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Scotland’s Fiscal Framework

Volume 769: debated on Wednesday 24 February 2016


My Lords, with the leave of the House I will now repeat a Statement made in the other place by my right honourable friend the Secretary of State for Scotland. The Statement is as follows.

“Mr Speaker, with permission I would like to make a Statement about the new fiscal framework for Scotland, which was agreed yesterday by the United Kingdom and Scottish Governments.

I begin by paying tribute to everyone who has worked so hard to arrive at this point: my right honourable friend the Chief Secretary and the Deputy First Minister, John Swinney, who have led these negotiations with skill, and the dedicated teams of officials from Her Majesty’s Treasury and the Scottish Government who have worked tirelessly on behalf of their respective Governments. They can all be proud of what has been achieved and the service they have given.

This is a truly historic deal that will pave the way for the Scottish Parliament to become one of the most powerful and accountable devolved parliaments in the world. We have respected all the principles set out in the cross-party Smith agreement and delivered a deal that is fair for Scotland and fair for the whole United Kingdom. As the noble Lord, Lord Smith, himself said yesterday evening:

‘When the Smith Agreement was passed to the Prime Minister and First Minister, both gave their word that they would deliver it into law - they have met that promise in full’.

Scotland’s two Governments will give more details in the coming days, but I would like to set out a few key elements of the deal.

The Scottish Government will retain all the revenue from the taxes that are being devolved or assigned, including around £12 billion of income tax and around £5 billion of VAT. The block grant to the Scottish Government will be adjusted to reflect the devolution and assignment of further taxes and the devolution of further spending responsibilities. We have kept our commitment to retain the Barnett formula, extending this to cover areas of devolved welfare. For tax, we will use the UK Government’s preferred funding model. Under this model, the Scottish Government hold all Scotland-specific risks in relation to devolved and assigned taxes, just like they do for devolved spending under the Barnett formula. That is fair to Scotland and fair to the rest of the UK.

However, for a transitional period covering the next Scottish Parliament, the Governments have agreed to share these Scotland-specific risks as the powers are implemented. Specifically, the Scottish Government will hold the economic risks while the UK Government will hold the population risks. So the Scottish Government will not receive a penny less than Barnett funding over the course of the spending review simply due to different population growth. By the end of 2021, a review of the framework will be informed by an independent report so that we can ensure we are continuing to deliver Smith in full, with the Scottish Government responsible for the full range of opportunities and risks associated with their new responsibilities.

We have also agreed that the Scottish Government will have additional new borrowing powers. This will ensure that the Scottish Government can manage their budget effectively and invest up to £3 billion in vital infrastructure. In line with the recommendation of the Smith agreement, we will provide the Scottish Government with a £200 million share to set up the new powers that they will control.

The Government have delivered more powers to the Scottish people, ensuring that they will have one of the most powerful devolved parliaments in the world and the economic and national security that comes with being part of our United Kingdom. That is what we have agreed and what we have delivered in full. Now that we have agreed this historic devolution deal, the conversation must move on to how these new powers are to be used.

The Scottish Government will have extensive powers over tax, welfare and spending. They will have control over income tax and be able to change the rates and thresholds. They will be able to create new benefits. The permanence of the Scottish Parliament is also put beyond any doubt.

The people of Scotland voted for these new powers and deserve to hear how parties in Scotland will use them—new powers that, if used well, can grow Scotland’s economy and population, and bring greater opportunity and prosperity. Now that we have agreed this fiscal framework, I hope and trust that this House and the other place will welcome it while of course subjecting it to full scrutiny. I commend this Statement to the House”.

My Lords, I thank the Minister for repeating the Statement on the fiscal framework and for the pivotal role that he has played in bringing about yesterday’s arrangement. First, we welcome unequivocally the news that an agreement has been reached on the fiscal framework. Thanks should rightly be extended to both Governments, the Deputy First Minister, the Chief Secretary to the Treasury and the Secretary of State for Scotland, as well as for a late intervention by the Chancellor. We congratulate and thank them all on working so hard to secure an arrangement, along with the officials of both Governments.

Yesterday’s agreement marks the removal of the final obstacle to the transfer of significant and substantial new powers to Scotland. As the Minister has already indicated, the noble Lord, Lord Smith, has said that the agreement,

“sees the recommendations of the Smith Commission delivered in full”.

In his Statement, the Secretary of State committed himself to publishing details of the agreement by the end of the week. Given that your Lordships’ House will be debating the fiscal and welfare elements of the Scotland Bill on Monday, we very much welcome this commitment. On that point, can the Minister briefly say whether he has an update on whether Committee rules will be applied for the final day on Report, as was suggested in Committee on Monday?

