In the current debate on independence, journalists and commentators regularly claim that “devo max” is the favoured option of a majority of the Scottish people, and some express an expectation that this will be the result of inter-party discussions between unionists that have been promised by Gordon Brown in the event of a No vote. In recent days, there has even been talk of “devo supermax”. This is strange. Very few people actually know what devo max means.
It is in fact an independent model which was proposed by the Scottish National Party (SNP) as a fallback position for independence. None of the three main unionist parties supported devo max in their proposals over the past year for transferring more powers to Scotland if it stays in the union.
The Scottish government sees devo max as a means of acquiring fiscal powers to promote economic growth through a more competitive tax regime. It set this out in a 2009 paper, proposing a model which they call full fiscal autonomy. This would make the Scottish parliament responsible for raising, collecting and administering the vast majority of revenues in Scotland – and the vast majority of spending. The Scottish government would make a payment to the UK government for common services such as defence and foreign affairs. The 2009 report described this as “the maximum form of tax and policy devolution short of independence”.
Why devo max is unworkable
The problem is that this is an entirely theoretical model which is incompatible with the British system. This is why it was rejected by the Calman commission, the body set up to look at the options for extending devolution in Scotland. Any additional powers for the Scottish parliament need to be compatible with a fiscal framework that is based on a highly integrated economy with common economic and fiscal policies; a free market in goods and services, capital, labour and knowledge; and similar standards of welfare benefits and public services funded by pooled taxes.
The current UK treasury model is expenditure-based. Budget allocations are made to UK departments and devolved administrations to meet their objectives. This avoids wasteful tax competition, and funding is transferred automatically to assist areas that raise lower levels of taxes than the average.
By contrast, the notion of full fiscal autonomy is tax-based. It means there is no money redistributed from the centre to help boost areas in need. But in particular, the SNP’s obsession with corporation-tax cuts would clearly be unacceptable to the rest of the UK. Calman rejected it as disruptive to the UK economy and to the management of government finances. The same would obviously go for handing over control of VAT or North Sea revenues (which are counted separately from the rest of corporation tax revenues).
The scope for tax variation in the UK is limited. Nor is there any evidence to support the SNP view that this would provide growth. The Scottish government’s own assessment of the impact of its flagship policy of cutting corporation tax is based on economic modelling – an imprecise science. In fact this produces a growth of only 1.4% over 20 years, or 0.07% per annum. This is trivial. It is reckless to argue for this change.
Bye, bye, Barnett
Moving the UK to full fiscal autonomy would end the Barnett formula, the system for transferring spending from London to Scotland, Wales and Northern Ireland. It consistently delivers higher spending to all three devolved administrations. The devo max model would result in real deficits that each administration would have to fund.
What would be beneficial would be some form of Calman plus, with greater control over income tax for accountability purposes and for example through devolution of housing benefit which would permit more efficient housing policy (this would enable the UK to keep the Barnett formula). This is essentially what the three main unionist parties are offering. Scotland has a very high level of welfare spending, which will grow, and therefore benefits from the pooling of resources.
It’s not possible for the unionists to go much further than their existing positions on increased powers without undermining the whole expenditure-based system. What is possible is to reach a swift agreement on new Calman-plus powers that can be implemented shortly after Scotland decides to stay in the union.