In respect of the block grant adjustment for stamp duty land tax—as it is in the UK—and for landfill tax, the UK Government put forward our proposals in December of last year. The Scottish Government responded in April.
We have differing approaches to how the matter should be addressed, but it would also be fair to say that both sides are prepared to look at the numbers. We are looking at the numbers now and I hope that we can work constructively with the Scottish Government. As I said, we put our proposals in place last year. As far as I am concerned, I want to ensure that we have a constructive dialogue with the Scottish Government to see whether we can resolve the matter sooner rather than later.
11:00
You say that the adjustment that is made will be a one-off adjustment. Under the mechanism that you propose, will the figure be the same year on year?
We could explore that one, but surely the key difference with the devolution of business rates is that the command paper that this Parliament and the UK Parliament considered said that you would not alter the Barnett formula, but we now find that you seek to do so. You say that it is not a change and that the formula is merely being updated. Do you accept that many people might view that as semantics?
They are also, to be frank, very hard to forecast. We have spent a bit of time meeting the OBR and looking at the new Scottish fiscal commission, and the one message that has come out of all that work is that everyone accepts that it is very difficult to forecast any of these things. There will never be agreement between the Scottish and UK Governments on an exact forecast for those taxes, will there?
Your paper suggests that, as everyone knows, there will be a transitional period for the Scottish rate of income tax. It talks quite specifically about a transitional period of two or three years. Has there been a final decision on whether it will be two or three years, or is it the case that, at this stage, we do not know and we will see how things develop?
Would any OBR reflections on the income that would be raised be available?
A number of changes have been made in other areas, such as welfare reform. The devolved settlement has been affected by the Welfare Reform Act 2012. For example, council tax reduction has been introduced and changes have been made to other aspects of funding and support that were previously provided by the UK Government, but which are now the sole responsibility of the Scottish Government. We get information about the changes at a national level, but we do not get it at a Scottish level. Could we get the OBR to provide a service that we will not get under the Welfare Reform Act 2012?
Scotland’s independent fiscal commission will look at the taxes that are devolved and we will continue to get figures from the OBR on those devolved taxes, but in other areas in which powers have been devolved, we will not get any comment from the OBR on the financial impact on Scotland, nor will we get any comment from the independent fiscal commission. Would it not be helpful if the OBR could provide information in such areas? If such an arrangement is good enough for the Scotland Act 2012, should it not also be good enough for the Welfare Reform Act 2012?
You have had a number of questions about the block grant adjustment mechanism, but I make no apology for returning to it, because it is by far the most important issue. I share John Mason’s concerns about timescales. The Scottish Government has to produce a draft budget at the beginning of October, and work for that will begin in the months leading up to that time. Without an agreement on the block grant adjustment mechanism, that will be a pretty difficult exercise. What plans are there to meet and engage at ministerial level to accelerate progress on the matter?
On the Scotland Act 2012 and the Calman recommendations on air passenger duty, would the same prediction or calculation have been done to evidence your statement that devolving air passenger duty would cause disadvantage elsewhere in the United Kingdom?
The latter. No final decision has been made. We want to see how things are working and we want to see the smooth and successful delivery of the SRIT. We will take a view later on the necessary length of a transitional period.
You are not the first minister to have given us an answer along those lines. It is frustrating when we cannot get the numbers, but I understand that you do not wish to go any further.
You were asked about the final decision on the block grant adjustment in the event that no agreement is reached between Governments. We need to have some idea about when the final decision will be taken. It was last September that Danny Alexander said, “Time is marching on.” All colleagues round the table would be keen to know when the final decision will be made and who will take it.
With your refusal to accede to a request from a commission within your own party for the devolution of what might be felt to be a—
It is fair to say that SDLT is—and clearly has been—a volatile tax. It is also fair to say that these areas are difficult. That said, however difficult they might be, it is only right and proper that we do everything we can to reach agreement in this area. We need to be fair to the UK and Scotland by making an adjustment that lets us know where we stand and which attempts to address what is happening with current receipts and what is likely to happen in future. Given that the two taxes are moving in different directions, if we froze things where they stand at the moment, the adjustment for landfill tax would likely turn out to be too great and the adjustment for stamp duty land tax would rather underestimate the likely future yield.
To use a phrase such as “willing to engage” is all very well, but we are now in June and I would have expected a little bit more than “willing to engage”. Are the two sides actually engaging? Is anybody looking for a halfway house?
A lot of work is under way at official level. As and when it is necessary to progress the matter further, I am sure that we would meet at a ministerial level as well. Indeed, in the past, we have held joint Exchequer committee meetings and discussed the matter. From a UK perspective, we are keen to progress the matter.
