Policy Scotland’s Contribution to the Smith Commission Debate

 The remarkable upsurge in political engagement during the referendum has been followed by a phase in which organisations and individuals across Scotland are preparing submissions to the Smith Commission. Smith is currently engaging in a wide consultation about what powers should be transferred to the Scottish Parliament, with the aim of obtaining a political consensus across all the main parties.

 Policy Scotland’s submission to Lord Smith raises a number of areas where more information and more thought is needed on the implications of changing tax raising and transferring welfare powers. Without this, the rush for a political fix for Scotland might result in an uneasy compromise that leads to instability. As we move forward to a devo-max or quasi federal solution for Scotland, the implications for the functioning of the Union as well as for the economic and social possibilities for communities, towns and cities, regions and nations across all of the UK need to be explored, bringing together the best research and leading thinkers.

 Our argument can be summarised as follows. In the past, ad hoc and asymmetric efforts at constitutional/structural reform have left the Westminster system largely intact, even as powers have been transferred. Despite devolution, the Union of Great Britain and Northern Ireland is one of the most centralised systems amongst western democracies, with unresolved tensions between levels of government and an unwieldy system of making public choices that many people in Scotland and increasingly in other parts of the UK regard as lacking accountability.

 Arguments about ‘devolution’, ‘localism’ and ‘subsidiarity’ may have different origins and levels of support in different parts of the UK. But underlying them are the same imperatives: downward shifts of autonomy away from Whitehall and calls for a new governance of Britain focused not just on the devolved nations but also on local authorities, especially in the city-regions. The implications of the transfer of powers following the Scottish referendum are not confined to Scotland. The question for the UK as well as for Scotland is how can relations between different levels of government be shaped in a way that addresses economic and social objectives such as improving competitiveness and increasing fairness, both real and perceived, in a Union that works.

 We have submitted a working paper to the Smith Commission http://policyscotland.gla.ac.uk/new-ideas-new-time-scotlands-place-new-union/

written by Duncan Maclennan, Des McNulty and myself. We propose a programme of events and debates which will we hope produce something greater than the sum of its individual parts – a structured ideas network that will provide the space to start thinking coherently about a range of devolution and decentralisation issues that go well beyond the additional funding and spending powers of the Scottish Parliament but rather addresses the fiscal systems, decision-making and substantive choices that could operate in a more coherent decentralised and quasi-federal system of nations, regions and local government in the UK. 

This debate is about mechanisms for pooling and sharing, equalisation and autonomy; it is about recognising the responsibilities of greater financial autonomy and the consequences and choices that go with that. We live in austere times; more powers don’t necessarily mean a net increase in resources but they could deliver better processes for making choices and improving competitiveness, provided that the right choices are made and the system of distributing responsibilities between different levels of government is coherent. 

The timetable and the political focus of Smith might not give adequate time for a full investigation of the issues we think are central to this debate about greater real autonomy. But we would hope to inform Smith and what comes after – the legislative process for Scotland, the thinking about city deals and how to reform the Union by bringing together expertise from the University of Glasgow, from civic and academic Scotland, and from strong international connections to federal and decentralised governance and fiscal systems elsewhere in the world. 

We do not pretend we have the answers to all the questions about institutional design, fiscal structures and how to best promote the economic and social justice improvements we are raising. But what we will do is develop a series of debates focused on the key questions and we will publish the main findings in specific papers, audio-visual materials and in a final report in February 2015 setting a road map for further work and engaging directly with the Smith Commission outcomes. 

We will be working on a programme of events of different sizes and types. Some of these we will run ourselves and others we will co-badge with partners. We will embrace local community levels of interest, as well as local government and metropolitan regions (and we hope talking directly to the concerns of Strengthening Local Democracy), as well as the Scottish and UK nations. We will avowedly take an internationalist and evidence-based approach, building on academic and policy links to countries like Australia, Canada, the United States but also important federal models in places like India and Nigeria and decentralising initiatives underway in France. Reflecting on this evidence, setting it in context and learning lessons will be essential to the work we will undertake. 

We will publish on our Policy Scotland website details and dates for our programme of events as they emerge. If any of these discussions interest you, please do get in touch. We will also publish outcomes and other materials from each event as we go along. 

