Scotland Bill

Lord McFall of Alcluith Excerpts

Monday 22nd February 2016 Lords Chamber

Moved by

[Lord McFall of Alcluith]

75: After Clause 19, insert the following new Clause—
“Non-budget expenditure and the Scottish Consolidated Fund: further provisions
Before the end of the first month of each financial year, the Secretary of State must lay before Parliament a full record, including minutes of meetings and Ministerial correspondence, of discussions between the Secretary of State, the Treasury and Scottish Ministers relating to the non-budget expenditure to be voted by Parliament authorising the payment of grants to the Scottish Consolidated Fund for that financial year.”

[Lord McFall of Alcluith (Lab)]

My Lords, Amendment 75 provides for the process leading to annual settlement between the Treasury and Scottish Ministers of the block grant to Scotland, to the Scottish Consolidated Fund. In tabling the amendment, we focus on transparency and accountability.

I will also speak to Amendment 75A, in the names of the noble Lords, Lord Kerr and Lord Turnbull, on borrowing powers. They may already be in place for all we know and I would like the Minister to enlighten us on that.

Amendment 79F in the name of the noble and learned Lord, Lord McCluskey, seeks the publication of the fiscal framework within 30 days of the Act being passed, if not before. Amendment 79G would expand the role of the Scottish Fiscal Commission, which is welcome, and Amendment 76 in the name of the noble and learned Lord, Lord Wallace, establishes the commission as per the recommendation by the Scottish Affairs Select Committee and the need to review the fiscal framework at least every five years. For that, we need a timetable and we ask: why is a review needed?

The Joint Exchequer Committee, chaired by the Chief Secretary to the Treasury, Greg Hands, has met 10 times already. It has been clouded in secrecy and we have heard already this afternoon about the need to lift the veil on that, particularly on the area of the sticking points. Up to this weekend, there was a daily, unattributed briefing from the Scottish Government, which was largely negative and unspecific in tone, but nothing from the UK Government, for which they should be commended. But that highlights the problem raised by the Economic Affairs Committee, which is that nobody knows what is going on. We need a deal securing Barnett because the powers that are being given to the Scottish Parliament are too important to walk away from. If I have one message for the Minister, it is that we cannot down tools at the moment.

We have had artificial deadlines, the latest being Valentine’s Day, or 14 February. This side is telling the Minister to negotiate right up to the end—to 23 March if need be. The powers that the Scottish Parliament will receive are without parallel elsewhere. Keep in mind that the Scotland Act 2012 devolved income tax, stamp duty, land tax and landfill tax, established Revenue Scotland and provided the Scottish Parliament with borrowing powers. Smith has now added income tax, with unrestricted power to set rates and thresholds for tax on non-savings and non-dividend incomes. There is also the receipt of the first 10% of the standard rate of VAT. If the Scottish Government grow the economy, the extra revenue coming from that will be for the Scottish Government and Scottish people alone, and we must not forget the aggregates levy and the airport duty tax.

The income tax that has been devolved is £11 billion. The VAT generated will be, as I mentioned earlier, for the Scottish economy alone, so Smith will result in the amount of revenue that the Scottish Parliament is responsible for being raised to double the amount that it has at the moment, from £8 billion to £16 billion, with an extra £5 billion in VAT revenue. Together, those revenues will account for more than half of the Scottish Government’s annual budget and around 40% of all revenue raised in Scotland.

The question that is still pertinent for the Joint Exchequer Committee is: how do we adjust the block grant to take account of the devolution of tax and spend powers? The Scottish Affairs Committee’s report, which was excellent, stated that Smith’s unanswered question, which we all agree with, was how to index the adjustment to the block grant so that the principle of no detriment and taxpayer fairness is satisfied. That question is unanswered at the moment.

Amendment 75 has to be seen in such a context, where transparency and accountability should be the primary considerations. On transparency and accountability, borrowing is extremely important, as was mentioned in the amendment of the noble Lord, Lord Kerr. Dr Angus Armstrong said in his evidence to the Scottish Affairs Committee that the question of Scottish borrowing powers is perhaps the most important in the whole debate. In that regard, we support the amendment of the noble Lord, Lord Kerr.

