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United Kingdom Internal Market Bill Contents

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Chapter 2: The UK internal market and devolution

Implications of the Bill for devolution

15.In this chapter we explore the implications of the Bill for the existing devolution arrangements. For an analysis of, and conclusions on, individual clauses, see chapter 3. For consideration of the devolution issues specific to the Northern Ireland Protocol, see chapter 4.

16.The devolved institutions were established in the late 1990s, long after the UK joined the European Union in 1973. The allocation of responsibilities between UK and devolved institutions assumed that many regulatory functions—including to support the integrity of the EU single market—would always be carried out by the European Union. The freedom of devolved governments to legislate differently within their own areas of competence has always therefore been constrained by the need to do so compatibly with EU requirements, including the principles of mutual recognition and non-discrimination.

17.The Government has said that it intends the United Kingdom Internal Market Bill to put in place an equivalent regime following the the end of the Brexit transition period 31 December 2020. Parliament legislated for this eventuality once already. Section 12 of the EU Withdrawal Act 2018 established an explicit restriction on devolved legislative competence in relation to retained EU law insofar as UK ministers make regulations to that effect. The intention of section 12 was to allow the process of agreeing common frameworks to be taken forward to agree UK-wide approaches, where necessary, for the powers flowing back from Brussels to the UK and the devolved territories.

Constraints on devolved competence

18.The Bill imposes new legal restrictions on the devolved administrations in the form of internal market principles relating to goods and services. These are mutual recognition and non-discrimination; together known as Market Access Principles. These principles are intended to mirror single market alignment within the European Union to a large extent.

19.The UK Government maintains that there is no restriction on devolved competence introduced by the Bill because the devolved institutions can continue to regulate economic activity for their territories and within their fields of competence.13 However, the Bill takes power to override future devolved legislation. As such, it would limit the scope for the devolved administrations to pursue policy divergence, for example by restricting the “legitimate aims” for which such divergence has previously been permitted by the equivalent provisions of EU law.14

20.Professor McEwen said the Bill “adds to areas of reserved competence. While it does not take away much of what the devolved legislatures and devolved administrations can do, it limits their scope, and quite explicitly.”15 Professor Hunt told us: “It has a very real and significant impact on what the devolved administrations and legislatures are able to do, and the effects that their policy choices are able to have within the field of devolved competence.”16

21.Mick Antoniw MS said that the ability of the Welsh Parliament “to exercise the powers we have will become significantly restricted and in many ways transferred to the UK Government … we will not know from one day to the next whether we can legislate and can exercise those powers. We may have the power to do things, but the Bill gives specific legislative competence to the UK Government to override those.”17

22.These constraints apply unevenly across the UK. The Bill will become a “protected enactment” under the devolution statutes, exempt from modification by the devolved legislatures, and its provisions will automatically override conflicting legislation passed by the devolved administrations. In contrast, the Bill cannot limit the ability of the UK Parliament to amend the Bill’s provisions or pass legislation to bypass its restrictions.

23.The implications for devolved competence will depend heavily on how the UK Parliament sets minimum standards for England, as the economically dominant part of the UK.

24.It will also be determined by future trade deals with the European Union and other countries. International relations is a reserved matter and so the devolved administrations are already under an existing statutory obligation not to act or legislate in a way that is incompatible with the UK’s international obligations. The terms of those agreements will therefore determine the scope for policy divergence between the legislatures in the UK and the extent to which devolved competence is constrained.

25.The measures in the Bill relating to UK market access for goods and services are accompanied by delegated powers so broad the Delegated Powers and Regulatory Reform Committee described them as “extraordinary” and “unprecedented”.18 In the context of devolution, it is troubling that substantive changes to the UK internal market scheme could be effected by delegated powers, which are subject to relatively limited parliamentary scrutiny and do not require the consent of the devolved legislatures.19 As the operation of the devolution arrangements and the respective power of the devolved institutions are constitutional matters, we would expect to see them amended by primary rather than secondary legislation—or by using a statutory procedure that requires the consent of the devolved legislatures. It would also reassure the devolved administrations if changes to the internal market arrangements were subject to the parliamentary scrutiny brought to bear on primary legislation, which allows for amendments to be considered, and over a period of time which permits their views to be heard.

