Scotland Bill

Lord Kerr of Kinlochard Excerpts

Monday 22nd February 2016 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

I rise to speak to Amendment 75A. I was in meetings in Glasgow this morning and came in during the earlier debate on the amendment to the Motion in the name of the noble Lord, Lord Forsyth of Drumlean. I heard his rousing peroration; I agreed with it. Had I been in the Chamber in time, I would have wished to speak in support of it. I agree with his “sunrise” Amendment 79H, which I guess he will speak to in a moment.

Mine is a much more mundane matter. My amendment concerns borrowing limits. I find that one of the difficulties of handling the Bill in the absence of the fiscal framework is not so much dealing with what is in the Bill as understanding why things are not in it. I do not know why no provision or regime for borrowing is set out. That is why my amendment proposes the principles for such a regime. It is a key element of the Smith commission report that there should be enhanced borrowing powers for the Scottish Government, and I agree with that. The core of Smith is paragraph 95, where the fiscal framework is discussed. The most crucial element for me, apart from indexation, is the borrowing limits—how is borrowing to be done?

We discussed this in the Economic Affairs Committee, and the report of the noble Lord, Lord Hollick, brings out that the committee did not believe that anybody would believe a no bail-outs rule. The committee firmly believes that it is necessary to be seen to stand behind Scottish borrowing. Scottish borrowing will be cheaper. It is clear to all that the United Kingdom Government stand behind it. The clearest way of spelling that out is to have a provision on borrowing in the Bill. I do not argue that we should set out specific limits in the Bill—that, clearly, is a matter for subordinate legislation, as my amendment suggests. However, it seems clear that we must set out the two categories of borrowing in the Bill, that they will be subject to ceilings, and that these will be negotiated and agreed in consultation with the Scottish Government but will be set by Her Majesty’s Treasury. That seems practical and commonsensical. It makes for cheaper borrowing for Scotland, which is, of course, also cheaper for the United Kingdom, since the United Kingdom will stand behind the borrowing.

If the borrowing is properly conducted, it will be as part of the United Kingdom’s programme. It will get slots in the programme if the United Kingdom wishes to issue bonds. I have no idea how big the increases needed are and what the current limits on Scotland’s borrowing powers are, and the Smith commission does not help a great deal on that. It states that,

“to reflect the additional economic risks, including volatility of tax revenues, that the Scottish Government will have to manage when further financial responsibilities are devolved”—

I agree with that—

“Scotland’s fiscal framework should provide sufficient, additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending in the event of economic shocks, consistent with a sustainable overall UK fiscal framework”.

That is clearly true, but it does not help to define what “sufficient” means. I do not know whether this is a matter of controversy in the current fiscal framework talks, but I think we should be told. Is it agreed that there should be ceilings on Scottish borrowing? Is it agreed that that level should be set by the United Kingdom Government in consultation with the Scots? Has that level been set; that is, has it been agreed?

This is talking about current borrowing, but I must say that I think there will be the need for a considerable increase. My view is that “sufficient” is going to be quite a lot more than the Scots now have, although it is inconceivable that it would be sufficient to deal with ensuring “budgetary stability” and providing,

“safeguards to smooth Scottish public spending in the event of economic shocks”.

Let us remember that the oil price on Scottish referendum day was $115 a barrel. That is quite an economic shock, and borrowing in the markets is not a credible way of dealing with it. However, there is a common-sense case for a large increase because of the seasonality of tax income and the need to smooth over the year. That element is clear, but there could be controversy about what the level is, in which case I think we should be told because transparency does matter.

The second kind of borrowing, also covered in my amendment, is borrowing to support capital investment consistent with the sustainable overall UK fiscal framework. I agree that that makes sense. There will be public investment which should be financed by the markets, but I do not know whether that is controversial for Her Majesty’s Treasury. I do not know whether the UK Government buy that bit of Smith, or whether there has been a discussion about how much. I do not know whether this is one of the reasons for the hold-up on the fiscal framework, and I think we should be told.

[Lord Forsyth of Drumlean (Con)]

I wonder whether the noble Lord could help me. When he talks about setting a limit on borrowing, are we starting with a new baseline or is it assumed that the existing level of debt has part of it somehow imputed to the Scottish Government, so that we then start from that baseline?

[Lord Kerr of Kinlochard]

I have not the faintest idea.

[Lord Forsyth of Drumlean]

Neither do I.

[Lord Kerr of Kinlochard]

I hope that the noble Lord, Lord Dunlop, knows, but I do not think that any of the rest of us knows what this means in the Smith report. Alas, the noble Lord, Lord Smith of Kelvin, is not here today to tell us.

It could be argued that there is no need to have any of this in the Bill, and I would like to hear from the Government whether that is their view. After all, they could have brought forward a Bill which said nothing about borrowing, despite the fact that it was a key part of paragraph 95 of the Smith report covering the fiscal framework. If it is their argument that there is no need to say anything about borrowing, I want to know why. As I said at the start, I believe that borrowing will be cheaper for Scotland and therefore better for the United Kingdom and Scotland if it is clear beyond doubt that the United Kingdom stands behind it. If it does, it is then clear that the United Kingdom has the right and the duty to set limits on that borrowing. I repeat that those limits should not be in the Bill. They should be set by affirmative resolution of both Houses, but the provision to require that should be in the Bill, and that is why I have tabled Amendment 75A.

