Scotland Bill

Lord Kerr of Kinlochard Excerpts

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.

[The Earl of Caithness (Con)]

My Lords, we are in a mess. It is a very sad occasion when you get a situation like this where the pass has been sold. What is most interesting about the debate is the number of Scots who are questioning this because it affects adversely the rest of the United Kingdom, and I add my name to that list. I have never before attended a debate in this House, in the many years that I have been here, which has involved so many Scots who are all on the same side against an agreement that is beneficial to Scotland. Let us make it absolutely clear: Scotland had a very good deal before the present devolution agreement and it now has an even better deal. It will rank as one of the great victories that the Scots have achieved over the English Government. It is the UK Government in this case, but as far as the Scots are concerned, it is the English Government.

At the meeting this afternoon my noble friend Lord Dunlop said that this is a significant agreement which provides the opportunity to end the blame game. Actually, nothing could be further from the truth. This will not end the blame game—the blame game will continue. All of us who have been brought up in Scotland know full well that whatever the UK Government concede to the Scots Government, particularly the Scots nationalist Government, it will never be enough. The blame will continue.

We have an interim agreement but a permanent agreement. The interim agreement has handed over the grenade, as the noble Earl, Lord Kinnoull, said, to go off five years or five and a half years down the road. No one is going to want to handle that grenade, and as the noble Lord, Lord Kerr of Kinlochard, said, it will be passed on again. So we have a false but permanent agreement which is of huge detriment to the rest of the United Kingdom.

--- Later in debate ---

[Lord Higgins]

My Lords, I have added my name to my noble friend’s Amendment 56A. It would simply insert, at the end of page 16, line 14, the words:

“must be made by statutory instrument”.

That amendment and the other amendments which stand in my name all arise from the 15th report of the Delegated Powers and Regulatory Reform Committee. I will quote as briefly as possible from the report, but the committee said:

“The Scotland Office have provided a delegated powers memorandum. We were disappointed with the quality of this document. In a number of cases, the explanation given in the memorandum failed to deal adequately with important aspects of the power, and most of the matters to which we are drawing attention in this Report arise from the fact that the explanation of the power in the memorandum is inadequate”.

I will not go on quoting from the Select Committee, but that is the general tone of what it said. In particular, it made a number of detailed criticisms which I have sought to cover by the additional amendments that I have tabled. I would be grateful if my noble friend would be kind enough to say whether he supports the other amendments, all of which seek to implement what was said in the committee’s report.

The committee goes on to deal in a little more detail with the subject matter of Amendment 56A. It said:

“To our surprise, there is nothing on the face of the Bill requiring the regulations to be made by statutory instrument. Since it is the invariable practice … we assume this is a mistake”.

I therefore seek in these amendments to cover the various points that the Delegated Powers and Regulatory Reform Committee made in its extremely helpful analysis. It would be helpful to know if my noble friend will accept the other amendments as well as Amendment 56A, which appears in both his name and my own.

On Thursday, the committee produced a further report that included remarks it received from the Government, including an apology for the inadequate way in which the proposal was first presented. We could go through each of the amendments in detail but perhaps my noble friend will simply indicate whether he agrees that we need to make the changes that I have put down on the Marshalled List and which implement the committee’s report.

[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.

Scotland Bill

Lord Kerr of Kinlochard Excerpts

Wednesday 24th February 2016 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

My Lords, I will touch on a rather similar point to the one that the noble Lord, Lord Empey, just made. I was very surprised by the way the Minister reacted at the end of our discussion in Committee on this point, when the noble and learned Lord, Lord Hope, made a very convincing case and explained the status of the amendment he put forward, as he has done again today. We clearly have two duties: first, to put the Sewel convention, as it operates today, on a statutory basis; and secondly, not to make a defective statute. It seems to me absolutely clear that the inclusion of the vague word “normally” makes this statute defective and a cause of continued dispute. We cannot do that.

