How have the institutions of UK devolution affected economic performance?

It is sometimes argued that the experience of devolution for Northern Ireland, Scotland and Wales implies that the regions of England need greater decentralisation to improve policy delivery and economic outcomes. But the evidence from the devolved nations after 25 years is much more ambiguous.

Since 1999, the power to make certain laws and deliver public services – from health and social care to education and transport – has been devolved to legislatures and executives in Belfast, Cardiff and Edinburgh – respectively, the Northern Ireland Assembly and the Northern Ireland executive; the Scottish Parliament and the Scottish government; and the National Assembly for Wales and the Welsh government (for more, see the Civil Service devolution factsheet).

Devolution was introduced a quarter of a century ago following a referendum in each of the three nations, all of which provided support for such a change.

Economists usually consider the impact of institutions on economic growth and performance at the national level. Here, we focus instead on how the institutional change associated with devolution in the UK may have affected the economic performance of what are collectively known as the ‘devolved nations’ or devolved administrations.

Devolution could provide ‘laboratories’ in policy-making – a mechanism through which to compare the effectiveness of different policy choices (Institute for Government, 2016). In practice, there has been a lack of evidence of any marked devolution dividend in terms of improved economic outcomes (Rodriguez-Pose and Gill, 2010; Scottish Parliament Information Centre, 2019).

Context

In his novel Heart of Midlothian, Walter Scott has a character say that one of the advantages of having a parliament in Edinburgh (as was the case before the 1707 union of England and Scotland) was that when the politicians misbehaved, they could be pelted with stones.

Claims about the accountability advantages of decentralised government have been around for some time. More recently, devolution has been considered as a possible explanation of regional economic growth, through an alleged benefit in terms of improved policy design. That is our focus here.

The quality of institutions and governance – including things like the transparency of decision-making, the extent of corruption, and the stability and safety of property rights – have been indicated as key determinants of growth (Barro, 1996; Acemoglu et al, 2004).

Given that devolution in its own right represents a substantial institutional change, and also the extent to which it leads to a number of institutional changes, it is plausible that devolution could have an impact on economic performance.

In this article, we consider three central issues:

How the economic performance of the devolved nations since 1999 compares to the UK average, as a rough indicator of whether performance has improved or not under devolution.
Certain institutional aspects of the devolved administrations that could affect economic performance.
Illustrative cases studies of policy choices under devolution with a particular focus on the extent to which policies have differed from those in England, and whether such differences have been beneficial.

Has economic performance improved relative to the UK average?

There has been little change in the relative performance of the three devolved nations throughout the period of devolution (see Figure 1). This does not prove that devolution has been ‘an economic failure’.

It is possible that in the absence of devolution, Northern Ireland, Scotland and Wales would have experienced relative economic decline, relative to the UK average, which devolution then counter-acted. (The evidence for this scenario is not obvious.)

Instead, what the data are implying is a lack of evidence that devolution led to a marked improvement in economic performance.

Figure 1: Income per person in the devolved nations compared with the UK average, 1998-2022

Source : Office for National Statistics (ONS), 2024

How has devolution differed across the devolved administrations?

Importantly, the detail of the devolution settlement differs across the three devolved administrations. That detail is summarised in a number of House of Commons briefings:

Institutional change is often qualitative rather than quantitative, but here we concentrate on institutional aspects of devolution that can be quantified. These aspects may affect economic performance, whether through their impact on the quality of policy-making or in terms of their influence on private sector activity.

The extent to which the devolved administrations actually operated

Northern Ireland is the clear outlier in this regard. Devolved government has remained in operation in Scotland and Wales throughout the 1999-2024 period, whereas in Northern Ireland, the executive was non-operational for more than 40% of that period.

Government instability is usually viewed as bad for business confidence (Aisen and Veiga, 2011). It is not possible to prove whether, or to quantify how far, periodic absences of an executive slowed down Northern Ireland’s growth

Figure 1 indicates that over the 1998-2022 period, there was very little convergence between Northern Ireland and UK levels of GDP per person. The year-to-year variations suggest little evidence that Northern Ireland was out-growing the UK average when the devolved government was operating.

Indeed, Northern Ireland’s best comparative performance was in 2006 when the devolved government was non-operational and its worst was in 2014 when devolution was operating. Northern Ireland’s relative performance was better during the 2003-06 period when devolution did not operate than it was during 2007-16 when the devolved administration did operate.

