Written evidence submitted by The Convention of Scottish Local Authorities (COSLA) (FSG0001)

The Convention of Scottish Local Authorities (COSLA) is a Councillor-led, cross-party organisation, representing all 32 Councils in Scotland, which champions Councils’ vital work to secure the resources and powers they need. COSLA works on Councils' behalf to focus on the challenges and opportunities they face, and to engage positively with Governments and others on policy, funding and legislation. We’re here to help Councils build better and more equal local communities. To do that we want to empower local decision making and enable Councils to do what works locally.

COSLA welcomes the opportunity to respond to The Financing of the Scottish Government Inquiry. COSLA’s response is high level due this Inquiry coming to our attention at very short notice.  We are however more than happy to offer further thoughts should the Committee welcome these after the submission date.

COSLA’s response to the questions are below:

1. How effective is the Barnett formula in calculating the amount of money made available to Scotland for providing essential public services?

- What was the original design intention behind the Barnett Formula, and to what extent has it fulfilled this purpose?

- What potential reforms to the Barnett formula could improve its effectiveness?

- How transparent is the UK Government’s decision making regarding the application of the Barnett Formula?

- What impact could putting the Barnett formula on a statutory footing, or otherwise formalising it, have on its effectiveness?

The Barnett formula has been with us for many years and is a well understood mechanism for calculating funding for Scotland for providing essential public services.  We are aware that there have been calls for review of the Barnett formula in the past, however we have consistently recognised the importance of having a stable and understood mechanism for funding to pass to Scotland from the UK Government.

At this point therefore COSLA has not called for specific areas that could improve the Barnett formula.  We are aware of there are complexities in the formula and it is not always straightforward to understand how the formula impacts (for instance why one UK Department’s funding may be relevant in the formula and another may not), however in many ways this reflects the importance of a mechanism which seeks to reflect need (which itself is complex) in the transfer of funds and, indeed, in many ways the simplified approach which is the inherent intention of Barnett is welcomed.

Should any future review take place we would strongly urge that this fully reflects the fact that the Barnett formula has provided a stable mechanism of providing funding to Scotland over many years.  Should a review be considered then areas of why certain departmental spending is included/excluded including large UK infrastructure projects and how timely transparency of any Barnett consequentials can be improved.

2. Following its review in 2023, to what extent does the current Fiscal Framework effectively govern the mechanisms for Block Grant Adjustments and fiscal flexibilities of the Scottish Government?

- To what extent could changes to Scottish Government borrowing powers enable more effective fiscal management, and mitigate against the impact of inflation and economic shocks in Scotland?

- Does the current methodology for calculating Block Grant Adjustments effectively reflect the associated transfer of tax revenues or welfare spending?

The strength of the current system is that it attempts to place responsibility for tax policy decisions with the resultant impact on the Scottish Government’s spending proposals. This aligns devolved government responsibilities with political accountability.

However, the block grant adjustment has the potential to run counter to the above principle, leading to the risk that the benefits that are attributable to any devolved tax policy changes are not fully realised.  This can equally work in Scotland’s favour if Scottish devolved tax performance exceeds that of the rest of the UK. As the Scottish Fiscal Commission have recently pointed out, the Scottish Budget is better off by £838 million because of the partial devolution of income tax. However, Scottish income taxpayers pay £1,676 million more in income tax than in the rest of the UK. So, in return for paying £1,676 million more in income tax, the Scottish Budget is only benefitting by £838 million.  This is due to the relative economic performance when compared to the rest of the UK, including London and the distortive effect of this should be considered. Further consideration of the BGA methodology may be merited in the light of actual experience. This however needs to be aligned with the wider fiscal framework and expenditure and borrowing controls that are currently held and set by the Treasury

On changes to Scottish Government borrowing powers, there are clear benefits in enabling effective fiscal management without undue constraints whilst recognising the need to balance this with the overall controls necessarily set by Treasury.  Local Government has substantial borrowing powers operating within a prudential code of practice and this could be a model potentially for changes to Scottish Government borrowing powers, however any changes to Scottish Government borrowing powers cannot therefore come at the expense or restriction of powers already utilised by Scottish Local Government.

3. Within the existing devolution settlement, what steps could the UK Government take to offer Scotland more financial certainty?

- Is there an appropriate level of coordination between the UK and Scottish Governments regarding in-year fiscal changes?

- To what extent can HM Treasury’s decisions regarding the block grant be challenged by the Scottish Government?

It is recognised that funding decisions will inevitably occur after the UK Budget as changing circumstances and policy decisions result from a moving political and environmental landscape.  However, in year changes can often result in uncertainty around funding and create complexity in the funding landscape.  It is important therefore that in year decisions are notified at the earliest opportunity and that these are transparent.  It has been difficult to be able to interpret decisions and the resultant funding and whether there is a clear way of linking these to related Scottish spending (recognising that the Scottish Government has full discretion over UK consequentials).

4. Are there any comparative perspectives that should be considered when assessing the effectiveness of fiscal devolution in Scotland?

- What learnings can be drawn from Wales and Northern Ireland’s funding settlement arrangements?

- Are there any learnings from international perspectives that should be considered?

Due to short notice we are not in a position to readily offer views on other fiscal relationships.  We have always been clear that Local Government should have full autonomy on spending decisions and related funding and there are well explored examples across the world where federal and central relationships contain at their core mutual respect for autonomy and independent decision making.

December 2024