I looked at how the Minister reacted when this point was made in Committee. I wonder whether he was not saying something: like the noble Lord, Lord Empey, I wonder whether there is a reason why the Government wish to retain the possibility of acting in breach of the convention as it operates. I wonder whether, for example, he was thinking about the Defence of the Realm Act or the Emergency Powers Act, which almost certainly would go into areas in a national emergency or a state of war where the Scottish Government would normally have fully devolved power. This seems fanciful, but I find it very difficult to think of a logical explanation for the Government’s position that we must write “normally” into the law and thus guarantee dispute in courts of law.

If there are circumstances in which the Government envisage that they would want to act in breach of what has been the convention and what is about to become law, they need to spell out in the Bill what they are. They need to replace the word “normally” with a subsection that defines those circumstances. It seems very unlikely that this is their thinking, but if it is, I hope that the Minister will explain it to us. Otherwise, I can think of absolutely no reason for not supporting the amendment in the names of the noble and learned Lord, Lord Hope of Craighead, and the noble Lord, Lord Norton of Louth.

[Lord McCluskey]

Would the noble Lord support this possible solution? There is quite some time between now and Third Reading. If the Minister, with the support of others—he would certainly have the support of the Liberal party—could approach his new friends in Edinburgh in the Scottish National Party, and the noble Lord, Lord McAvoy, and say, “This is a mess agreed by Smith. It’s been demonstrated that it can’t be done. Would you agree that we simply drop this clause?”, he might well find that they would be happy to let it be dropped and the Government could renew a statement that we will do what the Smith commission envisaged.

[Lord Kerr of Kinlochard]

I very much hope that the Government will give a serious, considered reply to the noble and learned Lord, Lord Hope. If it involved suggesting coming back at Third Reading with some variant of his wording, I would want to listen to that. But, it seems to me that we simply cannot do what the noble and learned Lord, Lord McCluskey, is asking for, which is to drop this altogether. It is an important point in the Smith report that the House of Commons has gone along with, and on which all the political parties agree. The idea of just dropping the clause is not possible, but we need to write one that is not defective.

[Lord Davidson of Glen Clova (Lab)]

My Lords, normally when the loyal Opposition hear valid and powerful arguments from many noble Lords and noble and learned Lords, they listen acutely and seek to put their weight behind those observations, particularly when they are put into an articulate amendment. However, in this case we will not support these amendments.

I suspect that the question “Why?” might come from the lips of certain noble Lords. It is our judgment that the political imperative suggests this position: if any of these amendments are passed by this House, they will be overturned in another place. It will be immediately accepted that that would be wholly undesirable. I notice the unfortunate distortion of the normally calm features of the noble Lord, Lord Forsyth, but he will fully understand, as one of the United Kingdom’s most able politicians over many years, that political imperative can be of considerable importance.

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.

--- Later in debate ---

[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.

--- Later in debate ---

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.

Scotland Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 8th December 2015 Lords Chamber

Is it the end result? I hope that the end result will be a more codified, United Kingdom-wide written constitution and then perhaps a new Act of Union containing a new statement of union. That will be the missing factor, but I find it inconceivable, as my noble and learned friend said, that the Scottish Parliament would not be a permanent part of that factor. So we should go ahead and allow the Bill to stand without Amendment 1.

[Lord Kerr of Kinlochard (CB)]

These are clearly very deep waters, into which a non-lawyer plunges with some concern. I am very glad that I understood part of what the noble Lord, Lord Purvis, said. I agree with him about the need for a convention.

My real worry about all this is that I do not believe in declaratory law. I strongly believe in 2% of GNP on defence; I strongly believe in 0.7% on aid; I strongly believe in emissions controls—but I do not believe in putting these things on the statute book. I do not believe in emissions control targets with no known means of fulfilling them. I do not believe in law that sends a message. A law is not worth having unless it changes something. I subscribe to the doctrine explained by the noble and learned Lord, Lord McCluskey.

