on relative needs (including Calman, Holtham, Lords SCBF) • funding should be allocated to the various parts of UK according to how much it costs to provide a particular level of public services there • A long-standing principle of public finance in UK - ‘long established’ in 1977 if not before • Roughly comparable to principles governing equalisation in federal systems e.g. the Canadian formulation of ensuring provinces have the means ‘to provide reasonably comparable levels of public services at reasonably comparable levels of taxation’ • The question is how one does that ...

14. Calculating the ‘spending’ block grant II • Lords SCBF and Holtham reports recommend a simple ‘top-down’ approach • Use relatively few indicators, which are significant in themselves (demographic ones), proxies for wider factors (e.g. morbidity/ mortality indicators for health), or both • Holtham found 90 per cent of variation could be accounted for by 2 variables, and 95 per cent by 6. Their final formula used 7. • Needs an independent body to calculate and manage the system – a ‘UK Funding Council’

15. The ‘fiscal equalisation’ grant • Holtham devotes much attention to methods for calculating appropriate reduction from the block grant to allow for their form of partial fiscal autonomy • Problematic – intellectually, not very parsimonious; and not ‘future-proofed’ • A grant, or stream within the block grant, that explicitly addresses fiscal equalisation would be desirable here • Could be comparatively simple – based on product of a ‘standard UK penny rate’ of personal income tax: • Work out UK average income from a penny rate of income tax (on per capita basis) • Work out variance from that of the actual tax revenue in Scotland/Wales/NI (again, per capita) • Grant = the difference between 1 and 2 multiplied by population of S/W/NI (which could be negative)

16. Institutional arrangements for the ‘fiscal equalisation’ grant • Operationalising ‘standard product of a penny rate’ could be complex: at what marginal rate of tax? • Need to have accurate figures for actual tax revenues at UK level (which exist) • And for Scotland, Wales and N Ireland – which are harder to get and certainly aren’t published (GERS and Holtham both used estimates) • Many of tasks (calculating the amount of the fiscal equalisation grant) would fall naturally within the remit of a UK Funding Commission (or UK Statistical Agency) • But the position of HMRC would need to change. It should become a ‘four-government agency’ (like the recommendations about statistical bodies above), reporting to all the governments who receive tax revenue from it.

17. Some concluding points The UK Government has tackled specific devolution issues relating to particular parts of the UK. It doesn’t have a general ‘devolution strategy’. It has no plan to work out how to manage relationships between the various parts of the UK, or a clear narrative to explain those relationships. That sort of debate is structurally biased in favour of nationalist parties, and puts unionist ones on the defensive. Such a strategy would enable the UK level to respond effectively. But getting there involves a very different outlook from the UK, and a different approach to the conduct of the debate.

18. Read more on the ‘Devolution Matters’ blog http://devolutionmatters.wordpress.com/