A former senior Civil Servant writes

Saturday’s Daily Record (20/02/2016) includes an item written by Professor Jim Gallagher about the long- running negotiations between the Treasury and the Scottish Government on the Fiscal Framework which will underlie the Scotland Bill when it comes into force.

Gallagher, we are often told, is an expert on devolution and all matters appertaining to government. His Wiki entry tells us that he “was Whitehall’s most senior civil servant concerned with devolution until he retired in June 2010, as Director-General for Devolution in the Cabinet Office, the No 10 Policy Unit and Ministry of Justice” (https://en.wikipedia.org/wiki/Jim_Gallagher_%28civil_servant%29). He is now a Research Fellow at Nuffield College in Oxford, as well as, since 2005, being a Visiting Professor at Glasgow University. The man clearly has considerable background in this matter.

It is therefore worrying that he can come put his name to an article which is little more than a deception followed by, followed by a gross over-simplification, followed by an error (lets be nice). Let’s take a few in order

  1. Perhaps the most serious, I think, comes right at the beginning. Starting from the unremarkable observation that the Scotland Bill will hand over all powers to Scotland over income tax in Scotland, Gallagher slips from that to the assertion that “now that we in Scotland get to keep all our own income tax, should we get a share of England’s income tax too?” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99)

    In putting this forward, it is as if Gallagher is asking us to believe that government, anywhere in the world, survives purely on income tax. This is not what the negotiations are about.

    The proposal to allow Scotland not only to set, but to keep all of its income tax (as well as getting half of the VAT raised in Scotland) which will require a suitable deduction to be made from the block grant. The Smith Commission’s emphasis on “no detriment” means that that income tax deduction made in the first year when Scotland has full control of income tax, must be indexed for future years The question has been how we do this?

    The Treasury has put forward some possibilities which have been found wanting by the negotiators from the Scottish Government, as their proposals are perceived to disadvantage Scotland. They are hardly alone this, since, as Nicola Sturgeon wrote in a recent letter to David Cameron, the method of indexation proposed by the Scottish Government is “considered to be the best way of satisfying the Smith Commission’s principles, not just by the Scottish Government, but also by committees of both the House of Commons and the Scottish Parliament, the broad consensus of academic opinion, the STUC and four out of the five parties represented on the Smith Commission.” (https://www.holyrood.com/articles/inside-politics/nicola-sturgeons-letter-david-cameron-fiscal-framework-negotiations)

    But that issue notwithstanding, where will the money come from to pay the block grant?

    Gallagher is trying to tell us it will come from “English income tax”, which is just rubbish. It might come, for instance, from the corporation tax which is earned in Scotland from our normal economic activity – things like excise duty on whisky – or National Insurance (which despite the name is not hypothecated). Or perhaps from oil tax revenue, when the oil price reverts to more accustomed levels. The more assiduous of you might have noticed that OPEC has agreed to stop adding to the glut on the world market by freezing production (http://www.reuters.com/article/us-global-oil-idUSKCN0VO01K) – the price rose by 7% on a single day. This won’t get oil back to where it was a couple of years ago, but it has been suggested that it might lead to actual cuts in production over the next few months (http://oilprice.com/Energy/Oil-Prices/Why-OPEC-Production-Freeze-Could-Pave-The-Way-For-Actual-Cuts.html) and the return of a healthier flow of oil tax revenue to Westminster.

    All of these are sources of tax revenue, which flow directly from Scotland to Westminster now, and will continue to do so even after the implementation of the Scotland Bill and whatever form the fiscal framework might take.

    So when a supposed expert tries to tell us that the balance of the block grant will be paid from “English income tax”, when the fact is that it will come from normal taxation, some at least of which, if not all, will have come from Scotland, then there is clearly something up with his argument.

  2. Next Gallagher tells us “With tax powers you get risk – how many taxpayers there are and how much tax they pay. If you don’t want those risks, don’t ask for tax powers. And remember, risk cuts both ways” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#y0ivDVYh5coa7lgf.97) which is true enough Professor, but only if we ignore two slight problems.
    1. Risk is something we are all accustomed to. I might look out the window and think “it won’t rain” and not take an umbrella. If I am wrong, my risk is that I get wet. The whole essence of insurance is paying others to take on risk for you – for instance damage to your home, or in the event of a car accident. But just as it is my decision whether or not to take an umbrella, it will be my decision, AND the decision of the insuring company to agree that they will take on my car insurance risk. We are all free social actors. However, Scotland isn’t in that position, as a whole plethora of powers that will affect economic – and given its significance to the fiscal framework negotiations and Gallagher’s argument , population growth – will remain with Westminster. Put briefly we are being asked to take on risk, without having control of the full range of policy options which might affect our economic and/or population growth.

