Scotland Bill

Debate between Earl of Kinnoull and Lord Kerr of Kinlochard

Monday 29th February 2016 Lords Chamber

[The Earl of Kinnoull (CB)]

My Lords, I want to come in on a similar theme and echo the earlier words of the noble and learned Lord, Lord Hope of Craighead. At roughly one o’clock last Monday my email system received a helpful letter from the noble Lord, Lord Dunlop. I thank both Ministers, who have been unfailingly courteous and very helpful in these extraordinary circumstances. That was said earlier and I wish to say it as well. The letter I received at one o’clock on 22 February was extremely complimentary about the negotiating position of the Government. It enclosed a letter to Pete Wishart. Paragraph 3 of that letter said:

“The UK government agrees with the Committee that the Indexed Per Capita … model would ‘breach the second no detriment principle, that of taxpayer fairness’. This model would see Scotland benefitting from an ever-increasing share of income tax from the rest of UK, irrespective of the Scottish Government’s policy decisions or relative economic performance”.

That is clear.

The following day—less than 24 hours later—we were told that the fiscal framework had been agreed. Paragraph 17 of that states:

“For a transitional period covering the next Scottish Parliament, the Governments have agreed that the block grant adjustment for tax should be effected by using the Comparable Model (Scotland’s share)”—

that sounds okay—

“whilst achieving the outcome delivered by the Indexed Per Capita … method for tax and welfare. This will ensure that the Scottish Government’s overall level of funding will be unaffected if Scotland’s population grows differently from the rest of the UK”.

I know this point has already been put to the Minister but I put it forcefully again and ask whether those two paragraphs can be reconciled clearly for the House so that we can understand what happened. I suspect that, quite simply, the white flag was run up to conclude negotiations for political expediency.

I now turn to the review clause and to the point made by the noble and learned Lord, Lord Hope. Paragraph 23 states:

“The two governments will jointly agree the method as part of the review. The method adopted will deliver results consistent with the Smith commission’s recommendations, including the principles of no detriment, taxpayer fairness and economic responsibility”.

That means essentially that all one has managed to do is to kick the hand grenade six years down the line. It will blow up and there will be a terrible constitutional crisis in Britain. I agree with the noble Lord, Lord Campbell of Pittenweem, and other noble Lords that we need to head this off at the pass. I urge the Minister and the Government to do something about this issue before the Bill goes on to the statute book.

[Lord Kerr of Kinlochard (CB)]

My Lords, I, too, am very concerned about the review provisions. The noble Lord, Lord MacGregor, was absolutely right in what he said about the Barnett formula and I agree with every word. Of course it should be needs based. However, I fear that that pass is sold. It was sold in the vow; it was sold before Smith even started. It is a great mistake and very damaging but we are where we are.

I am struck by the same point that the noble Earl addressed on paragraph 17. We are saying there that in the fiscal framework talks both parties have agreed that the right block grant annual indexation mechanism should be the comparable model, but they have agreed that it will not be used up to 2021; the wrong one will be used. Then comes the review, with no terms of reference set out, and the decision-making machinery in the review is that both Governments have to agree. As the French say, rien ne dure plus que le provisoire—nothing lasts longer than the temporary. I am afraid that the can is being kicked down the road not only until 2021 but as far as the eye can see. That is a serious mistake.

I agree with the noble and learned Lord, Lord Hope, on the dispute settlement mechanism, which, on the face of it, simply does not make sense—ending up with, “if they do not agree there will be no fiscal transfer”. What is that? Is it a nuclear weapon in the hands of the Government so that the whole thing stops? Is it a plausible nuclear weapon? Is it a credible deterrent? I do not think so.

However, we are where we are. I greatly sympathise with the noble Lord, Lord Dunlop, who handles these matters very well, but what are we expecting him to do? Are we expecting him to tell us tonight, “Okay, we will change the fiscal framework because the House of Lords does not like it”? I do not think he can quite do that, though his skills are legendary. However, the noble Lord, Lord Forsyth, may have the answer in Amendment 68—not the amendment to which the noble Lord, Lord Higgins, drew attention—which suggests that it would be a good idea that both Houses of Parliament should have a chance to have a serious discussion about the fiscal framework.

As a Scotsman, I admit that I am torn. When Mr Hogg passed the ball successfully in the last minute against the Italians and the Scots finally won a game, I was very pleased. It looks as if Mr Swinney is the Hogg of this particular match. There are consequences for the United Kingdom, for Northern Ireland, for Wales and for the north of England, so the UK Parliament should address the fiscal framework before the Scotland Bill goes on to the statute book. If the noble Lord, Lord Forsyth, were to press Amendment 68, I would be inclined to go with it.

--- Later in debate ---

[Lord Kerr of Kinlochard]

I welcome Amendment 56K, which covers borrowing, on which I have tabled Amendment 57. I think that Amendment 56K is a great deal better than my amendment and I congratulate the Government on producing it. For me, it was important that we had on the statute book a clear indication that there would be additional borrowing powers—that seems to be a necessary concomitant of tax devolution—that all borrowing would be in accordance with Treasury rules and that it would be subject to ceilings. All three elements are well met in the Government’s amendment.