Limited consultation

26.The use of delegated powers in the Bill to effect potentially significant changes to the competence of the devolved administrations is all the more concerning because only some of the powers require consultation. Where consultation is required, the Bill does not specify the timetable for such consultation, whether the Secretary of State would be required to report on its outcome, or what would happen if there were disagreements between the UK Government and a devolved executive.

27.The lack of any requirement for consultation for other delegated powers is more concerning. Mick Antoniw MS concluded: “There have to be amendments [to the Bill] that would ensure that, at the very least, there is consultation with the devolved nations. There should be a mechanism for consent from the devolved nations and a dispute resolution process.”20

28.The provisions in the Bill contrast unfavourably with section 12 of the European Union (Withdrawal) Act 2018, which provides for joint decision-making between the UK Government and the devolved administrations regarding restrictions on devolved competence for retained EU law.21

29.The approach adopted in the Bill is all the more surprising given what the Chancellor of the Duchy of Lancaster, Rt Hon Michael Gove MP, said when launching the UK Internal Market White Paper: 

“This plan is a power surge to the devolved administrations—giving them powers in dozens more areas. As powers flow back from Brussels to the devolved administrations in Edinburgh, Belfast and Cardiff—as well as to the UK government—we want to build on the good progress we have already made. We will develop new ways of working together and learning from each other to help create more opportunities for jobs and investment for businesses and citizens across the United Kingdom. 

“So we will work over the coming weeks with the devolved administrations in Cardiff, Belfast and Edinburgh on a new structure for how we can cooperate better and share ideas, and we will be bringing proposals to the table to agree a way forward. We should be learning from one another, combining the expertise of each nation to share ideas, innovation and, where appropriate, put in place processes for voluntary cooperation.”22

30.The lack of specificity about the consultation requirements in the Bill is problematic. The Government must set out the process for consultation with the devolved administrations on the management and adjustment of the internal market arrangements.

31.The Government should explain why a joint decision-making process for adjusting the proposed internal market arrangements was not included in the Bill.

Independent oversight, governance and dispute resolution

32.The Bill establishes the Office for the Internal Market (OIM), based in the Competition and Markets Authority, to provide independent advice and monitoring of the internal market. The CMA is a non-ministerial department of the UK Government and the devolved administrations have expressed concern about its status as an independent arbiter for this task.23

33.The OIM will have limited powers, which it may choose not to exercise,24 and it is unclear what the status of its monitoring and reporting will be—whether its findings will be binding or advisory. It is not clear how disputes relating to the internal market are going to be resolved. As Professor Hunt said:

“There is very little that we know from the Bill about how disputes are meant to be resolved; whether it is to be intergovernmentally, or whether there is to be a role for the courts. The market access principles and the discrimination principles are referred to as having direct legal effect. The impact assessment makes reference to businesses using them before the courts. It is unclear who the final referee will be when they are making those assessments.”25

34.It may be that the governance arrangements for policing the internal market will be determined as part of the wider review of inter-governmental relations. However, if that is the UK Government’s intention, it leaves a significant gap in the operation of the United Kingdom Internal Market Bill that must be addressed.

35.The Government should explain why the Competition and Markets Authority is the right body to have oversight of the monitoring of the UK internal market and why an Office of the Internal Market could not have been established independently, under the joint control of the UK Government and the devolved administrations.

36.The Government should seek to make the Office of the Internal Market more clearly accountable to the different legislatures in the UK.

UK Government spending

37.The Bill provides the UK Government with a widely-drawn power to invest in devolved areas. Clause 48 permits the UK Government to “provide financial assistance” in any part of the United Kingdom for a range of purposes. These purposes include infrastructure (utilities, transport, health, courts, prisons and housing), promoting economic development, and supporting educational, cultural and sporting activities. Clause 49 sets out how financial assistance may be granted and that it may be subject to conditions.

