The Smith Commission is considering what further powers might be devolved to Scotland. Lord Smith was appointed immediately after the independence referendum, following the joint statement made by the leaders of the Conservative, Labour, and Liberal Democrat parties of ‘[p]ermanent and extensive new powers’ for the Scottish Parliament (‘The Vow’, Daily Record, 16 September 2014) in the event of a No vote. Its terms of reference are ‘[T]o convene cross-party talks and facilitate an inclusive engagement process across Scotland’ leading to production by 30 November 2014 of ‘Heads of Agreement’ with recommendations for further devolution of powers to the Scottish Parliament’. The Commission is also obliged to publish draft clauses by 25 January 2015. The intention is, therefore, that a draft Bill should be ready several months before the 2015 General election.
These developments raise many important issues including whether the process that has been set in place for achieving further devolution is appropriate, how that process will proceed after the Smith Commission has reported and whether the link made between further devolution for Scotland and other constitutional reforms in the UK is appropriate and what, if anything, the process now begun will deliver. I will not attempt to answer all these questions but will focus instead on analysis of the proposals for further devolution put forward by the five parties in the Scottish Parliament all of whom are represented on the Smith Commission.
The Scottish Parliament and Government already have very extensive powers under the Scotland Act 1998. The devolved areas include health, education, housing, aspects of transport, the environment, agriculture, forestry and fishing, economic development, civil and criminal law, the justice system, police, and fire services, local government, planning and licensing and sport and the arts. Currently, the only powers of taxation are the power to levy local government taxes and the Scottish Parliament’s power to vary the standard rate of income by up to 3 pence in the pound. Borrowing powers are very limited. However, the Scotland Act 2012, which is based on the recommendations of the Calman Commission, provides for increased borrowing power and somewhat more substantial enhancement of tax-raising powers. The additional tax powers are devolution of Stamp Duty Land Tax and Landfill Tax which take effect in April 2015 and power to vary the rate of income tax by up to 10p in the pound (either way) but not power to vary the banding or to change the allowance or thresholds for paying income tax. The income tax changes are not due to come into effect until April 2016 and may, of course, be superseded by reforms arising from the current process.
The matters reserved to the UK Government include fiscal economic and monetary policy (taxation, government borrowing, public expenditure control, the currency and financial market regulation), defence, foreign affairs, nationality and immigration, social security and pensions, energy and a host of regulatory powers designed to secure a single market within the UK. These include competition law, intellectual property, many aspects of transport, employment law (including discrimination law), health and safety regulation and consumer protection. Broadcasting is also reserved.
In considering the scope for further devolution, four sets of issues must be addressed. The first is which specific functions should be devolved. The other three all relate to the financing of those functions and are taxation, borrowing and public expenditure. The power and responsibility of devolved government could be increased, either by devolving additional functions, or by giving more powers over taxation, borrowing and public expenditure, or by a combination of the two.
The Five Parties’ Proposals
This section provides an overview of the initial proposals which the parties have presented to Smith Commission. In general, these build on proposals previously made. Lord Smith had asked the parties to take a ‘principles-led approach’ to considering the detail of individual powers to assist in developing clear principles for the devolution of more powers.
Space does not permit a full account of each of the five proposals but a few comments are in order. Not surprisingly, the SNP’s proposals are the most ambitious. It wishes to see devolved all government functions except aspects of the constitution of the UK, such as the monarchy and the UK Parliament, monetary policy, including the currency and the Bank of England, aspects of citizenship, including nationality and passports, defence, intelligence and security including borders and many aspects of foreign affairs. Accordingly, there would be devolved for example, social security and pensions, employment and employability policy and important regulatory and other functions, e.g. in competition policy, energy and broadcasting. Nearly all taxes would be devolved including income tax, national insurance, corporation tax, capital gains tax, fuel duty, air passenger duty and inheritance tax. The Scottish Parliament would be responsible for all domestic expenditure including welfare and would make payments to the UK Government for reserved services.
