Fiscal Framework update
First Minister Nicola Sturgeon
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 UK Government to secure a fair deal. I am determined that this 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 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 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 and so it is as important, if not more so, than the Scotland Bill itself.
In setting out the current position on the fiscal framework, I want to remind 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.
This means that if tax policy and economic performance in Scotland remains the same as in the rest of the UK then 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.
This 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 the rest of the UK, then the costs and benefits of this should fall to the Scottish budget.
But if nothing changes - if tax policy remains the same and we match UK economic performance - then our overall budget shouldn't change either. This embodies the Smith principle of economic responsibility.
Presiding Officer, the Scottish Government has engaged constructively in these negotiations. Since March last year there have been ten 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 this issue with the Chancellor of the Exchequer, and I have also discussed it with the Chancellor and the Prime Minister.
As a result of all of these discussions, I am pleased to advise Parliament that we have now reached, or are close to reaching an agreed position, on all of the main issues other than 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 the Scottish Government will be able to manage tax volatility and economic shocks whilst also securing additional flexibility to invest in infrastructure.
Getting to this point has required compromise on both sides. However, I believe we have secured results that are fair to Scotland and to the UK and which 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 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. It guarantees the outcome of no detriment, regardless of changes in Scotland’s population share.
It is considered to be the best way of delivering no detriment by distinguished economists such as Professor Anton Muscatelli and by the STUC. 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 we have put forward guarantees no detriment to taxpayers, both in Scotland and in the rest of the UK.
However we remain unable to reach an agreement with the UK Government on this issue.
The reason in my view 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 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 out and I think it shares widespread support. 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.
Now, 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. This 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 this as significant and welcome progress.
However the key remaining question is what happens at the end of that five year period. In my view, this 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 this basis and discussions continue.
However, so far, it has appeared 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.
The Treasury has, over the last couple of days, been suggesting that if we cannot reach agreement on how to do this, there would be an automatic default to their preferred comparability model of block grant adjustment, without the transitional arrangements that deliver no detriment.
Presiding Officer, I am well aware that this all sounds highly technical - and it is. But it also has very real implications for Scotland's budget over the medium and longer term.
I want to spell out today what those implications would be.
If we were to agree the Treasury's preferred approach, then over the ten years from the end of the transitional period in 2022, Scotland's budget would be reduced systematically, compared to Barnett, by a cumulative total of £2.5 billion.
This reduction would happen even if Scotland's tax rates and economic performance matched the UK's 100 per cent.
Now, none of us know exactly what the world will look like in future. It's no secret that I hope 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 ongoing, 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 Barnett and therefore 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 Scotland was promised. The only concession they would be making is that they will give us five years before they start collecting the payments.
Presiding Officer, the powers Scotland was promised didn't 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 these new powers. And whether or not we get a deal, I have made clear that I will publish a manifesto that sets out what we could do with these powers.
My government will continue to work to secure agreement for as long as the Parliament allows us to. Indeed, even as we speak, discussions are ongoing with the Treasury in an attempt to secure movement and find agreement.
However, given that the vow was signed by the Prime Minister and the Prime Minister established the Smith Commission, I am writing today to David Cameron to suggest that - if agreement cannot be reached with the Treasury - he and I should seek to resolve the matter directly.
Presiding Officer, let me be clear. I am prepared to sign up to a deal that includes a transitional arrangement followed by a fair review if -
- firstly, 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, that 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 being applied now or by a pre-judged review in five years’ time.
I can advise the chamber that within the last hour I have received further proposals from the Treasury which we will now take time to consider and it will be the test I have set out that we will judge these proposals against and take a reasonable view of them.
Presiding Officer, I am grateful for the opportunity to update parliament today, I think it was appropriate that I did so.
I hope that the Scottish Government will have support of parliament in seeking to secure, even at this eleventh hour, a deal that is fair to Scotland and that lives up to the promise that was made to the Scottish people.