Tommy Sheppard

MP for Edinburgh East

Fiscal Framework an' a' that

Fiscal Framework an' a' that

Frustrated doesn’t begin to describe my mood yesterday when – for the fourth time in as many months I was down to speak in a debate in the Commons and didn’t get called. Of course, there’s no guarantee that anyone will get called by the Speaker and there’s a degree of chance and randomness about having your say. It’s also the case that the more you speak in debates, the less chance you have of being taken, as priority will go to someone who has spoken less. I’m now falling foul of that rule; although it doesn’t seem to apply to John Redwood – a Tory MP who seems to get to say his piece on pretty much everything!

Yesterday’s debate was on the negotiations taking place between the UK and Scottish Governments on the fiscal framework that will underpin the transfer of new powers to Scotland as set out in the current Scotland Bill. As subjects go, it’d be hard to think of anything more important to Scotland, and yet only four Scottish MPs were able to contribute including the Tory Secretary of State and his Labour shadow.

It’s a complicated subject and I spent five or six hours reading, researching and talking to colleagues about it in preparation for the debate. So you might imagine I was a bit narked when I didn’t get the chance to speak. So my time isn’t completely wasted I’m setting out what I would have said here.

The motion for debate was tabled by the Labour Party, which gets to choose the parliamentary agenda roughly one day a fortnight (the SNP get a day every three months). The motion, and those speaking for it, complained about a lack of transparency in the negotiations. This is a fair debating point but a bit silly when you think about it. It’s hard to see how negotiations could be done in anything other than private really; no-one wants to show their hand in public until a deal is done. As my colleague Kirsty Blackman put it maybe the Labour party was just feeling a bit left out as they have achieved a situation of having no influence in the government of either country.

For the record, SNP members of parliament have no more information about the discussions between the Scottish and UK Governments than anyone else. We, like everyone else, rely upon reports in the press and from independent commentators like the Institute of Fiscal Studies and Professor Anton Muscatelli, to get an idea of what’s happening. And there’s the rub. Sure the details of the negotiations aren’t public yet, but the gist of what is going on is plain for all to see.

The Scotland Bill intends to transfer some powers to set and collect taxes to the Scottish Government – hopefully from 2017. When this happens the amount of public spending in Scotland funded by the block grant from Westminster will be reduced. At the heart of what’s going on is a debate about how the reduction will be calculated.

The Smith Commission said that simply because a power was transferred to Scotland that should not of itself mean a financial penalty. Obviously in the future that power might be used in a way that requires an increase – or decrease – in spending. But at the point of transfer there should be what Smith called “no detriment”. This principle, which all parties are on record as agreeing to, should underpin the design of a formula to calculate changes in the block grant.

A worrying development yesterday was the intervention by Greg Hands, the Chief Secretary to the Treasury and the man leading the negotiations for the UK Government. He sought to qualify the principle by stressing the word “initially”, suggesting that as long as there was no detriment on day one, this shouldn’t be guaranteed in the future. Now, like so much else, this depends on what exactly one is talking about. By its very nature the transfer of powers implies an element of risk which Scottish Government ministers accept. So, if a power is used to pursue a policy and for whatever reason that ends up costing money, no-one is suggesting that the UK should fund that policy. But it’s an entirely different matter if the block grant declines because of factors which have nothing to do with the Scottish Government’s policy and which are completely beyond its influence.

There are several options for calculating the Scottish block grant still on the table. We know this from evidence given by Scottish and UK ministers to Scottish and UK parliamentary committees and from many public statements.

One of these options is called levels deduction. This bases reductions in the block grant on Scotland's population share of the change in comparable revenues in the rest of the UK. For example, say income tax revenues in the whole of the UK increase by £10 billion. If Scotland has 8.3% of the UK population it will be assumed that Scottish income tax revenue brings in £830 million and the block grant will be adjusted by this amount.

The problem is that tax revenues are not based on population share as there are many more higher rate taxpayers in the south of the UK. Scotland accounts for just 7.3% of UK income tax receipts. So the annual block grant deduction will therefore be greater than the growth in Scottish income tax receipts - even when income tax receipts are growing at the same rate in Scotland and the rest of the UK.   Over time the effects could be catastrophic. Some estimate that the Scottish Government could lose up to four billion in the next 10 years. This option is the one which Greg Hands told the Scottish Affairs Committee he was “tending towards”.

This mismatch between Scotland's share of UK income tax receipts and population share can be avoided through a system called per capita index deductions (PCID). This links changes in the block grant to actual changes in tax revenues, and adds an extra adjustment taking into account the change in relative population growth between the rest of the UK and Scotland.  In the case of income tax, this would mean indexing the initial block grant adjustment to the growth in per person income tax receipts in the rest of the UK. It is the only option, to my mind which guarantees no detriment and is true to the Smith agreement. This option is supported by senior economists and academics, by the STUC and by The Scottish Government. And, if I heard him correctly, it is also the preference of Ian Murray, Labour’s shadow Scottish secretary. If it had been agreed by the Treasury we could have had agreement on this many moons ago.

I appreciate that there’s a Scottish election in three months’ time and Labour is getting pretty desperate to find ways to make themselves look different. But the way they are conducting themselves in this debate about the future funding of services in Scotland is mischievous, if not downright irresponsible. Labour politicians are trying to suggest that the Tory UK Government and the SNP Scottish Government are equally to blame for the impasse in negotiations: a plague on all their houses. Some are even suggesting that the Scottish Government is deliberately trying to stall the negotiations to prevent the passage of the Scotland Bill and the new powers coming to Scotland.

This is just not true. The SNP are insisting that the Tories should stay true to their word. If they believe in Smith’s principle of no detriment, then they should not try to force a funding option which has a built in detriment. If the Scottish Government took any other approach they would be guilty of administering collective self-harm to the people of Scotland by allowing the Tories to bring in a series of backdoor cuts in public finances on top of the up front ones they are already imposing.

This debate will come to a head in the coming weeks. If an agreement is not reached before the Scottish Parliament is dissolved on 23rd March, then it will not be possible to pass the Legislative Consent Motion which is required. It’s time for Labour to stop playing games and line up alongside the Scottish Government, the STUC, and most independent expert opinion and back a position which protects Scotland's finances and the services on which our people depend.

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