At Second Reading, we heard from the noble Lord, Lord Norton of Louth, who is our prophet in these matters. He said:

“The Scottish Parliament is already permanent under the terms of the Scotland Act; it remains in being unless this Parliament legislates otherwise. New subsections (1) and (2), introduced by Clause 1, do not make it any more permanent than it already is”.—[Official Report, 24/11/15; col. 638.]

I understand the conundrum about the Smith commission, well explained by the noble and learned Lord, Lord Hope, but it seems to me that the noble and learned Lord’s own amendment, with the noble Lord, Lord Norton, goes two-thirds of the way to delivering what he feels we are required to do. Amendment 6 does not require subsection (1). The arguments of the noble Lord, Lord Norton, have demolished subsection (1).

What we need is something that says: “The provisions of the Scotland Act, which established the Scottish Parliament, shall not be repealed unless the Scottish Parliament has consented and”—here I part company with the noble Lord, Lord Lang; I think there is a need for a referendum—“a referendum has been held in Scotland on a proposed repeal and a majority of those voting have supported it”. We do not make it any more permanent by stating its permanence, and if a new provision adds nothing, we should not make it. It is permanent because it is on the statute book. I agree that in the real world the Scottish Parliament would not vote for its own abolition, but that gives a meaning to permanence.

[Lord Forsyth of Drumlean]

What about England? I agree it is not the real world but one can imagine circumstances in which the Scottish Parliament has been given all these powers and has got itself into a right mess and the people of Scotland wish to come back and be part of Westminster. It is entirely conceivable that people in England and Wales will want no part of that. So where is the opportunity for the United Kingdom to look at this as a whole?

[Lord Kerr of Kinlochard]

I do not think the noble Lord has quite understood my proposal. My proposal is that the language in the amendment in the names of the noble and learned Lord, Lord Hope, and the noble Lord, Lord Norton, should be preceded by the words: “The provisions of the Scotland Act establishing the Scottish Parliament may not be repealed unless”—and then the two conditions laid out in the amendment. It follows that I mean there would need to be a vote of this Parliament as well as of the Scottish Parliament, and the referendum that the noble Lord, Lord Lang, would not want but I think is necessary.

I have to say to the noble Lord, Lord Cormack, that I think the idea of a supermajority in this Parliament is a very bad one. I think supermajorities in general are a bad idea. Just as we should not add to the statute book provisions which add nothing, so we should not complicate our procedures by inventing a supermajority.

[Lord Hope of Craighead]

Does the noble Lord accept that he has very cleverly been answering the conundrum that I put to the noble Marquess, Lord Lothian, of trying to translate “permanent” into some other language that fits constitutionally with our established principles? I was suggesting that one should not be too tied by the word “permanent”, which is used by lay men, and the noble Lord has perhaps cleverly expressed a way of doing that.

[Lord Kerr of Kinlochard]

I am very grateful to the noble and learned Lord but I refuse to be drawn into a debate among lawyers about how clever I am.

--- Later in debate ---

[Lord McAvoy]

The emotional state of the Scottish electorate after the Scottish referendum is still to be analysed by a number of people and institutions. I do not know what happened and will be bold enough to say that the noble Lord, Lord Forsyth of Drumlean, does not know exactly what happened. But it certainly happened. He refers to people in the Scottish Labour Party thinking that nationalism would be killed off by a Scottish Parliament, but I am not one of those. It is about showing the Scottish people that we are trying to do our best for them. I agree with the noble and learned Lord, Lord Wallace of Tankerness, that a constitutional convention is required. In the long run, it must be required, because these issues keep cropping up.

[Lord Kerr of Kinlochard]

We Scots are quite a canny lot. Is the noble Lord quite sure that Scots would not spot that a declaratory law adds nothing? He said he opposed every one of the amendments, but he did not state in terms—no doubt he now will—that he opposed the one I drafted on my feet, which would limit the ability of the Westminster Parliament to change the provisions relating to Scotland by adding conditions such as a referendum and a vote in the Scottish Parliament. Is he quite sure that it would not cut more ice in Scotland if one was defining rather than declaring permanence?

