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The UK and Scottish Governments have so far failed to agree the new ‘fiscal framework’ that must accompany the transfer of tax and welfare powers recommended by the Smith Commission and set out in the Scotland Bill.
Perhaps the biggest bone of contention is how to adjust Scotland’s block grant to reflect the associated transfer of tax revenues and welfare spending to the Scottish Government. With another ‘deadline’ for an agreement looming, this observation aims to analyse the proposals put forward by each government, including a recent ‘compromise’ put forward by the UK government.
This is an extract from an IFS Observation, an output from a Nuffield-funded project to examine the ficscal issues in implementing the Smith Commission proposals and further devolution.
The IFS finds that there are clear rationales behind the positions of both the UK and Scottish governments. As already noted, it seems impossible to design a system that will satisfy all the Smith Commission’s principles. Both governments claim adherence to these principles, but prioritise them differently.
The recent ‘compromise’ proposal from the UK government represents a significant move towards the Scottish Government’s position – but the two sides remain some way apart on how differences in population growth between Scotland and the rest of the UK (rUK) should be reflected in the block grant adjustment (BGA) indexation method. Looking at income tax alone, simulations suggest that after 15 years, differences in funding per year under these proposals and the Scottish Government’s preferred option may amount to around 2% of Scotland’s income tax revenues and remaining block grant. This compares to a gap of closer to 5% between their initial proposals and the Scottish Government’s preferred option. But it still represents hundreds of millions of pounds a year (to put it in context, Scotland’s block grant this year is around £28.6 billion).
There are no right or wrong answers here – just differences in interpretations of the Smith Commission’s principles and differences in priorities when they clash. Perhaps it’s not surprising that a deal is still elusive. Reaching one will take good will and further compromises by someone.