Sunday, 24 January 2016

When is a bonus not a bonus?

Let's begin with where I stand. I have long been in support of Scotland moving towards something close to full fiscal autonomy. I think Holyrood should be almost entirely responsible for raising what it spends. I've said repeatedly that I don't think the UK parties have been ambitious enough in their promises of further powers. Though the Smith Commission comes fairly close. I think there's room to devolve corporation tax, and I would probably devolve national insurance.

I hate the Barnett formula. It is crude, has backed the debate about Scottish finance into a corner, and does nothing to incentivise accountable spending either at Westminster or Holyrood. The biggest error the UK Government made was to lay-out the "no detriment" principle, which basically stops them from replacing Barnett with a better method of resource distribution because it will always be the case that at least one nation is worse off in the short-term while a new system beds-in. I would scrap the Barnett fomula, in favour of a needs-based approach, like several of the Welsh reports on devolution have recommended. This would probably leave Scotland, in the short-term, slightly worse off, but it would be fairer, more accountable, and leave devolved administrations less at the whims of the macroeconomic policies of UK Chancellors.

The Partial Truth

One of the biggest myths perpetuated in the referendum, in which, remember, I voted Yes, was the notion that revenues from oil and gas would be a "bonus", not the "basis" for an independent Scotland's economy. When making this claim, the SNP would typically concern themselves with the GDP of Scotland: the overall economic output. It is true that, by a number of measures, Scotland's GDP per capita is a bit higher than the UK's as a whole. The Scottish Government released figures in March 2013 suggesting that, if you included North Sea oil in the statistics for 2011, the Scottish GDP per capita was higher by just under $4000 US at purchasing power parity than the UK as a whole. There was similarly much fanfare from the SNP that the level of Scottish GDP would be about the same as the UK as a whole if you did not include offshore activities.

GDP per capita is, however, only an indicative measure of the size of an economy. It does not reflect how much taxation can effectively be collected from that economy, and it does not in and of itself, give an indication what levels of public spending can be sustained in that country as a consequence. It may give a rough indication, but it does not answer the question. It does not even give a particularly good indication of the standards of living in a country, as it says nothing about the distribution of the economic output. It is blind, for instance, to income inequality and to the distribution of profits to those living in other countries, or to companies from other countries which may operate or own generators of economic activity based in Scotland.

The Myth

This broader macroeconomic situation was combined with a particular set of statistics that are collected annually by the Scottish Government and published in March 2013 for the year 2011-12. Some of you will remember the stats that gave rise to the famous #indyref meme about Scotland raising 9.9% of UK taxes, but only accounting for 9.3% of UK spending. The effect of this was that Scotland ran a net fiscal deficit that year of only 5% of GDP, compared to 7.9% of GDP for the UK as a whole. The current account deficits (which excludes the impact of capital investment) were 2.3%  of GDP compared to 6% of GDP respectively.

"Hurrah!" They shouted. "Scotland can do better on its own without the UK holding us back!"

If you were only to look at the year 2011-12, this might be a perfectly understandable conclusion to reach. There's a problem though. That year was hugely atypical. It is the only year of the last 5 when Scotland's position has been better than the UK's as a whole. In only 3 of the 15 years of GERS data since devolution has Scotland run a "relative surplus" to the rest of the UK. Those three years, 2005-06, 2008-09 and 2011-12, were the years in which north sea oil revenue was at its highest.

If you were to exclude the oil revenue from Scotland's contribution, the "relative deficit" (i.e. the extent to which Scotland was a net recipient rather than a net contributor from the UK Exchequer) has varied between £1400 per head and £2000 per head since the beginning of devolution. Oil and gas revenues would have to raise between £6 billion and £10 billion every year to keep Scotland broadly in-line with the rest of the UK.

That the on-shore deficit has remained fairly static suggests that Scotland's on-shore tax-base has not been growing in a way that would make us less dependent on oil revenues to pay our way. Indeed, in that year that the SNP were delighted to quote, Scotland's 5% net fiscal deficit would have been 14.6%, and its 2.3% current account deficit would have been 11.2%. This was the second worst the on-shore predicament has looked in the last 6 years.

Oil was quite literally the difference between us being ahead of the curve and miles behind it. This was a time, of course, when Brent Crude would trade at an average above $110 per barrel. This is the peak price, save a spike in 2008, in the commodity's history.

The Projections

The Scottish Government's White Paper predicted that Scotland would continue to see £6.8 billion to £7.9 billion of offshore revenues, premised on the price of oil staying around the $110 mark. We know with hindsight that this was hopelessly optimistic but in fairness, they weren't alone. The Department for Energy and Climate Change did predict shortly before the White Paper an oil price in excess of $110 in some of their own policy development assumptions.

We also know that even the more conservative projections of the OBR have proved to be wildly optimistic. In March and December of 2013, before and shortly after the publication of the White Paper, they were anticipating an oil price of around $97 a barrel for Brent Crude.

It's all very well for the SNP to throw up their arms and say "we got it wrong. But everyone got it wrong." Nicola Sturgeon tried to do as much on Andrew Marr's show this morning. But the implications of an independent Scotland getting the oil price catastrophically wrong are much more severe than they are for the United Kingdom. When oil and gas revenues collapse completely it increases the UK deficit by about 0.2-0.3% of GDP. The effect on Scotland is 6-10% of GDP added to the deficit. One is a bummer. The other is a catastrophe for economic planning.

The Facts

Which brings us to the most recent data we have from GERS, which remember is a set of figures produced by and for the Scottish Government. In March 2015, the figures for the year 2013-14 were included. They showed that Scotland accounted for 8.6% of public sector revenue and 9.2% of public expenditure, running a relative deficit of about £850 per head. We ran a deficit of 6.4% of GDP, compared to the UK's 4.1% and had a net fiscal deficit of 8.1% of GDP compared to the UK's 5.6%.

