The next item of business is a debate on motion S4M-14432, in the name of Kenneth Gibson, on Scotland’s fiscal framework. I call on Kenneth Gibson to speak to and move the motion on behalf of the Finance Committee.
14:41
One of the key priorities of the Finance Committee throughout the current session has been to ensure effective parliamentary scrutiny of the implementation and operation of further fiscal devolution. The committee has carried out a considerable amount of work on the fiscal powers arising from the Scotland Act 2012, and that has given us a firm grounding for our scrutiny of the fiscal powers that will arise from the work of the Smith commission. Our primary focus has been on the recommendations in the commission’s report for an updated fiscal framework for Scotland.
The committee is strongly of the view that the workability and effectiveness of further fiscal devolution are largely dependent on the revised framework. It is therefore essential that the framework is subject to rigorous parliamentary scrutiny. However, as it is not included in the Scotland Bill, it will not be subject to formal legislative scrutiny; rather, the framework is being developed in private through negotiations between the United Kingdom and Scottish Governments. Understandably, both Governments have agreed not to provide a running commentary on the negotiations, and it is entirely reasonable that they discuss the intricacies of the negotiations in private. At the same time, it is also entirely reasonable that the Westminster Parliament and our Parliament have sufficient time to comment on a draft of the framework prior to its final agreement by the two Governments.
The committee therefore welcomes the commitment from the Deputy First Minister that the Scottish Parliament needs to agree the fiscal framework prior to being asked to agree the legislative consent motion for the Scotland Bill that is currently being considered at Westminster. The committee would welcome a commitment from the Deputy First Minister during this debate that that will include sufficient opportunity for Parliament to scrutinise a draft of the proposed framework prior to final agreement with the UK Government.
I now turn to some of the substantive issues in the committee’s report. A central issue for the committee is the extent to which the new fiscal powers and the fiscal framework will provide the Scottish Government with the flexibility to pursue separate fiscal policies from the UK Government. The Deputy First Minister stated in his response to our report:
“it is essential that the fiscal framework provides the Scottish Government with genuine flexibility and choice to pursue its own distinct policy.”
However, the committee is concerned that the UK Government command paper that was published in response to the Smith commission suggests a much greater level of constraint. For example, paragraph 2.2.7 of the command paper states:
“the fiscal framework must require Scotland to contribute proportionally to fiscal consolidation at the pace set out by the UK Government across devolved and reserved areas.”
The Deputy First Minister made it clear in evidence to us that he did not accept that wording, which does not reflect the Scottish Government’s position. It would be helpful if the Deputy First Minister could confirm during the debate that he would not ask the Parliament to support a fiscal agreement that required Scotland
“to contribute proportionally to fiscal consolidation at the pace set out by the UK Government”.
Integral to fiscal flexibility will be the extent of the additional borrowing powers beyond those already devolved as part of the Scotland Act 2012. However, the current Scotland Bill does not include any new borrowing provisions. The Scottish ministers have indicated that they expect amendments to be lodged as the bill proceeds through Westminster. In relation to current borrowing, the committee does not believe that a cash limit is appropriate given the Scotland-specific cyclical risks that will potentially be faced by the Scottish Government post-Smith in future years. Instead, the committee supports a fiscal rule such as the requirement to balance the budget over the economic cycle. We welcome the Deputy First Minister’s agreement with our recommendations on current borrowing.
The committee noted that the block grant adjustment method in relation to income tax is intended to protect Scotland from some of the cyclical volatility in the UK as a whole. The two Governments previously agreed the Holtham method for the indexation of the block grant adjustment following the introduction of the income tax powers in the Scotland Act 2012. The Deputy First Minister has indicated that he believes that the Holtham method is also the most robust mechanism for indexing the block grant adjustment in relation to the income tax powers in the current Scotland Bill.
However, the committee heard from some witnesses during our inquiry that the Holtham method might penalise Scotland because we have both a relatively smaller number of higher-rate tax payers and slower population growth. Indeed, Professor Holtham previously advised the committee that his indexation method is
“not in the devolved territory’s interest if its own tax base is inevitably slower growing than that of the UK.”
The committee asked the Scottish Government whether it had carried out any analysis of the impact of the number of higher-rate tax payers and population growth. The committee also asked whether consideration had been given to the indexation of the block grant adjustment on the per capita tax base rather than the overall growth of the UK tax base and whether any analysis of that approach had been carried out.
The Government did not provide an answer to either question in its response to our report. In subsequent oral evidence to the committee, the Deputy First Minister confirmed:
“we are doing that analysis as part of our discussions with the UK Government.”—[Official Report, Finance Committee, 2 September 2015; c 25.]
Given his previous emphasis on the need for transparency in relation to the block grant adjustment, it would be helpful if the Deputy First Minister could confirm during the debate that that analysis will be published before the Parliament is asked to agree the fiscal framework.
The committee supports the introduction of a prudential capital borrowing regime on a statutory basis, and the Devolution (Further Powers) Committee is also supportive of the move towards a prudential regime. Although the Deputy First Minister welcomed the committee’s support for the introduction of a prudential regime, he made it clear in oral evidence that he is seeking prudential borrowing in addition to the existing capital departmental expenditure limit—a matter on which the committee concurs.
The committee also agrees that there needs to be a fiscal rule governing the medium to long-term limit on net debt, and we agree, too, with the Devolution (Further Powers) Committee that consideration should be given to a debt rule as a percentage of cyclically adjusted gross domestic product. A related issue is moral hazard, which was explained by one of our witnesses as
“when the sub-central level of government believes it can engage in ill-disciplined policies and ultimately has to be bailed out by the centre.”
Our witnesses agreed that the question of a possible bail-out needs to be addressed at the outset, and the committee has recommended that moral hazard needs to be explicitly addressed in the fiscal framework.
One of the primary concerns to be raised during our inquiry related to the second no-detriment principle that was proposed by the Smith commission. The committee was content with the first principle that neither Scotland nor the rest of the UK should be adversely affected as a result of the decision to devolve further powers. However, the second principle, which is intended to apply to policy decisions of the two Governments after the devolution of tax or spending powers, is much more problematic. None of our witnesses could provide an example of a similar principle in any other fiscally federal country, and it was pointed out that any methodology to implement the principle would be complex and likely to provoke disagreement.
The committee recommended that the second principle be treated as a high-level guide for both Governments in the application of the fiscal framework and in adjusting the block grant. However, even if it is treated as a high-level principle, further work needs to be done on refining the boundaries within which the principle applies.
I think that what was said about no detriment is important. Paragraph 174 contains the unanimous recommendation that there should be an independent arbiter between the Treasury and the Scottish Government. Given that no department of state and no devolved Administration has ever had a satisfactory relationship with the Treasury, which is judge in its own court, would Kenneth Gibson say that that powerful, unanimous recommendation should be a prerequisite for any agreement on a fiscal framework?
That should be the case. One of the things that came through strongly in the evidence that we took was that the Treasury is sometimes quite byzantine in the way that it works, in terms of both transparency and the formulas that it uses. I am sure that colleagues will explore that matter further as we proceed.
Last week, the Scottish Government introduced a bill to put the Scottish Fiscal Commission on a statutory footing. The policy memorandum to the bill states:
“enactment of these legislative proposals will play a vital role in delivering the Smith Commission’s recommendation that ‘the Scottish Parliament should seek to expand and strengthen the independent scrutiny of Scotland’s public finances’.”
Colleagues will be aware that the Finance Committee has already carried out a considerable amount of work on the proposals for a fiscal commission in Scotland and we will be the lead committee in scrutinising the bill at stage 1. We agreed our approach to the stage 1 inquiry this morning, we will publish our call for evidence on Friday and we hope to publish our report before the Christmas recess.
The committee published its report on proposals for a fiscal commission in January 2014. Our main recommendation was that the commission should adhere to Organisation for Economic Co-operation and Development principles and in particular the principles of independence, non-partisanship and transparency. As part of our inquiry on the fiscal framework we focused on an enhanced role for the commission post-Smith. Witnesses identified two main roles for the commission.
First, there was a general consensus that the commission should produce its own forecasts. The committee recommended that the Scottish Fiscal Commission Bill should be amended accordingly. The Scottish Government responded that it is not persuaded that the commission should prepare the official forecasts. That still leaves open the question of whether it should be able to conduct its own forecasts. The committee will consider that issue further as part of its stage 1 inquiry.
Secondly, there was strong support for the commission having a wider role in monitoring the adherence of the Scottish Government to its fiscal rules and the sustainability of the public finances. The committee recommended that the draft bill should be amended to include those roles. The Deputy First Minister responded that it may be desirable for the commission to have a future role in assessing the Government’s performance against fiscal rules. The committee will also consider the issue further as part of its stage 1 inquiry.
The committee also considered in detail the transparency of the Barnett formula and the need for improved intergovernmental relations on fiscal rules. That will be covered in detail by the deputy convener, John Mason, in his closing speech.
I finish by again emphasising the significance of the fiscal framework to the new devolution arrangements. It is, therefore, essential that this Parliament is given an opportunity to scrutinise a draft framework prior to any agreement between the two Governments.
I move,
That the Parliament notes the 12th Report, 2015 (Session 4) of the Finance Committee, Scotland’s Fiscal Framework (SP Paper 771), including its recommendations to the Scottish Government.
14:53
I am grateful to the members of Finance Committee for their report on Scotland’s fiscal framework. The written submissions and oral sessions all underline the importance of a sound fiscal framework for Scotland’s future. I agree whole-heartedly with the convener that the fiscal framework is an integral part of the devolution of further responsibilities. It is essential that the work that is undertaken to develop the fiscal framework properly takes into account all the relevant considerations that will be important in ensuring the financial future of Scotland under those responsibilities. The work of the committee has helped to shape how we approach the programme of work around the on-going negotiations on a fiscal framework.
I would like to provide some context for the work on the fiscal framework that is currently under way with the UK Government. Paragraph 94 of the Smith commission report recommended that the devolution of further tax and spending powers to the Scottish Government should be accompanied by an updated fiscal framework for Scotland. Crucially, Smith said that it was for the Scottish and UK Governments to jointly work together via the joint exchequer committee to agree the revised fiscal and funding framework for Scotland. That is the process in which I am currently engaged with the UK Government.
My overarching aim is to ensure that the new fiscal framework is fair and workable and that, as Smith also identified, Scotland’s budget should be no larger or smaller simply as a result of the initial transfer of powers. We want a fiscal framework that gives the Scottish Government the flexibility that it needs to create a fair and prosperous Scotland and the ability to use the powers that we have effectively. This must be about genuine autonomy and choice, and we know that it must be done in a responsible and sustainable way, building on the platform of our existing fiscal powers.
We need a fiscal framework that will ensure that further devolution provides the right incentives and increases accountability, linking the Scottish Government’s budget to Scottish economic performance in so far as that is possible given the range of responsibilities that are being transferred following the Smith commission’s report. Scotland should retain the rewards of her success in the same way as we must bear the risks of the policies and actions that we pursue. It is essential that the fiscal framework allows us to pursue our own distinct policies that meet the needs and wishes of the people of Scotland and does not tie us to UK Government policies.
I agree with the committee at paragraph 24 of its report, where it states:
“while Scotland’s revised fiscal framework needs to be consistent with the UK’s overall fiscal framework this does not mean that they need to mirror each other. For fiscal devolution to work it is essential that the Scottish Government has some flexibility to pursue distinct fiscal policies consistent with the overall UK fiscal framework.”
