There are many endearing things about the British constitution that have evolved over time and certainly have a useful function. This cannot be said for our local government and devolution settlements. Since the 1920s, there has been a relentless drive towards centralisation and the development of incoherent structures that are not accountable to the people.
The first problem is that the British state is highly centralised.
To give an indication of how centralised the British state is, in the UK in 2013, just 5 per cent of all tax revenue was raised below central government level. We often think of France as being a centralised state. There, the proportion of tax revenue raised at local government level is nearly three times as high.
Interestingly, things are not quite so bad when it comes to spending. About one-quarter of all government spending takes place below national level in the UK. That is a bit more than France, considerably less than Germany, half as much as the US and much, much less than Canada which is always the star when it comes to these matters.
At least until the Scotland Act, there was not a great deal of difference in principle between Scotland and England. Broadly, Scotland has a spending government and not a tax-raising government.
According to the economic evidence, this combination of taxes raised centrally and spending locally is the worst of all worlds.
The centralisation of tax-raising powers hampers economic growth and the effective provision of government services. It prevents competition between local jurisdictions and it leads to bloated government.
Devolving spending authority without tax-raising authority turns the local governments (and also the Scottish Parliament and Welsh and Northern Irish assemblies) into what economists call “rent seekers”. Instead of the key relationships being between local councillors and their electorates or assembly members or Scottish Parliament members and their electors, the key relationships are between officials and the Westminster government.
And the new powers being given to the Scottish government do not help either. In order to get good government, there needs to be clear lines of accountability with each layer of government explicitly raising its own taxes to finance its own spending. This will not happen under the 2016 Scotland Act.
Not only do we have a Westminster that is unwilling to really let go, we also have a completely dysfunctional constitutional settlement with MPs being able to vote on devolved matters which do not affect their constituents. To cap it all, Scottish and, to an even greater extent, Northern Irish and Welsh MPs are actually over-represented in Westminster.
A federal solution
So, what is the solution? English votes for English laws will lead to unstable and opaque government and, one day, to a constitutional crisis.
Other than complete independence (to which I do not object), there is, in my view, only one solution – the creation of a federal Britain.
The starting point should be that a UK federal government is in charge of defence, foreign policy, border control, management of the inherited national debt and, if we keep central banks, monetary policy and banking regulation. All other policy matters should be left to the home nations.
Crucially, any transfer of powers upwards to the federal level would require the unanimous agreement of the home nations and the federal parliament. This is really important. The number of nations within the UK is small enough for unanimity principle to be applied before any further powers are centralised. This is essential for a stable federal system. The US and EU systems have led to centralisation because unanimity is no longer practical.
In effect, this would return the union to its original purpose before the centralised welfare state was developed of providing defence, border control and the management of debt. Everything else would be done at home national level. This would include health and education (hopefully radically decentralised with funding through parents and patients), but also pensions, human rights issues, commercial, criminal and civil law, foreign aid, arts, land-use planning and, indeed, everything other than those few reserved federal powers.
The Welsh and the Northern Irish could choose to join England if they wished, making just two home nations within the federation – for simplicity, I will assume that there will, indeed, be just rUK and Scotland.
So, what about tax raising?
Tax raising would be absolutely transparent. There would be a federal tax and then taxes administered by the home nations. Both would collect their own taxes. Unfortunately, the EU does not allow variation in VAT rates so the rate of VAT would have to be set at federal level. In an ideal world, the federal government would be able to choose its tax base, but this EU constraint makes it sensible for VAT to be the federal tax that finances the federal functions. Indeed, the spending on the functions that I have suggested are carried out at the federal level would be roughly equal to the current VAT yield. There would then be no need for any other federal tax. All other taxes would be set and raised at Scottish and rUK level. Accountability would be crystal clear.
There would need to be strict separation of Scottish, rUK and federal debt, with the inherited debt being managed by the federal government and a strict no-bail-out policy. This would be buttressed by preventing the central bank from holding Scottish and rUK debt.
The proposal for a ‘Federal Britain’ is not only desirable in itself but provides the only coherent solution to the constitutional crisis through which we are now living other than full independence for the home nations.
Federal Britain: The Case for Decentralisation, from the Institute of Economic Affairs, is available to download for free here.