25
Examination of witness
Paul Johnson.
Q1 The Chair: Welcome to this, the first evidence session of the Lords Economic Affairs Committee’s inquiry into fiscal devolution in England. We are delighted that, for our first witness, we have an old friend, Paul Johnson, provost of Queen’s College, Oxford, with a distinguished history in public life, including the IFS before. This is being broadcast live, as you know, Paul, on parliamentlive.tv. A full transcript is going to be taken and we will make it available to you shortly after the meeting, so you can correct any errors. Again, thank you for joining us.
Let me start with a general question, but in a way the most important question: what exactly should we mean by the term “fiscal devolution”? Is it about revenue, powers, or both those things and other things? What are the objectives of fiscal devolution from a policy point of view? What should be the criteria by which we should judge the wisdom of fiscal devolution, however construed?
Paul Johnson: Fiscal devolution covers, in principle, devolution of spending and tax choices. The spending issue is fairly straightforward. We can decide to allocate money and how it is allocated from Whitehall—for example, as we do for the health service—or we could decide to allocate that money to local authorities or mayoral combined authorities and leave them to decide how they want to spend the money.
There are different kinds of spending devolutions. Schools budgets come through local authorities, but they cannot change the total amount that they spend on schools, so they have some flexibility on exactly how they spend it. Other elements of spending come to local authorities and they can choose, at least within their legal remits, how much to spend on adult social care, children’s social care, recreation or what have you. But even there, although in principle they have freedom over how much they spend, they are often in this very difficult situation in which they have legal obligations set centrally but limited budgets with which to meet those legal obligations.
You can see immediately that there are all sorts of elements to even the spending part of fiscal devolution. You can go the whole hog and just say to a local authority, or whatever level you are doing it to, “Here’s some money. Spend it as you will”. You can go all the way from there to, “Here’s the money and we are going to tell you exactly how to spend it, but you are responsible for the delivery”, and everything in between. We pretty much have everything at either end and in between in our system, which itself can create quite a bit of confusion. That is one part of fiscal devolution.
The second part, of course, is on taxes. Again, there are very different ways in which you can do that. Within limits, council tax is currently devolved. Local authorities can choose how much to increase it each year, but, again, they are constrained in how much they can do that and they have no choice over their tax base. They have to use the current A to H banding system and the valuations, which are essentially set centrally and based, as we all know, on 1991 values. There is some tax devolution on the council tax side, but it is extremely limited.
Beyond that, you can allow local authorities or local areas to raise new or different taxes, be that a tourist tax or any other tax you might want to mention. You can allow them, as we allow in Scotland and to some extent in Wales, control over some elements of national taxes, so they can change rates or allowances within the income tax system, for example. You can assign tax revenues to local areas so that they benefit if the local area is doing well or suffer if it is not doing well. Again, there are lots of different layers to the possible degree of tax devolution that you can provide.
There is a third element that I should touch on, which is that you can also devolve powers over how much local areas can borrow. You can do that either just to allow them a limited amount of borrowing to smooth from year to year, or you can give them capacity to borrow significant amounts to fund infrastructure projects over time.
That is quite a long answer to the first part of your question, but it is quite a comprehensive question with quite a lot of elements to it. It is important when we talk about fiscal devolution that we are always clear which of those things we mean in each of those areas.
The second part of your question is, in essence, about why we would do it. What are the potential advantages? You can divide those into two. One is about local democracy and accountability. In a well-developed devolved system, if local citizens understand what their representatives are doing and that they have power over their taxes and the quality of their local public services, they can hold them accountable for that. Equally, there are certain services that local politicians will know much better than central politicians, so they may be better at making those choices. There is an accountability in the democratic part of it.
There is also potentially an efficiency and knowledge element to this. Related to what I just said about local people maybe knowing more about where the money is best spent, it is also much easier to co-ordinate spending, in particular, from a local area than it is from Whitehall. If you are thinking about co-ordinating social services, health service, education services, early years services and so on, that may be, or almost certainly would be, better done at some subnational level than at national level.
The third argument, which is quite plausible, is that more devolution than we have at the moment might be good for economic growth, partly because you have that better local understanding and partly because it can give incentives to local areas to do more to, for example, allow development or incentivise economic development in their area, which very often they have very little, at least direct, incentive to do. While—I always stress this—I do not think that the evidence internationally proves that devolution is good for growth, it is pretty indicative that, if you do it well, it can be positive in that direction. In terms of why you would do it, there is some element of democracy and accountability, some element of local areas being better placed to make decisions and co-ordinate in a way that Whitehall cannot, and some element of being able to promote economic growth as well.
The Chair: That is very comprehensive. Thank you very much, Paul. That was great.
Q2 Lord Butler of Brockwell: I would like, if I may, please, to concentrate on the spending side of the account. I would be grateful for your assessment of the English Devolution and Community Empowerment Act. On the spending side, do you think that that goes far enough? Are there types of spending that you think can be safely devolved and types of spending that ought to be retained by central government?
Paul Johnson: The Act is another of these steps towards greater devolution. It is, broadly speaking, a positive step in that direction, but it has a number of issues. Partly, as we might come on to in a different context, it is providing different powers in different areas. You can see why it might, but that leaves us with this democratic deficit. Frankly, very few citizens have much idea at all about what powers are devolved to what authority in their area. That is a serious issue and not an easy one to overcome, given that different areas are themselves very different.
In terms of the kinds of areas that it is helpful to devolve, to some extent it comes back to the question that I was just answering. It depends what you are trying to achieve. If you are looking at joining up services in local areas, it is quite helpful to have things such as social care and health working more closely together than they are. That is quite difficult, often, with the different geographies these things are working in at the moment and the different degrees of devolution. If you are focused on economic development, I would suggest that transport is a very important part of that and control over significant parts of the transport budget is going to be important, particularly if you have control over the amount that you can raise.
That comes to a second point at which the current Act does not make a great deal of progress, which is that a lot of this is difficult if there remains uncertainty about what budgets are going to be into the future and a lack of control over the amount that you are able to spend. While it gives some additional powers over some elements of spending, it does not provide any additional certainty about what levels of spending are going to be available to local areas into the future.
As soon as you go on to these areas of where it is helpful, you can see why all these things—health, from one point of view, transport, from another, or skills, from a development point of view—can be helpful locally. Equally, if you have a patchwork of these across the country, joining up local transport networks or having different skills policies in different areas, you have to be willing to accept differences and potentially difficulties at the border, as it were, if you are going to do that, particularly across a large number of smaller areas. Certainly, when I have this in mind I am thinking about a relatively small number of relatively larger areas to make this work.
Lord Butler of Brockwell: Are there any types of expenditure where you think it is essential that central Government should retain control?
Paul Johnson: There are obvious examples. Defence immediately springs to mind. Where you are looking at national rail networks or the trunk road network, they are likely to remain under national control.
