Why federalism won’t save the Union

More devolution will only further weaken the ties which bind the UK together.

During his trip to Edinburgh last week, David Cameron rather unexpectedly announced that he supported an increase in the powers of the Scottish Parliament. The current devolutionary settlement, he said, did not have to be the "end of the road" and, provided Scots vote to reject independence at the referendum in 2014, he would be willing to examine ways in which it could be "improved further". Over the weekend, both Michael Moore and Alistair Darling expressed similar sentiments, although, like the prime minister, they refused to say how they thought Holyrood's legislative remit should be enhanced.
As Tim Montgomerie explained in the Guardian on Monday, there is a clear political rationale to this new "progressive unionism". The reality is that most Scots support greater fiscal autonomy and, so far, attempts to draw a line in the sand at the status quo - or, worse still, the Scotland Bill - have only played into the hands of the SNP. It makes sense, then, for unionists to seize the initiative by embracing federalism - or some variant of it - and handing Scots responsibility over the bulk of their financial and economic affairs. This would undermine the drive toward separation by sating the Scottish appetite for more self-government.
But would it? A federal UK would mean Scotland was only just shy of out-right economic independence. It would see Holyrood take charge of, among other things, Scottish income and corporation taxes, national insurance and - in all likelihood - North Sea oil revenues, while foreign affairs, VAT and monetary policy remained reserved to London. Further devolution for Scotland would have to be met with some form of devolution for England. This would almost certainly involve prohibiting Scottish MPs from voting on English-only matters. Under these conditions, the Union would amount to little more than a kind of glorified defence alliance, with Westminster's UK-wide role being restricted to that of conducting Britain's external relations.
The difficulty, though, from a unionist perspective, is that the case for Scotland to determine its own foreign and defence policies is at least as strong as that for it to determine its own economic policies.
For instance, an independent Scotland could cut its defence expenditure from the £3.1bn it currently contributes to the British defence budget to around £1.8bn in line with the Nordic average. This would represent a significant saving at a time when public finances were under considerable pressure. It could also force the removal of the hugely dangerous yet strategically redundant Trident nuclear missile system from its waters, thereby substantially improving its security situation. Finally, it could fashion a new role for itself in international politics which reflected its status as a small, northern European social democracy, rather than remain anchored to the UK as it struggles against the decline of its global influence.

Currently, these arguments do not chime with majority opinion in Scotland. But then, a decade ago, the idea that the Scottish Parliament should raise most or all of the money it spends didn't chime with majority opinion either. What changed was Scots' sense that they were capable of governing themselves: the more they did it, the more they wanted to do it. This bears out the "slippery slope" theory advanced by people like Tam Daylell and Michael Forsyth, the most staunch defenders of the UK's unitary political structure. They warned that, as Ian Macwhirter puts it, "independence is a process, not an event" which will occur incrementally over a number of years and through a series of different devolutionary stages, whether people vote for it directly or not. In light of recent events, it is becoming increasingly difficult to say they were wrong.

So, although Cameron, Darling and Moore may view federalism - or devo-max - as the best way to preserve the Union, there is a strong chance it actually represents another step along the road to Scottish independence. Devolution has a logic and a momentum of its own. So far it only seems to be weakening the ties which hold the UK together.

James Maxwell is a Scottish political journalist. He is based between Scotland and London.

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.