Wednesday, 10 February 2016

Barnett Fair?

During a brief appearance on BBC's Scotland 2016 last night I was asked about Nicola Sturgeon's letter to David Cameron (full version below) in which she highlighted the importance of the interpretation of the Smith Commission's "no detriment" clause in relation to the ongoing Fiscal Framework negotiations.

I had about a minute to try and cover this rather complex subject and - if I'm honest - I think I made a pretty decent fist of it. Judge for yourself: the relevant part starts at 25:30


With the benefit of the breathing space that this blog allows, forgive me while I let my belt out a notch and try to present a slightly more complete answer.

The key question here is: how do we interpret the Smith Commission's "no detriment" clause?

Even if you don't read the Smith Commission Report in full, I strongly recommend you read paragraph 95 from which I extract the following snippets (bold highlighting is mine);
95 (3): No detriment as the result of the decision to devolve further power; the Scottish and UK Governments' budgets should be no larger or smaller simply as a result of the initial transfer of tax and/or spending powers, before considering how these are used.
[...]
95 (4): No detriment as a result of UK Government or Scottish Government policy decisions post-devolution
(a) Where either the UK or the Scottish Governments makes policy decisions that affect the tax or expenditure of the other [...]
(b) Changes to taxes in the rest of the UK, for which responsibility in Scotland has been devolved. should only affect public spending in the rest of the UK. Changes to devolved taxes in Scotland should only affect public spending in Scotland. 
So there are in fact two "no detriment" clauses in Smith.

95(3) is very straightforward. If control over a tax that currently generates £1bn of revenue is transferred (and therefore Scotland gets to keep that revenue directly) then the block grant is reduced by £1bn at the same time; there is no detriment on the initial transfer1.


It's worth noting that if this "no detriment" principle was followed to allow all tax raising powers to be transferred to Scotland then there would still be a rump of block grant left at the end of about £8bn (because the "no detriment" approach protects the value of Barnett under current tax raising circumstances2). Readers of Chokkablog will be very familiar with this figure; if you're not please read "What's £8bn Between Friends"


95(4) is conceptually simple but could be hugely complicated in practice.

First of all let's clear up a surprisingly widely held misconception: this does not mean that the block grant would get reduced if Scotland raised more taxes by using one of its powers (increasing income tax for example). This point should be self-evident (there would be no incentive to use powers to raise more taxes if any increase was offset by a block-grant reduction) but Lord Smith himself felt the need to offer the following clarification in the House of Lords in November 2015;
We arrived at a principle whereby, when taxes are raised, the money is kept and is available ...3
The tricky point this clause is trying to to address is the knock-on effect of changing a tax in one country on tax or spend in another. Here are just three illustrative examples (there are many more);

  • If different healthcare charges were introduced in one country but not another, that could trigger health tourism, placing an increased cost burden on the "cheaper" country

  • If Air Passenger Duty is reduced in Scotland that could cause loss of air traffic to (say) Newcastle Airport thereby reducing the UK's APD take

  • If one country created a low income tax regime it could cause high earners to relocate to the other, thereby reducing the tax take in the country they leave

Clearly isolating and robustly quantifying effects like this will be extremely difficult if not impossible. The presence of these types of effects (whether intended or unintended consequences of Scotland using its devolved powers) is one of the main reasons why some of us counselled against the rush to devolve more powers. I covered many of these arguments while the Smith Commission was deliberating in 2014 and - having argued against devolving income, corporation and capital gains taxes or the minimum wage - I concluded
"... whilst "more powers" is a superficially attractive concept, the devil as always is in the detail.  "More powers" could - if not carefully calibrated - lead to the dismantling of the very benefits of Union that the Scottish people voted so overwhelmingly in favour of retaining."
But we are where we are. The Smith Commission agreement has to be honoured and the issues above should be resolvable by pragmatic political negotiation. As we'll come on to see; it's not as if the existing Barnett arrangement is flawless4.

But there is another far larger stumbling block to negotiation which has been raised by the SNP. In Nicola Sturgeon's letter to David Cameron (see page 2 below) she states;
"we are not about to accept risks [...] about which Smith made no recommendation"
So she explicitly accepts the points she's about to raise are not covered by Smith's recommendations before going on to say;
"The UK government's proposals for adjusting the block grant would require Scotland to grow receipts from devolved taxes more rapidly than the corresponding receipts in the rest of the UK simply to ensure its budget is not reduced. This does not meet the Smith Commission's no detriment principles.
We'll come back to this, but we've see what the Smith Commission explicitly covered in their "no detriment" principles and - particularly given she has already accepted that Smith "made no recommendation" about this area - the last sentence here is an unfounded assertion. She goes on to elaborate by saying;
In addition* we could not accept the risk that Scottish funding might be reduced below what it would have been under current funding arrangements simply as a result of differential population growth [...] We could not accept that relative demographic trends within the UK [...] should lead to a reduction in the Scottish budget
* I don't think this is actually "in addition", I think she's explaining why the highlighted problem arises

So what's going on here, why would "relative demographic trends" lead to a reduction in the Scottish budget and is it reasonable to "not accept" exposure to this effect?

