The Scottish Referendum in September 2014 had significant and far-reaching consequences for the political settlement of the United Kingdom. The pressure for more fiscal devolution and other economic powers in the devolved nations has increased demands for greater economic decentralisation in the regions and sub-regions of England. This edited collection constructs an analytical narrative that draws on the evidence of the Scottish experience and expert testimony from the Smith Commission and other policy advisors. Drawing on ideas from fiscal federalism and agglomeration economics, the contributors examine the reorganisation and restructuring of economic territories within the UK.
What is apparent in the UK experience of asymmetrical devolution is that many of the complex issues surrounding decentralised economic governance are not going to be addressed through simple expedients. The pertinent question is what should be the appropriate institutional logics and formal policy bailiwicks underpinning a new constitutional settlement? In other words, what new governmental powers and accompanying forms of governance are needed to achieve a more economically and spatially balanced economy?
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About the Author
David Bailey is Professor of Industry at Aston Business School.
Leslie Budd is Reader in Social Enterprise at the Open University.
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Devolution and the UK Economy
By David Bailey, Leslie Budd
Rowman & Littlefield International, Ltd.Copyright © 2016 David Bailey and Leslie Budd
All rights reserved.
Where Next for Scotland and the United Kingdom?
Within the last year, the Scottish people have said two apparently contradictory things. They want to stay in the United Kingdom, and they want to be represented by the SNP. By a majority of over 10%, Scotland chose to remain British, but then, with 50% of the general election vote, chose Scottish nationalists to represent it. The partisan politics of the general election were extraordinary. The Labour vote collapsed, and the SNP showed remarkable skill in building a coalition of voters. As a result, as well as exercising dominant control over both Parliament and government in Holyrood, they are the overwhelming Scottish voice in Westminster. People committed to what Scotland has rejected, it seems, represent Scotland.
This combination of results presents acute challenges for Scotland's relationship with the United Kingdom. Scotland's representatives will be seeking things that the United Kingdom will, and should, reject. Some of these may be no more than the theatre of politics - demand the unattainable, and trumpet the rejection. But amidst the rhetoric sits a real question: Is there a constitutional relationship between Scotland and the United Kingdom that satisfies Scottish aspirations and is acceptable to the United Kingdom as a whole?
Exactly what those aspirations are is not easy to see, but even if well-defined, they are not a matter for Scotland alone. In recent decades, Scottish demands for additional autonomy have been seen as largely a Scottish question pursued by Scots. The rest of the United Kingdom, or more precisely England, has by and large been tolerantly indifferent, and devolution has been shoehorned into the existing UK constitutional framework. This has changed. Some of the reasons for the change are purely political. The referendum campaign raised the real possibility of secession, and gained English attention. More recently, the idea that Scottish Nationalist MPs might impose a government on England in a narrow general election was made into a major election issue.
The proposals for more powers now on the table or demanded by nationalists press at or over the boundary of what can be described as devolution, and raise in acute form the two long-standing rough edges of the devolution settlement: the Barnett formula, and the West Lothian question. As a result, the discussion on Scotland's constitutional position can no longer be construed merely as what concessions Scottish politicians can wrest from reluctant UK ministers: this will be a negotiation with a mobilized English opinion, which requires a serious look at the UK territorial constitution as a whole.
A CHOICE MADE: POLITICAL, ECONOMIC AND SOCIAL UNION
The place to begin is following through the logic of the first choice made by Scots: the referendum decision to remain in the United Kingdom.
The referendum was at least as much a test of the union as it was of the idea of independence. Independence was a concept presented with relentless positivity, but it was a blank canvas onto which virtually any hope or aspiration could be projected. An independent Scotland could be richer, or fairer, or greener: Who was to say that was impossible? Union with the rest of the United Kingdom, by contrast, was a concrete reality. Perhaps its virtues could be taken for granted, but its faults were easy to see and to criticize. In the end, the voters seem to have concluded that the risks of change were too great. The risks were very real, and the campaign focused on them, but it is more fruitful to focus on the positive arguments that underlay those calculations of risk, and so get a sense the nature of the union that was defended, and accepted, by the electorate.