I believe that to be a central argument in the process that led to the Smith commission’s reforms, and it must be a central argument in how the fiscal framework applies to the management of the public finances in Scotland, creating the scope for this Parliament to take different decisions that allow us to pursue a distinctive fiscal policy approach. The fiscal framework will need to be agreed jointly by both Governments. The joint exchequer committee has met three times to date, and we will meet again later this month with the aim of concluding negotiations during the autumn. Let me make it clear, however, that the determining factor is getting the framework right rather than observing a particular timescale for that process.
The Finance Committee has also emphasised the importance of parliamentary scrutiny of the framework and its operation. I heard clearly the convener’s point that there should be scrutiny of a draft of the fiscal framework before its agreement. I will advance that point with the Treasury in setting out the Finance Committee’s position, and I will advise the committee and Parliament as part of the process to ensure that Parliament is fully informed about the development of the fiscal framework.
Paragraph 30(2)(b) of the Smith commission’s report recommended that there be
“pro-active reporting to respective Parliaments”.
Paragraph 95(9) recommended:
“The two governments should provide updates to the Scottish and UK Parliaments, including through the laying of annual update reports, setting out the changes agreed to Scotland’s fiscal framework.”
The Parliament will be aware that, under section 33 of the Scotland Act 2012, Scottish and UK ministers report on the implementation and operation of the finance powers and functions that are devolved under that act. I intend to update the Scottish Parliament on the implementation and operation of the fiscal framework in a similar way.
In line with the evidence and the unanimous recommendation of the committee, will the Scottish Government regard the establishment of an independent arbitration procedure as a prerequisite for agreeing the fiscal framework?
That would be an essential part of the process. Independent arbitration gives us confidence that, in a necessarily adversarial relationship with Her Majesty’s Treasury, we will be able to ensure that the interests and perspectives of the Scottish Parliament and the Scottish public finances are assessed appropriately.
It is important to recognise that it is for the Scottish Parliament itself to decide how it wishes to scrutinise the operation of the fiscal framework, and nothing that is agreed as part of the negotiations on the fiscal framework should prevent that key role from being undertaken. I recognise that the Parliament and the Finance Committee want to have on-going discussion on the fiscal framework negotiations. Today’s debate is helpful in informing me of Parliament’s perspective on a variety of issues that are being addressed as part of the negotiations. Information is published after every joint exchequer committee meeting, and I am happy to report back to the Parliament at the appropriate opportunity on the issues that are discussed. I gave my commitment to Parliament on 16 September that it will be able to consider and analyse the fiscal framework that emerges from those discussions before we move to any acceptance of the Scotland Bill through a legislative consent motion.
I have touched on the committee’s views on the need for distinct fiscal policies. The committee made a number of other recommendations that are relevant to the issues with which we are dealing in the joint exchequer committee.
We agree with the recommendation that there be “significantly increased” revenue borrowing facilities—those must give us the tools to manage tax volatility and Scottish economic shocks, and to provide us with the flexibility to be able to manage the greater risk that will inevitably flow from the management of the responsibilities from the Scotland Bill.
We agree with the committee that the Scottish Government needs more capital borrowing facilities in addition to the existing capital departmental expenditure limit and Scotland Act 2012 provisions. That is important in securing the flexibility to improve economic opportunity in Scotland, as we have shown in recent years with our expanded capital programme.
We agree that no detriment is a complex and potentially contentious issue to implement. It needs to be transparent and sustainable; it will need to be applied.
Devolution takes time and resources to implement properly. The full cost of administering and delivering the new powers, particularly the welfare package, needs to be met by the United Kingdom Government. As Smith said, the funding needs to be
“sufficient to support the functions being transferred”
to the Scottish Parliament and the Scottish Government.
Finally, we agree with the committee’s concerns about the transparency of the calculations of the block grant adjustment. I will not sign up to any adjustment that is not fair to Scotland. I am clear that the methods used to calculate the adjustments should reflect Smith’s core principle of no detriment. The baseline for Scottish public expenditure must continue to be set through the Barnett formula. That was promised in the vow. An adjustment will inevitably then be applied to the block grant to account for our new tax and spending powers. Any adjustment mechanism that simply seeks to reduce Scotland’s funding year after year, irrespective of the policies that we pursue, will not be acceptable to this Government. That would breach the vow and Smith, and we will not agree to such a provision within the fiscal framework.
I welcome the committee’s detailed and thoughtful consideration on the creation of the Scottish Fiscal Commission. We have drawn on the committee’s findings in developing our legislative proposals. Smith recommended that the Scottish Parliament should seek to expand and strengthen the independent scrutiny of Scotland’s public finances. I believe that the Scottish Fiscal Commission and our Scottish Fiscal Commission Bill, which places the commission on a statutory footing, will enable that to happen.
Our proposals will create a very different relationship between the Scottish Government and the commission. The commission ultimately has a veto over devolved tax forecasts. I revised downwards our non-domestic rates forecast in the 2015-16 budget after the commission reported that the initial buoyancy assumption “seems optimistic”. That stands in contrast to the relationship between Her Majesty’s Treasury and the Office for Budget Responsibility, characterised by paragraph 3.9 of the “Charter for Budget Responsibility: Summer Budget 2015 update”, which states:
“The government has adopted the OBR’s fiscal and economic forecasts as the official forecasts for the Budget Report. The government retains the right to disagree with the OBR’s forecasts”.
The committee questioned our approach to forecasting. The forecasting approach that we have set out in our legislation maximises transparency as both the forecasting methodology and the results of independent scrutiny are publicly reported.
The Scottish Government has made clear that we will not bring a legislative consent motion to this Parliament without an agreed fiscal framework that is fair to Scotland. That remains the case. As I told Parliament on 16 September, we see the fiscal framework and the Scotland Bill as one and the same thing. There is no point in having the powers if we do not have the fiscal framework that allows us to exercise the powers without prejudice to the interests of Scotland.
In considering legislative consent, this Parliament will consider the bill as a whole and as individual provisions. It will also consider whether the bill reflects the recommendations of the Smith commission. The secretary of state has promised substantive amendments at report stage, and I await those with considerable anticipation.
On 16 September, this Parliament again pointed the Secretary of State for Scotland to the work of the cross-party Devolution (Further Powers) Committee in identifying amendments that need to be made to deliver the recommendations of the Smith commission. The secretary of state should now take heed of this Parliament’s view.
I commend the committee for its work on Scotland’s fiscal framework and will engage further with it on the important work that will be done to ensure that the fiscal framework is designed in a fashion that meets the needs of the people of Scotland and the Scottish Parliament.
15:05
Everybody loves a good mystery. There is nothing quite like a page-turner and those moments of dramatic suspense to keep a reader completely engaged. Finally, there is the moment of satisfaction when the plot comes together and we find out who done it.
What I have described applies to a work of fiction but, unfortunately, it rather resembles our experience of the joint exchequer committee. That is a far more serious matter, because that committee is where the discussions take place between the Scottish and UK Governments about the fiscal framework. Currently, those discussions are shrouded in complete mystery and, to be frank, I do not think that that is good enough.
The fiscal framework covers the rules and institutions that govern our approach to the nation’s finances—how much we borrow, our debt levels and how we co-ordinate financial policy with the UK Government. It is essential to making sure that we have robust policies in place.
We are about to witness the single biggest transfer of power from the UK Government to Scotland since the creation of the Scottish Parliament, so we need to make sure that we take our responsibilities for raising taxes seriously and that the financial mechanisms that we put in place are robust and transparent. Therefore, I am genuinely at a loss to understand why the cabinet secretary is unable, or perhaps even unwilling, to share with members of this Parliament—who are allies with him in this project—and with the people of Scotland precisely what is going on. It is quite difficult for us to engage in a meaningful conversation or dialogue if both Governments are not telling us about their proceedings.
I agree with the convener of the Finance Committee. I accept that there is a balance to be struck, that there are sensitivities and that we need to allow the negotiations to take place, but the information that has been provided so far has been insufficient.
We get communiqués from the joint exchequer committee, which has met three times. I have asked the cabinet secretary questions. I do not begin to know how long the meetings are, but the communiqués on what has been discussed are becoming shorter and shorter.
I understand the importance of parliamentary scrutiny and I am doing my level best to inform the debate—hence my response to the Finance Committee and my contribution to today’s debate. Will Jackie Baillie set out what approach should be taken to help my discussions with Her Majesty’s Treasury?
I am happy to do so but, in the time that I have been allocated, it will not be possible to do that justice. I am happy to engage with the cabinet secretary, but the problem that I have is that his communiqués are so bereft of detail that it is difficult to know what discussions are taking place.
I recall that the cabinet secretary made a vague commitment to set things out in the autumn. My central heating is now on and autumn has arrived, but we are no closer to getting the detailed information that would enable a dialogue to take place between the Opposition parties in this Parliament and the cabinet secretary.
I am curious to know whether the cabinet secretary agreed to the lack of transparency. Will he now publish information on the discussions that have taken place to date? When does he expect the discussions to conclude? He has tied the fiscal framework to the Scotland Bill and the legislative consent motion, so are we to expect it after the Scotland Bill has been passed? Will an LCM run alongside the Scotland Bill? It would be useful for the Parliament to understand what his timetable is.
The Finance Committee’s report makes a number of comments about transparency. It points to a need for much stronger and more transparent parliamentary scrutiny of intergovernmental relations, following the Smith agreement. In evidence to the committee, Professor McEwen observed that most
“intergovernmental exchange continues to take place below the radar”,
which
“raises questions about the capacity of the Scottish Parliament and the UK Parliament to give effective scrutiny”.
Similarly, the Royal Society of Edinburgh stated that, typically, intergovernmental relations in the UK
“have been ad hoc, informal and undertaken on an issue-by-issue basis with little opportunity for public scrutiny.”
The RSE supports the development, as I do, of a much stronger joint ministerial committee system, with clearer guidelines, more regular meetings, enhanced transparency and, indeed, publicity.
Professor McEwen argued that there needs to be a degree of transparency prior to meetings of the formal institutions, so that the Parliament has the opportunity to contribute its views in advance. Likewise, there needs to be a degree of transparency in the aftermath of meetings, to allow for parliamentary scrutiny of discussions. It is fairly clear that there is a need for transparency and better scrutiny, yet the UK and Scottish Governments appear to be making backroom deals, cutting out both Parliament and people, subverting the democratic process and placing further devolution in jeopardy. That is simply not good enough.
I appreciate that negotiations will be sensitive, but there is a precedent for the publication of minutes and agendas. Mr Swinney will remember that the two Governments previously agreed to provide the minutes of JEC meetings to the Scottish Parliament and the UK Parliament. Minutes were received for the JEC meetings of 27 September 2011 and 18 June 2012, and papers were supplied in advance of the September 2011 meeting on an exceptional basis. If that could be done then, why can it not be done now?
I turn to the Finance Committee’s deliberations on an independent arbiter. A number of witnesses agreed that there is a need to establish an arbiter—a genuinely independent body that is responsible for advising on the calculations that underpin the system and for adjudicating in the event of any disputes between the Governments that they cannot resolve between themselves. I find myself in the strange but happy position of agreeing with the former First Minister on this point. The cabinet secretary also agrees that there is a case for an independent arbiter. I welcome that.
I look forward to scrutinising the Scottish Fiscal Commission Bill, because Labour members do not believe that the proposals are ambitious enough or providing sufficient independence.
Will the member give way?
I think that I am in my final minute.
I can allow you time if you wish.
I am happy to give way.
Does the member agree that having an independent arbiter would really take a change of culture and thinking at Westminster? Has she seen any sign that that might happen?