      To take a specific example, Universities Scotland and the Scottish Government are seeking powers to allow new graduates at Scottish Universities who are from outwith the EU, to remain in Scotland for at least a year after graduation (http://www.universities-scotland.ac.uk/blog/post-study-work-visas-when-it-works-and-when-it-doesnt/), rather than having to leave at the end of their course unless they find work, as proposed by the Home Office. Or what about economic policy? How much influence is exerted here by the City of London and how much by Scotland? If I were to drive my car carelessly then my insurance premiums would go up. But that would be because of my behaviour. In Scotland’s case, whether our population goes up is not entirely in our control, so it seems a strange argument that we should bear the risks, but without control of all the factors that contribute to that risk.

    2. What happened to “pooling and sharing”? The “broad shoulders of the UK”? Essentially what Gallagher is saying is – “To be strictly fair to English taxpayers, we shouldn’t. After all, if we pay more income tax, they won’t get any benefit from it.” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99)

      No, wrong again Professor. While clearly it would be unfair for Scotland to be in a “heads we win, tails we don’t lose” situation, the notion of pooling and sharing has to mean that under certain circumstances – for instance if Scotland does lag behind the rest of the UK – then we do get some of tax raised outwith Scotland (though as above, we aren’t just talking about their income tax, but about the taxation raised within the UK to pay the block grant).

      Gallagher might find merit in Ruth Davidson’s suggestion of “a guarantee of no less than Barnett for five years, reducing risk further. (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99) but what happens after five years? No more pooling and sharing is it?

  3. Gallagher is also exercised that “As well as per capita indexation, [Nicole Sturgeon] made welfare demands – £600million to administer the benefits that Holyrood can run from 2017.That’s just to pay for the bureaucracy, on top of the £2.5billion cost of the benefits themselves, which the Treasury cover anyway. Administration usually costs three to four per cent of the benefit bill but the SNP want nearly 25 per cent.” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99). The problem here is that this is just not true.

    Let’s quote her directly from her letter to David Cameron. The relevant section is

    “based on information provided by DWP and our own analysis of published data from DWP’s Personal Independence Payment and Universal Credit business cases, we estimate ongoing administration costs to be approximately £200m annually, and set up costs to be between £400m-£660m.” (https://www.holyrood.com/articles/inside-politics/nicola-sturgeons-letter-david-cameron-fiscal-framework-negotiations).

    In other words, the £600 million which Gallagher refers to is not “to administer the benefits”, but for set up costs, for the Scottish Government has, at the moment, no Welfare responsibilities, and thus has no administrative infrastructure for this purpose.

    Moreover, if we accept Gallagher’s claim that £600 million is 25% then the £200 million running cost must be 8% – still above the 3 or 4% which Gallagher claims would be normal for administration, but much closer (and for the record Sturgeon was also clear that Swinney would be prepared to compromise on these figures). In return the Treasury has offered £50 (fifty) million pounds to cover transition costs. How well does this meet the Smith recommendation of “an increase in Scotland’s block grant equivalent to existing UK expenditure in Scotland, including administrative savings and a share of the implementation and running costs “sufficient to support the functions being transferred”. (https://www.holyrood.com/articles/inside-politics/nicola-sturgeons-letter-david-cameron-fiscal-framework-negotiations)?

How shocking is it that someone of the experience of Jim Gallagher (senior civil servant in the Cabinet Office), and with his academic expertise (Senior Research at Nuffield College) should put his name to an article which is misleading in relation to where the revenue for the block grant comes from, in relation to the nature of risk, and in relation to welfare costs quite simply wrong about what Sturgeon had sought from the Prime Minster?

Yet should we be surprised? We have known for some time the clear Unionist sympathies of Sir Nicholas McPherson, the Permanent Secretary at the Treasury, something which provided George Kerevan last week with the ammunition for a thorough demolition of his “neutrality” (http://www.thenational.scot/comment/george-kerevan-nick-macphersons-quiet-but-calculated-sabotage-of-the-democratic-process.13722), if that fantasy still existed. As Kerevan notes “It is unheard of for a senior civil service mandarin to enter the political arena so brazenly.”