It seems clear that the UK will be standing behind borrowing in the markets by the Scottish Government—that is, borrowing in line with the statutory requirements of being within the limits and in accordance with the Treasury rules. That has to be clear, otherwise borrowing in the markets will be more expensive for the Scottish Government and therefore for all of us, since it will be part of the UK borrowing programme. I would be grateful if the noble Lord could confirm that my reading of that is correct.

The borrowing section of the fiscal framework document all seems to make sense and the increased limits seem appropriate, except possibly the biggest single increase. There are two elements that cause me a little bit of concern and I would be grateful for the Minister’s views. One is the annual limit of £600 million for borrowing in response to a Scotland-specific economic shock. Paragraph 66 of the framework document says:

“A Scotland-specific economic shock is triggered when onshore Scottish GDP”—

I think that it means GDP growth—

“is below 1% in absolute terms on a rolling 4 quarter basis, and 1 percentage point below UK GDP growth over the same period”.

I pause on the word “onshore”. I am not quite clear when the added value of the North Sea comes into GDP. Is it when it comes onshore? Can the noble Lord elucidate? Would an oil price shock, such as the one that we have just seen, be regarded as a Scotland-specific shock? If not, I see a possibility of debate and dissent down the line.

Secondly, the document tells us that when a Scotland-specific shock is triggered, it may be triggered from outturn data or from forecasts. It says:

“In the event that forecast data shows an economic shock but outturn data does not, no retrospective revisions will be applied to borrowing powers”.

I agree with that sentence.

I slightly worry about this. It is odd to define a Scotland-specific shock by its effect on GDP rather than by its own characteristics. If you do that, given that GDP is always subject to revision for a number of years—a point made by the noble Lord, Lord Darling, in our Committee stage debate on borrowing—it seems that, again, you have the possibility of some debate. That is dealt with in a way by using a rolling four-quarter basis for calculating whether Scottish GDP is growing at less than 1% in absolute terms and 1% below UK GDP. Even so, is the Minister quite sure that the best way of defining a Scotland-specific shock is by its subsequent observed effect on GDP rather than by some intrinsic characteristic?

[The Earl of Kinnoull]

My Lords, I rise to speak to Amendment 57ZA, which is purely a probing amendment that would have appeared in Committee if we had had the fiscal framework. It is designed to allow a bit more discussion about one or two issues.

The borrowing framework within the fiscal framework will of course be precedential and will be a template, no doubt, for other deals with other devolved bits of the United Kingdom. I put it to the Minister that there are great prizes here to be had for clarity and for going into quite exhaustive detail in what can be a difficult area. I should say that before I drafted my wording, which is purely indicative, I had of course not read Amendments 56K and 56L. I echo the words of the noble Lord, Lord Kerr, in that regard. I had to read the fiscal framework on a mobile phone, which is not ideal, at Bristol airport.

I want to discuss two points, the first of which is, can we go into a bit more detail, and where is the extra detail contained? Is it in a memorandum of understanding; has it yet to be decided upon? Such details cannot be simply brushed aside; otherwise, you simply store up arguments and problems for later on.

One issue that occurs to me is how you tot up the level of outstandings. In the capital markets, it is quite normal that the issue price of something is quite different from the principal amount. For a zero-coupon bond, it will be a heck of a lot less. What would one record in those circumstances against the limits, and where is that recorded? I have referred to the multicurrency issue. There is some help on multicurrency review— I did not pick that up on my mobile phone in Bristol airport—but it would be helpful to understand what the deal is on multicurrencies.

I have to say that I found some things a bit confusing. This issue is not dealt with in my amendment, but I refer the Minister to paragraph 68 of the document, which states, rather teasingly:

“The Governments agreed that the Scottish Government should have the option of refinancing, on the same terms, any debt due to be repaid in a year of a Scotland-specific economic shock”.

It seems to me that refinancing should be on similar terms, having regard to whatever interest rates are. I would love to have some help there, because almost certainly, the terms would not be the same when it comes to refinancing.

Also, paragraph 70 states:

“On request from the Scottish Government, the resource borrowing limits may be temporarily increased”.

There is no real help on the quantum of such an increase, on what “temporarily” means, or on whether the UK Government have a veto over that. It would be very helpful if the Minister commented on those issues.

The big issue, for me, is whether or not the UK is guaranteeing Scottish debt. With a 300-plus year record of repaying every one of its obligations in full and on time, the UK, as a united kingdom, has a unique opportunity to access capital markets at very favourable rates. I do not think that that would apply to an independent Scotland—certainly not in the early years. I would have thought it would be very helpful to Scotland if there was an express guarantee of some sort from the UK; I expressed it in the American format of “full faith and credit”. That would help Scotland. It is a free gift of the UK, given that the rating agencies will count Scottish debt straight into their view of how much indebtedness we have. I would very much like to hear from the Minister on that issue.