The campaign itself was like a two-year-long general election. Campaigning is ephemeral, more soundbite than seminar, with arguments relentlessly simplified and exaggerated by the media. This was, however, a campaign with a government on each side. The case for a separate Scotland is recorded mainly in the Scottish government's White Paper, Scotland's Future (Scottish Government, 2104), a bulky document, light on analysis but strong on reassurance; Scots were told they could keep the things they like about the United Kingdom, and ditch those they did not - and even gain a place in the Eurovision song contest. The case for the Union is surprisingly well documented, and much of the argument, heavy with underlying analysis and data, can be found in the government's Scotland Analysis programme (https://www.gov.uk/search?q=Scotland+Analysis accessed 01/06/15).
The positive argument of the Better Together campaign was set out at length in June 2013 by Alistair Darling in a poorly reported lecture at Glasgow University, subsequently published as a pamphlet (Better Together, 2013). It is a case for a political union, linked to an economic union and social union. The linkages mattered much in the debate, because those arguing for independence claimed it was possible to keep the economic and social sides of the union while dissolving the political union.
The United Kingdom is a 'union state' (Mackintosh, 1968; Rokkan and Unwin, 1982). That union is a political institution, based in Scotland's case on the union of the parliaments negotiated in 1707. Internally, the union is differentiated in ways that are analogous to the distribution of powers in a federal state, but it presents a single external face to the world, under single foreign and defence policy stance. Interestingly, this is something supported by more Scots than voted 'No' in the referendum (Curtice, 2013).
Formally speaking, the choice in front of the voters was whether to end the political union of the United Kingdom. However, the real debate was not about defence and foreign policy, despite some mention of Trident. Instead, it was about the other two connected aspects of the union: the United Kingdom as an economic union - a single home market, a single currency and an integrated economy - and the United Kingdom as a social union - a state that shares resources across its territory to guarantee certain levels of public services, pensions and benefits. These three aspects of the union are closely intertwined. You cannot pick and choose amongst them, and political union was the key to the other two.
To take an example, one of the biggest and most emotive arguments of the referendum campaign was whether an independent Scotland could continue to share a currency with the rest of the United Kingdom. Of course, if one truly believed in economic independence, one would argue for a separate Scottish currency, and some honest nationalists did. But the politics were obvious: voters trusted the currency they knew, so the 'Yes' campaign somewhat uneasily argued for an economic policy driven from London. The most interesting contribution to this debate was technocratic (Armstrong and Ebell, 2012). The Governor of the Bank of England (Carney, 2014) made clear his view that a stable currency union required a fiscal union, with a state authority controlling resources of at least 25% of the GDP, in UK terms about half of public spending.
You cannot have a fiscal union without a political union. Carney was making a point about the EU as well; it is a currency union (for most members) that cannot bring itself to be a fiscal union, because it lacks the necessary political cohesion. To put it in practical terms, no one in Germany pays the public spending bills in Greece: there is no democratic mandate across the Eurozone for this. But because Greece is a currency union, it cannot devalue its way out of its present economic difficulties. No sensible Scottish government would put Scotland in that position. All the neutral economic analysis shared this conclusion, and it was heavily emphasized in the United Kingdom's Scotland analysis programme: a currency union requires the fiscal union. And, of course, if that is true in the case of independence, it is even more obviously so when Scotland remains inside the United Kingdom.
A fiscal union means sharing resources across the whole territory. This promotes economic stability, but public spending is driven by normative principles, rather than just economic technicalities. In a word, its distribution is justified by reference to need, even though need is very imperfectly recognized in the mechanics of resource allocation. The most obvious example is the whole social security system, driven by the needs and circumstances of individuals, who, irrespective of their geographic location, receive benefits on the basis of entitlement. As a result, the social security system acts as not only (as is well known) an automatic stabilizer over time - increasing expenditure when the economy turns down - but also a stabilizer across geographies, transferring resources to areas where employment and tax income are lower. If it did not do that, there would be a risk of a multiplier effect, with the local downturn resulting in reductions in public expenditure, exacerbating the economic bad news.