Our deficit in cash terms was £9.8 billion (£12.4 billion including capital expenditure balances). Without oil revenues, which were £4 billion (down from £5.5 billion in 2012-13 and from £10.6 billion in 2011-12), we would have run a current account deficit of 10.3% of GDP and a net fiscal deficit of 12.2%.

In simple terms, our deficit has increased substantially in the last couple of years while the UK one has come down. Meanwhile, public spending in Scotland has stayed broadly the same (£66.4 billion, up from £64.5 billion).

The price of Brent crude oil in 2013-14 varied between $90 to $115 per barrel. So even when the Scottish Government's projection still held true, Scotland's public finances swung into an abrupt reverse. This was partly down to levels of production in the North Sea, which had not expanded in the way many had anticipated. This is not a trend in respect of which we can expect a substantial improvement in the near future, even if oil prices recover.

The price of a barrel of Brent crude oil today is $27.36. The OBR forecast for oil and gas revenue has been revised down to £100 million as of November 2015.

The Implications

When I have pointed out these facts elsewhere about this fiscal gap that Scotland has, over and above the rest of the UK, there are typically three common responses:

1. We will raise more tax revenue than the UK does
2. GERS don't accurately reflect how much tax revenue Scotland raises on, among other things, corporation tax
3. We would spend less on things we don't need, like Trident

To which I have the following responses.

Increasing Tax Revenue

Okay. The gap you need to fill, just to reach the UK's economic position, is over £4 billion, assuming, of course, that in March we don't find that oil and gas revenues have fallen from about £4 billion. If the OBR are right, and revenues are going to fall to £100 million, you essentially have an £8 billion hole to fill. In 2013-14, Scotland's on-shore tax revenue was estimated at £50 billion by GERS. How do you propose to increase the tax base by between 8 and 16%?

Let's be generous and assume the oil revenue won't fall. As an illustration, you would save less than £4 billion if you were to cut the personal allowance to £6500, or the level it was in 2010 before the Coalition took office. That would obviously be a terrible policy from the perspective of ordinary families.

You might want to shift some of that burden towards higher rate taxpayers. So let's say you introduce a 50p rate of income tax to replace the 45p rate. Treasury estimates suggest this raised between nothing and £3 billion a year for the UK as a whole in the short time it was last used. Most of that revenue, it is reasonable to assume, was raised in London, where the highest proportion of high earners live. Even if you managed to get our population share of that money, that still plugs less than 1/10th of the gap.

Maybe you want to raise the basic and higher rates of income tax. Let's say you do that by a penny. HMRC estimates say that would raise about £500 million. Not great. Maybe if we raised them by 5 percentage points, we would get close to half-way there.

So best case scenario we are talking a pretty substantial rise in income taxation, which will almost certainly hit "middle Scotland" and probably the poorest too. Just to stand still. Not to be better off than the rest of the UK, not for more and better public services. Just to stand still.

This also assumes that this higher tax regime has no negative effects on growth in Scotland, which it almost certainly would. Of course, the SNP have their Jokers up their sleeves now. "Cut corporation tax!" "Cut Air Passenger Duty!" they cry. Well okay, that might stimulate the Scottish economy, but it also empties your wallet.

There is no guarantee that, say, a 1-3% cut in corporation tax would stimulate more revenue to a Scottish Exchequer. In any case, the current GERS figures say that corporation tax accounts for less than £3 billion of Scottish revenue. A cut in these kinds of business tax are not going to more than double the revenues attributable to them. That requires a particular type of magic no country in the world has ever achieved. This is a question of scale.

GERS doesn't assess taxes properly

There are a number of arguments made that the assumptions made in GERS are too pessimistic and that they don't accurately reflect the true revenue raised by Scotland on the question of corporation tax, among others.

There are indeed discrepancies between GERS and HMRC figures when it comes to attributing tax to Scotland. The Scottish Parliament Information Centre (SPICe) address the reasons for these discrepancies. GERS tends to churn out slightly lower income tax receipts, slightly higher VAT receipts and slightly higher corporation tax receipts. The reasons for this are mostly related to the purpose for which these bodies attribute tax to different parts of the UK, but the estimates are fairly close.

The HMRC estimates if anything suggest a smaller tax base in Scotland than GERS, but even if on-shore corporation tax receipts were under-estimated by 50%, you would be plugging only 1/3 of the fiscal gap. In a good off-shore year!

Any prospective quibble with the GERS methodology would have to show errors so substantial and systematic that it would be tantamount to bringing in two to four times as much corporation tax as it assumes we do in order radically to change the central conclusions anyone would draw from them. This is not realistic.

We don't need to spend money on Trident!

According to FullFact, the operating budget for Trident, for the whole of the UK, from 2008-2012 varied between £2 and £2.4 billion a year. This is also the expected level of expenditure over the lifetime of its operation, excluding the costs of renewal. At the moment, the Ministry of Defence is spending about £500-600 million a year towards the renewal of Trident's Vanguard submarines, with the renewal cost's upper-estimate being about £25-30 billion. This has the potential, at the very most, to double the year-on-year cost of Trident until 2028 when the new fleet of Vanguards are expected to come into operation.

Even if it were the case that all Trident expenditure was attributable to Scotland (it isn't, not even close, the total defence spend in GERS is £3 billion) abolishing it would not clear the relative deficit Scotland has, even in an oil revenues year like 2013-14. You could cut the entire notional defence budget of Scotland attributed in GERS (2% of GDP) and it still would not clear our relative deficit. Just think of it that way: Scotland could literally have zero armed forces and still be in a worse fiscal position than the rest of the UK. We would have no money to spend on Bairns or Bombs.

Other ways of looking at this relative gap, is that we could abolish the schools budget and still not be in the same position as the rest of the UK. In a bad year, we could abolish the schools budget, the armed forces, and cut the NHS Scotland budget by 10%, and we'd still only just be in the same fiscal position as the rest of the UK.