I absolutely agree that it would take a change of culture. In fact, a lot of the committee’s report is imbued with exactly that. I am not a mind reader as to what the Conservative Government thinks, but I hope that we might hear some of that when they speak next.
I thank the Finance Committee for its report. I was not part of the committee when its members developed the report. It is very robust and I commend the conclusions to the Parliament. I will remind the chamber of what they were. The committee said that
“the workability and effectiveness of further fiscal devolution is largely dependent on Scotland’s revised fiscal framework”.
There is no overestimating how important that is.
There needs to be a willingness to work together between the UK Government and devolved Administrations in a culture of mutual respect. From a parliamentary perspective, there needs to be a culture of openness and transparency when communicating intergovernmental discussions.
It is not appropriate for this to be a dialogue simply between the two Governments; this is a matter for Parliament, too. I concur with the convener’s comments, but I believe that more transparency is required now.
At the moment, Parliament is, relatively speaking, in the dark. The people of Scotland are in the dark, too. The Scottish National Party Government must, as a matter of urgency, draw back that veil of secrecy and get on with developing a robust fiscal framework.
15:14
I thank the committee clerks for all their hard work on the inquiry and I thank all the witnesses who gave written and oral evidence. We had some excellent witnesses, and the report is a pretty impressive piece of work. I also congratulate the convener of the committee on his speech, which reflected pretty fairly the conclusions that we reached.
The first point that I will make is about transparency. I entirely accept the Deputy First Minister’s argument that it is not desirable and probably not achievable to give a running commentary on all the negotiations and discussions between Governments, but I would like him to address, perhaps in his closing speech, whether there is something between a running commentary and the current position. Although the communiqués are clearly intended not to tell us terribly much—I suspect that that is pure protocol—I cannot help but think that there is some possibility that we could get a bit more information than we currently get, so that Parliament and the Finance Committee in particular have a slightly clearer idea of where we are going.
Will Mr Brown help me by dropping me some comments after the debate on what type of information he believes would be helpful? I would appreciate it if he dropped me a note to take forward the discussions.
I am happy to drop the Deputy First Minister that note.
Let us take revenue borrowing, which I know from the communiqué was one of the issues that were discussed at the last meeting. Can we get an indication of where there might be agreement or disagreement? Simply hearing that that was discussed does not tell us terribly much. There may be areas of revenue volatility borrowing that are completely uncontentious to the extent that both Governments agree that they do not merit further discussion. We could then see where the difficulties are and where the challenges that need to be faced are.
If the committee and parliamentarians had some idea of where the challenges are, we would be well versed to contribute and to send suggestions to the cabinet secretary. That would get both Parliaments involved, as opposed to both Governments. I cite that as merely one example.
Where there are agreements on revenue volatility borrowing—I am sure that there must be some—can we know what those are, so that there is not simply horse trading all the way through to the end and nothing is agreed until everything is agreed? I think that the cabinet secretary referred to that. If we are negotiating and discussing on principle, I suspect that much, but not all, could be agreed up front in the same way as, in legal cases, both sides outline their arguments before they get anywhere near a judge so that, when they get in front of a judge, they discuss only the areas of contention and do not waste time on areas in which there is no dispute.
It is important for the Scottish Government to lay out some of its stall, as it has said publicly and quite clearly and loudly, from the First Minister to the Deputy First Minister and all the way down, that it will block the Scotland Bill or at least recommend that it be blocked unless the fiscal framework is fair. A press release spoke about the framework being “fair and flexible”; today, it has been said that the framework must be “fair and workable”. It is only fair to the Scottish public that we have some idea of what the Scottish Government deems to be fair. There should be some idea up front so that we do not get at the last minute the rather striking and bland statement, “We don’t like it because it isn’t fair.”
For example, what is the Scottish Government’s position on fiscal rules? Does it have any fiscal rules that it believes are required? Does it have a position on a fiscal rule regarding deficit and a fiscal rule regarding debt? Does it accept the committee’s recommendation that, once agreed, those rules should be put into statute? The committee discovered that, since 2010, only one fiscal rule has not been put into statute. Does the Scottish Government accept that recommendation?
Let us say for a second that Jackie Baillie’s promotion of Gavin Brown had come into effect and that he was a Treasury minister, but let us say that he was a Scottish minister. I presume that he would not agree to a fiscal framework that did not provide for independent arbitration, given the weight of the evidence to the committee and its unanimous recommendations. What would Gavin Brown do?
In relation to the former First Minister’s comments, I am not sure whether I have less chance of being a Treasury minister or of being a Scottish Government minister.
Alex Salmond said that paragraph 174 was agreed unanimously, but I will correct him. If he checks the record, he will see that it was not agreed unanimously at all. I dissented from two key recommendations in that paragraph because I was not persuaded by the idea of an arbiter who could go between the two Governments and put a final, binding arbitration on them—I was not convinced at the time and I am not convinced yet that that is workable and plausible.
Thank goodness the member is not a minister.
If the former First Minister had spent more time reading the report than he has on the Starship Enterprise, he might have been perfectly aware that I dissented from both those recommendations.
In my final few seconds, I will turn to the Scottish Fiscal Commission, which I will deal with more in closing.
Mr Brown, I can give you the time back for the interventions.
I am grateful for that.
I have to say that the Scottish Fiscal Commission Bill that the Scottish Government has put forward is disappointing and a bit toothless. The commission needs a wider and deeper role, and the key issue, on which the Finance Committee made a unanimous recommendation, is that the commission should produce its own forecasts. Nobody dissented from that recommendation. We have had evidence from around the planet that that is what happens in almost every country. The Scottish Government has not been able to provide any examples of countries in which only the official Government forecast is looked at and only it is used to decide whether the Government’s fiscal predictions are likely to be accurate.
I know that the Deputy First Minister has staked his position on the issue, but I simply ask him to look at the evidence and at what the experts have said. I genuinely think that the Scottish Government has taken the wrong approach on that one. I make a plea to him to be open minded as the bill goes through and change the provisions so that we can have independent forecasts, which will give us a much greater chance of getting it right.
A lot is at stake—we could be out by tens of millions or hundreds of millions of pounds. The chances of getting it right are increased enormously by having a system of checks and balances and by having independent experts who have access to their own forecasts. There would be much more possibility of getting it right than if we relied simply on Government forecasts.
We move to the open debate. Speeches can be of seven minutes or so, and I still have generous time in hand for interventions.
15:22
While listening to Jackie Baillie’s speech, I was interested by her trying to conjure the image of a mystery thriller. Unfortunately, during the course of her speech the only image that I could come up with was of Jackie Baillie standing outside a room with a cup pressed against the door, trying to listen in on what was happening behind it.
There is a balance to be struck. The point was made by the convener of the Finance Committee that we do not want a situation in which the Scottish Government is, essentially, outlining its negotiating position in full, in public. One of my difficulties is that although I listened very carefully to Jackie Baillie’s speech, I did not hear any detail on the kinds of things that Jackie Baillie wants the Scottish Government to lay before Parliament for scrutiny. I appreciate that she had only a certain amount of time, but I suspect that she could have at least given us a flavour of those things, as part of this process, which might have given us an indication of what she expects from the Deputy First Minister.
For me, the questions around the fiscal framework come down to flexibility, fairness and transparency. Flexibility is an issue in so far as, if we are to have new powers devolved to us, we must have the ability to use them for the betterment of the people of Scotland. The fiscal framework will determine the flexibility that the Scottish Government has to use the financial powers that will be available to it in order to deliver on that.
That is why the UK Government’s command paper and the subsequent comments by the Secretary of State for Scotland not sitting well together—as I have said previously—needs to be bottomed out. Paragraph 2.2.5 of the command paper is very clear:
“In the context of Scottish devolution, the fiscal framework must ensure that Scotland contributes proportionally to the overall fiscal consolidation pursued by the UK Government.”
Essentially, that ties Scotland to the austerity agenda. However, at the Devolution (Further Powers) Committee, the secretary of state was explicit that the fiscal framework is not intended to restrict the flexibility of the Scottish Government.
Two different positions are being articulated by the UK Government; it is important that the two positions be explored forensically to determine what exactly the position will be in relation to the fiscal framework and the ability of the Scottish Government to operate within it and to use the powers that are being granted to it.
That is equally true when it comes to borrowing powers which, as has been highlighted, are not explicitly mentioned in the Scotland Bill, although we know that borrowing powers are to come to the Scottish Parliament. There is a question about those powers: will they be supplementary to the current capital DEL budget, or will they be in place of the capital DEL budget? That is a not immaterial consideration. If the powers are to replace capital DEL, we will face a revenue hit simply to stand still as far as capital expenditure is concerned. To go beyond a standstill would incur a further revenue hit. That is a material consideration in relation to how fair and flexible the fiscal framework will be.
Independent arbitration is important. Gavin Brown says that he does not agree that independent arbitration is needed. The weight of evidence that came before the Finance Committee indicates that having the Treasury as sole arbiter—I think that that was the term that we used in the report—or as judge and jury on such matters does not suggest an image of fairness in how the fiscal framework will be dealt with. If the Treasury has an interest in the outcome and is also the ultimate decision maker for that outcome, it does not take too much of a leap of logic to suggest that it will serve its own interests rather than necessarily reflecting on the balance of interests and coming to a conclusion on that basis. I therefore think that having an independent arbiter would be important for ensuring that the Treasury plays fair in the process and does not simply look after its own interests, to the detriment of the abilities of this Parliament to exercise the powers that are being devolved to it.
Also on the subject of fairness, both the Finance Committee and the Devolution (Further Powers) Committee have spent a long time trying to come to terms with what exactly the second no-detriment principle will mean in practice. We are still a long way from getting to that point. The point about a high-level principle is fair enough, but the difficulty lies in knowing in what circumstances it would apply and what element of future proofing there will be around it, so that, for instance, an outcome five years hence is not traced back to a decision that was taken now, and a call for compensation made under the no-detriment principle. There has to be some indication of the period of time over which a no-detriment principle applies when the second no-detriment principle is being examined.
On transparency, the Devolution (Further Powers) Committee did some work and published a report on intergovernmental relations. One of the recommendations that the committee has come up with is that intergovernmental relations and scrutiny, examination and exploration of those relations should become a responsibility of a committee of the Parliament. The committee also said that that should be done both before and after formal meetings of the two Governments. My question is this: although it is fair enough for us to take those steps in this Parliament, what is happening at the other end? How do we ensure that appropriate scrutiny is applied to intergovernmental relations at the Westminster end of the process? Our ministers are coming to our committees and are talking about both the discussions that they are going to have and the outcomes of discussions, so scrutiny has to be applied to the role of the Westminster Government in that respect, too.
We cannot compel Treasury ministers or any Westminster Government minister to attend a committee meeting here, but that power exists for Westminster Parliament committees. It may be worth their while to explore how they would scrutinise intergovernmental relations.
I pay tribute to the clerks for supporting the committee’s work on outlining the areas around the fiscal framework that really need to be probed. One of the things on which the Scottish Government is focused—and that we should support it in—is ensuring that flexibility, fairness and transparency lie at the heart of the fiscal framework that we hope will be presented to Parliament once the negotiations have been concluded.
15:30
The report contains many important recommendations, all of which I agree with. I suppose that the most controversial part relates to the Fiscal Commission, and we should welcome the fact that the convener and other SNP members have been willing to challenge the Government both on the need for the commission to carry out its own forecasts, and through the committee’s recommendation that the commission should judge
“the performance of the Scottish Government against its fiscal targets”
and assess the
“sustainability of the public finances.”
