Revised Fiscal Framework Is Key to Success of Further Fiscal Devolution

29.06.2015

The effectiveness of further fiscal devolution will be largely dependent on Scotland’s revised fiscal framework, a Holyrood Committee has concluded.

A report published today (29 June) by the Scottish Parliament’s Finance Committee questions the extent to which the proposed fiscal framework would allow the Scottish Government the flexibility to pursue distinct fiscal policies whilst recognising the need for these policies to be consistent with the overall UK fiscal framework. 

The Committee has also recommended that the Scottish Fiscal Commission should be responsible for monitoring the Scottish Government’s compliance with its fiscal rules and targets and should carry out its own forecasts. 

The Committee sought views on the Smith Commission’s proposals for an updated fiscal framework for Scotland following the devolution of further fiscal powers and the proposals in the UK Government Command paper, Scotland in the United Kingdom: An enduring settlement

The report notes that the Committee is concerned that the command paper suggests a much greater level of constraint on the Scottish Government’s fiscal flexibility than the Smith Commission. 

In particular, the Committee concluded that there is a fundamental need to change HM Treasury’s role as the sole decision maker on fiscal matters. The Committee’s view is that this will require cultural change both within the Treasury and at all levels of inter-governmental relations. 

Finance Committee Convener Kenneth Gibson MSP, said: 

“Our report makes clear that progress on these matters will only be made if the UK Government – the Treasury in particular – actively demonstrates a willingness to work with the Scottish Parliament and Government in seeking agreement on a revised fiscal framework.

“There needs to be an openness and transparency in intergovernmental discussions and there must be meaningful consultation with both the Scottish and UK Parliaments. This process must not simply be left to the Governments to agree.” 

The report’s conclusions included: 

Borrowing

“…it is essential that Scotland’s fiscal rules are agreed through a process of negotiation which recognises the flexibility of the Scottish Government to adopt its own fiscal policies within the overall UK fiscal framework.” (para 35) 

“…that Scotland’s updated fiscal framework should include two fiscal rules. The first should be a balanced budget rule to govern the level of borrowing in the short to medium term. The second should be a rule to govern the medium to long-term limit on net debt.” (para 36)

“…the level of borrowing powers for current spending will need to be significantly increased and should be commensurate with the risks faced by the Scottish Government post-Smith” (para 58) and “given the risks associated with volatility in the Scottish economy the Committee does not believe that it is appropriate to have a cash limit on current borrowing.” (para 60)

“The Committee supports the introduction of a prudential capital borrowing regime on a statutory basis.” (para 72) 

No detriment 

“The Committee is content with the first ‘no detriment’ principle that the Scottish Government and UK Government budgets should not be adversely affected as a result of the decision to devolve further powers.” (para 98) 

On the second ‘no detriment’ principle, the Committee recommends that this “be treated as a high level principle to guide the governments in the application of the fiscal framework and in adjusting the block grant.” (para 99) 

Block Grant and Funding Formula

“…the increasing complexity of the funding model for Scotland means that it is essential that the calculations of the block grant are open and transparent” (para 110) and “that there needs to be a greater willingness within the Treasury to seek agreement with the devolved institutions on the methodology and operation of the funding model.” (para 112)

Scottish Fiscal Commission 

“…the remit of the SFC should include judging the performance of the Scottish Government against its fiscal targets and an assessment of the long-term sustainability of the public finances.”(para 138)

The Committee also noted “the strong level of support among witnesses for the SFC carrying out its own forecasts.” (para 132)

Intergovernmental relations on fiscal issues 

“The Committee notes that it is abundantly clear that the existing institutional IGR framework is not fit for purpose. The increasingly complex nature of devolution and the degree of interdependency at both a bilateral and multilateral level requires substantial change to both the structure and culture of inter-governmental relations.” (para 172) 

Economic and fiscal data 

“…the SFC should identify specific areas where economic and fiscal data need updating and that these are addressed by the Scottish Government as a matter of priority.” (para 183) 

“…the Scottish Government provides regular updates on the progress of its discussions with HMRC on access to data including the level of access for the SFC and the data on VAT assignation.” (para 184)

Read the report

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