If something sounds too good to be true, then it probably is. The answers the SNP have offered to plug Scotland's fiscal gap are woefully inadequate. Offering to scrap Trident to make the books balance is like walking into the Apple Store and offering to buy a Macbook Pro for 4 Pokémon cards. We can't have a reasonable debate about the state of our finances if the Scottish Government is going to keep obfuscating about unimportant things like who else didn't predict that the price of oil would crash.

The reality is simple: if Scotland were to be responsible for raising all of the revenue in Scotland and spending all of the government money, it would have to grow faster than India or China for a decade, or substantially raise taxes on ordinary folk, or introduce swingeing cuts across the board. Not, and I repeat, to balance their budget. Simply to run the same deficit that the UK runs just now. The unspoken reason that oil is neither "a bonus" nor "the basis" for Scotland's finances for the foreseeable future, there is no bonus to be had.

Self-sufficiency is absolutely something Scotland needs to achieve. We desperately need to grow our on-shore industry and tax-base to make us more competitive. But there is no quick fix, and were it not for a, yes, very flawed, set of funding arrangements that were set-up by Westminster, it would be one hell of a bumpy ride.

When the next set of GERS figures are released in March, they will start to take into account the fall in global oil prices. In ordinary political times, I wouldn't want to be in the shoes of a pro-independence government, in an election year,  trying to explain away a £4-8 billion hole in their prospectus. But then, these aren't ordinary times.

As we celebrate the Scottish Bard on his birthday tomorrow, perhaps we'd do well to remember:

Facts are chiels that winna ding
An' downa be disputed!

Thursday, 21 January 2016

Hysterical Nonsense on Tuition Fees Again

Iain Macwhirter has pushed my rage buttons (The Herald). Every single one of them.

This piece he's written for The Herald is completely and utterly hysterical about how tuition fees are a dreadful idea that should be opposed regardless of context.

He would do well, of course, to take a look at this very blog, in which I showed three years ago now how a student finance system that includes a fee component can actually lead to poorer graduates paying less and richer graduates paying more.

But let's deal with some of the specific nonsense in his Herald article today.

"Of all the injustices perpetrated by my generation on young people in the UK – absurd house prices, job insecurity, stagnant earnings – the worst is probably the imposition of unsustainable debt through university tuition fees."

Yes, because the exponential growth in house prices relative to general inflation and earnings isn't as bad as a student finance system that has increased admissions, increased maintenance payments (above inflation) and reduced lifetime contributions for the lowest earning graduates. Okay, Iain. If you say so.

"I keep being told by university figures that free tuition is unsustainable and that Scotland is somehow out of step with developed countries. This is not the case. In countries like Norway and Denmark universities are tuition-free, and elsewhere in Europe fees are mostly minuscule. England is alone in Europe in imposing fees of £9,000 (and rising)

Germany, that great industrial powerhouse, has just scrapped university tuition fees altogether. The Germans believe higher eduction is too important to leave to the private sector, and that the system the UK has been trying to import from America is ruinous for students and society alike."

Right, but you're not comparing like with like. These other countries do not have as high University admissions rates as we do, nor do they have the same kind of maintenance support. Those that do, do so at significantly higher cost to the public purse. Is Iain suggesting that we should cut the number of University places available to school-leavers or that we should cut maintenance payments? Now those measures really would hurt access for the most disadvantaged!

"Indeed, in America, where student debt is now $1.3 trillion, there has been a widespread reaction against the very policy Labour and the Conservatives introduced here. Hilary Clinton has made debt-free tuition the centrepiece of her campaign for the Democrat presidential nomination."

This is a non-sequitur straight out of the NHS school of lowest common denominator debate. The US system of student loans is completely different from the one in the UK. Repayments are not connected to earnings, there is no write-off period, and you can be sued for non-payment. As countless external commentators have pointed out about student "debt" in this country, it functions much more like a time and contributions limited graduate tax than it does any "loan" anyone will be familiar with in the conventional sense. When Hilary Clinton starts talking about "debt-free tuition" she means that the disadvantaged won't have to take out a commercial loan to pay for college. Commercial loans for tuition is something that has never even been remotely contemplated by the governments in the UK that have charged tuition fees.

"The rest of Europe rightly believes education is a public good and should remain so. Yet in Scotland there has been a strand of right and left-wing opinion that has argued vociferously that free higher education is wrong and regressive: that tuition fees are a middle-class subsidy; and even, following the arguments of the educational blogger Lucy Hunter Blackburn, that students are worse off in Scotland than their counterparts in England.

This argument is based on a false assumption that, through maintenance grants and bursaries, poorer English students somehow are compensated for the debt they take on in fees. The former NUS President, David Aaronovitch, has even claimed that poor students in England don't pay fees at all. This is nonsense. All students south of the Border pay tuition fees though, as in Scotland, some can apply for bursaries and scholarships, which may defray some of the cost."

Something can be a public good without being funded entirely out of general taxation. This is meaningless rhetoric. Indeed Lucy Hunter Blackburn made many of the points I made three years ago. It is specifically lower earning graduates in Scotland that are worse off than their English counterparts. At the time I wrote the piece, 3 years ago, the repayment thresholds were such that those with lifetime inflation-adjusted average earnings of £28,500 or less would be worse off under the Scottish system than the English one. That will have fallen slightly with subsequent threshold changes, but not hugely.

Macwhirter is also straw-manning the argument about maintenance grants and bursaries. This is a misunderstanding that has led to similarly hyperbolic language from Labour with respect to the Tories cutting grants and bursaries. Some grants and bursaries, it is true, are, under the old Coalition model, funded out of part of the fees that Universities charge and are supplementary. They were, however, never the major change that "compensated" for the fees though. The increase in general maintenance payments was the major change, which for the poorest students almost doubled. It meant that they had a much larger disposable income while at University, which is the main obstacle for those from disadvantaged families going there. What the Tory government is doing now is replacing the grant component with a loan component. This is actually very similar to what the SNP did in the last couple of years.