To understand this we need to understand both the intended and the actual consequences of the Barnett Formula. Bear with me, this isn't as bad as you might be expecting - let's take it in steps and illustrate by example

  • Scotland famously gets more spend per capita than the rest of the UK as a result of the Barnett Formula

  • The intention of the Barnett Formula was to close that gap over time (what is sometimes referred to as the "Barnett squeeze") by allocating any growth in spend equally per capita between the two countries

  • This works if both country's populations grow at similar rates. If you think about it, if all new Barnett money is allocated on a per capita basis then an increasingly large share of Barnett money becomes shared this way. The overall Barnett sum would trend towards being split equally on a per capita basis (the "unfairly" split base becomes less and less significant over time)

  • But - and it's a big but that was not foreseen by Barnett - this doesn't necessarily work if Scotland's population grows more slowly than the rest of the UK. This is easily illustrated by example;
    • Say Scotland's population is static but the rest of the UK's grows by 10%
    • If the rest of the UK maintain spend per capita then their total spend rises by 10%
    • Barnett means Scotland gets our population share of that 10% rise so our spend rises ...
    • ... which means Scotland's per capita spend must rise (spend has gone up, population hasn't) even though the UK's hasn't. Good old Barnett.

This really matters. Scotland's population growth lags the rest of the UK; at the moment the way Barnett is structured means we actually benefit as a result. The effect is of course symmetrical - for the same reason we currently aren't suffering the same level of per capita spend spend reduction as the rest of the UK

So the problem for Sturgeon - the problem for Scotland - is that by devolving powers we inevitably shift some money away from being indexed to UK spend and towards being directly dependent on our (population's) actual tax revenue generation. Because our population growth is slower that means we lose out compared to the alternative of not devolving the powers and maintaining Barnett.

It seems to me that it was never the intention of the Smith Commission to have "no detriment" applying to "compared to the alternative of not devolving the powers", but by trying to retain this rather perverse Barnett effect that is what the SNP are arguing for.

There are three lines in Smith that seem relevant here
95 (1): ... the block grant from the UK government to Scotland will continue to be determined by the Barnett Formula
95 (3) (c): The future growth in the addition to the block grant should be indexed appropriately
95 (6): ...the arrangements should [...] be seen as fair, transparent & effective

Well that's not a massive help really is it? As the IFS have pointed out
"it is impossible to design a block grant adjustment system that satisfies the spirit of the ‘no detriment from the decision to devolve’ principle at the same time as fully achieving the ‘taxpayer fairness’ principle: at least while the Barnett Formula remains in place." 
For what it's worth I think the IFS reach this "impossible" conclusion because they are applying a broader interpretation of "no detriment" than that  intended by Smith. It seems clear to me that the specific demographic trend benefits of the Barnett Formula can only be retained in proportion to the block grant. A proportion of the currently "locked in" benefit of Barnett must surely be sacrificed in return for transferring funds out of the block grant when devolving control/retention of more taxes.

So what?

The problem here is that the Barnett Formula is - under current demographic trends - objectively unfair to the rest of the UK. It's therefore impossible to find a fair solution that both gives Scotland the upside of replacing Barnett money with direct control/retention of more of our own taxes whilst at the same time keeping the protection from demographic trends that Barnett affords us. The fiscal framework negotiation are simply highlighting the inherent unfairness in the way an unchanged Barnett would work in Scotland's favour if no further powers were devolved.

More broadly, these negotiations highlight the fact that with devolved power comes devolved responsibility. Part of that devolved responsibility means being more directly affected by Scotland's particular demographic challenges.

I fear that in their summit-fever rush for more powers the SNP made the mistake of believing their own grievance-rousing rhetoric about how badly the Union treats Scotland. The next few days of negotiation are critical: we're about to find out how high a price we're going to pay for the SNP's intemperate haste to seize more powers and weaken the bonds of Union.

*****

Full Letter from Nicola Sturgeon to David Cameron (With thanks to Glenn Campbell's Twitter feed)




1. There is a minor point of uncertainty here between what any given tax did raise in the prior year and will raise in the year it's tranferred (before it's potentially changed) - but that is a relatively trivial point of negotiation

2. This would be in addition to our per capita share of debt, so is not the same as saying we would have an £8bn deficit; we would effectively be able to run a deficict £8bn larger than our per capita share of the UK's

3. As is often the way in live debate he completed the sentence with a form of words that can be somewhat confusing: " ...and, when taxes are reduced, the money comes off the block grant".  The only interpretation of this that makes sense to me is that by "comes off the block grant" he means you'd just have to use the block grant as it exists (take the money off it) rather than that the block grant would be reduced (which would clearly be ridiculous)

4. As the IFS have pointed out, in addition to the relative population growth effect discussed here there issues around the treatment of business rates as well

39 comments:

carl31 said...

How much, out of the Barnett block grant allocation, would be better measured by a metric that is not 'per capita'? - such as a 'per unit of land', or 'per public building' measure?

Anonymous said...

But should Scotland be exposed to demographic risks when Scotland has no control over immigration, or most taxes (inheritance tax, income tax on savings and dividends, capital gains tax, VAT), or monetary policy? Given their economic effect, these all have an effect on where people live. I just ask the question. Have you taken a look at Jim Cuthbert's article over on Bella Caledonia?

Richard A said...

Anonymous. I have heard SNP raise the point on immigration and must sy I am not sure what the point is. Anyone in the EU can come and work in Scotland, millions of citizens. Or is it just non EU migration (middle east, africa) which will drive Scotland?
It is up to the SG to create the conditions to attract them which clearly is not the case. Have we ever heard anyone from the SG talk about aspiration, wealth creation, reward - NO.
So lets not get into the red herring that is immigration.

Garve said...

Interesting blog Kevin, but your concluding paragraph is exceedingly odd.

