Having forborne from commenting on British territorial politics and finance for a long time, the Chancellor’s announcement that she is considering ‘fiscal devolution’ within England in her Mais lecture on Tuesday caught my eye. Although I’m strongly in favour of fiscal devolution as a way of strengthening sub-national governments in general, what’s being proposed is profoundly flawed. There are two big objections.
First, it doesn’t appear really to be fiscal devolution, meaning handing over powers over what to tax and how much. It’s tax assignment, handing over the revenues from certain taxes in certain geographical areas, which is very different. Tax assignment is widely considered a Bad Thing in the fiscal-federalism literature. It doesn’t allow the use of tax as a way of encouraging or inhibiting behaviours. It leaves control over tax as a policy instrument in the hands of the tax-setting authority, HM Treasury in this case. It’s not really part of any sort of fiscal devolution. What it does hand over are the proceeds of the change in any tax revenues to the spending authority – which is good for them if those go up but bad if they go down. Since so many of the levers that can shape regional economic growth remain in the hands of central government, or at least not in the hands of the sub-state government, this is handing over much downside risk than upside; they can lose significant income because of factors beyond their control. Any rational, sensible package of fiscal devolution needs to hand over a range of policy levers, not just tax ones, and that doesn’t really appear to be on the cards.
A secondary but related issue: what are the assigned tax revenues meant to fund? There should be relationship between the services provided and the tax used for it, if a major tax like income tax (or VAT, for that matter) is to be handed over. Income tax has a relationship with big, personal services everyone uses, like education, healthcare or social services. It doesn’t with the services that are typically devolved in England, which are transport or strategic-planning ones. A land-based tax would be much better for those services. Actually handing over real control of business rates – including deciding what’s taxable or not, not just the poundage rate of the tax – would make more sense.
The second big objection is constitutional rather than fiscal. Devolved authorities in England are run by elected mayors, not wider elected bodies. When there’s a board, it’s a delegated one of councillors elected to councils in the area of the ‘regional mayor’. This approach to regional devolution – a single big-shot, not a wider and more inclusive directly elected assembly – has always been problematic. It’s just about tolerable when the purpose of the mayor is to energise others or to administer broadly technocratic services, but the limits of that have been stretched for some time. To put any taxing powers in the hands of a single person is simply, constitutionally speaking, wrong. The King’s attempt to levy taxes is what triggered the English Civil War. This wouldn’t be the first time the Treasury has misunderstood the British constitution, but it’s one of the more serious ones. And you know that a policy is constitutionally misconceived when the best thing to be said for it is that it’s meaningless in constitutional terms, because it’s tax assignment not proper devolution.
Maybe it’s good that the Chancellor has decided to show a bit of the policy direction at an early stage, when it’s still being formulated and there’s a chance to change it. But if you want to spur regional economic growth, tax assignment isn’t the way to do it – and (proper) fiscal devolution to the hodge-podge of regional mayors who don’t cover all the country, whose powers vary widely and whose accountability problems are a long-standing source of concern – isn’t it. This is the problem with such incremental policy-making as English devolution has long had; each step has to take into account the mistakes made at earlier steps, when it’s very hard to go back and change things so they make sense. In political science terms, this is a classic case of path dependency, where the costs of a different policy exceed at any particular point the advantages of doing so, until they emphatically don’t. Perhaps, though, the realisation that regional devolved bodies need an economic aspect too is the reason to do it. Otherwise, the risks of grave constitutional problems and equally bad economic ones loom.
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DEVOLUTION MATTERS 