The Scottish Green Party’s proposals are nearly as ambitious. They would devolve most taxes, but flat rate taxes such as VAT and corporation tax would remain reserved, although a percentage of revenue would be assigned to Scotland. They would devolve social security in general but might not devolve pensions. Their proposals for energy do not go as far and they propose that the governance of the BBC should be shared between the UK and Scottish Governments.
The Scottish Labour Party’s proposals involve the least extension to current powers. They consider that pensions and the most cash benefits would remain reserved, although they would devolve housing benefit and attendance allowance. Labour also proposes devolution of a specific power in relation to railways. Its other suggestions are for devolution of responsibility for administration but not for policy, e.g. delivery of the Work Programme. The only substantial devolution of taxation powers they suggest is to extend the variation in income tax rates permitted (although not yet operational) under the 2012 Act from 10p in the pound to 15p and to permit the Scottish Parliament to introduce new Scottish progressive rates of income tax, so that it can increase the rates of tax in the higher and additional bands.
The Scottish Conservatives go slightly further than Labour. They are willing to consider devolving housing benefit and attendance allowance, and also devolving a power to supplement UK welfare benefits with additional payments, but no other functions are suggested. The main difference with Labour is in relation to taxation. They suggest that the SP should be responsible for setting rates and bands of income tax in Scotland, leaving only the tax threshold, tax allowances, definition of income for tax purposes and income tax on investments, dividends and savings as reserved matters. In addition, they state that Air Passenger Duty should be devolved. However, they state that they regard their proposals as being ‘a starting point for further discussion, albeit a floor rather than a ceiling.’
The Liberal Democrat’s proposals fall between the maximalism of the SNP and Green party proposals and the minimalism of the Labour and Conservative proposals. On functions they are closer to the Labour and Conservative positions. They consider that The UK should retain a single welfare system and should remain a unified, single market. They propose no new functions for devolution. The differences lie in their approach to taxation. They would devolve income tax to the extent of allowing the Scottish Parliament to set the rates and bands of income tax, but tax thresholds and allowances and taxation of income from savings and investments would be reserved. The SP would also set the rates of Capital Gains Tax for gains accruing to Scottish taxpayers and Inheritance Tax, and set the Aggregates Levy and Air Passenger Duty for flights from Scottish airports. Corporation Tax would continue to be a UK responsibility but the proceeds raised in Scotland should be assigned to Scotland. The Scottish Government’s borrowing limit would be increased. They would also create a new category of ‘partnership powers’, which require the co-operation of both devolved and UK governments.
The Smith Commission’s task is to broker a deal amongst the five parties. I will not assess the prospect for a deal – others are welcome to do so, but will analyse the proposals themselves. But there is a basic question which must be answered: what are the aims of the process? In my view, the main aims are to achieve further devolution of power to Scotland whilst also keeping the UK together. The process ought also to have two other aims: achieving a coherent territorial allocation of power and producing benefits for all parts of the UK and not just Scotland. I will attempt a preliminary evaluation of the parties’ proposals against these aims. These aims are all connected. Thus, devolving more power may be politically necessary to maintain the union and maintaining the union may be deemed a benefit to all parts of the UK. However, they may also have the potential to be in conflict. Devolving certain powers may result in an allocation of power within the UK which is incoherent and dysfunctional and/or does not benefit all parts of the UK, and devolving too much power would weaken the union. In addition to these high level aims, there are other criteria for evaluation, e.g. the feasibility of proposed changes on technical or other grounds.
Commentary on aims
I will comment on each of these goals, beginning with preserving the union. I have argued elsewhere that like all other nations the UK needs a reason to hold together. A common British identity can no longer perform that function. It has weakened as the props which supported it have weakened and an increasing proportion of citizens identify themselves as either Scottish rather than British, or as more Scottish then British. Support for the continuation of the union will, therefore, have to be based to a greater extent on perceptions of common interest than in the past. Those with a strong sense of British identity will continue to support the union; those whose British identity is less strong or non-existent will need to be convinced of the continuing benefits of the union. Policy-makers need to avoid two things. One is further weakening the sense of British identity of those who retain one. The other is weakening the integrative force exerted by common interests. From either perspective, enough needs to be shared across the peoples of the UK for them to believe either that a British nation still exists and/or that we still have substantial interests in common with citizens in the rest of the UK.