"I fear that in their summit-fever rush for more powers the SNP made the mistake of believing their own grievance-rousing rhetoric about how badly the Union treats Scotland. The next few days of negotiation are critical: we're about to find out how high a price we're going to pay for the SNP's intemperate haste to seize more powers and weaken the bonds of Union."

Perhaps I'm suffering from false memory syndrome, but as I recall the last few months before the referendum featured promises of more devolved powers from Labour, the Lib Dems and the Conservative party, not the SNP (or the Greens). It was the unionist side which made the vote one between independence v more powers rather than independence v the status quo.

To quote from the Vow, "all three main parties will deliver change for Scotland", "extensive new powers for the Parliament will be delivered" and "People want to see change. A No vote will deliver faster, safer and better change than separation."

18 months later, you blaming the SNP for "intemperate haste to seize more powers" seems a ludicrous rewriting of history.

The Smith Commission itself was made up of 60% parties from the unionist (more powers) side and 40% from the independence side. The SNP are now in the position of trying to get the best financial deal they can from a situation they didn't campaign for and which they did not have control over.

Fraser Whyte said...

Can you confirm my understanding of this?

There are two indexations being suggested which would affect the spending as follows. In the SNP's preferred indexation, if rUK's population increases faster than Scotland's then UKGov increasing overall spending in rUK but keeping *spending per capita* the same would result in higher spending per capita here?

In UKGov's preferred indexation, spending per capita in both rUK and Scotland would increase proportionally?

Is that correct?

Also, I thought Barnett proportions were dynamic and amended for population changes across the UK? Is that wrong?

Kevin Hague said...

I *think* the answer to your first question is Yes and to the second is "that's very much a second order effect compared to the current per capita share of change effect described above"

Anonymous said...

Scotland has PLENTY of control over immigration. There are 60 million UK residents who could migrate to Scotland tomorrow. And they all speak English! I can't get head round the fact that the seps claim that Scotland under the SNP is a wonderland of joyous civic engagement, whilst the rest of the UK is a hellhole. Then they turn around and in the very next breath says "well, of course no one from the rest of the UK is ever going to move here: we have to have the power to let in people from alien cultures who don't speak out language".

Anonymous said...

No control over immigration - like the rest of the UK, Scotland has no control over immigration from the EU which is where the majority of UK immigration comes from anyway. By Scotland staying in the EU/applying for membership as an independent country, we would have the same lack of control. In that sense, devolving that wouldn't change anything (I have heard the arguments for post-university visas for non-EU nationals but these are small numbers that wouldn't cause a significant demographic shift in Scotland). Unless you have an open door policy to the rest of the world, nothing will change. You could do that, but you'd probably end up with border controls at Berwick and Gretna. Monetary policy? Yeah maybe, you might get some changes in population, if you don't keep the pound and create your own currency (not without significant difficulties and costs). But if you try to get a currency union with rUK or adopt the Euro, yet again, it's beyond your control, and therefore, so are the economic drivers for immigration. Change inheritance tax? What, lower or higher? You'll end up with people re-domiciling in late retirement for lower inheritance tax. This won't solve the problem of relative slow growth in the working age population. VAT - a lower sales tax on goods is highly unlikely to make Scotland so attractive that people opt to move there if it was reduced marginally. It would have to make the cost of living materially, significantly less to affect people's decisions to move or not to move to Scotland. Plus, the costs associated with the potential loss of universal service obligations for delivery of items bearing VAT, and higher overall distribution costs in Scotland compared to the rest of the UK, would have a downside effect. Etc etc. If Scotland wants to attract immigrants in sufficient numbers to compensate for its slow growth in population, it needs a strongly performing economy with high relative take home pay, low personal taxes, low corporation taxes (to attract inward investment), good infrastructure and a good quality of life. The SNP can't change the weather (or blame it on Westminster, try though they might) and I can't see how you can bring about any of the other changes by leaving the UK and not, as a result, incurring huge costs to Scotland. If your argument is not for independence but for somehow having control of all of the things you mentioned above, I don't see how that's workable. All taxes, immigration and monetary policy devolved but yet still part of the same country? That doesn't make sense. So in the context of the post-Smith powers and the NO vote, Scotland has to accept exposure to demographic risks or just refuse the devolution of income tax power. Arguing that having no control over immigration means Scotland shouldn't have to shoulder demographic risks sounds very much exploiting and arguing a principle rather than confronting the reality of what might ensue.

Anonymous said...

If that's how you feel, then why not write to Nicola Sturgeon and John Swinney and ask them to refuse the offer of further devolved powers? I recall that the unionist parties were offering a more powerful Scottish Parliament (no doubt they thought that this could potentially win over the undecideds.) I voted No but it wasn't for more powers, it was for Scotland to stay part of the UK. If you want me to add my signature to such a letter, I am happy to do so.

If you move on from the referendum, however, and listen to what the hierarchy of the SNP have said post Smith, you can list any number of quotations saying 'Smith doesn't go far enough . . .', 'we would like more powers than Smith offers . . .' etc etc. That's not a rewriting of history; it's just that we are now in 2016, not 2014 and people have argued for different things in recent months and adapted to the prevailing circumstances. That being the case, then having these proposed powers is surely better than nothing for Sturgeon, Swinney, Hosie, Robertson etc????

Anonymous said...

Kevin,

Immigration:

(a) the EU - the point about people being able to come from the EU is a fair one, as far as it goes. However, it looks back, not forward: the present UK Government is, of course, trying to put barriers in place of free movement in the EU. It's also quite possible that in two or three years time, we'll be out of the EU, and there will be no free movement. I don't think Scotland at that point gets to renegotiate the funding formula that's been agreed.

