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Meeting of the Parliament [Draft]

Meeting date: Wednesday, December 6, 2023


Contents


Fiscal Framework Review

The Deputy Presiding Officer (Annabelle Ewing)

The next item of business is a debate on motion S6M-11546, in the name of Shona Robison, on the fiscal framework review. I ask members who wish to speak in the debate to press their request-to-speak button.

14:50  

The Deputy First Minister and Cabinet Secretary for Finance (Shona Robison)

I am pleased to open the debate on the revised fiscal framework agreement.

On 2 August, following a joint review, the Scottish Government and the United Kingdom Government published an updated version of the Scottish fiscal framework, thereby fulfilling a key commitment in the First Minister’s policy prospectus. The Government believes that Scotland’s future lies as an independent country and that it would be best served by the full range of fiscal powers and choices that independence would bring. However, until such a time as the people of Scotland choose a different constitutional path, we are committed to working with the current framework and working to improve on it.

The changes agreed with the UK Government are balanced and pragmatic. The new agreement strengthens the Scottish Government’s financial management levers and provides the Scottish Parliament and Government with greater long-term funding certainty. However, we need to be clear that, despite improvements to the framework, the fiscal position facing the Scottish budget remains extremely difficult.

The situation is, of course, made worse by decisions that were imposed by the UK Government in last month’s autumn statement. Once again, the UK Government has chosen to pursue an austerity budget that will have a profound consequence for Scotland’s public services. As the Institute for Fiscal Studies said of the autumn statement,

“the tax cuts are paid for by planned real cuts in public service spending.”

Even with the fiscal framework in place, levels of funding for the Scottish budget remain closely tied to spending decisions by the UK Government. Decisions to starve services in England hit our budget in Scotland, as the UK Government’s failure to invest in services in England means that the devolved Administrations in Scotland, Wales and Northern Ireland do not receive adequate consequentials.

A cursory look at the UK Government’s autumn statement for 2024-25 shows the devastating impact of Tory austerity being forced on services. Even using lower estimates of inflation, UK front-line resource budgets are being cut in real terms. For example, if planned UK day-to-day expenditure on services for 2024-25 had grown in real terms since 2022-23, health and social care spending would be more than £8 billion higher compared with Conservative plans for England.

The UK Government’s approach means that it has provided almost no funding to cover the cost of this year’s pay deal in 2023-24, never mind the cost of a 2024-25 pay deal. The lack of provision for the cost of national health service pay deals amounts to treating pay increases as though they were one-off costs, which they are not.

Prior to tax and welfare block grant adjustments, Scotland’s resource budget from the UK Government in 2024-25 will be more than £700 million lower than if funding had been in line with real terms over the two years. Changes to the fiscal framework cannot compensate for the scale of the UK Government’s failure to invest in public services at this time.

To return to the fiscal framework review, I make it clear that, although the revised agreement has delivered important improvements, the Scottish Government’s preference would have been for a review that was broader in scope. I also make it clear that, in some places, the agreement does not go as far as we would have wished. The scope of the review and its outcome were, of course, subject to agreement with the UK Government.

I also want to address the timing of the agreement. Throughout discussions with the UK Government on arrangements for the review, my predecessors and I have sought to balance the need to keep the Parliament informed with the need to maintain a confidential space for negotiations. In weighing whether to conclude an agreement during recess, I had to consider the benefits of securing improved borrowing powers in advance of the 2024-25 budget and the fact that we are negotiating with a UK Government that will probably go into election mode soon. Considering those circumstances, I concluded that it was appropriate and prudent to agree the revised agreement when the opportunity arose.

The Scottish fiscal framework plays a central role in determining the funding for the Scottish budget, and it has been key to enabling the devolution of the new tax and social security powers that were provided for in the Scotland Act 2016. The original fiscal framework, which was agreed in 2016, was the product of negotiations between the Scottish and UK Governments. Those negotiations were guided by the principles and recommendations that were articulated by the cross-party Smith commission, which published its findings in 2014. That remains the case for the revised agreement. The Barnett formula continues as the basis for calculating the block grant, and the framework continues to be bounded by the principles that were outlined by the Smith commission, including economic responsibility, sustainability and no detriment as a result of devolution.

Since 2016, the Scottish Government has used the tax and social security powers underpinned by the framework to pursue policies that are better tailored to Scotland’s needs. For example, the Scottish Government has delivered the fairest and most progressive income tax system in the UK, while raising extra revenue to invest in public services and Scotland’s economy. With devolved social security powers, the Scottish Government has ensured additional support for the most vulnerable in our society.

Liz Smith (Mid Scotland and Fife) (Con)

In light of the point that the cabinet secretary has just made, does she believe that there is a case for looking again at the principles of the Smith commission considering the time that has elapsed since, or does she think that they are the correct principles to underpin future fiscal frameworks?

Shona Robison

I am open to having that discussion. When Liz Smith made that point at committee, I said that a lot of time has elapsed and a lot of changes have been made. Under the current constitutional arrangements, further changes would need to be agreed on a cross-party basis, but we should have the discussion.

Since the unanimous passing of the Social Security (Scotland) Act 2018, we have introduced 13 benefits, seven of which are brand new and available only in Scotland. This year, we will invest £405 million in the Scottish child payment, improving the lives of more than 300,000 children across Scotland. As a result of the Scottish child payment and Scottish Government policies, 90,000 fewer children will live in relative and absolute poverty this year.

However, it is also the case that the fiscal framework has been stress-tested since 2016. The agreement preceded the European Union referendum and the subsequent chaos and uncertainty that accompanied the UK Government’s hard Brexit. We have also seen extraordinary fiscal upheaval as a result of the pandemic, the on-going cost of living crisis and the UK Government’s economic mismanagement.

Given that political and fiscal upheaval, the review provided us with an opportunity to take stock and consider elements of the fiscal framework that required change. The centrepiece of the agreement in 2016 was the block grant adjustment arrangements that account for the devolution of new tax powers and social expenditure to Scotland. Under those arrangements, a total of £16.1 billion was deducted from the Scottish block grant in the 2023-24 budget to reflect the devolution of various tax powers and the corresponding revenues that are now retained by the Scottish Government. Similarly, £4.4 billion was added to the block grant for 2023-24 to reflect the transfer of responsibility for a suite of social security benefits to the Scottish Parliament. The methodology that is used to calculate the block grant adjustments therefore has a material impact on the funding that is available for the Scottish budget. Securing the indexed per capita block grant adjustment methodology on a permanent basis is a significant win for Scotland.

The Scottish Government pressed hard for the indexed per capita methodology as part of the original fiscal framework. The 2016 fiscal framework said that the indexed per capita methodology would apply on an interim basis, with a permanent arrangement to be reviewed and agreed at a later date. Now that that review has been completed, the agreement to apply the indexed per capita methodology on a permanent basis is a positive step, because it removes uncertainty and protects the Scottish budget from the impact of slower population growth in Scotland, which has been the historic trend for the past 50 years.

