Tag Archives: fiscal autonomy

What happens when policymakers have multiple, potentially contradictory, objectives? The curious case of Scotland’s ‘fiscal framework’

It is common in policy studies to state that policymakers or governments have many potentially-contradictory objectives:

  • When we focus on ‘complex government’ we note their large size, tendency to break functions down into specialist departments and units, and for those units to produce policies which undermine those of others.
  • When we focus on policymakers, we question their ability to produce a consistent set of rank-ordered preferences.

Indeed, Lindblom’s famous suggestion is that policymakers only know how to rank their preferences when they are forced to choose between them.

Yet, in the case of Scotland’s finances, the other option is to defer those choices (perhaps indefinitely, perhaps until events supersede the original problem).

In that sense, the deferment of a key part of Scotland’s ‘fiscal framework’ is part of a fine tradition in Scottish politics to try one’s hardest not to talk about the size of the Scottish Government budget. The mythical ‘Barnett formula’ served this purpose well by providing an almost automatic way to adjust the size of the grant that the Treasury gives to the Scottish Government.

Here is the curious bit

Then came the famous ‘Vow’ which promised to maintain Barnett, and then came the new fiscal framework to deliver greater Scottish Government fiscal autonomy while also protecting the Barnett formula.

The problem is that these developments are starting to show how contradictory Scotland’s devolution settlement is becoming:

  • The ‘Barnett formula’ is a way to adjust the Treasury’s allocation of funds to the Scottish Government. Giving the Scottish Government a greater ability to control taxation reduces the role of the Barnett formula that the party leaders vowed to protect (in part, this only seems like such a contradiction because ‘Barnett’ is often used to describe Scotland’s good financial settlement, not the formula itself).
  • The two key principles underpinning the new fiscal framework – neither government should be disadvantaged by the decision to devolve (the Smith Commission’s ‘no detriment’ principle) and the reforms should not provide greater public services for one area without an equivalent rise in its taxes (‘taxpayer fairness’) – do not get along. As Bell, Eiser, and Phillips argue:

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.

Instead, they present three main options which come closer to one principle and further from the other.

So, to resolve this issue once and for all, the UK Government needs to form an agreement with the Scottish Government (or make a decision based on the extent to which it wants to please the Scottish Government), knowing that it will likely satisfy one policy aim at the expense of the other.

What seems to have happened is (a) an agreement between governments that neither government wants (a ‘compromise’), secured by (b) an agreement to see how it goes for 5 years before revisiting the issue again. In part, this allows the UK Government and the Conservative party to argue that it has delivered ‘the vow’ and put off the big fiscal decision until after the 2016 election.

So, the new framework no longer delivers the advantage of the Barnett formula (the ability to continue for a long period with minimal attention, combining a generous block settlement sort-of-adjusted according to population). Instead, we may be treated to the same tense negotiation and ‘compromise’ every run up to a Scottish Parliament election.

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Five political problems with ‘Full Fiscal Autonomy’ for Scotland

‘Full fiscal autonomy’ (FFA) is the devolution of all tax and spending decisions to Scotland. It involves the Scottish Government forming its own Treasury and Inland Revenue function, raising its own revenue, and making a contribution to the UK for shared services such as spending on defence and foreign affairs.

FFA is back on the agenda following the combination of a Conservative majority in the general election, on the back of votes in England, and its need to recognise a sweeping SNP win in Scotland. Early rumours suggest that David Cameron is ready to offer it ‘in a peace deal to save the Union’ and we might get the impression that a UK government can click its fingers and make it so. There are five important political problems with this idea.

No party in Scotland wants it – or, at least, not like this

This seems like a strange thing to say – surely, at the very least, the SNP wants it?! Yet, Sturgeon’s language throughout the election campaign (and p11 of the SNP’s manifesto) was about FFA taking a long time, based on it taking 5 years (2007-12) to introduce a modest devolved tax and spending regime. By this calculation, the groundwork for something far more ambitious would take longer than a second independence referendum to materialize.

The other main parties in Scotland have described FFA as disastrous (generally drawing on IFS analysis). It is hard to overstate just how much they are against it. Indeed, they were the parties which talked about it most because they saw it as a subject that weakened the SNP. Maybe it doesn’t matter so much that Labour used the imagery of the bombshell and the Liberal Democrats described the ‘devastating impact’ it would have on Scotland, since both parties are now out of the picture.

However, it does matter what the Scottish Conservative rhetoric has been, including the statement that, ‘The public deserve to know the full impact of what fiscal autonomy would mean for Scotland’, that FFA would produce ‘massive spending cuts, a hike in taxes or radically increased borrowing’, and that ‘Almost no major employers back the SNP’s plan for full fiscal autonomy’. Only three weeks ago, Ruth Davidson described FFA as a disastrous way to exploit Scottish taxpayers to secure independence ‘by the back door’:

Stage two comes if the SNP gets its way to impose independence by the back door. Ms Sturgeon has confirmed this week that separation remains her goal, and has refused to rule out another referendum soon. But, in the meantime, the goal is to settled for what the Nationalists call “full fiscal autonomy”. Under this plan, we’d remain in Britain, but all the financial ties we currently share with the rest of the UK would be severed. And Scotland’s system of public services would rest entirely on the shoulders of the poor, benighted Scottish taxpayer.

