Advertisement

Scottish devolution: a vow fulfilled?

Panicked unionist parties made a “vow” of more devolved powers to voters during Scotland’s independence referendum. A new bill promises to deliver. Will it? Simon Wilson reports.

16-2-11-Swinney-634
John Swinney: wants his cake, and a bit of yours too

What's in the bill?

It gives the Scottish government in Holyrood a range of significant new tax and spending powers, but stops some way short of full fiscal autonomy. From April 2017 the Scottish parliament will be able to vary the rates and bands of income tax for the first time; they will also keep half of all VAT receipts and be able to top up welfare payments and create new ones.

Advertisement - Article continues below

The bill recognises the Scottish government and parliament as permanent parts of the UK constitution for the first time, and stipulates that a referendum would have to be held before either could be abolished. It does not, however, give the Scottish parliament the right to decide on holding another independence referendum; that remains the preserve of the Westminster parliament.

Does the bill fulfil "the Vow"?

The so-called "Vow" the promise of more devolved powers made by panicky unionist parties ahead of the referendum was always more of an eye-catching Daily Record front cover than a concrete set of promises. For what it's worth, the UK government reckons the Scotland Bill, if it passes into law ahead of Holyrood elections in May, will make the Scottish parliament the most powerful devolved assembly in the world, and fully delivers on the recommendations of the Smith Commission set up following the "No" vote in September 2014.

Advertisement
Advertisement - Article continues below

The SNP, as might be expected, reckons the bill doesn't go far enough, while Scottish Labour has urged its opponents to "give up the grievance and start governing". One big bone of contention, naturally, is money and in particular the "fiscal framework" that will underpin the new set-up. The SNP government has set this weekend, Valentine's Day, as the deadline for an agreement.

What's at stake?

Tens of billions of pounds and (potentially) the future of the Union. In the first year of the new fiscal arrangement, it is relatively simple to work out what should happen. Just now, the majority of Scotland's annual £30bn budget comes as a "block grant" under the long-standing Barnett formula. The formula will stay in place, but once Holyrood gets more power to raise taxes, the amount of money handed over by the UK Treasury (which includes Scottish contributions) will need to be cut.

Advertisement - Article continues below

If Scotland gets around £10bn of cash-raising powers, £10bn will be cut from the block grant. So far, so good. But what has really got the politicians (and economists) arguing is what should happen in subsequent years as and when circumstances change and the economy (and indeed the population) of Scotland continues to grow at a slower rate than that of the rest of the UK.

What should happen?

Both the UK and Scottish governments are signed up to the principle of "no detriment" as laid down by the Smith Commission ie, neither government should be worse off financially as a result of further devolution, or as the result of policy decisions subsequently made by the other. But there are two big problems.

Advertisement
Advertisement - Article continues below

Firstly, some experts, such as economics professor David Bell of Stirling University, who has co-authored a paper on the subject for the Institute for Fiscal Studies, argue that the whole notion of "no detriment" is unrealistic. "If you are taking on new powers, then you take on the risk that something goes wrong in the economy and you don't get the tax revenues that you expected.

Advertisement - Article continues below

You cannot have a situation where, under all states of the world, things will be no worse that they would be under the Barnett formula." Secondly, even if you believe the principle is achievable, economists (and politicians) don't agree on the fairest way to index block grant adjustments after the first year and in the long run any differences will add up to tens of billions. Three different options are in play.

There's "indexed deduction", where Scotland's grant falls at the same rate as income tax revenues in the UK as a whole; "per-capita indexed deduction", where the first option is tweaked to protect Scotland from the effects of having slower population growth than the UK as a whole; and "levels adjustment", where the grant is cut in line with Scotland's population share of any change in income tax revenues in the rest of the UK.

Who wants what?

The last option is similar to the Barnett formula and is thought to be favoured by the UK Treasury. The Scottish government prefers option two, as it offers Scotland the most security Scotland's ageing population means its labour pool is likely to shrink over the next two decades and since devolution in 1999 its population has grown at 0.35% a year, half the growth of England's.

Advertisement - Article continues below

The SNP says it won't sign off on the Scotland Bill unless a fiscal deal takes into account the demographic issue. The UK's Scottish secretary accuses Scotland's deputy first minister, John Swinney, who is leading the negotiations for the SNP, of wanting to have his cake, eat it, and then have a bit of everyone else's cake too.

Where would a solo Scotland be now?

If the referendum had gone the other way, Alex Salmond hadset 24 March 2016 as independence day, says Fraser Nelsonin The Daily Telegraph. But "just as the discovery of North Sea oil transformed the prospects for Scottish nationalismin the 1970s, so the collapse of the oil price has destroyed itseconomic rationale today".

The SNP had foreseen Scotlandenjoying almost £8bn a year in oil revenue by now. Post-crash,the forecast is just £100m, 99% lower than the SNP imagined."So the first question a newly independent Scotland wouldhave to answer is how on earth to fill the £7.9bn black hole."

Advertisement
Advertisement

Recommended

How the fear of death affects our investment processes
Investment strategy

How the fear of death affects our investment processes

Many of our investment decisions are driven by one simple fact: the knowledge that, one day, we will be dead. Here, in an extract from his new book, J…
2 Jan 2020
The good investments of the 2010s – and the bad
Stockmarkets

The good investments of the 2010s – and the bad

John Stepek takes a look back on which investments did well and which did badly in the decade that’s about to come to an end.
26 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
UK house prices go into a gentle decline
House prices

UK house prices go into a gentle decline

Halifax’s house price index shows that UK house prices declined for the fourth month in a row in June.
9 Jul 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
Have small companies lost their edge?
Sponsored

Have small companies lost their edge?

SPONSORED CONTENT – The tectonic plates beneath the modern investing landscape appear to have started moving in new directions
26 Jun 2020