My honourable friend the shadow Secretary of State has, from the outset, called for greater transparency on the way these deals are negotiated. What this process highlights is that future intergovernmental relationships must be improved to make these powers work for Scotland. We all know that the major stumbling block was the indexation method used for the block grant adjustment. Under the compromise reached, there will be a five-year transitional period, which will cover the full term of a Scottish Parliament. Towards the end of this period, an independent review and recommendation will be published that will form the basis of a more permanent solution. We all hope and demand that agreement is reached. We would also welcome any further clarity that the Minister can provide on the transitional period. The Secretary of State has said that the new income tax powers will be available by April 2017, but the Deputy First Minister seems to have cast some doubt on that.

In the remainder of my reply, I will focus on the review. I welcome the fact that it will be fully independent, but can the Minister answer some very specific questions at this stage? How will the review body be chosen? Can he confirm that it will be done in a spirit of consensus with the full agreement of both Governments? What criteria will be used to determine its independence? This independent review is a guarantor for the United Kingdom and Scotland of the fairness of the final agreement and should assuage any doubts or problems about accepting it.

I close by saying once again how welcome this agreement is, and I hope that Monday will give us an opportunity to look at the issues in more detail. The priority for us now is to facilitate the passage of the Scotland Bill. It will be a historic date, and I believe it is now up to your Lordships’ House to deliver the Scotland Bill without delay.

My Lords, I thank the Minister for his Statement. It is certainly very good news that an agreement has been reached between the UK Government and Scottish Government on the fiscal framework. This agreement should allow the Scotland Bill to reach the statute book ahead of the Scottish Parliament elections and will introduce a very powerful range of new policy-making and tax powers to Scotland, which have been long supported by the Liberal Democrats on the journey to home rule. All of this delivers on the vow made by the UK party leaders and implements in full the recommendations of the all-party Smith commission.

However, I am sure there will be concern from all sides of this Chamber that we have not yet seen the full, detailed fiscal framework. Some of the arguments from the negotiations—which were of course all conducted very firmly behind closed doors, underneath the veil of secrecy—are still being repeated, most notably by the Scottish First Minister and others on her side of the argument. Nicola Sturgeon claims to have been fighting to defend the Scottish Government from cuts over a five-year period—first, she said of £10 billion, then £7 billion, then £3 billion and then, finally, £2.5 billion. She now claims that this threat—we will never know how real and present a threat it ever was—no longer exists.

What is certain is that under an independent Scotland, or if there was full fiscal autonomy, the cuts that Scotland would now be facing would be £10 billion—not over a five-year period, but each and every year. There would be no safety net or protection from the UK Government under independence. That would mean a cut over five years not of £10 billion, £7 billion, £3 billion or £2.5 billion, but of £50 billion under independence or full fiscal autonomy. What is also certain is that the Scottish Government have accepted the Treasury model for calculating the grant adjustment for each of the first five years.

It is worth quoting Brian Taylor, the BBC’s political editor in Scotland. He asks “who has given ground” in the negotiations and states:

“The Scottish government has had to compromise. They have gained less than they wanted in terms of cash to assist the implementation of the new powers, including welfare powers. They have been obliged to concede that there will be independent scrutiny of Scotland’s fiscal position in the run up to the proposed review which will take place in six years time ... the Scottish government has accepted that it will be, technically, the Treasury model which is used for operating the fiscal framework … Already Liberal Democrats are saying that is an error by Scottish ministers - that it will be difficult to escape the Treasury model, even the reformed version, once it is in place. That it might, in short, prove costly in the longer term”.

So it is clear that this is not the beginning of the end, nor even the end of the beginning. Rather, it all remains to be fought once again in 2021. It is inconceivable that the SNP will not use the opportunity for further grievance and battling with the UK Government.

The political editor of the Courier wrote this morning:

“One dampener to put on this otherwise joyous occasion is the question of what happens in five years when we revisit the terms of the deal? Will we be locked in some kind of 2016 battle re-enactment? Will it be even bloodier if one side decides it doesn’t like the now-agreed system? It’s possible the battles have just begun”.

I trust that the Minister agrees that we should now grasp the opportunity to establish a federal fiscal commission to look independently and objectively at the issues of financing not only Scotland but other parts of the United Kingdom in a fair and well-informed way. We do not have to wait until 2021.

The spin of one Government against the other in these negotiations has not been helpful, and it will, I predict, be repeated in 2021. However, the Minister is right: the big issue is now delivering the new powers and for Scotland to make proper use of them.

