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Fiscal framework must be true to principles of Smith Commission

11 February 2016

The Scottish Affairs Committee's report warns that the fiscal framework must not leave Scotland with risks it does not have sufficient powers to mitigate.

The report recommends that devolution of greater financial responsibility must be accompanied by enhanced borrowing powers and the adjustment to the block grant must abide by the Smith Commission principles of no detriment and taxpayer fairness.

Furthermore, it was reiterated to the Committee that the Barnett Formula was placed at the heart of this latest round of devolution.

Chair's comment

Committee Chair Pete Wishart said:

"For the fiscal framework to work it must have fairness and transparency as its central pillars. Most importantly it must meet the central principles of no detriment and taxpayer fairness as enshrined in the Smith Agreement. There must be clear mechanisms that protect Scotland from undue risk, and ensure that future adjustments to the block grant are fair to Scotland and the rest of the United Kingdom.

We were able to take evidence from both the UK and Scottish Governments and where it was apparent that there remains a significant gulf between each Government's respective positions we do not believe it is insurmountable.

The Scottish Affairs Committee suggests that the 'per capita' indexed deduction approach of adjusting the block grant satisfies the Smith principle of 'no detriment as a result of the decision to devolve'. In conjunction with this approach, the Committee heard that an additional adjustment could be applied to secure the principle of taxpayer fairness for Scotland and the rest of the United Kingdom. If applied this must ensure that Scotland's funding per capita is no better or worse relative to the rest of the UK than if the existing arrangements remained in place. We invite the two Governments to explore this solution.

This financial settlement will see substantial and significant changes to the relationship between Scotland and the rest of the UK it is therefore imperative that we get this right. We hope our report will help bring closer an agreement between the two Governments."

Key recommendations

  •  Economic forecasting should be provided by an independent body – Scottish Fiscal Commission to be given additional powers
  • Scottish Government to borrow from the market, underwritten by UK government, to instil market discipline and transparency in borrowing
  • Specific limit on current borrowing to be set and published to indicate additional risk being undertaken by Scottish government and measure performance
  • Initial adjustment should be based on average outruns over several years to avoid effects of an atypical in economic cycle
  • Scottish and UK governments work together to avoid confusion and uncertainty caused by transfer of devolved benefit powers
  • Scottish government should retain any additional VAT intake from improved economic performance
  • Operation of fiscal framework to be reviewed after four years

Further information

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