This territorial redistribution has important economic consequences. But it is, in essence, a moral proposition. Geographical differences in taxable capacity shouldn't result in differences in welfare provision. This is true in federal countries worldwide: all governments redistribute across their territories, some more comprehensively than others. Trade unionists in the United Kingdom fought at the beginning of the twentieth century to replace a failing local poor law, which could not meet needs as they arose locally as a result of economic change, with national resources mobilized for individual areas. It means that there are social rights that apply across the whole territory of the state.
So just as a fiscal union supports a currency union, it supports a common social citizenship. This, in turn, is linked to a common political citizenship. The truth is that people are willing to share with those with whom they feel they belong, with whom they have a common identity. Resource sharing within the United Kingdom is automatic and relatively painless. London taxpayers pay Liverpool pensions without really thinking about it. This is one of the characteristic signs of a nation-state: when Bismarck eventually succeeded in his project of German unification, among his first priorities was to create pan-German systems of social welfare. Social unions do not extend beyond nation-states; sharing fiscal resources across the European Union, for example, is much more difficult. German taxpayers simply don't pay Greek pensions.
So much for the internal logic of union. This matters because it is what the voters bought into, and conditions what they should get.
CHOICES MADE: POLITICAL UNION, SMITH AND 'THE VOW
More devolution is on the agenda. Voters were also promised that a vote to stay in the United Kingdom was a vote for change, and more powers for the Scottish Parliament. Each of the major parties supporting the union had set up a commission to look at the options for further devolution. All working independently, they came to very similar conclusions about the scope for increasing tax devolution and the capacity for some devolution of welfare. The parties didn't, however, develop a single common package before the referendum vote. They agreed, instead, to come together in very short order after the referendum (together with the SNP and the Greens) to produce a settlement involving greater powers. This was all set out in a 'vow' in, of all places, the Daily Record. Some readings of the campaign suggest that this was a turning point, though who knows. It is important, however, to understand all the contents of this vow: notably, in addition to greater tax powers, it also promised retaining the Barnett formula. This process became the Smith Commission, which produced a report (The Smith Commission, 2014) in November after the vote, at extremely high speed, and whose recommendations were turned into draft clauses before the general election and are now before Parliament in the Scotland Bill.
A striking thing about the referendum campaign was the way in which it acknowledged a radical view of the union between Scotland and the rest of the United Kingdom. In accepting that the Scottish people could unilaterally choose to leave the United Kingdom, the UK government and Parliament accepted that Scotland was a nation that could make this choice. As an inevitable consequence, it follows that the United Kingdom is (and actually has always been) a multinational state. It is a state that provides the constitutional framework and the external identity for more than one nation. That has always been the case since 1707, but the expression of this separate national identity became democratic only in 1999. Before that, it was expressed in the separate Scottish church, for many, or a legal system, and in the different institutions of Scottish government. The Smith Commission adopted the Labour party idea of making this explicit by entrenching the Scottish Parliament and giving the Sewel convention legal force.
In the event, the Smith Commission produced plans that are rather more radical than had been canvassed by the parties before the referendum. The immediate post-referendum political environment, no doubt, drove this. The result is a set of devolution plans under which the Scottish Parliament will have markedly wider tax powers - essentially over income tax - and will be assigned half of the revenue of VAT in Scotland. In consequence, something approaching 60% of the Parliament's budget will be funded from its 'own resources', and nearly 40% of the tax revenue in Scotland will belong to the Scottish Parliament. Additionally, the Scottish Parliament is being given the control over about £2.5 billion of welfare spending (excluding universal credit and pensions), the ability to set the housing element of universal credit, and the power to supplement from its own resources UK benefits paid in Scotland. This latter point is of great significance (and needs better definition in the Smith legislation). For public services, the Scottish Parliament has complete spending freedom, and tax powers will enable it to spend more or less. For pensions and benefits, for example the unemployed benefit, the United Kingdom guarantees certain levels, and it would be wrong if those were dependent on how well the Scottish economy was doing. A principle of the social union is that such risks are pooled. But there is no reason why Scotland should not supplement them from its own resources if it were willing to bear the fiscal consequences.
