After a dramatic referendum and UK general election, the Scottish remain divided on both independence and on whether to increase tax and public spending, while the English are becoming increasingly vocal in the devolution debate. Jim Gallagher considers the possibilities of a constitutional relationship that will satisfy Scottish aspirations and also be acceptable to the UK as a whole.

This is the second in a series of posts based on the Unit’s latest report, Devolution and the Future of the Union, published here.

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. In Holyrood, the SNP exercise dominant control over both Parliament and government. In Westminster, they will be the overwhelming Scottish voice, but will control nothing.

The partisan politics of the general election have been extraordinary. The Labour vote collapsed, and the SNP showed remarkable skill in building a coalition of voters, some for independence, others perhaps against austerity. But this tells us less about overall Scottish attitudes on either question than meets the eye. Scotland remains divided on both independence and on whether to increase tax and public spending, and not on the lines you might expect. Many independence supporters are anything but high spending socialists.

Constitutional challenges

Nevertheless the combination of these results presents acute challenges to Scotland’s relationship with the UK. Scotland’s representatives are committed to something Scotland has rejected, and for now they seem to be demanding things that the UK may, and probably should, also reject. Some of these demands may be no more than the theatre of politics–ask for the unattainable, and trumpet the rejection. But amidst the rhetoric sits a real question: is there a constitutional relationship between Scotland and the UK that satisfies Scottish aspirations and is acceptable to the UK as a whole?

In recent decades Scottish demands for additional autonomy have been seen as largely a Scottish question pursued by Scots. The rest of the UK, 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, at the least. 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.

More substantively, the proposals for more powers now on the table or demanded by nationalist ministers press at or over the boundary of what can be described as devolution, and raise in acute form 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 mobilised English opinion which could require a serious look at the constitution of the rest of the UK as well.

Limits to devolution?

One way of thinking about devolution is that it delivers federalism in a non-federal state. This sounds contradictory, but in fact has been remarkably successful. The Scottish Parliament, and indeed the Welsh and Northern Ireland Assemblies, have a wider range of responsibilities, and more powers, than many state governments in federal systems. Holyrood has hitherto lacked tax powers, but these are beginning to arrive: minor taxes in 2015, and a share of income tax in 2016. If the proposals agreed in the Smith Commission are put into effect, the Scottish Parliament’s powers will be as wide in both spending and taxation terms as a state government in the most decentralised federal states in the world, comparable to a Canton in Switzerland or a province in Canada. (Indeed in one critical respect more so: federal governments typically put conditions on financial transfers made to state governments, but this is not the case in the UK).

The reaction to these plans outside Scotland shows in very stark relief how the asymmetry of a devolved constitutional settlement shows where the limits to devolution might lie. The root of this is the fact that the United Kingdom Parliament is also England’s Parliament, and the United Kingdom government England’s government. The first rubbing point is the most obvious. If income tax is wholly devolved, or almost wholly as proposed by Smith, then Scottish MPs in the UK Parliament will be voting on the rates of English income tax, which their constituents will not pay. This is the West Lothian question, this time with teeth. (It does not arise with the partial devolution of income tax effective from 2016, under the Calman scheme).

The second rubbing point is more subtle, and takes us into the territory of spending as well as taxation. Devolved Scottish taxes will only be used to fund devolved Scottish spending. But there is no devolved English budget and so the same taxes levied by the United Kingdom government will, on the face of it, fund any UK expenditure. So it might be that English income tax payers are funding expenditure in Scotland–whether on welfare, or even on devolved services via the Barnett formula. It is relatively easy to devise funding formulae which demonstrate that changes in, say, English income tax are not used to fund changes in Scottish spending. But in the absence of a devolved English budget, and perhaps a devolved English government to manage it, it’s not so easy to see that English-only taxes fund English-only spending. And when Scottish spending is markedly higher than English and Scottish tax receipts are not, significant fiscal transfers from England to Scotland are obviously happening.

The greater the extent of fiscal devolution, the more obvious these points become. The first problem might in principle be dealt with by reducing the powers or number of Scottish MPs at Westminster. This is precisely the set of issues that Gladstone wrestled with English and Ireland at the end of the 19th century. In the end, giving up in despair at the complexity, he cut the Gordian knot by cutting the number of Irish MPs. This was carried through into the so-called devolution discount that applied in Northern Ireland from 1923 until 1972. (Detailed proposals have been made for reducing the powers of Scottish MPs to influence England-only legislation: but no detailed plans have been developed in relation to English-only taxation.) How consistent this is with a genuine union is open to question.

What Scottish pressure cannot reasonably expect to do is require that England should create its own spending programs and taxation (and perhaps a result at some point its own separate government) to accommodate Scottish aspirations for greater tax powers. Some in England may wish this, but most don’t. If it were to happen, an inevitable result would be the end of the Barnett formula, which was designed for a devolved, rather than federal, system. It would probably have to be replaced by some sort of needs-based system sharing out some of the proceeds of UK taxes. Many in other parts of the UK would welcome this, as it could only be to their advantage.

The pressure for more powers – what about devo max?

Scottish voters were promised during the referendum campaign that they would get a more powerful parliament, and the Smith Commission proposals would certainly deliver that. But SNP ministers demand more, and in this they may consider themselves to be supported by the balance of Scottish opinion.

