Arthur Midwinter: D minus for devo-plus plan

Reform Scotland’s proposals for increased fiscal devolution for Scotland are built on the sands of ideology and don’t stand up to close scrutiny, Arthur Midwinter writes

Reform Scotland’s proposals for increased fiscal devolution for Scotland are built on the sands of ideology and don’t stand up to close scrutiny, Arthur Midwinter writes

The launch of a devo-plus campaign group around proposals first published last year by the right-wing think-tank Reform Scotland provides yet another impractical and unworkable model of devolution finance in the UK.

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The idea is to create a system in which all three tiers of government – councils, Holyrood and Westminster – are responsible for raising the majority of the revenues necessary to fund their expenditure programmes. The paper that sets out Reform Scotland’s plans formed the basis of its submission to the Scotland Bill committee, although it modifies its previous plan to leave 40 per cent of income tax and 40 per cent of oil revenues under the control for the UK government, without explaining why.

The underlying assumption – similar to the poll tax – remains that increased fiscal powers will lead to lower taxes and lower expenditure, in line with Reform Scotland’s advocacy of limited government. The devo-plus model is presented as different from devo-max – which devo-plus group leader Jeremy Purves has described as a recipe for conflict and unworkable in practice – but there are in fact strong similarities between them. There would be a major transfer of fiscal powers to the Scottish Parliament, leaving Westminster responsible for only VAT and national insurance, after which the Scottish Parliament would raise 52 per cent of taxation and Westminster only 28 per cent, with 20 per cent funded by UK borrowing.

In addition, several welfare benefit programmes in the social protection budget will be transferred to Holyrood, totalling £7.2 billion, leaving £7.8bn under Westminster, of which pensions expenditure of £5.7bn is the largest item. Reform Scotland argues this will permit a more effective approach to alleviate poverty.

The devo-plus model assumes this will result in better government, greater efficiency, and increased economic growth. There is, however, a fundamental problem of methology with the report, in that it rests largely on ideological assumptions. There is no assessment of the current fiscal framework, or analysis showing why devo-plus would improve on it.

In particular, there is no discussion of macroeconomic policy. Reform Scotland argues that income tax and corporation tax should be devolved to avoid “confusion and duplication” and that these taxes can be altered to help Scotland retain and attract new businesses. This is clearly contradictory to the principles of the economic and fiscal union in the UK, which rightly regards fiscal competition as wasteful. This is in fact a fiscal independence model with only a difference of degree from devo-max. This is not a devolution model, unlike that proposed by the Calman Commission which formed the basis of the Scotland Bill currently before Westminster, which recognises that “any new taxation or borrowing have to be exercised within a UK macroeconomic framework”. This problem is simply ignored by Reform Scotland.

The report goes on to claim that making the Scottish Parliament responsible for raising most of its revenues will lead to better and more accountable government. This assertion relies wholly on the spurious claim that “this happens in many other countries”. This is a basic error. In modern governance most revenues are raised by central states, while most expenditure is incurred by sub-central governments, funded by a range of central grants, shared taxes and assigned revenues, as well as fiscal decentralisation. Income tax is the most common devolved tax to regional governments, and property taxes at the local level.

Therefore, few devolved governments raise most of their taxes, and political accountability operates at the margins, where they can apply their fiscal powers to set budget totals above or below their share of central funding. There is no clear evidence that either fiscal devolution or tax-cutting are necessary preconditions for growth. The World Bank’s view, that we know little about the relationship between decentralisation and growth, is consistent with the research evidence.

There is no serious discussion over the fiscal politics of devolving oil and gas revenue, and the report’s data shows that balancing the budget in Scotland will be heavily dependent on both oil revenues and UK government borrowing. How is UK government responsibility for meeting the Scottish deficit of £11.6bn an improvement in accountability?

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In its earlier paper on fiscal powers, Reform Scotland inferred that the operation of the Barnett formula provided a disincentive to politicians who wanted to cut spending. In fact, cuts in block grant forced spending cuts on the Scottish Government, and the SNP government added to them through its council tax freeze.

Overall, Reform Scotland’s discussion of fiscal powers and devo-plus simply raises serious doubts over the competence of its authors in this field. Further, the proposal to transfer about half of social protection spending is also unconvincing. The objective is to tackle “the split” between responsibility for welfare benefits and anti-poverty programmes, such as social housing, to allow a “more coherent approach”.

In fact, this proposal would fragment responsibility for benefits. Why splitting £15bn of expenditure between Holyrood and Westminster would make policy more coherent is never explained, nor is the proposed division of programmes between them.

There is no critique of the current system, to show that their diagnosis is justified. Indeed, the only logic I can see in the division of power is that it would deliver the fiscal arithmetic sought for Holyrood!

The final weakness in a report which argues for greater efficiency is that it offers no assessment of the administrative costs of the tax and spending changes proposed. The Calman report goes systematically through the basket of taxes, arguing on economic, administrative or cost grounds that most taxes should remain at the UK level. Reform Scotland provides no such explanation.

Devo-max and devo-plus are both theoretical models, based on assumptions and assertions, rather than evidence and analysis. Neither model can be found in current practice.

Both are fiscal independence models, which would disrupt the UK’s fiscal union which has a unified tax and benefit system. They would require a fundamental reform to the UK model, after which little resembling a political, social and fiscal union would remain.

As well, both rely on Scottish control of oil revenues to balance the books and maintain current spending, which is unlikely to be transferred under devolution.

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It is astonishing that Reform Scotland should propose such a fundamental reform on the basis of six pages of text, largely devoid of policy analysis. This raises serious doubts over the competence of the authors, including Reform Scotland’s chairman, Ben Thomson, in this field.

The presence of a handful of politicians in its group should not be interpreted as inferring this will be amenable to the unionist coalition which developed Calman. This is rather similar to the suggestion that Labour would support devo-max because former First Minister Henry McLeish and MSP Malcolm Chisholm favour it. None of the key players in these parties voiced any support for devo-plus, and this is no surprise, for it compares badly with the analytical rigour in the Calman report. There is in fact little scope for further fiscal devolution under the principles of the present fiscal union. Fortunately, this poorly developed proposal will get short shrift from sceptical minds in the Treasury.

Arthur Midwinter is a visiting professor at the Institute of Public Sector Accounting Research, University of Edinburgh