Devolution: that’s the real result of Scotland’s Referendum – not just for Scotland, but for elsewhere across the UK, says Dr Gerard Lyons.
But, first, Scotland. The final result was 55% to 45%, which was widely interpreted as a decisive victory. It was not uncommon, however, at the beginning of this year to hear people saying at lunches in The City that the big question was whether the Yes vote would reach 40% or not, as passing that threshold was then viewed as likely to keep the independence debate alive. In the event, the Yes vote breached that comfortably, yet the independence debate is now seen as dead for at least a generation. Perhaps.
That, if anything, shows how sentiment shifted during the year, and indeed in recent weeks the outcome appeared in the balance. But that was not the only thing to change. Lest we forget, when a referendum was first considered one issue was whether it should be a three way choice between yes, no or Devo Max. In the end, it seems that instead of the intended yes versus no, it was yes versus Devo Max. The offers from the party leaders of increased powers over spending and taxation clearly impacted the outcome. The question now is not only how Devo Max is delivered to Scotland but what it means for the rest of the UK as well. The devolution genie is now out of the bottle. How this impacts policy offerings ahead of the 2015 General Election remains to be seen, and whoever wins that is likely to face a very tough 2015 Comprehensive Spending Review, further complicating the spending debate. As that starts to bite it will reinforce the need to revisit the West Lothian question and the Barnett spending formula, if they have not already been addressed by then.
In the past, the broad topic of devolution has often been seen through the lens of what it means for local government finance. There has been no shortage of analysis here. Just consider the following reviews that have taken place in recent decades looking at local government finance: Kilbrandon Commission (1969-73), Layfield Committee (1974-76), Local Government Financial Reform ( 1986-93), Balance of Funding Review (2003-04), Lyons Inquiry (2004-07), City Finance Commission (2011) and the Mirrlees Review (2011).
Last year the Mayor of London commissioned an independent cross party report to look into this issue from a London perspective: The London Finance Commission, which outlined the case for increased fiscal powers for London.
Since then London has worked with other core English cities to look at this issue. Scotland is 8% of the UK economy, London 22.5% but its regional significance is greater, with many people commuting from outside London to work there. Indeed, London’s wider impact is seen by the fact that according to the European Commission three of the five most competitive regions in the whole of Europe are located in the south of England: London itself, and the regions of Surrey & Sussex and of Buckinghamshire, Bedfordshire and Oxfordshire. The economies of many regions are interlinked with London.
In economic size, as measured by Gross Value Added, using the latest annual data which is for 2012, the six biggest cities in the UK are: Edinburgh, which is a £17.2 billion economy, Glasgow £17.8 billion, Leeds £18.8 billion, Birmingham £21.2 billion, Manchester £51 billion and London £309 billion.
In the wake of the Scottish Referendum it would be wrong to view this as a competition between different regions and parts of the UK, as some media or politicians appear to have suggested. The key issue is how best to allow growth and boost living standards across the whole of the UK. Increased devolution may be part of the answer, aimed at empowering local business, improving competitiveness and addressing local infrastructure needs. Not only does London need to compete internationally, particularly given the importance of The City, but there is the need to see stronger growth from other UK cities, too. The UK also has many successful regional clusters, often linked to our world class universities. Take Warwick’s interaction with the vibrant West Midlands economy, Cambridge and its science base, and many other examples.
The Mayor’s London Finance Commission highlighted the need to increase the autonomy to invest, making it easier to raise finance, with appropriate governance in place, and in the case of London to level the playing field with competitor international cities. That Commission pointed out that London relied for 74% of its income as a grant from central government, whereas similar figures were 31% for New York, Berlin 25.5%, Paris 17.5% and Tokyo 7.7%. The implication is the UK is more centralised than others. Too often, however, the talk is of decentralising tax raising powers, but it could mean tax cutting too! Indeed what must be avoided is a system that just allows additional spending and taxation, and one that ensures effective governance and prevents big spenders seeking to woo over the electorate with short term promises that may prove hard to finance. Indeed the London Finance Commission stated, ‘devolution of taxation will be met with a pound-for-pound reduction in grant’. Across the globe there are many examples of poor finances, not just at national, but also at regional and the urban level. Remember Detroit, which went bust last year?