Let us remind ourselves of the capital borrowing powers, which are currently £200 million per year with a £500 million cumulative ceiling. It would be helpful, as the Scottish Affairs Committee recommended, if a prudential capital borrowing regime were introduced and put on a statutory basis. We are mindful that the Scottish Government can borrow from the UK Government, the National Loans Fund and commercial lenders, and can issue their own government bonds. That is important as the bedrock because the National Loans Fund allows the Scottish Government to borrow on very favourable terms. If the Scottish Government can find even more favourable terms, they can go there, but the bedrock is the National Loans Fund. Again, the Scottish Affairs Committee asked for a specific limit on current capital borrowing to be set and for the criteria on which that limit is based to be published. We agree with those recommendations completely.

The amendment in the name of the noble and learned Lord, Lord Wallace of Tankerness, asks for the establishment of a commission, which is another recommendation of the Scottish Affairs Committee. Therein, the need for transparency and independence is essential. We thought a number of weeks ago that the Scottish Government were going along with that line of independence when the Finance Committee under the chairmanship of its convener, SNP member Mr Gibson, said,

“we are strongly of the view that not only should the Scottish Fiscal Commission be independent, but it is vital that it is perceived to be independent. That is why we are calling for the Bill to be amended to strengthen the Commission’s role and to give it responsibility for producing the official forecasts”.

Only a month later in the Scottish Parliament, the Scottish Government reversed their view on that issue and Mr Gibson did not fulfil that cross-party recommendation from the Finance Committee. The need for a Scottish fiscal commission to be given responsibility for setting the finance and the forecast that the Scottish Government budget is based on is hugely important. We ask the Minister to look at that issue again.

We should remind ourselves of today’s report from the Treasury Committee in the House of Commons, which secured, under a freedom of information request, emails from the Treasury to the Office for Budget Responsibility. There is a perception that the Government were leaning on the OBR to ensure that the wording in the terminology was changed to favour Her Majesty’s Treasury. I made that point a number of weeks ago in this Chamber when the Chancellor of the Exchequer found £30 billion behind the sofa and the OBR came up with that particular figure. I said then that it was important for Robert Chote and the OBR to underline its independence. If trust in the statistics is questioned at all, trust in the whole of government also crumbles. What applies for the Treasury must apply for the Scottish Parliament, and when we are starting afresh with the Scottish Parliament, the need to underline that independence is really crucial.

Amendment 79G, tabled by the noble and learned Lord, Lord McCluskey, is also crucial because it asks for the independent scrutiny of the public finances. That recommendation by the noble and learned Lord was preceded by an article he wrote in the Herald a number of weeks ago, for which I commend him. It was an excellent article. From what we have heard today and from what the noble and learned Lord, Lord McCluskey, has proposed, it is clear that the scrutiny that we are giving the Bill is happening only in this House; it is not happening elsewhere. Therefore, the article by the noble and learned Lord, Lord McCluskey, and the amendments have to be taken very seriously.

The Minister presented us with the letter from the Chief Secretary to the Treasury, Greg Hands, at 1 pm today. I commend the Government and the Chief Secretary for that letter, but we were rather disappointed to receive so late in the day such a detailed letter, which we have had insufficient time to scrutinise. We welcome the fact that it tackles the thorny issue of Scotland’s population growth and possible disadvantage to Scotland’s revenues if its population grows more slowly than in the rest of the United Kingdom. However, the population in Scotland will grow more slowly than in the rest of the United Kingdom because—and the historian, the noble Lord, Lord Forsyth, can correct me here—it has been doing so since the very date of the Act of Union, and it will continue to do so. That needs to be looked at and therefore we commend the Government for doing so.

