The 2022 Review Of The Scottish Fiscal Framework: What's Been Agreed So Far?

10th November 2021

The UK and Scottish governments recently announced welcome progress in agreeing the scope of a review of the Scottish fiscal framework. What has been agreed so far is welcome, but there are still some details to be ironed out.

A commitment to review the Scottish fiscal framework in 2022 was made by both governments in 2016

February 23rd 2016, Scottish Parliament. At 2pm, First Minister Nicola Sturgeon tells MSPs that after 11 months of negotiations, a deal with the UK Government on arrangements for a new Scottish fiscal framework - to operationalise the fiscal powers recommended for devolution by the Smith Commission - has almost been struck. A ‘fair resolution' has been reached on the financial transfers between the governments to meet implementation and administration costs. Arrangements for capital and resource borrowing have been settled. Importantly, the UK Treasury has agreed that, until 2022, the adjustment to the Scottish block grant to account for tax devolution will be made according to the Scottish Government's preferred approach.

There is just one outstanding issue - what happens to the block grant adjustments after 2022? Both governments agree there should be a review of the block grant adjustment (BGA) mechanisms at that point. The Scottish Government thinks this review should take place with an open mind (‘without prejudice') as to the potential outcome. But it is worried that the UK Government sees the review as a way to adopt its preferred mechanism for adjusting the Scottish block grant. Adopting this method would, according to the FM ‘extract a significant price in return for the powers that Scotland was promised'. She adds: ‘I will not sign up to a systematic cut to Scotland’s budget, whether that cut is applied now or by a prejudged review in five years’ time’.

Just three hours later, the First Minister provides a second update to the Chamber. A deal has been reached. The Scottish Government’s preferred approach to calculating the BGAs will be implemented for a ‘transitional’ period of five years. Following this, the approach will be reviewed in 2022, with the review itself being informed by an independent report in 2021. Crucially, neither that independent report, nor the review that follows, will prejudge the approach to adjusting the block grant beyond 2022. ‘The deal will not allow a single pound or even a penny to be taken from the Scottish Government’s budget’ says Sturgeon.

But what should the scope of the review be?

So the commitment that there would be a review of the 2016 Scottish fiscal framework was an important part of the agreement itself. But it has been suspected for some time that the two governments might find it difficult to agree the specific terms of the review and the report.

The UK Government is known to favour a narrow review, focussing on the question that dogged negotiations in 2016 - which specific mechanism should be used to index the changes to the block grant to account for new tax responsibilities?

The Scottish Government in contrast favours a broader review, covering the full range of issues addressed in the fiscal framework – including limits on existing borrowing and reserve powers to address forecast errors and support capital investment, and issues around inter-governmental coordination and dispute resolution. The Scottish Government has also argued that the review should consider the nature of the fiscal settlement more generally, including scope for further tax devolution and powers to borrow under additional circumstances (beyond the existing powers to manage forecast errors and support investment spending).

Until recently, little progress on agreeing the scope of the review had been made. But in early October the UK and Scottish Governments announced ‘progress’. This was followed this week by further details from both governments.

What has been agreed so far? The two governments have agreed that there will be an independent report, commissioned in 2021. This report will focus solely on the block grant adjustment (BGA) question, not any of the wider fiscal framework issues.

In return for this apparent concession, the Scottish Government has secured agreement that the subsequent review will cover a ‘broader’ range of fiscal framework related issues, it will include stakeholder engagement (as opposed to being a purely intergovernmental negotiation) and will begin in early 2022 (rather than being kicked into long grass, which was looking increasingly likely).

Block grant adjustments: the 2016 debate reprised

The heart of the disagreement between the governments during the fiscal framework negotiations in 2015 and 2016 was around how the reduction to the Scottish block grant – to account for the transfer of revenues from the UK to the Scottish government – should be indexed over time. This is the question the forthcoming independent report will focus on.

The Smith Commission had established some principles to inform the design of this indexation mechanism. But these principles were inconsistent with one another. In the negotiations, the Scottish Government favoured its interpretation of the ‘no detriment’ principle. This led to it arguing for the so-called ‘indexed per capita’ mechanism for indexing the block grant adjustment.

Under this IPC mechanism, the Scottish budget is neither better nor worse off than without tax devolution as long as devolved tax revenues grow at the same per capita rate as the equivalent revenues in rUK.

This article is from the Fraser of Allender Institute.
Read the full article HERE