It follows a series of warning in recent days from what Sturgeon called “credible independent voices” – Glasgow University principal Anton Muscatelli, influential economist Jim Cuthbert, and the leadership of the Scottish Trades Union Congress – that Scotland could be massively disadvantaged unless a fair and enduring deal is agreed.
The Bill, enacting the Smith Report on further devolution, would give the Scottish Government responsibility for income tax and assign it half Scotland’s VAT revenues, in return for a downward adjustment to the Barnett Formula for allocating Scotland’s block grant share of UK spending.
But the talks over what that adjustment should be, and how it should be calculated in future, have become bogged down, missing their initial autumn completion target. Swinney told the CIPFA Scotland conference in March that he would not recommend Holyrood’s required assent to the Bill without a fair fiscal settlement.
In an article for today’s Herald newspaper, Muscatelli urges Scottish ministers not to settle for more devolution “at any price”, and warns that suggested formulae for recalculating Barnett in years ahead could leave Scotland “hundreds of millions of pounds” out of pocket. The issue of future-proofing the formula is understood to be the key barrier to a settlement.
Muscatelli says indexing to population, as the Treasury reportedly proposes, would hurt Scotland because its share of income tax is less than its share of the UK population. “Even if Scotland matched UK economic performance and grew its tax revenues by the same rate as the rest of the UK, the amount deducted from the block grant would always be larger than the revenues collected from tax,” he said.
“A much better alternative would be to index the block grant adjustment to the growth in income tax receipts per person in the rest of the UK.
“The Scottish budget would be no better or worse off.”
Cuthbert, writing for the Bella Caledonia website, calls the fiscal settlement “a decision which is likely to be second in importance, over the past 300 years, only to the recent referendum.”
Like Muscatelli, Cuthbert is concerned about what happens to the block grant after the initial “no detriment” provision insisted on by Smith expires, and he warns that the issue of relative population share would also create problems under the so-called Holtham principle, as proposed by the previous UK coalition, to index block grant reduction to growth in the overall UK income tax base.
“In order to grow our overall income tax base at the same rate as the rest of the UK, we would have to grow our per capita tax base faster than the rest of the UK,” Cuthbert writes.
“The only way Scotland can grow its income tax base is by growing its economy. However, under the post-referendum settlement, the Scottish government will lack many important economic powers.”
He adds: “What Scotland is actually being invited to take part in is the great Smith handicap race. We will hobble you by denying you the most important economic powers. Then we will set up a fiscal system where you have to engage in an economic race with the rest of the UK. And if you fail to win in that handicap race, then you will be severely penalised.”
STUC general secretary Grahame Smith said: “Scotland could find itself disadvantaged to the tune hundreds of millions in a relatively short space of time if the wrong method is applied and this figure could reach the billions over a longer time period.
“In this context, it would be completely wrong for the deputy first minister to sign up to a mechanism for block grant adjustment which would structurally disadvantage Scotland. It would also be entirely wrong for the Scottish Government’s political opponents to characterise an appropriately firm bargaining position as the [Scottish} Government ‘dragging its feet’ on new powers.
“The Fiscal Framework is absolutely central to the impact of further devolution and it would be entirely wrong to sleepwalk into a bad deal,” Smith said.