I have to say that I have become a little concerned by the way in which the commission appears to be acting as much as advisers as independent scrutineers; that needs to be addressed in the forthcoming bill.
Intergovernmental relations form another important part of the report. Just by chance, the Devolution (Further Powers) Committee published a report on that very matter yesterday. Although we cannot debate that report this afternoon, I think that its main theme can be summarised in one phrase: the importance of far more parliamentary scrutiny of such matters. That clearly chimes with a main theme of this debate, particularly as articulated by Jackie Baillie. Both it and the Finance Committee are absolutely clear that the existing institutions for intergovernmental relations are not fit for purpose and, crucially, the Finance Committee has made the recommendation, from which Gavin Brown dissented, that
“consideration be given to establishing an independent body to advise on the calculation of the block grant.”
Malcolm Chisholm and I are both members of the Devolution (Further Powers) Committee so does he agree that, on further scrutiny, it takes two to tango and that there will need to be agreement from the UK Government for some of the detail of ministerial meetings to be made public?
I absolutely agree with that.
The block grant adjustment is a key issue for the whole fiscal framework, and the Finance Committee has emphasised that the calculation of the block grant must be “open and transparent”, which clearly it is not now and never has been. We need the right initial adjustment to the block grant and then, crucially, fair indexation. That has already been established for our initial taxes. Of course, the key issue is income tax, and it seems that the UK Government has accepted the Holtham method, which indexes to the growth in the UK tax base. However, the committee raises the interesting question whether that should be per capita growth in the UK tax base and has asked the Government to look not only at that but at the number of higher-rate taxpayers increasing faster in England than it is in Scotland. I am glad to hear that that analysis is being carried out: it will be interesting to see the results.
The block grant adjustment relates to no-detriment principle 1. Far more problematic is no-detriment principle 2, which, according to the Finance Committee, should apply only to a major and calculable impact of the budget of the other Government. We are absolutely clear that it should not relate to tax competition, in the context of which the example of air passenger duty is often highlighted. I am reassured that George Osborne appears to agree. There might not be too many issues on which most people in the Scottish Parliament will agree with Mr Osborne, but during his appearance at the Treasury Committee earlier this year, he said that tax competition is something that should be allowed. In fact, he also said that the whole principle of no detriment relates principally to the block grant, so I am modestly reassured by his comments in that respect.
Another main theme of the report is flexibility. Concerns have been expressed that the UK Government might want to constrain this Parliament’s fiscal flexibility, just as concern has been expressed that it appears to be trying to constrain our social security flexibility in some of the provisions in the Scotland Bill. I agree with the report that we must have
“flexibility to pursue distinct fiscal policies consistent with the overall UK fiscal framework”
but, as the cabinet secretary said, the policies should not need to mirror each other.
The committee also pointed out that we should have flexibility on how we spend any tax surplus, if such we should have. We should not really need the UK Government to dictate what we do with that. Although the committee has recommended a debt rule in the medium and long terms, that rule should not necessarily be the same as the UK’s. The theme of flexibility on a wide range of issues runs through the report.
Finally, and perhaps most important, is borrowing. There is borrowing to cover cyclical volatility and revenues, and as Gavin Brown suggested, there is probably quite a lot of agreement about that, although we do not know the details. Far more contentious is capital borrowing, because one of the main differences between the Scottish Government’s economic policy and that of the UK—and, indeed, the Labour Party—is the greater emphasis on the positive role of capital borrowing. We are prepared to do more of that than the UK Government is currently countenancing. The committee recommends
“prudential capital borrowing ... on a statutory basis”.
That is an important recommendation
Related to that is moral hazard. John McLaren and Angus Armstrong were interesting in that regard. John McLaren said that there should be free access to capital markets for borrowing. Dr Armstrong supported that, but he emphasised that responsibility and liability need to be aligned and said that
“It would be anomalous for one government to control its tax and spending and another government to have ultimate responsibility for the debt that arose.”
That is the trade-off. We need prudential capital borrowing on a statutory basis but we clearly have to take full responsibility for repayment of the debt.
My seven minutes are up, so I conclude by agreeing with the Scottish Government that the fiscal framework must be fair. I hope that everybody in the chamber agrees. From the report, I draw the conclusion that an unfair fiscal framework could torpedo fiscal devolution, so we must have a fair fiscal framework before we agree the Scotland Bill.
Many thanks. I have indicated that speeches should be of seven minutes or so, but if members feel that they wish to contribute a bit more, there is time in hand.
15:37
I welcome the report, which mirrors part of the evidence that the Devolution (Further Powers) Committee has heard on the proposed Scotland Bill.
My overall feeling is that the Finance Committee’s report is focused. It consistently calls for flexibility, which is essential in the debate as we look towards a fiscal framework. Paragraph 24 of the report says:
“For fiscal devolution to work it is essential that the Scottish Government has some flexibility to pursue distinct fiscal policies consistent with the overall UK fiscal framework.”
No one should disagree with that. After all, we want that flexibility so that we can ensure that Scotland retains the rewards of success, just as we must bear the risks.
The Scottish Government reflects flexibility when it talks about looking to balance risks to, and opportunities for, Scottish funding, and about allocating the risks to the Government that is best equipped to manage them. It also looks at providing incentives and increasing accountability, and says that the framework should give Scotland as much genuine fiscal choice as possible, which is extremely important.
Of course, the Deputy First Minister has previously made it clear that the Government feels very strongly that the fiscal framework has to be the right one for Scotland. We could not possibly agree to a legislative consent motion that would cause any risk to Scotland and which would not give Scotland the best deal. I find it difficult to imagine why anyone could possibly disagree with that. Surely everyone in the chamber agrees that we should always look for the best deal for Scotland.
Jackie Baillie alluded to a separation of the Scotland Bill and the fiscal framework when she was talking about transparency. I do not believe that we can separate them at all. I am willing to get clarification on that.
I was simply seeking information from the Government as to what its intentions were in introducing the legislative consent motion. I hope that, in his summation, the cabinet secretary will shed some light on that.
I reiterate that the fiscal framework is integral to the Scotland Bill. We cannot possibly separate the two. Borrowing is also integral. Borrowing both revenue and capital is something that the Finance Committee has talked clearly about and, again, it is looking for that flexibility—the ability for the Scottish Government to adopt its own fiscal policies within the overall UK fiscal framework. The committee has stated that
“the level of borrowing powers for current spending will need to be significantly increased and should be commensurate with the risks faced by the Scottish Government post-Smith”
because a degree of volatility will have to be addressed. Currently, the Scottish Government borrowing limit is just over £2 billion over 10 years, which is not adequate for anything—even the limited powers that may come to Scotland through this latest Scotland Bill.
There was a lot of discussion from witnesses about borrowing and I think that there is some concern, too, about capital borrowing, which must be in addition to the capital DEL when the borrowing for capital spending comes in. The committee
“supports the introduction of a prudential capital borrowing regime on a statutory basis”,
as did many witnesses. Other members have spoken about that. Scotland’s councils are already able to borrow under a prudential regime, so it seems that it would be sensible to consider seriously such a regime for the Scottish Government.
Moral hazard was raised by Malcolm Chisholm. It was interesting that not an awful lot is said about that in the Finance Committee report, but quite a few of the submissions that were received by the Finance Committee mentioned the moral hazard facing the UK Government from the actions of a devolved Scotland. I felt that they somewhat disregarded the relationship between revenue raising and the expenditure that revenue is raised to support.
The submissions also ignored the moral hazard that could face this Parliament from the actions of the Westminster Parliament, which we have to guard against. We have already witnessed UK Governments playing games over the years with the devolution settlement and the Barnett formula. People will remember that although local government finance is a devolved responsibility, when this Parliament wanted to design a new system of local taxation, it turned out that the then Government, under Gordon Brown in the Treasury, took the view that if Scotland exercised its devolved power and responsibility, the UK Treasury was entitled to bank the £400 million windfall arising from council tax benefit being withdrawn from Scotland. That is the kind of moral hazard that the UK Government might impose.
I am very pleased that John Swinney is clear that we will not enter into any kind of agreement that could have a detriment to Scotland—we have to guard against any detriment, which brings me to the next point. The no-detriment principles are also addressed in the Finance Committee report. However, it is difficult to see how those principles can operate in a simple and “mechanical” way. I guess that that will have to be subject to regular negotiation between Scotland and the UK, if we go ahead. It is a difficult issue and I know that there was a lot of discussion about what “no detriment” means.
There was also a lot of discussion about how the Barnett formula was worked out. It was quite interesting, having listened to all the calls for transparency, that Professor Keating—as good an expert as we will ever get—in evidence talked about how impossible it is to work out how the Barnett formula works, and about the secrecy that is apparent in the UK Treasury. I have to say that I have not heard the unionist parties in this chamber screaming for transparency and openness when it comes to the Treasury rules. It seems that there is still an element among members in the chamber that is more interested in criticising the Scottish Government than in getting behind it to fight Scotland’s corner.
The reality is that, despite all our discussions about the fiscal framework, we in Scotland will, without a significant change in attitude at UK level in the Treasury and among some of the parties in this chamber, be negotiating with the UK Government with one hand tied behind our back.
I would like today’s debate to be a turning point. Members should recognise that the Scottish Government and John Swinney, as Deputy First Minister, are absolutely right: we cannot expect Scotland to enter an agreement that could damage it. If everyone gets behind that idea, it will be a very good footing from which to move forward.
15:45
I, too, welcome the debate. It has been just over a year since the historic referendum took place. It has been a year of change in Scotland, which is as a consequence continuing to evolve and grow in confidence. The fiscal framework that we espouse should allow for that growth in confidence and should set out an economic and monetary approach that covers all aspects of society. As the Finance Committee report notes, a key question at the outset should address the extent to which the Scottish Government’s fiscal policy is constrained or limited by the UK Government.
The Smith commission stated that Scotland’s fiscal framework should be consistent with the overall UK framework. In my opinion, that is misconceived: allied to, yes—but consistent with, no. As the committee pointed out, the command paper seems to go beyond that interpretation, stating that the framework must ensure that
“Scotland contributes proportionally to the overall fiscal consolidation pursued by the UK Government”.
The Chartered Institute of Public Finance and Accountancy, which recognises that point, agrees that, although the fiscal framework must be consistent, that does not necessarily mean that the content must reflect exactly the UK fiscal policy objectives, guidelines or mandates.
In fact, as in any devolved situation—temporary though it may be—there must be flexibility to pursue distinct fiscal policies as an input to an overall agreed fiscal framework. If we are to bear risks in that framework, we must secure and recognise the reward that goes with those risks.
On borrowing and on fiscal rules, the International Monetary Fund has stated that the most common rules—although not all of them—at a sub-national devolved level within the European Union and the Organisation for Economic Co-operation and Development seem to be a combination of a budget balance rule and a limit on the overall accumulation of debt.
The report gives examples such as Belgium, where the borrowing is supervised by an independent high finance council that is independent of both parties. Another example is Spain. In Germany, the Länder use borrowing to finance the shortfalls in revenue, and central Government has no power to place restrictions on their borrowing activities. The Länder have their own constitutional and statutory framework to control borrowing. There are other examples of arrangements with even greater flexibility—for example, in the Canadian provinces and in Australian states.
I agree with the Finance Committee that fiscal rules should be agreed through negotiation with the UK Government and should not be imposed on Scotland. There must be parity of esteem and respect with regard to the different elements of an overall framework.
