With the Scotland Bill set to devolve some limited tax powers to the Scottish Parliament, a new system of allocating money to Scotland needs to be agreed. The fiscal framework is what will become that new structure, and so getting it right is vitally important.
Here are the five key things you need to know about the fiscal framework:
1) The way Scotland’s funding settlement is calculated will change
The Barnett Formula – the means by which the Scottish Government’s block grant is decided by the UK Government – was designed under the assumption of tax powers remaining under the control of the UK Government. However, with new tax powers being devolved to Scotland, the Scottish Government will be able to raise some of what it spends.
So, under the Smith powers, the Block Grant is still arrived at by the Barnett Formula but a Block Grant Adjustment is then deducted from it to account for the amount raised by the new tax powers.
A way of agreeing how big the Block Grant Adjustment should be in each year is needed. And, the size of this adjustment then has to be re-calculated each year – this is called indexation – so finding a fair way to do this is a critical part of the fiscal framework.
2) The Smith Commission said that Scotland should be no worse off financially as a result of new powers
The Smith Agreement, signed by all political parties, outlined a core set of principles which the fiscal framework should be based upon. The most important of these is the principle of ‘no detriment’. This principle means that the Scottish Government should not suffer financially just because it has been given new tax powers.
The Smith Agreement states:
“The Scottish and UK Governments’ budgets should be no larger or smaller simply as a result of the initial transfer of tax and/or spending powers, before considering how these are used.”
3) Some models for a new funding settlement could result in millions lost from the Scottish budget
Professor Anton Muscatelli, the principal of Glasgow University and a leading economist, has said that Scotland could be hundreds of millions of pounds worse off within a matter of years depending on the adjustment formula that is created.
Professor Muscatelli has said that some mechanisms would likely “penalise” Scotland financially, whereas other mechanisms would provide a fairer deal for both the Scottish and UK Governments. He has suggested a model which links adjustments in the block grant to changes in income tax revenue per person in the rest of the UK.
4) Scotland’s new funding settlement is just as important as the actual powers being devolved
An unfair framework with an adjustment formula that penalises Scotland would lead to systemic cuts in the Scottish budget, which over a period of a few short years could total hundreds of millions of pounds and over the longer term, cost Scotland billions.
The resulting impact on Scotland’s budget, and the limited job-creating powers of the Scottish Government, would make it more difficult to afford public services in Scotland.
5) The Scottish Parliament will only approve the Scotland Bill if there is a fair fiscal framework
Once the Scotland Bill completes its passage through the Westminster Parliament, it will be the Scottish Parliament that will have the final decision on whether or not to agree it.
While the Scotland Bill still does not fulfil what was promised in the Smith Commission or in the infamous Vow, the SNP has always argued for maximum powers for the Scottish Government, and welcomed the devolution of new powers.
But not at any price.
Grahame Smith, General Secretary of the STUC, has warned that the new powers could prove a “poisoned chalice” depending on the shape of the fiscal framework.
That’s why a fair agreement on the fiscal framework is so key to the viability of future powers for Scotland. And why the SNP Government will only ask Parliament to approve the Scotland Bill if a fair fiscal framework has been agree.