There are interesting questions around the welfare system. You would expect pensions to remain under national control. It is not inconceivable that you could have more local control over some elements of working-age welfare. We have devolved council tax benefit to local areas in the not very distant past. There was some discretion over grants in the supplementary benefit system under the old national assistance system, which local authorities were able to make use of. Even in some of the things that we think of as most centralised, there are some areas where you could make decisions. In other countries, I think, you have that in working-age welfare.
If you go through the other big areas of spending, there are elements of health that you need to keep centralised, as some of the structures reflect at the moment. The big national specialisms are funded centrally, but historically in a way that is different from local or regional hospitals. You can see how you might split that out within elements of the health system, for example.
In education I do not think you want different areas. You would not want a patchwork within a country such as England, of different qualifications, for example, although of course we have different qualifications in Scotland. If you look at a place such as Australia, it has different school-level qualifications state by state.
I am going through these one by one to illustrate that even some of those areas that you might think and I probably think, certainly at the moment, are not appropriate for devolution, or would not be in the first wave of devolution, are not necessarily impossible to do in the longer run. It is worth keeping our minds open about those sorts of things that we might and might not be able to do. The sorts of things I have just mentioned would not be in the first wave of things you would move to additional spending at the moment.
Lord Butler of Brockwell: In the next stage of devolution, do you think it will be necessary for the Government to define those areas that they need to retain control of?
Paul Johnson: It will be helpful for Government to have a clear statement, yes, of where they are intending to get to in terms of both ends of that: what they are intending to devolve over a period of time, what they are going to keep hold of and, as you say, what they think it is strategically important that they keep hold of for a long period. One issue that devolved authorities have continually faced is the uncertainty about where these things are going to go and a lack of clarity and long-term strategy from the Government about where they are intending to go. There is space for quite a lot of work to go into building a consensus around exactly what you are describing.
Q3 Lord Young of Cookham: Lord Butler asked about spending. Can we look at the other side of the coin, which is revenue-raising? One report we were asked to read was a report by the Communities and Local Government Select Committee in 2014 that said this: “In our view, fiscal devolution and spending decentralisation are not synonymous. Fiscal devolution has to include significant tax-raising and retaining powers”. Would you go along with that?
Paul Johnson: They are not synonymous. I will use the example of Northern Ireland, which I think we might come on to a bit in a minute. As you are aware, I did a big piece of work on this a few years ago now. Spending is very heavily devolved to the Northern Ireland Assembly. It has genuine control over how money is spent. It has genuine control over choices between the different budget lines. It makes quite different choices from how those choices are made in England, but it has very little control over revenue. You can clearly have significant fiscal devolution, in the sense of devolution over spending, without devolution over tax-raising powers.
I was not quite clear of the import of the quote that you just used, but, as I said right at the beginning, you can clearly have more spending devolution, as you have at the moment. You can do that without tax devolution. That clearly constrains the choices local areas have, but it is not right to say that that is not a form, and potentially a significant form, of devolution. The Northern Ireland Executive and the Northern Ireland Assembly clearly have more control over devolved spending than regions or local authorities in England.
Something that is worth stressing in this is that Northern Ireland is not big. It has a population, I think, the same size as Kent, for example. This is not a level of government that is a higher or bigger scale than you could do at local authority or combined authority level in England. They do it without very much at all in the way of tax-raising powers. I am not advocating that, but it is important to be clear that these things are perfectly logically possible.
Lord Young of Cookham: To follow up that for a moment, if one reads the Mais Lecture, it seems that one of the options the Government are looking at is simply allocating a slice of income tax to a local authority area. Is that real fiscal devolution, or is that just a slight variation on what we have at the moment? Would that be the break with the past that we were told about in the Mais Lecture?
Paul Johnson: It is clearly not anything approaching full tax devolution. It does not give the local areas any additional power at all if all you are doing is allocating or assigning tax revenues to them. Why might you do it? I think the reason is that that potentially gives local areas a sharp incentive to be much more focused on growth than they are at the moment.
Again looking back to what we did in the Northern Ireland context, we recommended against that on the grounds that it also includes a significant amount of risk. Even the Northern Ireland Assembly has only limited powers over how the Northern Ireland economy will do relative to that in the rest of the UK. Indeed, if you look over the period we were looking at, it had done pretty badly. If you had assigned tax revenues at some point in the past, they probably would have lost out.
The arguments are certainly not fully against doing it. The argument for giving local areas a much stronger incentive than they have at the moment to focus on growth and get a dividend from that growth is pretty strong, but if you are going to do it, this is where there are very clear trade-offs, because things other than what you do locally can have an effect on how your tax base changes locally. You might get unlucky because some global change means that your local car factories or some other businesses do particularly badly.
You need to assess appetite for risk and decide how much you are willing to let certain areas lose revenue while others gain revenue. The whole point of assignment—certainly in the way I understand it is being considered, in a revenue-neutral kind of way—is that, if one area does well then, almost by definition, another area will do badly. If this is a significant fraction of their income and pushes through one for one, that could be quite difficult.
Indeed, it may not be a credible policy if it would result in very big changes in the amount of money local areas would have. You would need to put some kinds of caps and collars on what you would do and some sort of equalisation. Of course, the more you do that, the more you blunt the incentives you are putting in place. I would not rule it out, but it has to be very carefully designed. It is important to distinguish it from real policy devolution. It is not providing that.
Lord Young of Cookham: Can I have one final quick yes or no question? Is rate-capping consistent with any of this?
Paul Johnson: Do you mean business rates?
Lord Young of Cookham: No, capping rates for local authorities. They can raise their rates only by a certain amount predetermined by the Government.
The Chair: You mean council tax.
Paul Johnson: It is an interesting question. It reflects two things. One is that our local democracy, arguably, does not work brilliantly at the moment in the following sense. If you look at the coverage of the local elections two weeks ago, that was all focused on, “This is punishing the central Government”. There was very little sense that local authorities were being rewarded or punished for what had happened within those areas.
The case for putting a cap on council tax increases is that it could result in quite big tax rises without, potentially, the local politicians being either punished for doing it or rewarded for the better services that they provide. It is a huge tension in the system. The easy answer to your question is that, yes, it is not consistent with anything approaching devolution. I am going to give you a sort of “On the one hand and on the other” answer here. We are so far away from effective democratic devolution at the moment that I can see why it exists.
Q4 The Chair: Can I just ask a quick follow-up from Lord Young’s questions about borrowing, which you mentioned? Do you think there is a case for significantly more borrowing powers for local authorities, or in general, given the status quo in the UK?
Paul Johnson: You could give them significantly more borrowing powers only if they also had significantly more revenue-raising powers. To give an authority a power to borrow when it has no control over its income in the future—I would not lend to an organisation on that basis, other than that I would assume that central Government were standing behind it.
