Bastardized Federalism

     On Sunday, I was reading Iain Macwhirter’s latest column in the Sunday Herald, which was focused on the issue of Full Fiscal Autonomy (FFA) for Scotland, and asserted that expressions of concern with regard to it amounted to scaremongering and demeaning Scotland, along with the notion that critics were being too negative about Scotland and its prospects. 

     Leaving to the side that there are genuine, valid, and serious concerns about FFA and that such critics are skeptical of the policy because its potential adverse effects on Scotland, what caught my attention was how Macwhirter described the proposed constitutional arrangement.

     What the SNP (claims it) wants – and what Macwhirter appears to be championing – is a system in which Scotland remains as part of the United Kingdom, but with every single pound in Scotland being subject only to taxation levied by the Scottish Parliament at Holyrood, which means that the people of Scotland will no longer be directly contributing to the UK Treasury. Holyrood would send some form of payment to cover for shared services reserved to decisions at the UK level (defense and foreign affairs) and Scotland’s share of the UK national debt, but this is not the same as Scottish residents and business joining with their fellow British citizens in directly contributing to the maintenance of UK via taxation that applies to all British citizens, regardless of where they live.

     This means that Scotland will cut itself off from its financial links with the rest of the UK, and it will make Scotland independent in all but name (which some unionists describe as independence through the back door) but Macwhirter does not believe this to be the case because, as he claims, this is a “form of federalism, so even with fiscal autonomy there would be transfer payments to be negotiated as there are in all federal systems.”

     The esteemed columnist and journalist makes this sound reasonable because after all, Scotland would still be part of the United Kingdom and “sending a subvention south” for the aforementioned common services and debt payments. So Scotland should not be seen as contriving to have its cake and eat it too, and therefore, Macwhirter believes that Scotland should be entitled to “equalization payments.”

     However, in the eyes of people in England, Northern Ireland, and Wales, as well as many Scots, this does give the appearance of wanting to have the benefits of independence, but still wanting the financial backing of the rest of the UK. Worse, it adds fuel to the ugly perception that Scotland “sponges off” of taxpayers south of the Tweed. Under the current circumstances, Scotland and Scottish taxpayers – by being part of the same tax system as everyone else in the UK as a whole – contribute to the UK Treasury, as they have been doing for centuries, and as such, are entitled to UK spending – including the block grant via the Barnett Formula.

     But by essentially going it alone financially, the criticisms of Barnett and any other form of fiscal transfers to Scotland will become sharper and louder than ever before – just as would Scottish representation in the House of Commons would come under closer scrutiny.

     But what about that “subvention” as Macwhirter describes it? Wouldn’t it represent Scotland’s contribution to the UK’s coffers? Well, it appears that such a payment would only cover the aforementioned services still shared by Scotland and the rest of the UK, and therefore, money from the UK Treasury would only be spent in Scotland in relation to those services. If the “Scottish subvention” was strictly applied in such a way, it may mean that there would be little prospect of fiscal transfers directly to Holyrood, much less a fixed formula for an annual block grant.

     Macwhirter attempts to defend this and makes the argument for continued fiscal transfers on the basis that this is a “form of federalism.” After all, the UK appears to be on the road to federalism, and in federal systems, there are mechanisms for distributing wealth in order to provide assistance to states and to equalize the balance between wealthier regions and poorer ones.

     However, this does not make sense because under the SNP’s own proposals, Full Fiscal Autonomy means that every single pound of taxed money in Scotland goes directly to Holyrood, and none of it goes directly to the UK Treasury. Now, I admit that I’m not an expert on federalism or government systems in general, for those are topics that I study as a hobby – not a profession – and I also realize that federalism may mean many things to different people. But coming from a federation and having a basic understanding of major federal systems in other countries, I can say that Iain Macwhirter’s (and the SNP’s) vision of federalism goes out of sync with federalism as I understand it.

     In the United States, Germany, Australia, and Canada, taxation is a joint responsibility between the federal government and the federated (state/regional/provincial) governments, and the respective federal governments of those countries have the ability to levy and collect taxes throughout the entire federation. The federated governments within those countries have their own powers of taxation, which sometimes parallel those of the federal government, so that there may be federal and state taxes on income, corporate profits, consumption, and other sources of revenue. In some circumstances, there are taxes that can only be levied by the federal government, and taxes that can only be levied by the state governments.

