Thursday, 2 October 2014

Why Tory backbenchers might think twice before rebelling against Scottish “devo plus” – the politics of public spending and nationhood after the referendum - Prof Perri 6 - Chair in Public Management, Queen Mary

This is the second in a series of articles on this blog about the consequences of the Scottish referendum and the “vow” made by the three leaders of the main unionist parties. Having looked in the last piece at the likely development of Scottish National Party strategy to address the major public policy and public management challenges their programme faces, this article examines the implications for the public services of the positions emerging within the Conservative party.

The Conservatives' stance on the the terms and value of the union and on the governance of public spending in Scotland and the other countries of the UK now appears more divided than that party has been on these issues in their history.

Mr Cameron's “vow”, as part of his pitch to voters in Scotland to remain in the union, was that the Barnett formula on shares of public spending in the four countries would be maintained. As I argued in a recent post, Mr Cameron appeared – without clearly saying so – to allow Scots to expect that block grant payment to Scotland would not be reduced proportionately in response to tax increases made by the Scottish parliament under either its existing or new proposed tax-varying powers. Secondly, he committed his party to support additional powers for the Scottish parliament, which would include powers to control some taxes, although the details have yet to be settled. Based on the recommendations of the Conservatives' commission report chaired by Lord Strathclyde, we could expect much more extensive control over income tax for the Scottish parliament than Labour's or the Liberal Democrats' commissions recommended (see my brief summary analysis here).

Unfortunately for Mr Cameron, many of his backbenchers, leading figures and even some ministers do not support his plan. Boris Johnson, Mayor of London, immediately declared that even the status quo, in which slightly more per head is spent on public services in Scotland than in England, was, in his view, “slightly reckless” and the commitment to the Barnett formula should not be honoured in the form it was made. Backbencher Philip Davies has announced his intention to defy any Conservative party whip to vote for additional devolution to Scotland, and he also objects even to the current disparity in public expenditure per head, let alone any future divergence permitted as a result of Mr Cameron's “vow”. Even the Conservative transport minister Claire Perry objected to the implicit subsidy from English taxpayers for ““promises of financial party bags”, and a “wholeraft of goodies on offer for Scotland that will be paid for by us south of theborder to appease the Yes voters”. The Daily Mail newspaper reported a survey of backbench MPs finding a big majority of Conservatives opposed to the continuation of the Barnett formula, and plenty of Tory MPs willing to go on the record objecting to the public expenditure aspects of the offer made to keep the union. Although Mr Cameron insisted that, in his view, honouring the promise of further devolution to Scotland was not conditional on his plan for “English votes for English laws” in the Westminster parliament being implemented, it is clear that many of his backbenchers want to make it a condition. Even before the adoption of any “English votes” rule, Conservative justice minister Chris Grayling has demanded that Scottish Labour MPs must not go through the “no” lobby in the Commons on his bills, and he even appeared to reject Mr Cameron's insistence that further Scottish devolution was not conditional upon an “English votes” rule being accepted. The leader of the Tory backbench 1922 committee has threatened a Conservative backbench revolt unless further Scottish devolution is made conditional upon “English votes for English laws.

Even before we see the details of Mr Cameron's proposals for further devolution for Scotland, this division on the government backbenches will have important short term financial consequences for the management of public services in Scotland. The Tory backbenchers, it is important to note, are threatening not only future Scottish devolution but even the current higher levels of spending per head on public services in Scotland. As this blog has warned more than once before, the markets will price this kind of political risk into the cost of financing, and this will start affecting companies in Scotland which provide public services under contract to public authorities or which operate Private Finance Initiative style schemes. After the “no” vote, the issue is not the pricing in of currency risk. Now it is the pricing in of much greater uncertainty about the prospects for public spending in Scotland and therefore the sustainability of companies which depend on the flow of contracts with public authorities. Share prices of those companies which are heavily exposed to the Scottish public sector, and which are not able to offset that risk with other business (perhaps in England or other countries) could begin to be affected. Those companies which are already heavily leveraged on the basis of expectations of future Scottish public sector contracts will be the first to be affected. Public authorities in Scotland letting contracts may find that bidders begin to price in greater risk, and contract prices could begin to rise.