An independent report that was jointly commissioned by the Scottish and UK Governments ahead of the fiscal framework review estimated that the on-going use of the indexed per capita methodology for calculating income tax block grant adjustments alone could be worth around £500 million a year by 2026-27 when compared with other methodologies that were considered, such as the Treasury’s preferred comparable model. In my view, it is right to protect the Scottish budget in that way. The Scottish budget should not be penalised for lower population growth, which, of course, is outwith Scotland’s control, because we do not have the key levers over issues such as migration or the other levers that would be required.

The agreement also provides a substantial increase in the resource borrowing powers that the Scottish Government has to enable it to manage funding volatility associated with the operation of the framework. Specifically, it increases the Scottish Government’s ability to borrow to address tax and social security forecast errors, with borrowing capacity being doubled from £300 million to £600 million per year. Such forecast errors are a normal part of the way in which the fiscal framework operates, but that change will greatly improve the Scottish Government’s ability to manage and smooth funding volatility that is driven by forecast error. In turn, that will provide a more stable and predictable funding environment for the Scottish budget and the programmes and services that it supports.

Those new borrowing powers will take effect from 2024-25. I will set out how we intend to use the new powers in the forthcoming budget but, in principle, they would allow us to borrow in full to cover next year’s income tax and other reconciliations, which amount to £338 million. In effect, the ability to borrow in full spreads the impact of the tax reconciliations across multiple years rather than requiring that cost to be absorbed in a single budget.

Another important development involves changes to the operation of the Scotland reserve. Alongside borrowing powers, the Scotland reserve provides the Scottish Government with flexibility to manage its funding position across financial years and to respond to unforeseen circumstances. However, the Scottish Government’s ability to draw funds from the reserve was previously constrained. The amount that it could draw down was limited to a maximum of £100 million for capital and £250 million for resource funding. That amounts to around 1.5 per cent of the total Scottish capital budget in 2023-24 and 0.5 per cent of the resource budget.

I am pleased to report that those drawdown limits will be removed altogether as a result of the new agreement, which will significantly increase reserve flexibility and the Scottish Government’s ability to manage funding across financial years. As members would expect, specific decisions on the use and application of those bolstered powers will be outlined as part of the Scottish budget.

More broadly, we have also agreed that, in the future, all borrowing and reserve limits will grow with inflation each year. Previously, annual and cumulative limits for borrowing and reserve limits had been set in nominal terms, which meant that their power and effectiveness were eroded by inflation over time. Securing uprating ensures that the powers will continue to be viable and sustainable, and that limits will be protected in real terms.

In keeping with that approach and recognising how circumstances have changed since the fiscal framework was introduced in 2016, we have agreed to increase the baseline adjustment to the block grant that accompanied the devolution of responsibility for managing Crown Estate assets. That adjustment will increase in increments, and, when it reaches £40 million, in 2028-29, it will remain fixed in nominal terms.

To avoid any further delays in the Scottish and UK Governments concluding the revised agreement, it was jointly decided that arrangements for implementing VAT assignment would be further considered at a future meeting of the joint Exchequer committee. I very much appreciate the work that the Finance and Public Administration Committee has put into looking at that matter.

Viewed in the round, the agreement protects funding for the Scottish budget, updates the framework to reflect changes that have occurred since 2016, provides greater certainty on future funding and equips the Scottish Government with a set of strengthened fiscal levers.

However, as I said, although the revised fiscal framework agreement represents good progress and puts in place arrangements that better reflect the scale and complexity of the Scottish budget, the changes are not of the scale that is required to offset the broader fiscal challenge. In the autumn statement, the Chancellor of the Exchequer failed to provide the funding that devolved Governments need, and little consideration was given to Scotland and the specific challenges that we face, dealing with which will be very challenging indeed. I will set out the consequences of that in the budget on 19 December.

I move,

That the Parliament recognises the limited improvements to the Scottish Fiscal Framework, following a joint review with the UK Government; welcomes the outcome of the review, which provides an increase in the Scottish Government’s borrowing and reserve capacity, and also confirms the Indexed Per Capita methodology as the permanent basis for calculating Block Grant Adjustments for devolved tax and security spend; notes that, while the limited progress is welcome, the Framework cannot protect Scotland from the UK Government’s austerity-driven budget decisions; understands that the Autumn Statement saw real-terms cuts to frontline spending in NHS England and on justice, and that these cuts have impacts on the finances that are consequently available to Scotland; calls for the UK Government spending plans for 2024-25 to be urgently revisited to invest in services and provide the funding necessary to meet the costs of public sector pay deals, not least in the NHS, and believes that the Scottish Parliament should have all the fiscal levers to prevent Scotland being subject to the austerity policies that harm efforts to reduce poverty, develop a growing wellbeing economy, tackle climate change and invest in public services.

15:04  

Liz Smith (Mid Scotland and Fife) (Con)

Before I speak to our amendment, I apologise on behalf of my colleague Murdo Fraser, who is indisposed this afternoon, having fallen on the ice this morning. I understand that that is the case for other colleagues across the chamber. I extend the apology and wish them well in their recovery. I am afraid that members will have to listen to me twice today, as I will step in to perform the role of summing up.

Mention the fiscal framework and you can pretty much guarantee that a glazed look will come across the face of colleagues and journalists alike, such is its intense complexity and technical nature, but it matters hugely for the reasons that the cabinet secretary has set out. That is not just because of its importance to Scotland’s available finances but because of the need for Westminster and Holyrood to work together to get the best deal for Scotland. I believe that that is exactly what the public want and what they deserve.

We can see, yet again, from the Government’s motion and from what the cabinet secretary said in her speech that the Government does not really like the fiscal framework. It wishes that it was not necessary, because it would prefer different constitutional arrangements from the rest of us. However, both John Swinney in 2016 and Shona Robison in 2023 have rightly accepted that, under the current constitutional arrangements, they have a duty—and it is a duty—to ensure that Scotland gets the best deal. It is vitally important that both Governments do everything that they can to protect Scottish finance, particularly in these tough economic times.

The new framework, which was signed on 2 August, will do exactly that in a way that is better than the way that the 2016 model operated. Despite the fact that most economists believed that the latter served Scotland pretty well, it was clearly out of date, particularly as a result of inflationary pressures. The new model is better because it is gross domestic product deflator protected, it has provided greater flexibility to the Scottish Government on existing borrowing power, and it has taken into account the damaging consequences of exogenous shocks to the system. Those are all changes that the Scottish Government was rightly calling for, and it is good to see that they have been made.

John Swinney (Perthshire North) (SNP)

Could Liz Smith develop the argument about whether the revised fiscal framework adequately provides for the scale of financial shocks that we are experiencing? The finance secretary is having to wrestle with significant levels of inflation that we have not experienced for about 45 or 50 years. The crucial lack of response in the autumn statement demonstrates that, although the fiscal framework can provide all the rules that it wants, if the underlying financial position, as demonstrated by the autumn statement, is not sufficient to support public expenditure, public services in Scotland will feel the pressure as a consequence of Westminster decision making.