I refer to paragraphs 13, 14 and 15 in the letter, which tackle this issue. Paragraph 14 is very clear that, using the Scottish Government’s own forecast, Scotland would benefit from around £4.5 billion of growth in taxes from the rest of the United Kingdom in the next decade alone if the proposal that the Chief Secretary to the Treasury put to the Deputy First Minister were accepted. Paragraph 14 also states that if the Scottish Government grow the economy then Scotland will keep those revenues. Paragraph 15 states that the proposals offer a fair deal for taxpayers in Scotland; they are fair for taxpayers in the rest of the United Kingdom; and, to use a Clydeside expression, they are built to last. If that is the case, the only thing missing is the Scottish Government’s response. Why are they not agreeing that proposition? I ask for the veil to be lifted a little today. Regarding paragraph 15, given the short notice and the cursory examination we have had of it, it is important that the Minister responds to this.

Logic dictates that we need everything to be cleared up today, and that was argued very skilfully by the noble Lord, Lord Forsyth. However, in this area logic is not everything. There is political reality, and the political reality is that we must encourage this process in every way possible. That is why the Labour Party has bent over backwards to be helpful to the Government over the past few months and, even today, will provide no impediment or give any hint that it will delay or obstruct the Bill. We have a fractured union. That was expressed in the report by the Select Committee on Economic Affairs, very skilfully chaired by my noble friend Lord Hollick. Therefore, we do not wish to add even one iota to any further cleavage in that area.

The UK in its present form is not an old state, but it is a state comprising ancient nations. We have to be very sensitive to that. I mentioned political reality. An article in the Daily Record last Friday by a good friend of mine, Professor Jim Gallagher, looked at the second aspect of no detriment—namely, taxpayer fairness—but the headline for the article was “sleight of Hands”, obviously a play on the name of the Chief Secretary to the Treasury. Hopefully, that gives Members an insight that there is a grievance mentality, and it is something we must be very sensitive of. In particular, as an unelected Chamber we must do everything to be positive. That is why, in moving Amendment 75 and supporting other amendments, we hope that the Minister makes progress. As the noble Lord, Lord Forsyth, said, if that progress is to be made before Report then we would welcome the information being put in the public domain as soon as possible. In that spirit, I beg to move.

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[Lord McCluskey]

Yes—that was, of course, part of the purpose of the article I wrote for the Herald, which the noble Lord, Lord McFall, was good enough to refer to.

Plainly, the Scottish Government were perfectly entitled to try to secure the most favourable deal they could. It was they who created this timetable that we are being asked to stick to. The timetable was to enable them to go to the electorate in May and present themselves as having achieved a great victory. They created the timetable and we are all supposed to bow to it. I just wonder about that. In relation to the rush to get it through, it also puzzles me that John Swinney is so anxious to get his hands on extra tax powers because, when the Labour Party in Scotland proposed an extra penny on income tax, he replied, “Over my dead body”. Now, we would not wish any harm to the Deputy First Minister, but he has obviously no intention of exercising these tax powers, so what is the rush? It is all to do with the electoral process of the Scottish Government.

Even the devolution of a minor thing, such as the introduction of air passenger duty, could turn out to be worth nothing because, as was pointed out very widely at an earlier stage of the passage of the Bill, Newcastle Airport is going to suffer considerable detriment if all the Scots in the north of England flock to Prestwick, Glasgow, Edinburgh or even further north to take advantage of reduced prices. They are going to suffer a detriment and that detriment is going to have to be met by whom? By the Scottish taxpayer. In other words, the Scottish taxpayer is going to have to find the money to send to Newcastle that has been saved by whom? By the airlines. It is bizarre. The whole thing is slightly mad.

[Lord McFall of Alcluith]

If I remember correctly, the Chancellor of the Exchequer appeared before the Treasury Committee in January 2015 and, asked about the no-detriment principle for Newcastle and Manchester airports, said it did not apply to them. He pointed to the fact that in the previous year Newcastle Airport had increased its traffic by 12% and Manchester Airport had increased its traffic by 3%, so there was no problem whatever. So we are all in the dark yet.

[Lord McCluskey]

I fully accept what the noble Lord says; however I argue that there is room for argument as to whether there is a detriment to Newcastle. I just do not know. The Select Committee on Economic Affairs said, as has been quoted already by the noble Lord, Lord Forsyth:

“We agree … that the second no detriment principle is unworkable. It is a recipe for future disagreement”.

The only problem is the word “future”. It is a recipe for constant disagreement, including future disagreement.



