Scotland Bill

Lord Darling of Roulanish Excerpts

Monday 22nd February 2016 Lords Chamber

[Lord Darling of Roulanish (Lab)]

My Lords, in the earlier procedural debate we touched on many of the issues regarding whether we should consider the proposals of the fiscal commission. In some ways I am surprised that a number of your Lordships who have spoken tonight have talked almost favourably of the Barnett formula. There is something notable about the Barnett formula. One of the reasons that no one has ever touched it, from 1978 when it was first conceived until now, is that, despite its imperfections and despite the fact that many people in different parts of the UK might have said that it was unfair, it actually worked, because it was designed to pool and share resources across the United Kingdom. One of the major arguments that I and others made during the referendum campaign over the last few years is that one of the strengths of the United Kingdom is that you could make sure that when things turned against one part of the UK, because of its workings, in particular the Barnett formula, you could compensate for that. The Bill, which is soon to be an Act, will fundamentally change that because devolving to the Scottish Parliament the power to raise income tax will require a major adjustment to how Barnett has worked in the past.

One of the problems of reaching an agreement between the parties to change the constitution of our country over a four or five-day period is that it will inevitably result in unforeseen consequences as well as the foreseeable ones. One of the reasons that I want to see this fiscal framework as quickly as possible is that we are going into a completely new era. The Scottish Parliament will have more powers than most other devolved parliaments anywhere in the world. However, in many ways we are going into this new era with our eyes closed, because the debate that ought to be taking place about the consequences of what we are doing in Scotland as well as in other parts of the United Kingdom is simply not taking place. Part of the reason that it is not taking place is that the very framework on which all this will hang will not be published until possibly later this week, or possibly next week, when, as I said earlier, we will be in the equivalent of the 11th hour of the debate here.

I will touch on three areas covered by the amendments. One is income tax. I can see that in year one you can do a calculation that shows how much money will be raised by income tax in Scotland and therefore by how much the block grant is reduced. That is easy, give or take £1 million or £2 million. I pose the obvious question: what happens in five or 10 years’ time? How do you apply this no-detriment rule, or try to work out to whose credit it is or whose fault it is that the tax take was not quite what was expected, because Scotland collected either more or less? Any idea, such as that suggested in the White Paper published last year by the previous Government, that somehow you could do this mechanistically and it would not be subject to any politics or anything nasty like that is just for the birds. If we are not careful, what we produce will provide fodder for all those who want to feed off grievances and find grudges for years to come. As I said earlier, I struggle to see how that is going to be resolved.

The noble Lord who will reply for the Government will probably know the answer to this because presumably he has seen the fiscal document. The rest of us have not seen it. This is pretty fundamental. If you are going to say, as we have agreed, that the Scottish Parliament should have all the money that it raises by income tax and there is a consequence on the ground, what is that consequence?

I make one further point. I do not know the ins and outs of this argument about indexation for ageing. I have every sympathy with concerns about the fact that Scotland’s population is ageing faster. Being a supporter of the United Kingdom, I believe that we should pool and share resources. If the Scottish population is ageing more quickly than that of the rest of the UK, the whole point of the United Kingdom is that you can compensate for that. I hope the present Conservative Government are not taking the view that they will devolve and Scotland can live with the consequences.

If you had complete independence, which the noble and learned Lord, Lord Wallace, said would have happened in about three weeks’ time if we believed in the nationalist timetable, then we should be in a situation where Scotland was cut off from the rest of the UK and consequences would follow. However, we have not left the United Kingdom. That is why it is important that we continue to maintain the principle that we pool and share resources, but we should be clear as to the basis on which that is done.

This brings me to the point on borrowing on which the noble Lord, Lord Kerr, touched. I agree with him that we need to be clear about under what circumstances and in what amount the Scottish Parliament can borrow. There is a further point. Borrowing to invest is well understood. That is not problematic. The Scottish Government have the power to do that at the moment if they want to. It is borrowing to fund a shortfall in current expenditure that will cause a problem. There is nothing wrong with the Government borrowing when there is an economic downturn, as I know. The present Government know that as well, since they have had to do exactly the same thing. However, suppose the situation was that the Scottish Government had the power to borrow and, as now, there was a shock to the oil price system. If you believe the shock to be temporary—if it is only going last for a year—as the nationalists maintain when you ask them why oil is not, as they told us it would be in the White Paper, $113 a barrel but around $30 or $40 a barrel, it makes perfect economic sense to borrow to make up that shortfall. That is what you would do. However, if it is a structural change—and many people believe that it is a structural change that will go on for maybe five or 10 years—does borrowing then make sense? Under what conditions could the Scottish Government continue to borrow to cover that shortfall as opposed to making other more difficult decisions, such as putting up taxes or cutting spending?

