Meeting of the Parliament 07 October 2015
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.