This produces a remarkably decentralized system. The commonly used measures of decentralization inside a state are the proportion of spending decentralized below central government, and the proportion of taxation. On these measures, Scotland under the Smith Commission proposals will be comparable to a Canton in Switzerland or a province in Canada: an extraordinary leap from the wholly centralized United Kingdom of 1998.
The legislation now produced will require the consent of the Edinburgh Parliament as well as enactment at Westminster. Much detail requires to be sorted out, though the UK government has proposed the principles of a financial settlement. The most important question is how much less Barnett formula grants the Scottish Parliament will receive when it takes on these new tax powers. This has already been worked through in the context of the (Caiman) tax powers in the Scotland Act 2012. In essence, the Scottish Parliament will take on the risk of differential economic growth in Scotland affecting its own revenues (which under Smith will be nearly 60% of the total), but will be supported by a share of UK revenues, still mostly calculated via Barnett, for the remaining 40%. This means that the Scottish Parliament will have the major say over how much is spent on Scottish public services in total, as well as the share-out between different priorities. The price, of course, is that the total spent will be more at risk from how Scotland's economy does relative to the United Kingdom.
Broadly speaking, these plans are consistent with the union as defended during the referendum campaign. They do not disrupt economic integration, nor set up borders or significant barriers to trade, investment or employment. In terms of economic union, the UK government will be responsible for less than £20 billion of direct expenditure in Scotland (Social Security), but also for Barnett transfers of another £20 billion or so. This is enough to meet Governor Carney's test of keeping the currency union stable. Scotland is taking on some economic risk, as the budget of the Scottish Parliament will be heavily influenced by the Scottish economy. Shared resources means that devolved services are not completely dependent on Scottish tax resources, but the Scottish Parliament will have a great deal of flexibility to make quite different choices on the balance between taxation and spending on public services. The fact that the most important UK welfare benefits are guaranteed means that the risks of demography and asymmetric economic shocks are shared within what can properly be described as a continuing social union. The virtually complete devolution of income tax under Smith (all rates and bands will be a devolved decision) does create some difficulties for voting on income tax in Parliament at Westminster. How this is to be resolved has not been fully settled, and it is a harbinger of potential difficulty with more ambitious devolutionary schemes.
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Table of Contents
Introduction: Devolution and the UK Economy, David Bailey and Leslie Budd / Part I: Lessons from a Post-Referendum Scotland / 1. Where next for Scotland and the UK?, Jim Gallagher / 2. The Aftermath of the Scottish Referendum: A New Fiscal Settlement for the UK?, David Bell / 3. Local Tax Reform in Scotland: Fiscal Decentralisation or Political Solution?, Kenneth Gibb and Linda Christie / 4. Questions of Social Justice and Social Welfare in Post-Independence Referendum Scotland?, Gerry Mooney / Part II: Lagging or Leading in the Rest of the UK / 5. Economic Challenges and Opportunities of Devolved Corporate Taxation In Northern Ireland, Leslie Budd / 6. Commanding economic heights? The effects of constitutional uncertainty on Wales’ fiscal future, Rebecca Rumbul / 7. Securing Economic and Social Success: The Local Double Dividend, Neil McInroy and Mathew Jackson / 8. Beyond ‘Localism’? Place-Based Industrial and Regional Policy and the ‘Missing Space’ in England, David Bailey, Paul Hildreth and Lisa De Propris / 9. Prospects for devolution to England’s small and medium cities, Zach Wilcox / 10. City Dealing in Wales and Scotland: Examining the institutional contexts and asymmetric arrangements for policymaking, David Waite / Notes on Contributors / Index