(b) non-EU - we've seen for example a minor but significant barrier put in the way of non-EU migration to Scotland that Scotland is likely to benefit from proportionately more than elsewhere in the UK - the scrapping of the post-study work visa. It's a great way to attract young skilled international immigrants to a place like Scotland that's currently relatively marginal economically.

Macro-economic powers:

I seem to have been misunderstood on this by the other Anonymouses above. I'm not making a case that Scotland should have control of other taxes, or that any specific policy on any specific tax is going to attract more people to settle in Scotland. (I'm sure the other Anonymouses above don't think that a 1 p cut in income tax is suddenly going to attract a flood of new immigrants to Scotland any more than a 1 p rise will cause a sudden exodus). I'm also not suggesting Scotland should have control over immigration policy.

I was simply pointing to very great degree of economic control that the UK Government has over the economy as compared with the Scottish Government. While I acknowledge that there are many advantages to being in the UK (a question that has been dealt with by the referendum) I think you also have to admit that policy made for the UK is not always best suited for Scotland - this is inevitable in a big country like the UK - but that represents a risk which Scotland shouldn't have to take on.

I've mentioned the minor example of post-study work visas, and the more major issue of immigration and EU policy generally. There are examples:

- the Conservative Party's hostility to wind power (and elements of climate change scepticism) has led to instability in renewables policy that has caused several major problems for a business that is proportionately far more important for the Scottish economy than the UK economy;
- I recall interest rates being pushed up by Conservative chancellors in the eighties to cool a house price boom that wasn't happening in Scotland - so disadvantaging all UK exporters, including those in Scotland, whose economy relied particularly on export;
- I also recall mortgage interest rate relief being allowed to income tax at a time when house prices in the south of England were sky high, and when over 60% of people in Scotland lived in rented accommodation;
- through the fifties to nineties there was a process of nationalisation and then re-privatisation of businesses that removed headquarters of private businesses from Scotland, and often didn't return them to Scotland (there are some notable exceptions, like SSE and Scottish Power - but see my comment above in relation to renewables). This seems to be happening again with the former big Scottish banks.
- the UK Government is proposing to spend many billions on a high speed railway that isn't planned to reach Scotland (any time within my life expectancy at least)
- when a financial transaction tax was proposed, David Cameron went to Brussels to put a stop to it, saying that the City's interests were Britain's interests. The City's interests are much less Scotland's interests than they are Britain's interests.

I repeat, I am not suggesting Scotland should take over macro-economic powers from the UK - I'm just saying that these powers count for rather a lot in determining how Scotland's tax base grows. The UK needs to take responsibility for the growth of Scotland's tax base, since it's UK policy that primarily will determine it.



David GREEN said...

Kevin, You write parenthetically, in your piece, that:

"It's worth noting that if this "no detriment" principle was followed to allow all tax raising powers to be transferred to Scotland then there would still be a rump of block grant left at the end of about £8bn (because the "no detriment" approach protects the value of Barnett under current tax raising circumstances2).

This is an interesting point, and accurate as it stands. If the circumstances you describe were to come to pass, it would make clear that there was this £8 billion rUK payment passing annually to Scotland. What does rUK get for this, because it might be money well spent from rUK's point-of-view? For example, it would be very obvious that independence or FFA would eliminate, at a stroke, the £8 billion, and the consequences would be obvious. The £8 billion is then the annual cost of maintaining the Union; a sweetener. Throw in the costs of not being forced to move Trident, and it begins to look cheap at the price. The Scots would then be selling annually something that rUK wants; a kind of rent. Of course, if North Sea oil revenues come back on song, then Scotland has some fiscal leeway and might terminate the arrangement. But barring that outcome, it is a choice between a reasonable Scottish standard of living made possible by rUK, or eye-watering austerity. I can guess which way the YES/NO vote would go.

What is interesting about the current negotiations is how serious the SNP has become in believing in the inexorability of Scotland's relative population decline. Your correspondent, Anonymous at 9.49, was correct, in my view, when they said: "If Scotland wants to attract immigrants in sufficient numbers to compensate for its slow growth in population, it needs a strongly performing economy with high relative take home pay, low personal taxes, low corporation taxes (to attract inward investment), good infrastructure and a good quality of life." Fat chance at the moment, and without substantial North Sea oil revenues, fat chance in the future.

Garve Scott-Lodge said...

The anonymous commenters seem to be missing the point with regards to immigration.

Let me give an example. My son left the Highlands to work in Colorado. He married a US citizen. UK rules make it extremely difficult for him to return with a non-EU spouse. The rules say he would have to first find a job earning £18,600 per annum - and this rises significantly should they have children. In effect, the UK government makes it very difficult for my (future) grandchildren to be raised near me even if their parents want them to be.

The Scottish Government has zero control over this. Clearly it would be beneficial for Scotland to have more young taxpayers like my son and his family, but that is controlled from Westminster rather than Holyrood.

The situation is made worse due to the disparity in wages across the country. Finding a job earning £18,600 is easier in London and the South-East than it is in the Highlands, so this rule actively discriminates against an Invernesian who'd like to bring his/her spouse home rather than a Londoner.

In effect, a policy has been introduced at Westminster which may be beneficial to the south-east of England but which is detrimental to Scotland. The Scottish Govt has no control over this and is not consulted before such decisions are made.