Devolving more power has become a political necessity as a result of the high vote for independence and the pre-referendum vow to devolve more powers. Failure to deliver substantial further devolution would almost certainly be seen as a sign of bad faith on the part of the UK parties and only serve to increase nationalist sentiment and perhaps also a broader disaffection with mainstream politics. The concern is that in the current political climate it may not be possible to devolve power to the extent necessary to satisfy the demand for change without at the same time undermining the integrity of the union.
There is also a need for a coherent territorial allocation of power across the UK. In a multi-layered system of government, we need to address what functions are most appropriate for each level and whether apparently related functions can be successfully integrated if they are performed at different levels of government. Here, there is an obvious difficulty. The Smith Commission’s remit is limited to considering further devolution for Scotland. It has not been asked to consider further devolution in other parts of the UK, or changes to the position of local government, or the mechanisms for coordinating national and territorial government. So, it cannot by itself produce a package of proposals that will ensure a coherent territorial allocation of power in the UK. Nor has any other body been charged with this task. William Hague is chairing a cabinet committee looking at further devolution for other parts of the UK and ‘English votes for English Laws’ but that is not sufficient for the purpose.
Finally, proposals for further devolution for Scotland should be in the interests of all parts of the UK. The Smith Commission could consider that aspect of evaluation to be within its remit, but its composition and process are not well adapted to achieve that aim.
Devolution of functions: the welfare state and the single market
My analysis of identity and interest above suggests that there are severe constraints on the government functions that can safely be devolved without weakening the union. The key areas for discussion are the welfare state and the single market.
Welfare state functions
The welfare state has been both an important focus for British identity and a common interest because it functions by pooling income and risks on a substantial scale and it is here that the largest income transfers occur. Large elements of the welfare state are in fact devolved – education, the NHS and social work functions such as personal care for the elderly. The UK-wide element is essentially social security benefits including pensions. Opinion surveys suggest substantial public support in Scotland for devolving these matters. The two concerns about devolving these matters entirely are the risks and the effects on social solidarity. Currently economic risks and benefits are pooled across the UK. If pensions and social security are wholly transferred, there will be far less risk pooling. If the Scottish economy fares worse than that of the UK as a whole, the UK taxpayer would no longer help to support the inevitable rise in expenditure on benefits. Moreover, pensions and benefits are things the UK provides on a uniform basis for all its citizens. If benefits and pensions were devolved, that would be to break the most economically significant shared interest of the UK population. The welfare state would no longer function as a support for a common identity, nor would it provide a common interest for citizens in different parts of the UK to maintain the union. Therefore, the common elements of the welfare state must in general remain reserved functions.
There is a significant prospect of agreement amongst the Scottish parties that housing benefit and attendance allowance should be devolved. The argument for excepting these two benefits from the reservation of social security benefits is that that are the benefits most closely linked to two devolved functions: housing and personal social services. The argument is that it makes sense to devolve benefits which have a substantial impact on devolved policy. Housing benefit policy may affect the way in which housing is provided. If it were devolved, the Scottish Government and Parliament could ensure that benefit policy supported rather than undermined their preferred housing policy. Thus, for example, if housing benefit had already been devolved, it is possible that the so-called bedroom tax would not have been imposed in Scotland. Similarly, personal social services are provided mainly by local authorities, but the needs of vulnerable persons who require care from others are met by a combination of local authority services, NHS provision and social security benefits e.g. attendance allowance. Two of the three policy areas and funding streams are devolved. If attendance allowance were also devolved it would give more flexibility in policy to address a growing problem for which current policy responses seem unlikely to be sustainable in the long run.
There is a clear rationality to these proposals, but also a concern that they would further weaken the integrative potential of the welfare state. It might be thought that they will not do so because they are relatively limited changes. However, the amounts of money involved are substantial and the political salience of changes may be high. If, for example, the bedroom tax is repealed in Scotland but remains in the rest of the UK that might increase the resentment already apparent in England and Wales that citizens in Scotland have access to welfare state benefits and services which they lack (free personal care, free higher education, free prescription charges and cheap travel for over those aged over 60).