How we devolve greater economic powers needs to be worked out clearly, but it should not be seen as a competition between parts of the UK to boost their spending. Now that we have remained united, the competition is international and it is about devolving the powers needed to position the UK in a changing and growing global economy. This is likely to mean well run public services, low taxation and increased innovation, investment and improved infrastructure across many parts of the UK.
*Dr Gerard Lyons is Chief Economic Advisor to Boris Johnson and his new book The Consolations of Economics (Faber&Faber 2014) is now available.
The battle for independence may have been lost but Scotland appears to be winning the war
Now Scotland has voted ‘No’ to independence, the Westminster leaders may breathe a sigh of relief. 55 per cent of Scotland’s voters rejected the Scottish National Party’s proposal for independence and David Cameron, the Prime Minister, has ruled out another referendum. Meanwhile Alex Salmond, the SNP leader, who brought 45 per cent of voters with him on the ‘Yes’ campaign, urged no delay for Scotland’s new powers and has tendered his resignation.
The independence campaign was tarnished by the scare-mongering in the last week of the campaign. Big business leaders queued up to threaten Armageddon if the union was broken, without acknowledging that their products and the modern global economy in which they make good, is based on worldwide capital and labour markets, with different parts of the business often based in different countries. The governor of the Bank of England, Mark Carney, made an unseemly political intervention by claiming that Scotland could not keep the pound sterling if she went independent – leaping outside his remit and beyond the evidence too: Ireland kept the pound for decades, until it joined the European Exchange rate mechanism. Much worse, the panic amongst Westminster’s party leaders during the campaign, led to an 11th hour pledge to the Scots of much of the territory of independence even if they failed to win it in the battle of the ballot box. The Scottish Parliament has been promised more extensive powers; it will also have tax raising powers and party leaders have pledged that the Barnett formula, which gives the Scots £1,600 more per head than the English, will stay.
All of this has meant that instead of an open debate about the future constitutional arrangements of the constituent parts of the United Kingdom (with or without an independent Scotland) and its powers as a sovereign state, over foreign, defence and economic including fiscal policy, the future of the UK as a state is up for grabs, literally.
The powers of the sovereign state, including those to raise taxes, will go to Scotland. So will more spending powers, striking at the heart of one of the prerogatives of the state, and dismembering the economic sovereignty of HMG over the UK. The mania for using the law to promote fragmentation across society, initially deployed by the left in social and cultural policy has now been extended by the three party leaders to the constitutional make up of this country. By contrast, had the vote for Union been lost the vote, they or their successors would have been obliged to reach agreement with Scotland on defence and control of the Scottish ports as well as payment of the national debt, the ‘musts’ of statehood which were reached in the far more difficult circumstances of Ireland after the Anglo Irish War of 1918-21.
Instead, the pledges of panic will become formal constitutional arrangements, but without so much as a nod to the UK Parliament or the whole people of the UK it represents – including those north and south of the border. And to add insult to injury, we are now led to believe that a little England will be salvaged from the wreck with English votes (only) for English measures. The very little England-ism which the bulk of conservatively minded Scots have rejected and the English abhor, whatever their party politics, will be applied to carving up the left-overs for Westminster. (This is not to rule out the idea of an English Parliament, dealing with English issues, while Westminster is left to deal with ones that concern the UK as a whole.)
For the future, the focus must be on a settlement which is in the interest of the whole country. Such a settlement must be carried in the UK parliament. The Scottish genie, as Gerard Lyons says in today’s economic blog, is out of the bottle. Not only has Scottish national sentiment been uncorked, but a debate about the legitimate exercise of power has been unleashed. Any future settlement proposed by the political parties must be one of the manifesto commitments and a mandate sought from the electorate and Parliament for any constitutional change, including fiscal powers of tax raising or public spending. And it may also have to be put to the Scottish people.
Alex Salmon lost the battle last night, just –but he may yet win the war.
*Dr Sheila Lawlor is Director of Politeia.