Thank you, Mr Gibson. I apologise for being late this morning because of traffic. I will try to rattle through my statement as fast as possible.
I thank the committee for inviting me to give evidence on the Scottish Government’s new fiscal framework. In November 2014, the cross-party Smith agreement was published. In it, the commission stated that a new fiscal framework for the Scottish Government was needed. I am pleased to say that both Governments agreed and announced the fiscal framework on Tuesday 23 February. The details of the agreement were published on Thursday 25 February.
The historic deal will pave the way for the Scottish Parliament to become one of the most powerful and accountable of its kind in the world. Lord Smith of Kelvin said last week that the agreement
“between the Scottish and UK governments sees the recommendations of the Smith Commission delivered in full.”
I agree whole-heartedly with him. The deal that both Governments have agreed is fair for Scotland and fair for the rest of the UK.
Before we move on to the committee’s questions, I will take a little time to set out some of the detail of the key elements of the deal that we have agreed.
Integral to the whole framework is how we determine the Scottish Government’s block grant once it becomes more than 50 per cent funded by Scottish taxes. First, we have delivered on our commitment that the Barnett formula will continue to determine changes in the Scottish Government’s block grant when the UK Government changes spending on public services. We have further agreed with the Scottish Government that the Barnett formula will be extended to cover devolved areas of welfare.
For tax, we have agreed to use the comparable model. Under that model, the Scottish Government holds the same risks and opportunities for devolved and assigned taxes as it does for devolved spending under the Barnett formula. That means that the Scottish Government holds the risk that tax per head will grow differently in Scotland from in the rest of the UK, and responsibility in relation to population change will be shared in the same way for tax as it is for spending under the Barnett formula.
However, for a transitional period over the next session of the Scottish Parliament, the UK Government will manage overall population change. That said, I should it make clear that the Scottish Government’s funding during the transition period will still depend on the policy choices that it makes, on the relative performance of the Scottish economy and on Scotland-specific demographic changes.
To inform post-transition funding arrangements, we have agreed that an independent report will be presented to both Governments by the end of 2021. The subsequent joint review of the framework will ensure that we are still delivering the Smith recommendations, with the Scottish Government managing the opportunities and risks that are associated with its powers.
Although one element of the fiscal framework—the block grant adjustment—has garnered the most attention, there are other important aspects of the framework beyond that. We have agreed extensive new borrowing powers for the Scottish Government. The Scotland Bill was amended by the UK Government on Monday to reflect an increased aggregate capital borrowing limit, which will rise from £2.2 billion to £3 billion, and the Scottish Government’s annual limit is being increased to £450 million, which will allow for increased investment in vital infrastructure.
For resource borrowing, we have agreed to extend the Scottish Government’s powers, to reflect the new risks and opportunities that it will hold. The Scottish Government will be able to borrow up to £600 million each year for current expenditure, within an overall debt limit of £1.75 billion. In addition to being used to manage forecast error, that borrowing can be accessed if there is a Scotland-specific economic shock.
The Smith agreement was clear that both Governments should share the administration and implementation costs of devolution. The broad approach is that the UK Government will provide an agreed contribution to the Scottish Government, and the Scottish Government will then meet all implementation and on-going administration costs. The UK Government will provide £200 million to the Scottish Government to support the implementation of new powers. That funding will be a non-baseline, one-off transfer, which will supplement the block grant. In addition, the Governments have agreed a baseline transfer of £66 million towards on-going administration costs that are associated with the new powers.
With the exception of VAT assignment, where the costs will be shared, the Scottish Government will meet all costs of devolution. That will include costs borne by the UK Government—for example, in relation to the Scottish Government’s income tax powers and powers to vary elements of universal credit.
Both Governments have agreed on how to treat the principle of no detriment due to post-devolution policy decisions. We have agreed that all direct effects—that is, financial effects that will directly and mechanically exist as a result of a policy change—will be taken into account. Behavioural effects—that is, those that result from people changing behaviour following a policy change—will be taken into account only in certain circumstances.
Finally, I will touch on the important issue of independent forecasting. We have agreed with the Scottish Government that the Scottish Fiscal Commission will be responsible for producing all forecasts of Scottish Government tax revenues and demand-driven welfare, as well as forecasts of Scottish onshore gross domestic product. I know that the committee has supported that, and I am pleased that it has been achieved.
The fact that we have now agreed a framework means that, subject to outstanding actions in both our Parliaments, we can get on with implementing the powers and the Scottish Government can get on with using them. I believe that the deal is indeed historic. It delivers the new powers over tax, welfare and spending that were agreed by the cross-party Smith commission, and I, for one, look forward to seeing how the new powers will be used.
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