There is also a danger of there being negative consequences, some of which may be hard to foresee. Currently, policy responsibility for all social security benefits lies with the Department for Work and Pensions which attempts to make them work sensibly together. If devolving housing benefit leads to different rules for Scotland, then housing benefit in Scotland may not mesh so well with the benefit system as a whole. This is important as many housing benefit claimants also receive other benefits. Whilst that possibility is certainly foreseeable, other specific problems that may arise from policy divergence may not be. The immediate concern is the introduction of universal credit which will mean that housing benefit disappears along with five other means-tested benefits and is replaced by universal credit. If that goes ahead, a way would have to be found to extract the housing element of universal credit so that the cost of covering rents could be devolved. That is surely not impossible but it might cause considerable difficulty and additional expense. Thus far, the UK government has refused to consider a pause in the roll-out of universal credit. If the Scottish parties can agree a deal on these two benefits, it would be wise to do so. Accordingly, although devolving housing benefit and attendance allowance may look like ‘quick wins’ for the Commission, it cannot be assumed that these would be unproblematic reforms.
The other main focus of reserved powers is the preservation of a single market across the UK. I think there is some scope for changes in regulatory powers without diluting the sense of British identity that many Scots have. There is also perhaps less of a worry about dilution of common interests influencing public perceptions. However, there are concerns over coherence whether changes would be of benefit either to Scotland or the rest of the UK. Substantial disruption of the single market would not be of direct benefit either to Scotland or the rest of the UK as the costs of doing business in Scotland would probably rise. There might, of course be compensating benefits but we would want to be confident that there really were such benefits. It is worth remembering that the single market principle has never been interpreted to require complete uniformity of trading conditions across the UK and some forms of regulation are already devolved e.g. liquor licensing and other functions for which local authorities are the licensing body. Many aspects of environmental law are also devolved. So, The question, therefore, should be which forms of regulation can be devolved without imposing excessive costs on UK businesses operating, or wishing to operate in Scotland, costs which are likely to be passed on to consumers. There may be scope for more devolution in relation e.g. to energy regulation but that will raise complex questions.
Taxing, Borrowing and Spending
Having considered which additional functions might be devolved, I will now consider taxation, borrowing and spending. A major extension of devolved functions implies changes to taxing and spending powers, but the reverse is not true. Leaving functions as they are does not imply that arrangements for taxing and spending should stay the same. In fact, all the parties seem to assume that changes to taxing and spending are necessary even if the list of devolved functions remains as now.
Since 1999, public expenditure by the devolved governments has been financed largely by a block grant from the UK Treasury. Local authority taxation and business rates provide only a modest proportion of the Scottish Government’s income and the Scottish Parliament has never used its power to vary the rate of income tax by 3p in the pound. Annual changes in expenditure on the devolved functions are linked to changes in expenditure on the same functions in England and Wales. The formula took a historical baseline as given and there has never been a needs assessment across the UK. Under this system public expenditure per head has consistently been higher in Scotland than in England and Wales and the public have become increasingly aware of this. Increased authority to levy taxation will lead to pressure to reduce the proportion of devolved public expenditure supported by the block grant. That is the approach taken in the 2012 Act. If this happens, the perception that Scotland is unduly favoured by the Barnett formula should become less important but it is unlikely to go away. That resentment will not help to maintain support for the union.
There is an argument of principle for giving the Scottish Parliament more fiscal autonomy, namely that those who are responsible for spending money should also be responsible for raising it. It has been argued that there is currently an accountability deficit because the Scottish Parliament and the Scottish people are not confronted with the consequences of spending decisions. That in turn implies a change in the balance of funding; less funded by the block grant and more funded from taxes levied by the Scottish Government or local authorities. This is reinforced by the political imperatives both to devolve more power and to maintain support for the union.