The bigger, now only very slightly more long term question is whether a majority of the Conservative backbenchers positively wants to end the union with Scotland altogether, and wants to use the argument over public expenditure differentials to bring this about, in the belief that this would disable the left of centre parties from governing in England. That some on the right are prepared, at least privately, to admit to this view, is not in the public domain.

It is worth pointing out that there are always differentials in public spending per head within any country. There are big differences between the south east and the north west of England. Differences between England and Wales and especially between England and Northern Ireland would continue even if Scotland were pushed out of the United Kingdom. As a candidate for a general principle, the notion that – for example – every locality should receive the same proportion of public spending per head as every other in all circumstances is preposterous. When unemployment or other needs for service rise in one area more than another, demand-led benefits rise, and positively should. That is how fiscal stabilisers work to back a currency. True, the Barnett formula is not needs-driven but population driven. It is far from an ideal system. It certainly should not be sacred. But the weakest argument against the formula or indeed against further fiscal devolution for Scotland is to claim that shares of public spending per head should be equalised in nominal terms, whether by country, by region, by locality or by individual.

Nor, in a democracy, is there anything improper about political deals shaping divergence in public spending levels between parts of a country. Spain has different political and fiscal settlements for its several autonomous regions, which are not only driven by needs- or population-based formulae. To a lesser degree, so do Italy and India. If the political deals which are struck to hold diverse countries together do not grant special fiscal advantage over and above household needs for services in exchange for political union, then they have to grant other advantages, which may not necessarily make for better systems but only different ones. For example, the United States does not have separate political deals on fiscal transfers in quite the way that it appears to be implied for Scotland by Mr Cameron's commitment to the three parties' “vow”, but it does allow big variations in states' indirect taxes and in their take-up and adaptation of federal programmes such as Medicare and Medicaid. Federal systems are by no means all “symmetrical” in their fiscal treatment of their members.

What lies behind the Tory backbenchers' argument, if it is more than simple calculation of partisan advantage for the Conservatives in a country without Scotland, is presumably a major shift in the willingness of at least some Conservatives to support cross-subsidy and therefore fiscal stabilisation between the English people and the Scottish people. If that basic commitment of solidarity erodes far enough, then no union will last, whatever the particular formula for allocating public spending and whatever variation in levels of expenditure per head in good and in bad times one designs.

To those English Conservatives who no longer feel enough solidarity with the Scottish people to maintain a common pool of fiscal policy at all, the only arguments that remaining unionists in the Conservative Party could offer will be instrumental, calculating ones of self-interest. Bluntly, unionists remaining in the Tory party will have to offer their colleagues arguments that keeping Scotland in the union at the price of some higher level of public spending represents good value for English money. Although no union of countries can be sustained indefinitely on the basis of those kinds of arguments alone, it is important now to examine those instrumental and self-interested arguments, because they are likely to become central to the debate on the right of the political centre ground in the UK over the coming years. The extent to which those self-interested concerns can achieve traction with Conservative backbenchers will define the politics that shape public spending and public services for the next few years.

One of the self-interested arguments for the union which have already been recognised by right-leaning newspapers have to do with the trading position of the UK without Scotland. When the BBC's economics editor, Robert Peston, published his own estimate ( that without Scotland, the UK's current account trade deficit would rise to the dangerous level of around 7% – enough to trigger a run on sterling – many Conservative noticed. True, oil price volatility from year to year means that the North Sea certainly does not represent any surefire or long term means of bolstering the trade deficit. But Scotland's export potential across the range of its industries remains significant. At a time when the UK's current account deficit is worsening, despite economic recovery, this matters. For in the long run, even England, with its fifty million population, cannot rely exclusively on boosting domestic demand as its main strategy for economic recovery and growth, and the fact that Scotland's export industry profile diverges from that of the rest of the UK is a key part of the contribution it represents, even apart from oil. Moreover, whereas much of the UK's exports are things mainly of interest to European markets, Scotland exports a number of things which are much wider interest to emerging markets – something about which Conservatives who are doubtful about the prospects for recovery in the Eurozone ought to care.

