Having Reservations

As "architect of the Scottish Parliament", Donald Dewar argued that everything that could be devolved should be devolved¹. A corollary of that would be to say we should seek to devolve powers unless there is a compelling reason not to.

With my These Islands hat on, I've recently been looking at devolution from a Welsh perspective.  In doing so I discovered that Wales offers a perfect case-study of why devolving spending powers is not necessarily a good thing for the devolved nation concerned. Those arguing for further devolution of spending powers to Scotland would do well to take note.

If the United Kingdom stands for anything, it stands for the pooling and sharing of resources. Without such pooling and sharing, Scotland, Wales and Northern Ireland wouldn't each be currently receiving many billions annually in fiscal transfers from England. Without those fiscal transfers, public spending in the devolved nations would need to be dramatically reduced (or, less realistically, tax revenues would somehow need to be dramatically increased).

Using ONS data² we can see how significant these fiscal transfers currently are on a per person basis, not just nationally but also across England's regions.

 [To understand this chart: if you multiply each regional per person amount by the regional population you would get the cash amount transferred in or out - add these figures together and they net out to zero (I've checked, it works) - We're just shuffling money around within the UK here.]

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To head off the standard Scottish Nationalist response: no this data doesn't show that Scotland is somehow being damaged by being in the UK. In fact it reflects the fact that Scotland is able to spend more on public services than it would be able to if it wasn't part of the UK. It's worth noting that transfers "in" for Scotland are caused almost entirely by relatively high spending, for Wales mainly by relatively low revenue and for NI by a mix of both relatively low revenue and high spend. I'll publish more complete analysis by nation/region soon.

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The current mechanism for adjusting the budget available for devolved nations is the Barnett Formula. There are detailed briefings on the These Islands Website which explain both the history and mechanics of the Barnett Formula (How does the Barnett Formula actually work? and What is the Barnett Squeeze?), but all you really need to know is this: the Barnett Formula is not needs based, so changes in devolved budgets do not reflect changes in need.

The Barnett Formula in practice is highly sensitive to rates of change in population, resulting in it serving Scotland (with its declining population) relatively well compared to Wales and Northern Ireland. This is not in any way "fair" or "needs based". The chart below shows the impact over time of applying the Barnett Formula for Scotland, Wales and Northern Ireland, using realistic assumptions and where the only difference between the three nations' formula driven per capita budgets is their actual relative rates of population growth/decline.

This in-built unfairness is why whenever anybody sensible takes a look at the Barnett Formula, the conclusion is the same: it needs to be replaced by a needs based formula.

That the Barnett Formula remains in place today is testament to the combined forces of political inertia and the strength of the Scottish parliament. Scotland is most likely to suffer (relatively) if a "fairer" mechanism for allocating spending among the devolved nations is put in place.

This is of course why, when "The Vow" was being delivered, the SNP insisted that the Smith Commission recommendations included the line "the block grant from the UK government to Scotland will continue to be determined by the Barnett Formula". It's also why the SNP dropped their brief flirtation with the idea of "Full Fiscal Autonomy" for Scotland, because that would mean scrapping the fiscal transfers that enable Scotland's higher public spending.

What struck me when looking at the relative per capita spending data for Wales (see table below) was that the only comparable area of spending where Wales receives a higher per capita spend than Scotland is Social Protection. Social protection is of course not devolved, it's fully reserved. Being fully reserved it is effectively guaranteed to be allocated on a needs basis, because the entitlement to (for example) a State Pension is standard UK³ wide - if there are proportionately more pensioners⁴ in Wales, they'll get proportionately more funding.

Now look at all those other areas where Wales has less per capita spending than Scotland

• Health and Education are fully devolved  - so we know that Wales' capacity to spend in these areas has suffered relative to Scotland due to the way the Barnett Formula works
• Transport is c.80% devolved, so tells a similar story
• The mix of devolved vs reserved is less clear for other areas - but we can observe significantly lower spend for Wales relative to Scotland in "Economic Affairs", "Housing & Community Amenities", "Enterprise & Economic Development", ...

At this point the analysis only really takes me far enough to ask a pointed question: are these lower spend levels for Wales justified by lower need, or has the Barnett Formula left Wales unfairly starved of funds?

This is a blog, so you'll perhaps forgive a rambling conclusion (Chokkablog's motto is "thinking allowed" after all):

• From a "UK-wide" perspective, devolving further spending powers without replacing the Barnett Formula with a needs based formula would be both imprudent and reckless - because the Barnett Formula is not "fair"
• Devolving revenue raising powers carries similar risks. Even if you allow some base level fiscal transfer to remain (i.e. so that if 100% of revenue raising powers were devolved, Scotland would still receive some of England's tax revenues) you would still be exposed to the problem of how that figure was adjusted over time. It's also hard to see how such a situation would be tenable from an English perspective - the more revenue powers are devolved, the closer we edge to Full Fiscal Autonomy. Regular readers of this blog know that would be a terrible idea for Scotland
• Devolving Social Protection powers (for Scotland or Wales) would take away the assurance of  "needs based" funding that reservation of those powers gives
• There's a democratic trade-off involved in accepting that the UK-wide priorities may not be the same as those Scotland or Wales alone would choose - but being in a union is all about compromising how much influence you have in return for enjoying the benefits that accrue from being part of a greater whole. The data suggests Scotland does pretty well out of "the greater whole". At least as far as the Barnett formula is concerned, that's more by accident than design.

