After Brexit: The UK Internal Market Act and devolution

Part Five: The Effect of the UK Internal Market Act

The effect of the Act on the devolution settlement

Case study: Spending powers & the replacement of EU Structural Funds

The Issue: EU Structural Funds (ESF) support economic development across member states to invest in "smart, sustainable & inclusive" growth. UK nations no longer have access to these funds after exiting the EU.

What Scotland can do: The Scottish Government has successfully managed the ESF for many years, both before and after devolution, and expected to manage any replacement UK-wide fund in Scotland after EU exit.

What the Act means: The UK Internal Market Act at Part 6 gives the UK Government spending powers in devolved policy areas which means that the UK Government can exercise unilateral control over the UK replacement to ESF (the Shared Prosperity Fund, or SPF), bypassing the devolved administrations in ways that could undermine devolved spending choices, in devolved policy areas.^[37] The ESF and replacement SPF are of great importance to the Scottish economy and to communities across Scotland. The Scottish Government has published a clear, detailed delivery plan for how we would spend the replacement funds which was developed in partnership with stakeholders and based on a broad consultation carried out at the start of 2020.^[38]

The UK Government has already decided to use these new powers to override devolution and operate the SPF unilaterally, bypassing the Scottish Government. This removes powers previously exercised by Scottish Ministers to take decisions on spending that reflect the investment needs of Scotland's people, businesses and communities, and does not take into account the majority of consultation responses, which supported the Scottish Government's approach. It is also not known what the priorities of spending will be, just that it will have "common branding". EU Structural Funds allowed Scotland to establish funding priorities based on local conditions. The UK Government's Shared Prosperity Fund allows for no such local prioritisation.

108. Through the UK Internal Market Act, the UK Government has set in statute an "internal market" for the post-EU exit UK. This new regime will dictate the nature of policy making and the way the constituent parts of the UK engage with each other from now on.

109. While devolved legislatures will technically still be able to legislate as they currently do, laws that they pass will be fundamentally undermined by the Act's market access principles as well as being potentially open to legal challenge under the Act.

110. The legislation put in place in the Act is untested, complex and cuts across a wide range of areas and market features. It will create huge legal uncertainty and it can be expected that it will lead to a large amount of litigation.

111. The UK Internal Market Act will be an imposed constraint on devolved decision making, impacting asymmetrically on the devolved institutions in comparison to Westminster, as it will be a domestic legislative constraint imposed, and controlled, by Westminster.

112. It will also have a wide ranging and difficult to predict effect on devolved decision making. Being forced to accept goods, services and professional standards regardless of the standards set by devolved legislatures could also have a "chilling effect" on legislation. Potential new policy measures may not even be considered at all given the constraints on devolved powers to set standards across Scotland, and the possible asymmetric competition impacts on Scottish businesses of regulation. Constraining powers could constrain valuable policy innovation of devolved legislatures, with negative implications for the whole of the UK.

Case study (illustrative): Market access principles for goods & obesity

The Issue: Scotland has some of highest incidences of obesity among OECD countries. Being obese can cause a range of harms, including an increased risk of developing diseases like type 2 diabetes, hypertension, heart disease and some cancers.

What Scotland can do: The Scottish Parliament has powers to legislate for health matters. The parliament could in the future, for example, decide to legislate for measures to help tackle obesity, such as regulating in relation to certain food content standards.

What the Act means: If the Scottish Parliament decided to pass a law to regulate the content of goods to tackle the problem of obesity - in a manner that consciously sought to create a market impact in pursuit of a public health goal - it could not impose those standards on goods coming into Scotland from other parts of the UK, nor could it prevent those goods from entering the Scottish market, provided these satisfy regulations set elsewhere in the UK. Such a law may also be challenged by Scottish producers as an unnecessary barrier to their ability to trade freely across the UK.

This would be a direct constraint on the Scottish Parliament's ability to exercise devolved powers in health, making any attempt to regulate for food content standards meaningless and potentially open to legal challenge.