In conclusion, and crucial to this Chamber, I hope that the Minister can give us a cast-iron assurance that the detail of the fiscal framework will be published in time for proper scrutiny ahead of Report next Monday. I suspect that he will readily give us such a reassurance, as he is acutely aware of the strength of feeling on this issue on all sides of the Chamber. He has also been very directly involved in the negotiations and has put a considerable amount of his own acumen and effort into reaching resolution. He has also put a great deal of effort into dealing with the representations and frustrations of the Members of this House, which have also been considerable. For all of that, he should be considerably thanked.

My Lords, I thank the noble Lords, Lord McAvoy and Lord Stephen, for their support and their response to the Statement. This deal provides an opportunity to move the debate in Scotland on from process to policy, as the Secretary of State for Scotland said in the House of Commons earlier. The noble Lord, Lord McAvoy, talked about the rules for Report, and that is a matter to be discussed through the usual channels.

Turning directly to the point about time to scrutinise the deal, again, as the Secretary of State made clear to the House of Commons, my strong expectation is that the agreement will be published tomorrow and available to noble Lords. I will write to all Peers making it available to them. I also take this opportunity to offer an all-Peers briefing tomorrow with the Treasury.

The issue of intergovernmental relations was raised. I know that this is a matter of great interest; the Constitution Committee has issued a report on it. The noble Lord, Lord Smith, said:

“There should be no doubt that this was a highly complex package of measures to agree. It is difficult to imagine a bigger test of inter-governmental relationships … This provides an excellent basis for constructive engagement between the governments long into the future”.

That is what gives me hope that it will be possible to reach agreement when we come to the review in five years’ time. We must use the time in between to build those intergovernmental working relationships. The fact that this review will be informed by an independent report will help in that process. To address directly what the noble Lord, Lord McAvoy, asked, this will be a review without prejudice and a review by agreement, and it will not be imposed.

The noble Lord, Lord Stephen, talked about full fiscal autonomy, and I have to say that I look forward to the day when the SNP tries to reconcile the no-detriment principle with separation.

My Lords, I thank the Minister for enabling us to have the fiscal framework before we complete consideration of the Bill. To paraphrase Robert Burns, now that the First Minister, Nicola Sturgeon, has been bought and sold with English gold, could my noble friend give an assurance that the same generosity that has been given to Scotland will be applied to England, to the English regions, to Northern Ireland and to Wales? In particular, could he confirm the briefing that was given to the Times by a “Treasury insider” that, had this settlement been in place since 1999, Scotland would have got all the money from Barnett—that is, 20% more per head than in England—plus an additional £6 billion? If so, surely the rest of the United Kingdom is entitled to be treated with similar generosity.

When the Minister says that this is a transitional arrangement for five years that will be subject to agreement, is not another way of putting that there will be a veto on the part of the Scottish Government to prevent any change? Does he really think that this delivers a deal that is fair to all parts of the United Kingdom?

On that last point, absolutely I believe that this is a deal that is fair to all parts of the United Kingdom. That is what the Smith agreement was all about—being fair to Scotland and fair to the UK as a whole. That is what this deal delivers.

To address directly the first of the two points that the noble Lord raises—and this was a point that came up in the House of Commons—on the cost of the deal to England, Wales and Northern Ireland, there is no additional cost to the taxpayers of England, Wales and Northern Ireland. This deal produces the same outcome as Barnett set out in the comprehensive spending review. There is no adverse impact on UK taxpayers.

On the noble Lord’s other issue—I forget what it was; oh yes, it was the point about transition—the Scotland Bill, that delivers the Smith agreement, is a significant act of devolution. It represents a new world and an opportunity for a new politics in Scotland, one in which blame can no longer be heaped at Westminster’s door. It is absolutely right to have a review on how the far-reaching arrangements are working in practice to ensure that, as my right honourable friend says, they are fair, transparent and effective in line with the Smith agreement.

While I join in the welcome given to the Statement and the agreement, is the Minister aware that at this very moment HMRC offices in Scotland are being closed and thousands of people put on the dole? Is not this a stupid thing to do at a time when there are going to be more responsibilities on revenue and customs in Scotland?

I assure the noble Lord that we are very confident that the delivery of these powers will go ahead as intended.

In view of the fact that I asked the second Question yesterday, I feel entitled to give the Minister warm congratulations on his part in securing this agreement on the fiscal framework. Does not this pave the way for the debate in Scotland to move forwards and focus fully on how the new and extensive powers should be used?

