Holtham on Smith

The devil will be in the detail of the latest political compromise of devolution, says Gerald Holtham

The report of the Smith Commission is faithful to a law of politics.  When forced to open a can of worms,  don’t let all the invertebrates out. Just prise the lid back a little bit then kick the can down the road.

There is no doubt that the report recommends an big extension to devolution and a big change from the status quo.  But exactly how big a change?  Ah, you will find it all depends….

The report was always going to be the result of a five-way compromise between the parties of the governing coalition, the Labour party, and the SNP.  Only an ingénue would expect such a process to produce something clear, coherent and without ambiguities.  Equally only an ingénue would have expected the SNP to welcome it as anything more than the best that could be extracted from the Westminster parties.  In fact they have criticized the proposals as disappointing and only time will tell whether they reflect majority Scottish opinion.

Ambiguity in logic is a vice but in politics it is a virtue.  Consider the headline item in the report: Scotland will get complete control of income tax rates, with no restrictions.  That seems clear enough.  On its face it seems to open the door to unbridled tax competition.  If the Scots wanted to become a tax haven like the Isle of Man what is to stop them?  The answer is another provision of the report: the no detriment rule.  This says if the action of either the UK or Scottish government affects the revenue of the other, then compensatory transfer payments are due. If pursued to the letter this provision would make tax devolution unworkable.  Any change in rates will have spillover effects on the neighbours but quantifying and agreeing those as the basis for a transfer is more than difficult. The provision could effectively paralyse the ability to vary taxes.  Surely, this is understood.  The provision is a power in reserve to be brought out if the Scots go in for aggressive tax competition. Since the UK will continue to finance at least 40 per cent of Scots expenditure  via centralised taxes and the block grant, the provision has teeth.  If the Treasury considers it is owed money it could deduct it from the grant. How will this work in practice?  Who knows?

With the Scots controlling income tax rates it would appear that the UK government could no longer raise income tax in Scotland if faced by a national emergency.  But there is another provision that the Scots could be called on to shoulder their share of the burden if a UK-wide tax were levied “ in the UK national interest”.  Presumably that could take the form of an income tax surcharge.  Again, there may be less in the changes than meets the eye.

It is also unclear how the welfare changes will work.  Apart from universal credit, other benefits – for carers, disability, discretionary housing payments etc – are to be devolved and the Scottish government will have power to create new benefits.  How this will be financed?  The key characteristic of benefits payments is that no-one knows what they will be at the start of the financial year.  The total is not determined by the government setting a budget, as it is for other expenditures.  Certain entitlements are created by law and people claim if their circumstances permit them to do so.  If the number of people qualifying for benefits rises or falls unexpectedly the government forks out more or less.  In the jargon these are Annually Managed Expenditures, not ones subject to a Departmental Expenditure Limit.  If the Scottish government finances and administers these benefits itself, there will be two separate benefit systems since the UK retains pensions and the universal credit.  But if a unified system of benefits administration is retained, the Scottish government will be repaying variable amounts to the UK government.  That will at the least complicate operation of the Barnett formula.

Scotland finally gets Air Passenger Tax; all other taxes continue to be reserved to the UK, although 10 per cent of VAT revenues collected in Scotland will be assigned to the Scottish government with a commensurate reduction in the block grant.  Taking all income tax and 10 per cent of VAT will make Scottish government revenues much more variable, fluctuating with the state of the economy.  That must imply Scotland gets substantial new borrowing powers so it can maintain spending during temporary dips in revenue.  The report acknowledges as much but new rules and limits for this borrowing remain to be worked out.

Sometimes arrangements that are thrown together as a last-ditch compromise do work and last for a long time. Look at the Barnett formulae.  And the ambiguities leave both UK and Scottish governments plenty of wiggle room if they really want to work together. Often, though, such expedients fall apart.  The ambiguities provide plenty of room for conflict too  if that is what the politicians want.