However, perhaps there was a sign at a very early stage in Gallagher’s article of what was likely to follow. This was when he referred to (in line 3), “the argument between the SNP and the UK Government” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99) Why, Professor, the SNP and the UK government? Or am I being a trifle touchy here? If you think so then allow me to reword this, and then we will see what you think – “the argument between the Scottish Government and the Conservative Party”. That would seek no less influence on the reader, but be equally accurate, as John Swinney might be a member of the SNP, but is acting in his capacity as Finance Minister of the Scottish Government. In the same way, Gregg Hands might be a Conservative Party member, but is acting in his role as Chief Secretary to the Treasury. Why Gallagher expresses himself this way becomes obvious toward the end of his article, when he concludes

“It’s becoming pretty clear that the SNP won’t promise another referendum after the next Holyrood election. They think they’d lose. But without it they’ll have nothing to talk about. So maybe their aim is to reject the fiscal framework, whatever is offered and so derail the new powers in the Scotland Bill.” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99)

First of all, it’s not exactly clear at all – never mind “pretty clear” – that another referendum during the next Holyrood Parliament would be lost. In fact, it might be argued that given the relative weakness of Cameron’s renegotiation of the UK’s EU membership, thus raising the possibility of a UK vote to leave while Scotland votes to remain, another referendum is seen as quite possible by many commentators.

Secondly, and more importantly, what point is there in securing new powers if we don’t have the necessary resources to exercise them properly?

So the reason for the reference to the SNP, rather than the Scottish Government in his opening is not accidental. Indeed, it is part of the whole piece of the argument to put responsibility on one side in a negotiation, and to explain this by reference to the claimed bad faith of that political party, seeking to further its own political ends. Of course, “political party following self-seeking political strategy” is hardly news. But secondly, Gallagher himself says that a deal which was advantageous to Scotland would be “a hard sell to MPs in northern England, who get much less spending than we do” (http://www.dailyrecord.co.uk/news/politics/devolution-expert-jim-gallagher-asks-7399820#sfc1F8dTghqTi1l4.99) In other words there are political ends being pursued by the UK government (not the Conservative government), but that is not remarkable, only that the SNP (never the Scottish Government) is doing this.

Then again, given Gallagher’s connections to Better Together during the referendum campaign (http://www.bbc.co.uk/news/uk-scotland-25657929), maybe not such a surprise really?

 

 

 

 

    

 

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European football’s brave new world

There is an advert being run by Barclay’s Bank just now, which shows a young guy phoning one of their customers. He tells the customer that he is in the process of upgrading their account and that he just needs their security details. In the background someone else is saying “he’s lying”. “He’s lying”, going on to remind customers that Barclays will never phone and ask for security details. At the end of the ad the customer is told “thanks very much and have a nice day”, which is followed by the comment “well, that’s true at least”.

Much the same can be said of today’s initiative by Europe’s “big clubs” to give them a privileged position, either through “reform” of the Champions League, or the replacement of the Champions League with a separate ‘European Super League’ drawn from England, Germany, Spain, Italy and France. This is being proposed by Bayern Munich and Juventus (http://www.standard.co.uk/sport/football/bayern-munich-and-juventus-call-for-20team-european-super-league-to-replace-the-champions-league-a3155766.html) and would involve 20 teams, including, according to the Evening Standard, “Arsenal, Chelsea, Liverpool and the Manchester clubs”.

Karl-Heinz Rumenigge – Chief Executive at Bayern Munich – presents this as an inevitable development – “I see that in the top five leagues in Europe, the big teams are always getting stronger and stronger.” (http://www.bbc.co.uk/sport/football/35535729). Well of course they are – they are almost permanently in European competition where the big bucks are.

But the problem for the big clubs is that occasionally some guttersnipe gets above itself and outperforms the biggest teams. The best example this season, of course are Leicester, whose team cost less than 10% of what it cost Manchester City to assemble their side last Saturday, but who, by general agreement, took the much more expensive team apart.

Leicester though, aren’t about the occasional result. It seems almost inevitable that even if they don’t win the Premiership, next season they will qualify for the Champions League, or at least be given the opportunity to qualify through the final qualifying round.

Remember the names of the teams from England that the Evening Standard suggested would be included in the Super League – Arsenal, Chelsea, Liverpool and the Manchester clubs. Of course as only four teams from England can qualify for the Champions League, all five of these won’t be there every year. In the past the regular “loser” would have been Manchester City, though with the billions spent on the team in recent years that has ceased to be the case. Arsenal, on the other hand, have never failed to qualify, and it’s only been since Sir Alex Ferguson’s retirement that Manchester United’s permanent involvement has become uncertain. With the vast sums of money spent on the Chelsea team since Abramovich became the club owner, the team that has tended to be squeezed out in recent years has been Liverpool.