For example, in a world in which an authority borrowed a significant amount for a big transport infrastructure project that it was intending to fund under current rules, on the basis of an additional levy on business rates payers, that is a plausible way forward. Probably, significant additional borrowing powers have to go hand in hand with significant additional control over your tax base.
The nearest we would have at the moment would be via some sort of business rate precept or, potentially, through some other method of raising money, whether it be through land value capture or charging for the use of some new bit of infrastructure. If you have an income stream that you can identify, fine, but at the moment we are not really in that position.
Q5 Lord Reid of Cardowan: Thank you for being with us. What do you regard as the main obstacles, historically and presently, to the progress of devolution in England? To what extent are they political, in the sense of an ideological objection to it? Are they a matter of institutional turf wars and the reluctance to concede power, or are they objective structural problems and difficulties?
Paul Johnson: It is all of the above, in a sense. One of the biggest barriers has been that history is a barrier in itself. When you have not had significant devolution, you lose the capacity to manage it but also, perhaps even more importantly, lose that sense of regional, local, county-wide or whatever identity it is that creates the pressure for it. That is why things such as the Manchester authority and the West Midlands authority, which have grown over a period of time into organisations that are valued in their local areas, provide more of a basis on which to do it than perhaps we had 10 or 20 years ago.
I have been through various Governments that have thought about different models of this. There have been different views from central government about—this relates to what I was just saying—the level at which devolution should occur. We are beginning, I think, to move to some agreement about how that should be, but I remember 20 or more years ago: “Should it be city regions? Should it be the nine standard regions of England? Should it be based on county councils or what have you?” We have had a long period of uncertainty about the level at which it should happen. There has been an awful lot of discussion and debate about what that should be.
Then there is the concern within Whitehall. There is a genuine concern that people feel, rightly or wrongly, about what the consequences of this will be. What if someone messes this up? What if you give additional powers to region X and they make a complete pig’s ear of it and have to be bailed out? It is not quite put like that, but that is certainly the way that some people in central government would think about this.
That reflects the difficulty in moving away from this very centralised within England politics, where, as I was saying, the councillors of any particular town are turfed out not on the basis of how good a job they have done, but on how well the national Government are seen. You get into this cycle that it is quite difficult to break out of, which I do not think is bad faith by anybody, but it is a genuinely difficult thing to occur.
The last thing I would say is that, if you look over time, broadly speaking, until the movement to the combined authorities, we have moved away from allowing local areas control over anything, really. The big change that happened in the 2000s was around schools budgets, which used to be part of the general budget of local authorities. This was a very specific issue because there were headlines that some schools were seeing cuts in their budgets. The Government of the time decided to pass money straight through to schools and not allow local authorities control over that. That was quite a big, in a sense, constitutional change, which centralised stuff and was made off the basis, frankly, of a couple of weeks’, or even a couple of days’, headlines about the choices that certain local authorities had made. That is quite a good example of why we have, broadly speaking, moved up towards this level of centralisation.
If you look further back, the polytechnics used to have some local control. If you look further back than that, you had considerably more things over which local authorities had control. There has been this gravitational pull towards the centre for all sorts of different reasons over a long period of time. That is why we may not have got as far as we would like to, and we have not got as far as we would like to with devolution at the moment. The pushback against that through the combined authorities is quite a big change, and possibly a bigger change than is often recognised, because it is pushing back against what has been quite a long-term trend.
Lord Reid of Cardowan: I have one follow-up, which is more specific about the centre. This will seem, to anyone who has been in Parliament and government, a question to which the answer is obvious. Why do you think the Treasury is reluctant to cede power to local areas?
Paul Johnson: There is a general lack of trust between central and local government, frankly, not just between Treasury and local government. There is the concern, particularly if it is given borrowing powers, that that increases, in a sort of national account sense, the borrowing and debt of the Government of the time. If you have the sorts of fiscal rules that we have at the moment, that operates against them. There is a real sense of that desire to have control, fundamentally.
Q6 Lord Burns: You set out the different levels there could be in terms of fiscal devolution. Which is the level you would support? Would it be the same level throughout the country, or is there really a big difference between the city regions and other regions?
It seems to me that, if one is going to discuss what are the right things to devolve, one needs to have some agreement about the level at which it is going to be. For example, the requirements for a local transport system are very different from the requirements for, say, social care, in terms of the size of the devolved entity.
Paul Johnson: I do not have a fixed view on that question. Part of the answer has to be that we should work with what we have. What would be a disaster, frankly, would be to throw everything right back up in the air again and say, “Manchester is the wrong level”, or, “The West Midlands is the wrong level”. This is avoiding the question to some extent, but we need to work with what we have.
Bluntly, if I was starting with a completely fresh set of choices, I reckon something like the nine standard regions might work better, in that you have more capacity among bigger areas. You have areas that are substantial enough to be more confident that you could build the sorts of capacity that you need. The downside is that there is not any kind of great democratic legitimacy to the south-west, East Anglia or what have you, and it would be quite difficult to rebuild that. As ever, there are pros and cons, but we should probably work with where we are.
The Chair: It is interesting you raised Manchester there. I wonder why that is topical. It is an interesting example.
Paul Johnson: I cannot imagine. I have just been there; that must be what it is.
The Chair: It must be that.
Q7 Lord Prentis of Leeds: My question is about fiscal devolution and regional equality. Already, in talking about the subject this afternoon, you have referred to the consensus that fiscal devolution could improve democracy. You mentioned that it is indicative that it could bring about regional growth, but there seems to be less consensus that it can bring about regional equality. To what extent do you believe that fiscal devolution can promote regional equality?
Paul Johnson: It really matters how you do it. Clearly, if you were to assign significant taxes or give power over significant taxes without really big equalisation, you would move very quickly against regional equality. It was in the press just recently that three or four boroughs in London raised more in stamp duty than Scotland and Wales combined. You could take any other sort of example like that. There are very different levels of tax revenues in different parts of the country. If you moved towards devolution in a way that undid significant parts of the equalisation that occurs across the country at the moment, you would, arithmetically and immediately, create greater regional inequality, so you would absolutely need to be careful about how you do it.
There is also the risk, as I was referring to under a tax assignment system, that, if this is done on a revenue-neutral basis in some sense and one area does better than others, once you start doing well, you get more money and spiral upwards and other people spiral downwards. Again, you need to be very careful about the way you do that.
All that said, I am pretty clear that the international evidence is that, when you have more genuine control in regions, you do not get quite the huge level of regional inequality we have at the moment. England, on many measures, is one of the most regionally unequal countries. That is at least correlated with the lack of fiscal devolution that we have to subnational areas.
I cannot prove it, but my sense is that the broad swathe of the evidence is that, if you carefully move towards more devolution and give these local areas real incentives and powers to do more to promote economic growth in their regions, over time—and we are talking probably a decade or a generation, rather than a year—you can move towards greater regional equalisation or a greater regional equity. That really matters. That point about timing really matters.