It is entirely correct that the Scottish Govt take matters like this into consideration when negotiating the fiscal framework. We should not be penalised when Westminster takes a decision which is detrimental to Scotland compared to the rest of the UK.

theambler said...

"The situation is made worse due to the disparity in wages across the country. Finding a job earning £18,600 is easier in London and the South-East than it is in the Highlands, so this rule actively discriminates against an Invernesian who'd like to bring his/her spouse home rather than a Londoner."

That is as true of Edinburgh or Glasgow as it is of London. Any policy that benefits a whole region may be of detriment to a sub region, and that is true regardless of how big the whole region is. This has to be balanced by the benefits the sub region gets from being a part of the larger whole. Right now, Highland region gets relatively massive subsidy from the UK, and it would have to get massive net subsidy from an independent Scotland as well.

It's all about give and take. I acknowledge that Scotland loses some things in being part of the UK (like immigration policy), but it also gains things like the fiscal and monetary union that supports our economy when oil revenues are low. If we didn't have that union, emigration would be the pressing issue, not immigration.

Garve Scott-Lodge said...

@theambler

You're correct, but perhaps posting in the wrong thread. This thread is nothing to do with independence, it's about Scotland's position within the UK.

As part of the UK decisions will be taken by the UK Govt which will be detrimental to Scotland. So, in the current negotiations what should they Scottish Govt do about it? Should they shrug their shoulders and say "it'll probably all balance out in the end"?

Or should they try to foresee the potential pitfalls and make sure we're protected from them?

ron Sturrock said...

Thinking on possible scenarios, one springs to mind with a possible increase of the top rate of tax from 45p to 50p.
Estimated to bring in an extra £60-£100 million.
This may lead to high earners moving South and so benefitting rUK tax receipts, with "behaviour responses" a guess.
As I understand the "No detriment" rule will not apply as this is a policy decision by which you reap the rewards or failures.
As a policy decision it may affect inward investment given the higher rate of tax unless a carrot is dangled in mitigation.
It could in a sense, only marginally, affect population growth.
We can only suppose until the detaisl of any deal is published.

RJL said...

Garve Scott-Lodge, and one of the Anonymouses above . . .

You point out certain aspects of the UK system, which, taken on their own, point to a (slight) disadvantage to some or all parts of Scotland. That's fair enough. Very few have argued that all policies create universal advantage (on that point, people should read this article on the BBC website about the EU and how this has impacted cities in Britain in different ways - http://www.bbc.co.uk/news/magazine-355391700). However, some of the points made about wind farms and HS2 are wide of the mark - renewable subsidies from a large domestic market wouldn't exist in any form under independence. And HS2 has Barnett Consequentials. Unfortunately the business case doesn't allow for Scotland to be connected up first (for obvious reasons, it's got a smaller population than London, the Midlands or the North of England and therefore the cost/benefit analysis is less attractive). It will be connected eventually. In the meantime, the Barnetted monies from the approved spending on HS2 can be spent any way the Scottish Govt like.

There was also a comment about the City's interests not being Scottish interests. Notwithstanding close links in financial services between Edinburgh, Glasgow and London, the City is a far bigger contributor to the UK'S balance of payments than most Scottish-based industries. It is a far bigger generator of direct and indirect tax revenues than most businesses in Scotland and therefore affects the UK'S fiscal outlook. This affects Scotland directly as it determines how much is available to spend for one thing. So the City's interests are Scotland's interests.

The same goes for the Scottish Government at Holyrood - not all policies benefit all of Scotland. There was mention of historic monetary policy decisions being less beneficial to Scotland than the South East of England. I suppose that's much like the ECB making monetary policy decisions which benefit German exports but are to the detriment of Greece within the Eurozone. That can only change if the Scotland (or Greece) come out of their respective currencies. But since, on the whole (and the SNP seem to admit this) being part of pound sterling benefits Scotland (for reasons of our trading relationship with rUK), it has to accept some decisions aren't made solely with Scotland in mind.

There are other arguments when taken individually, again point to Scotland potentially being better off with a tailored policy to suit itself. The point of the devolution of income tax (amongst other taxes) is to put a measure of control of revenues, which it can then spend how it wishes, in to Holyrood's hands. This is a greater degree of autonomy in Scotland than is enjoyed at present. Autonomy comes with inherent risks. It could refuse the autonomy and be more dependent on a block grant which requires the whole of the UK to ultimately foot the bill of Scottish spending or it can take the risks on. What it cannot legitimately do is say we would like to have control over income tax and control over how it's spent but if it doesn't amount to the same level we enjoy now, the rest of the UK will have to make up the difference, without any sort of reciprocal arrangement. Either Scotland pays into the UK pot and gets a commensurate share or it doesn't contribute and it doesn't take from it. Otherwise, this is just a ransom demand by the SNP - pay us to stay or we'll argue for leaving again.

There is no policy in place to specifically hamper immigration to Scotland compared to the rest of the UK so it must bear the same demographic risks as the rest of the UK. It's just that its population trajectory happens to be slower.

RJL said...

Garve - yes they should argue for the best deal for Scotland. But they have to be realistic and negotiate in good faith with a reasonably held position. The more they argue for rUK to cover any shortfall in what Scotland can itself raise, the more it seems they are trying to hold rUK to ransom and to deliver independence by annoying rUK so much that there is an anti-Scotland backlash and we all decide to part ways far from amicably. We don't need this sort of division any more than we needed the division within Scotland brought about by the referendum.

