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

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