113. Fundamentally, the approach is inconsistent with the founding principles underpinning devolution within the UK, which depends on respect for devolved competence and restraint by Westminster in exercising its retained absolute parliamentary sovereignty. Differences in devolved areas have not been problematic, and a solution which imposes a new unilaterally designed, decided and managed regime was not needed. The Act does not recognise the particular role or status of devolved institutions in the UK's constitutional system: in the case of Scotland, the Scottish Parliament and Government were guaranteed their permanence by the Scotland Act, after the Smith Commission following the 2014 referendum. The Scottish Parliament and Government are not just stakeholders in the UK: they are fundamental components of the machinery of government in the UK.

Case study: EU education programmes & Spending powers

The issue: Upon exiting the EU, the UK Government decided to cease participation in (and by doing so also ended Scotland's access to) Erasmus+, the EU mobility programme which has benefited Scotland as part of the EU.

What Scotland can do: Education is devolved, and the Scottish Government has always been clear that ongoing participation in Erasmus+ is in the best interests of Scotland – a view backed up by stakeholders such as NUS Scotland; and a view which has seen significant support from across Europe, reflected in a letter signed by over 145 MEPs and sent to President von der Leyen on 22/01/2021.^[39] The President of the European Commission confirmed in her response that as a part of the UK, Scotland will not be able to participate as a full "Third Country" in its own right in Erasmus. We remain committed to encouraging full use of the elements of Erasmus+ that may remain open to Scotland, and we will look to explore further with the European Commission how we might maximise Scottish institutions' access to this vital programme.

What the Act means: The Act gives the UK Government power to provide financial assistance for specific purposes, including international education and training, and exchanges. UK Ministers have since confirmed that they intend to circumnavigate devolved administrations entirely and impose a replacement to Erasmus in Scotland without the consent of the Scottish Parliament: the UK Turing Scheme. This is a UK Government scheme that is likely to see Scotland worse off financially, leaving us unable to capitalise on our historic excellent performance under Erasmus; and with reduced opportunities for students, teachers and young people. The UK Government's plan to use the Internal Market Act to implement Turing negatively impacts upon our ability to provide students in Scotland with the best options for educational mobility and exchange; and impacts on devolution.

The effect of the Act on businesses, consumers and people in Scotland

114. The Scottish Government recognises that businesses want clarity in the context of an uncertain EU exit, and the global health and economic crisis caused by the COVID pandemic. The UK Government position is that that the Act gives business certainty, but it does the opposite: it destabilises devolution by undermining the Scottish Parliament's ability to set industry standards in devolved policy areas; creates regulatory incoherence (rather than collaboration) across the UK; opens the door to legal challenges; and risks a lowest common denominator approach to regulation and standards.

115. As we have already shown, the scope of the Act also goes further than EU single market rules. Given that the UK Government has said that the legislation is needed to address business uncertainty upon leaving the EU single market, it is unclear why the Act goes so much further in its blanket application and absence of exemptions than EU law. The common frameworks process was agreed to manage any regulatory gaps caused by leaving the EU. However, the Act was then introduced to manage things common frameworks cannot do.

116. Different standards have been applied across the UK for many years with no detriment to business or consumers. Instead, devolution has permitted variations in approach to reflect consumer preferences. The Act threatens to undermine how Scottish business can respond to consumer preferences. It also constrains recently devolved powers to support consumers in Scotland.^[40]

Case study: Market access principles & Minimum Unit Pricing

The issue: Alcohol use, particularly heavier consumption, has harmful consequences for individuals, families, friends and wider society in Scotland. On average, 20 people in Scotland died every week from illness caused by alcohol in 2019. Evidence shows that as alcohol becomes more affordable, drinking and alcohol-related harm increases, and that one of the best ways to reduce the amount of cheap alcohol drunk by people in any country is by making alcohol less affordable.

What Scotland can do: Public health is devolved and in 2012, the Scottish Parliament passed legislation to introduce a minimum price of 50 pence per unit of alcohol – this policy is known as minimum unit pricing (MUP). This measure aims to save lives, reduce hospital admissions, improve the lives of people affected by related secondary harms and, ultimately, have positive impacts across the whole health system and society.

What the Act means: As introduced, this public health measure would have been caught by the Act's mutual recognition principle. The UK Government amended the Bill to exclude "manner of sale" requirements from the mutual recognition principles. But MUP could still be caught by the Act's non-discrimination principles - if not by automatic application of these principles, then by private actors making challenges with reference to non-discrimination.

