The ‘Fiscal Framework’ between the UK and Scottish governments must be urgently reviewed, writes Richard Leonard
Autumn is the party political conference season, but it also heralds the start of the parliamentary budget setting process, including the Scottish Parliament’s budget for the next financial year.
The new Tory Chancellor Sajid Javid set out the UK Government’s spending plans and priorities before Parliament was prorogued. It is a spending round which, because of the suspension of Parliament, has not received the scrutiny it demands. Scotland is estimated to receive over a billion pounds in additional funds as a result of the Barnett formula – but it is worth turning our attention to other considerations.
Over the summer, the Scottish Fiscal Commission stated that the Scottish Government now needs to manage budget volatility as the devolution of tax and spending powers becomes fully operational. We know that next year’s Scottish Budget will begin to be adjusted to reflect any differences in actual income tax taken in comparison to the forecast tax receipts. In practice, this means that the Scottish Budget will be reduced by £229 million in 2020-21 and by £608m the following year. These amounts are referred to as forecast errors. In other words, these deductions will be applied because the Scottish economy did not perform as well as the rest of the UK. This revision process was agreed in the 2016 Fiscal Framework between the UK and Scottish Governments, which the then Cabinet Secretary for Finance John Swinney negotiated with the Tories.
It is a bad deal for Scotland. Under the SNP deal Scotland benefits in full from revenues raised as a result of Scottish Government fiscal policy decisions. But it loses in full if the Scottish economy performs poorly compared to the rest of the UK. As the Fraser of Allander Institute’s David Eiser recently argued. An implication of this is that if Scotland’s tax performance is poor compared to the rest of the UK as a result of Brexit, or a downturn in oil and gas or the effect of an ageing population or all three, then through the Block Grant Adjustment we take a hit. And a gaping hole will open up in our budget.
Also under the Framework negotiated between the SNP and the Tories if the devolved social security benefits’ take-up rates start to increase in Scotland – relative to the rest of UK – we take another hit. This is morally counter-intuitive, and economically counter-productive. At the time of the deal, Swinney boasted: “I have created – for my party – a reputation for effective fiscal management, fiscal credibility, and I am very proud of that.” But alongside the prospect of a funding gap, a credibility gap is now opening up. While these may appear to be technical matters, in practice they are hugely political. On the technical implications I am sure that the Finance Secretary had officials advising him of the risks at the time. On the political implications the SNP government must have understood how badly this deal would play out. Yet the SNP government signed Scotland up to this bad deal.
The Fiscal Framework sought to extend the Scottish Parliament’s accountability. The Institute for Government has stated that, “accountability is about a relationship between those responsible for something, and those who have a role in passing judgement on how well that responsibility has been discharged.” SNP ministers have accepted responsibility for Scotland’s economic performance, but this will still be largely determined by factors outside of their control. They should never have signed the Scottish people up to risks which they cannot manage.
By signing up to this deal, the SNP government accepted full responsibility for the devolved taxes. But the level of tax receipts is dependent on two factors: the tax rate and the tax base. The Scottish Government can vary the tax rate, but it has far less power over the tax base, which is instead dominated by the fortunes of the economy – such as the global energy market.
Indeed, the link between the Scottish tax base and decisions taken at Holyrood is weak. But John Swinney and the SNP government still saw fit to take on this significant risk to the Scottish budget and the wellbeing of the population. Surely they must have been aware of the potential consequences, such as slower growth in earnings and productivity?
Although Holyrood now has limited borrowing powers, including the right to borrow to cover fluctuations in the budget due to forecast errors, there is a maximum limit on this borrowing. It is currently at £300m per year. So, with this cap the Scottish Government cannot even cover the 2022-23 budget loss of £608m through borrowing.
This is one of the reasons why I have argued the Scottish Government’s borrowing powers should be extended so they can cover all fluctuations.
It should be able to borrow and issue bonds for both resource and capital spending with less restriction save the democratic safeguards of the Parliament.
The current Finance Secretary may wish to blame the poor fiscal performance on Brexit – but he would find the truth more sobering. It is in fact as much due to his government’s deal than any factor outwith the SNP’s control.
In 2021 the Fiscal Framework is due to be reviewed. And it is my strongly held view that this system needs to be comprehensively reviewed: we need an overhaul of the Block Grant Adjustment mechanism. As for social security, a floor should be provided so that our budget is adjusted upwards according to Scotland’s needs – rather than risking cuts to lifeline support when it is needed most. Strong accountability provides the foundation of a healthy democracy.
But any accountability mechanism should offer proportionate rewards for good performance – and proportionate disincentives for failure. In its current form, the Fiscal Framework is an unfair agreement for Scotland. The SNP government must explain why it signed up to this bad deal, and act now to protect the Scottish people from this £229m cut.