[Lord McAvoy]

I appreciate what the noble Lord said and apologise for not dealing with his amendment comprehensively. Even as he was saying that, it occurred to me that the reason we object to this is that it is laying down the law—to use that phrase—to the Scottish Parliament as to what they must do. The noble Lord, Lord Forsyth, may be trying to do that but I am not. That would be seen as trying to impose conditions on the Scottish Parliament. I take the point that not every Scot goes about saying, “I need to have this word ‘permanence’”. I take it that the noble Lord, Lord Kerr of Kinlochard, stays in Scotland.

[Lord Kerr of Kinlochard]

Is there a residential qualification to take part in these debates?

[Lord McAvoy]

No, and I am sorry if the noble Lord took that the wrong way. However, I spend my life in Scotland, week in, week out. I listen to people there and am heavily involved in community organisations. I am not trying to devalue the noble Lord’s point of view but I can speak only from my experience. There is a suspicion there—justified or not—about Westminster trying to lay down the law. I know I tempt fate saying that in front of the noble Lord, Lord Forsyth, but there we go. We are suspected of laying down the law in a popular way, not in a legal way—once again, there are too many lawyers. We are talking about how this would be seen as being dictated to by Westminster and interference in the mandate. The Smith commission had the agreement and we are pushing that forward. We would be interested in supporting the amendment of the noble and learned Lord, Lord Hope of Craighead, and I look forward to an interesting night.

Scotland Bill

Lord Kerr of Kinlochard Excerpts

Tuesday 24th November 2015 Lords Chamber

[Lord Kerr of Kinlochard (CB)]

The noble Viscount was good enough to tell me that he was about to make that announcement and that it was not directed only at me.

It is a privilege to take part in a debate which has included a remarkable maiden speech from the noble Lord, Lord Campbell of Pittenweem, whose international performances I have been admiring for about 55 years, and a wonderful maiden speech from the noble Baroness, Lady McIntosh of Pickering, whom I first remember admiring as an extraordinarily active Member of the European Parliament.

It is a privilege for me, too, to serve on the Economic Affairs Committee chaired by the noble Lord, Lord Hollick. I got to realise quite how big a privilege that was when the committee went to Edinburgh to take evidence in the Scottish Parliament. As we drove in from the airport, the streets were lined with cheering crowds, which is not normally how a Glasgow man like me is received in Edinburgh. It even brought a wintry smile to the patrician features of the noble Lord, Lord Lamont. But then our driver explained that the reason for the crowds was that we happened to be in Edinburgh on the day that the Queen became our longest serving monarch ever, that the streets were blocked and that we would now walk to the Scottish Parliament.

I agree with everything that the noble Lord, Lord Hollick, said. I cannot see how we can do our proper scrutiny job without seeing the fiscal framework, and I support the amendment in the noble Lord’s name. Of course we must pass the Bill, but we need to see this crucial part of its underpinning, which will explain how the system that we are about to legislate for will work.

For me, there are three unknowns—I hope the Minister will be able to throw light on them—that have to be made clear before we complete our scrutiny of the Bill. The first is the mechanism for the adjustment to the block grant, year by year, when Scotland is retaining virtually all its income tax paid in Scotland. How will that be done in a way that can be shown to be fair not only to Scotland but to the rest of the United Kingdom? The second is the limits on Scottish borrowing powers. The Economic Affairs Committee report rejects, in my view absolutely correctly, the idea that there should be a no-bailout rule. For so long as Scotland remains part of the union, in extremis, Scotland would be bailed out—of course it would. But that means that there have to be very clear, very strict limits on borrowing, and the House is entitled to know what they are. The third is that we need to know what arrangements are envisaged for future transparency. If the current negotiation on the fiscal framework, behind closed doors, is to be a precedent for the future, we will not see an enduring settlement but enduring dispute. There has to be an open, transparent, principles-based way of proceeding in future.