38.It is not clear how the UK Government intends the power to be used and what consultation there will be with the devolved administrations about this spending. The intention could be to use the power narrowly—for example to implement the Shared Prosperity Fund that will replace EU funding streams.26 Alternatively, it might be used by the UK Government to intervene in a wide range of devolved areas.

39.In the white paper that preceded the Bill, the Government said it “would consider which spending powers it needs to enhance the UK internal market, to help people and businesses in each nation to take advantage of it, and to further its ambition to level up every part of the UK.”27 The power in the Bill is framed in broad terms and could apply more widely than to the internal market. The Government should explain why such a broad power for the UK Government to spend money in devolved territories has been included in this Bill.

40.Professor McEwen said:

“it is in part a reflection of the UK Government moving away from what might have been labelled as a ‘devolve and forget’ policy to a ‘devolve and intervene’ policy. It is not at all clear the extent to which that would be in partnership with the devolved administrations or whether it would bypass the devolved administrations to enforce the role and status of the UK Government in those territories, in a bid to strengthen union.”28

41.Mick Antoniw MS raised concern about the power being used to bypass the decisions of devolved administration and questioned whether money spent under this power would be deducted from the block grant funding of the respective devolved administration.29

42.It is appropriate for the UK Government to seek to invest in devolved areas in a proportionate manner, which does not undermine the operation of the block grant. The Government already does so, for example, by co-investing in City and Growth Deals and supporting cultural institutions such as V&A Dundee and the Lloyd George Museum, Llanystumdwy. However, it is important for reasons of democratic accountability that the division of responsibilities for policy and spending between the UK Government and the devolved administrations is clear. These provisions risk blurring the lines of financial accountability.

43.The Government should explain how it intends to use the power in clause 48 to spend in devolved territories, what the processes would be for consulting the devolved administrations and how any such spending would affect block grant funding.

44.If the Government intends to use the power to spend money in devolved areas for limited purposes, it must justify the broad scope of the power, which could be used with less restraint by future governments. In any event, to ensure practical cooperation around the use of the power, the Bill should be amended to include a requirement that ministers, in exercising their power to spend directly in devolved areas, consult with the relevant devolved administration.

State aid

45.Clause 50 amends the devolution statutes to reserve subsidy controls, equivalent to state aid provision under EU law. The Bill’s explanatory notes state: “This can address the effects of distortive or harmful subsidies, whether that is in relation to international trade or the UK internal market.”30

46.The UK Government maintains that subsidy control/state aid policy is already a reserved matter. However, the devolved administrations contest this position and contest the need for, and constitutionality of, clause 50.31

Legislative consent

47.Given the concerns with the Bill, it is perhaps unsurprising that the devolved administrations intend to recommend not giving legislative consent to the Bill. The Welsh Government did not accept that “the measures proposed in the Bill are in any way proportionate to the objectives which the UK Government claims for it” and thinks that they “go far beyond the structure that may be needed to ensure economic and regulatory cooperation between the nations of the UK.” However, it was not opposed to the principle of the internal market or a UK-wide subsidy regime and would publish amendments to address its concerns.32

48.The Scottish Government said the Bill “undermines both the devolution settlement and agreed processes that are already established to agree common frameworks and ways of working across the UK following EU exit … it risks more uncertainty and confusion for business and consumers, and encourages harmful deregulation without democratic accountability or proper Parliamentary scrutiny.”33 The Scottish Parliament voted to refuse consent on 7 October 2020.34

49.The Northern Ireland Executive has not published a legislative consent memorandum. However, the Northern Ireland Assembly voted for a motion that expressed “deep concerns about the UK Government’s approach to negotiations and the terms of the United Kingdom Internal Market Bill” and which mandated the First Minister and deputy First Minister to oppose the Bill.35

50.The lack of legislative consent for a constitutionally significant measure relating to devolution would be regrettable. Until the European Union (Withdrawal) Act 2018, legislative consent had never been withheld. The passage of the Bill in its current form and without the consent of the devolved legislatures risks destabilising the devolution arrangements. The UK Government must work intensively with the devolved administrations to amend and clarify the proposals in the Bill in order to give the best chance of securing the legislative consent of the devolved legislatures.

