The final report of the Welsh Assembly's Independent Commission on Funding and Finance for Wales (the Holtham Commission) has been out for a week now, but was well trailed before then. I have refrained from commenting on it until having an opportunity to read it.
It follows on from its first report this time last year, and in view of the first report's themes, the conclusions and recommendations in the final report should come as no surprise. It's three main proposals are the introduction of a needs based block grant system for the UK to replace the Barnett formula; devolved income tax and other tax raising powers within Wales; and borrowing powers for the Welsh government and assembly.
This article does not deal with borrowing powers.
Needs based block grant
I will not say much about block grant and the Barnett formula, because I have commented on it before in the context of the report of the Richards Committee and on other occasions.
My prediction has always been that any government is going to struggle with the replacement of the Barnett formula, because a needs based formula would require reducing the Scottish block grant. Well in theory it wouldn't - the present Barnett system for Scotland could be retained and a needs based grant introduced for Wales - but the idea that those in England can always expect the worst outcome for them in order to further the interests of the devolved administrations may result in another (although more peaceable) Pilgrimage of Grace descending on London from the north of England, and this time perhaps from the south as well. (Although at first mainly to do with religion, in the Pilgrimage's second phase, feelings boiled over into insurrection partly because of fears of new taxes and economic favouritism and not just a love of the Old Church.)
There is also the problem of defining need. The Holtham Commission's proposals in its first report go to some pains to explain how this can be done, but different parts of the UK (and in particular those in England who have no one explicitly batting for them) are likely to harbour the suspicion that a needs criterion which is at heart subjective, whatever outward system of measurement may be devised for it, is being engineered against them.
Certainly the coalition seems to have put it on the back burner and I don't think the latest Holtham report is going to change this.
Devolved income tax
It is useful to compare the Calman Commission proposals on devolved taxation for Scotland with those of the Holtham Commission for Wales. Holtham can be thought of as a development of the Calman proposals. It is rather more "Calman-revised" rather than "Calman-plus".
In summary, under Calman the UK rate of income tax less 10% would apply in Scotland with a commensurate reduction in UK block grant (whether that grant comes from the Barnett formula or something else). The Scottish Parliament could then decide how much of the missing 10%, or more, is to be paid by Scottish tax payers. In effect they could set the income tax rate applying in Scotland to anything they want provided it is not more than 10% below the UK rate (and so either keep or suffer the difference), but cannot alter tax bands or differentials between bands. As well as tax bands and differentials remaining in UK government hands, so would the income thresholds for them, and allowances.
Under the Holtham Commission proposals, 50% of UK tax rates in each tax band would apply in Wales. The Welsh Assembly would then decide how much of the missing 50% in each band (or more) is to paid by Welsh tax payers, and could decide different rates for different bands (so they could decide to make Welsh tax less progressive or more progressive than UK tax), as long as the rates fixed by the Assembly are within 3% of the UK rate for the band. They could not alter the thresholds applying to each band, nor allowances.
Holtham also specifically deals with the key issue of how UK and Welsh growth would interconnect. The offset against the UK block grant contribution representing the 50% of income tax in Wales which is henceforward to be managed by the devolved institutions would be determined once and for all on the new system coming into effect, and would thence be indexed by reference to UK-wide growth of the tax base. So the Welsh Assembly and government would be rewarded or penalised for their own performance in financial management to the extent of the income tax levied in respect of that "missing" 50%. Something similar did not explicitly form part of Calman, and has since been one of the criticisms of the Calman report. However the Holtham Commission's proposal on this also has its consequences, which I deal with further towards the end of this article.
This is an interesting but odd mixture of concepts. Ostensibly 50% of income tax is to be "devolved", but so far as concerns rates of taxation it is only in fact devolved to the extent that the tax must be within 3% of the UK rate, so as a description this is somewhat misleading. This 50% really determines the amount of Welsh tax-take which is to be directly available to the Welsh Assembly and Government as a link to the economic performance of Wales.