My Amendment 79F includes the provision that the new fiscal framework should be published in full. That is very important. The noble Lord, Lord McFall, mentioned that we have to face political reality: I would not challenge his judgment on that, but I add something else. We also have to face the truth—not just the truth but the whole truth—in relation to the fiscal agreement. We need to know the background and I am sure that if it is not published in full, as it should be, then various means can be found, whether in debate here, by means of questions or by freedom of information requests, to discover the full background. What were the people bargaining about? What was the cause of the delay? My guess is that the cause of the delay was what I suggested before—namely, that they could not agree on amounts of money, so the complications are not real complications but deep disagreements.

As I mentioned in the article to which the noble Lord was kind enough to refer, lying behind these discussions and the problem for the Scottish Government is the following. If the present discussions about the fiscal framework reveal, as I suspect they will, that Scotland needs a substantial subsidy from the taxpayers in the rest of the UK—or at least in the rest of Great Britain—that is a demonstration that Scotland cannot exist without such a subsidy. Therefore, the economic case for independence, which was so bizarre in the original White Paper by the Scottish Government, disappears. In other words, we now know, because of the discussions going on—although we do not know the detail—that the economic base in Scotland is such that the tax yield will be very disappointing. The Barnett formula would, of course, disappear on independence and the oil bonanza confidently predicted at the time of the referendum campaign will continue to prove to be a mirage.

As I say, events have perhaps rather overtaken this amendment but it is time that the Scottish electorate were told the whole truth about the Barnett formula. That is part of this amendment. I have read with great care, and more than once, the proceedings of the Lords committee on the Barnett formula. It was a very powerful committee and the questioning was extremely good. The witnesses who gave evidence were of the highest quality and the lesson of that has to be that if we want to move to a just and fair system, we ought to move to one which is not based on a formula that was never invented for the long term but rather as a device to get through a problem existing in the midst of an economic crisis. We should move to a system based on need in terms of welfare and other things. It is time we were told the truth about that. That is the purpose of the second part of this amendment—proposed new subsection (2).

Detriment is said to be a principle in the Smith commission report. I am afraid that I do not recognise it as a principle. The principle that underlies public expenditure should in my view be the question of need. Public expenditure in different regions should be determined largely in relation to need. It is not a straightforward matter and I need not discuss the difficulties involved in that; we are all well aware of them. Therefore, the information that I seek is to give people the truth. The truth is more important than the political reality.

I can deal briefly with the other matter relating to Amendment 79G. The noble Lord, Lord McFall, has already referred to this and I simply adopt what he said. It is vital in Scotland that we have independent scrutiny of, and reports on, economic forecasts. One of the problems with the referendum campaign was that the government White Paper had some very dodgy statistics and forecasts and the Opposition did not question it sufficiently. In a sense, the Government got away with what they said. We need an independent body. I have suggested the model of the Office for Budget Responsibility. It is not ideal but it is the best model that we have. I deal with the question of independence in the way set out in the amendment. I do not pretend that this is an ideal way to amend the Bill, but the ideas here are such that the draftsmen could with ease convert this into a workable amendment.

The Smith commission talked repeatedly about strengthening the Scottish Parliament. One of its principles was strengthening the Scottish devolution settlement and the Scottish Parliament within the UK, including parliaments’ levels of financial accountability. The commission referred repeatedly to independence. I need not quote all the relevant paragraphs. As the noble Lord, Lord McFall, pointed out, the Bill which was before the Scottish Parliament—the Scottish Fiscal Commission Bill—contains a clause which states:

“In performing its functions, the Commission is not subject to the direction or control of any member of the Scottish Government”.

However, the Bill declines to give the commission responsibility for providing independent assessments and forecasts for the Scottish economy. So if they are not made by an independent commission, who makes them? The Scottish Government make them.

Kenny Gibson was cited, but it is worth doing so again. He was the SNP chairman who expressed the unanimous view of the committee:

“We are strongly of the view that not only should the Scottish Fiscal Commission be independent, but it is vital that it is perceived to be independent. That is why we are calling for the Bill to be amended to strengthen the Commission’s role”.

