Options for reforming devolved fiscal frameworks after the pandemic – Institute for Fiscal Studies

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The COVID-19 pandemic has been a significant challenge for all levels of government across the world. In the UK, the decentralized governments of Northern Ireland, Scotland and Wales are responsible for most of the public services heavily affected by the pandemic and have designed and implemented much of the health response public to it. They were also responsible for designing and administering grants and property tax breaks for businesses.

They have had to fulfill these responsibilities and manage their budgets within the context of budgetary frameworks agreed upon before the pandemic – although the UK government has made modest, but important, temporary changes to funding arrangements in 2020-2021. These changes, combined with the huge funding increases made available by the UK government and the fairly symmetrical impact of the pandemic across the UK’s four countries, avoided the risk of a major funding crisis for decentralized governments. But this “success” does not mean that there is no room for improving existing fiscal frameworks to make them more robust to future shocks, or that the same ad hoc changes would necessarily be appropriate if another shock extreme unfavorable was occurring.

This report examines a range of options for reforming existing fiscal frameworks, with two main goals in mind: first, to make them more resilient to future crises, including a potential re-intensification of the COVID-19 pandemic over the course of the year. winter 2021-2022; and second, to help decentralized governments support economic and social recovery from the pandemic.

Management reform options

We distinguish between reforms that we recommend as permanent framework changes, to address what might be seen as underlying design weaknesses, and those that could be made as temporary changes during crises.

Assessment of these options

Our assessment of these options is based on a review of the performance of existing frameworks and ad hoc changes during the pandemic, the principles set out for the design of the frameworks, consultation with UK and decentralized governments, and an analysis of simple quantitative scenario. From the perspective of decentralized governments, we assess the extent to which reforms would provide greater clarity on financing, more flexibility to respond to fiscal shocks, and better insurance against the risk that these shocks are asymmetric. From the UK government’s perspective, we also consider the potential impact of the reforms on their control of all public sector borrowing and debt, and their fairness to all parts of the country, including England. Our options assessment is also informed by a review of subnational frameworks in other countries, with a particular focus on their performance (as well as the broader experience of intergovernmental coordination) during the pandemic, drawing on several case studies.

Recommendations

Our review leads us to reject some changes to fiscal frameworks, recommend others, and argue that the desirability of some changes depends in part on subjective opinions about the nature of UK political union. This is especially true for changes in the degree of redistribution and insurance to be provided to decentralized governments, and the nature of intergovernmental coordination.

Main recommendations

Our assessment of potential permanent changes

  1. Funding guarantees provided to decentralized governments in 2020-2021, which provided decentralized governments with additional upfront funding and funding certainty, should not be provided on a permanent basis. In “normal” times, there are less likely to be substantial in-year increases in planned spending in England, as was the case last year. The benefit of providing greater certainty of initial funding to decentralized governments is therefore outweighed by the risk that the use of funding guarantees would cause decentralized governments to significantly increase funding than England, which would be unfair. . However, the risk that decentralized governments will be forced to cut spending at the end of the year if England’s funding is cut later in the year should be addressed by ensuring that they will be able to postpone such cuts. , perhaps by expanding the scope of their borrowing powers to cover this eventuality.
  2. More generally, there are arguments in favor of a modest extension of the scope and breadth of the borrowing powers of devolved governments in “normal” times. The ability to borrow to fund discretionary resource spending would provide additional flexibility to respond to unforeseen events and therefore reduce the need to withhold funding instead. Even sizable borrowing by decentralized governments would have little impact on UK borrowing and debt. But that would raise concerns about fairness given that England would not have such borrowing powers. An annual discretionary borrowing limit of 1% of deconcentrated government resource budgets would provide useful additional flexibility while minimizing these equity issues.
  3. The Scottish Government’s annual borrowing limit to correct forecasting errors is set to be raised to £ 600million on a permanent basis. This limit, and the equivalent Welsh government limit, should then be indexed to changes in overall global grant adjustments, rather than being set in cash terms.
  4. To provide more flexibility, limits on withdrawals from the Scottish and Wales reserves should be tightened and potentially abolished. Consideration should be given to increasing the total amount that can be held in reserves and, at a minimum, existing limits should be indexed rather than set in terms of cash.

    Our assessment of potential temporary changes during shocks

  5. The additional flexibilities that we recommend under the normal functioning of deconcentrated budgetary frameworks would not be sufficient during an extreme and rapid adverse shock like the COVID-19 pandemic. In such circumstances, a combination of reintroduction of funding guarantees and extensions of the borrowing powers of decentralized governments will likely be warranted. This would ensure that policymaking is not held up by waiting for funding to be available through the Barnett Formula, after the policies for England are announced. The UK government should also be prepared to bypass Barnett’s formula if a shock has clear and significant asymmetric impacts across the UK, but it will likely be very difficult to quickly develop a tailor-made needs-based formula for these purposes. .
  6. Beyond that, we do not believe it is practical to establish in advance the criteria for determining when an extreme adverse shock occurs, or the changes that should apply to normal funding terms. if a shock is identified as occurring. Indeed, such shocks are, by definition, difficult to predict and the most appropriate response will be different depending on the nature of the shock. Instead, decisions will inevitably have to be made in an adaptive and ad hoc manner. But we must be clear in advance that the policy will be nimble if such shocks occur.
  7. Improved collaboration between the UK and decentralized governments could help identify how a shock is impacting (or is likely to impact) UK nations, and inform the design of an appropriate budget response . A truly collaborative approach, aimed at forging consensus, would also give greater legitimacy to any decisions made, which could be important if a shock particularly affects part of England and it makes sense to only top up funding. from England.
  8. To facilitate such improvements, formal channels of communication and coordination should be strengthened, and we agree with the recommendations for a permanent intergovernmental secretariat serving a reformed joint ministerial committee. However, a culture change both in the UK and at the level of decentralized governments is also needed to maximize the benefits of collaboration and coordination.
  9. Particular attention to intergovernmental coordination should be where political responsibilities significantly overlap, interact or are likely to have spillover effects on other parts of the UK. In the context of the COVID-19 pandemic or a future pandemic, this includes (central) responsibility for larger economic support measures such as the leave scheme, and (delegated) responsibilities for public health restrictions . Since deconcentrated governments cannot really exercise full control over them in the absence of appropriate economic support measures, a feasibility study on establishing leave-type support on a geographic basis should be undertaken. company and published urgently. If possible, such support could be made available both if illnesses or hospitalizations exceed particular thresholds (paid for by the UK government) or at the request of a decentralized government (paid for by that government) .
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