Devolution finance Devolution finance under the Tories under the Tories

Presentation for IWA/WGC Presentation for IWA/WGC Conference on ‘Life under the Conference on ‘Life under the

Tories’Tories’

Cardiff, 3 December 2009 Cardiff, 3 December 2009

Alan Trench Alan Trench (University of Edinburgh and (University of Edinburgh and

Constitution Unit, UCL; Author, Constitution Unit, UCL; Author, ‘Devolution Matters’ blog)‘Devolution Matters’ blog)

The debate so far I The debate so far I Scotland: calls for ‘full fiscal autonomy’ Scotland: calls for ‘full fiscal autonomy’

(National Conversation, Reform (National Conversation, Reform Scotland, Hallwood and McDonald) Scotland, Hallwood and McDonald)

Calman Commission: a limited measure Calman Commission: a limited measure of fiscal autonomy (10 income tax of fiscal autonomy (10 income tax points plus small taxes), needs basis for points plus small taxes), needs basis for grant whenever that happensgrant whenever that happens Largely endorsed in principle by UK Govt Largely endorsed in principle by UK Govt

white paper white paper Scotland’s Place in the UKScotland’s Place in the UK, , though diluted – and no timescale for though diluted – and no timescale for deliverydelivery

Conservatives endorse the principle but Conservatives endorse the principle but will reconsider and produce their own will reconsider and produce their own white paper white paper

The debate so far II The debate so far II Commons Justice Cttee: grant should be based on Commons Justice Cttee: grant should be based on

need – and someone else should say howneed – and someone else should say how Lords Barnett Formula Cttee: grant should be based Lords Barnett Formula Cttee: grant should be based

on relative need, using small number of top-down on relative need, using small number of top-down proxy indicators (rather than very detailed needs proxy indicators (rather than very detailed needs assessment done in 1979) assessment done in 1979) And also institutional reform – independent And also institutional reform – independent

commission to carry out assessment, limiting commission to carry out assessment, limiting powers of HM Treasury powers of HM Treasury

No formal response published yet from Treasury No formal response published yet from Treasury Holtham Commission: Wales underfunded by 2 points Holtham Commission: Wales underfunded by 2 points

by using UK Govt criteria for England (gets 112 %, by using UK Govt criteria for England (gets 112 %, should be 114%)should be 114%)

Peter Hain has declared UK Govt intention to protect Peter Hain has declared UK Govt intention to protect Wales from ‘disproportionate disadvantage’ arising Wales from ‘disproportionate disadvantage’ arising from the convergence effects of Barnett (as further from the convergence effects of Barnett (as further convergence is unlikely, this is pretty meaningless)convergence is unlikely, this is pretty meaningless)

Where the Tories are Where the Tories are Commitment to the Union; acceptance of devolution Commitment to the Union; acceptance of devolution Willing to allow a referendum on Part 4 GWA 06 Willing to allow a referendum on Part 4 GWA 06 Concern about the inequities Barnett creates (primarily Concern about the inequities Barnett creates (primarily

an English resentment of its generosity to Scotland) an English resentment of its generosity to Scotland) Because of its perceived ability to threaten the Union, Because of its perceived ability to threaten the Union,

Scotland looms much larger in Tory thinking than Scotland looms much larger in Tory thinking than Wales does Wales does

Liking for the control that grant funding brings (both Liking for the control that grant funding brings (both directly over general public spending, and indirectly in directly over general public spending, and indirectly in tying devolved policy to that in England) tying devolved policy to that in England)

Endorsement of principle of ‘fiscal accountability’ for Endorsement of principle of ‘fiscal accountability’ for Scottish Parliament as recommended by Calman Scottish Parliament as recommended by Calman But misgivings about timing of fiscal powers and But misgivings about timing of fiscal powers and

borrowing powers given the economic and financial borrowing powers given the economic and financial climate climate

And concerns about concessions to ‘the Nats’ (more And concerns about concessions to ‘the Nats’ (more SNP than PC) SNP than PC)

The situation the Tories The situation the Tories will facewill face

Ongoing economic crisis – limited economic growthOngoing economic crisis – limited economic growth Desire to cut taxes if there’s a chance Desire to cut taxes if there’s a chance

Severely stretched public finances Severely stretched public finances Reduced tax revenues (around 10% less in 2009 than Reduced tax revenues (around 10% less in 2009 than

2008) 2008) Higher demand for entitlement-based funds (social Higher demand for entitlement-based funds (social

security, esp Job Seekers Allowance) security, esp Job Seekers Allowance) Very high levels of public debt, with implications for Very high levels of public debt, with implications for

interest payments interest payments Need to ‘do something’ about devolution finance Need to ‘do something’ about devolution finance

Scottish demands Scottish demands English concerns about the generosity/unfairness of English concerns about the generosity/unfairness of

Barnett Barnett The $64,000 question: How strategic will the The $64,000 question: How strategic will the

Tories be? And how strategic will circumstances Tories be? And how strategic will circumstances let them be? let them be?

