Devolution Max – a step towards independence

The Calman proposals on devolution have a major advantage over so-called ‘Devoluton Max’, says Professor ARTHUR MIDWINTER: they are evidence-based

 

In recent months, there have been numerous media reports that the SNP may include a fallback option in the independence referendum – know as “Devolution Max” or Full Fiscal Autonomy (FFA) – in the expectation that Scots will not support the independence option.

The Scottish Government provided a brief summary of the model in its fiscal autonomy consultation paper, referring to it as Full Fiscal Autonomy, and then as Devolution Max in its White Paper on Scotland’s future.

This states that

 ” … full fiscal autonomy would make the Scottish Parliament and Scottish Government responsible for raising, collecting and administering all (or the vast majority of) revenues in Scotland, and the vast majority of spending in Scotland. A remittance or subvention from Scotland to the United Kingdom would be required to cover common United Kingdom public goods and services, such as defence and foreign affairs.  The range of services paid for in this way would be subject to negotiation at the time of any revised settlement.  In essence, this framework would be the maximum form of tax and policy devolution short of Independence” (p.29).

It is clear that such a model would be regarded as a major step towards independence, and it is difficult to see what benefit it would be to the rest of the United Kingdom. Unlike the Calman Report (Commission on Scottish Devolution 2009), the SNP does not provide any assessment of the financial implications of such a model, nor any acknowledgement that – unlike independence – this is not a matter for Scottish voters only.

It is important, therefore, to provide a critical appraisal of the Devolution Max model to further the political debate. Devolution Max is incompatible with the UK fiscal structure and principles, and would generate significant instability in the Scottish public finances, and not, as Calman seeks to do, strengthen the Union.

The UK fiscal framework

The United Kingdom is a deeply integrated economic union with a single market in goods, services, labour, capital and knowledge, to which all four nations have equality of access.

Responsibility for managing the economy in common with international practice is reserved to the central state and exercised through the Treasury and the Bank of England. The management of the public services is allocated to Whitehall departments and the devolved administrations.

Resource allocation – to departments and devolved administrations – operates on the basis of relative expenditure need, as agreed in political judgment. In Scotland’s case, this has always operated using England as a benchmark with adjustments for Scotland’s higher needs, and entrenched in the block and formula model – known as Barnett – since 1978. This provides a high degree of stability in funding with adjustments made to an existing baseline.

This expenditure-based approach to public funding reflects the economic unity of the UK in that the spending needs of the whole UK are considered together. The three devolved administrations all receive above-average per capita spending, in recognition of higher levels of poverty, unemployment, remoteness and other factors deemed drivers of need in political decisions.

Spending is funded by pooled taxes, so fiscal transfers occur automatically irrespective of revenue contributions to the Exchequer. This model is tried and tested, and any changes in fiscal powers under devolution require to be consistent with it. That’s why the Calman Report stressed that certain aspects of the management of the economy are indispensable to the maintenance of the Union and that tax changes should not undermine that Union, or result in economic distortion which diverts the flow of resources – eg, business movement within the UK for tax gains.

In summary, the UK fiscal system is expenditure-based and avoids tax competition. It is difficult to see how Devolution Max based on fiscal capacity and an autonomous fiscal policy, could be regarded as a workable model of devolution.

The Scottish Government’s position

The Calman Commission’s financial remit was to consider changes which would improve the financial accountability of the Scottish Parliament and secure the position of Scotland within the United Kingdom. Its proposals were consistent with the UK fiscal structure, retaining the benefits of stability and transparency through block grant, and increasing fiscal powers which are compatible with central economic management, and impact directly on Scots residents only.

The combination of Scottish income tax, land transactions and landfill taxes, with commensurate reductions in block grant, meet the accountability objective, and raise the self-financing elements of the Scottish Budget from 14 to 35 per cent. Calman further ruled out NICs, VAT, Corporation Tax and oil and gas revenues on economic, administrative or volatility grounds.