My question to Chic Brodie is the same one that I asked Jackie Baillie. Does he see any sign of a change in attitude or culture at the Westminster end?
I believe that the capabilities of our negotiators will encourage them to see the light.
The definition of balanced budget rules is important. The IMF has pointed out that devolved Governments should be allowed the flexibility to absorb cyclical variations in their revenues over a number of years. CIPFA’s view is that there should be a balanced approach to the current budget over the economic cycle as agreed between the separate Governments.
In that regard, I agree with the Finance Committee that the level of borrowing powers for current spending will need to be increased and that there should not be a cash limit on current borrowing but the respective Governments should instead agree a balanced budget fiscal rule.
We have already mentioned independent arbitration. I refer to the Belgian authorities, which have an independent high finance council to agree that.
Greater powers over revenue and expenditure imply that we accept greater risk and volatility in Scottish budgets, so borrowing powers need to be flexible, up or down, to accommodate the risks. Countries such as Canada, Switzerland and the US do not impose limits on their devolved states. Scotland should have free access to capital markets. We have talked about the issue of moral hazard being addressed by the agreed framework. I believe that Scotland is mature enough financially. Over the past seven years, the cabinet secretary and his officials have provided a background of balanced budget capability, and they are more than able to deal with the issue and to negotiate on changing the culture at Westminster.
The no-detriment principle has to be agreed from the outset. The decisions on local determination of tax and policy making have to be made from the outset and made public in the interests of fairness and transparency. As I said, esteem and respect are required of both Governments. The funding model for Scotland, the Barnett formula, is becoming even more confusing, so there needs to be a clear understanding of the methodology and operation of Barnett going forward. Flexibility will be required as more revenue-raising powers are devolved.
The Scottish Government has published a consultation on a bill to place the Scottish Fiscal Commission on a statutory footing, which is an important step forward. Scrutiny and forecasting are of vital importance to the performance of Scotland’s economy. Forecasts for the Scottish economy are often based on UK Government assumptions, which are often questionable and not based on real data. Two years ago, in the UK fiscal outlook, the Office for Budget Responsibility said on Scottish taxes that its methodology in attempting a realistic forecast was a work in progress. That was bad enough then but, in 2015, it said that there had been no substantial change in the methodology.
The Finance Committee report questions the availability and quality of economic and fiscal data for Scotland. The Scottish national accounts project—SNAP—was set up seven years ago to
“try to fill in some of the gaps”—
some of them are large gaps—
“in the national accounts data that are available for Scotland.”—[Official Report, Finance Committee, 13 May 2015; c 1.]
That is, the data from the OBR. Scottish Government officials were recently asked to give an idea of the progress that is being made and they responded that they consider that they are not even halfway to where they need to be. They believe that that is because of a lack of appropriate UK data, as I have already pointed out in relation to the OBR.
That is an extremely important issue. In fact, it is probably the most important issue that we have faced recently. Scotland needs data that are reliable, accurate and as up to date as possible. We need support to ensure that we have accurate national accounts that are not based only on UK Government assumptions. We need a macroeconomic forecasting model for Scotland. I ask the committee to investigate further whether the current models for producing national accounts and forecasting are of sufficient size and scale to deliver that accurately for Scotland.
It was stated in evidence to the committee that we should consider a Scottish equivalent of the OBR. There might be an argument for going a step further and ultimately establishing a Scottish treasury as part of the implementation of a fiscal framework, to oversee borrowing within the devolved framework. That probably will come. Such a Scottish treasury would provide accurate forecasting and national accounts. The two comunidades forales, or autonomous regimes, in Spain, the Basque Country and Navarre, have their own treasury departments. The Basque autonomous community ranks first in Spain on per capita income, with gross domestic product per capita being 40 per cent higher than that of the European Union as a whole and 33.8 per cent higher than Spain’s average.
I agree with much of what the committee report says, but I believe that we must take the opportunity to set up a framework and perhaps a treasury and enable Scotland to continue to prosper and grow with confidence, and to grow its economy.
15:54
I thank the Finance Committee for its work on the report. To the outside eye, this might seem a fairly dry parliamentary debate on a dull Wednesday afternoon. It is dull outside and people might see it as dull in the chamber.
James Kelly can liven it up.
I will do my best, Mr Eadie.
In fact, the issue that we are debating is very important. We have impassioned debates in the chamber about, for example, how best to grow the Scottish economy, how we build a strong health service, how we achieve attainment in education, or how we get a fair local government funding settlement, but a lot of that flows from the Scottish budget. Clearly, the fiscal framework will have a dramatic impact not only on the size of the Scottish budget, but on the choices and priorities that the different political parties in the chamber are able to outline—I will touch on that aspect later.
The report makes a number of important points, the first of which relates to the no-detriment principle, which is very important in ensuring that the forthcoming changes will have no adverse effect on the Scottish Government. It should be remembered that that principle is so important because with regard to UK spending in a Scottish context, as the Government expenditure and revenue Scotland figures point out, we spend more than we take in in tax.
There is general agreement on the first no-detriment principle that no Government should gain or lose through any of the changes that will be made, with an emphasis on the importance of transparency in terms of implementation. The second no-detriment principle relates to policy changes, and I have looked at the report and listened to contributions to this debate on that principle. Mark McDonald is not in the chamber, but I agree with his point that it is not clear how that principle would operate, although it seems that there will be guidelines. However, it is important that there is transparency about the discussions between the two Governments to ensure that, as the second no-detriment principle requires, there are no adverse effects.
I take the member’s point that it is not clear how that principle would operate, but I think that some people would go further and say that it is impossible to see how it would operate. Would the member go that far?
I just observe that from the committee’s deliberations on the issue, the evidence of the witnesses who appeared before the committee and members’ contributions to this debate, it seems that people are struggling with how the principle would operate. We must try to engage with that in order to find a way forward. Ultimately, what the principle is driving at is that any policy changes should cause no detriment to the Scottish budget. That must be the objective, so we must try to find a way through to that.
Members have made important points about financial forecasting and the independence of the Scottish Fiscal Commission. Particularly in light of the vast array of changes that are coming, forecasting is very important to the Government’s financial planning, not only for how the budget is organised but for the potential impact on the economy. Forecasting is absolutely crucial in that regard.
The Government’s performance targets are also important. I know that the Government and the Finance Committee have struggled with that issue through the years, not just in terms of looking at the targets but in trying to link them to outcomes. The Scottish Fiscal Commission provides an important way forward in independent forecasting and the proper monitoring of performance.
The impact of the forthcoming changes will alter some of the political debate around the Parliament. The emphasis will change from a simple block grant arrangement to one in which we are responsible for collecting the taxes and spending the money. That will have some interesting implications when it comes to election time, because the parties will need to outline in their commitments not only their spending plans but how they would directly raise the money to fund them. When we had a debate on education a couple of weeks ago, Labour talked about creating a new 50p tax rate in order to promote educational attainment. There was quite a lot of silence from members on the SNP benches when that was proposed. It will be interesting to see how the different parties tackle such things as the new powers develop.
A lot of the discussion this afternoon has been about the technical detail. It is important not to forget how we link that back to our local areas and the challenges that we face. For example, Shelter Scotland said yesterday that it reckons that, to tackle the housing crisis, Scotland needs 12,000 more affordable homes a year, and we know that there are still nearly 600,000 people in Scotland who are not being paid the living wage. In my constituency, there are now more people in the population but fewer general practitioners to cover them. One of the challenges is to determine how we can use the new powers and arrangements in order not only to fund the Scottish Government’s existing commitments but to look at some of the new challenges that are coming up.
It is important that we get the fiscal framework correct and that there is respect and transparency between the two Governments. That is important because the fiscal framework will impact on the Scottish budget, on the Scottish economy and, ultimately, on people in all our constituencies and regions.
16:02
I agree with James Kelly that, although this is a dry and technical subject, it is of critical importance to the decisions that will be made in the chamber, and also to changing the terms of the political and economic debate in Scotland.
It seems to me that the overriding imperative must be to ensure that the fiscal framework that is agreed by the UK and Scottish Governments allows the Scottish Government, whichever party or parties form it, the flexibility to raise much more of its own revenue, the ability to determine its own spending priorities and the capacity to benefit from increased tax revenues in the event that we are able to successfully grow our economy to a far greater extent than is currently the case.
Other members have focused on the role of the Scottish Fiscal Commission, so I do not intend to address that in my remarks this afternoon. Instead, I wish to focus on the specific issues of the borrowing powers that will be available to the Scottish Government, which other speakers have touched on this afternoon, and the block grant and funding formula that will underpin the further powers that are coming to the Scottish Parliament.
The Finance Committee’s report states:
“One of the key questions to be addressed in developing a revised fiscal framework is the extent to which the Scottish Government’s fiscal policy will be constrained by the UK Government.”
Mr Gibson, in his opening speech, mentioned Governments following ill-disciplined policies. In all the discussions about the need to ensure that the Scottish Government operates in a fiscally responsible way, it is worth reflecting that, at quarter 1 of 2015, UK debt stood at a staggering £1.65 trillion, which is 81.58 per cent of gross domestic product.
One of the key issues is the direct controls that central Government exercises on the amount that the Scottish Government will be able to borrow. The Smith commission proposed additional borrowing powers for two purposes—first, to ensure budgetary stability and provide safeguards to smooth public spending in the event of economic shocks, and secondly to support capital investment. The committee examined the options for fiscal rules that will act as a constraint on the level of borrowing that the Scottish Government has at its disposal, and the options for current and capital borrowing.
As the committee said in its report,
“There was a general agreement among witnesses that current borrowing powers should be commensurate with the additional level of risk faced by the Scottish Government following further devolution.”
Linda Fabiani referred to paragraph 58 of the report, where the committee said:
“it is clear that the level of borrowing powers for current spending will need to be significantly increased”.
The committee went on to say that
“the Scottish Government will require substantial new borrowing powers to manage ... volatility”,
and that
“The Committee is, in principle, supportive of examining the proposal to allow current borrowing for preventative spending on the basis that it is about investing in the future.”
It is clear that the method for indexing the adjustment to the block grant will have a direct impact on the scale of current borrowing powers that is required. Although there is agreement to use the Holtham method for indexation of the block grant adjustment following introduction of the Scottish rate of income tax, there are doubts about the extent to which the mechanism will enable Scotland to withstand risks at UK level and UK-wide economic shocks to which Scotland is exposed.
The main concern is that the Scottish tax base might grow more slowly than that of the UK as a whole, due to the relatively lower number of higher-rate taxpayers in Scotland compared with the rest of the UK and the impact of relative population growth. The relatively lower number of higher-rate taxpayers in Scotland explains why Scotland’s income tax contribution to the UK Exchequer is 7.3 per cent, which is less than our 8.3 per cent population share.
That brings home to me that the further powers that are coming to the Scottish Parliament primarily rely on income tax as our main source of revenue raising. Why should we not have power over national insurance contributions, so that we could reduce the burden on employers, or over capital gains tax, so that we could devise a fiscal regime or set of incentives for entrepreneurs and manufacturers?
The disproportionate number of very high incomes in London and the south-east of England means that our income tax base is lower than that of the rest of the UK. In his paper, Dr Jim Cuthbert said:
“there are naturally going to be extended periods when the income tax base in Scotland grows more slowly than that of the UK as whole.”
He told the committee that, on that basis,
“Under Holtham indexation, Scotland will be penalised.”—[Official Report, Finance Committee, 22 April 2015; c 21.]
Dr Cuthbert also expressed concern about the impact of relative population growth on indexation. He pointed out:
“over the last ten years, the rate of population growth in the UK as a whole has been higher than the rate of population growth in Scotland by an average of 0.22% annually.”