It is interesting to see the report's reasoning behind enabling the Assembly to set different rates between tax bands. The example given in the report concerned higher rate payers migrating to England if they would otherwise be hit by the Assembly increasing the basic rate of tax, given the close proximity of most of Wales to England and that much of the tax base comes from the border areas of Wales: Holtham wants to allow less progressive taxation in Wales, which will surely be a difficult sell politically. (Holtham is persuaded by the "Laffer curve" for higher rates of income tax in areas where taxpayer mobility is a significant factor, under which increasing higher rates beyond the Laffer maximum can result in a reduction of the tax taken. It implies that those only on the basic rate of income tax are a "captive audience" unlikely to move to England if that rate is raised above the rate set by the UK Parliament for England and Northern Ireland.)
Other tax matters
Holtham also recommends consideration should be given to devolving rates of corporation tax, but this is complicated because of EU rules on state aid.
As in the case of Calman, it recommends that stamp duty land tax should be wholly devolved, and (unlike Calman) capital gains tax on property and land. By "property" it appears to mean things affixed to land rather than chattels or non-physical property. It also recommends as in the case of Calman that landfill tax and aggregates levy should be devolved.
The wider picture: (1) need and the block grant
I said I would comment further on how the block grant would work. The use of need as the determining factor in block grant allocation could be seen as the enemy of fiscal responsibility, the reinforcing of which the report states is one its aims. It means that if the devolved administration fails to administer the economy well and economic performance diminishes, then the UK tax payer is, through a needs based formula, there at least in part to soak up the consequences of the failure: so there is a contradiction at work here. The same could also of course be said about the benefits system, but few would want to argue against UK-wide benefits unless the UK were to be split into entirely separate economic units.
The report's recommendations would bring about some linkage between good financial management and an appropriate reward for the devolved administration, by freezing the 50% "offset" against the needs-based block grant to which I have referred, and then indexing it against the UK-wide tax base.
Of course a fixed formula such as the Barnett formula, with the application of local taxation on top of that and the same frozen offset, would reward performance just as well, leaving the workings of the Barnett formula and the UK benefit system as the UK's response to need. Any system may have to be rebased from time to time, even one following the Holtham approach. One could argue that Barnett can be rebased now on a one-off needs basis once devolved taxation is first introduced, with occasional rebasing as required thereafter, rather than making annual arguments about relative need between the constituent parts of the UK a permanent feature of the future government of the UK.
The wider picture: (2) the UK dimension
On its economic analysis, and its consideration of how that plays out in relation to devolution, the Holtham Commission is very thorough. It also makes much more of a nod to how its proposals affect the integrity of the UK as a whole than does Calman. It comments that "We have tried hard, both in this report and in our previous publications, to avoid any suspicion of special pleading", with a whole section elsewhere devoted to "The dimensions of the union between Wales and the rest of the UK". Although the latter section of the report considers, amongst other matters, what it describes as "negative spillovers", it does so only in the fields of economics and tax competition. It does not deal with the wider political consequences, nor dare I say it, the wider legal-constitutional aspects.
I am sure regular readers will have realised that this is still an area which worries me.
In whatever way the relationship between achievement/reward and devolved taxation may be managed, the outcome of these proposals would be that Scottish income tax would be set by the Scottish Parliament provided it is at a level not more than 10% below the UK rate, and Welsh income tax would be set by the Welsh Assembly provided it is within 3% of the UK rates. Since no Scottish Parliament is ever going to wish to set the income tax rate applying in Scotland which is at a level more than 10% below UK rates - it would be completely unrealistic unless there were to be fiscal autonomy giving rise to a wholesale redesign of the tax system in Scotland - the net effect is that the Scottish Parliament would henceforward set the rates of income tax applying in Scotland. The Welsh Assembly would be subject to the plus or minus 3% cap as against UK rates to which I have referred, should the Holtham recommendation on this be accepted, but any thought that an Assembly might want to set it outside those bounds anyway is somewhat illusory. The devolved institutions would also set their own rates of landfill tax and aggregates duty, and might in due course have areas of capital gains tax for which they set the rate.