Liz Smith

Mr Swinney is making a constitutional point, and we disagree on these constitutional arrangements. The question of exogenous shocks relates not just to the current economic circumstances but to the conditions of the Covid pandemic, which other countries have suffered on exactly the same basis as us. We will have our constitutional debates, but I do not think that they should take place in this particular debate. There is a case to be made that it should have been a committee debate, because it is about the fiscal framework, which Mr Swinney signed in 2016 and now his colleague has signed in 2023. Those are important aspects of how we try to ensure, under the current constitutional arrangements, that we move forward together.

John Swinney

I am not making a constitutional point. I am making a point about the substance of the autumn statement, because that fuels, in general, the size of the public finances that are available to the Scottish Government to deploy. The point that I am making is that the failure of the Conservative Government to take adequate account in the autumn statement of the enormous effects of inflation will have a profound and unavoidable effect on the pressures on public finances and public services in Scotland. That has nothing to do with the constitution; that is about the existing arrangements just now, which are a result of the policy choices of the Conservative Government.

Liz Smith

Mr Swinney made exactly those points when he was finance secretary. He is not just talking about the current autumn statement. Mr Swinney would have been making those points about previous budgets. It is a constitutional point, because he fundamentally disagrees with the arrangements about how Scotland receives its money. That is the constitutional difference. It is not just this autumn statement that he has objected to, but previous ones, and he has made his point very strongly in the chamber.

The Deputy First Minister was right when she said that any fiscal framework requires serious negotiation and an understanding from both Governments that compromise will be necessary, and that is very much what we got. I am sure that local government would like that same process of mutual engagement and understanding when it comes to the Verity house agreement, which took such a knock two months ago when the council tax freeze was announced without any consultation. That point is very well made by the Liberal Democrat amendment.

The debate about the principles of the Smith commission, particularly when it comes to the no-detriment clause, matters. It is a very technical argument, but it matters. I am glad that the Deputy First Minister thinks that that might be worthy of debate, because it is very difficult, as was evidenced by the independent report by David Eiser, David Phillips and David Bell, who made it very clear that, although all those principles have very good intentions, it is exceptionally difficult, if not impossible, to ensure that they are all followed at the same time. Given the time that has elapsed, should we think about whether we have to update the Smith commission? I think that the Finance and Public Administration Committee is interested in that.

Is Liz Smith suggesting that paragraph 18 of the Smith commission report should also be up for review?

Liz Smith

No. I am talking very specifically about the four principles. The difficulty, which has been identified by independent analysis—not by politicians—is whether it is possible to go along with all those four principles at the same time, and the Finance and Public Administration Committee has to review that.

That raises the issue, which the cabinet secretary referred to, of the block grant adjustment methodology, because that matters, too. If we get a glazed look when we mention the fiscal framework, we get a sense of unintelligibility when it comes to talking about BGAs, but they also matter. That is the dilemma at the heart of any fiscal framework negotiation. How do you measure the change in equivalent UK spending and revenues in terms of adjustments that need to be made for different fiscal and demographic structures in Scotland?

Do I have nine minutes, Presiding Officer?

Yes. I can perhaps give you another minute and a half, in the light of the generosity in your taking of interventions, but no longer than that.

Liz Smith

We owe the officials in the Scottish and UK Governments our praise and congratulations for the way that they went about the renegotiation. They worked extraordinarily hard on what are immensely difficult technical changes. I know that the cabinet secretary commended the officials when she came to the committee, and—I give her her due—she commended her UK colleague at the time, John Glen, and I know that that was reciprocated by him.

I will come back to a few other comments in my summing up, but those are the most important points when it comes to assessing the fiscal framework. We have a big debate ahead of us on exactly how we take that forward.

I move amendment S6M-11546.4, to leave out from “notes” to end and insert:

“further welcomes the co-operation between the Scottish and UK governments in signing the 2023 fiscal framework agreement to deliver the best outcomes for the Scottish economy, and welcomes the extensive financial benefits that accrue to Scotland on an annual basis in terms of the fiscal transfers provided by the Barnett formula.”

15:13  

Michael Marra (North East Scotland) (Lab)

I add my and Scottish Labour’s thanks to those given by Liz Smith to the officials and experts who were involved in what is a complex piece of work that has developed over a long period of time—longer than many of us might have expected.

I had hoped that this afternoon’s debate would be an opportunity for a full exploration—a substantive debate—of the structure and detail of the outcome of the fiscal framework review; what the Government sought to achieve in those negotiations and why; what compromises were reached; the upsides and the limitations; why indexed per capita was preferable to the comparable method and other options that were on the table; the timeframes for future review; and, crucially, what the Government and the Parliament might seek in future developments.

However, instead, the motion quickly dispatches co-operation and negotiation in urgent search of further division. Although concerns are certainly merited, the tone in parts of the Deputy First Minister’s blame-shifting speech is of the type that has come to typify her Administration, desperately trying to distract and deflect from its own sorry mess.

Will the member give way?

Michael Marra

Not at the moment. I am just beginning, sir.

Nowhere is that more apparent, I am afraid to say, than in the Government’s reality-denying post-truth response to the damning programme for international student assessment—PISA—figures that were released yesterday. Scotland’s once mighty education system is continuing a 16-year trend of Scottish National Party-led decline. What was the Government’s response? It was, “Nothing to see here.” Meanwhile, a generation of Scots are being betrayed by a shambolic Government that has failed to deliver the education system that they deserve or even to preserve the system that they once had. That is utterly shameful.

If the Government is keen to discuss the real context of the fiscal framework review rather than the content of the review itself, so be it, because that context is certainly illuminating. The projected £1 billion funding gap for the upcoming budget between the Government’s spending pledges and the funds that it has available will rise to £1.9 billion by 2027-28. A large portion of that budget is determined by income tax receipts that are raised in Scotland. The utter failure of the Government to grow the Scottish economy has resulted in a stagnant low-investment economy that the SNP has created and that is holding Scotland back. Such a performance means that our fiscal position suffers year on year. For that, the SNP must accept responsibility.

Will the member take an intervention?

Michael Marra

No, sir.

Faced with a budget black hole, we have a finance secretary who has embraced the Treasury on the limited borrowing powers that she describes, desperate to conclude an agreement and happy to sacrifice the long-term good for the short-term good of her party.

I thank the member for giving way. Will he commit the Labour Party to renegotiating the fiscal framework if Labour wins the next election?

Michael Marra

We are all committed to continual development of the fiscal framework. There will be reviews in future parliamentary terms. I anticipate that the settlement will continue to evolve in future years, just as the devolution settlement has evolved significantly since 1997, with ever more powers arriving in the Scottish Parliament. We will look at the fiscal framework as those issues develop. It would be only right to do so. The Finance and Public Administration Committee has heard that that is part of the process to which we are all committed.