How bad will things be? How bad will things be? Falling tax revenues (overall 9.1% lower in Oct 09 than Oct 08; Falling tax revenues (overall 9.1% lower in Oct 09 than Oct 08;

2009 Budget estimate was a decline of 7.8%) 2009 Budget estimate was a decline of 7.8%) Increased social security costs, notably JSA. According to PESA Increased social security costs, notably JSA. According to PESA

2009 (based on 2009 budget), to rise from 25.1% of total 2009 (based on 2009 budget), to rise from 25.1% of total resource budgets in 2007-08 to 27.1% in 2010-11. If resource budgets in 2007-08 to 27.1% in 2010-11. If unemployment grows, that will be higher yet. unemployment grows, that will be higher yet.

Increased debt service charges – from 5.7 to 7.1% of resource Increased debt service charges – from 5.7 to 7.1% of resource budget between 2007-08 to 2010-11 by official figures, and budget between 2007-08 to 2010-11 by official figures, and already forecast for 7.7% by 2010 by IFS in Jan 09. already forecast for 7.7% by 2010 by IFS in Jan 09. War-time levels of debt War-time levels of debt Will become even more expensive as interest rates go up Will become even more expensive as interest rates go up Ireland as an example Ireland as an example

Plus costs of bank bail-outs, and increased defence spending? Plus costs of bank bail-outs, and increased defence spending? The numbers are probably getting worse: we will know more The numbers are probably getting worse: we will know more

after the PBR next week after the PBR next week The only saving grace: most of Wales’s block grant is The only saving grace: most of Wales’s block grant is

underpinned by health (46.8%) which Tories have committed at underpinned by health (46.8%) which Tories have committed at least to protect if not increase in real terms. Also important are least to protect if not increase in real terms. Also important are education (33.8%) and local govt (14.4%): together, 95% of the education (33.8%) and local govt (14.4%): together, 95% of the block.block.

What the Tories might doWhat the Tories might do A bilateral deal with Scotland over tax powers (what about A bilateral deal with Scotland over tax powers (what about

borrowing?) borrowing?) Good for SNP, in keeping with established Tory approaches Good for SNP, in keeping with established Tory approaches But offers no advantage to Wales whatever. But offers no advantage to Wales whatever.

Retain block grant but recalculate allocations to Scotland, Retain block grant but recalculate allocations to Scotland, Wales and NI Wales and NI Can be used (and portrayed as) part of a programme of Can be used (and portrayed as) part of a programme of

spending restraint spending restraint Very limited direct benefit to Wales Very limited direct benefit to Wales Treasury still in control Treasury still in control But a high road to Scottish independence But a high road to Scottish independence Hain’s fudge a pragmatic (if meaningless) response to this Hain’s fudge a pragmatic (if meaningless) response to this

problem problem A UK-wide, decentralised, approachA UK-wide, decentralised, approach

Needs-related grant Needs-related grant Fiscal autonomy all round, with fiscal equalisation to Fiscal autonomy all round, with fiscal equalisation to

compensate Wales and NI for its effects compensate Wales and NI for its effects Means 2 forms of equalisation and transfer Means 2 forms of equalisation and transfer No money to help cushion its introduction No money to help cushion its introduction

The implications of what The implications of what the Tories might do the Tories might do

The Barnett formula is a very effective way of The Barnett formula is a very effective way of transmitting spending cuts to devolved govts’ budgets transmitting spending cuts to devolved govts’ budgets

Any cuts are very likely to have constitutional Any cuts are very likely to have constitutional ramifications as well as financial ones. Even if the pain ramifications as well as financial ones. Even if the pain is shared ‘fairly’, Scotland & Wales are much less likely is shared ‘fairly’, Scotland & Wales are much less likely than they ever were to accept the justice of that. than they ever were to accept the justice of that.

Undertaking more comprehensive and explicit forms of Undertaking more comprehensive and explicit forms of redistribution (especially fiscal equalisation) is very redistribution (especially fiscal equalisation) is very tricky: funding the transition will be hard, making the tricky: funding the transition will be hard, making the transfers plain will be unpopular in ‘contributing’ parts transfers plain will be unpopular in ‘contributing’ parts of England of England

Bilateral deals are politically attractive and easy to Bilateral deals are politically attractive and easy to implement – but will weaken the glue of ‘union-ness’. implement – but will weaken the glue of ‘union-ness’.

Who is advising? The Treasury is deeply hide-bound and Who is advising? The Treasury is deeply hide-bound and unable to approach these issues in the sort of unable to approach these issues in the sort of imaginative way that is needed. imaginative way that is needed.

Will any of these considerations matter if there should Will any of these considerations matter if there should be a hung parliament?be a hung parliament?

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