Co-operation is key to a fiscal settlement

THE national fiscal architecture will have to be redesigned in order to support the Smith Commission proposals, writes Alan Alexander
Lord Smith of Kelvin launches the Heads of Agreement. Picture: Alex HewittLord Smith of Kelvin launches the Heads of Agreement. Picture: Alex Hewitt
Lord Smith of Kelvin launches the Heads of Agreement. Picture: Alex Hewitt

With the UK general election out of the way, attention is once again turning to the devolution of further powers to Scotland.

The Royal Society of Edinburgh has long maintained an active interest in the matter. At various stages of the debate, we have drawn on the broad experience of our Fellows to provide authoritative and independent advice to both the UK and Scottish Parliaments on a range of related issues.

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Recently we considered what should be taken into account when determining a future fiscal framework for Scotland in light of the Smith Commission proposals.

We are well aware that this is a highly topical and contentious issue, for it is of fundamental importance to both Scotland and the rest of the UK.

If the Scottish Government gains responsibility over the areas of taxation recommended by the Smith Commission, it follows that the national fiscal architecture will have to be redesigned in order to support these new powers.

This is the backdrop from which we raised a number of concerns in a submission to the Scottish Parliament finance committee in April 2015.

We noted that the process for implementing the Smith Commission proposals is moving ahead too quickly. If this continues, it risks undermining the aim of achieving an “enduring settlement”, to quote the UK government’s draft legislation for enacting the Commission’s proposals. The results could have wide-reaching implications for both governments.

Action needs to be taken to ensure that sufficient time is allowed for meaningful consultation with relevant individuals and bodies. This includes scrutiny and testing by the Scottish and Westminster parliaments. In addition, clear steps should be outlined to allow the re-appraisal of any proposals prior to their enactment.

The devolution of new tax and borrowing powers under the Scotland Act 2012 offers an opportunity for reflection. Since April, the Scottish Government has had control over land and buildings transaction tax and landfill tax, and next year it will gain new borrowing powers. The application of these powers should be thoroughly reviewed to help inform how the Smith Commission proposals are implemented.

There is a further need to consider the principles that will underpin the constitutional structure. Reasoned and robust debate is required on several key elements. These include: clearly establishing which risks and opportunities should be pooled, and those that should be devolved; developing mechanisms to regulate fiscal relationships between the Scottish and UK governments; and the provision of fiscal data within an appropriate reporting framework.

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On the principle of needs-based funding, there is a clear requirement to reconsider the relevance of the Barnett Formula as the basis for determining the ongoing fiscal relationship between the UK Treasury and Scotland. In the context of fiscal devolution envisaged by the Smith Commission, it may be unfit for purpose.

There is a pressing need to bring clarity to how the principle of “no detriment”will work in practice. In theory, the principle would apply to cases where either the UK or Scottish government made a policy change which affected the tax receipts or expenditure of the other. The result would see the decision-making government reimburse any costs incurred by the other, or vice versa. We feel that it is important to outline the boundaries within which this principle will operate.

The RSE argues that there should be a Scottish office of budgetary responsibility. Such an institution would fulfil a crucial role by acting as an independent fiscal body, providing authoritative forecasts of budget positions and future revenues. It is crucial that the body be independent in status and directly accountable to the Scottish Parliament.

Beyond a forecasting role, consideration should also be given as to whether this body would provide analytical commentary on strategically important issues. This could include, for example, the fiscal implications of demographic change.

In considering the sheer scale of the complexity and challenges associated with negotiating a fiscal framework for Scotland, a certain irony becomes clear: namely, that we need to design a system to enable much closer fiscal co-operation between the Scottish and UK governments.

In this regard, we support the development of a stronger joint ministerial committee system with clearer guidelines and an increased number of regular meetings, as well as greater transparency and publicity. Not only is it important to nurture co-operation at ministerial level; this needs to be extended to cover the officials charged with developing and implementing the new fiscal framework.

They have a tough job ahead of them. The RSE will watch their progress with interest.

• Professor Alan Alexander is general secretary of the Royal Society of Edinburgh