Will the member give way?

Michael Marra

No, thank you. Not on that point.

The hasty agreement that was struck by the finance secretary was, frankly, one of a Government that is rushing from one crisis to the next. The rushed process has shut down any opportunity for genuine debate or robust scrutiny on the substance of the issue.

Will the member give way on that point?

Michael Marra

No, thank you, sir.

Professor David Bell, who is one of the three authors of the independent report, told the Finance and Public Administration Committee on 19 September that he was surprised that the report was held back for five months before being published on the same day as the finalised fiscal framework, when a fait accompli was arrived at. That should have been a genuine opportunity for broad discussion, but it was all rushed out the door during the summer recess. The Government tried to schedule a debate on the fiscal framework review in September, before the Finance and Public Administration Committee had even had the opportunity to take evidence on the updated agreement. This debate is scheduled for a little more than two hours, but, back in September, we had longer than that to debate the many merits of football. Our nation’s finances deserve a little more time. The Parliament exists to spend more time on the matters that will impact every citizen and those who have not yet been born. Why is the Government so desperate to avoid the genuine scrutiny that Labour would like to see—deleting WhatsApp messages, forgetting meetings, refusing to reform freedom of information legislation and, even today, suing the Scottish Information Commissioner?

The Deputy First Minister told the Finance and Public Administration Committee that she did not think that there would be a public debate about the fiscal framework, because it is “quite technical”. I find that quite astonishing. Like so much in the SNP’s tenure—NHS waiting lists and school attainment—this is being filed in the a-little-bit-too-difficult pile. Granted, it is not an instant vote winner such as tax freezes, free bikes and laptops, but good Government in the best interests of the people of Scotland rests on getting the “quite technical” issues right.

Will the member give way on that point?

Michael Marra

No, thank you.

The updated fiscal framework gives Scotland more borrowing powers. In the Parliament, the SNP frequently claims that it is powerless to deal with the situation in which it finds itself. Let us be clear: the Tories have wreaked economic havoc on the country, for which we all pay the price every day in higher bills and falling living standards, but the SNP has a very strong hand in making much of the fiscal mess in which it finds itself at the moment. It has tools at its disposal to do something about it.

Shona Robison

Given that litany of accusations, I wonder what Michael Marra would say to his Welsh Labour Government colleagues, who are facing exactly the same challenges as we are. Would he put those accusations to them when they sit in the same room as us, making the same points as I do to the Treasury that the problems emanate from the United Kingdom Government, the lack of fiscal powers and an autumn statement that will lead to difficult decisions with regard to public services?

Michael Marra

I have no doubt that there are significant problems with the autumn statement, the situation that the Tory Government has left this country in, the state that it has made of our economy and the fact that it is not sufficiently funding our public services—the Labour Party and I have said that clearly. If we have the great joy of having the opportunity to serve in Government in the years to come, Labour will have to deal with the situation that we find ourselves in. We know that there are difficult times ahead in that regard, and we know that the finance secretary has a difficult time on her hands in dealing with the budget that is in front of her. However, she also knows that the situation that this country finds itself in is because of the failure of the SNP to grow the economy, grow the median tax income and grow the tax receipts that fund our public services. That is the only way in which we can substantively deal with the situation that we face.

The actions that we are hearing about today are not those of a competent Government that is thinking strategically about how best to serve the people of Scotland. Rather, they are the actions of a Government that is in crisis, out of its depth, making it up as it goes along and caught in a maelstrom of its own scandals, gaffes and controversies. Scotland deserves far better than that.

I move amendment S6M-11546.3, to leave out from “, while” to end and insert:

“the deal was agreed to by both governments as part of the devolution settlement that has evolved significantly since 1998; regrets the lack of public scrutiny afforded by a rushed final agreement that saw the simultaneous publication of the Independent Report along with the political agreement, thereby preventing full parliamentary discussion and the input of expert bodies; believes that Scotland has been held back by the Scottish National Party administration and the UK Conservative administration, which have built a low-growth, low-wage economy and, as a result, the UK Autumn Statement was delivered in the context of a stagnating economy and the highest overall tax burden since the Second World War; notes the Scottish Fiscal Commission’s modelling of a £1.9 billion revenue gap by 2027-28 between the Scottish Government’s committed spending and projected available revenues; further notes that this analysis was undertaken prior to the First Minister’s further sizeable spending commitments made at the Scottish National Party conference in October 2023, and calls on both of Scotland’s governments to prioritise economic growth, to put wages into the pockets of hard-pressed people in Scotland, and to generate the taxes to pay for vital public services, which are currently undermined by the financial and economic incompetence of ministers in Edinburgh and London.”

15:21  

Alex Cole-Hamilton (Edinburgh Western) (LD)

I am pleased to speak on behalf of the Liberal Democrats.

The fiscal framework is, of course, key to the pooling and sharing of resources across our islands and ensures that Scotland benefits from the decisions that we make while being protected by a framework of support from the UK Government in the good times and at times of national crisis.

What we are talking about today is a situation in which there is more flexibility than ever and more power than ever, but—as we have already heard—that will not stop the SNP blaming Westminster more than ever. Listening to ministers, one would not know that we have seen income tax being devolved and that the way has been opened to a £4 billion social security system, and one would not know any of the other positive changes that make the fiscal framework a necessity.

I am glad that agreement could be reached on changes including increasing resource and capital borrowing capacity, but Scotland deserves two Governments that have a genuine interest in working together to make devolution work as it should and as it could. Resolving differences maturely should be the norm—not a rarity. There should be a shared interest in devolution being a success. Of course, there is little spirit of co-operation and partnership on show in either the SNP or Conservative contributions to the debate. The Scottish Government would rather debate powers that it does not have than make best use of the powers that we already have.

Do not get me wrong: I am happy to agree with the Deputy First Minister that there was little that was worth welcoming in the UK Government’s autumn statement, which saw NHS budgets being squeezed and a giveaway to big banks that will cost the Treasury billions of pounds by prioritising big banks’ profits over making working families better off. I sincerely hope that it will be the Conservatives’ very last autumn statement.

However, there is no escaping the fact that the SNP Government has been writing cheques that people simply cannot cash. It has had its fingers in its ears and has been taking them out only to point them at Westminster.

Let us take, for example, devolution of social security, which is a crucial component of the reasons why we need a fiscal framework. We have seen the latest independence paper, which was published just today. What is not in it is mention of the agency agreement that Scottish ministers have with the Department for Work and Pensions. Powers that we all agreed in 2014 should be devolved are still not available to be used, because Scottish ministers are still not ready to receive them and are asking the DWP to run the system for them.

I know that ministers will say that some benefits have already been devolved—that is certainly true—but look at what is happening in that regard. We have seen reports that, under Social Security Scotland, waiting times for decisions on adult disability payments are, in some cases, in the region of four to seven months. Compare that with their taking two or three months under the DWP in London. Applicants have spoken about waiting on the phone for three hours or more before giving up. They were promised a better system—a system that would be steeped in dignity, which is what we all rallied behind.