This is neither a fantastic idea nor a dreadful one. It's a very simple trade-off that says the more of maintenance that takes the form of a student loan, the more money you can give students up-front when they are studying. The students that end up "paying the price" of this shift to loans and away from grants are, because of how student loans are repaid, the higher paid and those later on in their careers. The impact of this is only felt when they make larger contributions later on in life.

"But student debt is vastly higher in England because of tuition fees, and is growing so fast the Government is in a panic. Repayments have been dwindling, which is why the Conservatives have just broken their word and abolished maintenance grants for students from low-income families. Undergraduates have to finance their higher education living costs and tuition fees entirely from loans.

Students in England face emerging from university with debts of around £55,000. They will spend the rest of their lives with this ball and chain, the burden of which will be most acute just as they are trying to start a family and buy – or rent – a home.This will have profound economic consequences as student debt crowds out consumer spending."

Yes, the UK Government is in a panic. Because the gamble they took that graduates would be earning a lot more than they actually are hasn't paid off. So in effect, we have more, direct, state-funding of Universities and students because they'll never repay all their debt. How is this any different from a government having to pay up-front? At best here your complaint is that the UK government is only asking high earning graduates to pay more and that there aren't enough high earning graduates. This is absurd.

It's also total nonsense that "this burden is most acute just as they are trying to start a family and buy - or rent - a home". This deliberately misrepresents how student loans are repaid, which is a flat percentage of your income over a threshold. It bites least severely when you are earning less. Moreover, as has constantly been pointed out, student debt is not taken into account by a mortgage lender as an existing credit risk, like any other debt would. It is merely treated as a deduction from gross income, just like income tax is.

"However, it can only be a matter of time before students realise what is happening. Some have been deluded into believing they can avoid debt repayment by keeping their earnings below the repayment threshold of £21,000. After 30 years, the debt is extinguished. But they are in for a shock.

The Government has already lowered the threshold for repayments by breaking another promise to raise it annually in line with inflation over the next five years. The forecast is that a majority of those entering higher education in England will still never repay their debts, the interest on which rises each year. This cannot be allowed to happen, so there will inevitably be further fiddling with thresholds to increase debt repayments."

No this is total nonsense. Students aren't deliberately trying to keep their income below £21k. This is like saying that people deliberately try to keep their income below £10,500 so they don't have to pay income tax. This is stupid. Stop it.

It is true that the Tories have welched on the undertakings made by the Coalition about the threshold for repayment. Advocates of the Coalition system like Martin Lewis have been very critical of this recent change. However, any change to the write-off period would require legislation, and may encounter legal challenges for representing retroactive changes to the terms on which someone took student support. As we have seen, though, the dangers of thresholds being fiddled with is hardly unique to a system in which tuition fees are charged. The Scottish Government let the repayment threshold for our students consistently lag behind inflation until relatively recently, and it was only dealing with maintenance debt.

It was anticipated early-on, even before the changes the Tories are proposing to make now, that "the majority" would never repay their debts in full. That was actually the point of the system. The real question here is how much the UK Government is willing to underwrite. This feeds back to a much simpler and more fundamental question about government and it is "how much money are you prepared to spend on the higher education system". This is a question you have to confront regardless of whether or not you ask for some sort of graduate contribution. And since the type of graduate contribution England has is one that asks more of high-earning graduates than low-earning ones, it's not an aberration.

"And it's not only the threshold that is being raised; so are the fees themselves. Oxbridge colleges have been lobbying hard to charge “the market rate”. The new vice chancellor of Oxford, Louise Richardson, formerly of St Andrews University, appears to want see the American system introduced in its entirety, with no fee limit. In America, fees of $40,000 or $50,000 a term are not unusual."

This is scaremongering. There are no plans to do this. The Browne Review recommended that this should be possible. The Coalition said no. Emphatically. Where is your evidence that the Tories are seriously contemplating this?

"Why are universities so keen on fees? Essentially, because many vice-chancellors are attracted to the idea of universities being run on the model of private schools. Many already regard their institutions as private, which is one reason they are so opposed to the Scottish Government's Higher Education Bill that asserts, rightly, that they are public bodies dependent for their survival on taxpayers."

This is baseless. Where is your evidence that Vice Chancellors think this?

Universities are not government bodies. They are supposed to be autonomous places of learning. If governments want to support a large proportion of the students that want to go to them for a public interest reason, that is entirely their prerogative. The objections Universities have to the HE Bill is that the Scottish Government is effectively proposing to subordinate Universities to governmental, not public, control. The Bill included provisions that would have weakened the authority of University Rectors (something Macwhirter should be aware of given he used to be one), the individuals elected by the student population to represent their interests, and would have allowed the Scottish Government to set the rules for election to, and decide who gets to sit on, the governing bodies of Universities. Opposition is not some private sector conspiracy; it is opposition to an attack on autonomy in the public sphere.


Please, Iain, try to approach this with even a semblance of a level head. You have singularly failed to do so in this piece.

Tuesday, 19 January 2016

Miranda and Legality

David Miranda (Credit: The Guardian)
Many of you will have been paying close attention to a controversial use of powers under the Terrorism Act 2000, which followed-on from the Snowdon leaks of classified NSA files. A man called David Miranda, partner of journalist Glenn Greenwald, had obtained on a USB stick encrypted files in connection with the leak, and was detained at Heathrow airport under what are known as the "Schedule 7 powers" of the Terrorism Act 2000. The factual background of the case is quite neatly summarised by Lord Justice Laws in the Divisional Court, and repeated by the Court of Appeal, whose judgment came out today.

I do not intend in this blogpost to go through the particulars of all of the five grounds of appeal. Others have done this better than I can do justice to. However, I do wish to comment on what has been described as an "inconsistency" in Lord Dyson's judgment handed down today, raised by Carl Gardner in his piece here.