That means that Scotland has to grow its per capita tax base faster than the UK does if it is not to be penalised.
Malcolm Chisholm said that indexation could be based on growth in the per capita tax base rather than overall growth in the UK tax base. That is a recommendation of the committee, which is worthy of further consideration. Given the real threats that have been identified in evidence to the Finance Committee, it is vital that the issue be addressed and resolved.
Mr Salmond mentioned independent arbitration, and his comment led to a rare outbreak of agreement with Jackie Baillie. That is not just an essential prerequisite for the Parliament’s agreement for the fiscal framework but the logical extension of the committee’s conclusion, in paragraph 174, that
“there is a fundamental need to change HM Treasury’s role as the sole decision maker at both a bilateral and multilateral level”.
Linda Fabiani, who I think is no longer in the chamber, hit the nail on the head when she talked about transparency. Transparency cannot be a one-way street; it must apply to the UK Government and to the Scottish Government. There is no consultation or transparency when the Treasury takes decisions about the operation of the Barnett formula. For example, the Treasury decided that the Olympic games were a UK item and therefore a reserved matter outwith Barnett, so no Barnett consequentials came to Scotland. In contrast, the Commonwealth games were considered entirely a matter of Scottish expenditure, to come out of Scotland’s block grant.
I think that all members need to reflect on the point about transparency. In the words of Margaret Cuthbert, in evidence to the House of Lords Economic Affairs Committee:
“This arbitrary system, determined by one participant body in the system, has to change and become fully participative and transparent.”
We need to take careful cognisance of that.
The successful conclusion of negotiations on the agreement of Scotland’s fiscal framework is one on which the future effectiveness of further fiscal devolution will depend. We need a robust and credible fiscal framework that gives the Scottish Government the flexibility that it needs, and the Scottish Government’s budget should not be adversely affected as a result of the decision to devolve further powers.
16:10
I congratulate the committee, as others have, on a robust report.
A Herald article on 15 March discussed a study by the University of Edinburgh’s academy of government and was based on a series of interviews with senior figures connected with the Smith commission process. The article states that, having spoken with key individuals, the researchers concluded that the Treasury was very much in charge of the Smith process. Indeed, one of its senior officials headed the secretariat supporting the negotiations.
After I read that article, I had a look at what the university researchers concluded, and their comments make for interesting reading. They say that their interviews made it clear that the Treasury was a controlling and steering force in the process. That conclusion is perhaps unsurprising given previous academic work on the Treasury’s role in the UK public policy process. The Treasury provided numerous technical briefings to the commission’s members and was the pre-eminent Whitehall department in the process of defining a fiscal policy package that was acceptable from a UK perspective.
It was with those comments from impartial academics in mind that I read the committee’s report and viewed with increasing concern some of its observations and recommendations, which are clearly designed to ensure that the fiscal framework does not give undue influence to the Treasury in a way that is detrimental to Scotland. I congratulate all the members of the committee, from every party, who put Scotland’s interests first. I particularly welcome the committee’s expressed concern that the command paper suggests a much greater level of constraint on the Scottish Government’s fiscal flexibility than even the Smith commission suggested, and I welcome the committee’s comments on borrowing, no detriment and the block grant funding formula.
Reading the section of the report on the block grant, I was struck by the comments of witnesses on the Barnett formula. Professor Keating pointed out that
“Barnett has never been defined, so Barnett is whatever the Treasury says that it is.”—[Official Report, Finance Committee, 20 May 2015; c 17.]
Dr Jim Cuthbert argued that the Treasury has, to date,
“signally failed to operate the Barnett formula transparently.”
John McLaren suggested that the new complexities that will accompany the additional tax powers and the changes that come from Smith could make the lack of transparency even worse. Even the Economic Affairs Committee of the House of Lords, which is not an institution that I often quote favourably, said:
“On every funding decision the Treasury is judge in its own cause”.
That really has to change, given what is at stake for Scotland’s public services in the future.
That is why I whole-heartedly congratulate the committee on recommendations following paragraph 173. Paragraph 173 states:
“The Committee notes that it is abundantly clear that the existing institutional IGR framework is not fit for purpose. The increasingly complex nature of devolution and the degree of interdependency at both a bilateral and multilateral level requires substantial change to both the structure and culture of inter-governmental relations. In particular, the Committee agrees that it is clear that the ‘machinery for devolved finance can no longer be left to the discretion of HM Treasury.’”
That is very well said.
That is followed by the committee’s recommendations at paragraph 174, which I will not go through in detail because there are quite a few of them. I endorse the first recommendation—
“for inter-governmental relations to be meaningful in relation to fiscal matters ... there is a fundamental need to change HM Treasury’s role as the sole decision maker at both a bilateral and multilateral level”—
and the penultimate recommendation, which is:
“consideration should be given to establishing an independent body to advise on the calculation of the block grant”.
As Alex Salmond and others said, that is essential, given how the Treasury has operated in the past with devolved Administrations.
I also draw attention to some of Dr Jim Cuthbert’s evidence. Other members have talked about the Holtham indexation method and how that could be detrimental to Scotland’s finances, given our slower population growth and lower numbers of higher-rate taxpayers. I echo those concerns, and I am pleased that we are going to be looking at the issue again.
Dr Cuthbert raised another issue in his evidence to the committee that I thought was interesting and worth raising again. He posed the question of a UK Government deciding that it was going to fund extra expenditure on a reserved issue, such as Trident, by raising UK income tax rates:
“Since defence is a reserved function, public expenditure on Trident is regarded as ‘benefiting’ the whole of the UK. So public expenditure in Scotland will rise by Scotland’s population share of the extra spend on Trident. Since aggregate public expenditure in Scotland has now risen by this amount, the principle of Clause 95(4)(b) is in danger of being breached, so to avoid this happening, Westminster will reduce Scotland’s Block Grant correspondingly.”
Dr Cuthbert goes on to talk about the implications of that being “stark”:
“if Westminster decides to use an increase of rUK income tax to fund a reserve service ... (as it is perfectly entitled to do under the current proposals), then Scotland”
faces a stark choice: it can either cut its devolved services or raise its income tax rates. Dr Cuthbert says that there is not necessarily an easy solution to that quandary, although he offers a solution: a rest-of-UK income tax for devolved spending in England and another band for reserved taxes. That is probably a debate for another day.
Many thanks. We now move to the closing speeches. I invite all members who have taken part in the debate to return to the chamber to hear them.
16:18
This has been a pretty fascinating debate. It has been aided in part by the fact that speeches have been made not only by members of the Finance Committee but by members of the Devolution (Further Powers) Committee. Although Devolution (Further Powers) Committee members are looking at the topic from a slightly wider perspective, they clearly have knowledge of the fiscal framework. The combination of those contributions from both committees has definitely supplemented the quality of the debate.
A number of speakers made the point that this topic is if not the most important then one of the most important issues that we will discuss, debate and agree over this parliamentary session. The results of that agreement will potentially span several sessions of Parliament. As Smith said, it is an issue that should not require on-going negotiation. We have to get it right first time, so I agree with the cabinet secretary when he says that it is more important to get it right than to make sure that we finish it exactly to a preset timescale—he is quite correct on that.
A point that has come through from a number of members is the issue of transparency and what is going on at the negotiations between the UK and Scottish Governments. I plea to the cabinet secretary that he addresses that issue in his closing remarks. Is there something that can be done to give the Finance Committee and other parliamentarians a bit more information on what is going on? I accept entirely that we do not want to have a running commentary as that would not be desirable; I simply ask whether more can be done.
There is a slight concern, certainly from my side, that the negotiations will conclude at some point in the autumn or later on in the year and that we will then have an unveiling of the fiscal framework—
I think we agree that, in general terms, once the conditions have been agreed there should be as much transparency as possible. However, the OBR works with HM Revenue and Customs to develop the budget input for the UK Government and, according to the policy memorandum to the Scottish Fiscal Commission Bill, the UK forecasts that are published by the OBR at each UK fiscal event
“are prepared by HM Revenue and Customs and subject to in-house review by the OBR. Neither the nature of this scrutiny, nor its impact, is made public.”
Do you not think that it would help us to develop the culture of openness if the basis of those forecasts was made public?
Anyone who has heard Robert Chote give evidence at Westminster or here at the Scottish Parliament would struggle to accept the notion that those forecasts are not independent and that they are overtly manoeuvred somehow by HMRC. Of course some of the initial raw data comes from HMRC, but I have listened to Mr Chote on a number of occasions and there is no doubt in my mind—and I think that I can speak for most of the committee on this—that it comes through loud and clear that he is particularly independent, and that the OBR will not be controlled or dominated by anyone, much to the unhappiness, at times over the past few years, of the Chancellor of the Exchequer.
The point that I was leading on to was that I have a slight concern that the fiscal framework will be unveiled and the Parliament will be presented with a binary choice: we will have to accept it in its entirety or reject it in its entirety.
I know that the fiscal framework is not a piece of legislation, but I will draw an analogy with the legislative process. We will be treating the fiscal framework like an affirmative instrument, to which we cannot propose amendments or discuss any of the terms; we simply have to accept it or reject it in its entirety. It would be preferable if the process for dealing with the fiscal framework were more akin to the process for dealing with primary legislation. In that way, parliamentarians and Scotland more widely would be able to make contributions, with the result that we would get the best fiscal framework for not just Scotland but the UK as a whole, and one that was enduring and sustainable and which did not need to be reviewed and negotiated every year or every couple of months. That is my hope, and I make a plea to the cabinet secretary to address that in some way in his closing speech or thereafter.
I also make a plea for us to be told a bit more about what goes on in the discussions. Quite fairly, the cabinet secretary asked me to prepare a note for him on what kind of information would be useful, which I will happily do after the debate. I mentioned revenue borrowing in my response to his intervention. Could we have information on capital borrowing, too? Although there might not be agreement on whether there should be a limit, is there broad agreement at this stage between the Scottish Government and the UK Government that there should be some form of prudential borrowing regime, as suggested by Smith and as proposed by the Finance Committee, or are we not there yet? Has the issue simply not been discussed yet? Has it been discussed and put on ice, or is progress being made?
Information on what discussion there has been on the no-detriment principle would also be useful. There are two parts to the no-detriment principle. The first part seems to be broadly accepted by everyone, but there seem to be misgivings on both sides of the political divide on what is described as no detriment 2. There seems to be a lack of clarity on what it means and what the implications are. Has there been discussion between the Scottish and UK Governments in which they have agreed that it should be looked at only in a high-level way, not a mechanical way? I refer to the suggestions that the Finance Committee made in its report. The two Governments said in a joint communiqué that options for future governance of the fiscal framework were discussed, but what does that mean? What kind of options might have been on the table?
Members talked about the Scottish Fiscal Commission. The biggest issue that has been discussed over the past couple years is the production of forecasts. I reiterate my view—which I think is the committee’s view—that the Fiscal Commission must have the ability to produce its own forecasts. Whether they are treated as the official forecasts is less important than the fact that the Fiscal Commission must have the ability to make them if it is going to be able to scrutinise rigorously and do its job properly. That becomes more important with every year that passes, as we get greater financial control.
Most finance ministers will not want to cede control—there is nothing unique in the Scottish Government there—but I genuinely believe that, given the optimism bias errors that occur among Governments across the planet, it is too important to leave forecasting in the hands of the Government’s finance department.