The inequalities that we have at the moment are very long-lasting. They are rooted in our economic history as well as in our political history. If you are going to follow a “levelling-up” agenda, you need to do that consistently over a very long period. That needs, in my view, to involve both force from the centre, in terms of providing frameworks and money, but also significantly more powers in regions to take their own future into their own hands. I have gone off there where I think the evidence is certain, but I think I am still in the area where the evidence is pushing fairly strongly in that direction.
Lord Prentis of Leeds: If local areas are given greater revenue-raising powers, are there mechanisms that could be put in place between areas to ensure greater equality?
Paul Johnson: Yes, absolutely. In a sense, that is how the local government finance system works at the moment. Those areas that raise a large amount from council tax get less in the way of central grants than those that do not raise very much from council tax.
For example, you could devolve some aspect of stamp duty. I am not suggesting this; this is just an example. You have very different amounts that are raised in particular areas. You would not start from saying that Westminster could keep all of the stamp duty raised in Westminster, but you might look at some measure of how things change over time, or you might look at some measure of stamp duty on new-build properties which gives you exactly the kinds of incentives you want and that would reduce these equalisation issues. You could, in addition, layer on top of that an equalisation mechanism that said that Westminster would only get a fraction of what it achieves, because we know that new-build properties in Westminster are going to be worth an awful lot more than new-build properties in most of the rest of the country.
At one level, it is technically straightforward to build in these mechanisms to create an equalisation. In practice, it is inevitably a difficult choice, because there are always choices about how you do it. The way that you do it will have an impact on exactly who gets how much and where the incentives lie. I am not worried about the possibility of doing it, but it is very right to draw attention to the practical and political difficulty and the trade-offs involved in doing it.
Lord Prentis of Leeds: It is at the back of my mind that, for many years, people have talked about public services and postcode lotteries, when, in reality, it is different regions taking different decisions, or different parts of a public service.
Paul Johnson: I hate that term, “postcode lottery”, but you are absolutely right. It is very much in the English psyche to talk about it. It is a barrier to real devolution and one reason why central government is always tempted to intervene when it looks like something is less good in one area than another.
We talk about postcode lotteries even now, where we have really substantial central control. Some local health areas may have access to slightly different treatments than others, and that is called a postcode lottery. You will find that people have to wait a different amount of time for jury trials, or whatever, in different parts of the country. I have not heard that referred to in that way, but it certainly could be. How well you are treated through social care, despite the legal constraints, differs from place to place. You certainly get a different quality of schools according to where you live.
We would simply have to get used to the idea that there is variation among these things. You might think that genuinely having more power devolved to local level, which would give people more control—or at least the sense of more control through local democracy—might make people feel a little more comfortable with this. What they feel occasionally at the moment is, “It is less good here than it is over there, and actually I have no say over it being less good here than it is over there”.
Q8 Baroness Wolf of Dulwich: People rightly worry about equalisation with devolution, but there is one argument that you touched on but did not quite make a lot of, which is that it is generally likely to be better to have 50 people, or 50 groups of people, thinking about how to address a problem than one group. If you look at countries that are highly federal, such as Canada or the United States, you can see major differences over time in how different states have approached things.
My question is whether, if we look at history, there is evidence that in that situation other areas learn from it. Do you actually create a different culture in terms of states talking to other states or mayors talking to other mayors? Is that something that happens, or is that wishful thinking?
Paul Johnson: That is an interesting question. You are absolutely right to raise it. As a social scientist who would love to analyse these things happening differently place by place, it would be wonderful to have that kind of experimentation within England.
Looking at the experience within the United Kingdom, there certainly is some work that has looked, as you all know better than me, at the differences between outcomes in the Welsh, Scottish and English education systems, which reflect different policies. We certainly know things as a result of that. I hope that the various Governments are learning something from it. There is certainly lots of analysis looking at the different experiences in US states. I am afraid I am not qualified to tell you how much difference that makes to behaviour in different states. I am afraid I do not know the answer to that.
Q9 Lord Reid of Cardowan: I am interested in your earlier comments in response to Lord Prentis’s question. If I understood you correctly, you believe that further devolution will promote more regional equality. I am questioning that in my own mind, because surely there has been an element of regional inequality that has resulted from the maldistribution of funds from the central Government. I think, for instance, of health, where, bizarrely, for decades, more money was going to the most affluent areas with lesser health needs than was going to the areas of most need. That was a decision of central government.
Therefore, unless I am getting this wrong, at least one of the three elements that would foster the inputs to growth and progress in any particular area will be dependent upon grants from central government, in effect. Of course they can borrow and develop their own local tax, depending on the policies. I am wondering to what extent the history, until relatively recently, of what I would call maldistribution of sources from the centre to areas in the regions, or in any devolved entity, might also overcome any progress that would be achieved by devolution itself to those regions. I hope it is clear what I am asking.
Paul Johnson: There are two elements of that. The way in which central government funds have been distributed and how that relates to need has changed, and it has changed very substantially over time. If you look over a long period of time, you find money being more focused on poorer areas, poorer schools and poorer areas of health than it was some considerable time ago.
If you look at spending on local authority grants, you certainly see over the 2010s that that was reduced for poorer metropolitan areas more than it was for better-off areas, and that is being somewhat reversed at the moment. If you look at spending on schools, you saw a period through the 2000s that was focusing more on poorer schools, which was somewhat reversed from the mid-2010s onward. You see these different trends over different periods, and different focuses of different Governments in how redistributive they choose to be. That is a choice that any central Government are always going to have.
In terms of the impact of devolution on equity, as I was saying, there are obviously lots of issues around how the local tax system works and how equalisation of the taxes works and so on. When I am talking about a long-term possibility, at least, that it would result in lower inequality between regions, it is about the extent to which that might result in better economic outcomes in areas that have devolved powers, and in particular if they have more economic powers—the kind of powers the mayoral combined authorities are beginning to get, more powers on the infrastructure side and better incentives, particularly if you are assigning revenues or giving them incentives that are built around local revenues.
Those are the sorts of things that, over time—I am not talking about over a Parliament, but over a protracted period of time—could create the context in which regional inequality can begin to diminish. My comments about that were much less about the allocation of public service resources and much more about what might happen to economic growth, GDP per capita and so on, region by region.
Q10 Lord Carrington of Fulham: I am interested as to why everybody is interested in devolution, because presumably devolution is to reduce the power of the centre to control what is going on in whatever the local region is—the borough, the city or whatever. In other words, it is to allow them to do what they want to do, without central control to stop them doing what the centre does not want them to do. So you have to replace it with something that is going to make the local accountable. The obvious way of doing that is through the ballot box in some form, particularly to encourage people to take their local authorities more seriously—and, indeed, for local businesses to take their local authority more seriously. That is one reason, I suppose, why the natural corollary of devolution is to give greater tax-raising power.