The Judgment

The main finding against the government was based on the conclusion that, for want of adequate safeguards to prevent arbitrary use, Schedule 7's detention and search powers fail the test that must be satisfied to comply with the European Convention on Human Rights. As such a "declarator of incompatibility" under s4 of the Human Rights Act was issued. In particular, s4(2) provides that:
"If the court is satisfied that the provision is incompatible with a Convention right, it may make a declaration of that incompatibility."
The effect of a declarator is not to invalidate, discontinue or limit the enforcement of primary legislation (s4(6)(a)). On the contrary, it has full force and effect.

It is not unlawful in a specific instance for a public body to act incompatibly with the ECHR where they are "acting so as to give effect to or enforce" "one or more provisions of, or made under, primary legislation which cannot be read or given effect in a way which is compatible with the Convention rights". This is very clearly set-out in s6(2)(b) of the Human Rights Act.

This means that a piece of legislation can violate the ECHR, but it is not competent for a British court to make a finding of illegality in respect of a public body acting incompatibly, where that illegality results, and only results, from the incompatibility of the primary legislation that it is enforcing. Obviously if, for example, secondary legislation was incompatible with the Convention for additional reasons and/or a public body supplementarily acted in a manner which was incompatible with the Convention, then a British court could strike down that secondary legislation and find the actions of the public body to be unlawful. The appropriate remedy in that instance would not have to be a declarator of incompatibility.

Acting compatibly with the ECHR

There are three criteria that must be satisfied if an interference with a qualified Convention right is to be considered to be lawful, and therefore escape any risk of this declarator being made. An interference must be (a) in pursuit of a legitimate aim (b) prescribed by law and (c) necessary in a democratic society.

Prescribed by Law

The importance for our purposes is the relationship between (b) prescribed by law and (c) necessary in a democratic society. The former is a standard that requires, as Carl puts it:
"any law such as Schedule 7 must be accessible and its operation sufficiently foreseeable so that people subject to it can regulate their conduct; and it must contain sufficient safeguards to avoid its arbitrary exercise"
Necessary in a Democratic Society

The latter constitutes a proportionality test, the particulars of which have been expressed on several occasions by the UK Supreme Court. One such exposition is given in the Bank Mellat case, where Lord Reed sets out a 4-stage test:
"It is necessary to determine
(1) whether the objective of the measure is sufficiently important to justify the limitation of a protected right,
(2) whether the measure is rationally connected to the objective,
(3) whether a less intrusive measure could have been used without unacceptably compromising the achievement of the objective, and
(4) whether, balancing the severity of the measure’s effects on the rights of the persons to whom it applies against the importance of the objective, to the extent that the measure will contribute to its achievement, the former outweighs the latter…. In essence, the question at step four is whether the impact of the rights infringement is disproportionate to the likely benefit of the impugned measure."

Third Ground of Appeal

The third ground of appeal in the Miranda case maintained that [59]:
"the use of Schedule 7 power against Mr Miranda was an unjustified and disproportionate interference with his right to freedom of expression guaranteed by article 10 of the Convention"
This ground is solely concerned with whether the interference with David Miranda's Article 10 right was proportionate. It is not concerned with whether it was in the pursuit of a legitimate aim or prescribed by law. It is, moreover, concerned with the particular. What the court was being asked to determine there was whether the test set-out by Lord Reed in Bank Mellat had been satisfied. Lord Dyson concludes [84]:
"The compelling national security interests clearly outweighed Mr Miranda’s article 10 rights on the facts of this case. In reaching this conclusion, I also bear in mind the considerable deference that the court should accord to a decision to invoke the Schedule 7 power in a case of this kind. It follows that, subject to the point raised by the fourth ground of appeal, the decision to exercise the power was proportionate on the facts of this case"
Clearly these remarks are confined to the question of proportionality, and not to whether it is prescribed by law.

Fifth Ground of Appeal

The fifth ground of appeal, which was ultimately successful, maintained that Schedule 7 of the Terrorism Act 2000 was "incompatible" with Art 10 of the ECHR. The conclusion reached was that Schedule 7 [119]:
"Is not subject to adequate safeguards against its arbitrary exercise"
And is therefore not prescribed by law.

Carl's Argument

Carl argues that it is inconsistent, on the one hand, for Lord Dyson to make his finding in respect of the fifth ground of appeal, but not to have found that the third ground of appeal also succeeded. As he puts it (emphasis added):
"If Lord Dyson is right that judicial review is inadequate, and cannot sufficiently protect journalistic material, then it cannot protect it in this case; Lord Dyson’s own ruling that questioning Miranda was lawful must be inadequate to satisfy human rights law. Without prior independent authorisation Miranda’s questioning can’t have been “prescribed by law”, and so must have breached the article 10 right to free expression. Lord Dyson could not possibly have “cured” that breach today."
This is a perfectly correct statement of law from the perspective of the Strasbourg court. They couldn't care less if the failure to be prescribed by law arises from the primary legislation itself or from the particular nature of the action purporting to be taken under it. The applicant is suing the state as a whole, not a particular branch of it. If this goes to Strasbourg, and they agree with Lord Dyson that Schedule 7 is incompatible with Article 10(2) for want of being legally prescribed, they will make a declaration to that effect and award damages in just satisfaction.

The Problem

But for a UK court, the distinction is extremely important. Indeed, it is precisely the reason that the third ground of appeal was framed as it was, in terms of proportionality alone, rather than in terms of compatibility with the Convention. The third ground of appeal concerned, in reality, not just whether the interference was proportionate, but also, by inference, whether the public body exercising the Schedule 7 powers could avail itself of s6(2) of the Human Rights Act to escape illegality completely.