Members should remember that the SNP wants us to believe that it could set up an independent Scotland’s welfare system in its totality—pensions and all—in just 18 months, although it has taken more than a year to devolve 11 simple benefits. People were promised a better system in 2014—it is just not good enough. This Government would rather debate powers than make best use of the ones that we already have.

Behind the lazy cry for the break-up of the United Kingdom in the Scottish Government’s motion, members will find years of warnings from experts who went unheeded.

For example, at least as far back as 2018, the Auditor General was warning that the NHS was not in a financially sustainable position. Scottish health boards are now forecasting a deficit of £395 million this year. The problems have been allowed to stack up, and people will be worried that the dire outlook will mean cuts to services and even longer waits for patients who are in pain.

I remember the words of Professor Paul Gray, the chief executive of NHS Scotland for six years under Nicola Sturgeon. He said:

“The current system was going to be overwhelmed regardless of Covid. The virus ... simply brought the date of that event forward.”

In 2011, the Christie commission warned about the need to increase preventative spending in order to stop demand swamping public service capacity. However, cuts to mental health and drugs budgets have flown in the face of that reform agenda. The Scottish Government would rather debate powers than make the best use of ones that we already have.

The amendment in my name speaks to Scottish councils’ ever more precarious position. Council leaders have just warned that local authorities are at risk of bankruptcy and that essential services, in their words, “will cease”. It will be game over. Councils need a fiscal framework that respects and recognises the important work that they do, the freedoms that they need in order to innovate, and their need for a fair share of Scottish Government resources. However, in recent months, in the shape of the Verity house agreement, the Scottish Government drove a coach and horses through the fiscal framework.

When councils are squeezed until the pips squeak, education gets squeezed until the pips squeak, as well. We do not need to look far beyond yesterday’s programme for international student assessment—PISA—figures, which Michael Marra rightly referred to as an insight into the impact of the Scottish Government’s cuts. I will speak more about that in my closing remarks.

I move amendment S6M-11546.2, to leave out from first “limited” to end and insert:

“improvements to the Scottish Fiscal Framework, following a joint review with the UK Government, and welcomes the outcome, which will protect and enhance devolved powers, providing more flexibility and choice than ever before, continuing to build on the cross-party agreement reached at the Smith Commission in 2014, but condemns the Scottish Government’s repeated failure to treat local authorities fairly in setting the Scottish Budget or to establish a new fiscal framework that ensures that local authorities get a fair share of resources, harming their efforts to reduce poverty, grow local economies, tackle the climate emergency and invest in essential public services, including schools.”

I call Ash Regan to speak to and to move amendment S6M-11546.1, for up to six minutes.

15:27  

Ash Regan (Edinburgh Eastern) (Alba)

As we have been discussing, the fiscal framework is complicated, but I believe that it is deliberately so. It is the formula for determining Scotland’s funding as part of the UK, via the block grant and Barnett formula, minus abatements or deductions.

Scotland is rewarded if we grow our economy faster than the UK’s and is punished if we do not. However, no region of the UK—other than London and the south-east—ever ends up with higher gross domestic product rises than the UK average. The additional no-detriment clause, which we have been discussing this afternoon, was added to the Smith commission report. That was meant to recognise the fact that, for the most part, Scotland’s economic performance has a lot more to do with reserved UK economic policy than it does with anything that we do at Holyrood.

Recently, during the pandemic, we witnessed at first hand why we need full fiscal autonomy. Much of the financial support that the Scottish Government could provide to back up public health policy could be delivered only if the UK Government decided that those were also the priorities in England.

In my opinion, the no-detriment provisions do not deliver for Scotland as they might. Rather than the Smith commission delivering greater fiscal control and responsibility for Scotland, it has, unfortunately, left us in the position of having greater accountability but, crucially, without the fiscal levers to back it up. Greater responsibility without power is never a good position to be in.

In recent years, the Scottish Government has chosen to increase tax slightly. That should mean more money being raised to invest in better public services, which I think we would all welcome—I am sure that the Scottish public would welcome it very much. However, that is not what happened. The Scottish Parliament information centre reports that the Scottish public paid £900 million in higher tax over a three-year period, but the Scottish budget rose by only £170 million over that same period. Therefore, £730 million was lost because of the fiscal settlement. That would be enough to raise the Scottish child payment to £40 a week several times over.

Scotland is in the unfortunate position of raising tax in order to fill a black hole in the block grant that was created by the fiscal framework.

Michael Marra

Will Ash Regan tell us whether, when she was a minister in the Government, she expressed to her colleagues any scepticism about whether those tax positions were the right approach to take, given the consequences?

Ash Regan

Michael Marra might not remember this, but I was in the justice department. I certainly did have conversations with colleagues, particularly about funding settlements for justice, but I was not responsible for broader financial decisions.

My opinion is that there was not a good deal for Scotland, and the new fiscal framework is worse still. I believe that it is a trap—an economic trap and a political trap—that the Scottish Government has acceded to, either knowingly or unknowingly. The fiscal framework is a means of forcing the Scottish Government to pursue a low-tax, small-state approach to government. That is against the values of the Scottish Government and, of course, of the majority of Scots who elected that Government. The new framework also has built into it the real danger of relative economic decline.

Separating economic impacts that come from UK policy from those that are from policy that is created in this Parliament is now an almost impossible task, which was alluded to earlier in the debate. However, the new deal seems to be an acceptance that it is just too difficult. As a result, Scotland just accepts that it will be responsible for both. Disastrous economic choices that are made in London are heaping misery on a Scotland that is running just to stand still against factors such as soaring inflation and Brexit carnage.

Dr Jim Cuthbert, formerly of the Scottish Office, explains that it is nigh on impossible for the Scottish Government to develop a successful fiscal policy under the arrangement. Therefore, it is very easy to see why the Conservatives are happy with the settlement. I do not think that they should be, by the way, because it harms their constituents as much as it harms my constituents.

However, it is less easy to understand why the Scottish Government has agreed to the settlement. Is it really in the best interests of Scotland, or is it, in fact, damaging? One reason why I believe that it is damaging is that it is forcing Scotland into sub-optimal decisions on capital spending. For example, the poor-value public-private partnership is a model of financing public sector infrastructure that the UK Government has now moved away from, because it can; however, Scotland cannot, because our choices are very limited.

Will the member take an intervention?

Ash Regan

I am concluding now, I am afraid.

It is clear that devolution can deliver to us only so much and that the powers of independence will enable Scotland to create a thriving economy, a wealthier nation and higher living standards for all of us.