If you are going to give them greater tax-raising power to be able to raise the revenue that they need to spend locally, putting to one side at the moment all the equalisation problems and everything else, you have to, somehow or other, decide how much of their budget they are going to raise in taxation. Do we have any idea at all as to what level of local taxation, which is spent locally, would have to be raised locally to increase the feeling among the electorate, or indeed the central Government, that that local authority was actually in control, as opposed to being a devolved body that just spends money on behalf of the centre and therefore, if it gets into a mess, blames the centre for the fact that it did not have enough money?
Paul Johnson: I agree with the premise of your question—that is very much what I was trying to set out to begin with. If you do not have that local accountability, this whole thing is going to struggle to fly. At one level, you could be asking a question about the Scottish and Welsh Governments, which have something of an inclination to blame the fact that they are still dependent for significant chunk of their revenue on decisions made in Whitehall, even though they have considerable control over spending and, in the Scottish case, really quite considerable control over taxes.
Again, this relates to democratic accountability. The Scottish and Welsh Parliament and Assembly are now fairly well understood; they are fairly clearly separate from Whitehall. My sense is that people are broadly voting on the issues in those two countries. We are a long way away from that in most of England, which is why we would need—and I agree with the premise of your question—to build these things together. Arguably, we are beginning to move in that direction with some of the combined authorities, and we may have got some considerable way in terms of moving in that direction with the combined authorities.
Whenever you have these subnational units, you always have a risk that, if things are going well, local politicians will say it is down to them and, if things are going badly, it is the fault of the people in Whitehall. The people in Whitehall will say that, when things are going well, it is down to them and if it is going badly it is down to the things happening in the global economy. That is just what happens, and I do not think that anyone is ever going to be able to stop that.
I do not have a sensible answer to your question about what fraction of tax revenues would need to be raised locally. In some areas at the moment, a very high fraction is coming from council tax plus business rates. I am not aware that that has had any great impact, relative to the position 20 years ago, when a much smaller fraction overall was raised from council tax. I suspect that it is less to do with the quantity that is raised. It is also, I think, to do with the sense of capacity to make changes, as well as the amount that is actually raised locally.
Lord Carrington of Fulham: Just to expand this a little to the borrowing powers of whatever body we are talking about, if they are going to have borrowing powers, presumably we are talking about control coming from the lenders who are going to provide the money to these local authorities. In other words, in the current fashionable jargon, it would be the bond markets—although actually, it would not be the bond markets, but it would be the lenders to the local authorities. As you said, they have to have a cashflow stream to be able to service the debt, to be able to borrow.
What has happened historically? I am thinking of my own personal experience when I was a Member of Parliament. Hammersmith and Fulham managed to get itself into a terrible mess on the money markets, and the lenders to Hammersmith and Fulham were absolutely convinced that they had an implied government guarantee. That, I think you would find, would be true today of most lenders on local authority debt: they would assume there was an implied guarantee. If we are going to give devolution, we presumably have to move away from an implied government guarantee on local authority debt. Is that realistic?
Paul Johnson: Again, I agree. I entirely follow the logic of what you are saying. That is one of the risks; it is clearly one of the issues that would need to be overcome in order to get to some reasonable outcome. One of your colleagues asked earlier why it is that central government is so reluctant to give up these sorts of controls. You have answered the question, to some extent, which is that there is always the sense that central government is on the hook when something goes wrong, whether in the provision of public services or when a council goes bust, and in particular when it comes to paying back debts in the way that you are describing. I agree with the problem. It is clearly one that would need to be overcome, if we were going to do this in an effective way. I do not have the answer.
Lord Carrington of Fulham: I hope we can get one, perhaps, with this inquiry.
Q11 Baroness Penn: To return to the question of local taxation, you referred to the lack of capacity of local areas to make changes to local taxation. There is a wider discussion of the well-known flaws with our main forms of local taxation of council tax and business rates. Do you think that reform of local taxation is a prerequisite to successful fiscal devolution, or could you pursue different forms of fiscal devolution without looking at reform of local taxation?
Paul Johnson: Reform of local taxation would certainly be something that I would be very much in favour of. It would be good, for all sorts of reasons. I will not rehearse the problems with council tax, which is regressive, based on 35-year-old values and massively inequitable across the country. That would be a good place to start in terms of ensuring a sense of equity, if you were to go down a substantive route of devolution.
All that said, I do not think that it is actually a prerequisite. If you were going to either assign or give power over other tax streams to combined authorities, you could certainly do that in the context of the local tax system that we have. You could leave council tax exactly as it is and devolve some aspects of other taxes, or allow some other taxes to be raised, although it would be a better world if you changed council tax. It is worth saying in that context that, as I understand it, the high value council tax surcharge, as I think it is called, is in effect a national tax layered on top of the local tax. That is not a not particularly good signal of where things might be going.
The other aspect of quasi-local taxation, although local authorities have very little control over it, is business rates. The business rates retention scheme has at least allowed some element of some of the incentives that we are talking about to feature in local decision-making. We are seeing that, because of exactly these concerns about equalisation, in some of those areas that have benefited for a period—it is now being brought back and started again, which limits the disequalisation but also limits the incentivisation that is there. It gives you at least a model for how you might develop that, whether it is using business rates or some other tax to provide the kinds of incentives that you would like.
Baroness Penn: To follow up on that, you have said that you could do fiscal devolution without reform. Your views on council tax and its need for reform are well known. It would be good to get your views, in the context of the aims or purposes of fiscal devolution that you set out at the start, whether it is about more local accountability, more responsive service provision or local economic growth. If you were looking at the question of fiscal devolution, would reform of local taxation would be higher in your priority, lower in your priority or your starting point, or would you leave it be? You might accept all the political reasons why these have not been reformed, even though there is a good economic case, and look elsewhere. On a slightly different point, could devolving control over some of that local taxation be a successful route to reforming it, given that it has not been reformed by central government?
Paul Johnson: That is interesting. I had not until now, oddly enough, put the two questions together in my mind. In one sense, if you try to do all of this together, you might create additional problems. If you were to move to what I think would be a sensible way of structuring council tax, such that it was based on current values and proportional to the value of the property, you would raise an awful lot more council tax than you are at the moment in London and the south-east and an awful lot less in other regions. That would be an immediate impact, so you would need to put more equalisation into the system. If you were to do that at exactly the same time as you were devolving other powers, it might be difficult to disentangle in people’s minds the impact of the two things. It might be something you would want to do together, or not—I have not thought through the political economy of that. I will mull that over in the back of my mind for a minute.