However, this year, Leicester have created a more difficult problem, in that, given their current position, it would seem likely that only three other places will be available. Let’s suppose Manchester City, Arsenal and perhaps Manchester United if Tottenham Hotspur don’t gate crash the procession. But no Chelsea, no Liverpool and perhaps even no Manchester United, who will all lose out on the considerable rewards of playing in the Champions League.

How considerable? The following table makes this clear (source http://www.totalsportek.com/money/uefa-champions-league-prize-money/)

Thus from playing in the Champions League, an English team winning the competition could make 100 million euros. There are some points to note from this:

  1. That an English club could make as much from “market pool share” as from winning the Champions League. What is the market pool? This is defined by UEFA as “The market pool amount will be distributed according to the proportional value of each television market represented by the clubs playing in the UEFA Champions League (group stage onwards), and will be split among those teams competing from a given association”. In other words, a team from Scotland will get much less than an English club might hope to get from the market pool because the English TV audience is much larger than the size of the Scottish TV audience. Or a team from the Netherlands will get much less than a team from Germany, or Spain, or even Italy or France because these are much larger countries with much larger TV audiences. In other words, while UEFA are cutting back on the market pool from 45% to 40% of revenue over the next four years, it is not an accident that the Super League would involve teams from England, Germany, France, Spain and Italy because teams from these countries have a built in, permanent advantage when revenues are distributed from the Champions League.
  2. What does it tell you when a club can make as much from the market pool as it can from playing success? It might well be the case that the argument that the bigger countries contribute more than an equal share of revenue from their television operators, but is the Champions League a sporting competition or a financial one? Sadly, I think we know the answer to this.
  3. How do the rewards from the Champions League correspond to domestic rewards? In many countries of course – particularly the smaller ones – they dwarf what can be earned from domestic success. The above table tells us that if Celtic can manage to get through the qualifying rounds this time, they will make 12 million euros, even if they don’t win a point – that, at current exchange rates, is £9.3 million. For winning the Scottish Premiership, it was reported by STV at the time of the creation of the SPFL, the Champions would win approximately £2.5 million, so if they did nothing more than turn up for eight Champions League group games, Celtic could make getting on for four times more than they can in Scotland. When they last qualified for the group stages in 2013/14, while they lost five times (in a group that included Barcelona, Milan and Ajax) they did win once, which alone would have earned them another 1.5 million euros (£1.16 million). On top of that they would also secure a share of the market pool (though being a smaller country, a smaller share).

    In short, in smaller countries the rewards from Europe dwarf those from the domestic game. Celtic win £2.5 million (or thereby) from winning the SPFL, but from this season could make £10.5 million + their share of the market pool, even if they do as dismally as they did in 2013/14.

    Moreover – and perhaps arguably even more important – that type of money is just not available to other Scottish clubs who don’t play in Europe, giving Celtic a considerable advantage over other Scottish clubs, in much the same way as clubs from bigger countries have an advantage over Celtic because of their preferential access to the market pool.

    In many respects football has become a self-reinforcing process, in that if Celtic win the Scottish Premier League and qualify for Europe, the much greater rewards from Europe make it more likely they will win the Premier League again which qualifies them for Europe which make the much greater awards in Europe available to them, which makes it more likely they will win the Premier League again which qualifies them for ………….

  4. But what about in the bigger countries. The following table suggests what would be won by each club at the end of the current season should Leicester win the Premiership

As we can see the reward for winning the Premiership is broadly similar to that from wining the Champions League. However, this avoids a very difficult point. The above forecast – for such it is by Sportek (http://www.totalsportek.com/football/premier-league-prize-money-table-2015/) – suggests not just that Leicester will win the Premiership but that Tottenham will be second, meaning that of the clubs suggested by the Evening Standard for the Super League only two will actually compete – Manchester City and Arsenal. Or put another way, Manchester United, Liverpool and Chelsea will not, and because they wont compete in the Champions League they will not have access to up to £100 million in revenue from European competition.

OK, they can’t all win it, and it’s probably unlikely that any of them would win it. But even if they only got to the last eight, they could still make 70 or 80 million euros – between £54 and £62 million – which instead becomes available to Tottenham and Leicester. It is obvious that a revenue hit of that sort of magnitude has to be harmful, particularly as with Manchester United it will have happened (according to the above forecast) for two seasons on the bounce. It simply cannot be allowed to happen, or at least not too often.

So, in conclusion, let’s go back to Herr Rumenigge who is quoted later on as saying

“A super league outside of the Champions League is being born. It will either be led by Uefa or by a separate entity, because there is a limit to how much money can be made.”