The extent of coalition government

All three devolved administrations have contrasted with the traditional Westminster model of a single-party majority government.

Northern Ireland has had multi-party executives of at least three parties and sometimes four or five. Scotland’s experience has been varied: sometimes a one-party majority or one-party minority government, and sometimes two-party coalitions. Wales has most often had a single party government, sometimes minority or sometimes co-operation or coalition arrangements with a second party.

If one thinks that single party governments act more decisively and make hard decisions, then one might have expected the arrangements in the devolved nations to worsen performance. But many commentators would point to the alleged benefits of more consensual models of government.

Much hinges on how well the methods used to ensure collective responsibility within a coalition government – such as agreements and programmes for government – actually work (Nooruddin, 2010).

Whether the party in power in devolved administrations is the same as in Westminster

Under devolution, the parties in power in the devolved administrations have usually been different from the party in government at the UK level. An exception was the 1999-2007 period, when Labour was in power in both Scotland and the UK. Nevertheless, even during this period, policies in Edinburgh on higher education funding or personal care began to depart from those in London.

Different parties might lead to policy clashes, and hence confusion and uncertainty. Fraught relationships between the UK government and the devolved administrations – particularly in terms of where the powers ‘repatriated’ from the European Union (EU) would land – was one aspect of the turmoil around Brexit between 2016 and 2020 (Morgan and Wyn Jones, 2023).

At the same time, there may be scope for the devolved administrations to mitigate harmful policies at the UK level. In Scotland and Northern Ireland, devolved powers have been used to ‘soften’ aspects of welfare reform, the assumption being that too much welfare reform is a bad thing (Devolution of welfare, House of Commons Library, 2019).

Use of ministerial directions

Ministerial directions are a form of administrative device issued when a minister overrides the clear policy advice of their senior civil servants.

Northern Ireland appears to be an outlier here, with far more ministerial directions compared with the other devolved nations. Between 1998 and 2023, Northern Ireland had 105 directions, while there were 82 for the UK government, five in Scotland and just one in Wales (Belfast Telegraph, 2023; Department of Finance).

Use of directions could indicate that ministers are, correctly, emphasising some ‘big picture’ issue over any narrow considerations of value for money or effectiveness. For example, the unusual circumstances that emerged because of the Covid-19 pandemic were associated with a wave of directions.

That said, frequent use of directions might indicate that decisions are being made according to narrow party political considerations. The relatively high number of directions in Northern Ireland could point to weakness around the control of public spending, which is consistent with the over-spend that did occur in 2022-23.

Limited policy capacity

None of the devolved administrations has a second, revising chamber in its assembly/parliament. This relates to a broader question around whether the overall capacity to develop, refine and evaluate policies is sufficiently wide or deep in Northern Ireland, Scotland and Wales.

Given the small populations in Northern Ireland and Wales (1.9 million and 3.3 million respectively, compared with 5.5 million in Scotland), lack of broad policy capacity – such as think tanks and independent policy research – is more likely to have been a constraint in those two devolved administrations (Brownlow, 2022).

What has been the impact of policy decisions taken by the devolved administrations?

Above, we have looked at how institutions might affect policy-making. In this section, we reverse the focus and examine how the policies chosen might imply something about the institutions.

If the devolved administrations had improved economic performance, one might have expected to see cases where policies in Northern Ireland, Scotland and Wales departed from those in Westminster and did so in a beneficial manner.

Some policies fall into this category, but in practice, some may have been chosen because relatively high levels of public spending facilitated options that were not available in England.

A third category of policies consists of those that differ from England but with negative results. Below is a sample of these three categories of policies.

Policies that differed from the UK, with beneficial outcomes

One example is Scotland’s land and buildings transactions tax, a tax applied to residential and commercial land and buildings transactions where a chargeable interest is acquired. This policy anticipated how, in England in 2014, the very old tax stamp duty would be reformed from a ‘slab’ to a ‘slice’ basis, hence removing some of the previous distortions to price setting in the housing market (House of Commons Library, 2023).

Scotland’s fresh talent initiative – a post-study work visa in place between 2004 and 2008 – responded to the nation’s declining population (which contrasted with growth in the rest of the UK) by relaxing the immigration rules for foreign students (House of Commons, 2023).