A way forward

51.The UK Government’s analysis makes clear the UK internal market is already highly integrated—much more so than the EU single market. The analysis also makes clear the considerable economic costs for the devolved territories should there be any disintegration of this market as a result of significant regulatory divergence.36 This would also have damaging consequences for devolved administrations’ budgets that are more reliant on revenues from taxes they control. There are strong incentives to reach agreement.

52.We consider that mechanisms already exist to provide a foundation for preserving a strong and functioning UK domestic market. They are not perfect—we have made recommendations to strengthen them and further work will be needed.37 It will require an intensified effort to finalise common frameworks, a recognition in the Bill of the role of common frameworks and improvements to inter-governmental relations mechanisms.

53.In our report on The Union and devolution we set out six principles of Union: solidarity, diversity, consent, responsiveness, subsidiarity and clarity.38 These principles should form the basis for the approach of the UK Government and the devolved administrations in finding a consensual way forward.

Common frameworks

54.The UK Government and the devolved administrations are in the process of drawing up common frameworks to manage the extent of divergence across the UK in policy areas previously determined at EU level.

55.At the start of the process, the Joint Ministerial Committee agreed that there would “be close working between the UK Government and the devolved administrations on reserved and excepted matters that impact significantly on devolved responsibilities.” It agreed principles for common frameworks; that they would “be established where they are necessary in order to

• enable the functioning of the UK internal market, while acknowledging policy divergence;
• ensure compliance with international obligations;
• ensure the UK can negotiate, enter into and implement new trade agreements and international treaties;
• enable the management of common resources;
• administer and provide access to justice in cases with a cross-border element;
• safeguard the security of the UK.

“Frameworks will respect the devolution settlements and the democratic accountability of the devolved legislatures, and will therefore:

• be based on established conventions and practices, including that the competence of the devolved institutions will not normally be adjusted without their consent;
• maintain, as a minimum, equivalent flexibility for tailoring policies to the specific needs of each territory as is afforded by current EU rules;
• lead to a significant increase in decision-making powers for the devolved administrations.”39

56.Work on the common frameworks has been progressing. It is expected that five to seven frameworks will be operational by the end of 2020.40 Professor McEwen contrasted common frameworks with the Bill:

“With common frameworks, where all the administrations participated, it was very much a co-owned process. They explored the problem together and investigated the areas where they felt there was a need to replace EU frameworks with something, whether legislative or non-legislative, for the UK. It was a co-operative process from the outset. With the UK internal market proposals, it was much more top down, and the understanding of the problem was defined at the outset in UK Government terms. It was a different type of process. The engagement was not wholly satisfactory.”41

57.We consider that adhering to the principles agreed for formulating common frameworks would improve the likelihood of reaching agreement on how to progress the Bill. We are not convinced that opportunities for managing the UK internal market through the common frameworks process have been exhausted. This contributes to our doubts about the necessity for the Bill.

58.Our witnesses suggested that the issues the Bill sought to resolve could be addressed through common frameworks. Professor Hunt said: “The common frameworks have not been given the opportunity to demonstrate that they would provide what is needed for the UK’s internal market.”42 She said the UK Government needed “to make clear the relationship between the Bill and the common frameworks.”43

59.Professor McEwen explained that the UK Government could use its existing powers to maintain consistency in the internal market while common frameworks were agreed:

“There are powers in the withdrawal agreement that were introduced explicitly to ensure consistency across the UK. There was a political agreement on the part of the UK Parliament legislating for England not to legislate contrary to what was already in EU law … If that regulatory power was used under the withdrawal agreement to freeze existing EU law, it could be used to hold the line until the common framework was agreed. That does not seem to have been canvassed as an option … It is obviously conditioned by the deadline of the end of transition, but there are guarantees around continuity already provided by retained EU law, and common frameworks can be given scope to work.”44

60.Continuing to use the arrangements provided for by retained EU law may not be a long-term solution for the internal market, but it would provide breathing space for the UK Government and the devolved administrations to negotiate an agreement on how best to proceed. This approach would also allow the possibility of retaining the EU single market principles of subsidiarity and proportionality, which might provide greater reassurance to the devolved administrations on the potential limitations of their competence. Further, it would provide a greater opportunity for the devolved institutions in Northern Ireland to contribute to the common frameworks process, as their input had been limited by the long suspension of the power-sharing arrangements.45

61.The Government should explain why the Bill does not mention common frameworks and how it expects the arrangements for the UK internal market will relate to the common frameworks.

