Scotland Bill

Debate between Lord Kerr of Kinlochard and Lord Dunlop

Monday 22nd February 2016 Lords Chamber

[Lord Dunlop]

No; we will not see disputes, because that is the process we are involved in at the moment, which is to reach an agreement on how all these aspects operate. That is what we are doing. When I say that I am optimistic that we will reach an agreement, that is on the basis of the discussions we have had so far and the issues that remain outstanding.

I will move on to the second leg of the second no-detriment principle, which is to do with taxpayer fairness. Changes in devolved Scottish taxes—for example, income tax—should affect public spending only in Scotland, and vice versa for equivalent taxes in the rest of the UK. What does that mean in practice? It means that taxpayers in Newcastle and Liverpool will not fund even higher levels of public services in Scotland not available to them. The noble and learned Lord, Lord McCluskey, touched on some of these issues in his recent Herald article, which has already been referred to. The other aspect is that Scotland does not inadvertently gain a double benefit, via Barnett consequentials and a fixed proportion of any growth in tax revenues from the rest of the UK.

In conclusion, therefore, in this part of what I intend to say, some block grant adjustment mechanisms work better against different principles, and the UK Government’s approach is to find a mechanism that performs well against all of them. Each principle is not perfectly met in every respect, which is what we are trying to deal with in the negotiations that are going on at the moment.

[Lord Kerr of Kinlochard]

Has the Minister looked at that bit of the Economic Affairs Committee report, where the committee comes to the view that it is easy to understand the first no-detriment principle at the outset—the ab initio principle—but that the attempt to legislate for or to operate a no-detriment principle down the years is a will-o’-the-wisp: it cannot work? If this is what is holding up the fiscal framework, call it off—it will not work. You cannot distinguish over time whether the tax take went down because of the tax measure, a change in the Scottish economy or in the world economy, or in the oil price, so you have a recipe for a continued debate, with the argument going round every time if you are trying to say that there must be no detriment down the years. Abandon it—it will not work. The Smith commission did not say how it would work, and I do not for a moment believe that it thought it would work. It is a lovely principle to get people to agree and then they can go home, but we are doing something different now.

[Lord Dunlop]

We very much recognise what that report says, which is that if you interpret the no-detriment principle as applying absolutely literally to all effects, whether behavioural or indirect, it is very difficult to arrive at a single solution. However, these are the issues that are being addressed in the negotiations, and when the framework agreement is published the noble Lord will see how the two Governments have addressed those issues.

On the block grant indexation mechanism, Smith says that,

“future growth in the reduction to the block grant should be indexed appropriately”.

There has been much talk about the need to avoid endless wrangling. We are therefore trying to make this process as mechanical as possible. The issue is how much of the growth in relevant taxes in the rest of the UK will benefit Scotland post-devolution.

With new powers come new responsibilities, and, as has already been mentioned this evening, the debate is around appropriate allocation of responsibilities between the UK and Scottish Governments and what is a fair division. The UK Government continue to manage UK-wide risks and the Scottish Government manage marginal Scotland-specific risks. To give an example, if there is a UK-wide recession, there will be a smaller block grant deduction to shield Scotland from UK-wide impacts because the growth in UK taxes will be lower. We have achieved agreement before with the Scottish Government for the Scottish rate of income tax, which is indexed against movements in corresponding UK Government tax.

The key issue, which has been raised in the debate by the noble Lord, Lord McFall, and other noble Lords, is how population change is managed. The UK Government will continue to manage the impact of UK-wide population change in all devolved areas. We are looking for the Scottish Government to manage marginal Scotland-specific changes. The Scottish Government already manage these changes within Barnett, and John Swinney, when he appeared before the Scottish Parliament Finance Committee last summer, accepted this.

The UK Government’s proposal, which is contained in the Chief Secretary’s letter, addresses this population concern and we are prepared to share the risk. The model we have tabled recognises that Scotland’s share of income tax revenue is less than its population share and it ensures that, like Barnett, the tax adjustment takes account of changes in Scotland’s population. So if Scotland’s population share falls then so will the tax deduction.

However, let me be clear: we cannot agree something where the Scottish Government are not accepting their fair share of population risk. Why? If it is right that Scotland retains all the growth in its own tax revenues, then it is difficult to explain as fair that a fixed proportion of growth in the rest of the UK’s own devolved tax revenues is added to the Scottish budget irrespective of how good or bad are the policy choices of the Scottish Government and the relative performance of the Scottish economy as a result.

--- Later in debate ---

[Lord Dunlop]

As I said, it depends on the timing of an agreement. Obviously it would be preferable, if possible, to provide amendments for this Bill, but that depends on our reaching an agreement and the timing of that agreement.

[Lord Kerr of Kinlochard]

The noble Lord said that this is not the most controversial element. In fact, he implied that it was not controversial at all. In that case, do we have to wait for all the difficult bits of the fiscal framework to be agreed before we see the easy bits coming out if there are outcomes there? My noble friend Lord Turnbull is right that this Bill would be better if there were a provision in it on borrowing. I do not know whether my language is correct but this is different from the 1998 Act. We are explicitly laying down the mechanism for settling these limits because it is a reasonable assumption that there will be much more borrowing. I think it is desirable to amend the 1998 Act and, if we are going to do that, why not do it in this Bill?

[Lord Dunlop]

The difficulty is that you cannot separate out one element of what is an overall package. Both Governments have agreed that nothing is agreed until everything is agreed. Therefore, I do not think it is possible to pluck out just one aspect and to move ahead with it on a different timescale.