     At the end of the day however, the federal systems I have mentioned still feature some form of taxation levied by the central (federal) government on all parts of the federation. The federated governments have fiscal autonomy, but not full fiscal autonomy, which is to say that those governments have the power to impose their own taxes on the residents and businesses within their jurisdiction for the needs and purposes of those areas. However, not every unit of taxable money goes to those governments because (as part of a wider federation), its residents and businesses are subject to some form of federal taxation, and so some of that taxable money goes to the federal government for needs and purposes across the entire federation (and this was already planned to be implemented under the Scotland Act 2012, and is to be greatly enhanced by the passage of another Scotland Act this year, which will give Holyrood full control over income tax rates in Scotland).

     Among those needs and purposes include the mechanism that the federal government uses to distribute money to specific parts of the country – i.e., fiscal transfers from the federal government to the state governments. Of the four federal countries mentioned here, Canada, Australia, and Germany have programs that are explicitly designed to equalize the fiscal capacities of the states/provinces within them, which invariably means making payments to less wealthy areas or areas that need assistance in covering the cost of providing public services.

     The United States does not have a fixed mechanism for achieving these ends, but some equalizing does occur when the federal government provides funds for specific programs within the states, such as education, food and nutrition, and health programs (like Medicaid). In addition, the federal government spends money to assist states in the financing of large capital projects, such as roads, bridges, and other forms of infrastructure. On average, the 50 states receive nearly half of their revenue from the taxes they levy on their residents (which ranges from North Dakota at 65.7% to New Mexico at 36.4%), and just under a third comes from the federal government (ranging from Mississippi at 42.9% to Alaska at 22.4%) through various programs and initiatives. The remainder comes from a mix of interest earnings, service charges, royalties, and local government transfers.

     So while the states are able to tap into their own tax base, they do not have exclusive access to it because they share their individual tax bases with that of whole United States, and this allows for money to be used to assist other states and the people that reside within them. While this does not amount to the same thing as the Barnett formula or the equalization payments found in other federations, it still amounts to a system into which everyone pays and from which everyone benefits.

     Regardless of how it’s done however, there is not a federal system I am aware of in which one part of the federation is not subject to some form of federal taxation (like everyone else) – where that part of the country effectively keeps all of the tax revenue raised within its borders, but then expects that the rest of the country will continue on happily with “equalization payments.” How is that possible when the taxpayers residing in that area are no longer directly contributing to the central government?

     It isn’t. What the nationalists and their supporters want with regard to FFA is not federalism – at least not the way I have come to understand it – and by going down this path, they are either living in a pipe dream where they do have their cake and eat too, or (as many suspect) they are trying to create conditions where the rest of the UK finally gives up on Scotland and the Union altogether. At the very least, it is an admission that while Scotland can get on as fiscally autonomous within the UK, it cannot continue with current levels of spending without something plugging the gap – whether that means cutting spending, increasing taxes, or benefiting from the financial assistance of the rest of UK.

     With regard to the Union itself, it is the nationalists and their supporters who are quite negative about it. Throughout the referendum campaign and up to the present, it has been common to read from a pro-independence columnist and/or tweeter who talks about the UK as being a country in terminal decline, living in its past, and having absolutely no hope for the future. Further, they characterize the UK as being this horrendously dark and scary place that watches poor people suffer with a smile on its face and hates immigrants, which does nothing but paint a broad brush against the Union and makes unfair characterizations about the people inhabiting it.

     If only these people could join with their fellow British citizens in moving forward and striving to understand one another, while pushing on to build a better Britain – which naturally and quite critically involves building a better Scotland. That should be the ideal as opposed to breaking apart.

     Federalism – in the way the US, Germany, Australia, or Canada exercise it – in my view can help to achieve this and strengthen the Union. FFA – the SNP’s (and Macwhirter's) butchered and bastardized federalism – will not, and thank God it has been defeated in the Commons.

     Going forward, I hope to write further on federalism and how it is practiced in Germany, Canada, Australia, the United States, and perhaps others. In particular, I would like to shed light on how their tax systems work, as well as their mechanisms for fiscal transfers, and the amount of fiscal autonomy exercised by the federated governments, which helps to achieve a healthy balance between them and the federal government, and binds the country into one.

     If Britain can achieve something like this and the British people strive to make it work, Britain – in my ever humble opinion  shall endure.