The SNP criticised these proposals because they did not provide the fiscal instruments necessary for an autonomous fiscal policy, which they saw as necessary to tackle Scotland’s economic underperformance.

This is a superficial view based on a single economic indicator – GDP – which has been effectively rebutted by several independent researchers using a range of measures which show clearly that Scottish economic growth has been broadly in line with UK growth, and has improved since devolution (Fraser of Allander, 2006; Centre for Public Policy and the Regions, 2007; and the Scottish Parliament Information Centre 2011).  Moreover, GDP growth figures “are a poor measure of how well the economy is doing” Larry Elliot, The Guardian, 24 July 2011).

Further, the assumption that fiscal autonomy and cuts in business taxes will promote growth, are wholly theoretical. There is no clear and consistent body of research evidence to support this theory, and theory is a poor basis for fiscal reform, as the poll tax showed.

Moreover, there are no comparable models to Devolution Max in international practice. False comparisons have been drawn by the SNP with fiscal autonomy in Catalonia and the Basque Country in Spain; however, while they have control over tax collection, the extent to which they can vary tax levels is constrained by a fiscal co-ordination regime managed by the Spanish Government. The UK’s fiscal structure is in line with international practice: as most taxes are raised by the central state, income is the most common regional tax, and property the most common local tax.

Supporters of devolution should not, therefore, support a partisan, theoretical model like Devolution Max, which has not been subject in any way to rigorous financial appraisal by its advocates.

The politics of Devolution Max are revealing. Professor John Kay, an economic advisor to the First Minister, reports that Scotland recognises that “the SNP is more popular than its defining policy”, and that adding Devolution Max to the ballot paper would make it the likely outcome as the middle option.

Journalist and SNP member George Kerevan argues similarly that Alex Salmond will use the threat of independence to win full fiscal autonomy, and that would result in further battles with the Treasury over oil and gas revenues. He therefore concludes that Devolution Max would only work in a federal system, and to work in Scotland would require the improbable wholesale reform of the UK state.

This analysis is broadly correct, but fails to address the fiscal deficit issue. Official estimates have for years shown Scotland has a structural fiscal deficit under the UK public sector accounts system. This is evidence of redistribution for need, not economic failure. But under Devolution Max, Scotland would inherit a significant deficit unless UK accounting practice on oil and gas revenues were to be changed. That would require the unlikely political support of all of the United Kingdom, when there is a strong body of opinion that Scotland is already over-funded. Even then, Scotland’s books would only balance if oil revenues were consistently high, rather than volatile. Scotland’s deficit ranged between £8 and £10.2 billions between 2002 and 2007 (Government Expenditure & Revenue Scotland, 2006-2007, table 3.1).

The emphasis on competitive advantage in the Devolution Max model is seriously at odds with the UK fiscal system’s focus on co-operation, equity and co-ordination. Its uncertainty over resources is a poor alternative to the stability of resources under Barnett.

It has been observed that Scotland benefits from “automatic macroeconomic stabilisation and a public expenditure per capita substantially above the UK average”, while “the adoption of fiscal autonomy would be a dangerous and risky step for the Scottish economy” (Brian Ashcroft et al, 2006).

From this review, it should be clear that Devolution Max is not a devolution model, but an “independence” model. Indeed, it has been reported that it is being discussed as “Independence Lite” in internal SNP debate, to convince doubters of its merits. Yet the Scottish Government put the case as “Devolution Max” in a submission to Calman when seeking broader support.

Labour should expose this false prospectus over Devolution Max. Moreover, it cannot be delivered through an advisory referendum, as it requires UK Government consent, and it would require much more rigorous analysis to convince the Treasury this is a feasible and fair model.

By contrast, the Calman Report is the most comprehensively researched and rigorously argued set of financial proposals since the Layfield Report of 1976. It will create greater accountability and choice over spending and tax levels, while retaining the stability and benefits of the block grant. Unlike the SNP’s approach, it is evidence-based, and it deserves Labour’s continued support.

Professor Arthur Midwinter is an Associate in the Institute of Public Sector Accounting Research of the University of Edinburgh Business School.