We have asked the OBR to start forecasting on the taxes now, so that it can refine its methodology before the system is implemented in April 2015. However, we need to reach a conclusion about how the adjustments will be calculated. We want to do that as soon as we can.
I do not know whether the OBR has done any work on that. I can see what information is available and provide it to you.
Is there any specific date by which you hope to have the matter resolved, from your perspective?
We are getting into the details of the discussions that we would have but, essentially, we are looking at a one-off change to the block grant adjustment and a one-off change in the Barnett consequentials for future years.
No, I do not. We need to find a sensible way to ensure that the changes to the block grant and the overall support to the Scottish Government reflect the yield forgone to the UK as a consequence of devolution. It is important to deal with two points, which are, first, working out the existing yield, which is a relatively simple task, and, secondly, taking into account what happens in the future given that, as a consequence of devolution, the future yield of SDLT that is anticipated will no longer come to the UK Exchequer. That will be forfeited, and it is important that the public finance system reflects that.
I fully take on board the point that you make. I am slightly nervous about jumping in without hearing what the OBR might say about the practicalities of that and whether some of the forecasts that it currently provides could be broken down for the nations and regions of the UK in a sufficiently robust and reliable way. Your question is a technical one that it would be better to raise with the OBR than with me.
I take on board your argument, but you would need to ascertain from the OBR the answers to various questions relating to the strength of the challenge that doing what you suggest would present it with.
I will revert to the main question of the day, which is the immediate block grant adjustment. As far as I could see, the difference in your latest statement was between an additional adjustment for Barnett consequentials and an additional adjustment for inflation. You might already have explained this and I might have missed it, but could you say a bit more about what an adjustment for Barnett consequentials would mean in concrete terms?
That work was undertaken internally in the Treasury and Her Majesty’s Revenue and Customs. The UK Government has to take into account the concern that if APD were devolved and there were markedly different rates in different nations of the UK, there could be a transfer from one UK airport to another UK airport that would result in an overall reduction in yield and create a distortion. That is why we have been cautious about devolving APD.
Our next item of business is to take evidence from David Gauke MP, Exchequer Secretary to the Treasury, on the United Kingdom Government’s report on implementation of the financial provisions in the Scotland Act 2012 and on the impact on Scotland of the recent UK budget. Mr Gauke is joined by Lindsey Whyte, deputy director devolved and local government at HM Treasury. I welcome you both to the meeting and invite Mr Gauke to make a short opening statement.
I am not sure that I want to put a particular deadline on it. Clearly, the sooner that the issue can be resolved the better. We want to work through the numbers in order to resolve the situation, and I think that the Scottish Government does, too. It is challenging to ensure that we can get that one-off adjustment to ensure that the matter can be dealt with, addressing not only the situation now but that in future years, when there are likely to be changes in terms of the yield that will be brought in by the taxes.
It is a complicated matter. However, as I said, we put forward our proposals some time ago, and the Scottish Government responded a couple of months ago. We are working constructively with the Scottish Government to resolve the issue.
Would you not accept that, to most people, a “one-off adjustment” would mean that the figure would be the same year on year? Is that not what most people would understand a one-off adjustment to be?
I think that we agree on the issues, but I suppose that my question is actually about timescales. When you were asked earlier about the timescale, it did not come across to me that you felt this to be very urgent. One of the major elements of the committee’s remit is watching the budget, and we are now approaching the budget for 2015-16, the process for which will start after the summer. This discussion, too, is part of that process and I am concerned that the matter is just drifting on. You made your proposal in December, or seven months ago; you have had a counter-proposal, but according to you nothing better has come forward since December. That suggests to me that we are not making much progress on this matter.
In that evidence, has there been recognition of the different kind of flight and airport services in Scotland as compared with England, Wales and Northern Ireland?
We have set up a parliamentary committee to examine the impact of welfare reform. I convene that committee and I would love to have an opportunity to discuss the welfare changes with Iain Duncan Smith or Esther McVey in the same way that I am discussing with you the changes that the Scotland Act 2012 has brought about. The next time you speak to them, could you tell them that we would be happy to have a discussion with them about how they could help in getting the OBR to inform us about the issues that we are considering? At the moment, they will not talk to us and will not give us that information.
We are working through the numbers together. We are trying to reach agreement on the matter. We set out our proposals some time ago. We want to reach agreement and we are not being in any way unreasonable. We are not ruling out options. We are trying to explore things in the hope that reasonable people can reach agreement in this area.
Who in the UK Government is ultimately leading the discussions? Would it be you or one of your colleagues?
How is work progressing to identify clearly who are Scottish taxpayers?