I move amendment S6M-11546.1, to leave out from “believes” to end and insert:

“notes that although VAT assignment was recommended by the Smith Commission, several years later, half of VAT raised in Scotland that was to be assigned to the Scottish Budget is still not included in the updated fiscal framework, and believes that only with the full powers of independence will the Scottish Parliament have all the fiscal levers required to reduce poverty, grow the economy, tackle climate change by investing in the future of carbon capture technology in the North Sea, and invest in public services.”

I call Kenneth Gibson to speak on behalf of the Finance and Public Administration Committee.

15:33  

Kenneth Gibson (Cunninghame North) (SNP)

I welcome the opportunity to speak in this debate on behalf of the Finance and Public Administration Committee. I will focus on the fiscal framework review, which has been an area of interest to the committee since the start of session 6.

We provided a consultation response to the independent report authors, and we expected to be given an opportunity to contribute to the review, as originally agreed by the UK and Scottish Governments in 2021. As we now know, the review was much narrower in scope when the outcome was unexpectedly announced in August 2023. The speed with which the review was agreed came as a surprise to both the committee and the stakeholders from whom we took evidence last month. As the Deputy First Minister has explained, a narrow window of opportunity emerged for the review and the UK Government did not favour widening its scope. In addition, the possibility of an imminent change of Treasury minister meant that the Scottish Government had to grab the opportunity to secure what improvements it could to the existing fiscal framework.

Unfortunately, we have not been able to explore the UK Government’s perspective on the negotiations. The Chancellor of the Exchequer, like his three predecessors—admittedly, two of them were short lived—has not responded to our invitations to engage or to give evidence to the committee. The former Chief Secretary to the Treasury also declined those invitations, despite his stated keenness to work with the devolved Parliaments. The Treasury’s approach is very unhelpful, and I know that committee colleagues are also keen to have greater engagement with it.

I turn to the outcome of the review. The updated framework confirms that the indexed per capita method will continue to be used to adjust the block grant, rather than a comparable method. That was a key gain for the Scottish Parliament in 2016, following tough negotiations that were conducted by the then First Minister, Nicola Sturgeon, and Deputy First Minister, John Swinney, who had dug in their heels after months of discussion. That means that the Scottish budget will benefit by millions of pounds each year, because the indexed per capita method takes account of the fact that Scotland had, at the point of income tax devolution, lower income tax capacity than the rest of the UK. It also takes account of the potential differential population growth between Scotland and the rest of the UK.

In the updated framework, borrowing for capital expenditure will be linked to inflation so that the limits increase in accordance with the GDP deflator. That is very positive overall, given that the value of resource and capital borrowing has been fixed since it was first published alongside the Scotland Act 2016, despite inflation having risen by more than 30 per cent, eroding the spending power that is constrained by those limits.

However, the committee was surprised to see that the Fraser of Allander Institute estimates that borrowing growth over the next four years will be only a cumulative 5.5 per cent. As capital inflation is outstripping GDP deflator inflation, that is a wholly unrealistic measure. Looking at capital inflation specifically would be more accurate and helpful. Witnesses have suggested to the committee that that might be one aspect on which the Scottish Government had to compromise in order to reach agreement. Of course, the negotiation was between two parties that were not equal in terms of who could ultimately decide the outcome. As the Deputy First Minister has explained to us, using the GDP deflator was the only option on the table. As my dear old late mum said, however, half a loaf is better than no bread. That limited gain is important to Scotland.

Resource borrowing limits remain at £1.75 billion but will now rise with the GDP deflator. Capital borrowing limits are £450 million annually with a total limit of £3 billion. Both limits are now index linked to the GDP deflator. It is disappointing that prudential borrowing, which would provide greater flexibility and is available to Scotland’s local authorities, is not available to the Scottish Government. That power would provide it with better ways of dealing with and balancing its budget.

On the annual borrowing powers, the updated fiscal framework increases the limit from £300 million to £600 million a year in order to meet forecast errors, which is again welcome. That will also be index linked from next year. That is particularly helpful given that there will be a large negative reconciliation of £390 million next year to reflect income tax receipts in 2021-22. That said, as witnesses have advised the committee, modelling by the Scottish Fiscal Commission shows that the forecast error could still exceed that limit once or twice every decade, so those challenges remain.

With the increase in the annual borrowing limit, the updated fiscal framework no longer provides for any additional borrowing for a Scottish economic shock. As members will recall, economic shock provisions were previously available to respond to forecast error rather than to manage changes in resource spending.

The updated fiscal framework also defers a decision on VAT assignment in Scotland to a future joint exchequer committee meeting. At our committee’s round-table discussion on VAT assignment last month, the clear and unanimous consensus was that no form of VAT assignment from Westminster to Holyrood could address the significant uncertainty and volatility that it poses for the Scottish budget, despite the best efforts of officials over many years to explore how that methodology might work. The significant issues that remain include the fact that there will never be any reconciliation to actual Scottish VAT receipts, the fact that income from VAT receipts in the UK can be significantly revised retrospectively over a number of years and the fact that it will not be possible to directly link the Scottish Government’s actions on the economy to subsequent changes in VAT receipts.

Without policy control over the setting of VAT assignment, it would be all risk and no reward. As such, we believe that the joint exchequer committee should stop exploring the current VAT assignment methodology, and we welcome the Deputy First Minister’s commitment to keep us informed about those discussions.

The updated fiscal framework states that it will be reviewed periodically on a five-yearly basis, but not more than once in any Scottish or UK electoral cycle. With a UK general election on the horizon, the Deputy First Minister has advised the committee that it has a number of asks of any incoming UK Government in relation to the framework. We are mindful of the experience of the Barnett formula, which was a temporary measure when it was introduced, in 1973. As such, we seek an assurance from the Scottish Government that a key ask of the next UK Government will be that the next fiscal framework review is significantly more substantial and that it will enable the Scottish Parliament and stakeholders to participate actively in the process.

As that process has concluded for this year, I again thank all the officials who have participated and have helped ministers north and south of the border to provide the updated fiscal framework review. It is beneficial to Scotland, although not as beneficial as we would like.

The Deputy Presiding Officer

We move to the open debate. I advise members that we have no time in hand, so if any interventions are taken, the time must be absorbed within the member’s speaking allocation, which is up to six minutes.

15:40  

Michelle Thomson (Falkirk East) (SNP)

Starting at the beginning, there was much commentary during the Covid crisis that some of the lending that was being made available was merely propping up zombie businesses. What do we mean by “zombie businesses”? Investopedia says that zombies are countries

“that earn just enough money to continue operating and service debt”.

They

“have no excess capital to invest to spur growth.”

They

“are typically subject to higher borrowing costs and may be just one event ... away from ... a bailout”.

I said “country” instead of “company” deliberately, for that is the UK today—a zombie country. It is the UK that had the slowest recovery from the pandemic of all the large advanced economies. It is the UK where growth lagged behind the average for both large and small advanced economies for the 40 years before the pandemic. It is the UK that, only today, was ranked last in UNICEF’s table of child poverty, with the worst rise in child poverty between 2012 and 2019 of the world’s 39 richest countries—thank goodness for the Scottish child payment. It is the UK that had Government debt equivalent to 97.8 per cent of GDP at the end of October 2023. Economically, the UK is not okay, and anyone who says otherwise is either a fool or utterly disingenuous.