Apart from the financial aspects, the report does propose a large step towards home rule even if it does not arrive there to Scottish satisfaction.  The powers still reserved to the UK government cover the state pension, the new universal credit, the minimum wage, equality legislation, licensing offshore oil and gas extraction and tribunals covering immigration and banned organisations.  Otherwise all domestic policy issues are either devolved or the Scottish government has at least the right to be consulted.  Moreover the framework of government itself in Scotland – boundaries, electoral systems etc – is devolved. The Scottish Parliament and Government are to be permanent entrenched institutions and the convention whereby Westminster does not legislate on devolved matters is to become law.  This is a constitutional innovation which effectively relegates to history the doctrine of untrammelled Parliamentary sovereignty and adds, in effect, elements of a written constitution.

The implications for Wales are moot.    Welsh politicians will certainly want the recommendations of the second Silk report to be implemented.  They may want more, including many of the extra powers offered to Scotland, though they will be rightly unsure of their capacity to discharge all the responsibilities without a substantially larger Assembly.  They will also rightly want Welsh institutions constitutionally entrenched too.

When it comes to responsibility for revenue raising, the Welsh government has always been more reluctant.  The Welsh and English economies are even more intertwined than the English and Scottish ones so distortions introduced by tax divergences would be greater in the Welsh case.  The “no detriment” clause would be  unworkable and if pushed vigorously would inhibit any move to different tax rates. Finally, Scotland does not need a referendum to assume additional powers.  Wales is committed to hold one before any income tax devolution. Stephen Crabb may be pushing for it but you are not advised to hold your breath.

Gerald Holtham Chaired the Independent Commission on Funding and Finance for Wales, also known as The Holtham Commission. He is a Fellow of the IWA

17 thoughts on “Holtham on Smith

  1. Apologies: there is a misleading ambiguity in the above. The proposal is for the Scottish government to get 10 percentage points of the VAT rate. Since the standard VAT rate is twenty percent, that means it gets half the standard-rate revenues. What I wrote is naturally read as meaning it gets 10 per cent of the revenues, which is wrong.

  2. So parliament could pass a bill that prevents it from abolishing devolved institutions. However, I don’t see what would stop that bill being itself abolished as a first step if devolution were to be reversed. Unlike say the Human Rights Act, there would be no international implications. Of course you might pass a bill to entrench the entrenching bill, but then what is to prevent …

  3. More ‘Hot Air’ from Gerald and whilst I do not disagree with most of his observations I find it unacceptable that yet again Gerald seems to be oblivious to a simple fact which is the Failed Welsh Governance in all aspects under devolved provision.

    So, 15 years of abysmal governance with hardly any scrutiny from the Welsh media the subtle message goes on relentless ‘Wales needs more powers’!

    Perhaps the right time is now to find a way to free the muzzled Welsh media from the clutches of the Y Fro nationalists in Labour Government and elsewhere who are the only beneficiary of the post devolution period in Wales.

    It would be nice if the IWA had the courage to take the lead and give Welsh public some long overdue honesty about the corrosive impact of Welsh Government’s driven Social Engineering agenda and take it from there!?

  4. Once again to my surprise I find myself half-agreeing with friend Glasnost. It should be pretty clear really that the only real purpose of ‘Welsh’ Labour, just like ‘Scottish’ Labour, is to deliver Labour votes in support of the UK wide party, whose policies on the whole do few favours to Wales. So in a sense, much of Labour controlled devolution is just jobs for the boys and you’d be better off without it. But then IMHO you’d be much better off by far if you followed the Scottish model and voted in a Government that put Wales first. But then what do I know?

  5. What a pleasant place Planet Glasnost must be to live in. Everything can be explained by reference to a conspiracy theory. Taking your proposition of the simple ‘fact’ of failed Welsh governance in all aspects under devolved provision, it’s not Gerald Holtham that has a credibility problem.

  6. Glasnost UK is so right. Why are we considering meaningless constitutional issues when the Welsh language is destroying our country? The language fanatics in the Labour Party have so much to answer for.

