Peter Jones: The politics of the fiscal framework

THE Scottish income tax arrives in April '“ when agreement is reached on the rules governing it, writes Peter Jones

Nicola Sturgeon will want to make political hay from the fiscal framework negotiations ahead of the elections. Picture: PA

Is a new Scottish political age in which Scottish politicians take responsibility for raising some of the money they spend about to dawn, or is this promise of a new era about to be stillborn, battered to death in a bout of drearily familiar bickering between Edinburgh and London?

The signs are not good. SNP ministers have been loudly proclaiming their determination to resist any wicked London plot to cut Scottish public spending while UK Conservative government folk have been insisting, somewhat more mildly, that they just want to be fair to everyone.

The noise concerns what is called the fiscal framework, in which Scotland’s shiny new tax powers – the first tranche of which are due to come into force in April – will operate. The fiscal framework rules will determine the portion of the Scottish Government’s budget which comes via a block grant from the UK Treasury.

In very rough terms, the block grant currently comprises 90 per cent of Scottish Government spending, dropping to about 80 per cent when the partial tax powers of the Scotland Act 2012 come into being, and then will reduce further to about 50 per cent when the bigger powers envisaged by the Smith Commission come into play.

Since the Scottish Government spends, in very round terms, £40 billion, the fiscal framework will be responsible for annual changes to at least £20bn of that budget. Get the framework wrong, and Scottish ministers might find themselves a few hundred million short – or, on the other hand, UK taxpayers might be handing a few hundred million more of their money to Scotland than they ought to be.

That’s why it is very important and why negotiations between Scottish finance secretary John Swinney and UK Treasury chief secretary Greg Hands, who met again yesterday, have been dragging on for months.

But the politics of this are also important, particularly as First Minister Nicola Sturgeon faces her first Holyrood elections as SNP leader in May. These drawn-out negotiations have served her well – all the SNP shouting has built up a winning political position, irrespective of whether there is agreement or not.

If there is agreement, she can claim to have successfully defended Scottish interests by fighting off all manner of Treasury attempts to steal Scotland’s money. If there is no agreement, she can make the same claim and then go on to demand another majority mandate to carry on the valiant resistance.

Since winning a third term, or Holyrood3 in the political shorthand, is necessary in order to keep the hope of an Indyref2 alive (absurd though that is in the current circumstances of near-zero oil revenues), you can expect this to be a dominant election campaign theme.

This theme will be even stronger if Mr Swinney carries through with his promise to publish all the papers from the negotiations once they are concluded one way or the other. Though this promise has been made virtuously in the name of transparency and the public being better informed, the result, I am sure, will be dense fog and public confusion.

That’s because the papers, which were never intended for public consumption but for private debate between expert civil servants and their political masters, will be densely technical and practically impossible for all but the highly-informed to understand fully.

But among them will be nuggets of political gold suggesting that this or that Treasury proposal would have severe consequences for Scottish spending, or this or that Scottish Government idea would badly disadvantage English taxpayers. These headlines will dominate public discussion, and not the algebraic minutiae behind them.

It is also the case, in my view, that the negotiations are trying to achieve something which is close to impossible. The aim is to produce a formula to calculate by how much the Treasury block grant should be reduced to compensate for the sums which will be directly raised by Scottish taxes so that the Scottish Government’s budget is no better or worse off.

This can be done easily in year one, but it appears impossible to set out a formula which will carry on doing this in subsequent years while also satisfying all the Smith Commission’s principles of “no detriment” to taxpayers north or south of the Border. The closest possibility seems to be Glasgow University principal Professor Anton Muscatelli’s “per capita indexed deduction” method. (See what I mean about this being hard to understand).

Explaining the mechanics would take too long. But briefly the idea is to relate the block grant deduction to changes in income tax receipts, not on a total volume basis, but according to how much the average Scottish income taxpayer stumps up (the per capita bit), benchmarked against per capita income tax receipts in the rest of the UK, and indexed to remove inflation effects.

This has the virtue of removing Scotland’s relatively low population growth (compared with the rest of the UK) as a factor which could reduce the Treasury block grant. But as Jim Cuthbert, an indefatigable analyst of these matters, points out, it doesn’t remove risks of penalising grant cuts or luxurious grant increases caused by changes in the richness of the tax base (ie, whether there are more or fewer higher-rate taxpayers) outwith the Scottish Government’s control.

In fact, for any given formula, it is possible to work out scenarios that work either to Scotland’s advantage or disadvantage. These, however, may bear little relation to what might happen in reality.

For example, the Barnett Formula is the current fiscal framework for determining 90 per cent of Scottish Government spending. In the 1990s, Mr Cuthbert and others produced analyses contending that a “Barnett squeeze” would eventually reduce per capita Scottish public spending from being about a fifth higher than equivalent spending in England to being exactly the same as south of the Border.

Despite the argument being arithmetically sound and irrefutable, the Barnett squeeze has simply not happened, at least to anything like the predicted extent. That’s because public spending does not exist in a formula-governed world, but in politics which is ruled by people whose main aim is to win elections.

And I fear that election winning, rather than serving the public’s best interests, is what the fiscal framework negotiations are now all about.