Meeting of the Parliament 23 February 2016
I want to take this opportunity to update Parliament on the progress of the negotiations to agree a fiscal framework to accompany the Scotland Bill. Over recent days we have continued to work with the United Kingdom Government to secure a fair deal. I am determined that that work should continue for as long as necessary to secure agreement, subject, of course, to the views of the Devolution (Further Powers) Committee and Parliament as a whole.
The Deputy First Minister updated the Devolution (Further Powers) Committee this morning and will update the Finance Committee tomorrow. It has always been our intention to allow Parliament adequate time to consider and scrutinise any agreement. In the continued absence of such an agreement, I think that it is right that I explain to Parliament why our discussions have not yet reached a satisfactory conclusion.
As members know, for the new powers contained in the Scotland Bill to be delivered, a fair fiscal framework has to be agreed between the Scottish and UK Governments. That framework will determine how the powers proposed by the Smith commission can be used, so it is as important as, if not more important than, the Scotland Bill itself.
In setting out the current position on the fiscal framework, I want to remind the Parliament of the key principles set out by the Smith commission. The Smith commission said that the Barnett formula should continue to determine the size of the block grant. That is the benchmark against which all the proposals for the block grant adjustment should be assessed. Crucially, Lord Smith set out his interpretation of the principle of no detriment—that Scotland’s budget should be no larger or smaller simply as a result of devolution. That means that, if tax policy and economic performance in Scotland remain the same as in the rest of the UK, the Scottish budget should be no better or worse off than it would have been under the Barnett formula had tax powers not been devolved. Equally, the rest of the UK should be no better or worse off either.
It is about the appropriate transfer of risk and responsibility. We have always accepted that, if the Scottish Government changes tax policy, or if our economic performance diverges from that of the rest of the UK, the costs and benefits of that should fall to the Scottish budget. However, if nothing changes—if tax policy remains the same and we match UK economic performance—our overall budget should not change either. That embodies the Smith principle of economic responsibility.
The Scottish Government has engaged constructively in the negotiations. Since March last year, there have been 10 meetings between the Deputy First Minister and the Chief Secretary to the Treasury through the joint exchequer committee. The Deputy First Minister has also discussed the issue with the Chancellor of the Exchequer, and I have discussed it with the chancellor and the Prime Minister. I am pleased to advise Parliament that, as a result of all those discussions, we have now reached or are close to reaching an agreed position on all the main issues other than the block grant adjustment mechanism. For example, on the financial transfers required to meet implementation and administration costs, we have reached what I think is a fair resolution. On capital and resource borrowing, we have made good progress on ensuring that the Scottish Government will be able to manage tax volatility and economic shocks while also securing additional flexibility to invest in infrastructure.
Getting to this point has required compromise on both sides. However, I believe that we have secured results that are fair to Scotland and to the UK and that reflect the recommendations of the Smith commission. The key issue on which we have not yet reached agreement is the block grant adjustment. The Scottish Government has considered a number of proposals that have been put forward by the UK Government, all of which would deliver detriment to the Scottish budget. The method of adjusting the block grant that the Scottish Government has proposed—per capita indexed deduction—would deliver no detriment as set out by the Smith commission.
Per capita indexed deduction is predictable, transparent and sustainable, and it guarantees the outcome of no detriment regardless of changes in Scotland’s population share. It is considered by distinguished economists such as Professor Anton Muscatelli and by the Scottish Trades Union Congress to be the best way of delivering no detriment. It also has the support of many members across this chamber and of the Finance Committee of this Parliament and the Scottish Affairs Committee of the House of Commons. In proposing per capita indexed deduction, we have listened to concerns from the UK Government about its implications for the second Smith principle—taxpayer fairness. As a result, we amended our proposal to ensure that Scotland would not benefit from any changes to devolved taxes in the rest of the UK.
In summary, the proposal that we have put forward guarantees no detriment to taxpayers both in Scotland and in the rest of the UK, but we remain unable to reach an agreement with the UK Government on the issue. In my view, the reason for that is not just that we have a difference of opinion on how to reach an agreed outcome; it is more that we have a difference of opinion about the outcome that we are seeking to achieve. In short, the UK Government does not share our interpretation of the principle of no detriment. Our interpretation of “no detriment” is as I have set it out, and I think that it has widespread support across Scotland. The UK Government’s view is that, in the years following the transfer of powers, the Scottish budget should bear detriment as a result of relatively slower population growth even though we are gaining no new powers to influence population growth.