On the question of giving local areas more control over the structure of their council tax, that comes in the context of whether they should be allowed more control over tax rates, and so on. You would have thought this would be the obvious place to go, in a sense. Why not allow Westminster to charge more on very expensive properties, or why not allow Hartlepool to reduce what it charges on its band A and B properties and make up that money somewhere else? You can probably tell that I am thinking slightly off the top of my head, but that seems to me the sort of thing you would think was reasonably within the remit of a democratically accountable local authority—as long as we have that sort of democratic accountability, which, as we have talked about, at the moment we may somewhat lack. You would then potentially end up with tax competition between neighbouring authorities, with people moving from authority A to authority B because they have significantly different council tax rates. That is something that you see in other devolved countries, but it also has some cost, in the sense that it creates an inefficiency.
Lord Young of Cookham: I have a quick follow-up to an answer you gave to Baroness Penn. When you talked about reforming local taxation, one option you said was to allow some other taxes to be raised. Can I press you a little bit on that? Which other taxes did you have in mind?
Paul Johnson: At one level, there is an infinite number. The sorts of taxes that people have talked about are tourist taxes. I do not have a strong view one way or the other as to whether they are a good idea, but they are the sorts of things that you could do. Clearly, they are much more beneficial to some areas than to other areas, and they would be the ones that are making the case for it. You could allow additional property taxes. Local congestion charging is one that some places make use of.
Lord Young of Cookham: What about vehicle excise duty?
Paul Johnson: Potentially, but in my understanding it is quite hard to do that from a practical point of view—but yes, you could. Do not quote me, although I am being quoted on this, because it is public. I am not sure, but I cannot see why you could not do vehicle excise duty as one possibility, but there may be reasons.
Q12 Baroness Wheatcroft: You talked earlier about the English psyche and how it reacts to things like “postcode lottery”. I would rather like to look at how the English psyche might react to the sort of devolution that we are talking about. There is a view that the English pride themselves on the differences between different areas, but only when the services they get are at least the same, and clearly that does not work. I wonder whether incremental change is just going to enable England to pussyfoot, the way it tends to, and prevaricate, and nothing really dramatic will happen. There does not appear to be a huge appetite for devolution among the electorate, maybe with one or two mayoral exceptions.
Paul Johnson: I possibly should not have used the term “English psyche”. I am not sure I want to be quizzed on the English psyche. It depends on what one is thinking about devolution for. Certainly, in my mind, I am thinking about it most often in the context of what we do to get economic growth doing better, and how to get it more equal across the country. Clearly, some method of devolution cannot be the only answer to that. We are talking about devolution at the moment, but clearly a whole range of other things need to be got right on fiscal policy, regulation, infrastructure investment and a whole series of things.
It strikes me that, if you are going to sell devolution, it needs to be sold as part of a package that is about how to make the country a better place over the next 10 to 20 years and includes a whole series of other elements. This is probably not the appropriate moment to go through my bucket list of things I would like to see done. All this requires—and this is the biggest political challenge—a consistent view of how to do this over time and an honest setting out of the trade-offs. Devolution is one part of that package. You are probably right that, if you were to go to the electorate and say, “We have one thing to offer you and it is devolution. It is going to do all these wonderful things”, it would rightly be considered that that was not going to be the answer.
Baroness Wheatcroft: The other side of that is that, if it is not done as a big-bang type offering and you are trying to persuade people to accept that there will be benefits in 10 to 20 years or longer, is that actually going to happen in a country where we are so far behind most others in the amount of devolution, with both the spending and tax-raising that goes on locally, or do we have to be a bit braver?
Paul Johnson: That is a good question. We started off with a question about the recent Act, and that has moved things on a little bit. What Rachel Reeves said in the Mais Lecture appeared to move things rather more, although I think there has been a little bit of rowing back on that on the fiscal side.
It takes time, inevitably, to build up the local institutions, knowledge, capacity and so on, so I do not think that the answer is that we change everything tomorrow. This is going to sound like having my cake and eating it, but I think the answer is that we are not going to have full fiscal devolution tomorrow, but it might be that we set a date in 10 years’ time, where we will be in a very different position to where we are today, and set out a plan as to how to get there, with the appropriate structures, institutions, capacity and so on.
That is a big bang in the sense of setting out, “Here is an Act that says that this is where we want to be in 10 years’ time, with all these additional powers with the combined authorities”—or wherever we want them to be—“and here is a route to getting them”. That is not big change tomorrow, but it is being very clear about where the end of this journey is. That is what is, frankly, lacking from any of the Acts and political statements and so on at the moment. There is no sense of end point.
Baroness Wheatcroft: To push on one final point, do you think that that 10-year goal, for instance, will require both fiscal and planning devolution, so devolution on both fronts, spending and raising money, to go in tandem?
Paul Johnson: I think so. I think it is quite hard to make the case that this will be the big change that could have the capacity to really change people’s lives, if you do not have more power on the tax side as well. That would be my view, yes.
Q13 Lord Newby: I wanted to move on to the worked examples we already have of major devolution in Scotland and Wales, although I do not think that anybody, other than Gordon Brown, who proposed that English cities should have legislative powers in his devolution report, is suggesting that we have that degree of devolution within England. I wondered what lessons we could learn from Scotland and Wales, particularly going back to the three potential benefits you mentioned right at the start of going down this route.
First, there is the local accountability point. Clearly, with having just had the elections for the Scottish and Welsh Parliaments, there is a degree of accountability, although Whitehall still gets blamed for things that go wrong. Secondly, how far do you think that local knowledge has led to better policy implementation in Scotland and Wales? That was the second plank, I think, of your argument. Thirdly, on economic growth, which was the third leg of your argument, to what extent do you think there is any evidence that devolution in Scotland and Wales has assisted in increasing economic growth in Scotland and Wales?
Paul Johnson: I will start almost with a prior question. One thing it has shown us is that this is possible. We know that it is possible to devolve income tax rates and thresholds and so on. We know that it is possible to devolve other elements of taxation. We know that it is possible to devolve substantial bits of spending that previously have not been. We have at least learned that and that is genuinely important.
In terms of your questions, on the accountability, as you know, it was never expected that one would end up with a single party in power for so long in Scotland. That is down to specific issues around Scottish independence and the relationship with the rest of the UK, which is probably going to be rather different in mayoral authorities or English regions. I would not argue—and I think this is where your question was leading—that these have been significantly more effective from an economic point of view than what we have seen in England. I do not have the figures to hand, but certainly there was a period of time where growth in Scotland was even less than growth in the rest of the UK, which is one of the reasons why it has gained less from its higher income tax rates than it otherwise would have done.
To go back to this point about accountability, there is always that easy argument for, “It’s not our fault. It’s the fault of the fact that we are not getting the money that we want from elsewhere”. There are not strong arguments from what we have seen there that say, “Look, suddenly the Welsh economy and the Scottish economy have grown much faster than in the rest of the UK”. That clearly has not happened. Rather, I am afraid, as we have seen here, we have seen some pretty significant policy mistakes. You cannot look at that and think, “Yes, there is the answer. That is a proof of the concept in terms of its impact on growth”. Sorry, was there a third question?