As far as I am concerned, the focus is on reaching agreement. I do not want to put a particular deadline on that and convey a sense of, “If you don’t agree with us by such and such a date, then we’re going to do our own thing.” That is not the appropriate approach. I want to work constructively with the Scottish Government, so that we reach agreement. The sooner we do that, the better. I think that the committee would agree with that.
Turning to the issue of air passenger duty, the command paper was informed by the Calman commission, which called for the devolution of air passenger duty. However, the UK Government decided not to do that on the basis that it was considering the wider future of aviation duty and that it would not be practical to devolve the duty while those considerations were on-going. I understand that the plans to reform APD are now in place. Indeed, your party, through the commission that was chaired by Lord Strathclyde, has called for the devolution of air passenger duty, so when are you going to get on with that?
On a point of order, convener. This agenda item is on the implementation of the Scotland Act 2012 and the UK budget for 2014. I seek your guidance on how questions on a commission set up by a political party are relevant to the matter under discussion.
It would mean that the Barnett consequentials would be reduced, presumably by a small amount, given that the taxes concerned are relatively small. The amount is to be determined, but it should reflect the future yield of those taxes.
That concludes questions from colleagues around the table, but I have a few more. I will start with air passenger duty, which Jean Urquhart and others have asked about. The issue is that the market is already distorted. I remember that, when I was younger, I was able to fly from Glasgow directly to Porto, Banjul in the Gambia, Kefalonia—I went to all sorts of places in my wild youth. However, you cannot fly to any of those places from Glasgow, because APD has focused more flights in places such as Manchester and London. That means that there are not so many jobs in our airports, because there is not as much need for taxi drivers, engineers, baggage handlers, caterers and so on. There is already a distortion, because people are having to travel a couple of hundred miles to Manchester or go via London, with all the environmental and other issues that come into play.
Given that promises were made—as can be seen in the foreword to this report—and the fact that your party north of the border believes the proposal to be a good idea, I do not understand why there is such reluctance on your part.
It is important that the adjustment takes into account what is likely to happen over the years ahead. Indeed, the Scottish Government’s proposal in this area involves uprating in line with inflation. I do not think that it would be a sensible course to make a cash reduction to the block grant and to set that in stone without taking into account the fact that there are likely to be changes in yield over the years ahead. I do not think that that would be a fair way of doing it, either for the UK as a whole or for Scotland, because either the one-off adjustment that was set up would overshoot the current situation to reflect what was likely to happen in future years or it would underestimate and fail to properly reflect what was likely to happen in future years.
I will be happy to take that away. If we are getting into matters for the Department for Work and Pensions rather than matters of tax—
The ultimate scenario is that there is no agreement. However, a decision will have to be made at some stage. You have your budget and we have ours. For us, it is probably slightly more important, in that what is being devolved is a bigger chunk of our budget than it is of yours. Ultimately, you have the power to set and impose a figure. At what stage would the UK Government just impose a solution?
Yes. It is worth bearing in mind that there are already changes. For example, flights from the islands do not have APD charged, and that measure is in place to reflect the fact that there are different characteristics there. Nonetheless, if one looks at what is likely to be a distortion between Newcastle and Edinburgh, or between Bristol and Cardiff, those are factors that a UK Government has to take into account.
Yes—I think that everyone wants constructive negotiations. You have emphasised the need for that a number of times. You also said that you do not seek to impose a decision. At the same time, surely there must be a deadline after which there would, as Gavin Brown said, be an impact on the Scottish budget deliberations. Surely there must be a deadline in mind that you cannot go beyond and by when negotiations must be concluded.
Thank you very much, convener. It is a great pleasure to be here.
There is nothing that I particularly want to open with and I am happy to get to questions as quickly as possible. I am grateful for the opportunity to appear before the committee to discuss the subjects that you have mentioned and to provide evidence that I hope demonstrates constructive progress on the implementation of the Scotland Act 2012 and addresses any concerns in respect of the last budget.
The UK Government proposes an adjustment to the block grant based on the approach that was taken when business rates were devolved to Scotland, which involved a reduction in the block grant baseline and
“updating the ... Barnett comparability factor from 100 per cent to 0 per cent”,
although those elements would need to be negotiated in respect of the block grant adjustment.
I understand that, on 28 May, the Chief Secretary to the Treasury said that there is no political party in the UK that is proposing to make any changes to the Barnett formula, that he did not think that it was on the cards and that there was no prospect of a change to the Barnett formula. How does what is being proposed square with what Danny Alexander said just a couple of weeks ago?
I certainly do not want to suggest that there is any lack of urgency on this matter. We set out our proposal in December, and the Scottish Government responded some four months later. We are keen to reach agreement.