During the Referendum, Policy Scotland played a neutral role enabling debate and providing a platform for the campaigns and other voices to contribute to the independence debate. In this critical post referendum period where time is at a premium and there is so little space officially for a more thorough-going consideration of devo-max, federalism and decentralisation, especially in terms of its economic, financial design and governance implications, we believe we have the opportunity to facilitate and support such a process of knowledge sharing and development. But this will be a genuine ideas network – we do not know where the debate will take us or what the answers might be. All we are doing is honestly framing what we think are the key questions and facilitating debate with leading thinkers from civic and academic society. We think it will be both important to the future but also a rewarding experience.

Note: this post was also published on the Policy Scotland website.

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At the Shelter Scotland Annual Lecture

This evening, Danny Alexander gave the annual Shelter Scotland lecture. It was entitled Housing and the UK Economy. Well-attended by the Scottish housing fraternity, it was chaired by Richard Holloway. He made the point that the 1951 Tory Government delivered 300,000 units a year and they justified this massive output achievement (and its contrast with recent lowly efforts) on the basis of the then Government’s desire to boost economic productivity as well as tackle the acknowledged crisis in housing. It should however be noted that Holloway later berated the poor aesthetic quality of postwar UK and Scottish urban housing stock – these two facts may be related?

Danny Alexander defended his own Government’s record both on the deficit reduction and on welfare reform, the latter primarily as work incentivisation. He then went on to argue that housing was a source of macro financial instability and that this was best tackled by radically increasing housing supply (indeed to the 300,000 figure). He also argued that policies to do with localism, help to buy, planning reform and other supports (a ‘blizzard’ of policies) had contributed to significant growth in units developed – but still well below 200,000 even in recovery phase.

It was an understandable though not an entirely convincing defence of the Coalition core policies. It remains the case that deficit reduction could have been managed in a much less dramatic and austere way that did not risk the slow and postponed economic recovery that followed. And deficit reduction was less successful in its own terms than was promised. The welfare reform proposals have struggled under most reasonable analyses: the failure to roll out universal credit in anything but the simplest of cases, the racheting-up of sanctions, the treatment of the ill and disabled, the faulty behavioural assumptions about private landlords cutting rents or under-occupiers moving to smaller units. All not borne out, let alone the growing empirical picture of hardship and loss brought by these measures and the huge growth of in work poverty and reliance on benefits in work. None of this was mentioned tonight.

Turning to housing, Alexander’s big idea was to contemplate the state as a housing commissioner. What this would mean, he seemed to say, was looking at the proposition that if the housing system can generate say 180,000 units, the state would commit to building 120,000 (to get to that magic annual total of 300,000) and would then sell them off, presumably to a range of providers across the market and non-market sectors. In this sense, it would financially be like a short term equity loan – fronted by government but repaid on resale.

I would suggest that the Treasury thinks hard before pursuing this sort of line. First of all, it suggests a degree of market-second guessing, knowledge and planning on the part of the state that would have Frederick Hayek spinning in his grave. Second, via lags and other cycles it may serve to exacerbate the development cycle and actually restrict the role of the market developing via over-building. There is considerable and extensive scope for unintended consequences here and I would suggest going very warily. Third, there is a real numbers fixation here with building targets but little sense of the economics going on around it particularly how the demand side responds. I had the sense this evening that Mr Alexander could evidently recognise the macro argument that the housing sector can be financially destabilising but he could only seem to see supply as the answer not, for instance, to also seek to minimise the culture of speculation and be more creative with taxation and consider more work on mortgage regulation.

Later on Duncan Maclennan asked in the Q&A session what advice Mr Alexander would give to help the housing lobby make a productivity case for more housing investment. His response was telling in that unlike transport infrastructure or telecom broadband, he could not see housing having the same impact on the economy. Duncan used the arguments popularised by US economists like Don Haurin to argue that there is evidence that good housing improves parenting and educational attainment (let alone supporting labour market functioning and large construction multipliers). It does seem that there is definite scope in this area to make a stronger economic argument.