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33 thoughts on “Devolution Max – a step towards independence

  1. A good read, but I would still like to see the entire UK move to a more federal model. The majority of Scots favour more fiscal powers for holyrood but are against total independence. We have to be sure that Calman goes far enough for them. Unfortunately the SNP spin machine under Mr Pringle has convinced alot of people that Calman does not go far enough, without any actual evidence. As I say perhaps federalism is the cure, we’ve been looking for.

  2. Why should the homeowner have to hang around for the burglar to leave just when he feels like it after picking the choicest items?

    1. Think you’re on the wrong thread, this is about Scotland, not the old British empire.

      1. I want the United Kingdom probably less than most Scots, so I consider my views every bit as important as any Scot. There is not one MP speaking up for England as those in England are BRITISH. Therefore, I expect them to hand over the silver when the burglar decides to leave.

        1. I agree that England doesn’t have a separate voice but to insinuate that the Scots are burglars shows how ill informed you are as is the author of this article.

          1. So you know better than an academic at Edinburgh University. Why would Scotland’s premier research University hire someone who was “ill informed “. You are an arrogant little toerag aren’t you. Perhaps you would like to provide us where the author of this article is “ill informed” and then back that up with some facts. Or is it you that is “ill informed” as I suspect.

  3. Typical, rather than engage in debate or challenge the message let’s just shoot the messenger.

    I hope that this contribution is read carefully not only by those who advocate ‘Devolution Max’ as a fall back position if (as seems inevitable) independence is rejected in any referundum but also by those within the Labour Party who are tempted to appease the SNP in the mistaken belief that Scots are demanding greater and greater powers for the Scottish Parliament.

    I wish that Donald Dewar had never said that devolution was a ‘process not a destination’ or, at least, more fully explained his rhetorical flourish. I strongly suspect that he never meant it to be interpreted, in the way it is now, as a justification for an endless process of devolving responsibilities from Westminster to Holyrood. Rather it was an exhortation to make creative use of the powers which had already been devolved to make a real difference to the life of fellow Scots.

    The SNP will never be entirely satisfied with any level of devolution. Let’s just accept that and forget any attempt at compromise where no room for compromise exists. Labour should concentrate on making devolution work. Calman improves a settlement which, after all, is barely 12 years old. This is not the time to be advocating further changes which, as Professor Midwinter amply illustrates, wouldn’t work anyway.

  4. This is a matter largely for those within the Labour Party who support devo max to resolve with those who support Calman.

    The SNP supports independence and that’s what we’ll argue for. Devo max will only be an option if other parties can agree what it is and who supports it.

      1. That really isn’t up to the SNP. The Government has said it is willing to include a third question on devo max but the problem as I see it is that no party supports that. As Professor Midwinter has pointed out the Government included the option of the maximum form of tax and policy devolution, short of Independence, for consultation – but there needs to be more clarity on what is being proposed with that option, how it would work and who supports it before it could be a viable option to go onto the ballot paper.

        The ball is really in the unionist/devolutionists’ court on this one. If they want to extend devolution to any point up to and including full fiscal autonomy it’s up to them to make that case. Otherwise the choice is between the status quo and independence.

        I get the feeling that there are some at least in the Labour Party who would like to go further than Calman but my message to them would be get on with it because there needs to be some clarity about that otherwise it won’t be considered.

        1. “That really isn’t up to the SNP. ” Sorry again Indy. The Nationalists said they didn’t have their promised referendum in 2010 because they didn’t have a majority. Now they have. They decide if there’s a referendum, when and what is/are the question(s).

          But they will not have a straight “independence yes or no” one-question refrendum as you want, because they know they would lose it. So they will put Devo-max on the ballot because they hope to sell it behind a smokescreen of “more power for Scotland, not really independence.”

          As we’ve seen from Prof Midwinter it won’t work. And as I said, it’s at odds with the direction of the Eurozone countries.

