Scotland Bill

Lord Hollick Excerpts

Monday 29th February 2016 Lords Chamber

[Lord Hollick (Lab)]

My Lords, we have arrived at a rather unsatisfactory situation. We were given the fiscal framework at the end of last week. We have seen no worked examples and have had no opportunities to scrutinise the framework in any detail. The Economic Affairs Committee spent some months evaluating all the aspects of the fiscal framework and, in particular, the various methods that could be used to adjust the block grant. None of them was perfect. Indeed, it was extremely difficult and we concluded that to meet both the requirement for fairness with reconciling the Barnett formula and the various elements of the fiscal framework, somebody would lose out.

The provisional conclusion is that the rest of the United Kingdom will lose out. Our specialist adviser, Professor Bell, spent the weekend trying to unpick and understand the fiscal framework. He concluded, based on the fact that although the Government agreed that the comparable method to calculate the annual block grant should be used, that will in fact not be used. Instead, as we have heard from a number of speakers, the per capita method, which ties the reduction in Scotland’s block grant to the rate of growth of per capita tax revenues in the rest of the UK will be used, but it will be adjusted for the rate of population growth in Scotland.

What does that all mean? It means that, either way, Scotland wins. That seems to me to undercut the whole principle of further devolution whereby you have taxes and take responsibility for how they are spent and how the economy grows. Scotland is essentially having its cake and eating it. As far as the impact of choosing not one but two different methods, which can sometimes contradict one another, to settle the block grant, we have a position of great confusion. That position of confusion will apparently last for five years. Our specialist adviser, Professor Bell, calculates that assuming that tax revenue per capita grows at 4% per annum in both Scotland and the rest of the UK over this five-year period, the Scottish block grant will be £280 million per annum larger by 2021, due to the application of the per capita rather than the comparable method. Further, the comparable method will cost the rest of the UK taxpayers £350 million more in 2020-21 than the levels deduction, which is another method of calculating this, would.

In other words, more than £600 million appears to have moved across the table from the rest of the UK to Scotland, so this is a triumph of negotiation by Scotland and congratulations to them. However, the political consequences are grave for those parts of the UK which, under the Barnett formula, already receive less than they would certainly be entitled to on a needs basis. This creates, quite naturally, for the north-east, south-west, East Anglia, and other parts of the UK a very unsatisfactory position and a very strong case for a complete review of how funding is allocated, particularly in England, which we are seeing is now going for much greater devolution.

The devolution train has left the station for Scotland and is leaving the station for other parts of the UK, but the funding formula to cope with that is frankly broken. It needs to be looked at. Naturally, as I think I inferred from the comments of the noble Lord, Lord Empey, other nations will look carefully at the settlement to see whether there is something in it for them.

It is a mess. I will leave it to the noble Lord, Lord Dunlop, to decide how we will get out of it, but frankly I believe that the tactics that have been used by the SNP to force this—I can understand the politics and the desire to have this all settled before the elections—have left us in a very unsatisfactory position.

Just one more thing: earlier speeches referred to paragraph 17 of the framework agreement, which says that,

“the block grant adjustment for tax should be effected by using the Comparable Model (Scotland’s share), whilst achieving the outcome delivered by the Indexed Per Capita”.

I interpret this as being an annual discussion of what the arrangements are. We are kidding ourselves slightly if we think that this will go on for five years and we are in a stable state. This will have to be reviewed each year, year in, year out. Passing a fundamentally important piece of constitutional legislation in the absence of proper scrutiny and debate in both Houses makes this a very black day.

Scotland Bill

Lord Hollick Excerpts

Monday 22nd February 2016 Lords Chamber

[Lord Stephen]

If that is the case, we must flush the SNP out on this, and we must be transparent and open about the progress that has been made and what is being offered by the UK Government in terms of the fiscal framework. The UK Government must be prepared to defend their position as fair and reasonable.

Whatever the result today, I believe that the arguments for greater openness and transparency on the fiscal framework will apply with even greater force when we reach Report. That will be the critical stage for the future success of the Bill.