Those who want to read the detail of this will find it in an article in the Scotsman of 11 February by Bill Jamieson. When the vote came, the SNP people voted down that proposal by four votes to three. Bill Jamieson’s article in the Scotsman drew attention to North Korea. I think the SNP is more like a North Korean drill squad: if a commander says, “Do a backward somersault”, the words are hardly out of his mouth before they are back on their feet, having done a backward somersault. It is a classic example of the exercise of this rigid discipline within the SNP. If we do not have an independent fiscal commission, we are in trouble.

We have had enough talk of dodgy dossiers and I have had enough of reading out my notes. I hope that I shall move these amendments in due course.

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[Lord Dunlop]

No; we are not departing from the Smith agreement at all. It is the function of the negotiations. As I say, these are high-level principles, and the two Governments have to work out how these principles are applied in practice. That is what we are doing. The Barnett formula will continue to operate and determine departmental spending and how that flows through in Barnett consequentials. That will not change.

[Lord McFall of Alcluith]

The noble Lord mentioned the issue of WILLIEs—people who work in London but live in Edinburgh. If the Scottish Parliament put up the rate of tax and these individuals then decide to pay themselves in dividends, that would be tax competition, and therefore the Scottish Government would not be compensated. Am I correct?

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[Lord Dunlop]

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

[Lord McFall of Alcluith]

Can I press the Minister on this? We have three models in front of us—the per capita index deduction, the index deduction and the levels deduction. Do I take it that the Minister has ruled out the per capita index deduction because there is too much of a bias to Scotland in terms of its population going down and it being rewarded excessively? Looking at the Chief Secretary’s letter, it would seem that the Government from paragraph 13 onwards have looked at the levels model and the index model and decided to provide another hybrid model to the negotiations for the SNP. Is that what the Government are doing? Given paragraph 13, I asked earlier what the response of the Scottish Government has been. Are they warm to that hybrid model now?

[Lord Dunlop]

The Committee will understand that at a very delicate time in the negotiations I do not want to comment on the state of the negotiations in detail. It is clear from the Chief Secretary’s letter that we have indeed tabled what the noble Lord described as a hybrid model.

I shall pick up on a point made by the noble Lord, Lord Forsyth. We are seeking to avoid—I think the Secretary of State for Scotland put it this way in a recent debate—the Scottish Government wanting to have their cake and eat it and have a slice of everyone else’s cake while they are at it.

I now turn to borrowing, which was raised by the noble Lords, Lord Kerr, Lord Darling and Lord Turnbull. I should say at the outset that we have a lot of sympathy with what this amendment seeks to achieve.

--- Later in debate ---

[Lord McFall of Alcluith]

There does not seem to me to be a need for separate legislation on borrowing. It is very important that the Minister clarifies that point now, otherwise we will just be chasing shadows afterwards.

[Lord Dunlop]

As I said, what we require in terms of legislation for borrowing depends on the final agreement. I do not think I can say more than that at the moment.

I shall conclude on a couple of points. Smith calls for a review and the Government support that idea. We are in a new world and it is right to assess how the fiscal framework and fiscal devolution work in practice and whether they impact fairly and equitably on the finances of Scotland and the rest of the UK.

I have already mentioned independent fiscal scrutiny, and the amendment from the noble and learned Lord, Lord McCluskey, addresses this. It is certainly the case that the UK Government strongly support a robust independent Scottish Fiscal Commission. That would include the capacity for that body to undertake independent forecasts—it would not just, as it were, be marking the Scottish Government’s homework. That is one of the key issues in the fiscal framework negotiations.

Finally, on commencement, my noble friend’s amendment is relevant in proposing a sunrise clause if we are unable to agree a fiscal framework. As we have already discussed, we are working hard to agree a fiscal framework. As I said earlier, I do not think that it is helpful to speculate what options would be open to us if an agreement cannot be reached. My noble friend suggested one option, and other options have been suggested as well. We will take those ideas away and set out our conclusions on Report. I therefore ask noble Lords not to press their amendments.

[Lord McFall of Alcluith]

I beg leave to withdraw my amendment.

Amendment 75 withdrawn.