          1. No Alex,

            The Nats will ask for full Independence, it is up to the Unionists among us to say what we are proposing as an alternative.
            We need to define what our dream is for the future of Scotland

            If that is Calman fine, but if so I’ll support Independence in the Referendum, even tough it isn’t my first choice.

            I have tos support what Scotland needs, but I’d prefer FFA/Dev Max which allowed us to remain in support of the regions of England who are in the same position as we are (NE/NW and the wash for example)

  5. “It is clear that such a model would be regarded as a major step towards independence, and it is difficult to see what benefit it would be to the rest of the United Kingdom. ”

    Frankly the primary concern of elected members of the Scottish Parliament should always be the Scottish nation & its people who they are mandated to serve.

    The benefit or otherwise of policies that benefit Scotland on the rest of the United Kingdom should be at best of secondary concern. Westminster regularly makes decisions that benefit England & often just the south east corner of England with little or no regard for the impact on the other constituent countries of the UK.

    Perhaps if Scottish Labour stopped putting the needs of the English party & its desire to appeal to middle England first it could regain some of the lost trust from the Scottish electorate.

    1. You are aware that that in order for a country’s economy to be strong, it’s neighbours economies must be strong. Perhaps you should realise there is a world outside of Scotland and what happens there impacts on us.

      1. So given the weakness of the Eurozone & the US, our leaders shouldn’t even bother trying to improve the lot of their citizens. Altough to be fair to the Tories they don’t even try.

        There is a world outside of Scotland but the primary concern of any govt is or at least should be it’s own people.

        If Dev Max/ Indy Lite or whatever it’s eventually called is can be proved to be of benefit to the people of Scotland why shouldn’t it be introduced. Although having said that my preference is still for full independance.

  6. This analysis is not nearly deep enough.All is well if we all believe in similar ways of funding outcomes. When England decided to change its funding model for higher education, this had a huge impact on the devolved counties(which isnt totally played out yet). What if it decides to privatize health? Do we all think that whatever Englands political mainstream (and it has been steadily been moving to the right for two decades ) decides, we all just have to tag along.
    I think this is where Labour in Scotland has to have its debate.

    1. I have been thinking about the health charges thing myself Gavin. If they ever introduced charging to see a GP (only for those who are liable also for prescription charges) of lets say £10 a visit and the English health budget was cut accordingly, Scotland’s budget would be automatically be cut. And the usual suspects – on both sides of the border – would then start whining about how unfair it is that a Scottish administration (either Labour or SNP) continued to allows Scots (as would be likely) to go to the doctor for free whilst in England they are getting charged.

      In this tax debate, I seem to sense that for many on the (unreconstructed) unionist side that the UK Treasury is the font of all knowledge. If Scotland gets control over certain taxes and we raised them above that of the rest of the UK we are “making the economy uncompetitive”. If we lower them then we are “beggering our neighbours”. Ye canna win.

      (Concerning beggering the neighbours – was it not G.Brown that fought against EU fiscal harmonisation?)

      And I think the same people will be damned about implementing a “German solution” – where in return for having unitary income, corporation and VAT rates – the state governments have collective veto over the setting of those taxes via the Bundesrat. The notion of the First Ministers of Scotland, Wales and NI having an influence in setting VAT for the whole of the UK I think they would find comical.

      Of course though not part of the UK but still dependent on it for trade etc, the Crown Dependencies seem to be able to manage their “fiscal autonomy”. Next month is the Manx general election and the result could be a Scot as Chief Minister. So to stop the FM from exploiting “Mr Rodan in the Isle of Man leads a government with full fiscal autonomy as its Chief Minister but would not have anywhere near these powers if he was the First Minister of his native heath” – Steve Rodan must be stopped for the good of union!

      Anyone by the way for the integration of the Crown Dependencies into the UK?

      1. Aberdonian, “beggering our neighbours” – surely some mistake? The only question that remains, is it your first or second ‘e’ which is the typographical error?

  7. “Scotland would inherit a significant deficit unless UK accounting practice on oil and gas revenues were to be changed”

    Is that an admission that Scotland is in budgetary surplus, whilst the UK as a whole runs a deficit?