Anonymous said...

Come on, Anon.
If you're trying to insinuate that Scottish independence is the answer to your grumbles, you'll have to spell it out.

Anonymous said...

Perhaps the Scottish govt could try to be constructive. That would be fresh.

Anonymous said...

No, I'm not suggesting independence is the answer to all my "grumbles". Independence brings its own problems. What I was trying to say is put well by the ambler - a policy that benefits the whole may not be suited to a part. It remains the UK government that is in control of macro-economic policy, subject to some tax varying powers Scotland will acquire. If the UK government is responsible for the macroeconomy, should it not take the risk of a shrinkage in the Scottish tax base, rather than the Scottish Government?

Anonymous said...

Garve Scott-Lodge, the average salary in Inverness is over £27K. If your son had the skills to get a visa to work in America, and is not moving back, I seriously doubt that it is the inability to find a job paying £18,600 in Scotland that is the problem.

Anecdotes make a poor basis for policy decisions.

Anonymous said...

I agree. This isn't a one-sided affair. The desired outcome here should feel like (even if it can't precisely be) win-win, and sadly the position adopted by the SNP all but assures it will not be. The asymmetry in these negotiations is that one side is working in the interests of the whole UK, including Scotland, while the other is working only in the interests of Scotland. One side appears prepared to make concessions to reach an agreement, the other does not and treats anything less than 100% of its demands as unreasonable. One side parent, the other child. It was this self-interested, "f**k the rest of you, we're off" attitude that antagonised a great many people south of the border in the run-up to the referendum. It looks set to do so yet again if the Scottish Government, so clear in 2014 that the nation could stand proudly and independently on its own two feet for ever, ends up now hogging considerably more than its fair share from the UK teat. Frankly, I'm hoping that Westminster sets out its final position and then says, if you don't accept it we'll introduce the FFA you've always wanted. That would get some SG panties in a twist..... Rocoham

RJL said...

Anonymous 16.35 - that would have to work both ways for it to be fair. If the rest of the UK had an income tax shortfall, Scotland would have to make up the difference. 1) Such a scenario is unlikely anyway given the demographics; 2) Scotland would in that case not be able to have income tax fully devolved as it would be required to contribute to the overall pot of money, or at least be ready to. The proposal from the Scottish Govt is that whilst income tax collected will go only to Scotland (as per Smith)to be spent only on Scotland, if this isn't enough, rUK has to cover the shortfall in x years time. It does not offer to pay any share of what it collects to rUK to cover rUK's spending to return the favour. If rUK's income tax receipts go up in relative terms, it has to use some of this to pay for Scotland whilst getting nothing in return. If Scotland's income tax receipts go up, it doesn't have to contribute a penny of this to rUK. This is about fair distribution of taxpayers' money, not which govt sets macroeconomic policy.

bucksboy said...

Devolution is IMO a pigs ear and this excellent article makes it quite these changes amplify its botched nature (not a comment on the public servants implementing the bidding of their masters best they can).

Seems every few years the constitutional ball is going to be picked up and kicked a bit further down the field. WM will give ground and hand out yet more party bags and the scope for cranking up division, grievance and inequity between the people in this small island has more life breathed into it.

On a positive note I expect there are now many more salaried politicians and public sector bureaucrats than there were pre-devolution.

Anonymous said...

RJL - I'd be happy with mutual transfers between constitutional units of equal status, but the Scottish Government and UK government are not of equal status, but that's not what the debate is about. The U.K. Parliament remains legislatively supreme and has chosen to devolve some fairly limited economic powers to the Scottish Parliament and Government. However, the U.K. Government retains immense influence over what happens economically in Scotland. The Scottish Government is not asking that the UK Government should make up its income tax shortfall. It is asking that, in the calculation of the deduction from its block grant as a consequence of the devolution of income tax, the U.K. Government's economic power should be recognised, and it should take the risk of a relative decline in Scotland's tax base that arises mainly as a result of the UK government's management of the economy.

It's already been acknowledged in this debate here that economic policies that benefit the UK as a whole may not benefit one particular part. I'd go slightly further and say that much of the U.K. Government's management of the economy is directed towards promotion of the financial institutions of the City. Be that as it may, there is clearly a nexus between governmental power, economic power and population that hasn't favoured Scotland since the rise of the powerful state in the early 20th century. If there is any doubt about this, note:

U.K. Population growth since 1900 from 36 million to 65 million at present
Norwegian population growth since 1900 from 2.2 million to 5.1 million at present
Danish population growth since 1900 from 2.4 million to 5.6 million at present
Irish population growth (whole island) from 4.5 million to 6.5 million (despite partition, civil war and emigration) at present
Scottish population growth since 1900 from 4.5 million to 5.3 million as part of the U.K.

The relative decline in Scotland's population is a consequence (I'm not suggesting it's deliberate) of the U.K. Government's management of the economy - the limited devolution to Scotland can do only relatively little to change that - so I'd suggest the UK government should take on the risk of relative population decline in Scotland

Anonymous said...

Though, of course, Scotland experienced a massive population expansion during the Industrial revolutions.

Perhaps it's not unusual that that reached a plateau.

I'd bet good money you would find it harder to contrive a grievance if you compared the modern day with 1707 - surely a more meaningful comparison.

Anonymous said...

Annoymous, if you conclude that "the relative decline in Scotland's population is a consequence (I'm not suggesting it's deliberate) of the U.K. Government's management of the economy", then presumably you also believe that partition, civil and emigration caused Ireland's population to grow.