It has been claimed that the Wales children’s commissioner – a role specifically focused on children’s rights and how these are affected by decisions made by public bodies – is the first such position in the world, although New Zealand may have been earlier (House of Commons, 2023; Mana Mokopuna).

The plastic bag tax, which was introduced in Wales in 2012 as an early example of environmental taxation, was the first in the UK, although it was likely to have been inspired by the Republic of Ireland’s policy introduced a decade before (Frater and Lee, 2012). There are positive assessments of the impact of this tax (House of Commons Library, 2020).

Policies that differed from the UK, but based on a funding advantage that may not be sustainable in the long run

Throughout the period since 1999, funding for public spending in Northern Ireland and Scotland per capita has been substantially higher than that in England (by at least 20%). The funding premium for Wales has been smaller, at 10-20% (Northern Ireland Fiscal Council).

The traditional geographical funding arrangements in the UK, notably the Barnett formula, have consistently worked to the disadvantage of Wales (Holtham Commission, 2009). Indeed, levels of funding per person have often been lower than estimated relative need (Independent Commission on Funding and Finance for Wales).

The devolved administrations in Northern Ireland and Scotland have used their funding advantage to create a situation of ‘super-parity’ relative to England. Specifically, they have a broadly similar quality of services compared with England, but with a lower level of charges (although ‘similar quality’ has sometimes been disputed).

The absence of university tuition fees for Scottish students who study in Scotland is one example. One effect of this is that Scottish higher education has become less well funded than its counterpart in England (Scottish Parliament Information Centre; Institute for Fiscal Studies).

An example from Northern Ireland would be the lack of domestic water charges. One result of this policy is that funding to maintain and improve the water and sewerage infrastructure in Northern Ireland has had to rely on an annual allocation out of the general block grant for the Northern Ireland departments. This funding has often fallen short of needs and lacks long-run stability (ITVx, 2024).

Policies that differed from the UK but were unhelpful

During the 2010s, schools in England moved in the direction of a more centralised, knowledge-rich curriculum. Comparably, in Wales, the emphasis was on the development of broad skills and wellbeing. England has been moving up in the rankings of the Programme for International Student Assessments (PISA) – a measure of 15-year-olds’ ability to use their knowledge and skills in mathematics, reading and science to meet real-life challenges – but the performance of students in Wales has fallen (Institute for Fiscal Studies, 2024).

In Scotland, after a long period during which the Scottish government refused to use its devolved powers to vary income tax, recently some tax rates have been increased relative to the rest of the UK. The Scottish system has become relatively more progressive.

One downside of this has been that the revenue raised has been less than it would have if the former UK rates had been retained. Given the fiscal deal with the UK government, the deduction from the Scottish block grant exceeds the amount collected through the devolved income tax (GOV.UK, 2019; Institute for Fiscal Studies, 2022;andMcIntyre et al, 2022).

Rather than simply cutting and pasting a Whitehall environmental scheme to promote boilers using renewable fuels, Northern Ireland developed its own scheme, the Renewable Heat Incentive, during 2011-17. The design of this policy, specifically overly generous subsidy rates, gave incentives for more rather than less use of energy (Department of Finance).

Conclusion

Economic performance is not the only basis for judging devolution, but it matters a lot. The devolved administrations are challenged by the paradox that the public seems to want more devolved powers, but people do not want to receive different services from those provided in the rest of the UK (Curtice, 2006).

There is a lack of strong evidence that devolution has substantially improved the quality of policy-making and hence of economic outcomes. Northern Ireland appears as an outlier with especially unstable and possibly even irresponsible governance at times.

While it is sometimes argued that the experience of devolution implies that the regions of England need greater decentralisation in order to improve policy delivery and economic outcomes, the evidence from the devolved nations is much more ambiguous (HM Government, 2022; Resolution Foundation, 2023). It points to the likelihood that any devolution dividends are contingent on the careful design and working of the institutions of devolution (Rodriguez-Pose and Gill, 2010).

Where can I find out more?

What is devolution, how is it changing and where might it go next? Economics Observatory article by David Bell at the University of Stirling.
Devolution explained: Local Government Association.
Devolution: Links to Institute for Government articles on this topic.
Devolution factsheet: From GOV.UK.
In place of centralisation: The Economy 2030 Inquiry from the Resolution Foundation.