I also managed to ask a question in this case about the bedroom tax. In his lecture Danny Alexander said he supported the affordable housing bill and hoped it would get into law and thereby significantly weaken the spare room subsidy. I asked him if this happened or indeed other future governments chose to abandon the bedroom tax – would there still be point in devolving Housing Benefit? His reply indicated that he (and the Lib Dems?) have bought the IPPR argument (as Labour has) that housing policy is devolved and HB should therefore be too. Regular readers will know I do not really accept this: housing is not completely devolved and reserved elements such as private housing impact on the rest of the system so there is not such a degree of devolution in reality. Moreover, the second IPPR benefit devolution requirement was stability in benefit spending – yet the larger part, local housing allowances for the rental market are important, growing and volatile. I don’t think this even therefore makes the IPPR’s own case for justifying the devolution of HB. Will the Smith commission look closely at the details and not just the big picture – devolving social security, as experts like Paul Spicker has stressed, is not at all straightforward.

An interesting and thought-provoking evening. Richard Holloway described it and courteous and candid. Apart from the politics as normal defence of government (always odd within the Coalition’s particular strains), Danny Alexander was considered and thoughtful and he clearly has a substantial interest in housing and making innovative housing policy. While I didn’t agree with aspects of what he had to say, it is positive that the Government, the Lyons Review and people like Kate Barker are promoting housing prominently, rightly, in the run up to next year’s election. It is a momentum that needs to be sustained – initiatives like the Shelter Scotland Housing and Well-Being Commission will be essential (1).

Note
(1) I should declare an interest in the Commission as I act as an advisor to it.

Life in the old dog

The New Scottish Transactions Tax: Setting a Precedent?

The New Scottish Transactions Tax: Setting a Precedent?

Much has been written on the new Land and Building Transactions Tax (LBTT), launched last week by John Swinney, at least in terms of its principles and the new tax rates to be introduced next year. Commentators like Mark Stephens have written clearly about several of the key issues that will arise[i]. I wrote a post (Towards a Scottish Land and Building Transactions Tax) back in April 2013.

Applying to residential properties from April 1 2015, the tax will have the following structure:

£0-£135,000 – zero-rated

£135,000-£250,000 – 2%

£250,000 – £1 million – 10%

Over £1 million – 12%

I would make the following general points about the LBTT:

1. Transactions taxes may raise a decent amount of revenue but they distort mobility decisions and have market consequences (Mirrlees suggests they should be abandoned n favour of recurring property taxes).
2. Moving to a marginal tax rather than the slab basis of the Stamp Duty Land Tax (SDLT) is an important improvement. Now people only pay the highest applicable marginal rate on the top most portion of the property value not in its entirety. This should lessen though not completely remove valuations and prices agreed just below tax thresholds.
3. Both SDLT and LBTT have the unhappy characteristic that they will have volatile revenues which will be hard to predict. They depend on property values, tax rates and the volume of transactions – recent experience suggests considerable variation in the revenues generated, a point we return to below.
4. There will be considerable continuing incentives to follow UK Governments and tinker with the tax for economic and political reasons. Far better to leave it well alone.

The other big issue for me is the revenue take associated with LBTT and not just its volatility to the Scottish Government. Critically, a negotiation has to be had with HM Treasury to decide on how much the Scottish Block should be adjusted because we are now raising the LBTT rather than getting a share of SDLT. The Scottish Government reckons it will be worth £558 million in 2015-16. What principles should the Scottish Government adopt? 

A press release by the Scottish Government released last week said: “the Scottish block grant will be adjusted to recognise that the tax receipts will flow to Hollyrood and not to the Treasury in London”. It may be that this has already been sorted out within Government but I cannot find any evidence of the principles adopted. The tax is volatile so would you take last year’s receipts, a moving average or an estimate based on expected receipts depending on how the market will move going forward? Over-estimating receipts will permanently disadvantage the net fiscal position for Scotland so this is a genuinely important negotiation. 

This is not of course just a matter for LBTT, important as that is to the public finances and the long term consequences of a one-off decision. It is also setting a critical precedent for further devolution of taxes and spending that will impact on the future negotiations surrounding those additional powers that come from the settlement of the pre-referendum ‘Vow’. This apparently minor issue from the implementation of the 2012 Act could therefore have a much wider set of repercussions. How seriously are our political masters in Holyrood taking that precedent setting exercise?

[i] http://i-sphere.org/2014/10/10/swinneys-stamp-duty-critics-are-talking-rot-but-the-real-test-will-be-the-council-tax/