My understanding is that that is going very well. We have a clear definition. We have just made a very minor change to the definition via the Wales Bill to pick up a small technical point. As I understand it, that seems to be pretty successful and no new difficulties are emerging.
Would that adjustment vary from year to year, or would it be a one-off?
There is continued uncertainty as to the impact of devolving APD on the UK as a whole. There is evidence to suggest that devolution would result not so much in an increase in the numbers of people flying, but a switch from one part of the UK to another. We need a proper understanding of the impacts on the UK as a whole. There are significant powers in the Scotland Act 2012, which we are implementing, and it is right that we focus on that. Until we are more confident as to the impact of devolving APD, we are not focused on that particular area. However, as you said, the debate on that is on-going. The Strathclyde commission has recommended that APD be devolved, so the matter has not gone away. To be very frank, we also have to take into account what the impact would be in the UK as a whole.
I think that the questions are relevant because paragraph 4 of the foreword to the report states:
“This Coalition Government made a commitment to people in Scotland to deliver the recommendations of the Calman Commission in our Programme for Government, and we have delivered.”
Jamie Hepburn is querying whether that has actually happened in terms of APD. However, I hope that Jamie will move on from this topic fairly soon.
That would be me.
The point that I would make on APD more generally is that it raises a considerable amount of revenue for the Exchequer. At a time when, although we are bringing down the deficit significantly, there continues to be a large deficit, we have to be careful about what we do with the public finances. It is also worth pointing out that, at the budget, we made changes to APD so that the more expensive band, as it were, was removed and rolled into a less expensive band. We have taken steps to reduce APD in a number of circumstances. That had a fiscal cost. That was a tax cut and represents money that we have forgone and which, therefore, cannot be used in other areas. We are restricted by the state of the public finances. It is also worth pointing out that no VAT is charged on air flights, so APD is perhaps performing a role that other taxes do in some other circumstances.
APD applies consistently across Great Britain and brings in a great deal of revenue, and being sensible about the public finances means that we face some difficult choices.
Thank you very much for your comments. As is normal procedure in the Finance Committee, I will start with some opening questions before we open out the session to colleagues.
First, I will touch on chapter 6 on borrowing powers. In September 2013, the committee sought clarification from the Chief Secretary to the Treasury regarding whether the Scottish Government and Scottish local authorities might be disadvantaged by not having access to the preferential project rate at which English local authorities could borrow from 1 November 2013 to take forward major infrastructure projects. The Chief Secretary to the Treasury stated that that seemed to be a “perfectly reasonable point” and undertook to look into it. As yet, we have received no clarification. Can you provide clarity for us?
The point that I would make is that the Barnett formula remains in place, but that it has been the case throughout the history of the Barnett formula that, as more items have been devolved—taxes or spending—adjustments have to be made to take into account that further devolution. What we are talking about is not a fundamental rewrite, reform or recalculation of the Barnett formula—far from it. It is a further example of a situation that we have seen a number of times in recent years in which the Barnett formula needs to be updated to reflect the fact that there is further tax devolution.
So the Strathclyde commission, which your party set up, was too quick off the mark in calling for the devolution of that particular duty right now?
I would much rather ask the DWP ministers about those issues, I can assure you.
Has the UK Government moved its position at all since December, or has it basically said that the Scottish proposal is not very good, so nothing is going to happen in that respect?
It would be a one-off in that it would be agreed here and now. It would be put in place for the future, and we would not revisit it in future years. To ask whether there will be an identical percentage for each and every year in future or whether the percentage will be agreed here and now but might reflect projected changes in yield is very much to get into the precise details of the mechanism. The point is that it is a one-off, in that we agree the adjustment now, and it is in place, so that there will be certainty for the Scottish Government and the Scottish Parliament about the impact on the Barnett consequentials for future years.
You recognised the difference between Belfast and Dublin airports and made allowances. Was that a consideration when you looked at Newcastle and Edinburgh, for example?
In paragraph 66, you talk about
“making all Barnett consequentials slightly smaller”.
You have answered a number of questions on that. Malcolm Chisholm asked what amount of money you were talking about, and you said that that is still to be determined and that you do not really want to put figures on it. I can understand your position but, from our perspective, that is quite frustrating. Do you have a ballpark figure in mind? Are we talking about hundreds of thousands of pounds? Millions of pounds? Tens of millions of pounds? You must have a rough estimation of the sort of sums you have in mind.
I will ask my last question, which I think is relevant to the Scotland Act 2012 because that act sets out that it is possible to devolve other taxes to the Scottish Parliament in the future, and it might be thought that APD is a fairly minor but obvious one. The Exchequer Secretary’s party made a recommendation that stated that that could be done right now but, from what we are hearing, there is a refusal to do that. I suppose the question that that begets is how serious the prospect is of further devolution of any substantial taxation powers in the future, whether they have been recommended by the Strathclyde commission or not.