This is important from Miranda's perspective. The declarator does not entitle him to any additional form of redress. A finding that the specific application of the law, but not the law itself, was disproportionate, would likely entitle him to some sort of pecuniary redress. Paradoxically, were he to prove that Schedule 7 was in and of itself disproportionate, he would be enabling the government to grant a broader immunity from compliance with the Human Rights Act to those exercising powers under Schedule 7, as it would, much like the prescribed by law failing, fall under the terms of a declarator of incompatibility.

If the specific instance of the exercise of this power was disproportionate (in the Bank Mellat sense), it would not have mattered whether or not the provision was prescribed by law. The public body would in any case have acted illegally in the specific instance. It would have been no "defence" to say that they were "acting so as to give effect to or enforce" "one or more provisions of, or made under, primary legislation which cannot be read or given effect in a way which is compatible with the Convention rights". The primary legislation would not have authorised them to act in that way. With respect to proportionality, the provisions can be, and in Miranda's case were, exercised in a manner which is compatible with the Convention rights. Any body which exercises that power in a way that is disproportionate is going beyond what Parliament intended.

Carl's Response

In response to this, I'm sure Carl would still respond with a combination of these sentiments:
"Legality is a logically prior requirement: only if a power is “prescribed by law” can its use be proportionate and so rights-compliant."
"The concept under the Human Rights Act 1998 that legislation may in itself be incompatible with a Convention right is a radical one: it means that the legislation necessarily and systematically causes breaches of human rights. Conversely, if not every use of a piece of legislation breaches human rights, then it is compatible with those rights."
"The Human Rights Act forces judges to make a choice. Either a piece of legislation is in principle compatible with human rights, in which case its use in particular cases may still breach rights (and so be unlawful); or it’s incompatible with those rights in principle, in which case its use in every case will breach rights (and, in an apparent paradox, will therefore be lawful). You can’t have it both ways. You can’t hold the questioning of David Miranda compatible with human rights if you also think the legislation it was done under is not."
The problem here is that the first of these three quotes is not actually correct. In many instances, legality may operate in that way, and there may well be some overlap on the facts between the threshold to be "prescribed by law" and the arguments made in relation to parts 3 and 4 of the Bank Mellat proportionality test. But it does not follow that all exercises of a power are disproportionate if none of them are prescribed by law. Some of them may be proportionate. This may not save you in front of the Strasbourg court, but it does save you under a British court enforcing the Human Rights Act, provided that you can show s6(2)(b) applies.

As such, even if a British court concludes that "the [primary] legislation necessarily and systemically causes breaches of human rights" that does not mean that it can find a wholly derivative and otherwise lawful action to be illegal. Where the second and third quote breaks down here is that Lord Dyson did not say anything that contradicts Carl's "converse" inference. The specific use of Schedule 7 against Miranda was not prescribed by law, but British courts are compelled not to do anything about it where it is the direct, exclusive and necessary consequence of enforcing an incompatible primary statute that was incompatible by, and only by, reason of not prescribing the interference by law.


Whether you like it or not, this is how the Human Rights Act was formulated, and this is specifically how declarators of incompatibility are supposed to work. I suspect Carl and I disagree quite drastically as to the trajectory our domestic human rights framework should follow were we to move away from this muddy compromise.

Wednesday, 16 December 2015

We need to talk about tax


The Scotland Act 2012 changed the nature of the tax raising powers enjoyed by Holyrood. When the Parliament was first created, it had the power to vary the basic rate of income tax by up to 3 percentage points either side of any rate that the Chancellor of the Exchequer set for the UK as a whole. If Holyrood cut the basic rate, it would receive a smaller block grant, and if it raised the basic rate, it would receive a larger block grant.

One of the main criticisms of this power was that it did not allow the Scottish Parliament effectively to spread any tax increase completely progressively across the income spectrum. Although the existence of the personal allowance meant that those on higher incomes would see a greater impact on their tax bill than the least well-off, the distributional impact was fairly flat, and a rise would, in percentage terms, mostly hit the professional middle class earning about £30-40k in today's money. The inability to alter the higher rate of income tax, which was responsible for a much larger share of high-earners' tax bill, meant that an increase in the basic rate would be regressive beyond that income bracket.

If, for example, that old power still existed, and the Scottish Government decided that, from 2016-17, it wanted to raise the basic rate of income tax by one percentage point, this is how it would affect Scottish taxpayers:

As you can see, the mildly progressive nature of that tax power quickly tails-off once taxpayers start paying the higher rate of tax instead. The maximum increase in someone's liability under the power is capped at £957, and that would require the full 3% increase to be introduced.

Impact of the Scotland Act 2012:

However, the original Scottish Variable Rate was never used, and fell into disuse before being replaced with a new power. Under the Calman Commission proposals, the Scottish rate of income tax was introduced. Under this arrangement, the Chancellor of the Exchequer levies a basic, higher and additional rate that is 10 percentage points lower for Scotland than for the rest of the UK. There is a corresponding cut to the block grant. The Scottish Government must then decide to what extent it wishes to "fill the gap" or even go beyond it.

There is a constraint to this power, which is that the Scottish rate of income tax must be the same across all income brackets. If you want to raise one tax rate, you must raise them all, and by the same percentage point increase. If the Scottish Government levies an SRIT of 10p, the rates in Scotland will be the same as those in the rest of the United Kingdom. If the Scottish Government wanted to increase the rate of income tax by 1%, they would levy an 11% SRIT. The effective tax rates in Scotland would then be 21%, 41% and 46%. Using the same scenario as before, the effect of this would be as follows:

The key difference from a distribution perspective, therefore, is that the Calman power removes the upper-ceiling on the additional liability that the Scottish Government can impose on the higher paid. This has the effect of making an increase in the SRIT modestly progressive across the board. Indeed, for someone earning around the minimum wage (£14kpa) would see their tax bill rise from 4.57% to 4.80% of their gross income, an increase of £32. This is in contrast to someone earning £60kpa, who would see a rise from 22.17% to 22.99% of their gross income being taken in income tax, an increase of £492. Put another way, such a rise would cut the take-home pay of someone on the minimum wage by £2.67 a month and someone on £60k by £41 per month.