The people advocating it are doing it to help themselves, not Scotland

Some senior conservatives are using the right language with the SNP and describing the Scottish result as something that has to be respected – but suddenly portraying FFA as good for Scotland and the Union would be near impossible given what the David Cameron said about it less than a month ago.

allardyce 2

Others may be describing FFA as a way to stick it to the SNP, encourage centre-right politics in Scotland and satisfy an audience in England. For example, Conservative MEP Daniel Hannan argues that the SNP is the Scottish equivalent of Greece’s Syriza and only able to use anti-austerity rhetoric because the Scottish Government doesn’t raise its own budget.

allardyce 1

This tactic is divisive and damaging

Playing politics with Scottish constitutional change just makes things worse. Portraying FFA as good for England and some much-needed medicine (or, perhaps confusingly, a poisoned chalice) for Scotland is divisive and goes against the idea that the Conservatives want to do what it takes to protect the Union.

Key arguments against Scottish independence apply to FFA

Remember the sorts of issues that arose during the referendum, such as: you can’t have a shared currency if your tax/ spending regimes are too different (No campaign); and independence is a way to get rid of Trident (Yes). These problems would resurface with FFA, since the UK Treasury would want assurances that Scottish Treasury decisions did not have too much of a knock-on effect, and an SNP-led Scottish Government would not want to transfer money to the UK for Trident. Effectively, the UK Conservative government would be saying: ‘you can have FFA if you pay for the shared services we choose, and you stick to our fiscal rules’ (the latter seems to be a feature of the albeit-vague ‘no detriment’ principle). Calling this ‘full fiscal autonomy’ would be rather misleading.

There would be very little to hold the Union together

The economic argument dominated the independence campaign. It was by far the biggest element of the No campaign. FFA would largely remove that argument, since almost all warnings would be about powers that have already been granted to Scotland.

In short, ‘full fiscal autonomy’ for Scotland could be seen as the ultimate cynical solution to the rise of the SNP, and could well backfire to cause the death of the Union – unless the parties are now proposing something that can be described (with fingers crossed) as FFA while being nothing of the sort.

See also: Alex Salmond saying that it’s not on offer anyway (2m30)

Then see David Cameron ruling out FFA and focusing largely on implementing Smith: http://www.bbc.co.uk/news/uk-scotland-32750461

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Devo-Max: Does it mean the maximum you WANT or the maximum you CAN HAVE?

Let me show you a very important distinction between two kinds of devo max:

  • the big one that people often seem to support, but can’t get; and
  • the smaller one that seems to be on offer, that people confuse with the big one they can’t get.

The big one that people often seem to want but can’t get

If you look at opinion polls on devo-max, the understanding is this:

Devo max This term has become short hand for the idea that the Scottish Parliament should become responsible for nearly all of Scotland’s domestic affairs, including taxation and welfare benefits, while foreign affairs and defence would remain the responsibility of the UK government (What Scotland Thinks glossary). The BBC has reinforced this definition: ‘Devo-max, n.The devolving of all powers to Holyrood other than defence and foreign affairs‘. The Scotsman has plumped for ‘most powers short of defence and foreign affairs’.

Then, this is what people respond to in opinion polls:

  • ‘59% agree that the Scottish Parliament should become primarily responsible for taxation and welfare benefits, the two principal areas of domestic policy that are still reserved to Westminster’ (John Curtice 15.9.13)
  • Pensions might go up or down or stay the same if the ‘Scottish Parliament made all decisions for Scotland apart from defence and foreign affairs’
  • Maybe Scotland should leave the UK “If 75% vote for ‘full financial independence’

So, this is the maximum devolution that many/ most people seem to want.

The smaller one that seems to be on offer, that people confuse with the big one they can’t get

Yet, this is not on offer, partly because no party is offering it, and partly because they can’t offer it. Instead, some parties have begun to think about offering the maximum devolution you could expect to get if you stay in the UK and want a UK-wide economic policy framework. This kind of devo max is not about autonomy over economic policy as a whole. It is about devolving some more income tax, and maybe some other taxes, and maybe more of the social security system. And yet, what you read is that you are now being offered devo max:

This is ‘devo max’ only if ‘devo max’ means the maximum you can reasonably expect to get under devolution. It does not mean becoming responsible for ‘taxation and welfare benefits’.

So, the crap thing about the public and media discussion so far is that most people say they have heard of devo max in much the same way that they might respond to the question: ‘have you heard of that EU guy?’