I was personally wary about participating in this debate and shrinking my thinking to the tinkering with a fiscal framework when it is designed to ensure that, if it is heads, the UK Treasury wins and, if it is tails, the UK Treasury wins. The amendments to the motion are mostly ridiculous and show the paucity of vision that is encapsulated in the zombie deniers who are seated opposite. The vast majority of monetary and fiscal policy resides with Westminster, and we must not forget that macroeconomic framing.

In my remarks, I intend to focus on the limitations for capital expenditure and the lack of prudential borrowing powers. Capital expenditure is a vital tool. Infrastructure development creates jobs, improves productivity, brings longer-term economic benefits, has a multiplier effect, and is typically—and normally—used to encourage growth. Instead of our having to look down the barrel of a 7 per cent cut over the next few years, the capital borrowing amounts have been retained, with a mechanism to uprate them by inflation, but they are tied to a GDP deflator, which is nowhere near inflation.

The Deputy First Minister noted to the Finance and Public Administration Committee:

“the biggest challenge that we face comes from capital borrowing limits ... We got as much as we could achieve, but were just not able to expand the basket of measures that were being looked at.”

Interestingly, the DFM’s comments were followed by comments from one of her officials, who explained:

“the Treasury viewed that as a zero-sum thing, as anything that it gave us would be a loss to its fiscal position”.—[Official Report, Finance and Public Administration Committee, 23 November 2023; c 11, 12.]

That is a working example of no detriment. That comment, more than anything else, explains my opening remarks about why the UK is a zombie country and why we are locked into low growth.

We cannot look forward to a change from the Labour Party, either. Sir Keir Starmer has clearly indicated his intention to follow exactly the same macroeconomic policies that have led us to this point.

That leads us to the alternatives. I am grateful for the report that Jim Cuthbert wrote for Common Weal, which he sent to the Finance and Public Administration Committee. In it, he reminds us that PPP schemes and their variants, such as private finance initiative schemes, were used enthusiastically by Tory and Labour alike. He also reminds us of the frankly staggering cost to the public purse, the lack of value and the conclusion that was reached by the House of Commons Public Accounts Committee, which said:

“Treasury cannot produce evidence to support its claims that PFI is worthwhile for any reason apart from the fact that it takes debt off the balance sheet”.

The UK Government has now retreated from the use of those schemes, but it has left Scotland and Wales with the ability to use more modern yet still expensive variants, such as a mutual investment model, instead of providing proper capital borrowing powers.

I will make one final remark. The convener of the Finance and Public Administration Committee noted how ridiculous it is that local councils can access prudential lending yet the Scottish Government cannot do that, despite it being part of the Smith commission’s recommendations. I agree. Regrettably, that was not on the table, presumably because it might have brought significant benefit to the people of Scotland.

15:45  

Brian Whittle (South Scotland) (Con)

I am delighted to speak in this debate on behalf of the Scottish Conservatives. As members have said, it might be a rather dry topic, but it is hugely important. The amendments to the fiscal framework that were adopted this August and agreed by Shona Robison are an adjustment to the original agreement that was signed by John Swinney in 2016. The updated arrangement will see the indexed per capita mechanism for calculating the block grant adopted permanently, which protects the Scottish budget from the risk of slower population growth. The main impact, according to the independent report, is on the block grant adjustment for tax, which could be worth around £200 million a year after five years and circa £400 million after 10 years.

A key element in Scotland’s finances is the Parliament’s ability to scrutinise public spending. Alongside the devolution of further powers to the Scottish Parliament, the Smith commission recommended that the Scottish Parliament should expand and strengthen independent financial scrutiny of Scotland’s public finances. That is set against the worrying situation that my colleague Liz Smith highlighted of the increasing lack of transparency on and scrutiny of the fiscal framework, as can be seen by the issues that the Finance and Public Administration Committee came up against when it sought to scrutinise the said framework.

The situation became so bad that it necessitated a letter from the committee convener to the Deputy First Minister intimating that the level of scrutiny that was requested and agreed on by the Scottish Government was not delivered. Given that the committees of the Parliament are charged with scrutinising Scottish Government policy, that is a worrying trend, which is mirrored by the on-going issues that Audit Scotland is having with financial transparency from the Scottish National Party Government. That is especially worrying given that financial scrutiny of the fiscal framework impacts on every aspect of public spend and is crucial to the future of Scotland’s economy. That cannot be allowed to continue.

Does the member accept that that is also a problem at Westminster, because the Parliament there was not able to scrutinise the agreement?

Brian Whittle

I would not disagree with that. It is important for Governments to be transparent, so I will not argue with that at all.

Government is about choices. When it comes to how those choices are made, increasingly, a veil of secrecy is descending on the SNP as the outcomes of its financial decisions come to the fore. The fiscal framework is about the devolution settlement, which, as I said, funds our public services. It is about both Governments working together for the benefit of Scotland and the UK, which is exactly what the public want.

The trouble is that, for the SNP-Green Government to succeed in its ultimate objective, devolution has to fail. Let us face it: the Scottish Government’s funding and handling of our public services is hardly delivering the outcomes that we all want and that the public need. We have a health service in crisis, with record waiting times—

Will the member give way on that point?

Brian Whittle

I will just finish this point.

There are record waiting times and consistently poor health outcomes, despite the Scottish Government consistently claiming that the NHS has record investment. We have a housing emergency and, probably most worrying of all, in the recently published PISA results, we see the consequence of the SNP’s mismanagement of the education system and letting down of our teachers and pupils, despite claims by the Scottish Government of increased numbers of teachers.

Shona Robison

Brian Whittle mentioned investment in public services. Does he believe that the autumn statement, which gave £10.8 million to the health service from consequentials, helps or hinders investment in the health service? Every commentating body has said that the autumn statement is at the expense of investment in public services.

Brian Whittle

I thank the cabinet secretary for her intervention, because it allows me to highlight exactly how the SNP Government approaches these questions. On the one hand, it says that we have record investment but, on the other, it says that we do not have enough.

Ultimately, what matters is outcomes. We have increased waiting times in our health service and increasingly poorer health outcomes from our health service. How we spend money matters. The fiscal framework is only one side of the coin; how the Scottish Government manages its budget is the other.

Handily, as we have just heard, the SNP has a built-in excuse that everything bad is due to a lack of funding through the Barnett consequentials. It seems strange to me that, at every First Minister’s question time, the First Minister laments a lack of money through the Barnett formula, but his and his party’s solution is to be independent, with the £10 billion black hole in our finances that would ensue from that. That question has dogged the SNP for years, and it has consistently refused to, or been unable to, answer it, but it matters.