Under these proposals, the other remaining links with UK rates of income tax would consist only of the thresholds applying to each income tax band (in effect, the "definitions" of the bands) and, for Calman and Scotland only, the differentials between these bands. This represents a substantial deepening of the West Lothian Question, given the constitutional link between representation and taxation. If income tax rates applying in Wales or Scotland were to be less than those in England, and the higher rates in England were only to be carried by virtue of the votes of Scottish and Welsh members, it is easy to see the trouble that this might cause.
In short, the present arrangement under which the devolved institutions are responsible for spending large sums of money from the UK Treasury whilst having limited responsibility for raising it (and none at all in Wales) can and should be viewed as an anomaly. However, is it an improvement to solve that anomaly by making another one worse, and is the union made more secure by doing so?
The answer to that may be yes, but this is a debate which has been completely lacking so far, yet one which needs to be had, and which will come back to bite us in due course if we don't.
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Update: An exchange of comments made on this article has led me to the conclusion that, as far as income tax is concerned, the Calman proposals and Holtham proposals do not significantly worsen the West Lothian question (although I still think eyebrows would be raised if higher rates were to exist in England only by virtue of the votes of members for Welsh and Scottish constituencies). To see why, it is necessary to think in big and implausible numbers. Let us say that the Westminster Parliament were to decide that income tax should go up by 5%, and the Scottish Parliament were to decide not to follow this but instead to keep rates in Scotland as they are. They would be entitled to do this, but would take a significant revenue hit. Only the top 5% of income tax they set would supplement the block grant, rather than 10%, so if they wanted to make up the difference they would have to think about raising local taxation (eg through non-domestic rates or domestic local taxation) or finding the money in some other way.
Of course, for taxes which are to be wholly devolved, such as landfill tax and stamp duty land tax, the West Lothian question does apply in full force, but these are not taxes likely to start pulses racing (although interestingly it was stamp duty which was one of the issues which finally drove the American colonies to rebellion).
Showing posts with label calman. Show all posts
Showing posts with label calman. Show all posts
Tuesday, 13 July 2010
Tuesday, 1 December 2009
The long game
The Scottish government published its white paper on proposals for a referendum on Scottish independence yesterday. Since its publication, most of the political commentariat appear to think that Alex Salmond is on the run, with the recent Labour by-election win in Glasgow (albeit in one of their safest seats in the UK), and with polls showing a small decrease in the amount of enthusiasm in Scotland for independence.
I think this is a misjudgement. Alex Salmond is in this for the long game, and it is significant that the white paper yesterday proposed that only three of the four main options available for the future should be put to the Scottish electorate in a referendum. These three options are:
He probably realises that he is not going to be able to get a Bill with a referendum offering these three options through the Scottish Parliament as at present constituted, but he is no doubt looking beyond that to the Parliament as constituted after the next Scottish elections. No doubt he would be willing, if he had to, to reach "devolution max" and subsequently independence after a period of "Calmanisation", but the clear preference coming from the white paper is to avoid that detour and go straight to "devolution max" where he would be well placed to create severe difficulties for unionist government within the UK leading ultimately to independence.
Devolution max
This option involves remaining within the UK but having control of a wide range of things which are currently reserved matters. People in Scotland would continue to have British nationality and to participate in UK affairs within the realms of defence and foreign affairs, to the budget for which they would presumably contribute, together with what the white papers refers to as "macroeconomic policy" and possibly some social protection and pensions, but aside from that they would set all of their own social priorities and most particularly determine most of their own taxation. On this the opaqueness of the white paper is most marked - one of the main levers of macroeconomic policy for the UK government is taxation. If that is taken away through devolution, the main macroeconomic lever left is the fixing of the Bank of England repo rate (sometimes called the bank rate); but this could not be devolved anyway without Scotland adopting its own currency, or acceding to the Euro (in which case the Scottish government would be subject to the rate fixed by the European Central Bank).
Let us then carry out a thought experiment with a system of "devolution max" of this kind in force which goes down the road that the SNP are charting. Were the Scottish government to become financially autonomous, responsible for raising its own taxation to meet its own expenditure, the UK parliament would only set taxation for the rump of the UK - England, Wales and Northern Ireland. It seems inevitable that members of the UK parliament elected for Scottish constituencies would no longer be able to vote in connection with the fixing of rates of taxes such as income tax and corporation tax applying outside Scotland, to which their constituents would not be subject: were they to do so, it would fly against the constitutional links between taxation and representation (in fact as I have mentioned even the much more modest Calman proposals raise issues concerning this constitutional link), and be grossly unfair to people in the remainder of the UK.