[Lord Hollick (Lab)]

My Lords, the Economic Affairs Committee, which I chair, and the Constitution Committee both concluded after extensive inquiry that, in the absence of any information about the fiscal framework, it will be impossible for the House to assess whether the Bill will cause detriment to all or part of the United Kingdom. As the noble Lord, Lord Forsyth, pointed out, we are talking about billions of pounds which could move between the rest of the United Kingdom and Scotland, so this is no small matter.

I think the Government have accepted the logic of that position, which is why we are taking Parts 2 and 3 out of order in today’s Committee. In his opening remarks, the Minister said that there will be ample opportunity on Report to scrutinise the fiscal framework. If, as he has hinted and as newspapers have reported, the fiscal framework is to be published in the next few days, would he agree that ample scrutiny can take place only if the procedural rules of Committee stage are applied to Report stage? Will the Minister confirm that he and his noble friend the Chief Whip will press for that?

Scotland Bill

Lord Hollick Excerpts

Tuesday 24th November 2015 Lords Chamber

Moved by

[Lord Hollick]

As an amendment to the Motion that the Bill be now read a second time, at end to insert “but that this House calls upon Her Majesty’s Government not to schedule Parts 2 and 3 of the Bill in Committee until the updated fiscal framework proposed in Scotland in the United Kingdom: An Enduring Settlement (Cm 8990) has been published”.

[Lord Hollick (Lab)]

My Lords, the Economic Affairs Committee, which I chair, has over the past four months conducted an inquiry into the devolution of public finances to Scotland. We heard evidence in London and Edinburgh from academics, economists, politicians and business leaders, and we met the Scottish Parliament’s Finance Committee. Based upon the evidence that we heard, we unanimously concluded that the financial measures in the Bill could be understood and scrutinised only once the fiscal framework was available. The amendment in my name seeks to ensure that the framework is available to Parliament in time to allow a full and informed consideration of the Bill. As the Minister mentioned, the Governments in Westminster and Holyrood declined to appear before us, citing the need to maintain confidentiality until agreement had been reached. Therefore, the terms of the fiscal framework remain shrouded in mystery.

The Scotland Bill is based on the recommendations of the Smith commission, the aspiration of which was,

“to bring about a durable but responsive democratic constitutional settlement, which maintains Scotland’s place in the UK and enhances mutual cooperation and partnership working”.

There are three aspects to the Smith commission recommendations on financial matters: the tax powers, the welfare powers and the fiscal framework. The latter is the mechanism to make the first two work. The Bill contains the tax provisions and the welfare provisions. It does not contain, nor is it accompanied by, the fiscal framework. This lacuna prompted the former Chancellor, the right honourable Alistair Darling, to tell us that the process was a “rotten” one, and that,

“nobody has a clue what is going on”.

So what is the fiscal framework, apart from elusive? On 14 October 2015, the Secretary of State for Scotland told the Scottish Affairs Committee:

“The fiscal framework is a vital element of the package that will make Holyrood one of the most powerful devolved parliaments in the world”.

In Scotland, the Deputy First Minister has said the framework is,

“an integral part of the devolution of further responsibilities”.

The Smith commission stated that the framework would contain,

“the funding of the Scottish budget, planning, management and scrutiny of public revenues and spending, the manner in which the block grant is adjusted to accommodate further devolution, the operation of borrowing powers and cash reserve, fiscal rules, and independent fiscal institutions”.

The fiscal rules will provide the operating system for Scotland’s devolved financial powers under the Bill. For example, Scotland will need to be able to borrow more to manage the potentially increased income volatility arising from its reliance on devolved tax income, which, unlike the block grant, may fluctuate. Without the fiscal framework we do not know how much it can borrow, the limits to that borrowing or what would happen if the borrowings cannot be repaid. Scotland’s block grant will need to be adjusted annually to take into account the devolved taxes. How this is done may operate to Scotland’s detriment over time. The mechanism to make the annual adjustment will be a crucial part of the fiscal framework.