Anonymous said...

Actually, if you take the population stats back to 1707, I think you'll still find a substantial relative decline in Scotland's population as compared with that of England - In 1707 there was one Scot for every five people in England and Wales, in 1900 one Scot to every eight or so, and now one Scot to every twelve. This has not been the experience of our neighbours. Scotland's relative population decline accelerated in the 20th century as the state became a more important economic actor.

Anonymous 11.08 - you (perhaps rightly) suggest I haven't produced proof that it's the UK's management of Scotland that has caused the relative decline. Well, if there is a factor in Scotland's relative decline other than its economic management by the UK, please say what it is.

I am not manufacturing a grievance. I'm not even saying that relative population decline is necessarily a bad thing - though it does suggest some underlying economic malaise. The debate on whether or not there should be a union has been settled,as far as I can see. The point at issue at present is the fiscal arrangements for the future government of Scotland and who should take the risk of a relative decline in the tax base, both by a decline in the population and a decline in its wealth.

I only mention the point on relative population growth because it's fundamental to this fiscal framework. I suggested above that the Scottish Government doesn't have the powers either over immigration or the economy to grow Scotland's population. No one's sought to contradict that. If that's the case, it seems to me that the Scottish government's case that it should not bear the risk for a relative decline in its tax base is unanswerable.

I'm rather left with the feeling that other contributors want to see Scotland suffer in order that they can prove a point against the Scottish government. It really is time to stop fighting the referendum.

RJL said...

Not sure why my response hasn't been published yet - it wasn't rude although it was perhaps a bit long! I will keep it brief.

The UK Govt will not cease to act in the interests of, and have a policy remit for all of the UK in terms of immigration and macroeconomic policy following implementation of the Scotland Bill. As such, Scotland's ability to grow its population is no more or less hampered or helped than any other part of the UK either now or following the passing of the legislation. However, Holyrood will have almost full control over income tax and full entitlement to the revenues produced by this tax in Scotland. There is no requirement to top up the rest of the UK's income tax revenues whose income taxpayers enjoy no special policy advantage over Scotland when it comes to population growth. They happen to have higher projected population growth rates but this is not through any govt policy specifically designed to generate greater population growth rates in rUK relative to Scotland.

In light of the above, there is potential detriment to the citizens of rUK as taxpayers in the long term if they are required to safeguard against any fall in Scottish income tax revenues but no such detriment to Scottish taxpayers who are not required to contribute to the rest of the UK's income tax revenue under the Scottish Govt's proposal and in line with the Smith Commission's proposal to devolve income tax (I accept that in practice this would work on a pre-arranged indexation basis rather than a more crude 'we've just checked this year's figures and we haven't got as much money as we used to get, now give us £xxx billion!!' but nevertheless it's potentially detrimental to taxpayers in the rest of the UK and a no win situation for them, in terms of keeping income tax revenues accrued by them, if they grow their population, which, of course, they are perfectly entitled to do, as is Scotland).

So whilst there may disparities in governmental power, the issue of fairness to payers of income tax in different parts of the UK is brought into question. That's why the case for taking on the risk is far from unanswerable. Yet again, there is too much reference to 'government' and not taxpayers. Taxpayers pay for the government and those in the rest of the UK are in no better baseline position to grow their population in any part of the UK as far as immigration or macroeconomic policy (taken as a whole) are concerned. So why should they contribute their personal taxes to Scotland whilst Scotland's taxpayers don't contribute towards them, and in fact be 'penalised' for relative population growth, as would be the case in the Scottish Govt's preferred formula? It's not 'pooling and sharing' if one side isn't sharing its revenues with the other.

I think the fair solution is the one currently proposed by the UK Govt and Treasury:

http://www.scotsman.com/news/politics/greg-hands-scottish-government-is-getting-a-fair-deal-1-4029599

https://www.gov.uk/government/publications/chief-secretarys-initial-response-to-the-scottish-affairs-committee-report-revising-scotlands-fiscal-framework

Kevin Hague said...

Nothing sinister - when I saw this I checked and it had been automatically filtered as spam!

RJL said...

Also the point about 'wanting to see Scotland suffer' is insulting and stupid. It's going down the same line of thinking of accusing people realistic about Scotland's prospects as an independent country as 'talking Scotland down.' Basically if you don't want independence and you're not willing to hold the rest of the UK to ransom in the event of not getting it, you must just hate Scotland! . . .Pathetic!

I'd suggest we, in the main, are against independence, as you can probably tell but equally we don't seek additional powers that could potentially undermine Scotland's fiscal position. But if we are to gain additional powers in Scotland, we who disagree with you on these points, do so because any deal has to be fair to all parties within the United Kingdom, 1) because that's obviously what fair-minded people would want anyway and 2)since we are minded to want Scotland to remain part of the UK, the last thing we want is an embedded framework which could cause acrimony with the rest of the UK and threaten the Union even more. As long as it's fair in principle, we can all get behind it and make it work.

A fair agreement can be reached and the one proposed by Greg Hands which has a Barnett Formula equivalence in it seems the fairest to me.

The last thing I want to do is fight the referendum incidentally. It would be my great preference to not see another one in my lifetime!

RJL said...

Thanks Kevin. Great blogging by the way!

Robin said...

Anon. Somehow "I am not manufacturing a grievance" sits rather uneasily with your final paragraph! People arguing that Scotland's interests are not automatically pre-eminent in an issue that concerns the whole of the UK are not wanting to see Scotland suffer, just the matter addressed with proper fairness towards all.