The UK Government wants to reach agreement. We are not trying to say that things must absolutely be done in a certain way, or we will impose them upon you. We are engaging and working with the Scottish Government. We are listening to what it says in response to our proposals. We are trying to explore the detail. As you have said, the matter is complex, but I believe that we are acting in a perfectly reasonable way, with a genuine desire to reach agreement on it.
Is a meeting scheduled with Scottish Government ministers in order to progress the matter?
Both the Scottish Parliament and the Parliament in which you sit considered the Scotland Bill on the basis of the command paper. Do you not think that we have been somewhat misinformed, as we are no longer clear that what was termed a “one-off adjustment” will be a one-off adjustment?
Finally, the original cost estimate for creating the Scottish rate of income tax was £40 million to £45 million. The most recent estimate that I have seen is a reduction of that to £35 million to £40 million. Is that £35 million to £40 million the most up-to-date estimate as far as you are concerned or has that figure changed?
As I say, in the spirit of a continuing constructive dialogue, setting deadlines would be counterproductive. What we want is to reach agreement.
What I can say, convener, is that in the 2013 autumn statement the Government announced that local authorities in Scotland and Wales will have access to the Public Works Loan Board project rate to support priority infrastructure projects. From 2014-15 to 2015-16, £250 million of project rate borrowing will be available to Scotland, subject to agreement with the Scottish Government on the precise mechanics and conditions. That will mean access to cheaper borrowing at a discount of between 20 to 40 basis points on the certainty and standard lending rates.
Thanks for that. I am sure that colleagues will explore some of those issues further.
We still believe that we have seen nothing better than the proposal we set out in December. However, I stress that we are keen to engage constructively. We are working through the numbers, which has been very helpful. I hope that we can reach agreement—we are keen to do so—and it is important that both sides engage in the process. I entirely agree with the point that you have just made.
Not at the moment, but there is constructive dialogue between officials. We hope that we can make as much progress as possible through that dialogue. As far as I am concerned, as and when we need to have a meeting, we will have a meeting.
Lindsey, do you have anything to say on where officials are with the conversations on the block grant calculation?
I think that the Strathclyde commission has made a valuable contribution to the debate but, here and now, our focus is on implementing the significant powers that are in the Scotland Act 2012. That is where we are looking. The position on APD has not changed. We need a proper understanding of the risks from a distortion of competition and the risk to revenue were we to devolve APD. We continue to keep the matter under review but, as I say, our main focus at the moment is on implementing the existing powers in the Scotland Act 2012.
11:15
In addition to the points that I have already made, there is the point that we have been clear that post the referendum we will look at these matters again. However, as I said, at this point in time our focus is on implementing the powers that are in the Scotland Act 2012.
That is for them to deal with; it is not for me to speak on their behalf.
That is the most up-to-date number that I have as well.
Does that mean that there will be a one-off block grant adjustment and then an addition, which, from the Scottish point of view, would just be indexation for inflation? From your point of view, it presumably means a bit more than that.
Of course, Dublin is not part of the United Kingdom, but there are particular circumstances in respect of Northern Ireland, which shares a land border with another country, as that other country has a different regime. As a consequence, we saw that Northern Ireland faced particular difficulties, so we sought to address the situation, but it was based on the specific circumstances that applied in Northern Ireland.
No, I do not accept that. It has been a well-established principle that tax powers should be devolved in such a way that the process does not have an unfair impact on the nation to which the powers are being devolved or on the UK as a whole. In relation to the block grant adjustment for the two taxes concerned, we have consistently sought to ensure that the formula that is used is fair to Scotland and to the UK.
I certainly hope so.
The final area that I wish to touch on is chapter 7 of your report, which is headed “Power to devolve further existing taxes and create new devolved taxes”. From what I have understood, you have said that the focus at the moment is on delivering the Scotland Act 2012; I certainly agree with that. The point is made in paragraph 48 that
“neither the Scottish Government nor the UK Government has put forward proposals to create new devolved taxes”.
As regards the Scotland Act 2012 and the Scottish rate of income tax in particular, the timescale before it is fully devolved is quite long—it will probably be 2018-19 or beyond before that is totally hived off. Is that the sort of timescale that you are thinking about, and would we not consider any further existing taxes until the 2012 act provisions have been fully implemented?
What I would say is that we are keen to resolve the issue. I have quoted to you what the sums are in terms of SDLT and landfill tax—if you like, the revenue that would be forfeited as a consequence of devolution. However, there are differing trends, and it is important that the formula that we come up with reflects that.