Greater transparency is needed in the on-going process and on the Scottish Government’s red lines, given that it is threatening to potentially vote down the Scotland Bill if it is not “fair”, to use its word. The Finance Committee has a clear role to play in that. Given the spirit of the Smith commission and the fact that all the political parties were involved in it, along with other stakeholders, where is there a chance for us to make a contribution so that the ultimate fiscal framework that is agreed is one that endures, stands the test of time and does what we all want it to do?
Many thanks. Before I invite Richard Baker to speak, I put out a call to Kenneth Gibson. If he is in the building, would he please return, as the convener of the Finance Committee, to hear the debate on his motion on Scotland’s fiscal framework?
16:26
If we behaved like that at the committee and did not turn up either on time or to hear all the evidence, we would certainly be for the high jump. Presiding Officer, I echo your encouragement to Mr Gibson. I hope that he will come to the chamber to reflect on what has been a very good and constructive debate.
In fairness to the convener, the quality of the debate reflects well on the committee’s assiduous work in considering the fiscal framework that the Scottish Government will have to adopt as it takes on significant new powers over the money that it raises. Determining how the framework should operate will be a key decision for this Parliament, for the future of the Scottish Government’s fiscal policy, and, crucially, for the fulfilment of the principles and policies that were set out by the Smith commission, as a number of members have said.
There has been a broad consensus around the chamber today. As Gavin Brown pointed out, there was not agreement across the committee on every point in our report, but there was a broad consensus that we need a framework that secures a sensible approach to fiscal policy and allows the Parliament to scrutinise its operation effectively.
In the few minutes that I have to close for Labour, I will reflect on three broad themes that members have raised in the course of the debate. The first is the need for a framework that secures a disciplined approach to fiscal policy. The second is the need for flexibility, which many members spoke about, so that the Scottish Government can take a distinctive approach to fiscal and economic policy. Finally, we had a lot of debate around transparency in the negotiations between the Governments on agreeing the framework, but of course transparency will be crucial once the framework is in place. Its roll-out and operation must be subject to parliamentary scrutiny, and that scrutiny must be allowed to happen.
The committee has made the case for a framework that underpins a robust approach to fiscal policy, which is why we recommended that there should be a legislative requirement for ministers to bring to Parliament a charter for budget responsibility. Clearly, the committee has got its message across on that issue. There is an implicit need for Parliament to be assured that ministers are not taking on unsustainable borrowing that would be incompatible with the UK fiscal framework. However, as Mark McDonald said—and organisations such as CIPFA agree—Scottish ministers must have flexibility in the framework to pursue distinct fiscal policies. That flexibility is necessary for fiscal devolution to be meaningful. If ministers are to have the flexibility that they need, the Parliament needs appropriate borrowing powers to accompany its new tax powers. Members have spoken about their concerns in that regard.
I was a member of the Scotland Bill Committee ahead of the passage of the Scotland Act 2012. Linda Fabiani, whose convenership of that committee I enjoyed, rightly referred to borrowing. In the evidence on the Scotland Bill, a limit of £1.5 billion was proposed. At that point, I accepted that there should be a far higher cap on borrowing of around £5 billion.
In the evidence on the fiscal framework to the Finance Committee, we heard the case for a higher cap and the case for a prudential borrowing regime. Ultimately, the committee recommended that we have a prudential regime. In any event, it is clear that, if the Parliament chooses to take a different approach on issues such as infrastructure or investment in preventive measures, there should be far greater flexibility on borrowing than is currently the case. Indeed, we heard that that could be achieved without a significant impact on overall levels of UK borrowing. The committee has therefore made a compelling case for the Parliament to have sufficiently greater borrowing powers. I hope that UK ministers will pay heed to the committee on that issue.
The third issue that I want to cover is transparency, to which a number of members have referred. Jackie Baillie and others have challenged ministers to provide more information on the discussions that are taking place on agreeing the framework, while acknowledging that we will not get a detailed running commentary on ministers’ meetings. Once the framework is in place, clear protocols and procedures for parliamentary scrutiny need to be established. Parliament will need to be assured that the operation of the framework does not disadvantage Scottish Government budgets.
On the block grant adjustment, we might be persuaded of the case for Holtham’s proposal on indexation, but as Malcolm Chisholm and others said, implementation will be crucial. If it is not based on growth in the tax base per capita in the UK, it could be disadvantageous to the Scottish budget. Whatever mechanism is decided for the block grant adjustment, it needs to be in line with that no-detriment principle.
Members have referred to the second no-detriment principle, and we need to be clear about how it will be applied. The committee has made the case, as Gavin Brown said, that it should be a high-level principle. In any event, it is vital that the Parliament is aware of any potential impact that the principle’s operation will have on budgets before we agree any policy changes in the future.
Most important, there must be proper scrutiny in Parliament and in the broader public arena of the operation of the framework. That is why I said that, once the framework is in place, we need clear processes for scrutiny. Scottish and UK ministers must therefore be prepared to update Parliament regularly on its operation and to provide evidence to committees in both Parliaments.
Jackie Baillie powerfully made the point that the current joint exchequer committee meetings simply do not provide a transparent or effective mechanism for intergovernmental dialogue. That must change, and a new process must be put in place.
Several members made the case for independent arbitration of disputes between the two Governments over the framework. As Jackie Baillie said, Labour members agree with that proposal.
We are entering a significant new phase in respect of the Parliament’s powers and responsibilities. The establishment of the Scottish Fiscal Commission is fundamental to securing both a smooth transition to the use of the new powers and confidence in the forecasts of Government revenues so that we can be assured that there will be no negative impacts on future budgets.
We now have an opportunity to establish a Fiscal Commission that builds on models of best practice that are already in place around the world. That will require a commission that is properly resourced and able to produce its own forecasts, as the convener of the committee pointed out in his opening speech. Giving the commission those powers will not only inform debate on the operation of the framework, but, as we know from international examples, mean good discipline for the Government. I ask the cabinet secretary again to consider carefully the case that we have made for the commission to be empowered in that way.
I know that there was not unanimity in the committee on every point in the report, but we reached a broad consensus, which has been reflected in the debate, on the great majority of issues around the fiscal framework. That is why I commend without hesitation the committee’s report to Scottish and UK ministers. If the recommendations are adopted, that will secure not only a robust framework but measures that will be important and beneficial to good government and effective devolution.
16:35
I will begin with the issue of transparency, because it has percolated through the whole debate. In his closing remarks, Gavin Brown asked how a broad cross-section of opinion can be involved in the discussions and the process. Frankly, I think that that is what today is about.
Today is an opportunity for Parliament to inform me. What the Smith commission requires us to do is bring together UK and Scottish ministers in the joint exchequer committee to negotiate a fiscal framework. I go into those negotiations to represent the interests of Scotland. I assure Parliament that I take that deadly seriously. I look to today’s debate and the Finance Committee’s thoughtful report to help me to be informed about the balance of parliamentary opinion on the issues that are of significance and at stake in this whole process.
Will the cabinet secretary take an intervention?
Of course.
I think that it is a two-way process. It would be extremely helpful to understand where the discussions currently are in order to facilitate the dialogue between the Parliament and the Government, which I believe could be allies in the negotiation process if there was more information available to the Parliament. I wonder whether there is some mechanism to facilitate that.
Let me make two points. The first is that I think that I have been very open with Parliament about all the discussions. I know that Jackie Baillie will furrow her brow at that statement, because it does not suit her narrative.
I have in front of me the Official Report of the Finance Committee meeting of 2 September, where across 30 columns I was questioned about the issues relating to the fiscal framework. I also have the Scottish Government’s response to the Finance Committee’s report, which goes to a further 15 pages of text on the Government’s position and our thinking. I have also participated in this debate and set out our thinking.
I am one player in the negotiation. Where is the Treasury in all this? If the Treasury wants to work out my negotiating position, it only needs to look at the Official Report of the Finance Committee meeting, the Government’s response to the Finance Committee report and what I have been saying all afternoon and on various other occasions when this issue has been at stake. I believe that I have been very open—as open as I can be—within a process that is a bilateral discussion between the Scottish and the United Kingdom Governments.
By saying that, I do not mean in any way to cut Parliament out of the process. I need Parliament. I need it to be supportive of me on the arguments that I put forward. As Linda Fabiani suggested in her very thoughtful contribution, Parliament needs to create a unity of purpose around what it wants to see in the fiscal framework. It is as much in my interest to make sure that that is secure, because I want a deal that will satisfy Scottish parliamentary opinion. That is the only perspective that matters to me.
I ask members to reflect for a moment on how open the Scottish Government has been with the Scottish Parliament on our negotiating position, and how open the UK Government and the Treasury have been with the UK Parliament and UK public opinion on the issues from their perspective. In all these discussions, I am trying to find a way of being as open as I can be.
Mr Brown has been quite critical of the communiqués that we have issued after each of the meetings. He asked, for example, whether capital borrowing had been discussed. If Mr Brown had consumed the contents of the communiqués, he would realise that capital borrowing has, of course, been considered, because it is one of the topics referred to in them.
Will the cabinet secretary give way?
I will give way in just one second.
That is why I asked Mr Brown to provide me with some idea of what information he would like to see. I would then try to seek agreement with the Treasury to release it. I cannot, in good faith, release information unilaterally, as that would be a breach of the process in which we are involved, which is a joint ministerial discussion between the Scottish and UK Governments. That is the invitation that I have given to Mr Brown.
In her speech, Jackie Baillie did not have time—in a debate in which I have just been given a note to say that I now have even more speaking time than I thought I had—
My pleasure.
—to cover any of the things that she would like me to negotiate on or argue for. She was immensely constrained on time.
I said that I would give way to Mr Brown.
I am sure that the cabinet secretary will accept that I was not asking him whether capital borrowing had been discussed. I have of course read the communiqués. I was asking to what extent it was discussed, and whether there was broad agreement on something that may be less contentious. For instance, is there broad agreement over having some form of prudential borrowing? That was my question—I was not just asking whether it was discussed at all.
The only thing that I can say to try to provide clarity—I hope that the Chief Secretary to the Treasury does not take exception to what I am about to say, but I think that this is the only way I can answer Parliament honestly on this question—is that the chief secretary and I have agreed that nothing is agreed until everything is agreed. Mr Brown shakes his head, but if he asks the chief secretary, he will find that that is his position. It is also mine. Parliament must understand that I could agree something during meeting 1, on day 1, but then find out during meeting 5, meeting 10 or meeting 20—however many meetings we have—that the detail is unacceptable. What do I then do about issue 1, on which I agreed at meeting 1? Parliament has to understand that we will have to consider the agreement in the round.
I accept that there will be issues where I might not get everything that I want—although I will try my level best to get everything that I can. Parliament has heard from me directly—it could not have heard this any more clearly—that if I do not believe that the fiscal framework that is on offer is acceptable to the Scottish financial public interest, I will not support it, and I will not recommend that Parliament endorses such a proposition.
Jackie Baillie asked about the timescale. We have agreed that we will try to conclude the discussions in the autumn. I know that the heating is on—it is on in my house as well. The heating in my house was on at times during the summer, into the bargain. Anyway, the heating is definitely on.
Another issue that the Parliament must bear in mind is the fact that the Scotland Bill is not yet in its final form. It is still going through the parliamentary process in the House of Commons, and it is yet to go to the House of Lords. On the basis of what the Secretary of State for Scotland has said, when the House of Commons returns on Monday there may be substantive change to the Scotland Bill from what we saw before the summer recess. That may have a significant bearing on what the fiscal framework has to do.
That is the best that I can offer regarding the timescale, although I will of course update Parliament on the process.
