IN THE torrent of emails that daily cascade into our mobile phones and laptops, one headed “NOBODY KNOWS WHAT IS GOING ON” compels attention.
All the more so, when it comes from the Lords economic affairs committee. It should surely have a clue, “what is going on”.
But this was the heading on its report on the Scotland Bill, due for its second reading in the Lords on Tuesday. For individual taxpayers in Scotland, and particularly for Scottish business, the report raises unsettling questions about Holyrood’s preparedness for “more powers” and the broader fiscal environment in which they will be exercised. It is a blistering attack on what it sees as confusion, ambiguity and sheer unworkability at the heart of the bill.
This attack on the lack of preparedness and clear fiscal framework ahead of the devolution of tax and spending powers is heightened by the proximity of the UK Chancellor’s detailed Autumn Statement on Wednesday.
The key role of the Spending Review is to set out the government’s spending and borrowing plans, the outlook for the budget deficit and intended progress on debt reduction. It will also carry detailed forecasts on the outlook for the economy over the next 12 months.
Deserving of scrutiny though many of these forecasts and assumptions will be, the very fact that they are available for questioning is a major feature of the budget process and system. It requires considerable preparation and research if budgets are to have some semblance of logic and resilience and to ensure as far as possible that spending projections do not collapse at the first breath of adversity.
Looking at all this, it is hard not to conclude that the Scotland Bill has indeed a long way to go. The Lords argue that the bill should not proceed to committee stage until the devolution fiscal framework is published. The bill, says committee chairman Lord Hollick, “has the potential to fundamentally change the UK and impact on us all both politically and economically…Parliament is being asked to pass the bill before we are told full details about the fiscal arrangements that will underpin this new era of devolution. That cannot be right.”
It says the move towards income tax revenue devolution as well as almost full power to set the rates of tax has been done with “undue haste” and too little assessment of the economic and political consequences.
It says the fiscal framework is central to future financial devolution arrangements and Parliament cannot be expected to scrutinise the Scotland Bill without seeing the details.
So much for the rush to deliver “more powers” in time for the Holyrood elections next May.
But it is not just the timetable to which the committee objects but many of its key provisions. It argues that the “no-detriment” rule on Scottish or UK Government policy decisions post-devolution is “unworkable and a recipe for continuing conflict”.
It believes that a “no bail-out” rule between the UK and devolved governments would not be believed by the markets
Instead, the UK and Scottish Governments should agree simple and clear borrowing rules and a maximum ceiling on Scottish Government debt.
It urges much greater transparency and scrutiny of how funding is allocated to the devolved nations. The Office for Budget Responsibility should scrutinise the funding of devolved governments alongside the Scottish Fiscal Commission in Scotland. In addition the chairs of the finance committees of the Westminster and devolved parliaments should meet regularly to ensure effective and co-ordinated scrutiny.
And its most controversial conclusion of all is that the Barnett Formula which the Smith Commission agreed to maintain “is not a sustainable method to calculate funding” and “should be modernised and replaced with a needs-based funding formula for distributing funds to devolved administrations”.
Their Lordships are by no means alone in their criticism of the arrangements for the substantial increase in tax and spending powers on which the SNP administration is dependent to meet its welfare and social reform ambitions.
A new joint paper by researchers at the IFS, the University of Stirling and the Centre for Constitutional Change concludes that it is not possible to satisfy all of the Smith Commission’s “no detriment” principles.
It also finds that the precise way in which the remaining block grants are calculated and indexed over time could mean differences of more than £1 billion a year in the Scottish Government’s budget in the space of a decade or so.
It concludes by suggesting the time may now have come for a more fundamental reassessment of devolved finance – including the operation of the Barnett Formula. The problem with all this is that retention of Barnett was written into ‘The Vow’. And Finance Secretary John Swinney said this weekend he did not agree with “many” of the conclusions of the Lords committee, including its proposal to remove the Barnett formula.
The paper also underlines many of the concerns I have raised here in previous columns about the operation and scope of the proposed Scottish Fiscal Commission that is supposed to operate as Scotland’s Office for Budget Responsibility. Many issues here – not least the scope and remit of the commission and its capacity to analyse and assess the administration’s budget arithmetic and economic forecasts – still need to be resolved.
Meanwhile, what of Wednesday’s Autumn Statement? This year’s higher-than-projected borrowing numbers could bring into question the realism of a £10bn surplus by 2019/20 as set out in the July Budget.
Osborne already faces challenges including how to deal with the defeat of proposed Working Tax Credit reforms by the Lords (which would have saved £4.4bn), and the task of finding another £20bn of discretionary consolidation through departmental spending cuts as part of the Spending Review.
Let’s hope we do not have to level the charge “Nobody knows what’s going on” after Wednesday. «