As you say, you can see why I do not want to put a number on it, and I can also see why I do not want to put a number on it, even though I appreciate your position and the fact that you would like to put some parameters on it. However, the most helpful approach is for us to continue to engage constructively with the Scottish Government and for the Scottish Government to continue to engage constructively with us in a way that means that we can reach agreement on this matter.
12:00
You were also asked about possible face-to-face ministerial engagement to reach that agreement. You said that you will meet at ministerial level as and when it is necessary to do so. You are in Scotland. The cabinet secretary with whom I imagine you would have those discussions was here half an hour before you were. Surely it would have been sensible to arrange to discuss the matters while you were here.
I am afraid that I am going to talk about the block grant adjustment, too. It is understandable for two reasons: first, because it is relevant to the immediate budget that we face; and secondly, because it is the critical factor for the fiscal devolution that we are going to get and indeed the enhanced devolution that some of us—a minority around the table, I think—want rather than independence. It is pivotal for that.
I support more fiscal devolution because it gives us more flexibility on the rates but also because of the central idea that we should gain more of the fruits of economic growth and so on. I presume that that is the thinking behind the block grant adjustment for the SRIT, which will be by far the most important one. Have all the details of that been resolved? There was some discussion about whether differences in population size would be taken into account. The cabinet secretary, John Swinney, told us that he had asked officials to give further consideration to that question. Is that still an issue or, from a Treasury point of view, is population size just related to economic growth more generally?
I want to stick with the issue that was just raised. Mr Gauke, in 2010 your Government published a command paper that it called “Strengthening Scotland’s Future”—I emphasise that that is your title rather than one that I might accept myself. That paper says:
“When the smaller taxes are devolved, currently planned to be April 2015, there will be a one-off reduction which will then be deducted from the block grant for all future years.”
The convener read out the updated position, as set out in the latest update on implementation. Why has the UK Government changed its position?
The position at official level is very much as you have set out. We have had the Scottish Government’s proposal and we are talking to the Scottish Government to understand the mechanics of that proposal. We are at the stage of working through the detailed numbers in order to compare the two proposals and assess them so that both Scotland and the UK get fair and equal treatment.
I am not putting numbers on it, but there would be a change in the Barnett consequentials, reflecting what we anticipate will be the future changes in yield for the taxes.
Thank you for that response. I am sure that that is very welcome for Scottish local authorities, but is there any reason why the Scottish Government should not be able to access the same rate?
You mentioned that the Scottish Government has proposed a mechanism whereby the one-off adjustment could be uprated. It sounds to me as though, in the process of negotiation, the Scottish Government is trying to accommodate and move towards the UK Government’s perspective. How is the UK Government moving towards the Scottish Government’s perspective?
I want to pursue some of the issues that have been touched on.
Our hope is that the income from the landfill tax will decrease—I assume that that is the case in the UK as well—because less will go to landfill. If we were hugely successful and managed to have no landfill after a year or two years, there would be no revenue from that source. That would be the extreme case; I am not suggesting that that will happen. That would mean that there would be quite a dent in our budget. Has that been taken into account in looking at the forecasts?
I am uneasy about your comment that there has been nothing better than what came forward in December. I am not asking for all the details, but your proposal had, say, 10 points, and assumptions were made about inflation and other matters. I presume, therefore, that it would not be a question of a whole new and better package coming along, but of saying, “Well, you think inflation’s going to be 2 per cent; we think it’ll be 4 per cent, so let’s settle on 3 per cent.” Is that the kind of area that we are in?
As the Prime Minister has made clear, we need to know first what Scotland’s constitutional future will be; obviously, we will know that later this year. The committee’s focus today is very much on the 2012 act but, post-referendum, assuming a no vote, there will be considerable thought and interest regarding what further powers the Scottish Government should have. That debate will be very interesting. However, at this point the focus is on what we already have in the Scotland Act 2012.
Given the evidence and the decisions that you have arrived at, will it be a permanent feature that air passenger duty will not be a devolved tax? To your mind, is the evidence against devolving it so strong that it would not be considered in future?
At this precise point, as we have heard, there is constructive engagement between officials and a lot of detailed work is on-going in working through the numbers. It is important that officials are able to continue that work—to work through the numbers, the details and the implications of the two proposals that are, if you like, on the table. Once that has been completed, and to the extent that there are any outstanding areas for agreement, that would be the point at which a face-to-face meeting would be most beneficial.
I am grateful for your suggestion that I meet Mr Swinney today. I would be more than happy to meet him. I am not sure that this point is necessarily the best time to do that, but I would be more than happy to meet him to discuss the issue further, as and when it would be appropriate for concluding the matter.