Members of the Parliament have asked me for some sense of what issues the Government is pursuing. I thought that I had gone through that in my initial remarks, but I will go over some of it again. We very much agree with the Finance Committee on the recommendation that there be significantly increased revenue borrowing facilities. We have to be able to manage tax volatility and Scottish economic shocks. We agree with the committee that the Government needs to have more capital borrowing powers in addition to the existing CDEL and Scotland Act 2012 provisions.
We had a very interesting discussion about the no-detriment principle. Members such as Malcolm Chisholm, Mark McDonald and Linda Fabiani correctly identified that it is easier to assess and apply the no-detriment principle at the moment of devolution than it is to work out any application of the principle once policies and proposals have been implemented over time.
On the question of the block grant adjustment, on which Mr Chisholm, Mr Eadie, Mr McDonald and others made substantive contributions, I have carefully listened to what Parliament has said to me about the Holtham mechanism and the importance of a per capita assessment being applied to the block grant adjustment. Those points have been made very clearly by members, and I will take them forward in the forthcoming discussions in relation to the fiscal framework.
Lastly, I want to cover the Scottish Fiscal Commission. The Government has made some changes to the Scottish Fiscal Commission Bill for its introduction, and one change relates to the commission’s ability to prepare any report “as it considers appropriate”. Ministers will in no way direct its agenda; it will be up to the commission to prepare reports as it sees appropriate. We have also put in place a requirement for an external evaluation of the commission’s performance to strengthen both its independence and external scrutiny of it.
There has been quite a lot of commentary about the fact that the commission will not carry out its own forecasts. In that respect, it will be in pretty good company; the fiscal commissions in Austria, Belgium, Finland, France, Ireland, Portugal, Slovenia and Sweden are in the same position, in that they comment on the forecasts made by the Governments in those countries. We are no different in that respect.
Will the cabinet secretary give way?
Will the cabinet secretary give way?
Presiding Officer, I will detain you even longer if I take these interventions.
It is at your discretion, cabinet secretary.
In the interests of courtesy, then, I will take Jackie Baillie first.
I thank the cabinet secretary for his courtesy. I wonder whether in any of those countries members of the fiscal commission advise as well as scrutinise the Government. Surely that is a conflict of interest.
I am not sure about the situation in other countries, but the Scottish Fiscal Commission does not advise the Scottish Government; it has a veto on our forecasts.
Is it not the case, though, that the fiscal commissions in all the countries that the cabinet secretary has listed work with not only Government forecasts but independent forecasts from elsewhere? Is that not the crucial difference?
I have just said that I have put into the bill the ability of the commission to prepare other reports “as it considers appropriate”. The commission is therefore free to consider any other opinion that it might bring together, but its assessment of the forecasts is consistent with the approach that is taken in all the countries that I have mentioned.
Presiding Officer, I fear that I have detained Parliament too long on this question, and I apologise to Mr Mason if I have eroded his time. I think that the debate has been helpful, but I hope that the Parliament looks carefully at not only the substantial contributions that I have made on the Scottish Government’s negotiating priorities but the fact that we need to negotiate in a way that protects the public interest of the people of Scotland.
Many thanks.
I call John Mason to wind up the debate on behalf of the Finance Committee. Mr Mason, you have until almost 5 o’clock.
16:47
Thank you very much, Presiding Officer. I know that in the past you have felt bad about cutting me short, so I appreciate all the time that I have been given today.
This has been quite a sensible debate. If we were being honest, we would probably say that we do not always have sensible debates in this place, but this debate has been quite good.
Before I address some of the key points that have been made this afternoon, I want to touch on a couple of the main issues in our report that the convener, through lack of time, was unable to cover in his opening speech but which, in fact, have featured in the debate. One of the main issues to emerge from the committee’s recent work on further fiscal devolution is the need for much greater transparency and accountability in relation to the calculation of the block grant. The Barnett formula is viewed as opaque and there are real concerns about the role of the Treasury as the sole decision maker on the block grant; I will return to that point later.
The House of Lords select committee on the Barnett formula, which Joan McAlpine referred to, found Barnett’s workings to be “opaque” and the data “inadequate and inaccessible”. It recommended that the Treasury publish its workings on the operation of the Barnett formula
“in a single, coherent and consistent publication.”
However, it has been pointed out to us that the recommendation has not been acted on in a comprehensive manner. The Finance Committee therefore recommended that the UK Government
“publishes details of the operation of ... Barnett ... and”
the block grant adjustments
“arising from”
further
“fiscal devolution alongside each UK budget and Autumn Statement”,
and we will pursue that issue when we take evidence from the Chief Secretary to the Treasury following the publication of the fiscal framework.
The committee also examined intergovernmental relations, which Alex Salmond touched on during his interventions. In relation to fiscal issues, Lord Smith highlighted the weakness of the intergovernmental relations in his foreword to the commission’s report, stating that
“a more complex devolution settlement means the problem needs to be fixed.”
The Devolution (Further Powers) Committee has stated that the current arrangements are not fit for purpose and the Scottish Government has recognised that the IGR machinery requires overhaul. The United Kingdom Government has stated that reformed IGR will be underpinned by stronger and more transparent parliamentary scrutiny, but the committee identified two interrelated difficulties.
First, most bilateral relations between the two Governments take place on an ad hoc and informal basis, which leads to a lack of transparency and accountability. As one of our witnesses pointed out, most intergovernmental relations take place below the radar and that raises questions about the feasibility of effective parliamentary scrutiny. There is therefore a need for a more formal and structured approach, including at least biannual meetings of the joint exchequer committee and the finance ministers’ quadrilateral. There also needs to be a more systematic approach to reporting of the meetings of the joint exchequer committee and the finance ministers’ quadrilateral. That should include, as a minimum, advance notification of agendas to allow the Scottish Parliament to contribute its views, along with a detailed and timeous minute of discussions to allow for effective parliamentary scrutiny.
A number of members touched on those issues, especially Jackie Baillie and Gavin Brown. To be fair, the committee accepts that there has to be a balance. Delicate negotiations cannot always be conducted in public so there is a trade-off between how open the two Governments can be with each other, and how open each Government can be with its respective Parliament.
Secondly, the formal institutions that exist are consultative bodies without any co-decision powers. In particular, as I have already said, there are concerns about the role of the UK Treasury as the sole decision maker on fiscal matters. As many members who have spoken today and many witnesses to the committee stated, that is not sustainable. The UK Government has to be willing to work with the devolved institutions in seeking agreement on fiscal matters post-Smith. That will require cultural change in the Treasury and at all levels of intergovernmental relations.
For example, the statement of funding policy that sets out the current fiscal arrangements for the devolved institutions has not been updated since 2010, despite the devolution of fiscal powers in the Scotland Act 2012. Although the statement is discussed with the devolved Governments, it is agreed between the Chancellor and the Secretary of State for Scotland. As the Deputy First Minister told the committee, that is absurd. As a minimum, the statement of funding policy needs to be agreed between the UK Government and the three devolved institutions.
A number of our witnesses suggested that there is a need to establish an independent body, like the Australian Commonwealth Grants Commission, to act as arbiter. That was the point that Alex Salmond made during his interventions. Such a body could be used to resolve disputes on issues such as the block grant adjustment. The committee recommended that consideration should be given to establishing such an independent body.
It is worth saying that this is one of the big differences between devolution and federalism. Yesterday, a large delegation from Bavaria visited the Parliament and the Finance Committee had a brief meeting with them, when we saw how they operate differently from us. Places such as Australia and the United States have written constitutions that make it possible for the two bodies that would be involved to go to the courts or to an independent arbiter, but that is not the case in the UK. It has to be asked whether it will ever be possible to resolve the issue satisfactorily without a written constitution.
The final area in the committee’s report that I wanted to mention was the importance of economic and fiscal data for Scotland. A number of our witnesses questioned the availability and quality of that data, and there was also a question over access to HMRC data. The committee has requested that the Fiscal Commission identifies specific areas in which economic and fiscal data need to be updated and that they are addressed by the Scottish Government as a matter of priority.
I will now mention some of the issues that have been raised in the debate, some of which I have already covered in my remarks. The first and most obvious issue, which we expected to come up this afternoon, is the question of forecasting. It is perhaps the issue that Gavin Brown highlighted the most, with regard to whether the Fiscal Commission should be doing the forecasting.
It would be fair to say that there was a range of opinions within the committee. I think that we all agree that independent forecasting is absolutely essential. Various questions were raised, to which perhaps we did not really get answers. For example, if the Fiscal Commission was doing the forecasting, who would be checking the forecasts or looking at them independently? One member of the committee raised the example of Audit Scotland. That is quite a good example of an organisation that comments and looks at something from the outside. In my opinion, it is fairly highly respected and has a big impact because its reports often appear in the media, yet it is not involved in doing the work itself. That is certainly one valid way for the Fiscal Commission to operate, albeit that around the world there are examples of a number of ways of doing that.
Malcolm Chisholm raised the question whether the Fiscal Commission could be involved in giving advice and improving the system or whether that meant that it would lose its independence. We return to independence being the key thing, but I do not think that we have an answer to that question.
Chic Brodie mentioned that some people who gave evidence wanted to have a Scottish equivalent of the OBR. Committee members feel that we do not have to copy England in every regard and we could perhaps do things a little bit differently, in our own way.
The question of resources also came up at the committee. I do not think that that has been mentioned. If we have two parallel forecasting systems, one for the Fiscal Commission and one for the Government, there is clearly a resource issue as well as duplication and I wonder whether that needs to be the case. Richard Baker mentioned that the Fiscal Commission needs to be resourced. We were concerned about that as a committee, but I think that we are now somewhat reassured that that will be okay.
This afternoon, we have had quite a lot of discussion about no detriment and Mark McDonald painted a picture showing that it is almost impossible in practice to work that out at the part 2 stage of no detriment. The example often given has been airport passengers who might not go to Newcastle but travel directly from Scotland if we have control of APD. However, the question then arises about some of the passengers possibly being in Newcastle because of detriment to Scotland so it would not be new detriment to England; it would be about undoing or rebalancing the detriment that is already there to Scotland.
I disagree with James Kelly, who raised the point that no detriment was important because Scotland was spending more than its income. That has clearly not been the case every year. It varies from one year to another. It is also true that the UK is still spending more than its income and has been for some considerable time. The no-detriment principle is more fundamental than that and is not about current spending.
Borrowing is another issue that has been raised a number of times. As Linda Fabiani said, prudential borrowing seems to work very well in local government—that is certainly my experience. However, preventative borrowing, which was mentioned by the Institute of Chartered Accountants of Scotland and was touched on by Jim Eadie, can be a bit of a vague issue and we did not really reach a conclusion as to whether we could pin that down.
The other issues—I will run out of time to cover them, even though I was given until 5 o’clock—were about changing the attitude at Westminster and whether there is any sign of that happening. However, the whole budget process at Westminster is clearly quite different. Here, there is a lot more consultation, as John Swinney explained.
I could also talk about data, which is an issue with regard to the block grant adjustment, as Joan McAlpine and others mentioned. There is also the issue of transparency. Gavin Brown talked about not wanting to make a binary choice, which I agree with.
This subject is extremely important. The Finance Committee has put a lot of time and effort into examining it. We are very grateful to the expert witnesses, to the clerks and to others who have supported us in the process. It is still unusual for devolved Administrations to have such a Fiscal Commission and I think that we have the opportunity in Scotland to lead the way. I look forward to further debates on the bill itself and I commend the report to the chamber.
Previous
Portfolio Question Time