I want briefly to touch on two aspects of the Smith commission report that I personally regret. One is reflected very clearly in the Bill and we need to work on it, and the other is accepted by all parties and regretted by me. First, I am uneasy about the choice of personal income tax to provide the bulk of devolved revenue raising. As the noble Lord, Lord Campbell of Pittenweem, reminded us, the union is responsible and will remain responsible for the individual’s safety—security, defence, development aid, foreign affairs and so on. Would that truth not be more readily perceived by the individual if he believed that he paid his share of the cost of that safety through his income tax? Think of an analogy with council tax: could he not receive a statement indicating where the money was going and how it would be spent? It seems to me, in principle, wrong. I am not arguing against the quantum of devolved revenue raising; I am arguing against the choice of this particular tax. But that pass is sold, and I am sad about that.

Secondly, the other pass that is sold and that I am also sad about is our old friend Barnett. I do not need to rehearse the arguments because we all know how unsatisfactory the Barnett formula is: introduced in 1979 as a temporary expedient, it was always intended to be replaced quite soon. Its financial effects now were explained to the House this afternoon by the noble Lord, Lord Hollick, and its deficiencies were explored in detail in the Select Committee report of 2009 under the chairmanship of the noble Lord, Lord Wakeham. On looking at the Barnett formula, everybody has always agreed that it should be replaced by a needs-based formula. Sadly, that is not going to happen because the vow decreed that the Barnett formula should continue and the Smith commission felt bound by that.

The Economic Affairs Committee report correctly states that the committee unanimously thought that that decision was wrong. The report recommends that the Government consider the case for,

“introducing a needs based approach to funding devolved administrations”.

Last week, all guns blazing and shooting from the hip, the Scottish Government came out against that recommendation. That is unworthy and short-sighted.

Barnett is not demonstrably fair, and is seen as unfair by many in Wales and some in England. An enduring settlement cannot be based on perceived unfairness. Of course, I do not believe that fair allocation necessarily means equal allocation. The cost of providing services such as health, education, transport and social services to an agreed UK standard is plainly higher in Sutherland than it is in Surrey. Peripherality, sparsity of population, population age structures, dependency ratios, incidence of chronic ill health and life expectancy all differ across the kingdom. It should not be impossible—the Australians do it now—to devise a system for fairly assessing relative costs, and so needs, on a continuing basis. Of course there will be disputes about the weighting of the various factors, but these disputes would be containable if clearly based in a framework of principle.

I do not think it follows that any change to the Barnett formula would be a change for the worse for the Scots. I believe that under any fair system, the Welsh would certainly gain compared with the status quo now, and England would undoubtedly receive less per capita. I do not know where the Scots would end up, but I do not agree with their assumption that what we have, we hold—that there must be no change to the Barnett formula because it is bound to be for the worse.

The real gain would actually be stability. It would be possible to explain inequalities, how they arise and why they are fair. Current inequalities are the product of a 1979 back-of the-envelope formula that really needs replacing. But that pass is sold, and I am sad about that too.

The difficulty we are in is the result of piecemeal devolution driven by pragmatism, not principles. The underlying principles have not been clearly enunciated. Devo-max was not an option on the referendum ballot paper, and that was a mistake. But that is what we are now getting—devo-max defined on the hoof in the heat of a referendum campaign.

Of course we must pass this Bill—we are where we are—but once we have done that, I hope we can sit back and think. I hope we can think about the proposal from the noble Lord, Lord Campbell of Pittenweem, for a new Act of Union. I hope we can think about the advice we get from our Constitutional Committee, as quoted by the noble Lord, Lord Lang of Monkton, this afternoon:

“The UK Government and the major UK-wide political parties need urgently to devise and articulate a coherent vision for the shape and structure of the United Kingdom, without which there cannot be constitutional stability”.

I strongly agree with that.

I also agree with the noble Baroness, Lady Quin, that the case for a constitutional convention grows stronger every day. The essence of that convention would be that it meet in public, in total transparency. That way, if any participant or group of participants in a convention show themselves unwilling to subscribe to sensible principles and genuinely to seek an enduring settlement, that would be evident to all.