The Chief Secretary on the Fiscal Framework believes that if the Scottish Government walks away from a deal now, it will be letting down the people of Scotland.
On September 18th 2014, the people of Scotland voted decisively to remain part of the United Kingdom. In agreeing to implement the recommendations of the Smith Commission both the Scottish and UK Governments have a shared an objective to make the Scottish Parliament one of the most powerful devolved administration in the world, with real powers to change the lives of people in Scotland.
I am confident that the Scottish Government, with the right decisions, can use these powers to make Scotland an even more attractive place to live and do business.
Once implemented, the recommendations of the Smith Commission will mean, that for the first time, more than half of the Scottish Government’s budget will come from Scottish taxpayers rather than a grant from the UK government.
As Chief Secretary to the Treasury, I am acutely aware of the need for the Scottish government to have the tools and flexibilities it needs to make its own tax and spending decisions and be responsible for the outcomes.
Lord Smith set out high level principles that the fiscal framework needed to deliver, but he was clear that the two governments were best placed to agree the details. Our approach to the ongoing negotiation with the Scottish Government has been guided by these principles throughout.
The UK government is absolutely committed to securing an agreement with the Scottish government, which gives Scotland the changes it has called for and fully meets the principles set out in the Smith Agreement.
And we’re nearly there.
But now, at the final hurdle, we find ourselves facing an obstacle.
For our part, we’ve moved a long way towards the Scottish Government to reach a deal, and we’re continuing to talk to our partners in Holyrood.
We know that will involve listening and compromising, something we have done continually throughout this process, but we need the Scottish government to do the same.
We agree that for a lasting deal, the principles of the Smith Commission must be fully met, and that the deal must be fair to taxpayers in Scotland and in the rest of the UK.
What is not fair is the deal the Scottish government are proposing. The Scottish Government is making three main demands.
First, that billions of pounds from the growth in income tax receipts from the rest of the UK should continue to flow to Scotland, even after income tax has been devolved. The UK government’s position is logical and fair.
The Prime Minister has been clear from the start of this process that any deal has to be both fair for Scotland, and fair for the rest of the UK. This is at the centre of the Smith Agreement, in paragraph 95 (4b). “Changes to taxes in the rest of the UK, for which responsibility has been devolved, should only affect public spending in the rest of the UK. Changes to devolved taxes in Scotland should only affect public spending in Scotland.”
Second, that the Scottish Government should not need to manage any impact of Scotland’s changing population on its tax revenues. And yet the Deputy First Minister has said that managing population change is one of a range of risks that the Scottish Government take on as a consequence of gaining new responsibilities.
Third, the Scottish Government believes that all of the fiscal and economic forecasts that it will use to make decisions on taxation and spending should be produced by the Scottish Government, rather than independently.
Contrast this with the position for the UK as a whole, where the Office for Budget Responsibility produces independent forecasts without political interference. And consider, if Alex Salmond had won his referendum in September 2014, Scotland would now be staring into the abyss, with oil revenues down an astonishing 98% on what the SNP had forecast with terrible consequences for the public services those revenues were intended to fund.
The Scottish Government’s deal would mean the Scottish Government benefitting from billions of pounds from the growth in income and other taxes in the rest of the UK, long after these taxes have been devolved, whilst keeping all devolved taxes in Scotland to themselves.
This is not logical, and does not meet Smith’s taxpayer fairness principle.
But the UK Government wants a deal because we want Scotland to benefit from effective use of the substantial powers being devolved. And therefore we have proposed a new funding model to the Scottish Government, which seeks to meet the Scottish Government’s demands halfway.
This proposal treats population change in exactly the same way for tax as the Barnett Formula does for spending, with Scotland’s population share being updated over time.
This would mean that the Scottish Government was being treated like all other governments, who have the same population to generate taxes and use public services. So if Scotland’s population grows quickly, the Scottish Government will receive more tax revenue but need to provide public services to more people; if Scotland’s population grows slowly, the Scottish Government will receive less tax revenue but need to provide public services to fewer people.
While this is arguably more generous to Scotland than the letter of the Smith Agreement, we are committed to delivering on the vow we made to the people of Scotland.
The deal on the table gives Scotland a huge opportunity to take more control over its own destiny.
In my role as Chief Secretary to the Treasury, I’ll do everything I can to deliver the lasting deal Scotland wants, whilst remaining fair to taxpayers in both Scotland and the rest of the UK.
The ball is now fully in the court of the Scottish government, and we must all hope they do not miss this opportunity.