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.