However, if there were to be a UK government dependent on its Scottish members for its majority, we could then be left with a UK government which could only wield a majority on matters of defence and foreign affairs but not on taxation. It could therefore be left unable to progress its policies on anything. It would probably be forced to march its Scottish members through the lobbies to force through taxation measures, and policies in all areas except defence and foreign affairs, which could not apply in Scotland. People in the remainder of the UK, and particularly in England, would probably not stand for it. Constitutional mayhem would result: and the pressure points leading to break-up could well come from England rather than Scotland.
The unionist parties
It is probably for this reason that only the Scottish Liberal Democrats have come out in favour of "devolution max" - or at any rate, Tavish Scott their leader has. Such is the chaotic state of Liberal Democrat policy making that, akin to the debacle over Vince Cable's mansion tax, no attempt has been made by them to address the wider issue of how the remainder of the UK could be governed in a way which would actually work in the event of "devolution max". Thankfully we do not need to spend too much time wringing our hands over this at the UK level as the Liberal Democrats are never going to be elected to government at Westminster to give effect to their policy. However, if they hold the balance of power in the Scottish parliament after the next Scottish elections they may turn out to be the SNP's version of the Bolsheviks' "useful idiots" in terms of assisting in passing a referendum Bill in the Scottish parliament. This surely must be one of Alex Salmond's hopes.
How the Tories would take this on depends on their leader at the time (which might not be David Cameron if the party fails to secure a working majority at the next election). David Cameron is wedded to the union but support for the union amongst the Tories cannot necessarily be assured in the future. A different leader might be open to the siren calls of Scottish fiscal autonomy notwithstanding the constitutional instabilities this would create. The post-Thatcher era has left the Tories as, in effect, an English party, so in that sense they do not have a great deal to lose.
The Labour party have the most at risk from "devolution max". They tread a delicate path requiring them to keep their Labour bases in Scotland and to a lesser extent Wales adequately rewarded on the one hand, and not being seen as an anti-English party on the other hand. "Devolution max" would mean they could stop worrying about dissatisfaction with the Barnett formula, but they show no signs at all of thinking about how to resolve the present constitutional anomalies arising from asymmetrical devolution, which would not leave them well prepared if faced with a situation where they had to deal with the problem of a successful "devolution max" referendum. Electoral dynamics also mean that it is only they (either with a small UK majority on their own part or in a Lib/Lab pact) who could end up in government faced with the constitutional dilemma to which I have referred, and one fears that their first and maybe last reaction would be to put their heads in the sand.
In consequence, neither the Labour party nor (in the short term) the Tories are going to go down the "devolution max" road. Were they to be manoeuvred by Alex Salmond into it, say via the Liberal Democrats in the Scottish parliament, I would not give the union more than a few years to survive. For Alex Salmond, job done.
I think this is a misjudgement. Alex Salmond is in this for the long game, and it is significant that the white paper yesterday proposed that only three of the four main options available for the future should be put to the Scottish electorate in a referendum. These three options are:
- no change
- "devolution max" within the UK (what the white paper refers to as "Full Devolution")
- independence from the UK
He probably realises that he is not going to be able to get a Bill with a referendum offering these three options through the Scottish Parliament as at present constituted, but he is no doubt looking beyond that to the Parliament as constituted after the next Scottish elections. No doubt he would be willing, if he had to, to reach "devolution max" and subsequently independence after a period of "Calmanisation", but the clear preference coming from the white paper is to avoid that detour and go straight to "devolution max" where he would be well placed to create severe difficulties for unionist government within the UK leading ultimately to independence.
