This comes from the FT this morning and given the importance of the issue I offer no apology for the length of the quote:
There remains fierce debate about how far devolution [to English cities] should go and which cities should be eligible.
The Core Cities grouping – representing England's eight largest city economies outside London as well as Glasgow and Cardiff – on Thursday launch a “devolution declaration” for further and faster reform.
The Key Cities body, comprising 26 smaller cities, is arguing that they should have local control over taxes ranging from VAT to stamp duty and council tax.
There is no doubt that George Osborne is keen on devolving powers. I am not surprised: it provides him with an opportunity to blame cuts on others. The political gain to him is enormous. But what worries me is that I have not seen a coherent justification for devolving tax powers to regional governments, let alone to English cities.
Do not get me wrong in saying that: I am not saying that taxing powers should not be devolved, but a theoretical justification for which power should be devolved, and within what framework has not, as far as I know, been developed. The Calman Commission on devolving powers to Scotland did not do this, in my opinion: it was a pragmatic review reflecting its composition. The result was pragmatic devolution of small taxes (the aggregates levy), straightforward taxes (mainly relating to tax) and minor tinkering to mainstream rates (which powers have not been used). A recent House of Commons library note tends to confirm this.
This pragmatic approach may well have been appropriate: at the macroeconomic level tax is a fundamental instrument that a national government responsible for the level of overall economic activity in the state as a whole must use. The moment that key taxes, such as income tax or VAT, are devolved, and especially if they are devolved without being pitched to a nationwide standard rate, central government loses most of its ability to use fiscal policy to control the economy. It is then then largely dependent on monetary policy, which has for the last few years been almost totally ineffective because central bank interest rates have, for practical purposes, been close to zero.
To put it another way, devolving tax powers can mean giving up the entire right of central government to manage the economy while substituting in its place a game of local tax competition in which individual cities will compete to reduce tax rates to attract business and wealthy individuals to locate within their geographic domains without any consideration to the overall economic consequence of their behaviour.
I stress, it may be possible to overcome some of these difficulties with a limited number of devolved authorities ( let's call them Scotland, Wales and Northern Ireland for convenience) but once cities get this power the probability of control begins to break down whilst the opportunities for chaos multiply. And, I stress, order is only possible if the devolved taxes are very carefully considered.
Land taxes can, of course, be devolved. So too, I think, might employer's National Insurance be capable of being devolved (one that I've never seen discussed). Some minor taxes might also be devolved, as has already been the case in Scotland. But to suggest VAT could be devolved moves us into the realms of economic chaos.
I stress that as yet I do not have complete answers to this question. But it looks to be a major issue that now requires careful thinking, and there is no sign that the government is giving it that attention. That worries me, a lot.
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This government does not do proper theoretical analysis or planning. It is a lazy government which relies on MSM to promulgate plausible sounding soundbites which are not much different from proverbs: ie “look before you leap” sounds right till you come across “he who hesitates is lost”. Government policy relies on that kind of appeal, not much more to it than that.
I think it is possible that Cameron and Osborne et al are just stupid: but in that particular elitist way which assumes that they are fit to govern by virtue of who they are, not what they do. And also assumes that it is rather infra dig to be seen to do any work: a gentlemen must be seen to do things effortlessly, so as to reinforce a perception of superiority. It is not long before the seeming of ease becomes the enjoyment of ease, and the behind the scenes graft is not done at all.
I think you’re miles ahead of the game here.
There’s not a chance in hell of fiscal devolution of any kind being considered in this Parliament – not even the relaxation of central controls over council tax and business rates. The Treasury just are not anywhere near the stage where they’d consider trusting local authorities even with an element of assigned revenue a la Scotland, let alone the power to vary rates or bands.
This might, and I mean might, get a hearing under the next Government, but that would require a lot of shifts in thinking that there’s not yet any evidence of.
One paper that’s worth a read is IPPR’s “Funding Devo More”, which was written in 2012 and takes a theoretical look at prospects for Scotland. If I remember correctly it comes out against corporation tax devolution, for similar reasons to those that you have previously raised.
I wish I was ahead of the game
I fear I am not
I think it is changing very fast
I hope you are right
1. Why would Employer’s NI be suitable of devolved powers but not, say, Employees’ NI? Or IT? What is different about Employers’ NIC?
2.You suggest calling the limited number of devolved authorities Scotland, Wales and Northern Ireland “for convenience”. Wouldn’t it be more convenient to call it England?
1) ‘Ers NIC tends to have closer relationship to job creation
2) Not sure I follow
I think when it comes to Scotland (and I would imagine Wales and Northern Ireland) the case for tax devolution is that the Scottish parliament is seen as the locus of Scottish Politics and the Scottish Government seen as the central actor. Westminster in the public view is of secondary importance. Therefore it makes sense for these powers to exist at the Scottish parliament because that is the body that the public regard as most important. Beyond policy benefits the democratic case is there.
Devolution to English cities on the other hand has no such justification. The public clearly do not see city councils as the centre of politics, most people vote in council elections (when they vote at all) based on their opinion of the national parties. In many cases people are not aware of the partisan composition of their local Government and I include people who follow politics closely in that assessment. To place that kind of power into the hands of local Government is to remove accountability.
But as the Eurozone is proving you cannot have fiscal autonomy within a monetary union
I agree that it the potential for fiscal autonomy is indeed limited and it was always my position that if Scotland went independent it would need its own currency. My point though is it is justifiable on democratic grounds to devolve tax powers to Scotland. Devolution to local Government is a much harder case to make.
Accepted
But both have to be constrained
So how does America manage then? All the different states have different tax raising powers but all have the same currency. Some ‘cities’ even seem to get most of their income from traffic fines. Yet nobody seems to think the federal government has lost complete economic control – or have they in fact?