117. To deliver business certainty on the domestic front, the UK Government should have committed to completing UK common frameworks in good faith and to restoring cooperation in intergovernmental relations. The Act has moved the UK in the opposite direction.

118. The Act is damaging to businesses and consumers in Scotland and across the UK. Without the balance of EU single market regulation, the Act means losing the benefits of variations in approach to reflect consumer preferences, health and environmental considerations in Scotland, and the advantages of high-quality regulation of meat and fish products. In addition, the wider UK market will lose the policy innovation made possible by devolved parliaments and governments taking initiatives that are later adopted elsewhere in the UK.

119. Given the overwhelming support in Scotland for remaining in the EU, as discussed earlier, the Scottish Government introduced the UK Withdrawal from the European Union (Continuity) Bill (now Act), to enable Scottish law to continue to align with EU law where appropriate and within devolved competence. The Bill became an Act after receiving Royal Assent in January 2021. However, with the Internal Market Act in force, even where the Scottish Parliament and Scottish Ministers wish to maintain alignment with high EU standards, the UK Internal Market Act risks undermining those devolved policy choices, and could force us to accept lower standards set elsewhere.^[41]

120. Scotland's food and drink trade benefits from the advantages of high-quality regulation. The Act's market access provisions of mutual recognition and non-discrimination will undercut goods produced to high quality standards because rather than enabling administrations to take the lead on advancing public health, social and environmental initiatives, mutual recognition in the form advanced in the Act enforces a lowest common denominator that undermines such initiatives. In the post-EU exit context of the UK urgently needing to enter into trade agreements with other countries, applying the principle of mutual recognition to the domestic market may make it easier for the UK to enter into agreements on standards for imported goods that would not be acceptable to devolved administrations - and for those to become the norm across the UK. Examples of this can be found in issues such as the specific objectives set out in the US Government's mandate for trade talks with the UK and the decision of the UK Government to block amendments to Brexit related legislation which would have protected food and animal welfare standards and the health service from any future trade deals.

121. Scotland's attempts to secure our high standards within the UK after EU exit have been resisted by the UK Government to date. This, combined with the effect of the Internal Market Act raise serious concerns about Scotland's ability to secure standards in devolved policy areas. For example, if the Scottish Parliament chose to maintain the ban on the sale of chlorinated chicken or hormone-fed beef in Scotland in response to the UK Government agreeing to regulatory equivalence measures as part of a trade deal that would facilitate such products being imported and sold in the UK, the Act has the effect of giving the UK Government power to undermine the decision of the Scottish Parliament and force their sale in Scotland.

122. Scottish businesses want to compete on quality and provenance as well as cost, but Scotland's high food safety, animal welfare and environmental standards would be undermined by the requirement to accept lower standards set elsewhere. In addition, the Act could undermine the ability of consumers in Scotland to make informed food choices, as the Act prevents the Scottish Parliament from legislating to require appropriate labelling for all such products sold in Scotland. The reputation for quality that underpins our world-class food and drink industries, and the many thousands of jobs they support, could be undermined by the imposition of lower standards on Scotland.

123. In addition to the risks to standards and businesses outlined above, people in Scotland will now live with a significantly constrained devolution settlement, with no vote being cast to mandate such constraint. The balance prior to the Act that aimed to ensure decisions are made as locally as possible to reflect local needs and factors; and that other policy goals can be pursued alongside pure market goals, is directly contradicted by the Act's market regime. This undermines Scotland's powers to deliver "a more successful country with opportunities for all of Scotland to flourish through increased wellbeing, and sustainable and inclusive economic growth" – as Scotland's National Performance Framework aims to do.

124. Furthermore, in relation to the spending powers given to the UK Government in the Act, the Scottish Council for Voluntary Organisations (SCVO) has highlighted the view of members that funding priorities should be set at a devolved level, tackling inequalities, enhancing human rights and promoting wellbeing "by linking outcomes with Scotland's National Performance Framework and other relevant policy frameworks". SCVO raises concerns over management of the Shared Prosperity Fund, which looks set to be managed centrally by the UK Government.^[42]

The effect of the Act on Scotland's role in international trade negotiations

125. The UK Government position is that internal market arrangements are a means of ensuring that a state's internal regulatory and market arrangements are aligned with its external trading relationships.^[43] Constraining devolution may be seen as advantageous in the negotiation of trade deals. However, in addition to the risk to standards outlined above, it does not reflect the purpose of devolution, and further undermines the benefits of devolved nations' expertise, collaboration and trust in international negotiations.