What John Swinney said:

In his draft budget speech before Holyrood today, John Swinney said (emphasis added):

"Presiding Officer, today’s Draft Budget marks the first time that a Scottish Government will propose a Scottish Rate of Income Tax.

From April 2016, the UK Government will reduce the block grant by £4.9 billion with the partial devolution of income tax powers and at the same time switch-off 10 pence of income tax in Scotland.

I am required now to set a rate in Scotland.

The current power allows for one single rate to be set here in Scotland and applied equally to all three income tax bands – the basic, higher and additional rates.

This means that any rate set above 10 pence would increase the tax paid by all Scottish taxpayers. By its nature, exercising this power would have a disproportionate effect on the amount of tax paid by those on the lowest incomes.

Likewise, whilst any rate below 10 pence would cut the tax bill paid by all taxpayers, those on the highest incomes would see the greatest benefit."

This is nonsense:

Taken with the analysis above, the claims about "proportionality" in this statement simply do not stand. Indeed, it is internally inconsistent. The lock-step nature of the power means that only one of two things can be true. Either:

(a) All rates above 10p disproportionately increase the liability of the better off and all rates below 10p disproportionately decrease the liability of the better off; or
(b) All rates above 10p disproportionately increase the liability of the worst off and all rates below 10p disproportionately decrease the liability of the worst off.

Indeed, the empirical evidence above suggests that (a) is true and (b) is untrue. His justification for not increasing income tax is mutually inconsistent with his justification for not cutting it. In both cash and percentage terms, an increase in income tax in Scotland would place a burden predominantly on higher, not lower, earners.

If you were to be charitable, you could say that the proposed tax powers in the Scotland Bill would allow John Swinney to raise the taxes of the richest while either keeping the taxes of the poorest static or even to cut them. Under those proposals, the lock-step is being removed, which would allow the Scottish Government to raise the higher and/or additional rate without touching the base rate. But that doesn't stop John Swinney being more progressive now with the power he has; it simply means he can be more progressive later than he could just now. The notion that you should eschew progressive politics until you're given the power to be perfectly progressive is frankly abdication of governmental responsibility.

It should also be remembered that the Calman power will only be in place for 2 years. For the sake of 2 years, a 1% increase in the base rate would mean asking the poorest of Scots to pay the equivalent of a second class stamp every week more towards public services. For middle-income Scots you'd be asking less than the cost of their TV licence. For high-earning Scots, you'd be asking for the equivalent of a mobile phone contract or a satellite TV subscription, to fund public services. After that 2 years, you could cut or reverse the increase to basic rate payers. The rise in the personal allowance to £11k in 2017-18 would actually wipe-out any increased burden faced by minimum wage-earners in the second year of such a policy anyway.

The purpose of this is not to say that the SNP should raise this tax. It is to illustrate the absurdity of Swinney's stated justification against it. It is not credible to claim that "exercising this power would have a disproportionate effect on the amount of tax paid by those on the lowest incomes".

If John Swinney is to justify a government position which is anti-austerity: which thinks that the current level of resources made available to government programmes is not adequate, he needs a better explanation for why he has consciously not asked high-earning Scots to undertake a greater share of that burden. Raising the taxes of people on low and middle-incomes may not be popular, but as part of this specific tax power, it is both progressive and would raise the additional revenue he says Scotland badly needs. There are perfectly good, cogent, reasons for not wanting to raise personal income taxes, but he isn't offering them. The only logical conclusion we can draw is that John Swinney thinks it is more important that money stay in people's pockets, including Scotland's richest 10% of earners, than that the austerity "funding gap" be filled.

This is many things, but more progressive than the British consensus? It ain't. This stance is more at home with David Cameron and George Osborne than it is with Jeremy Corbyn or John McDonnell. That might be no bad thing, but let's at least level with the Scottish public that this is the reality we inhabit. The SNP are not a centre-left party on tax.

UPDATE: 23:06pm 16.12.15

I have decided to add a few graphs to display visually the impact of setting the SRIT at 11p instead of 10p. The wider the gap between the red line and the blue line, the greater the impact of the tax change on that particular group. As you can see, in both absolute and percentage terms, the 11p rate, proportionally speaking, hits those on higher incomes more. I have included a white line to indicate the national median wage: to the left of this line is the impact of the lowest 50% of earners in Scotland. As you can see, the gap is almost non-existent in all graphs for the lowest of earners, and is widest for higher earners. This indicates that an 11p rate would be a progressive step on the status quo. Unless John Swinney is arguing the more "right-wing" case that the problem is an 11p rate will raise no money, or lose money to the Scottish budget, and therefore necessitate a reduction in public service provision, there is no principled case against his introducing it.

Wednesday, 11 November 2015

Tax Credits and the Scotland Bill

The SNP introduced a proposed amendment to the Scotland Bill. It would have made the subject matter of the Tax Credits Act 2002 an exception to the general reservation of Social Security schemes. To understand what this means, we need to look at the way the Scotland Act works.

The Scotland Act

Under Schedule 5 of the Scotland Act, certain policy areas are designated as "reserved matters", which means Holyrood, in general, has no say over those issues, what the law is in relation to them, and how government agencies give effect to those schemes. In most instances, Westminster Government departments will have direct control over the way those matters operate, but sometimes the Scottish Government or Scottish local authorities will have a role in administration or implementation.

At the inception of the Scottish Parliament, welfare was a reserved matter, as was taxation, save for a specific income tax power. This means that social security has been legislated for across the UK in a fairly uniform way, and welfare schemes, tax credits, and tax has remained largely the same across the different nations.

What's New

The Scotland Bill changes this. A wide array of "exceptions" are being made to this general reservation. This will give the Holyrood Parliament the freedom to change, replace and create social security benefits in certain areas, and to top-up and change the way certain benefits that remain reserved, especially the housing component of Universal Credit, operate. This means, for example, more flexibility in mitigating the "bedroom tax".