On a positive note, the UK Government has now signalled some movement towards our position. The Treasury has now offered to deliver—on a transitional basis—a no-detriment outcome for the period up to 2021-22. That would be achieved by annual adjustments to a Treasury-proposed methodology rather than by our preferred method of per capita indexed deduction. However, given that it would deliver exactly the same outcome as PCID, we would be prepared to accept that as welcome progress.
The key remaining question is: what happens at the end of that five-year period? In my view, that is now the only substantive issue standing in the way of agreement. Both Governments are prepared to agree a review after five years, but we do not yet agree on what the purpose of that review should be. The Scottish Government considers that the review should be to reach agreement on a longer-term block grant adjustment method that delivers results consistent with the Smith commission’s recommendations, including the principle of no detriment that I have set out. We have put forward a proposal on that basis and discussions continue. However, so far, it appears that, as far as the UK Government is concerned, the purpose of the review is to decide how—not if, but how—we move to a position where the Scottish budget starts to bear population-driven detriment. Over the past couple of days, the Treasury has been suggesting that, if we cannot reach agreement on how to do that, there will be an automatic default to its preferred comparability model of block grant adjustment, without the transitional arrangements that deliver no detriment continuing to be in place.
I am well aware that this all sounds highly technical—it is technical—but it also has very real implications for Scotland’s budget over the medium and longer term. I will spell out what those implications are.
If we were to agree the Treasury’s preferred approach, over the 10 years from the end of the transitional period in 2022 Scotland’s budget would be reduced systematically, compared with Barnett, by a cumulative total of £2.5 billion. That reduction would happen even if Scotland’s tax rates and economic performance matched the UK’s 100 per cent.
None of us knows exactly what the world will look like in future. It is no secret that I hope that Scotland will become an independent country in future, but I could not reach agreement in the full and certain knowledge that, if current constitutional arrangements remain in place, the deal will deliver an on-going, substantial and systematic cut to Scotland’s budget, relative to the Barnett formula, after just a single parliamentary term. That would not live up to Smith, because it would not protect the Barnett formula. Therefore, I think that it would be a clear breach of the vow.
The Treasury’s approach would instead see the UK Government extract a significant price in return for the powers that Scotland was promised. The only concession that it would be making is that it would give us five years before it started to collect the payments.
The powers that Scotland was promised did not have a price tag attached to them when the vow was made. The vow was made freely and unconditionally. The question remains: will it now be delivered? I continue to hope that it will be. I want the new powers. Regardless of whether we get a deal, I have made it clear that I will publish a manifesto that sets out what we would do with those new powers.
My Government will continue to work to secure agreement for as long as the Parliament allows us to do so. Indeed, even as we speak, discussions are on-going with the Treasury in an attempt to secure movement and find agreement. However, given that the vow was signed by the Prime Minister and that the Prime Minister established the Smith commission, today I am writing to David Cameron to suggest that, if agreement cannot be reached with the Treasury, he and I should seek to resolve the matter directly between us.
Let me be clear: I am prepared to sign up to a deal that includes a transitional arrangement followed by a fair review if, first, the review is governed by a shared and continuing commitment to the principles of Smith, including the principle of no detriment that I have set out; and, secondly, there is no assumption of a longer-term adoption of a model that delivers population-driven detriment, or any suggestion of an automatic default to such a model, in the event that no agreement is reached, but I will not sign up to a systematic cut to Scotland’s budget, whether that cut is applied now or by a prejudged review in five years’ time.
Within the past hour, we have received further proposals from the Treasury, which we will now take time to consider. It is against the test that I have set out that we will judge those proposals and take a reasonable view of them.
I am grateful for the opportunity to update Parliament. I think that it was appropriate for me to do so. I hope that the Scottish Government will have the full support of Parliament in seeking to secure—even at this 11th hour—a deal that is fair to Scotland and that lives up to the promise that was made to the Scottish people. [Applause.]