|Date:||22 March 2016|
|Authors:||David Bell , David Eiser and David Phillips|
|Publisher:||Institute for Fiscal Studies|
Scotland’s Fiscal Framework – an essential part of the devolution of new tax and welfare powers – was finally agreed one month ago, after many months of tortuous negotiations. The most difficult thing to agree was how to adjust the Scottish Government’s block grant funding to account for its new revenues and spending responsibilities.
The Fiscal Framework Agreement states that for the first five years of devolution the block grant adjustments (BGAs) will first be calculated using the UK government’s Comparable Model but then adjusted to “achieve the outcome delivered by the Indexed Per Capita (IPC) model”.
All this means, of course, is that it is the IPC approach that will ultimately determine the BGAs. Under this method, if Scotland’s devolved revenues and welfare spending per person grow at the same percentage rate as those in the rest of the UK (rUK), then the Scottish Government’s budget will be exactly the same as if devolution had not happened.
These are among the findings of a new report released by researchers at the Institute for Fiscal Studies and the University of Stirling, funded by the Nuffield Foundation and the Economic and Social Research Council. The report appraises Scotland’s new Fiscal Framework, considering whether it meets the Smith Commission’s principles, which government got the deal they wanted, and the impact that tax and welfare devolution could have on Scotland’s budget and the budget risks it faces.
The report also finds that:
David Phillips, a senior research economist at the IFS and one of the authors of the report, says “It was never going to be possible to design a Fiscal Framework that satisfied all the Smith Commission’s principles: they are mutually incompatible. In the end, the Scottish Government’s preferred approach was chosen, which prioritises the ‘no detriment’ principle. During the negotiations, the UK government had claimed this approach was unfair because it violates the ‘taxpayer fairness’ principle. This begs the question of whether the UK government has changed its mind or merely conceded the point.”
“The Scottish Government did not get everything it wanted though”, says Professor David Bell of the University of Stirling and the Centre on Constitutional Change. “It has had to agree to economic and fiscal forecasts being made by the independent Scottish Fiscal Commission, rather than its own economists as it had wanted. And it has much lower borrowing limits than it had hoped for. These limits look like they should be enough to cope with fluctuations in its revenues and welfare spending. But the rules about when the borrowing powers can be used may be more constraining.”
David Eiser, also of the University of Stirling and the Centre on Constitutional Change and another of the report’s authors, says “Many features of Scotland’s funding regime look unusual in an international context. The Scottish block grant will continue to be determined largely by historical accident through the Barnett Formula, and will still bear no relation to Scotland’s relative spending need. The Scottish budget will be protected from the effects of UK-wide economic downturns and the Scottish Government will have some powers to borrow during short-term shocks that hit Scotland disproportionately. However, the Fiscal Framework Agreement offers virtually no protection against the risk of Scotland’s devolved revenues under-performing, or its welfare spending growing more rapidly than in the rest of the UK in the longer term.”
1. ‘Scotland’s Fiscal Framework: Assessing the Agreement’ by David Bell and David Eiser of the University of Stirling and the Centre on Constitutional Change and David Phillips of the Institute for Fiscal Studies (IFS) is being launched at an event in Edinburgh on 22 March 2016 and will also be presented in London on 23 March 2016: http://www.ifs.org.uk/events.
2. This paper was supported by funding from the Nuffield Foundation. The Nuffield Foundation is an endowed charitable trust that aims to improve social well-being in the widest sense. It funds research and innovation in education and social policy and also works to build capacity in education, science and social science research. The Nuffield Foundation has funded this project, but the views expressed are those of the authors and not necessarily those of the Foundation. More information is available at nuffieldfoundation.org
3. The paper was also supported by funding by the Economic and Social Research Council (ESRC) through the Centre for the Microeconomic Analysis of Public Policy at IFS (grant reference ES/H021221/1) and through the Centre on Constitutional Change.
4. The ESRC Centre on Constitutional Change is the hub for research of the UK’s changing constitutional relationships. Its fellows examine how the evolving relationships between governments and parliaments in London, Edinburgh, Cardiff, Belfast and Brussels impact on the polity, economy and society of the UK and its component nations.