Lord Newby: The other question was about policy experimentation and the extent to which, because the people taking decisions on health, education, transport or whatever, are more local than the people in Whitehall, the quality, in some sense, of the decision-making improves because they are doing it more in line with local factors.
Paul Johnson: Again, I can think of a number of counterexamples. We know that particularly the Welsh, but also the Scottish, education system has been underperforming the one in England, which may be related to different policy decisions. That is an interesting example of where different parts of the United Kingdom can learn from one another.
Beyond that, you have someone, David Phillips, in the room, who is much more expert on the details of everything that has happened in the different countries. But no, I do not have a long list of examples where they have made a much better job of it than they otherwise would have done, but I am sure that there are some examples.
Lord Newby: I am particularly struck on the economic development side, because Scotland has an economic development agency, for example, with a budget. The bit of the regional economy that I know best is in Yorkshire, where we have none of this, and no infrastructure for co-ordination at all. I have argued in favour of such a thing. What worries me slightly is that my argument is not helped by the fact that, if you look at Scotland, which does have such a thing, the overall progress of the Scottish economy is not noticeably that much better as a result. Is this because longer‑term underlying factors affect the Scottish economy, which means that even its relatively poor performance is less poor than it might otherwise have been?
Paul Johnson: That is a difficult counterfactual. The decline of North Sea oil over time has clearly had a negative effect, particularly around Aberdeen and those elements of Scotland. There are long-term issues that the west coast of Scotland and Glasgow face in terms of health, which are different from those in similar cities in the rest of the UK.
Your comparison with Yorkshire is interesting. Yorkshire is the same size as Scotland in terms of its population. It is rather similar; it has a number of fairly substantial cities within it, and a significant rural area. But it has not had at any point, over a protracted period of time, the kinds of powers that Scotland has had. The fact that Scotland has not roared ahead does not seem to me to be a very strong argument for not giving Yorkshire the same kind of chance that Scotland has had.
Q14 Lord Reid of Cardowan: I want to follow up exactly on Lord Newby’s points. First, I should declare an interest, or maybe it is a mea culpa. I was a very early proponent of devolution, along with Gordon Brown and others who have been mentioned. I am still a supporter of it, but I have to say, on all three of the criteria and objectives that you laid down before, anyone who is looking at the experience of Scotland over the last 25 years would find it difficult to use it as evidence for a strong case for devolution.
In terms of the first, economic growth, it is not that it has not soared ahead—it has fallen behind. There may be external reasons for that, but the reality is that, if your objective was for the dynamism of Scotland to be released to go ahead of England, it has not done it. It has ended up with a worse economic performance over 25 years.
On the second one, that it would somehow be more sensitive to Scottish cultural and political dimensions, I cannot think of anything that the Scottish Government have done, apart from on land ownership, in 25 years that would fit that description. They certainly have taken a different view; they have spent money, largely money they do not have, on free prescriptions, free university places, free social care and so on, but the result for that has not been better services. Like the economy, the services have gone backward. The much-vaunted Scottish education system, which I was very proud of, is now falling down international leagues, not just in comparison with England. Then there is the NHS. You mentioned the west of Scotland. The NHS is much less efficient and effective.
Thirdly, I question the whole basis of the assumption of local accountability. There is no doubt in my mind that a major factor in the voting patterns in Scotland has been the UK Government. When there is an unpopular Government, such as the Conservatives, or indeed the present Labour Government, it reinforces and helps to explain why the SNP has been in power for so long. I am not complaining about that—it is just a reality of life—but it brings into question the idea that somehow the local government of whatever entity of devolution it is will be held accountable by local people for its performance. On the basis of performance, the SNP would not be there, quite frankly. I am not saying that parti pris—the evidence is there. The fact is that the perceived failure of UK Governments has been reacted to in exactly the same way as you suggested it might be in local elections—that is an element: “Even though the potholes are not being filled, we are going to vote to get rid of this Government”.
I am not against devolution, but I am saying the evidence of the one big example that we have of devolution practice does not fill me with confidence that we can go ahead on those assumptions. That is being a devil’s advocate. You may disagree with all three.
Paul Johnson: No, I do not disagree with any of that. That is a pretty clear description of what has happened. No one can make the argument that the Scottish economy has done better than the English economy or that Scottish public services have done better than English public services over this period. You will know more about the politics than I do. Part of this is that, if people want to vote for things that do not work, that, at one level, is how democracy works. I am not going to push back against any of that as a description of what has happened in Scotland.
Q15 Baroness Wolf of Dulwich: Northern Ireland is of course very much a special case in all sorts of ways. As we mentioned at the beginning, you chaired the independent commission in Northern Ireland looking at fiscal devolution. That is now a few years ago. The commission made a few quite specific recommendations, but also had a number of principles about how one should think about it. Could you summarise a little bit, in retrospect, how far your deliberations there, obviously in a very specific political context, carry over to what you have said about fiscal devolution more generally in this witness session?
Paul Johnson: It was an interesting exercise. I went into it with a pretty open mind about what might work and be feasible and sensible. If I learned one thing from the whole process, it was that I ended up convinced that significant additional tax powers were perfectly feasible—whether right or wrong, they were perfectly feasible. There are some taxes that were not feasible. VAT would be very difficult to devolve. Income tax, actually, is not that hard. A lot of smaller taxes, whether it is landfill levy, stamp duty or even inheritance tax, are not too difficult to do. One lesson from it is that it is something that is undoubtedly feasible.
As you say, the Northern Ireland context is very specific. On one level, given that, as I recall, we were doing some of the work when the Executive was disbanded, it felt a little bit like a slightly strange moment, because you have a set of politics that makes it very difficult to achieve. We got two sets of very different input from different parts of particularly the business and political community. There was one set of people whose view was, “This Executive are not working as it is. You must be mad if you want to give them more control over taxes”. There was an equal and opposite view, which was that the only way we are going to get these people to grow up and do it seriously was if they actually have real control over their budgets, rather than merely continually going and begging to Whitehall and having no capacity to do anything for themselves. You decide where you sit on those—they both seem to be plausible descriptions of what was going on.
Where we ended up was that, if you wanted to do anything substantive, we know from the lesson of Scotland, and to a lesser extent Wales, that it is perfectly feasible to devolve aspects of income tax. That could make a significant difference to the amount of revenue that is raised and provide greater local transparency on some of the decisions.