The second argument is Scotland's base of tax revenues is fairly robust. At a time when one of the biggest worries for British government is that tax revenues are not matching the rate of GDP recovery, the fact that Scottish unemployment is slightly lower than the UK average and that tax paid per head is higher than in the UK generally and may have been running ahead of the UK's tax revenues per head for more than thirty years now suggests a degree of economic vibrancy of a tax buoyant kind that the rest of the UK should believe that it has reason to want to keep within its economic and fiscal systems. At a time when Conservatives are more anxious than Labour is about moving the UK public sector current account into surplus in order to begin repaying the accumulated public sector debt, the robustness of Scottish tax revenues ought to be an important consideration.

Third, allowing the union to end would probably cost England more in set-up costs for border controls, in transaction costs for business for dealing with Scotland once the two countries have different currencies, in managing the currency risk costs of the transition, than would be saved by the relatively modest reductions in public spending per head, once Scottish tax revenues no longer come to the UK exchequer to offset public services in Scotland.

Fourth, the costs to the English taxpayer for the complicated arrangements required for cross-border regulation of everything from Cheviot forestry and water systems and the Solway estuary to regulatory coordination of a host of Edinburgh and London based businesses will not be trivial.

Fifth, there are important arguments about security which unionists in the Conservative party will offer their colleagues. An independent Scotland would run a significantly more open immigration policy than the UK does or is likely to do, even under a Labour government. To respond to that, the rest of the UK would have spend much more on monitoring cross-border movements, whether or not physical border controls are set up at road crossings between the Solway and the Tweed. More significantly, the costs to the English taxpayer of moving the Trident submarine base, of finding replacements for the Cape Wrath training grounds for the RAF, in replacing RAF Lossiemouth and other Scottish bases, will be very significant indeed. In the medium term, the prospect of a recrudescent stand off with Russia is likely to mean that the rest of the UK will have to worry about Russian air force manoeuvres over the northern approaches and Russian submarine movements underneath them in what would then be Scottish air space and the Scottish maritime area. Even if a deal were struck between the UK and an independent Scotland for the UK to patrol in these areas (because a Scottish defence force is likely to be a small affair), the costs and difficulties of doing so from bases further south will be much greater.

Finally, if the Conservative backbenchers force a reneging on the deal which Mr Cameron offered in signing the “vow”, there will be damage to England's reputation. The accusation of “perfidious Albion” will surely be made in Scotland after such a move and perhaps more widely among Britain's allies. No Conservative premier would be able to make commitments in similar circumstances for a generation and be credible.

In short, Tory unionists will point out to those of their colleagues who are increasingly England-centred, that a declaring that the price of the special fiscal deal to keep Scots in the union is not worth paying may be a case of English self-harm. Of course, self-interested and instrumental considerations of this kind alone will not sustain the union in the long term, if English sense of their bond to Britain as a collective unit erodes to the point that English taxpayers do not want to be part of a united fiscal risk pool with their Scots neighbours. But it is the hallmark of the sectarian thought style in politics to insist that principles framed in terms of narrower and narrower identities of membership must be insisted upon, even at the expense of making the English members of their favoured identify worse off economically, in security and in reputation.

This debate between unionists and English nationalists within the Conservative party will shape not only the politics of the next year but the framework for public spending and public services, the prospects for the Exchequer and therefore for market for UK public debt, for the next UK parliament. The debate will also allow adroit Scottish Nationalists to exploit divisions in the Conservative party, as a previous article on this blog argued. Although the “English votes for English laws” debate is one principally between Tories and Labour, the question of whether Conservatives think the fiscal price of keeping the union is worth it for English taxpayers is one that engages a complicated relationship between English nationalists and Scottish ones.

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