I thank my noble friend for his words. We are months away from elections to the Holyrood Parliament and, as I said earlier, the deal opens the way to make sure that that debate is on the right terms—about how each of the political parties competing in that election will use those powers, and not the perpetual debate about what those powers are.

At the risk of mixing my metaphors, although they will be well understood by all Members of this House, have we not, for the duration of this Bill, been burying our heads, ostrich-like, in the sand, while turning a blind eye to the elephant in the room? Did we awaken yesterday from our slumber to kick a hornets’ nest into the long grass where we hope that the English will not notice it and the Welsh will be ignored? I shall translate that for those who have not followed this debate. The elephant in the room is, of course, the Barnett formula. The hornets’ nest is also the Barnett formula because if anyone disturbs the Barnett formula, the hornets will fly out. The blind eye is the decision by tame Scottish politicians, supported by the UK Government, to continue Barnett without discussion of its inequities or its notorious unfairness, particularly to Wales. The long grass is the five or six-year period. The question simply is this: will the documents to be published now or in the next five years show clearly the extent to which the rest of the UK is contributing towards this expenditure by the Scottish Government?

As I said earlier in answer to another question, there is no additional cost to taxpayers in other parts of the United Kingdom. We have had many debates in this House about the Barnett formula. There are many former Secretaries of State who, when they had the opportunity to get rid of the Barnett formula, did not do so. Indeed, some of those Secretaries of State take great pride in arguing for more resources for Scotland. They were very effective at doing it, and I pay tribute to them for that. However, when proposing a move away from the Barnett formula, with the idea that there is some easy solution that would do away with the hard negotiation that is required with the Scottish Government, I am at a loss to know why we would expect the SNP to fight Scotland’s corner any less strongly than former Secretaries of State did.

My Lords, given that the Prime Minister was able to publish the details of a far more complicated deal with the European Union when he made his Statement to the House of Commons on Monday, why is the full fiscal framework not in front of this House this afternoon? I do not understand why in the light of that the Government cannot be more specific about what will happen in five years’ time if agreement is not reached on this independent review. What will be the status quo at that time should an agreement not be reached?

As I said, today is the final day of the Scottish Budget. That is why we do not have the fully published document today. There are a few minor technical and implementation issues from the agreement that need to be finalised. However, I have given a commitment to the House, and my strong expectation is that that agreement will be published tomorrow.

My Lords, will there be anywhere a cash limit upon the amount of money which English taxpayers will be required by this agreement to pass across the border for the benefit of Scottish consumers?

I can only repeat what I said earlier: there is no additional cost to the taxpayers of England, Wales and Northern Ireland.

My Lords, while there is general support in the north-east of England for Scottish devolution and its progress to date, does the Minister recognise that there will be real resentment if it becomes apparent over time that there is substantially more money available for public services on the Scottish side of the border than on the English side and that that resentment will undermine English support for the maintenance of the United Kingdom, which would be very unwelcome if it happened?

I absolutely understand what the noble Lord is saying. That is why we have sought a deal that is fair to Scotland and to the rest of the UK.

My Lords, I compliment my noble friend on his modesty on leaving out of the Statement the one line in which the Secretary of State for Scotland in another place complimented him on his invaluable contribution to these matters. I welcome the fact that the conclusion of the negotiations has been reached, at least to the extent that it now enables the legislation to pass into law once it has finished its progress through this House and, at long last, bring the Scottish Government to a degree of accountability for their actions before the Scottish people. My noble friend referred to the review to take place in five years’ time. Can he confirm that when that review is produced by this independent body, it will be implemented without any further interruption or interference by either the Scottish Government or the UK Government?

Once the review is complete, it will be for the two Governments to reach an agreement. However, I need to say to my noble friend that this is a very significant act of devolution. In future, more than 50% of the Scottish budget will be financed from taxes that are raised in Scotland, and that is a major development.

My Lords, with the current concentration on Scotland, there is a danger that Wales will be sidelined. Perhaps we too should have had a referendum. Is the Minister aware that Cardiff University has just produced research for the Welsh Government suggesting that Wales will lose out massively as a result of the Chancellor’s personal tax allowance changes? Will we be compensated for that?

Obviously discussions are going on between the UK Government and the Welsh Government about the fiscal arrangements for Wales. I am sure, as this deal has been successfully concluded, that they will be successfully concluded as well.

