These Isles: Navigating Fiscal Decentralisation

This is part three of the series. The full essay is available to read here. 

 

The risk of reframing the UK as a League or Union of the Isles is not so much that an influential and powerful English parliament might dominate Welsh, Scottish and Northern Irish institutions, but that it could destabilise the work of joint isle-wide bodies if the new arrangements were not held with respect. Overrepresentation of the smaller nations in the Council might act as a limited counterbalance to the challenges faced, but there is little escaping the fact that England, with approximately 85% of the population, could potentially cause significant tests to the successful management of the market by common British institutions. Nevertheless, decentralised, federally inspired constitutions, which are better placed to interact nimbly with international economic decision-making and be representative of cultural and ethnic diversity within nations, are more appropriate to the context of the developing 21st Century.

 

As explored by David Melding AM in his book The Reformed Union: The UK as a Federation (Institute of Welsh Affairs 2013), protection of the isle-wide economic union, which works to address opportunities, risks and threats collectively over time, is as important as supporting the political and social aspects underpinning the relationships between nations. For example, a robust system of fiscal decentralisation might not immediately include allocation to the national governments of responsibility for setting taxes on capital, retail sales and excise duties, whereas those on corporations, income, payroll and property are suited. Sharing the income tax base is an obvious approach. However, the large-scale economic implications of national governments having the comprehensive powers to vary differently the higher and lower rates through a ‘tax on base’ model must be considered carefully. This is because income tax is a major source of receipts which varies in yield during the economic cycle, demanding some provision of borrowing powers to the nations for dealing with fluctuations in revenue. Intergovernmental relationships within a federation or confederation could be seriously strained by any debt crises caused through injudicious borrowing, especially if accompanied by creditors expecting, whether rightly or wrongly, bailouts from central bodies. Therefore, until the new fiscal arrangements are embedded, access to global markets by national governments should be discouraged for a period, with an isle-wide body established to act as a facilitator of lending for capital programmes of a substantial nature.

 

The decentralisation of wide-ranging tax raising powers would clearly diminish the need for distributing large block grants from the centre. However, special care should be taken to create a system which is stable, compensating for any uneven distribution of prosperity through appropriate equalisation grants. To this effect, a shared fund could be established into which wealthier nations contribute and less affluent ones draw. The substantial tax payments made by Wales to the Treasury during its natural resource boon over a century ago, which significantly supported Britain’s economic development, more than justify the transfers assigned by the Exchequer to the nation today in aid of equalisation. These could be described as an insurance payout of sorts, based on historical premiums paid. Such recognition of significant contributions made over time in sustaining shared aims, past and present, might even help untangle ongoing discussions regarding the future ownership of offshore resources, responsibility for which could continue to rest centrally initially, whilst onshore resources should be allocated to the national governments. The Barnett formula looms large in this debate, leading to calls for a revised needs-based formula with equalisation grant-levels fixed through formal constitutional mechanisms, allowing national governments some predictability in planning and delivery.

 

In time, an alternative approach to equalisation is for fiscal policy to be increasingly shaped by a design whereby the majority of tax revenues are retained by the national governments, which in turn would transfer resources centrally to support joint isle-wide functions, and economic stability across the internal market to ensure that public goods and services are funded at similar levels. This makes the costs and benefits of the system transparent, but may be a step too far to begin with, as reducing the level of inequality between the territories of a newly formed federation or confederation must be a strategic priority.

 

The challenge to both Conservative and Labour parties is to become more formally representative of the nations within their organisational structures. The make-up of the Liberal Democrats is already federalised and the strength of the nationalist movements in Wales, Scotland and Northern Ireland at a level uncommonly seen in other multinational states globally, with the notable exception of Spain i.e. Catalunya. Interestingly, the Scottish Nationalist Party’s (SNP) stance during the independence referendum of 2014 was closer to that of devo-max than a classic sovereignty model of the past—better suited to the modern era of globalisation, worldwide corporations and growing integration between states. As described by Tom Devine in his book Independence or Union (Penguin Press 2016), the SNP intended that ‘an independent Scotland would retain the monarchy, membership of NATO and sterling, through a currency union with the rest of the former UK. This would inevitably have had major implications for the economic powers of a new Scottish state. There was also much talk of a future social union between Scotland and England in the event of independence, which would have eased some of the trauma of separation.’

 

The fact that 45% of Scottish voters would have preferred to end the Union in 2014 might suggest a lessening in appeal of the British identity, despite a majority of the electorate in Scotland being opposed to independence. However, some pause is required before jumping to this conclusion as the dual identity of the Scottish people within the UK has complex roots and meanings. The same is true of the population in Wales. Moreover, feeling British, whether wholly or partly, may not necessarily denote that a person is committed to supporting political unionism. It could also be based on a pride in past achievements and a continuing awareness of the cultural and social connections forged between the populations of the isles during many centuries. Interestingly, the recognition of multiple identities, highlighted in recent decades by the European dimension of UK politics has created a genuine paradox for some committed nationalists—in that if it is possible to be Welsh or Scottish and European, is it therefore not possible to be Welsh or Scottish and British too? Admittedly the situation in Northern Ireland is more complicated.

 

The challenge to UK-wide unionists who advocate reformed institutions, made modern and fit for purpose, for the 21st Century is that the majority of Eurosceptics within their ranks distrust supra-national and federally inspired governance structures as a principle, instead favouring centralised unitary constitutional models domestically. However, is it entirely a coincidence that the only UK territory which does not have its own parliament in the era of devolution is the one most likely to express alienation from the European Union?

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The following sources have inspired ‘These Isles’.

 

• David Torrance: ‘A process, not an event’: Devolution in Wales, 1998-2018 (House of Commons, 2018)
• Lord David Owen, Gwynoro Jones, Lord Elystan Morgan and Glyndwr Cennydd Jones: Brexit, Devolution and the Changing Union (2018) and Towards Federalism and Beyond (2017)
• Tom M Devine: Independence or Union (Penguin Press, 2016)
• A Draft Constitution for a Confederal United Kingdom (Scottish Constitutional Commission, 2015)
• Linda Colley: Acts of Union and Disunion (Profile Books, 2014)
• David Melding AM: The Reformed Union: The UK as a Federation (Institute of Welsh Affairs, 2013)
• Barry Cunliffe: Facing the Ocean: The Atlantic and its Peoples (Oxford University Press, 2001)
• James Mitchell: ‘From National Identity to Nationalism’ in the book The Challenge to Westminster: Sovereignty, Devolution and Independence (Tuckwell Press, 2000).

 

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