On 14 October, the noble Lord, Lord Dunlop, told the Scottish Affairs Committee he was confident that agreement on the fiscal framework would be reached this autumn. More recent reports suggest that the target date for publication is now mid-January, which would of course be in time for consideration in Committee. Our report identified seven crucial problems with the Bill, the first of which is the absence of the fiscal framework. The majority of the other problems also arise from its absence. Let me describe four of the problems.

How will devolution affect Scotland’s funding? Scotland is funded through the block grant as adjusted each year by the Barnett formula. The formula has been used since 1978 and produces disparity in spending per head between regions of the UK. The latest Treasury figures, published last week, show that taking the UK’s identifiable spending as 100%, England is 97%, or 3% below the average; Scotland is 116%; Wales is 111%; and Northern Ireland is 125%. It is generally assumed that the disparities reflect the differing needs of the four countries. That may well be the case but, at present, this assumption is not based on any logical underlying assessment. Six years ago, the Select Committee on the Barnett Formula recommended that the assessment of funding should be based on need and introduced over a 10-year period. We endorse its conclusion and urge the Government to consider this option. It will produce a fairer, more transparent and, crucially, more sustainable outcome for the whole of the UK.

One of the most important and complex issues is how to determine the amount by which the block grant paid to Scotland would be adjusted each year to take account of devolved powers. In the first year, the block grant is set by subtracting the revenues foregone by the UK Government from the total block grant. This fulfils the first no-detriment principle enunciated by the Smith commission. In following years, it must be indexed to reflect the tax forgone by the UK Government. The choice of a method of indexation may seem technical, but it is of vital importance to Scotland and the rest of the UK. If it is not transparent and judged to be fair, it will become a source of annual grievance—and the figures involved are substantial.

As we have heard, Scotland will be taking responsibility for £11 billion of income tax revenue, which is 30% of Scotland’s total block grant of £37 billion. We looked at three indexation options: a fixed percentage, indexed deduction to changes in the rest of UK revenues, and indexed deduction to changes in the rest of UK revenues per head. In each case, even if Scotland matched UK economic performance and grew its tax base by the same rate as the UK, the amount deducted from the block grant would be bigger than the revenues collected from tax. Within three or four years, the Scottish budget could be hundreds of millions of pounds lower as a result. Over 20 years, we calculate that it would reduce in real terms by between 34% and 27%. This is unlikely to be a recipe for harmony between nations.

Deciding who bears the risk is another thorny subject. Devolution gives the devolved entity the powers to take responsibility for its overall economic performance. If successful, Scotland expects to benefit from that success. But what if it is less successful or its economy suffers from a UK-wide shock, such as the banking crisis? To what extent should it be protected in such adverse circumstances? Well, that will depend on the fiscal framework.

Another principle governing the financial relationship between Scotland and the UK is the Smith commission’s second no-detriment principle, which states that there should be no detriment to the UK or the Scottish Government as a result of policy decisions made after devolution. But how will this work in practice? Professor Kay asked what would happen if you reduced health expenditure in England and made people pay for certain procedures, with the result that ill people would be more inclined to go to Scotland and healthy people more inclined to go to England. Does anybody really imagine that compensation will be paid between the two jurisdictions to reflect that? Furthermore, if the Scottish Government lowered air passenger duty, would they have to compensate Newcastle Airport for any loss of revenue caused by passengers moving their custom to Scottish airports? How would the compensation be decided? Would there be an annual negotiation between the Scottish Government and HM Treasury? If one side is dissatisfied, who would decide? That is yet another opportunity for an annual row. Our witnesses concluded that the second no-detriment principle was simply unworkable and should be abandoned.

The Scotland Act 2012 granted Scotland increased borrowing powers and the power to borrow on the market. Witnesses agreed that the current powers were insufficient to cover the additional devolution in the Bill. Any changes to Scotland’s borrowing will be part of the fiscal framework and require legislation. Linked to expanded borrowing is the question of what will happen if Scotland is unable to meet its debt obligations. Is a “no bailout” rule really feasible? We have seen what happened to that rule in the eurozone, while during the financial crisis the UK Government bailed out the largest Scottish bank. The evidence that we heard was clear: a “no bailout” rule would simply not be believed by the markets. It is therefore essential that there are clear and consistent rules in the fiscal framework specifying the amounts that can be borrowed.