This also begs the question that the noble Lord, Lord Kerr, raised, as to on whose account do you borrow? Are you borrowing on your own account? With the best will in the world, a new Scottish Government are bound to start with a lesser credit rating than the UK simply because they are a new kid on the block and have no track record. Again, being in favour of the United Kingdom I am quite happy that borrowing ought to be done on a UK basis, but if that is to be the case the consequences need to be spelled out. None of these things can be left in the hope that it will all work out okay on the night.

The White Paper published last year assumed that there was good will. You have to bear in mind here that the Scottish National Party exists to make Scotland independent. That is what it is for. That is what it is looking at all the time. Therefore, if you have something that is opaque, where there will inevitably be difficulties, you are simply storing up problems—I should like to say for the future, but no, it is not for the future; they will be there from day one.

Exactly the same points are being made on welfare. As I said during the referendum, I have never understood the argument that Scottish taxpayers, of whom I am one, would want to pay money to people to administer a benefit system, a lot of which is, ironically, being administered in Scotland for the rest of the United Kingdom and providing useful employment. Why do I want to pay more for someone to do that or, for that matter, to collect my taxes?

Leaving aside the collection cost, if you take the actual expenditure on mainstream benefits, a lot of benefits have been devolved to the Scottish Government and that is absolutely fine. However, again, it is unclear to me who in five or 10 years’ time would bear the cost if, for example, the policies north and south of the border were different. It is entirely acceptable that they should be different. We are bound to have, as we do now, Governments of different political complexions. However, if, for example, you have an ageing population, all other things being equal, your disability benefits will start to go up. Is that okay? Is that built into the settlement or will taxpayers in other parts of the United Kingdom have something to say about it? I am sure these problems are resolvable, although I note that Professor Bell of Stirling University said recently that no one else in the world has done this.

As an aside, my own preference, having got to the stage that we have, is that we should look at countries such as Canada—big countries that have a federal settlement in many senses but have provinces with different powers. One of the advantages is that when you pay your income tax you can see that some of your tax is going to pay for things such as health and education, but you pay tax to the federal Government for things such as pensions or defence and so on. It is then easier for other things to slot into place—borrowing to fund various activities and so on. We have not looked at that.

It is often said that the British are good at compromising, but what we have here is not devolution being done to any overall template—it is being done on the hoof. When you do things on the hoof, sooner or later you trip up. As I said earlier, this is not just a matter between one political party and another. If this fiscal framework had been published, others from outside could have looked at it and said, “There is a better way of doing this”, or, “Have you thought of the consequences of that?”. Instead, the public north and south of the border have been kept largely in the dark. That is simply going to cause considerable difficulties.

Other issues have been raised as well, such as bailouts and the question of no detriment, which we will need to come to. Equally, the White Paper published last year had examples of what would happen if the UK Government were to raise or decrease expenditure. What would the consequences be? Could you have a situation where more taxes are being paid in one part of the United Kingdom to fund expenditure somewhere else? Again, these are problems to which I have not yet seen the answers.

I heard people say in the earlier exchanges that having an EU referendum campaign lasting some four months was an awfully long time. Having lived through a referendum campaign that lasted some two and a half years, frankly, I would have killed for four months. I fully accept the right of the Scottish National Party to campaign for independence but what I bear in mind is that the majority of people in Scotland were clear that they wanted to stay as part of the United Kingdom. What worries me about this, and until I have seen the fiscal framework I cannot pass a final judgment on it, is that rather than resolving the matter and saying, “That is the settled will of the Scottish people”, we have put something in place here that will lead to opacity, confusion and eventually grievance. That is not a way to get a secure settlement. Perhaps the Minister will have words that reassure us on all these points. So far I have not heard them but I look forward with great interest to what he has to say.