[Lord Wallace of Tankerness (LD)]

My Lords, I shall speak to Amendment 76. The points made by the noble Lord, Lord Kerr of Kinlochard, beg questions which I am sure the Minister will seek to answer in terms of the Government’s understanding of how the Scottish Parliament’s borrowing powers will operate after the passage of this Bill. The Scotland Act 2012 also contained borrowing provisions and I would be interested to know what the dynamic between them is and how they will fit together. This is an important part of the overall arrangement because specific borrowing limits might not necessarily appropriately appear in statute. It is therefore important that the Committee be made aware of what is in the Government’s mind.

The amendment I have tabled with my noble friend Lord Stephen seeks a review of the fiscal framework. We tabled it some time ago, perhaps even before the Scottish Affairs Committee came up with a similar recommendation. That was done on the basis that, by the time we reached it and could debate it, the fiscal framework would have been published. Noble Lords will remember that even at Second Reading there was much concern about the fact that we did not have any detail on the fiscal framework. There is a recognition that however much work goes into this—I do not dispute the good will that the Minister has indicated on a number of occasions—there is a possibility, I put it no stronger than that, that it might not actually be perfect. It therefore makes sense that somewhere down the line there should be a review of how the fiscal framework is operating. We say that it should be given at least four years to run, but not much longer. We also propose that this should not be done by one Parliament or the other. In fact—although it is probably quite a novelty, we should not be scared of that—it should be reviewed by a committee that involves Members of the Scottish Parliament and of both Houses of the United Kingdom Parliament. A report should be published with recommendations that are submitted to both Houses of the UK Parliament and the Scottish Parliament. Quite simply, this tries to ensure that once the fiscal framework has had an opportunity to operate, a better judgment can then be made of how well it is living up to expectations.

I do not want to repeat all the points made earlier by my noble friend Lord Stephen in the debate on the amendment to the Motion moved by the noble Lord, Lord Forsyth, but it is absolutely right to talk about transparency. For example, the First Minister of Scotland released a letter to the press in which she set out the Scottish Government’s view of the no detriment principle, but we do not have a clue about the United Kingdom Government’s view. Anyone who knows the workings of the Scottish Government and the Scottish National Party knows that they are very adept at this. They will get in first so that their definition of no detriment suddenly becomes the currency. The United Kingdom Government will then try to come up with a different definition, but they will be told that they are selling out, and because the Scottish Government got in first and have defined the terms of the debate, that puts everyone else on the back foot. That is why we have been arguing both privately and in the Chamber with Ministers that we need far more information and that the Government need to be much more transparent—not necessarily about the nitty-gritty, small-print detail of where they are at any particular moment but about what they understand by the no detriment principle, for example.

An amendment in this group from the noble and learned Lord, Lord McCluskey, also provides for the fiscal framework by way of a Scottish fiscal commission, modelled on the Office for Budget Responsibility. It is a very worthwhile idea, which the Scottish Parliament has been looking at. However, it falls short of the independence of the OBR that we would like to see, although the noble and learned Lord does seek to address that. Indeed, paragraph 16 of the letter we received at lunchtime today from Mr Greg Hands, the Chief Secretary to the Treasury, to Pete Wishart MP, the chair of the Scottish Affairs Committee, indicates that, “All elements of the fiscal framework are being discussed with the Scottish Government, including the important recommendation of the Scottish Affairs Committee that there is a clear consensus that forecasting should be done by a body independent of Government. We agree with the conclusions of the Finance Committee of the Scottish Parliament and recommend that an enhanced Scottish Fiscal Commission be made responsible for forecasting in Scotland”. Perhaps the Minister would care to elaborate on that and how he sees it developing.

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[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.

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[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.

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Tabled by

[Lord Kerr of Kinlochard]

75A: After Clause 19, insert the following new Clause—
“Borrowing powers
(1) Section 66 of the Scotland Act 1998 (borrowing by the Scottish Ministers etc.) is amended as follows.
(2) For subsections (1A) and (1B) substitute—
“(1A) Subject to subsection (1B), the Scottish Ministers may borrow by way of loan or by the issue of bonds (but not bonds transferable by delivery) any sums required by them.
(1B) Borrowing by Scottish Ministers shall be subject to—
(a) annual limits; and(b) an overall ceiling. (1C) The annual limits and the overall ceiling shall be set by regulations made by the Treasury, following consultation with Scottish Ministers.
(1D) Regulations under subsection (1C) may not be made unless a draft of the regulations has been laid before and approved by a resolution of each House of Parliament.””

[Lord Kerr of Kinlochard]

I understand the Minister’s point about nothing being agreed until everything is agreed. That seems to me a very reasonable point to make. However, that applies to the numbers, the levels and the ceilings; it does not apply to the principle of limits and having them in the Bill. If that is not controversial, I really think that on Report we ought to see it, not necessarily in my language but in some language, in the Bill.

Amendment 75A not moved.