Much hangs on the terms and principles of the fiscal framework. It deserves very close scrutiny. Yesterday, the Constitution Committee said:

“In the absence of any information about the fiscal framework, it will be impossible for the House to assess whether or not the Bill will cause detriment to all or part of the United Kingdom”.

Holyrood has made it clear that it will not give legislative consent to the Bill until it is satisfied by the fiscal frame- work and until MSPs have the opportunity to consider the fiscal framework in detail. However, the House of Commons completed all stages of the Bill without sight of the framework. The Government’s haste to legislate risks adding insult to injury. Not only is this major constitutional change being made on the hoof; it is being made in the dark. This is currently, in the words of Alistair Darling, a “rotten” process but does not have to be so.

In the overview accompanying his letter to Peers dated 11 November, the noble Lord, Lord Dunlop, stated that the Government aimed,

“to give respective Parliaments time for due consideration of both the Fiscal Framework and the Scotland Bill”.

He has today confirmed that this remains the Government’s firm intention. This is welcome, but meaningful only if the fiscal framework is available while the Bill is scrutinised in Committee. By moving Parts 2 and 3 to the end of Committee stage, the Minister no doubt hopes to ensure that the framework will be published before the final Committee day, but if it is not he must assure the House that he will defer the final Committee day until it is published. If he cannot give that assurance today, will he explain how the Government will make good on the promise given in the overview, repeated today, to allow Parliament time for due consideration of the financial framework if its publication is further delayed? This is a settlement that must endure. Undue haste will make for a bad outcome. I beg to move.

--- Later in debate ---

[Lord Dunlop]

As has been clear from everything I have been saying, we want to get a fiscal framework agreed so that this House and the House of Commons can look at that agreement. This is what we are working to achieve.

The Smith commission secured the cross-party agreement of all five of Scotland’s political parties. The parties subsequently included manifesto commitments to deliver it and supported the introduction of the Scotland Bill. While there are those in the other place who do not consider the Scotland Bill goes far enough, there is support for it and for further powers for the Scottish Parliament. As the noble Baroness, Lady Liddell, pointed out, the nationalists like nothing better than to talk about process. We want political debate in Scotland to move on to a debate about policy and how the powers in this Bill that rebalance the devolution settlement by reintroducing real fiscal responsibility to the Scottish Parliament will be used. The Government look forward to engaging with this in full and I commend this Bill to the House.

[Lord Hollick]

My Lords, I thank all noble Lords for their contributions to this debate. In particular, there have been two outstanding maiden speeches from the noble Lord, Lord Campbell of Pittenweem, and from the noble Baroness, Lady McIntosh of Pickering. As one of the few English speakers in the debate, it was a privilege for me to hear our Scottish brothers and sisters—all part of the union, I am pleased to say—making such fine speeches, analysing the issues very well and intervening in a pugnacious way—all laced with good humour. It has been a privilege to be part of it.

I think the Minister has struggled to answer the question which has been put to him on a number of occasions. He has heard everybody in the House say that the fiscal framework is necessary for the proper scrutiny of the Bill. I think he accepts this. If the fiscal framework is delayed—and it has been delayed so far—what steps will the Government take to ensure that both Houses of Parliament will have the opportunity to scrutinise the Bill in the light of the fiscal framework?

My noble friend Lord Reid has come up with an interesting proposal. The noble Lord, Lord Forsyth, has intervened on a number of occasions. The question still hangs in the air and it is one that we will continue to follow closely. If the fiscal framework is not available and the Government seek to pass this legislation, this House will need to look at it very carefully, because I do not think it is the wish of this House. It may well be, on that occasion, that the House will need to divide and give its decision. On this occasion I do not think that is necessary. I beg leave to withdraw the amendment.

Amendment withdrawn.