Unfortunately, there are two major obstacles to getting the right outcome. The first is that the three UK parties have committed themselves to retaining the Barnett formula. That ought not to have been included in the vow. The Commission’s hands have been tied before it starts. The second is that the Commission has been asked to change the arrangements for financing one of the UK’s constituent nations in isolation. What we need is a new UK-wide deal on financing government but Smith cannot deliver that. If there are to be substantial changes to Scotland’s taxation powers whilst leaving the Barnett formula in place other parts of the UK are likely to resent this.
Questions of identity and common interest also arise in relation to tax devolution. The key questions are whether reducing the share of the tax burden that is levied on a UK basis will undermine the sense of British identity or perceptions of common interest. If taxation diverges substantially, the media are likely to emphasise that. More generally, more tax autonomy means that a smaller proportion of public services is funded collectively by UK taxpayers. Questions of coherence and common benefit also arise. Taxes interact and governments generally try to make the tax system as a whole work coherently. More tax autonomy inevitably means more fragmentation of policy-making authority. Devolving specific taxes in isolation may leave little room for public policy manoeuvre. If it seems that there is no room for pursuing different public policies from the rest of the UK, the Scottish public are likely to find enhanced fiscal autonomy a disappointment. People might for example, assume that Scotland would fund public services more generously than England, but this may be difficult to achieve. Thus, income tax is a particularly sensitive tax politically. Voters notice it more than other taxes and it is very difficult for governments to increase. Accordingly, full devolution of income tax with no other major taxes devolved might give the illusion of fiscal autonomy without the political reality. A future Scottish Government might want to take offsetting measures to reduce the pain for the biggest ‘losers’ from income tax changes without having the fiscal flexibility to do so.
The question of common interest is most acute in relation to possible tax competition, e.g. if a Scottish Government were to set lower rates of corporation tax than the rest of the UK. If that were successful in attracting business to Scotland but that business relocated from the rest of the UK, Scotland’s interests would be advanced at the expense of the rest of the UK. Overt tax competition is likely to stir resentment in the rest of the UK. A state such as the UK is unlikely to permit tax competition on a major scale within its borders. Therefore, the “devo-max” solution under which the UK retains only defence and foreign affairs and Scotland decides the rest will not be agreed by any of the UK parties. There is a variety of possibilities between devolving only income tax and the full “devo-max” package. The further one goes along the continuum, the less pressing the problem that the devolved government does not have the policy autonomy its people expect. However, the more fiscal autonomy, the more likely it is that the UK government and people will see the extent of tax competition permitted as unacceptable, thus undermining the union.
An alternative way of enhancing autonomy is to assign the proceeds of taxes to Scotland. That removes the concern about tax competition but does not necessarily give greater scope for policy autonomy. It leaves Scottish public policy at the mercy of UK decisions about the nature and levels of taxation.
Borrowing also has to be considered. It would be possible to increase the borrowing powers of the Scottish Government. This would certainly increase policy autonomy as the government could adjust the level of borrowing according to economic circumstances. However, given the importance of borrowing levels to the money markets, the Treasury and the UK parties are going to want to keep control at the centre. The Scottish Government might be given extensive legal powers to borrow but only if the Treasury approves the overall borrowing and public expenditure levels on an annual basis.
The Smith Commission is faced with a very difficult task; not just finding some compromise amongst the views of all the parties, but more importantly crafting proposals which achieve the key aims of devolving substantially more power to Scotland and keeping the UK together. Further devolution must give the Scottish Parliament and Government greater actual freedom to make public policy in order to be considered a success. Yet devolving more power is unlikely to enhance a sense of a common British identity in future. Rather it is more likely to undermine it. As identity weakens as a prop for union so the importance of common interests increases. But policy autonomy can weaken perceptions of common interest as well e.g. by tax competition. Much depends on how those perceptions of common interests are formed and elite strategies (e.g. how governments explain the benefits of union) may play an important part. Up till now the pro-union parties have not made a good enough job of this. It remain to be seen whether they can do better.
Tom Mullen is Professor of Law at the University of Glasgow
 See ‘The Independence Referendum 2014’ Journal of Law and Society (2014), forthcoming.