Budget 2021

The dilemma of devolution – more powers but potentially worse off

Published: 3 November 2021
Author: Richard Parry

Rishi Sunak’s Budget on 27 October revealed that in the medium-term he is prepared to live with numbers no Chancellor since the 1970s would have planned – tax receipts at nearly 40% of GDP and public sector debt stuck at 83-85% of GDP. The previous freezing of thresholds and allowances until 2026 could be a money machine in times of higher inflation. For Scotland, the building-back of English public services under the ‘levelling-up’ agenda will also finance more devolved-equivalent spending.

Sunak said of the Union that ‘we are bound together by more than transactional benefit’. But that phrase describes well the interactions between the Scottish Government and the Treasury. An announcement on 14 October set the stage for an independent review of Scotland’s fiscal relations with the UK, prior to an intergovernmental review of the fiscal framework, starting, in Finance Secretary Kate Forbes’s words, ‘as close to the beginning of 2022 as possible’. In fact this is not new: the February 2016 fiscal framework agreement between the two governments suggested such a review would be ready by the end of 2021.

Many might imagine that these fiscal relations had moved on to a new, long-term, basis by the Smith Commission of 2014 as implemented by the Scotland Act 2016. This devolved many social security benefits in the families and social care area, and also gave Holyrood important taxes to set alongside the council tax and non-domestic rates it had always controlled. These included tax on property transfers and, the big one, exclusive control of income tax rates and bands (but not the personal allowance, taxes on savings and dividends, and national insurance contributions). This was meant to fulfil the pre-referendum promise of unionist parties to make a ‘no’ vote to independence a trigger of more devolution and the own-resources revenue streams to pay for them.

The fact is that, even pre-Covid, this model of the Scottish public finances has proved hard to implement. The Scottish Government would not take on the 2016 powers until it had agreed a new fiscal framework with safeguards against loss of UK transfers until 2022. Although since 2020-21 nominally included in its budget, it has not taken yet take over (‘migrated’) policy and administration for the more expensive social benefits on offer for devolution, especially Personal Independence Payments, Attendance Allowance and Disability Living Allowance. The first of these is set to be replaced by a new, and potentially more expensive, Adult Disability Payment in September 2022. It has made changes to income tax rates but knows that getting too far out of line with the UK risks losing the main residence of highest-income taxpayers and creating high marginal rates for some earners some through the interaction with national insurance thresholds. VAT receipts in Scotland, meant to be assigned to the Scottish budget to take it up to about half of its total expenditure, have not yet been moved over and would not carry any right to change VAT coverage or rates. Air Passenger Duty has not yet been devolved as planned.

The 2016 changes seemed clear – at the point when taxes or spending responsibilities are shifted from UK level, the money yielded or spent moves over to the Scottish budget for subsequent changes to be made by devolved political decision.  But in practice the overall effects are complicated. The concept of the ‘block grant adjustment’ is also meant to protect the UK from Scotland’s making a lesser tax effort than England in its own-resource area (either through setting lower rates or achieving a lower yield through weaker economic growth). Until 2022 the ‘indexed per capita’ transition mechanism is meant to prevent Scotland from losing out from the new arrangements, but in the long term more devolution means more risk. Calculations of spending and tax yields are unstable and often revised retrospectively. Covid has added swathes of new UK spending either bypassing the Scottish budget altogether or generating Barnett consequentials requiring decisions on when and how to spend them.  Accounting management within and between financial years in consultation with the Treasury is as delicate as ever.

Beyond the detail is the status of the main mechanism of territorial stabilisation in the UK in recent decades – the granting of incrementally more devolved powers sufficient of stave off nationalist demands. The SNP’s argument is that such increments, while in principle welcome, expose yet more anomalies and disadvantages to Scotland that only the full powers of independence would resolve. In the meantime they have a dilemma – do they turn down more powers to protect the UK funding supply? So far they have understandably fudged and manoeuvred, preserving for as long as possible transitional rights from the pre-2016 pattern of very limited local revenue sources. It helps that the complexity of the issues keeps them below the political radar, and the new independent review may work to Scotland’s advantage.  But lurking around is the dark secret that the Treasury’s position of ‘you’re welcome to more powers and please raise the money to pay for them’ is perhaps a poisoned chalice and a self-limiting factor on the amount of tax-and-spend devolution that a Scottish calculation of ‘transactional benefit’ would indicate.

Image courtesy of HM Treasury (https://flic.kr/p/2iCS7o1), shared under terms of CC BY 2.0 License.

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