Neil McGarvey and I wrote this (in Scottish Politics) when the discussion was more popular:

devomax Cairney McGarvey 2013 p241

See also

 

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Under ‘Devo-Max’, ‘Fiscal Autonomy’ is an illusion

OED definition of autonomy: a.  The condition or right of a state, institution, group, etc., to make its own laws or rules and administer its own affairs; self-government, independence.

devo max tweetThe Scottish independence debate lacks clarity at the best of times, and many debates rely on its participants guessing or assuming the positions of others. In particular, the ‘further devolution’ options are not well defined, partly because ‘devo max’ will not be debated before a referendum.  Most discussion of devo max so far has exposed widespread confusion about its meaning.  Perhaps the most common mistake is that it involves, ‘a proposal in which Scotland would have full economic independence from the United Kingdom but would still remain a part of it and be governed in specific areas such as foreign policy and defence’ . Devo max is not about autonomy over economic policy as a whole. Indeed, even independence would not guarantee such autonomy if the plan is to keep the pound (interest rates would be ‘set’ by the Bank of England, and the Scottish Government’s fiscal policy would be influenced strongly by discussions with the UK Government).

A lack of clarity on ‘fiscal autonomy’ under devolution is particularly unfortunate because we know that the Scottish population seems to want it without knowing what it is. ‘Fiscal autonomy’ implies the right of the Scottish Government to set its own tax and spending regime.  Yet, most proposals are nothing of the sort.  Instead, we are talking about autonomy over particular tax instruments, not them all – and, therefore, no way to vary the balance between taxes.

Treasury figures for the UK as a whole* give us a rough-and-ready guide to the proportions involved:

  • The main taxes already devolved account for 8% of UK government receipts (business rates and council taxes are both 4%).
  • The ability of different regions within a single EU member state to have different rates for corporation tax (8%) and VAT (17%) is limited.
  • Income tax accounts for 26% (or 25% if we include tax credits), a figure kept low by the separate collection of National Insurance (18%) as a tax on employment income (it is an indicator of entitlement to certain benefits, but goes into the same pot)
  • Excise duties are 8% and ‘other’ is 14%.

The breakdown gives us a sense of proportion about the current devolution of taxes and the rather limited fiscal autonomy of the Scottish Government even if it gains, under the Scotland Act 2012, its new ability to vary income tax by ten pence in the pound (a one pence, or 4%, change in income tax might change the Scottish Government budget by little over 1%).  It is also unable to vary the relative difference between lower and higher tax bands and, more importantly, to adjust overall mixes of taxes and spending to influence economic growth (and therefore tax revenue).  The more significant development may relate to a new ability of the Scottish Government to borrow.  The Scotland Act 2012 gives the Scottish Government the ability to borrow up to £2.7bn from the UK Government, subject to Treasury approval.

So what does this all add up to? In my opinion, the further devolution of a small number of taxes does not deserve the title ‘fiscal autonomy’ (indeed, the Scottish Government wouldn’t be much more fiscally autonomous than local authorities, who raise a small proportion of their own income). All it does is allow some parties to look like they are promising significantly more devolution without it doing anyone any good. Or, it gives the impression that the Scottish Government would be increasingly responsible for raising the taxes it spends without giving them the ability to do much with them. It’s a ‘fiscal autonomy’ trick that no one should be invited to fall for.

Qualification 1: focus on what leaders say, not what people say they say

To be fair to David Cameron, a lot of the discussion is by people putting words in his mouth. What he said was vague: “Vote no – that can mean further devolution……more power to the Scottish people and their Parliament”.

A similar, but more detailed, emphasis can be found in the Scottish Labour Devolution Commission’s Powers for a purpose (p5) which talks about ‘scope to enhance the autonomy and accountability of the Scottish Parliament through an extension of tax powers’.

Qualification 2: the production of these figures is political

*Consider three different ways in which to make the calculations outlined above . One method is to adopt the same approach but use figures from the Scottish Government’s Government Expenditure & Revenue Scotland documents which now attempts to take into account a geographical share of North Sea oil taxation revenue. The pro-independence group Business for Scotland uses Table 3.3 to produce its own table which puts, for example, income tax at 20.4%.

Another method is to describe these calculations with reference only to the devolved Scottish Government’s budget, which is approximately 60% of spending in Scotland. This is the approach taken by Powers for a purpose (p6) which recommends ‘widening the variation in income tax in the Scotland Act [2012] by half from 10p to 15p … so that it raises about 40 per cent of its budget from its own resources’. The rough-and-ready calculation is that income tax is 20-25% of UK income, and three-quarters (15p of 20p) of that percentage is 15-19%. Adding this 15-19% to 8% (business and council tax) gives you 21-27% of a notional overall income. Then, to express it in terms of the Scottish Government’s 60%, multiply by 10/6 to give you 35-45% of the Scottish Government budget.

A third is to present both types of calculation on the same table, which is done by Reform Scotland, who try to take into account the Scottish Parliament’s proposed larger budget:

Labour Devo Commission - Reform Scotland workings - 20.3.14

 

See also: Scottish independence referendum: What is Devolution Max?  (Michael Moore’s description of devo max as a ‘brand without a product’ was during evidence to the Scottish Affairs committee).

This is an abridged and updated section from Paul Cairney and Neil McGarvey’s (2013) Scottish Politics

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