A phone conversation late on Tuesday between first minister Nicola Sturgeon and chancellor George Osborne ended months of wrangling between the two governments over how to replace the Barnett Formula when the Scotland Bill gives Scotland full control of income tax, a share of revenues from VAT, new capital borrowing powers, and increased authority over the benefits regime.
Interviewed on BBC radio, Mundell issued a plea for Scottish political debate to end its decades-long obsession with constitutional grievance. “What we need to do now is to move on to discuss the [new] powers and how they are used for the benefit of the people of Scotland,” he said.
While few observers expect the independence issue to fade away as a result of the Scotland Bill reforms, there were efforts from both governments yesterday to present the deal as an honest compromise and to resist questions about who had blinked first. Both sides were keen not to be seen to have crashed the reforms.
The key blockage arose from Smith’s insistence that the new tax powers, discounting any differentials in policy between the two governments, must not work to the detriment of taxpayers on either side of the border.
Swinney and Sturgeon insisted that the Treasury formula, by failing to allow for divergence between Scotland and the rest of the UK in both population growth and demography, would cost Scotland £3-7bn over the next decade relative to the block grant Barnett would have yielded. Whitehall, equally, thought Holyrood’s proposed per-capita solution would disadvantage the rest of the UK.
A deal was ultimately reached to apply the Treasury formula, but with significant amendment to ensure no disadvantage for Scotland and with a review of that arrangement after five years in which both governments will have to agree to the outcome. It means that no long-term solution can be imposed against the will of either government.
The Treasury also made a significant concession in accepting that the £50m it proposed to allow for the cost of setting up a new Scottish benefits regime was inadequate. It will now contribute £200m towards those costs.
In the immediate aftermath of the deal, Sturgeon told MSPs: “This deal will not allow a single pound, or even a penny, to be taken from the Scottish government's budget."
A statement from Osborne said the deal meant “a stronger Scotland in a stronger UK.” He added: “It is fair to the taxpayers of all of the UK and it gives Scotland one of the most powerful devolved parliaments in the world.”