As I said earlier, we set out our proposals in December last year and the Scottish Government set out its proposals in April of this year. We are in discussion. Both sides have agreed to look at the numbers and to explore the particular proposals. We do not believe that we have heard anything to suggest that there is a better approach than the one that we set out in December, but I stress that we are keen to engage constructively, to look at other options that might be available and to explore those in a constructive manner.
The earliest projections that we had from the OBR for landfill tax were dramatically wrong, and they were then reviewed. That was in recognition of the political policy in Scotland—you can correct me if I am wrong about how that changed and what that might mean.
I suspect that there was something of a learning curve for what we now call the land and buildings transaction tax, given the difference in house prices and commercial property prices in Scotland.
What other learning curves are there for you? As you try to estimate the economy in Scotland in different areas, is there a realisation that there are considerable differences in other areas, too?
That is not what I am saying. What I am saying is that there are challenges and difficulties, and there is clearly an on-going debate about APD that may well be revisited in future. The point that I want to get across is that we must exercise a degree of caution because of those difficulties, and that our focus is on trying to implement the Scotland Act 2012, which is a significant and important matter that should not be underestimated, and which the committee clearly takes seriously.
We have made a number of changes in respect of capital borrowing powers and have reduced the restrictions, so there is greater flexibility for the Scottish Government. Does Lindsey Whyte want to add anything on the particular point about the Scottish Government?
So you would not even be willing to commit to consider other powers or taxes before 2018-19 if there was a no vote.
Minister, I appreciate that, quite rightly, you were not willing to commit to a deadline for resolving the issue, but in effect there is a deadline in that the draft budget comes in October and work will have to be done in the run-up to that time. Clearly, you cannot be held to this, but is it likely that the issue will be resolved in June, July or August?
I do not accept that we have changed our position. We want a one-off adjustment. It is important that that adjustment reflects not only the existing yield from those taxes but also what is likely to happen in the coming years. That is why the one-off adjustment should consist of both an adjustment to the block grant and an adjustment to the Barnett consequentials calculation. We believe that that change is the best way to reflect both the situation that we are in and where we are likely to be, given the forecast for significant increases in the yield from stamp duty land tax in the coming years and for decreases in the yield from landfill tax.
Very much so. We have two taxes that appear to be moving in opposite directions. You are absolutely right—we anticipate that landfill tax receipts will fall in the years ahead. If we considered that in isolation, it would not be fair on Scotland were we just to make a one-off block grant adjustment on the basis of current receipts, when those receipts are likely to fall away. We must also put into the equation what is likely to happen with stamp duty land tax, on which the projections are that the yield will increase over the years ahead. It is worth pointing out that SDLT is a bigger tax—the Scottish yield from landfill tax is roughly £100 million a year, whereas from SDLT it is £500 million a year. We must take into account the trends on both taxes, which are going in different directions.
Perhaps I should attempt to describe our proposal very briefly and in very broad terms. The framework that we have proposed is that there would be a one-off block grant adjustment and, at the same time, an adjustment for the Barnett consequentials. Four months after we made that proposal, the Scottish Government came back with a proposal for a block grant adjustment and then an uprating in line with inflation. We believe that our proposal better reflects the position that we should all be trying to get to, which is something that reflects the current and future position of yield from those taxes. We are more than willing to engage constructively with the Scottish Government, and I hope and believe that the Scottish Government is willing to engage with us and that we can reach agreement in this area.
11:30
I entirely agree with your point about the purpose of the Scottish rate of income tax, about improving accountability and about there being a greater link, if you like, between economic performance within Scotland and tax base and so on. It is an important point.
The UK and Scottish Governments have agreed the mechanism for the Scottish rate of income tax and the way in which the block grant will be adjusted in relation to that. It is consistent with the principles that have been agreed by both Governments, so I do not see any particular difficulties or unresolved matters with that process.
Thank you. I have a final question: how will any decision that is taken be communicated to the committee and to the Scottish Parliament?
Specifically on the population point, once we are through the transition period, we have agreed between both Governments that the adjustment will be indexed to the UK’s non-savings and non-dividend tax base. That tax base will of course vary according to a range of factors, one of which will be population, so it will be factored through that part of the process.
11:45
In calculating the adjustment of the block grant, it is not necessary to calculate what will be raised from the equivalent Scottish tax. The point is to work out what the SDLT yield will be. The relevant number is what is forfeited from the UK Exchequer. That is the number that results in the block grant adjustment, not the amount that is going to be raised by the Scottish tax. I want to be clear about that important distinction.
