Scotland: Devolution

Lord Lang of Monkton Excerpts

Wednesday 29th October 2014 Lords Chamber

[Lord Lang of Monkton (Con)]

My Lords, it is a great pleasure to follow the right reverend Prelate and to reassure him that the Romans did indeed get well into Scotland—but it did them no good. I am sure the whole House looks forward to the maiden speech in today’s debate of the noble Lord, Lord Lennie.

I welcome this further debate on devolution, although it takes place in greatly changed circumstances. What should be happening now? I think the ideal answer is calm reflection, consultation and consideration of a way forward, not just for Scotland but for the whole United Kingdom. Unionism won the referendum but for a secure future it is clear that the union now has to change. I believe now that a wide consultation process should take place and that it should involve the interests of all the component parts of the United Kingdom.

Few can now dispute the causal link between the establishment of a Scot-centric, lopsided, asymmetrical, tax-free, unstable form of devolution in the Scotland Act 1998 and the slow but accelerating landslide towards separation that has ensued. That approach has not brought stability or fairness. Successive changes have fed the flames and come close to destroying the United Kingdom. Under that approach, devolution has become a separatist policy. It has been the gift that keeps on taking. The slogan that Labour coined in the 1990s, “We didn’t get the Government we voted for”—that self-deluding piece of constitutional chicanery—is the same slogan that the separatists have picked up and run with ever since. That is why we have to pause, step back and bring the whole nation into the debate. That is why I am uneasy about the rush to action to which we all find ourselves firmly committed, although of course we do have to honour the commitments that have been given.

I would like to try to be constructive, in particular to seek information from the Government to head off any threats that the latest devolutionary proposals create, because I think I see a potential impending problem. The core of what is contemplated now is the raising of a higher proportion of what the Scottish Parliament spends from direct taxation by it, instead of from a grant from the Treasury. There will of course be a read-across in due course to Wales and Northern Ireland. Of the variations on offer, I support the Strathclyde commission’s proposal to transfer the whole of income tax as it forces the issue directly towards the pockets of those who will have to pay. It will be a democratic stimulus. But my concern is this: I do not understand how it can possibly work. The funding system for public expenditure in Scotland is much misunderstood, in particular the Barnett formula. A formal submission from the Scottish Labour Party to the Smith commission referred to the “Barnett grant”. But there is no such thing as a Barnett grant. It does not exist. Barnett is a mathematical formula—no more, no less. It has no funds to grant. The funds come from the Treasury’s Scottish block grant, annually disbursed. The block grant is the key to the whole thing. The baseline of that block grant is not recalculated every year except to take account of relative population changes. Rather, it is the accumulated mass of past settlements and favours won for Scotland by past administrations, to which is added a new sum each year. It takes no account of relative need. The disbursement of that annual sum is where the Barnett formula comes into play.

I will spare your Lordships the details of how the mathematics of the formula works. It is intended to, and it does, erode gradually—very gradually—the excesses contained in that grant. In due course, it will become increasingly irrelevant as the block grant itself is cut into. It is the block grant that enables Scotland still to spend much more per head than England on many public services, and England and Wales are right to feel short-changed. It is the block grant that is now about to be hacked into by the 10% income tax provision in the Scotland Act 2012, not yet implemented, and by whatever further devolution of taxation the Smith commission decides on.

I wonder how the product of that 10% income tax and future tax transfers will be calculated and the block grant therefore cut. The impact of that and the further tax transfers proposed could be substantial, reducing the block grant by a large amount. Out of date though it is, and largely irrelevant as a true measure of relative need, the block grant is a pot of gold compared to the uncertainties that lie ahead with its replacement by Scottish income tax. The tax base in Scotland is weaker than in England. There is a larger public sector and correspondingly smaller private sector. With the machinations of the nationalists stirring up uncertainty and loss of confidence, that is likely to get worse. Investment decisions and productivity look endangered just when they will need to be enhanced. But the cushion embodied in the block of some £4 billion, which Barnett does not touch, could now evaporate along with much of the block. The consequences for current spending levels and future taxation could be extremely serious.

I have long argued that the surplus that has built up in the Scottish block grant should be addressed to bring fairness to the rest of the United Kingdom, but in the context of tax changes now facing us, we urgently need clarity on that potentially very difficult issue. What plans has the Treasury to erode or retrieve part of that £4 billion? Does it plan in some way to identify and hypothecate spending within the reducing block, thus second-guessing how the Scottish Parliament might spend it? Then the block grant would no longer be a block grant.

I ask my noble and learned friend to tell the House how that transition will be managed. What will happen to that £4 billion cushion that I referred to? It is an excessive figure, but some of it is deserved and, at the least, a transitional period is needed if it is to disappear. Will there be what is urgently needed across the whole United Kingdom: a new, needs-based study of relative need and new arrangements introduced to meet what will be fair and just forms of support, once the facts have been accurately established? The matter is now becoming a burning issue.

That brings me back to my central theme. It is only by establishing fair and balanced systems and powers of government across the whole United Kingdom, varying in detail but harmonised in their underlying principles, that we can hope to achieve the stability that will secure the long-term future of the United Kingdom.