[Lord McCluskey]

The noble Lord said that the Barnett formula works. I doubt that anyone would contradict that. It works, and does so from the point of view of the Treasury for the reasons given: it is simple and clear, and so on. First, does the noble Lord suggest that it works fairly throughout the United Kingdom? Secondly, because of the future governed by this Bill, does he support subsection (2) of the new clause that I propose in Amendment 79F? It calls for the Secretary of State to publish,

“a full description of any agreement whatsoever reached between the … Governments relating to the future of the Barnett Formula or its application, amendment or replacement in the future”.

We need to know not whether it worked in the past but whether it worked fairly and how it will work in the future. Does he support that amendment?

[Lord Darling of Roulanish]

In relation to the Barnett formula, I chose my words carefully. I said that it worked; I did not go on to say “terribly well” or “extremely well” or “without any complaint”. If you look at the north-west of England, there is a legitimate complaint there that Barnett treats it the same as it does the south-east of England, when their economies are clearly very different. I know that successive Chancellors looked at the Barnett formula. I looked at it in the halcyon period of the three weeks between taking office and discovering that Northern Rock was on the horizon, which presented me with rather more pressing problems that I had to deal with. But I can see why, it having been there for so long, no one has touched it. I am sure that others in this House will know that the late Joel Barnett often said that he never intended it to last. It was a fix but it worked. However, where I agree with the noble and learned Lord—I will confess to not having studied his proposed new subsection (2) in the detail I perhaps should have done—is that if we are having a new system, we really need to know how it works. What we do not want is what happened in the aftermath of the Smith commission, when everybody signed up to it and the next day it was denounced. That will not work. If we have something that does not work, let us find out now rather than coming to that awful realisation over several months and years to come.

[Lord Bruce of Bennachie (LD)]

I support Amendment 76 but I have sympathy with all these amendments. I think the noble Lord, Lord Darling, has just touched on the value of a federal system, which I suspect the UK will have to come up with if it is to find a stable solution. In the context of Canada, where I spent some time last summer, I was well aware that for years the Albertans complained that they were subsidising Quebec. But right now the Albertans are grateful to have the support of Ontario, as the oil price has collapsed. That is the benefit of being part of a union with the ability to move fiscal transfers around, as the shocks hit different parts of the economy. I suspect that the majority of people in Scotland voted to stay in the United Kingdom because their heads told them that was the reality.

Apart from simple practice, the other issue with the Barnett formula is that, as the noble Lord, Lord Forsyth, said, as a formula it has narrowed the gap between Scotland and the rest of the UK. That is why while it was 25% when he was Secretary of State, it is now 20%. When people talk about the Barnett formula, they are not really talking about that but about the historical difference in spending in Scotland, which predates the formula and has arrived for a variety of reasons. Again, the noble Lord, Lord Forsyth, mentioned the difference in per capita spending but I am sure he would recognise that the whole point of a needs-based formula, if that is what we move to, is that it is not based simply on per capita spending but on needs. We should reflect on the fact that Scotland has 40% of the land area of Great Britain and less than 10% of the population so, for example, the unit costs of delivering services such as small schools to remote islands and highlands are inevitably higher. Any formula must at least acknowledge that.

--- Later in debate ---

[Lord Dunlop]

I think we are reflecting at the outset that Scotland produces a lower proportion of total UK income tax. We are applying that comparability factor from the outset. The Scottish Government will still bear population risk. If there is deviation from that initial situation—whether it is a result of their policy choices—that is how they would bear the population risk.

[Lord Darling of Roulanish]

Can the Minister explain another point he raised? I am puzzled how it will ever be possible within a reasonable timescale to properly assess whether a measure taken by either the UK Government or the Scottish Government resulted in higher growth and therefore a higher tax rate or the other way round. The Minister must know that most of these matters are in dispute, sometimes for years, because no one can be really sure why a tax take went up or down. There can be a hunch or a feeling, but these things are contested maybe even decades after they happen. Given that this is a settlement that has to fix the grant every year, I am just wondering how you do it.

[Lord Dunlop]

As I said, the agreement will set out the mechanism by which these matters are determined, so in that sense we will have reached agreement. That will avoid the perpetual wrangling. If you like, that is one of the complexities that we have been wrestling with and why it is taking time—

[Lord Darling of Roulanish]

I have one more observation. I am just wondering how, in the case of the SNP, perpetual wrangling can be written out of the script.

[Lord Dunlop]

A good start is if we actually get an agreement that, I hope, we can announce in the not too distant future.