As regards the OBR forecast or any forecast for yield, such things are notoriously difficult. The OBR’s reputation and credibility are very strong. For example, I was talking to a Canadian economist who has been looking at the OBR’s performance and he was very impressed by it. That is not to say that everything is bang on, but there is no obvious sign of getting things wrong consistently in one direction as opposed to another. The OBR is widely respected and seen as independent, as indeed it is. That is important, but forecasts are notoriously difficult and there is always more to learn, refine and improve, and circumstances are always changing, which can make things difficult.
No, but I add that the Public Works Loan Board rate is available only to local authorities throughout the United Kingdom—it has been designed as a lending rate for local authorities.
You said to the convener that your proposal would not alter the Barnett formula, but it strikes me that that is precisely what it would do. You may say that it would not alter it in a substantial way, but I again refer to the command paper, which stated:
“The UK Government recognises some of the concerns expressed about the current system of devolution funding but at this time the priority is to reduce the deficit and any changes must await the stabilisation of the public finances.”
I think that the UK Government said that that would not happen until 2018 at the earliest, but we now find that the mechanism that you propose is an alteration of the Barnett formula. Why has there been a change in the position that you set out to the Scottish Parliament and the UK Parliament in your command paper?
Beyond what is already set out, that is a matter for debate post the referendum, not pre the referendum.
I can see why you ask that question. I remain reluctant to put a particular date on it. It would be beneficial all round if we could reach agreement sooner rather than later. It is some time since we set out our detailed proposal—we did that in December last year. As I say, I hope that we can make progress sooner rather than later. There are two parties involved, but both sides can engage constructively—it is in both our interests to resolve any uncertainty.
I am not quite sure exactly how we would do that but, assuming that agreement has been reached, we would work with the Scottish Government to ensure that the committee was informed fully of the details of the agreement.
Okay. Thank you for that.
I move on to the block grant adjustment. The Cabinet Secretary for Finance, Employment and Sustainable Growth, John Swinney, stated:
“We need to agree soon the block grant adjustment mechanism for the devolved taxes, not least to ensure that estimates can be factored into the preparation of the draft Scottish budget this autumn.”—[Official Report, Finance Committee, 7 May 2014; c 4080.]
Obviously, time has been rolling on over the issue for some months. Indeed, the Chief Secretary to the Treasury said last September that “time is marching on.” What are the bottlenecks when it comes to reaching an agreement? How do you believe that we can and should overcome those?
I will not press the point further, but I hope that you will take from the number of questions on the issue the depth of its importance to the committee.
On the block grant adjustment, are you discussing each of the two taxes separately or will there be a blended block grant adjustment?
Thank you very much for answering our questions. We really appreciate you coming to the Scottish Parliament and, in particular, the Finance Committee. I also thank colleagues for their questions.
12:04 Meeting continued in private until 12:29.
Again, I do not accept that. What is proposed is not a fundamental change to the Barnett formula. It is an updating of the Barnett formula to take into account further devolution, in the same way as adjustments were made when business rates were devolved and when additional spending areas have been devolved, which has led to changes to the Barnett consequentials. Certainly, as far as the UK Government is concerned, this is not a rewriting of the Barnett formula. I accept that there is a threat to the Barnett formula, but that is a yes vote in the referendum.
That is a good question. There is a degree of flexibility on that. We want the best result. As I said, the two taxes rather go in different directions: the yield of one is likely to increase and the yield of the other is likely to fall. We want to reflect the totality, so we are prepared to be flexible on whether the answer involves looking at the two separately and then bringing them together or whether the answer is, to use your word, a “blended” adjustment.
The Scottish Government is about to set up its independent fiscal commission to look at forecasts for the three taxes that have been devolved. That will run in conjunction with the Office for Budget Responsibility, which will continue to produce forecasts twice a year on the land and buildings transaction tax and the landfill tax. The OBR will also give forecasts for the aggregates levy, although that is not being devolved.
During our discussions on forecasting and our discussions with the OBR directly, there have been a number of requests for the OBR to consider producing forecasts across all its areas of responsibility to help advise the Scottish Government in terms of the strength of the economy. Could the OBR play a role in producing that type of information? Are there reasons why you would think that that could be problematic?
As far as what the OBR could do for the Scottish Government, that is principally an issue for the Scottish Government and, to an extent, the OBR, assuming that it has the capacity to do what is requested of it. The extent to which the Scottish Government wishes to make use of the OBR, or wishes to have an independent body on the more purely Scottish aspects, is a matter for the Scottish Government. We think that the OBR is doing a very good job. It is seen internationally as a very respected organisation. A lot of countries are looking very closely at the model that we have followed in the UK, in which there is an independent forecaster and body, separate from Government, which gives greater credibility to the numbers. We are very pleased with how the OBR has operated.
On services that the OBR might provide to the Scottish Government, I would be interested to see what the Scottish Government had to say first.