62.The Government has failed to explain why a combination of retained EU law, its existing powers to amend that law, and common frameworks could not provide the certainty required at the end of the transition period to secure an effective UK internal market. Such an approach would obviate the need for the Bill.

63.The Government justifies the Bill in part due to the need to provide certainty for the UK’s trading partners.46 International relations are a reserved matter and devolved legislatures and administrations cannot legislate or act, respectively, in ways incompatible with the UK’s international obligations.47 UK ministers also have direct powers to intervene if they believe that any action proposed or taken by devolved authorities would be incompatible with any international obligations, ordering such action not to be taken.48 Together these protections should be sufficient to satisfy any trading partner that obligations undertaken by the UK will be honoured across the state. It is not clear why the further restrictions on devolved competence in the Bill are necessary.

64.The Government should explain why, given the devolved administrations are required by the devolution statutes to comply with international agreements ratified by the UK, the Bill is needed to ensure adherence to common standards for goods and services arising out of such agreements.

Strengthening intergovernmental relations

65.We recognise that there are political tensions inherent in these relationships, and that the structures and processes of intergovernmental relations have been put under increasing pressure by the Brexit process and the political differences between the UK Government and the devolved administrations.

66.Professor McEwen said that the “existing machinery of intergovernmental relations is simply not fit for purpose.”49 Professor Hunt agreed that a “stronger system of intergovernmental relations” was needed50 and Mick Antoniw MS suggested that “a more effective Joint Ministerial Council, properly resourced, with a dispute resolution mechanism” would “take us a long way forward”.51

67.We have repeatedly recommended improving the operation of intergovernmental relations and the Joint Ministerial Committee.52 A review of the Joint Ministerial Committee began more than two years ago and has still not reported.53 The report of the Dunlop review of intergovernmental relations has not been published almost one year after it was completed.54

68.While the Government has said that it expects the Dunlop report to be published before the Bill reaches the statute book, it would have been better for it to have been published ahead of the Bill.55 A stronger system of intergovernmental relations, with greater trust and collaboration, may have averted some of the difficulties that the Bill has produced. While collaborative working relationships cannot be brought into existence merely by the publication of a report, its publication and a commitment to strengthen intergovernmental relations would be important steps towards building trust.

69.The need for reform of intergovernmental relations and the lack of progress has damaged the relationship between the UK Government and the devolved administrations. Better Joint Ministerial Committee structures and processes would foster a more open and collaborative approach to dealing with the challenges of operating the devolution arrangements in the new circumstances after EU membership.

70.We recommend that the commencement of the United Kingdom Internal Market Bill should not take place before the conclusion of the review of intergovernmental relations and the publication of the Dunlop review.

71.The Chancellor of the Duchy of Lancaster, Michael Gove MP, expressed willingness to engage with the devolved administrations in a hearing with the Scottish Parliament’s Finance and Constitution Committee:

“[W]e will seek to properly and better understand any concerns. If there are ways in which the bill can be improved, not least in the House of Lords, we will take the opportunity to do so. The essential purpose of the bill—to make sure that we have a functioning UK internal market—is shared by the Welsh Government and the Northern Ireland Executive. Issues have been raised about aspects of the bill, and we will work in good faith with those administrations to find an answer.”56

72.We welcome the remarks of the Chancellor of the Duchy of Lancaster about listening to the concerns of and working with the devolved administrations on the Bill. These words need to be followed by actions: by amending the Bill, providing clarity and reassurance about some of its provisions, and taking steps to improve inter-governmental relations.

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