EVEL’s Unintended Consequences

Only two hours after the Scottish referendum result was declared, Prime Minister Cameron announced that “just as Scotland will vote separately in a Scottish parliament on their issues of tax, spending and welfare, so too England as well as Wales and Northern Ireland should be able to vote on these issues”.[1]

Last week the Government withdrew its proposals to introduce English Laws for English Votes (EVEL) due to the threat of a backbench revolt, and will re-submit amended proposals this week. This blog examines some of EVEL’s unintended consequences.

Symmetry between Scottish MSPs voting on devolved matters which affect Scotland and English, Welsh and Northern Irish MPs voting on the same policy areas which affect their own nations may seem like common sense. It is consistent with the principle of representation with taxation.

Yet the economies of the union are deeply integrated and decisions in one nation have spill-over effects to the others. And some spill-overs matter more than others: England is ten times bigger than Scotland and so ‘England only’ decisions taken south of the border (by English only MPs) may have a much greater impact on the north than vice-versa.

To take account of spill-overs, the Smith Commission proposed a ‘no detriment principle’ whereby nations would be compensated to leave no nation worse-off (a) from devolving powers, and (b) as a result of devolved policy decisions. We are on record (to the Treasury Select Committee) stating that EVEL is profoundly undemocratic because of the asymmetry of spill-overs and the impossibility of measuring and compensating them with any degree of confidence.

The first issue is the idea that no party will be worse off by devolving substantial powers. This is based on the idea that devolution is a zero-sum game and losers can be compensated by winners.

Yet there might be losses to both sides. As the Bank of England Governor Carney often points out, the common feature of successful monetary unions is the high degree of fiscal risk sharing. This is like the gains from trade – it benefits all nations. For example, no longer pooling income taxes reduces risk sharing. Even if the costs from the loss in risk-sharing could be measured and agreed, each nation cannot be compensated when all nations lose.

Second, there will necessarily be spill-overs from sharing a common monetary policy and these will tend to be asymmetric to the detriment of the smaller nations. The Bank of England’s projections which inform the setting of monetary policy are conditioned on tax and spending plans. Because England is ten times larger than Scotland, any changes in English taxes should be ten times more important for UK-wide monetary policy than changes in Scottish taxes.

This means that under EVEL, English MPs would have a much greater influence on union-wide monetary policy than the Scottish Government ever could. We don’t have to look very far to see how bigger countries can influence monetary policy which may be inappropriate for smaller ones, especially when there is no fiscal risk sharing.

Third, Scottish MPs have pointed out that decisions taken by English MPs on England only issues affect Scotland’s funding through the Barnett formula.

For example, if English MPs vote to cut spending on say, a transport link in England, all else equal the block grant to Scotland is reduced by 9.8% times the change in English spending. While it is true that the more that taxes are devolved to Scotland the less this is a problem (as the block grant is reduced accordingly), Scottish legislators would have no say on the matter.

Fourth, EVEL would deprive the UK Government of direct control of a significant share of taxes which may have spill-overs to borrowing costs. Devolving income tax to Scotland reduces the UK Government’s direct control over £11.5bn of revenues. But if a Grand Committee of English MPs controls English income tax then that is a further £138bn removed from the Exchequer.

Of course this money does not disappear, but the UK Government would have lost direct control of nearly one third of its tax revenues. In the next crisis, the debt sustainability arithmetic would have the added complication of which resources the UK Government can control. 

Fifth, taking income taxes out of the common taxation pool introduces tax hypothecation (ring fencing for a particular purpose). It would make no sense to pay for common spending from English or Scottish pots of income tax revenue then ask for compensation from the other.

Whereas Scotland can borrow from the UK (via the Public Works Loan Board) to replenish its pot, presumably this would be much more difficult for a country the size of England. This raises the possibility of English as well as Scottish and UK bonds.   

These are very important constitutional issues. Yet rather than have them exposed to Parliamentary scrutiny of a legislative process, the Government has chosen to introduce EVEL by a change in Standing Orders (Parliamentary procedures). Given the importance for the UK and the potential unintended consequences of EVEL we suggest that democracy would be better served by a full legislative process.