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NOTES

1. Profile: Donald Dewar the architect of the Scottish Parliament

2. Country and regional public sector finances: Financial year ending March 2016

These figures are used to allow consistent comparisons between regions and nations. The "geographic" (favourable to Scotland) N Sea revenue allocation methodology figures are used, but in the year in question N Sea revenues were only c.£60m or about £11/capita for Scotland (so frnaly irrlevant).

The deficit for Scotland using these figures is slightly higher than that shown by the 2016/17 Scottish Government GERS Report (£15.2bn vs £14.5bn in GERS for 2015/16 - a £130/capita difference).

The figures are very close also to the GERW data produced by Cardiff University for Wales (£14.8bn vs £14.7bn).

3. Except NI

4. As indeed there are: ONS data

Smith Commission and Corporation Tax

I try to avoid writing these posts during working hours as I have a business to run; but this morning I was forwarded a link to this Scotland Tonight interview and it irritated me so much I have to get this out of my system.


It features our old friend Gordon McIntyre Kemp, Chief Executive of Business for Scotland.  I will resist an ad hominem attack and I've said my piece about Business for Scotland and their Smith Commission Submission so let me focus instead here on the specific question being debated, that of income tax devolution.

To be absolutely clear: I'm a businessman who would benefit from lower corporation tax in Scotland but I think it's a bad idea for two reasons

• Using differential corporation tax rates to shift business activity around the country is value destructive to the UK as a whole - it simply reduces the UK's overall corporation tax take and hands money back to profitable businesses instead of targeting the less well-off in society


• Worse than that: it creates incentives for creative accounting within businesses to ensure profits are reported in low tax areas of the UK without necessarily needing to change any real economic activity.  Just look at the tax avoidance strategies of Google, Amazon, Starbucks etc. - if they'll do that across international tax borders we can safely assume they would apply similar accounting strategies within the UK

I could take apart McIntyre-Kemp's arguments one-by-one but frankly what's the point?  We know he leads an organisation who's very raison-d'etre is to campaign for independence and more powers for Scotland. That's fair enough; he and his members are entitled to think that way.  Unfortunately for them they are not in tune with the democratic will of the Scottish People.  

The Vow itself states:  "We agree that the UK exists to ensure opportunity and security for all by sharing our resources equitably across all four nations to secure the defence, prosperity and welfare of every citizen".  McIntyre-Kemp and his members would I'm sure accept they don't share that view

• His focus and that of Business for Scotland is not "sharing resources equitably" but rather on Scotland getting its hands on as much resource as possible


• Their concern is not "defence, prosperity and welfare of every citizen" - they would be compelled to append the words "of Scotland" to that sentence

But even given that context some of McIntyre-Kemp's arguments are a little strange

• He points to discussions around possible devolution of corporation tax to Northern Ireland and suggests the "bit of water" which separates us doesn't make a difference.  Mr McIntyre-Kemp clearly isn't involved in the physical movement of goods if he really thinks that.


• He complains about not being able to control VAT on tourism activities - surely if its a good idea for Scotland it's a good idea for the UK?  Of course arguing to reduce taxes you don't control is easy when you don't have to live with the consequences of reduced tax revenue that might result.  The Nationalists do that a lot.


• He complains about not having control of NI whilst we're being offered full control of income tax. Let's be absolutely clear on this one: the proposed new powers allow the Scottish Government to redistribute wealth through income tax policy changes - nobody seriously argues that not having control of NI is a hindrance to that


• He moans about not having power over oil & gas taxation.  You might have noticed that Nationalists have been a little quiet about that one so it's surprising to hear this on his list. The block grant would be reduced on day 1 by the amount of oil & gas revenues transferred and it would be damaging to Scotland's economy if those revenues continue to decline.  I guess Mr McIntyre-Kemp lacks the economic pragmatism of some of his Nationalist bed-fellows.

McIntyre-Kemp suggest we need to "get serious about the powers that are needed". Maybe he and his memers should "get serious" about deciding what they will do with those we'll be getting.  

• Full control of income tax: so we can redistribute wealth, we can reduce or increase the total income tax burden.  So what are their proposals?


• New powers to make discretionary payments in any area of welfare: so we can use money raised through income taxation or saved in areas of devolved cost to help those less well off in our society.  So what are their proposals?

Instead of using his valuable airtime to make a positive case for how these new powers could be used he - with wearying predictability and embarrassing inaccuracy  -  resorts to asserting that these powers do not represent "substantially more devolution ... unless they meant substantially less" and complains "we've been promised more powers but we're not getting them".  He even argues the powers mean "effectively we can't have a labour government".

The SNP, Business for Scotland and Mr McIntyre-Kemp have become so used to complaining about what we don't have that they appear incapable of changing tack. We are getting substantial new powers; we will face tough tax and spend decisions. Making constructive recommendations around what we'll do with these powers is a lot harder than simply complaining and blaming others for all of our woes.

I look forward to seeing how the Nationalist organisations propose embracing and using these new powers - they are substantial enough to expose expose their "all things to all men" promises and to require them to stop ducking economic reality.

No wonder they're not happy.