About two thirds of Scottish opinion takes what one might think of as a commonsense view that domestic affairs should be dealt with Edinburgh and defence and foreign affairs (and macroeconomic policy) at UK level. This is the legendary ‘Devo Max’ under which the Scottish Parliament exercises full fiscal powers, and makes a transfer to London to pay for common services like defence. No doubt this is why the SNP’s manifesto set out a commitment to full fiscal autonomy.

It will be readily seen that this is not a form of devolution, but an impossibly loose form of federalism. Indeed it happens in no federal country anywhere. It could require the rest of the UK to reconstruct itself as a confederation with some sort of Federal Parliament dependent on the goodwill of the constituent nations to give it resources (a bit like the EU). Alternatively, Scotland could go for the Channel Islands option: full fiscal powers but no Scottish representation in Parliament at Westminster (in such an arrangement how could Scottish MPs vote on any matter at all other than defence or foreign affairs, and or on any tax?) Neither of these is devolution.

The temptations of government

UK Ministers must be sorely tempted to offer full fiscal autonomy. After all, 56 out of the 59 Scottish MPs stood on that platform and 50% of Scots voted for them. The Scottish government wants it, and the fiscal arithmetic looks alluring from the point of view of the Treasury. If Scotland depended only on Scottish (and North sea) tax revenues in fiscal transfers from the rest of the UK would cease. The UK Treasury would be something like £8 billion a year better off. Scotland would either have to tax more, spend less, or succeed in creating truly magical levels of economic growth. Treasury ministers might even be benevolent and defer any contribution to the UK national debt, and they could still be quids in, enough to cut English income tax by nearly a penny in the pound. If such a deal also cut Scottish representation in the UK Parliament, removing troublesome nationalist members, a UK government might take the view there was nothing but upside for them. No more Barnett formula, no more complaint from England, no asymmetry at Westminster.

So why shouldn’t they? Three reasons. First of all, and most obviously, this would be fiscally catastrophic for Scotland. Even the SNP ministers recognise this, and are now asking for time to grow the economy before implementing the policy. Since they would have to deliver economic growth approximately 15% more than the UK’s it seems highly unlikely they would ever succeed. There would be a direct effect on public services, of course, where most of the spending bonus compared to England is to be found. There would be an indirect, multiplier, effect on the Scottish economy. Even the least Keynesian economist would expect that taking £8bn out of demand could create a something of a collapse in the Scottish economy.

Secondly, this is not what the Scottish people were promised in the referendum: they were promised devolution, not a Channel Islands solution. However tempting that might be politically, it would be breaking a promise. And thirdly, it would be tantamount to the end of the United Kingdom, principally because it would end the fiscal sharing across the territory which is necessary to make a state a real union. The Channel Islands are not part of the UK. Scotland would not be either.

But powers beyond Smith?

SNP ministers seem to be backtracking on Devo Max (‘make me fiscally responsible, Lord, but not yet’). Instead they are seeking control over what they call business taxation, which appears to mean corporation tax and employers national insurance contributions. Given control of these, they say, they would make targeted reductions and create economic growth, and so make full fiscal autonomy possible. One is tempted to say that this is magical realism without the realism. But would it be possible in practice to devolve these taxes?

Devolution of corporation tax is proposed for Northern Ireland, according to a formula which is intended to reduce the risk of companies avoiding tax by pretending to be based in Northern Ireland. In principle this could happen in Scotland also. It would further increase the dependence of the Scottish Parliament on Scottish resources (so that pushing three quarters of its income was from Scottish taxation). As a result the fiscal transfers from the rest of the United Kingdom under the Barnett formula would be roughly equivalent to the excesses of Scottish spending over the UK average.

Devolving National Insurance might be practically possible in terms of collection, in that it shares many of the characteristics of income tax. It is collected by employers, and most employees have a clearly defined place of residence. It is however one of the gateways into benefits, notably the old-age pension, and it’s not clear how different rates of national insurance would work alongside the same rates of old-age pension, or the same entitlement to other contributory benefits. Although the national insurance fund is formal, it is nevertheless the case that the national insurance contributions are paid into a UK pot. Devolving national insurance even in part would be a conscious decision to break up a critical element of the UK welfare state, and would require the creation in effect of an English welfare system as well as the Scottish. Were some or all of national insurance to be devolved the same issues will arise as with other tax devolution: can Scotland reasonably expect the same tax paid in England to support Scottish spending?

Is there a way forward?

Nationalist politicians will always argue for more powers for Scotland, whether they are consistent with maintaining the union between Scotland and England or not. Ideally not, they hope. UK politicians, and those in Scotland who accept the result of the referendum, should take a different view. The approach of the United Kingdom government appears to be cautious. Smith was promised, and will be delivered. Beyond that they are prepared only to look at other plans. They are right to be careful.

Scotland has voted for both union and for distinctiveness. Those who are willing to accept the result of both votes need to set out the principles for a system of devolution which meets 3 tests:

• It is consistent with Scotland remaining part of the UK on the basis promised in the referendum
• it delivers the maximum scope for Scottish distinctiveness, and a different Scottish approach, notably on questions of public spending, taxation and welfare without taking unacceptable risks for the Scottish economy
• it does not seek to impose on England a system of government which England does not want.

Nationalist politicians will ask for any power they might hope to get, and some they hope to be denied. Either sort of ask should be measured against these tests.

About the Author

Jim Gallagher is Gwilym Gibbon research fellow at Nuffield College, Oxford, and visiting professor of government at Glasgow University. He advised the Better Together campaign.