For the benefits that are being fully devolved to Scotland, the funding for those will come from money that Westminster currently spends: it will be hived off into a separate fund, in much the same way as spending is for other areas at Holyrood at the moment, from which the Scottish Parliament can draw resources to pay for those benefits in Scotland. If the Scottish Parliament wishes to top-up a benefit or to create a new one, it can do so from its own resources.

It can pay for those new or top-up benefits in one of two ways: it can re-allocate spending from other parts of the Scottish Government's budget; or it can exercise Scotland's new tax powers to increase revenue that way.

The SNP's Amendment

Eilidh Whiteford is responsible for the amendment
Eilidh Whiteford's amendment to the Act sought to make Tax Credits an exception. Quite how they envisaged this would operate is far from clear. The exceptions the UK Government has introduced for specific welfare benefit areas are a lot more detailed than this amendment was (see especially proposed ss20-28).

With each of the benefits that is already being devolved, considerable thought has been put into the mechanics of allowing Scotland to diverge from the rest of the UK. Questions like who is going to be responsible for the administration and the structure of those benefits, DWP, the Scottish Government, local authorities, have been examined at length to ensure the schemes are workable.

It does not appear that the same thought has been given to the devolution of tax credits. For one thing, and unlike most social security and welfare, tax credits are functionally administered through HMRC rather than the Department for Work and Pensions. It is not clear whether this amendment envisages that the Scottish Government would now administer and set the rules for tax credits in Scotland, or merely legislate variations on the UK scheme and ask HMRC to administer it for them. What role, if any, would Revenue Scotland have in the interplay between these taxes and the soon to be devolved personal income tax powers? It isn't clear.

It also is not clear how the SNP proposes the Scottish block grant is to be altered to take account of the fact that tax credits in Scotland would be different from those in the rest of the UK. This is where the nature of tax credits being different from other welfare could take on an added importance. It is not as straightforward as splitting rUK "spending" from Scottish "spending" with respect to tax credits as it is for other welfare payments. Would we decide what is "Barnettable" in this context?

This proposal, it should be clear, does not involve protecting the amount of money available in tax credits for Scottish workers and families. It merely proposes to devolve the subject matter. If the Scottish Government wanted to protect Scotland from George Osborne's cuts to tax credits, therefore, it would need to find the money from elsewhere: within its own budget. This change cannot force George Osborne to spend more money. At most it can ring-fence Scotland's share of what he decides he wants to spend on tax credits. Unless the SNP have an alternative proposal to the Barnett formula, that is the necessary effect of their amendment.

The Alternative

Understanding those implications is important, because it serves to show how little things would change compared with what the SNP could do regardless of whether or not tax credits are devolved. It is not necessary, as Alex Neil admitted in a Holyrood debate only a week ago, for Holyrood to have legislative control over tax credits in order to protect those who would be affected by tax credits cuts.

The "power to supplement" or to "create" new benefits, targetted at the families and workers affected, could fill that gap and would put the Scottish Government in no worse a position as to finding the money to pay for it. If anything, they would benefit from administrative clarity that tax credit devolution would not, as there would be no need to complicate the fiscal framework even further.

One of the major criticisms that the SNP have been directing towards the Secretary of State for Scotland is that the Scotland Bill's new fiscal framework is taking longer than anticipated to agree between the UK and Scottish Governments. What seems perplexing to me is why the SNP are therefore advocating amendments to the Scotland Bill, which do not give them any greater power to protect Scotland from tax credit cuts than they have already, which would serve to complicate and delay the fiscal framework negotiations. No doubt if that did happen, they would then complain to the press that the UK Government was breaking its promises to deliver new powers promptly to Holyrood.

The only policy decision that the SNP would be able to make with the devolution of tax credits that they could not make with their other welfare powers would be to cut the tax credits of people by more than George Osborne has. I doubt they plan to do this. If we were to be charitable, they may wish to taper tax credits more aggressively at the top of the income scale to protect those lower down. This would be a potentially welcome change, but the cynic in me suggests that is not their intention at all.


What this is endemic of is a desire by the SNP to keep the public debate in Scotland away from actual politics and policy decisions and into the realm of constitutional politics. Any situation where the SNP could mitigate the worst excesses of Westminster policy, but at a price, is distracted from by saying Scotland wouldn't have these tough decisions to make if only we had more powers.

The problem is, with powers comes responsibility. There may be perfectly sound reasons for saying that Scotland should control its own tax credits system. What is needed beyond that, though, is a government that is super clear on the detail about which winners and losers they would pick instead of the approach of the Westminster Government. The SNP want Scots to believe that they can fix all of the problems of Osborne's cuts without any of the drawbacks.

It speaks to a more fundamental characteristic of the way the SNP have governed Scotland in the last 8 years. They seem afraid to actually use Scotland's powers to try new things when it comes to deciding how we spend our money. Where they have made public sector reform, it's been to centralise, rather than to look under the hood. The danger is that if they use the powers and it works well, it risks showing Scotland that it literally can have the best of both worlds: policy better suited to its own needs while sharing resources and schemes where it is expedient to do so with the rest of the UK. Using the powers now also risks exposing the fact that the SNP have let a lot of things stagnate in Scottish society where they had the power to be radical. That rather undermines the rhetoric and rose-tinted vision of the utopian independence-based alternative.

The debate has to move on now. The Scottish Parliament has extensive powers. Sure it's not as powerful as I'd like it to be. But it has more than enough to get started. If the SNP really are right and these powers don't help Scotland: prove it. Try something new and then come back if it doesn't work. But this Scottish Government and many of its supporters are increasingly sounding like the petulant child that complains they got a red Power Ranger instead of a green one. You've got a Power Ranger. You can play with it or you can sulk.