(Maybe it helps because the public sector is much smaller?)
They have ended up with a disaster
Bankrupt cities
States with dire finances
Failing infrastructure
And a massive deficit
Great example
Agreed, but your point was “central government loses most of its ability to use fiscal policy to control the economy” so was wondering whether you consider American Federal government HAS indeed lost such control and if so whether this is because of or in spite of being the world’s largest economy..
Yes it has to some degree
For example it is almost unique in not having a VAT
I think your view would have much more impact if you argued that the American federal state had lost its economic control owing to the local states’ freedom – which you now have.
Although Britain is much smaller than the US – and geographically situated in muddled Europe – I think the least the UK can do is offer its constituent states a little more freedom including fiscal freedom. And, as England in the UK is so relatively enormous – after all, even though William Hague has moved to Mid-Wales, Yorkshire still has a larger population than Scotland, what other devolution system is there other than city ‘states’? There is very little really rural left in England (Mid Devon or Cumbria perhaps?). Your contempt for the paucity of the local council vote is precisely because they have no power. I’m not a Tory and it’s a disastrous time to be given power, but as long as the power stayswith them it will be good for the UK political participation and that must be good for the future of the UK. Less nationalism and more localism, less Westminster bubble and more local knitting is likely to encourage more people into the political process! Whilst there are some highly intelligent people in the Commons I suggest we should not be putting all those eggs in the one basket..
This is a deliberate poisoned chalice
See it for what it is
It works rather well for Switzerland. There are twenty-six separate cantons, comparable in geographic terms to local authorities in the UK. Each one sets its own tax rates. There is no race to the bottom; in fact the country runs extraordinarily well.
And that’s been the way for 800 years
Which makes the comparison with newly devolved cities utterly meaningless
VAT is a tax on trade transactions. A penalty on trade. It discourages trade and enterprise. The last thing we should be penalising is trade and production (taxing labour). Winding VAT down, or better abolishing it, is a very good step indeed. Talk to small businesses about VAT and its complexity, and swear words eventually come out. Many people are frightened away from establishing small businesses because of the complexities of VAT.
Shifting taxation to the “values” of land away from trade is the first step in a “fair” tax system that will promote growth. It is so obvious.
I slight diversion here by me of the prime point.
“The public clearly do not see city councils as the centre of politics, most people vote in council elections (when they vote at all) based on their opinion of the national parties.”
Excellent point Richard. We still have constituencies, which is an outdated notion dating from the horse and carriage times. How many times have we heard “we like our MO as he/she get thing doe here”. What they mean is that the MP is dabbling in local issues, which is the remit of the local councillors. Abolish constituencies and people will then be more aware of local councils and vote accordingly.
The recent election has highlighted the undemocratic nature of the electoral system. UKip, love em or loath em, polled one third of the votes of the Tories and got 1 seat, 310 less than the Tories. Most people did not vote Tory, yet they have unrestrained power. Most people did not vote for Thatcher, at any time, yet she had unrestrained power to destroy British industry without any effective checks, balances or counterweights. Shouting loud from the opposition benches did nothing. A proper PR system would have meant that Thatcher would not have destroyed British industry, a price we are paying for today.
I agree
But all we will get are boundary changes to reinforce the status quo
UK the is breaking up. Southern Ireland has already gone. Nationalist movement are strong in Scotland and Wales and about half of Northern Ireland fought for over 30 years to get out. The North of England is disgruntled as wealth clearly is directed south. Alarm bell should ring and a system implemented that satisfies all. No such thing. Cameron foolishly gave the Scots a referendum that nearly nearly split the union further. Now he meddling again. He cares nothing of the union and is prepared to split it as without the Scottish votes the Tories have a great chance of being power each election.
Anyone who cares about the union and the people of the UK would not event entertain referendums, aim towards a federal system and have PR implemented ASAP. They are the first steps in adding long term fairness and stability to the UK.
Fiddling while Rome burns comes to mind.
VAT is indeed a burden on small businesses, and is one of the best examples of the need for tax simplification (whatever happened to that project?).
As far as I’m aware, EU membership precludes setting different VAT rates in different parts of the UK. Hence the assignment of some VAT revenue to the Scottish government, which just substitutes for part of their block grant from Westminster.
On a point of information, there has been some discussion of transferring National Insurance to Scotland, and it was in the SNP manifesto.
VAT is not variable, you are right
NIC is
I prefer to adjust ‘ers only as that has a more direct impact on employment rates
I take your point about the potential effect of employers’ NIC on employment.
However the majority of all NICs currently go to the UK National Insurance Fund (NIF). The NIF is used to pay for contributory benefits. Some slice of the NICs is directly allocated to the NHS (presumably the English NHS?).
Those complications might be used by the Treasury/Government as an argument against devolving employers’NIC. Or at least make it difficult to disentangle?
The NIF is not purely notional
NIC is tax
NIC is a tax but a very regressive one as it stops being payable completely in higher income brackets. Really the personal allowance should apply to both tax and NI. But that would probably be far too complex for the Conservative press to support.
Agree entirely that PR and federalism need to be implemented soonest but the difficulty with true federalism is that England is about 85% of the Union so it makes it a lop-sided federation, which is why Prescott’s regionalism and Osborne’s City Regions have been suggested.
Perhaps a better way round it it to use the French example and have councillors co-opted by election into a second Chamber for England. (And whilst we’re at it perhaps we can substantially reduce the number of MP’s as it has always seemed to me that when politicians say that the state is too large what they really mean is that the government is too large!)
The link in “A recent House of Commons library note tends to confirm this. – See more at: http://www.taxresearch.org.uk/Blog/2015/05/14/what-taxing-powers-should-be-devolved/comment-page-1/#comment-723432” does not work.
Sorry
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