My Lords, the Statement concludes by saying that the fiscal framework should be subject to full scrutiny. How is that to be achieved in your Lordships’ House when the Scotland Bill has already reached Report stage and we will be operating under the restrictions that we always do on Report and at Third Reading? Should those restrictions not be removed, given the situation that we are now in? Secondly, the perpetuation of the Barnett formula means that the injustice between England and Scotland is going to be perpetuated as well. That cannot possibly be regarded as fair.

I think I have covered the rules of Report in an earlier answer. As I say, with the funding arrangements we have sought to strike a balance that enables these powers to be transferred to the Scottish Parliament while respecting the “taxpayer fairness” principle that applies across the rest of the UK.

My Lords, in the light of what others have said, along with the fact that the Barnett formula is seen to be extremely unjust and unfair to other parts of the UK, will an analysis be produced of the impact of the new fiscal arrangements in Scotland on the other parts of the UK? Many local authorities are now suffering such dire cuts that public services are in severe danger of being lost in many parts of England, to my knowledge. With this announcement, there ought be a proper analysis of what impact it will have on local services in England and the rest of the UK.

The review will look at how the funding arrangement is operating against the Smith agreement. I remind the House, because this is often forgotten, that the Smith agreement says that it should,

“aim to bring about a durable but responsive democratic constitutional settlement, which maintains Scotland’s place in the UK and enhances mutual cooperation and partnership working”,

and should,

“not cause detriment to the UK as a whole nor to any of its constituent parts”.

That is something that the review in five years’ time is going to have to take into account.

My Lords, is the implication of this agreement that the Barnett formula is, as it were, the acquis communautaire which provides the baseline against which fairness is judged?

During this transitional period, the protection that is put in place ensures that what was the case with regard to the numbers in the comprehensive spending review will be delivered over this period.

My Lords, I, too, commend my noble friend Lord Dunlop for his perseverance, stoicism and patience in bringing these important negotiations to a conclusion. Does he consider that the real clout to be delivered to Scottish politics by the Bill and this fiscal framework agreement is to relish the prospect of a very reluctant SNP Government being compelled to accept fiscal and economic responsibility for their political decision-making, and that one of the most important components of any review will not be what happens in this place, the other place or in the Scottish Parliament but will be the views and expressions of the Scottish electorate, who may be suffering from the impost of some of the Scottish Government’s policies?

I very much agree with my noble friend. The whole purpose behind this is that the Scottish Government should be held fiscally accountable for the decisions they take so that they should be able to reap the rewards of the good decisions they take and bear the risks and costs of their bad decisions.

My Lords, on that last point, the Calman commission, of which I was a member, tried to find a way to ensure that the success of the economy in Scotland led to an increase of government funds and tried to tie in revenue for the Scottish Government to the success of the Scottish economy. The Statement appears to be saying that whatever goes on in the background, it is all down to Barnett and that however the numbers are made up, it ends up being Barnett. In what substantive terms is that a change?

As the Statement made clear, if the Scottish economy grows more slowly than the UK economy as a whole, that risk will be borne by the Scottish Government.

My Lords, can the Minister help us by expanding a little on set-up costs; he mentioned a figure of £200 million. Would that apply to the departmental expenditure limit from the DWP on the costs of the administration of the new social security powers that will be available to the Scottish Government in the future?

The figure I mentioned is a one-off implementation cost to transfer the powers over and the systems that go with them. It is not an ongoing cost.

My Lords, I leave policy to others better qualified than myself, but process is important. So that my noble friend shall not forget the intense interest on this and other sides of the House in that process and the ability of this House to scrutinise what will be put before it, I remind him that a simple procedure and a way of satisfying that would be to take parts of the Bill in the same order as they were in Committee, and that when we get to Parts 2 and 3, the Bill should be recommitted to Committee for those two parts.

I thank my noble friend but I cannot commit to what he asks. We have already moved a Motion to consider on Report the Bill in the same order in which we considered it in Committee, which was precisely to allow time for this agreement to be reached and published, and to allow your Lordships’ House to scrutinise it.

My Lords, in answer to a previous question the Minister rather proudly announced that 50% of the revenue under the new arrangement would come from the Scottish taxpayer. Does that mean that the rest of the revenue will come as a subsidy from the UK Government?

No. It has always been the case—right from the start of these discussions—that a block grant would continue. However, we are providing for more of the budget to be financed from the tax revenues raised in Scotland.

My Lords, I live on the other side of the border from my noble colleague Lord Beith but not far from the border. I share his perception from that side of the border of the impact of not talking about Barnett. Will the review’s terms of reference include looking at the consequences of retaining the Barnett formula?

As I said earlier, this is an open review and it does not establish a default position. It will be for the Governments to set the terms of reference and the remit, and those will be decided in due course.