Just as in the Barclays advert, eventually we get some truth – “there is a limit to how much money that can be made”. This is an obvious truism, but what is missing is the determination of the big clubs to secure as much money for themselves, a point emphasised by Andrea Agnelli (President of Juventus) who said “You need to protect shareholders of the club, who are the real stakeholders” – not fans, but shareholders, which is at the heart of another Agnelli observation that “top football clubs should be able to make as much money as their counterparts in American sports” (http://www.standard.co.uk/sport/football/bayern-munich-and-juventus-call-for-20team-european-super-league-to-replace-the-champions-league-a3155766.html) Where will this money come from? Well eventually one way or another it will come from fans, even if in the form of TV revenue, which can be disguised as much as we like, but with pay TV comes from fans. But fans aren’t stakeholders in the world of the 20 European Super League – shareholders are stakeholders. Fans are customers to be milked as thoroughly and regularly as possible. But, fair play to Rumenigge and Agnelli – at least we did get the truth eventually.

But before you go, one last point in passing. How odd is it that the “champions” (if Leicester do it) are on live TV less often than Liverpool, Chelsea and even Newcastle?

A wee word about SNPx2

A TNS poll out this morning offers the following predictions

Constituency vote                    Regional List    

    

The net result, if one uses Scotland Votes (http://www.scotlandvotes.com/holyrood) would be

SNP 73 seats

Labour 26 seats

Conservatives 20 seats

Liberal Democrats 6 seats

Greens 4 seats

In the constituency vote the SNP win 69 seats, Labour are wiped out, the Tories win 3 seats and the Lib Dems hang on in Shetland.

All of this assumes a uniform swing and no effective local issues – always dangerous assumptions. But note this – that with 52% of the regional list vote, the SNP win 4 regional seats – not even one in every region. While Labour, totally blitzed in the constituencies, win no fewer than 26 regional seats but with 19% of the regional vote which is closer to one third than half the SNP regional vote. With 17% – again nearly a third of the SNP regional vote – the Tories win 17 regional seats (having three constituencies), more than four times the regional seats won by the SNP.

Two points from this

  1. While the use of Proportional Representation and DeHondt was to give Scotland a more democratic Parliament, let’s be clear too that the difficulty that is normally encountered with such systems for a single party to secure a majority was not out of mind either. If we think back to the AV referendum in 2011, the Labour Party was split on that issue. While Ed Miliband was in favour, many of his cabinet – in particular the Blairites, including John Healey and Caroline Flint, as well former ministers such as David Blunkett, Lord Prescott and Margaret Beckett – actively campaigned against AV. There is a strong strand of support for First Past the Post in the Labour Party. An important reason for the voting system in Scotland was that Labour were in partnership with the Liberal Democrats when plans for the Scottish Parliament were being drawn up by the Convention, and some form of PR would be a key demand of theirs to go along with the plan. However, the SNP chose to boycott the Convention. Would things have been different had they participated?
  2. The problems with advising SNP constituency voters on how to use their second vote are well known – not every SNP voter is happily going to vote for the main alternatives (RISE, Solidarity or Green) and if the vote is split between them, it allows the Unionist parties to profit. But where we are, with SNPx2, will allow the Unionist parties to profit. The opposition given the SNP’s 73 seats will number 56, but the Unionist opposition (Labour + Conservative + Liberal Democrat) will be 93% of that. Might we have had a more desirable outcome had there been Yes candidates run at Regional level, distinct from the SNP? Could this have given us the “independence Parliament” that Jim Sillars have called for, where the debate is not about “if independence”, but about “how independence” and “the reality of independence” – i.e. not about whether we should be independent, but debating how best to achieve this and what kind of Scotland we want to use our independence to create and how we will do this? Clearly we have missed the opportunity for this for next May. Instead we have locked ourselves into the same old carry on at Holyrood. Does anyone think that today’s FMQs is a good advert for an independent Scotland (http://www.bbc.co.uk/news/live/uk-scotland-scotland-politics-35459606 and start at 12.02)? We have to look forward to five more years of the Kezia and Ruth Show.

It might also be worthwhile bearing in mind what the Presiding Officer has had to say at the end of FMQs –

Some of the behaviour in during first minister’s questions has been quite unacceptable. Members watch the proceedings again and basically take a long hard look at themselves.”

Today was hardly an edifying spectacle, and not a good advert for an independent Parliament (mind you, neither is Westminster). Surely we cannot make the same mistake again in five years? We simply have to find a way to resolve the problems of how the Regional List works. But for now, on the basis of this poll, it looks very much like ‘business as usual’.