  7. Well argued R B J and J R – As you both seem to be so self righteous perhaps you can explain to me how on earth any Government can resurrect an ancient cultural language spoken by the few and make it as in this case a National Language of Wales and do so by compulsion and dictate?

  8. When I see a dog’s dinner set of proposals like this I begin to wish Scotland had voted ‘yes’! Then we could have handed them their whole can of worms and left them to get on with it until they default and the UK has to clean up their mess anyway…

    But the people who come out of this the worst in my view are the UK government, and the x-party anti-British cabal at the centre of the political class, who continue to show they are unfit to govern. They seem to be incapable of thinking anything through!

    Glasnost is right – Wales is just an even bigger problem waiting to happen!

  9. Jack Rawls’ interventions are beautifully judged. I can’t tell whether he is being satirical or whether he is in a world of his own.

    Alasdair, if you want to be really dark about it what stops the army seizing power in a military coup? Politicians don’t have heavy weapons. Fortunately we live in a country where constitutional behaviour is expected and generally the rules are observed.

  10. If the Welsh Government had the power to vary or scrap the Air Passenger Tax then Cardiff Airport would wipe the floor with Bristol Airport. This cannot be allowed to happen, of course, as it would scupper the Cardiff / Bristol “Severnside” extravaganza. So Wales will lose out to English Regionalism. Time to sort out our structures and our national principles, before engaging on whimsical cross border ventures.

  11. Good to see you haven’t lost your touch when it comes to resorting to personal remarks rather than reasoned argument. Your use of the term self righteous puts me in mind of pots and kettles.

    Your attack was on Gerald Holtham for producing more ‘hot air’ and nothing to do with language development; a case of deflection, methinks. Professor Holtham enjoys a reputation for a well-researched and insightful understanding of Welsh governance. People listen to him because of the substance contained in his remarks. Do you think that you are able to say the same about yourself? I’m sure you could if you tried.

  12. David Lloyd Owen – The answer is simple as the world has moved on since the Brittonic languages were the main tongue of the British Isles and today only insignificant remnants are found to be still in existence in various forms across the British nation.

    Resurrecting an ancient and a largely a primitive language by state compulsion is never going to work as vast majority of British people including Welsh majority have no affinity or any interest in the Welsh language, especially the children.

    Welsh speaking Labour leaders have no mandate from Welsh people to Socially Engineer post devolution Wales into a Welsh speaking nation and a huge damage has been inflicted with more to follow – Wales needs Democracy not a Totalitarian Celtic Republic.

  13. A valuable intervention from Holtham, drawing our attention to the ‘sleepers’ within the detail (such as the ‘no detriment’ rule) which could make the Smith arrangements a damp squib when implemented. These questions are, of course, being completely ignored by the mainstream press in their haste to herald an ‘historic’ constitutional change and head off the SNP surge in Scotland… I wonder if it will work?

  14. Those who condemn people for speaking their own language ought to display a coherent and comprehensible command of the language that they deem to be superior.

    The act of resurrection takes place when raising a body from the dead; this is the centerpiece of our Christian tradition, one that has existed for 1600 years in wales. 500,000 people speak Welsh fluently in Wales, they are not dead.

    An ancient language? Yes, and so are Chinese, Hebrew, Japanese and quite a few other tongues. Should they be abolished?

    A primitive language? On what basis is it primitive? What other languages are primitive? Should they also be abolished, simply because of a (misplaced) problem of perception? Do the races associated with these languages need to be abolished as well?

    Placing observations such as in the posting above against other languages and the people associated with them would be seen unacceptable in almost every other political, linguistic and racial context.

    As a returnee ‘Aboriginal Briton’ I take some pleasure in rejecting such a ghastly viewpoint. ‘Yma o hyd!’

  15. Allowing off-topic comments, such as on the Welsh language, is a deterrent to some of us getting involved in the debate on the subject in question. Do you have moderators who can disallow such comments or are they to be allowed to continue?

  16. Dave, I agree. I responded to this comment because it needed to be replied to. Otherwise, each topic has its own place.

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