Devolution max
This option involves remaining within the UK but having control of a wide range of things which are currently reserved matters. People in Scotland would continue to have British nationality and to participate in UK affairs within the realms of defence and foreign affairs, to the budget for which they would presumably contribute, together with what the white papers refers to as "macroeconomic policy" and possibly some social protection and pensions, but aside from that they would set all of their own social priorities and most particularly determine most of their own taxation. On this the opaqueness of the white paper is most marked - one of the main levers of macroeconomic policy for the UK government is taxation. If that is taken away through devolution, the main macroeconomic lever left is the fixing of the Bank of England repo rate (sometimes called the bank rate); but this could not be devolved anyway without Scotland adopting its own currency, or acceding to the Euro (in which case the Scottish government would be subject to the rate fixed by the European Central Bank).
Let us then carry out a thought experiment with a system of "devolution max" of this kind in force which goes down the road that the SNP are charting. Were the Scottish government to become financially autonomous, responsible for raising its own taxation to meet its own expenditure, the UK parliament would only set taxation for the rump of the UK - England, Wales and Northern Ireland. It seems inevitable that members of the UK parliament elected for Scottish constituencies would no longer be able to vote in connection with the fixing of rates of taxes such as income tax and corporation tax applying outside Scotland, to which their constituents would not be subject: were they to do so, it would fly against the constitutional links between taxation and representation (in fact as I have mentioned even the much more modest Calman proposals raise issues concerning this constitutional link), and be grossly unfair to people in the remainder of the UK.
However, if there were to be a UK government dependent on its Scottish members for its majority, we could then be left with a UK government which could only wield a majority on matters of defence and foreign affairs but not on taxation. It could therefore be left unable to progress its policies on anything. It would probably be forced to march its Scottish members through the lobbies to force through taxation measures, and policies in all areas except defence and foreign affairs, which could not apply in Scotland. People in the remainder of the UK, and particularly in England, would probably not stand for it. Constitutional mayhem would result: and the pressure points leading to break-up could well come from England rather than Scotland.
The unionist parties
It is probably for this reason that only the Scottish Liberal Democrats have come out in favour of "devolution max" - or at any rate, Tavish Scott their leader has. Such is the chaotic state of Liberal Democrat policy making that, akin to the debacle over Vince Cable's mansion tax, no attempt has been made by them to address the wider issue of how the remainder of the UK could be governed in a way which would actually work in the event of "devolution max". Thankfully we do not need to spend too much time wringing our hands over this at the UK level as the Liberal Democrats are never going to be elected to government at Westminster to give effect to their policy. However, if they hold the balance of power in the Scottish parliament after the next Scottish elections they may turn out to be the SNP's version of the Bolsheviks' "useful idiots" in terms of assisting in passing a referendum Bill in the Scottish parliament. This surely must be one of Alex Salmond's hopes.
How the Tories would take this on depends on their leader at the time (which might not be David Cameron if the party fails to secure a working majority at the next election). David Cameron is wedded to the union but support for the union amongst the Tories cannot necessarily be assured in the future. A different leader might be open to the siren calls of Scottish fiscal autonomy notwithstanding the constitutional instabilities this would create. The post-Thatcher era has left the Tories as, in effect, an English party, so in that sense they do not have a great deal to lose.
The Labour party have the most at risk from "devolution max". They tread a delicate path requiring them to keep their Labour bases in Scotland and to a lesser extent Wales adequately rewarded on the one hand, and not being seen as an anti-English party on the other hand. "Devolution max" would mean they could stop worrying about dissatisfaction with the Barnett formula, but they show no signs at all of thinking about how to resolve the present constitutional anomalies arising from asymmetrical devolution, which would not leave them well prepared if faced with a situation where they had to deal with the problem of a successful "devolution max" referendum. Electoral dynamics also mean that it is only they (either with a small UK majority on their own part or in a Lib/Lab pact) who could end up in government faced with the constitutional dilemma to which I have referred, and one fears that their first and maybe last reaction would be to put their heads in the sand.
In consequence, neither the Labour party nor (in the short term) the Tories are going to go down the "devolution max" road. Were they to be manoeuvred by Alex Salmond into it, say via the Liberal Democrats in the Scottish parliament, I would not give the union more than a few years to survive. For Alex Salmond, job done.
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