I think we'd all prefer to stop fighting the referendum; however, since the SNP have neither accepted it as resolving firmly the issue of independence nor tabled any more credible economic case for considering it again than did the ludicrous white paper, here we still are.

Rocoham

Anonymous said...

Why have you chosen to use population size as a measure of prosperity? That's a bit strange. Traditional economics uses productivity - GNP and GDP.
If we're dependent on a subsidy per head from rUK, I suppose would matter, but are you saying that? If you are, what's all the complaining been about? If you're not, why not grab this big chance to shine?

Anonymous said...

Anonymous 15 Feb 12.53 - the reason I mention population is that we're talking about the fiscal framework, which relates (primarily) to determining Scotland's block grant following the Scottish government's acquisition of power to levy income tax. It seems to me that population is one important element in the tax base for income tax. Wealth is another, and I did mention that too. I think relative population change at least in Europe isn't a bad proxy for relative wealth, and I had wanted to point out the historical change in Scotland's position since the rise of the powerful state in the early 20th century. No one has yet suggests an explanation for Scotland's relative population decline that doesn't involve the management of its economy by the UK government. Yes - it would be good to grab this chance to shine, but we need to be realistic: the UK government will still have a far greater influence over Scotland's income tax base than Scotland will. If Scotland's population continues to decline it will largely be a consequence of the U.K. Government's management of the Scottish economy, not the Scotish government's.

RJL 1: i think you're approaching this from the wrong end. You're correct that what's proposed isn't a pooling and sharing arrangement, but nobody's proposing it should be - the UK government isn't either. A pooling and sharing arrangement would make sense if it was being negotiated with other self governing units within a federal system, but there doesn't seem much prospect of that.

I don't actually think it's true that other parts of the UK haven't enjoyed a special policy advantage over Scotland. Your discussion of the point suggests you don't think government influences the development of an economy significantly. The concentration of wealth in the south east of England is very much a consequence of government policy, even if it wasn't necessarily a conscious aim. I quoted several examples above where Scotland was put at a disadvantage by a policy conceived as good for the UK as a whole. However, the relative change in population must speak for itself: Scotland has generally lost ground as compared with all its neighbours. In the absence of any other explanation, that seems to suggest UK policy has historically not favoured Scottish economic growth at the same rate as the UK as a whole.

You also refer to fairness to individual income tax payers. It's an interesting argument, but I don't think it works. Individual English income tax payers are not impacted by Scotland's fiscal framework. The U.K. Government will continue to draw its revenue from a wide range of sources, and will pay the Scottish block grant from that wide range of sources of revenue. There is no direct subsidy from one payer of income tax to another.

RJL 2 - I apologise and withdraw unreservedly. I certainly didn't intend to suggest that anyone in this discussion hated Scotland. I had intended to suggest an inclination to diss the SNP that caused other matters not to be examined in an entirely neutral way. Reflecting on what you say, even that goes too far - I'm sorry.

Anonymous said...

Points intelligently and courteously put. Appreciated.

Rocoham

Anonymous said...

Sorry Anon @ 16:41, I still find it hard to square your comment: "No one has yet suggests an explanation for Scotland's relative population decline that doesn't involve the management of its economy by the UK government.", with this:

http://www.theguardian.com/politics/2014/jul/27/scottish-independence-scotland

from the SNP.
If you want to say that you don't want transfer of funds to the Scottish Government to be disadvantaged because of it's declining population, why not just say that?
Trying to blame that decline on the Government just seems tendentious.

Anonymous said...

Kevin

when you were going through your (first) divorce did you base how you and your spouse would manage on what was in the joint current account at the time?

Or did you look at what joint assets you had and how circumstances would change as earning power and dependencies also changed? Did you imagine one or the other would always do things the same way? Or have the same income and outgoings?

Did you look at what each of you had put into the union and how one partner's earning power had possibly been disadvantaged at the expense of the other's?

If you think this representation of what a separation agreement entails is inaccurate then think how economists are looking at your simplistic assessments?

It is not your figures that are wrong it is your entire premise and that is what you cannot seem to understand.



Anonymous said...

Dear Anon @ 15:20 26/03/16
If you hadn't included the "(first)" in your opening paragraph, I would have just thought your divorce metaphor was just clumsy, rather than a bit spiteful. However, you're the one that has to look in your mirror, so let's go with it -

"did you base how you and your spouse would manage on what was in the joint current account at the time?" I wouldn't expect so, but I think we would be smart to base it on an allocation of joint annual income, or some reasonable estimate of expected income. That would be GERS for an independent Scotland. GERS is what Kevin and the SNP's White Paper use for illustration. Maybe there's a factor that would make a significant difference. Can you suggest anything?

"..Did you imagine one or the other would always do things the same way?...". I'd imagine not, but in the near future things would seem likely to be similar.

"...one partner's earning power had possibly been disadvantaged...". Possibly, but - in the case of Scotland - almost certainly not. Scotland's contributions to the world before the Act of Union? Hmmm..Duns Scotus? St Patrick (perhaps)? After the Act of Union? How much time do you have? I'm pretty confident wealth increased as well as culture - judging by the vintage of our cities and grand architecture (granted the latter is affected by natural decay). I'm prepared to look at any facts to the contrary though.

"..not your figures that are wrong it is your entire premise... you cannot seem to understand." I can't understand either. The existing finances would seem to be the best premise for inferring/guessing future finances. What premise do you think would be better?