    This whole piece is written from a Unionist perspective. Fair enough, if you’re a supporter of the Union. But it’s hardly a surprise that the Scottish Government prioritises Scotland and the Scottish economy, without apology or the cringe so beloved of ‘Scottish’ Labour.

    Of course, the UK balance sheet might be a bit more robust if Gordy Broon hadn’t flogged off our gold reserves at a cost of £12 billion (the cost so far -based on current spot rate per troy ounce).

    CC

  8. Cynical Highlander, you’re throwing at me Strathclyde University. REALLY! Where are they in the world rankings again? I just found his personal webpage, the man is a rural economy expert. I think we should leave this debate to the grown ups don’t you?

    1. You are aware, no doubt that Midwinter was Dean of the Faculty of Arts and Social Sciences at the University of Strathclyde up until 1999. Didn’t seem to bother him much…

      And in 2008 was a consultant to Labour in the Scottish Parliament.

  9. I’ve always been of the opinion that FFA is tantamount to independence. It’s nice to see an academic analysis that shows chapter and verse why.

    But the SNP’s position on fiscal autonomy is not just biased and unsupported by evidence……it contradicts their other “policy” of “independence” in Europe.

    The underlying logic of the EU is political union which implies monetary union. In response to the current economic crisis, the Eurozone has just agreed in principle to move towards more fiscal uniformity…. i.e. thetre will be less fiscal autonomy for individual Eurozone members. If the SNP was “independent” in Europe it could not exert FFA over the Scottish economy…. But it wants FFA while integral to the UK…

    I know the “case” for “independence” is primarily an emotional argument, but this level of logical distortion is dizzying….

    1. In fact there is no logic to your position.

      If Scotland was independent we would not be wholly in control of our own economic and monetary policy that is true.

      But we would have a much greater level of control of economic and monetary policy than we do now.

      You are also mistaken to believe that the SNP wants full fiscal autonomy while remaining within the Union. We don’t. We want independence.

      1. Indy, I admire your indefatigable commitment to believing that the SNP leadership wants “independence”. I beg to put the case that, if the referendum ever happens, there will be three questions, because the straight “independence yes or no” choice will not be allowed by your party.

        And today J Swinney said as much by pushing for more tax powers within the UK. But as Prof Midwinter says, such tax powers are inconsistent with the UK’s integrated economic management system.

        And as I point out, “independence in Europe” policy does not allow competitive rates of corporation tax.

        Unless you’re saying you want “independence in Europe”, staying out of the Euro, staying within the protection of the UK economy by keeping the pound, but undermining the UK’s tax structure by having competitive rates of corporation tax.

        Sorry Indy. It’s your position that has no logic.

        Or, the logic is… facing in all directions at once is ok if it helps the SNP to get a few more votes.

    2. Even as I clicked the button on the above, Merkel and Sarkizy were on the telly demanding “closer economic governance” of the Euro area and a constitutional commitment from Euro members to balanced budets.

      And this…

      “In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency – something likely to be strongly opposed by the low-tax Republic of Ireland.” (you’ll have gade Arc of Destitution then”….

      Not to mention the SNP’s aim for control of corporation tax as reported in today’s newspapers… “SNP backs corporation tax control”….

      http://breakingnews.heraldscotland.com/breaking-news/?mode=article&site=hs&id=N0404791313459795335A

  10. Surely this point as to whether the Calman report was good or bad is rather moot, seeing as we’re not getting the recommendations of the Calman report? The Condem coalition has cherry picked the parts of the Calman report that suit (Westminster) are that’s how the Scotland bill was made up.

    Of course, if more time had been spent debating the Scotland bill and less time attacking the Nationalists…

  11. Did I hear right? This morning in the news, Calman himself admitting the tax element of his proposals were “not evidence based”.

    The irony of your article is not lost on me.

  12. I agree wholeheartedly with your comments here and in the guardian. Labour should go for a no on both questions, logically if the SNP lose on the first they should lose on the second….

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