Rethinking devolution finance

1
Rethinking devolution finance

• Alan Trench
• School of Law, University of Edinburgh

2
Financial issues in Wales

• Key political issues are about the amount of
  public spending, with little interest in
  tax-raising powers quite different from Scotland
• Traditional views within the parties there Plaid
  Cymru in favour of a needs assessment and block
  grant related to need, Labour in favour of
  Barnett and the status quo (and saying
• Labours views may be changing, partly thanks to
  tightness of CSR 08 settlement for Wales and
  partly because of tough line taken by Treasury on
  second-order issues (capital-revenue splits,
  Olympics as UK not English function so no
  consequentials)
• Commitment to set up a commission to look at the
  Barnett formula, borrowing powers and tax-raising
  powers part of the All Wales Agreement between
  Labour and Plaid Cymru
• Not yet been acted on something which may have
  serious consequences, as Scottish/UK debate moves
  on

3
The UK issues

• The Calman commission has a clear financial remit
  but no membership from outwith Scotland
  certainly none from Wales or indeed England
• A problem if Calman really has a remit to look at
  finance with effects for all parts of the UK, as
  it appears to
• Finding a solution that delivers politically and
  economically not easy
• given that the issues are quite different for
  recipient parts of UK (Wales, N Ireland, NE
  England in particular) and paying parts (London,
  SE England, possibly Scotland)

4
Possible answers

• A solution is likely to involve both an
  equalisation grant and substantial fiscal
  autonomy each attractive in different ways to
  different parts of UK (fiscal autonomy for
  Scotland, equalisation for Wales and N Ireland)
• From a Unionist point of view grants from the
  centre play a vital role in manifesting the value
  of cross-UK redistribution a potential safety
  net even for those regions not presently
  receiving them
• Also need to ensure that Scotland and Wales can
  do fundamentally different things if they want to
  which in fact Barnett constrains (and makes it
  hard to have hugely different policies to
  England)
• There is no single right answer and of the
  not-wrong answers, there could be different
  Labour and Conservative versions

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Fiscal autonomy in comparative context

• In federal systems, constituent units commonly
  raise 70-80 per cent of own spending (even when
  there are equalisation systems e.g.
  Switzerland, Canada)
• If, for Scotland, UK were to hand over all
  proceeds of income tax and VAT, that would equal
  about 57 per cent of Scottish Govt spending in
  2004-05
• Add local govt revenue and the total is still
  only 66 per cent
• A major issue would be what an equalisation
  system equalises for cost of providing services,
  varying demand for services, or fiscal
  inequalities
• Other benefits of greater fiscal autonomy
  clarity about finances, so political
  accountability and legitimacy enhances policy
  tools available to devolved admins minimises
  blame-shifting when things go wrong