We inevitably looked at corporation tax as part of this, which we have not talked about at all so far. We looked at corporation tax because there was a period in the early to mid-2010s when there was a very big effort in Northern Ireland to get corporation tax rates devolved, because, of course, corporation tax rates in the Republic of Ireland are much lower than they are in the UK. Businesses in Northern Ireland and the Government in Northern Ireland felt they could not compete effectively with the republic. This even got to the point of being in a Bill—I cannot remember exactly where it got in Westminster, but this got taken down quite a significant route back in about 2014 or 2015, from memory. It foundered on the then Chancellor’s view that you want this control over corporation tax because you want to cut corporation tax. If you are going to cut corporation tax, the year 1 impact will be a significant reduction in your budget. If you have a significant reduction in your budget because you have cut one of your taxes, you have to find the money yourself—and that just clashed. I should say that this was prior to the review that we did. They were not up for doing that, so that is obviously one of the constraints on what is feasible.
I came out with a much clearer view that these sorts of things would be feasible. I really ought to stress this. Northern Ireland is a very small economy. From memory, it has something like 1.5 million people. It has pretty low GDP per head, but what it has that regions of England and, to some extent, the combined authorities do not have, is that the people living there are a recognisable unit, although obviously divided in other ways.
Baroness Wolf of Dulwich: Can I push you a bit on this? You say you came out feeling that it was feasible, and I would like to follow through a bit on which taxes you thought were the primary candidates. Reading the report, it feels a bit more positive than that. It feels as though you came down, if not on the side of, “This will make them grow up”, on the side of, “This is potentially, on the balance of probabilities, a good thing”. Is that fair?
Paul Johnson: Yes, that is fair, but I just wanted to stress the feasibility. I went in at best neutral about the feasibility. Also, in terms of the genuine devolution and, therefore, control over your future economic capacity that you would have, I came out thinking that this, certainly on the balance of probabilities, was something that was worth doing.
Baroness Wolf of Dulwich: Could you summarise what principles made you feel that, with this tax, for example, you could do that? How did you put things in order of being not merely feasible but easily doable? What were the principles?
Paul Johnson: Goodness me. You have almost certainly read this more recently than I have.
Baroness Wolf of Dulwich: I have read only the summary.
Paul Johnson: You have even read the summary more recently than I have. From memory, it has to be a tax that is clearly defined as raised within the borders that you are talking about. That is why, for example, VAT is extremely difficult to do; the structure of VAT makes it very difficult. Indeed, Scotland was supposed, at some point, to have VAT revenues assigned to it, and that has foundered on the structural difficulties of achieving that. It needs to be clear where the revenue is raised.
There are other elements, such as stamp duty, and probably inheritance tax, vehicle excise duty, and a range of taxes that are geographically clear. There are two sorts of taxes—there are taxes that are big enough to make a real difference, and taxes that are much smaller. Income tax is one that is both clear in terms of where it is raised and big enough to make a real difference.
What is interesting about Scotland and Northern Ireland is that the border issue is less of an issue than it might be between one mayoral authority and another right next door to it, because there is not a huge amount of economic activity around the Scottish-English border, and clearly there is a very clear border around Northern Ireland, which made that perhaps easier than it would be for other taxes.
It needs to be relatively straightforward administratively to collect, although HMRC, if it was done through income tax, would continue to play a significant role in that. We talked to people in Wales and Scotland who said reforming and doing a different method of stamp duty land tax was something that they were able to do relatively straightforwardly, for example.
Then you have the question about the extent to which this can lead to tax competition with other parts of the country. The argument for corporation tax devolution is that it could allow more effective competition with the republic, but do you want one part of the UK to be competing with another part of the UK through corporation tax rates? The answer could be yes, because you want to attract businesses to those areas that are most in need of greater economic growth, but then you have to think very carefully about, as I was saying at the beginning, how the equalisation would work.
The other thing that we were very focused on is how much risk Northern Ireland is willing to take, and how you respond if things go horribly wrong and how you tax them if things go incredibly well.
Baroness Wolf of Dulwich: I have one final question that is related to what you have just raised. Were there any clear lessons there in terms of equalisation, either via the block grant adjustments or anything else that came out of thinking about this?
Paul Johnson: Clearly, you need to start with agreed block grant adjustments. If you devolve a certain amount of income tax, you take that away from the central allocation, then you need to have a view about how that develops over time. You almost certainly need some borrowing powers, just to allow for unexpected variations in how those things change. You probably need a backstop, if things go horribly wrong. At that point, in a sense, you stop being punished for your own foolishness or your own inability for things to grow.
You need the right basis on which to make the comparison with the rest of the UK. If you are thinking of income tax, for example, and the economy is growing at a certain amount, it is possible that income tax revenues in the rest of the UK will be growing faster than those in Northern Ireland, because there are not very many top-rate income taxpayers in Northern Ireland. As more are pushed into that in the rest of the UK, or if people right at the top suddenly start paying a lot more income tax, should you punish Northern Ireland for the fact that it may have the same economic growth rate but it is getting less from its income tax?
Some of that is really quite technically involved to get right, and there are quite significant debates already between the Treasury and Scotland over some of these particularly difficult issues.
Q16 Lord Burns: If we look at Scotland, Wales, Northern Ireland and other advanced countries that have more fiscal devolution than we do, how is that freedom exercised typically? Is there any pattern to it? Is there anything that one can learn from how it is that local authorities would do things differently to the way that they do them today in terms of allocation and the priorities that they make? I can see some pattern and similarities between what has happened in Wales and Scotland in terms of things such as free prescription charges, et cetera, but are there any wider lessons to be learned about how people exercise the discretion?
Paul Johnson: We did look at that, and I cannot remember the answer to it in terms of looking at it more broadly. Rather than making up an answer, I would probably best say that I did know once but have now forgotten. I am sorry.
Q17 The Chair: We will look at your report for that. Thank you. Paul, we have ranged really far and wide. Thank you so much for your time. I have one final question for you. If you had to suggest one or two things that you would like to see us say in our final report, what would they be?
Paul Johnson: There is a very high-level point, which is that we need clarity about long-term landing points, as I was saying to one of your colleagues earlier. It is possible to be radical about where we are going, as long as we are clear about it and there is a point at which we want to get to it.
The second thing I would say is that there is a strong case for more devolution of tax-raising powers, and that an obvious place to look, if you want to do something really substantive, is within the income tax system, but there are other places that you could look to do that. That is not to say that you have to do this for there to be more devolution on the spending side, but we should leave the door wide open on more devolution on the tax side.
I have heard, and I understand and agree with a lot of the concerns that people have raised—and I would be really interested to see what your future interviewees say about this—that that somehow needs to be combined with a better way of having that local transparency and accountability, which we are a long way from at the moment. But we are a long way from it because we have always been a long way from it, and you need to build the accountability with the powers. I accept that that has been a struggle in Scotland and elsewhere but, if we do not start to grasp the nettle, we are never going to move towards greater devolution and, therefore, in my view, in the very long run, greater equality of economic performance.
The Chair: Thank you again very much, Paul. We are very grateful for your time and, with that, I can declare this meeting is over.
