SCD0005 - Evidence on The Smith Commission: Proposals for Further Devolution to Scotland

Written evidence to the Smith Commission inquiry submitted by Rt Hon Alistair Carmichael MP

Dear Ian,

IMPLEMENTING THE SMITH COMMISSION AGREEMENT

Thank you for inviting me to appear before your Committee on 3 February to discuss the Government’s progress in implementing the Smith Commission Agreement following the publication of the Command Paper Scotland in the United Kingdom: An enduring settlement on 22 January. I promised to write on several points arising from my oral evidence session.

Consultation between Scottish and UK Ministers

The Committee asked about a handful of clauses which include a consultation process. This is sensible and proportionate, because of the nature of the responsibilities involved. In many cases the requirement to consult is reciprocal between UK Government Ministers and Scottish Ministers. The rationale for the consultation processes is set out in the table annexed to this letter.

Fiscal matters

At its core the Smith Commission Agreement provides the Scottish Government with more budgetary flexibilities and responsibilities. At the same time, Scotland continues to benefit from being part of the UK and the ability to pool risk and resources across the much wider tax base of the whole of the UK. It is important to note that the relative importance of the block grant will reduce. Currently the Scottish Government receives around 90 per cent of its funding through the Barnett-based block grant. This will reduce to around 30 per cent with the implementation of the Scotland Act 2012 and the delivery of the Smith proposals. As a result, the Scottish Parliament will be responsible for more than 50 per cent of its funding and will be able to determine changes to its funding by changing taxes. The IFS estimated that an increase of 1 percentage point in the basic rate of income tax would raise around £365 million, and the same increase in the higher rate would increase tax revenues by around £60 million.

During the referendum campaign the UK Government published a detailed analysis on currency and monetary policy that showed how the current currency and monetary policy arrangements within the UK has brought economic benefits to all parts of the UK, including Scotland. The analysis discussed in great detail that a formal sterling currency union would be a less favourable arrangement. It should be noted that the analysis concluded that within a sterling currency union, an independent Scottish state would find it more difficult to adjust to the effects of economic challenges, such as a fall in the global oil price.

The analysis published by the Scotland Office in December last year showed the shortfall an independent Scotland would be facing up to with an oil price of $60 per barrel, compared with the revenue predictions of the Scottish Government based on an oil price of $110 per barrel. Instead of generating the £20.2 billion predicted by the Scottish Government between 2016 and 2019, the falling oil price would provide only £4.7 billion for the exchequer of an independent Scotland. That is nearly a 77% reduction in what the Scottish Government estimated before the referendum. The current oil price of around $55 per barrel would have meant an £17.1 billion shortfall in the first three years of independence. The lower oil price would now have raised only £3.2 billion - an 84% reduction in what the Scottish Government expected in the first three years of independence. This shows that for a $1 fall in Brent crude prices on the global market, the Scottish Government would have to deal with around £300 million less in North Sea taxes compared to their $110 per barrel baseline.

Other matters

You asked about international comparisons of systems of intergovernmental relations which involve arbitration. I am not aware of another country that has a binding system. We also discussed the GERS publication, for which I understand a publication date of 12 March has been announced by the Scottish Government.

Please let me know if I can be of further assistance to the Committee.

Rt Hon ALISTAIR CARMICHAEL MP

SECRETARY OF STATE FOR SCOTLAND

Annex A

Consultation requirements

Clause	What is the consultation about?	Rationale for consultation
6	Regulations to make changes to the digital service	The draft clause gives powers to the Scottish Parliament over the franchise and registration arrangements for local government elections in Scotland and the Scottish Parliament elections. Scottish Ministers will have the power to create a system to facilitate registration for these elections. The UK Government has a digital electoral registration service which remains reserved. If Scottish Ministers want to use this reserved service for devolved Scottish Parliamentary local election registration, then they need the agreement of UK Ministers.
20 21	Regulations to determine the liability of claimants in respect of accommodation costs Regulations relating to persons to whom, or time when, Universal Credit is paid	Paragraph 43 of the Smith Commission Agreement is very clear that Universal Credit (UC) should remain a reserved benefit. All five parties to the Agreement signed up to that. The clauses devolve powers to Scottish Ministers to make alternative payment arrangements in relation to UC. Draft clauses 20 and 21 require consultation as to the practicability of proposed arrangements and agreement as to the date on which any changes brought in by the exercise of the new devolved powers come into effect, so that DWP (which will continue to administer UC) can make the necessary practical and IT changes. Consultation is reciprocal between UKG and the SG.
27 28 29	Power to give Ministerial direction about road signs Power to make an order relating to speed limits Power to give Ministerial directions on speed limits Regulations on speed limits for certain types of vehicles or temporary speed limits	In one single state with no internal border controls, it is common sense for both Scottish Ministers and the UK Government to consult each other on changes, and to communicate clearly with people moving across the border. Again, the consultation requirement is reciprocal.
38 39	Regulations to make schemes relating to fuel poverty support Regulations to impose obligations on gas suppliers to reduce carbon emissions Orders to impose obligations on gas suppliers to reduce home heating costs. Orders to impose obligations on electricity suppliers to reduce carbon emission Orders to impose obligations on electricity suppliers to reduce home heating costs	The clauses require consultation and agreement to give full effect to the recommendation in the Smith Commission Agreement (para 68) which states that the proposal will be implemented in a way that is not to the detriment to the United Kingdom, or to the ability of the UK to meet its international obligations and commitments on energy efficiency and climate change. The reserved powers focus on the overall cost and scale of the obligations to ensure that the obligations continue to operate appropriately within the single GB market and prevent competitive distortions that could disadvantage some consumers. That disadvantage would occur if costs in Scotland were disproportionate (whether high or low) as those costs are spread across GB consumers.

12 February 2015