126. The UK Internal Market Act means that Scotland's already limited ability to represent Scotland's interests in trade deals are compounded by having to accept whatever standards are imposed through the deals the UK strikes – even in devolved areas. While the negotiation of trade deals is an area reserved to the UK Parliament, the scope of modern trade agreements means that they often cover a range of reserved and devolved policy areas. The UK Internal Market Act means that the UK Government can more readily disregard the views and policies of devolved administrations in trade negotiations, as any outcomes of negotiations can be imposed across the UK through the Act's provisions.

127. In other states, sub-state administrations have a role in influencing and agreeing those new trading relationships. For example, the Canadian Provinces had a substantive role involved in developing Canada's mandate in the negotiations with the EU that led to the Comprehensive Economic and Trade Agreement (CETA).

128. The full, formal and early involvement of the Scottish Government and Scottish Parliament is necessary to ensure the legitimacy, and effective implementation, of treaties. There are significant structural weaknesses in the oversight and scrutiny of the UK Government's approach to international negotiations. This is concerning not only for the devolved governments and parliaments, but also for Westminster.

129. The Scottish Government published detailed proposals designed to significantly enhance the role of devolved administrations in the development of future UK trade arrangements in 2018^[44] and has argued the case ever since. The proposals are even more relevant in the context of the UK Internal Market Act. The Scottish Government's proposals are designed to ensure that Scotland's economic and other interests are identified, protected and promoted and that Scotland's voice is heard and respected. Some two years after the publication of the Scottish Government's proposals and, despite repeated and consistent argument in favour of an enhanced role, the engagement of the Scottish Government and other devolved administrations in the development of trade deals remains limited and patchy.

130. Such an enhanced role will be in everyone's interest. Domestically, it would ensure that negotiations are conducted on a proper understanding of the economic and other trade related issues for the devolved governments; that decisions would be taken closer to the people affected and have a greater transparency and legitimacy; and that any problematic issues would be surfaced and dealt with quickly. Implementing these proposals would also provide reassurance to the UK's future negotiating partners that negotiations are proceeding on consensus within the UK, and consequently that any agreements would endure.

131. Modern trade agreements cover a wide range of subjects which cut across devolved and reserved competence: the impact of one part of an agreement can be felt across the whole and will affect the economic and wider interests of Scotland. The Scottish Government made this case to the UK Government this year in detailed comments on issues arising during trade negotiations with Japan, the US, Australian and New Zealand. However, the UK Government has chosen to exclude the Scottish Government both from the talks and the development of the final negotiations mandate.

132. The UK Government has also voted down amendments to the Agriculture Bill and the Trade Bill that would have protected UK standards in future trade agreements and given devolved administrations a meaningful role in the development of future UK trade arrangements. This, combined with the effect of the Internal Market Act mean that Scotland's ability to influence and improve trade deals is severely limited, leaving the UK Government as the sole arbiter of standards across UK nations and policy areas - even where they are devolved to the legislature of Scotland.

The EU Trade and Cooperation Agreement

133. On 24 December 2020, the EU and UK reached an agreement on their future relationship: the Trade and Cooperation Agreement (TCA) took effect on 1 January 2021 upon the end of the transition period.^[45] Despite the Scottish Government's repeated efforts to engage with the UK Government, including setting out compromise proposals, the free trade agreement negotiated as part of the TCA does not reflect Scottish Government views - instead providing the kind of "thin", or "low" deal that was opposed by numerous Scottish stakeholders.

134. The Scottish Government's preferred approach to trading with EU partners is, as the Continuity Act provides for, to remain aligned as closely as possible with EU standards. The interactions across the Continuity Act, TCA and Internal Market Act are untested, complex and potentially highly damaging. For example, the UK Government could decide to diverge from the EU in a manner which violates the terms of the TCA. Scotland's ability to maintain alignment with EU could be undermined by the market access principles of the UK Internal Market Act. In such a case, would Scotland be forced into non-compliance with the terms of the TCA, and consequent tariffs for Scottish business, through the legal requirements of the Internal Market Act?