I watched the Smith commission all those years ago, and I remember all the parties’ protagonists being interviewed about the process and the outcomes. I remember John Swinney being very pragmatic in saying that he did not get all that he wanted but that he got more than the other side had wanted to give, and that that was the nature of negotiation. I thought that that was a very good way of summing up that process. However, the very next day, the same Deputy First Minister—all members of his party have done this every day since—declared to anyone who was holding a microphone that Scotland had been short-changed. If it was that bad, why did he sign the declaration?

To an outsider, something as technical and complicated as the fiscal framework is pretty dry material for a speech. In fact, even to an insider, it is pretty dry material. However, in closing, I will quote from a speech by Charlie Munger, vice-chairman of Warren Buffett’s Berkshire Hathaway, who died just a few days ago. In a speech to graduates at the University of South Carolina law school, he said:

“The last idea that I want to give you, as you go out into a profession that frequently puts a lot of procedure, and a lot of precautions, and a lot of mumbo-jumbo into what it does, this is not the highest form which civilization can reach. The highest form that civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another.”

As I come to the end of my speech on Scotland’s fiscal framework review, I am bound to ask whether, more than anything, Scotland would not benefit from a little more time spent by its Government and politicians building trust and a little less time on procedural mumbo-jumbo.

15:52  

John Swinney (Perthshire North) (SNP)

Having negotiated the inaugural fiscal framework, in 2016, I know and appreciate how difficult a challenge it is for the Scottish Government to secure a broadly acceptable set of financial arrangements with the United Kingdom Treasury. I therefore warmly commend the Deputy First Minister for securing the agreement that was announced some weeks ago, which is the subject of today’s debate.

In essence, the agreement builds on the agreement that was put in place in 2016. Crucially, the agreement embeds on a permanent basis the use of the indexed per capita mechanism for calculating block grant adjustments. That was the key issue of negotiation in 2016. I say to Brian Whittle that there would have been no fiscal framework agreement in 2016 if that provision had not been in place, and I constantly made that expressly clear to committees of this Parliament.

I am very sorry that Willie Rennie is not here for my speech, because I am going to mention him. I am reminded that, in 2016, he said to the First Minister at the time that the Scottish Government had made a fundamental error in accepting the model, because we would never be able to protect it at the point of review. The Deputy First Minister has not only protected the model at the point of review but has embedded it permanently, which we were unable to secure in 2016. That is a formidable achievement.

The model that underpins the fiscal framework is essential in protecting Scotland’s public finances, because we already carry population risk in the Barnett formula, and the indexed per capita mechanism was necessary to provide long-term stability.

Liz Smith

I am very glad to hear Mr Swinney make those comments. To give him credit, that was a difficult job in 2016, and he did it. The Deputy First Minister has done the job in 2023. Does he disagree with Ash Regan that this fiscal framework is worse than the previous one?

John Swinney

Yes, I disagree with that point of view and I will come on to explain why.

I cannot decide whether Mr Marra’s contribution was curious or churlish. Mr Marra speculated that he wanted more time to decide whether the indexed per capita mechanism was preferable to the comparable method. The comparable method is the proposition of the Conservative Treasury. Mr Rowley, on the Labour benches, had the good grace, in 2016, to recognise the Government’s achievement in seeing off the comparable method. Here, Mr Marra is inviting the Conservative Treasury to inflict it on us. I have never heard such folly in my life.

Michael Marra

I assure the member that he did not hear such folly here, either. That is not what I said. I said that it would be good if the Parliament was able to scrutinise all the options, talk about them and have them explained by the Deputy First Minister—the ups and downs—so that we can all get behind the conclusion that Mr Swinney has come to, if indeed it is the right one.

John Swinney

Mr Marra says,

“if indeed it is the right one”.

I rest my case that he is speculating on what the right outcome is. He should go back and look at what Alex Rowley, Jackie Baillie and—crucially—Malcolm Chisholm said in 2016. Malcolm Chisholm was my strongest ally in negotiating that outcome in 2016, because he could see the dangers for us of a rampant UK Treasury with the comparable method that Mr Marra is now embracing. If Mr Marra is to be at the helm of negotiations in the future, heaven help Scotland—that is all that I can say.

One of the reasons why the Scottish Government was able to negotiate what was, in my view—this is where I disagreed with Ash Regan earlier in the debate—a broadly acceptable fiscal framework in 2016 and protect that at the point of review was down to one word, and that word is “agree”. The Smith commission concluded that the Scottish Government and the UK Government must agree a fiscal framework—not that the UK Government should consult the Scottish Government, which were the usual weasel words, and not that there should be a discussion, but that the UK Government and the Scottish Government must agree a fiscal framework.

I kept the Smith commission meeting late into the night to make sure that that single word got into the final wording of the agreement, because my experience told me that, if we were not treated as an equal in that conversation, we would be steamrollered by the UK Treasury.

We now know that agreement mattered, because the independent report that was published on the agreement made it clear that the fiscal framework arrangements and securing the indexed per capita mechanism—which I consider to have been a mighty achievement and essential for Scotland—have prevented the loss of approximately £500 million per annum from Scotland’s public finances.

For me, there is a deep lesson for Scotland in that respect. Unless we are treated as an equal, we are likely to lose out. Look at what has happened in other areas of intergovernmental relations. The passage of the United Kingdom Internal Market Act 2020 without our consent has undermined devolution. The passage of the Subsidy Control Act 2022 without our consent has undermined devolution. Where we are not equals, we will lose out. That has been demonstrated in the autumn statement. We are losing out badly because we are at the mercy of decisions that are taken to suit the political agenda of the United Kingdom Treasury, where it can use its power to overwhelm the interests of Scotland and where we are not treated as equals.

I draw the simple lesson that Scotland will prosper only where we are treated as an equal, and I want us to be treated equally as an independent country.

15:58  

Alex Rowley (Mid Scotland and Fife) (Lab)

This debate is being held against a background of financial instability, sluggish performance in the Scottish and UK economies and many of our public services buckling under immense financial pressure.

Therefore, the fact that the Scottish and UK Governments have reached agreement on a fiscal framework that provides greater funding clarity for Scotland is welcome, as is the news that increased flexibility in how the Scottish Government manages the public finances has been agreed.

When asking people what the fiscal framework is, I have found that the most common answers are that it is very technical or that it is very difficult to understand. Although complex, the fiscal framework sets out the rules for how the devolution of tax and social security powers following the Scotland Act 2016 is supposed to work in terms of finances. It sets out the mechanisms by which the Scottish block grant is adjusted to reflect the fact that large amounts of tax and social security powers are now the responsibility of the Scottish Parliament.

I note that the Scottish Government says that the agreement protects the Scottish budget from the risk of Scotland’s population growing at a slower rate than that of the rest of the UK. That risk is a reality, and it is one of the many areas where the Government must use the powers that it has to address Scotland’s population concerns by putting in place a coherent strategy to encourage people to come to Scotland, work in Scotland and make Scotland their home.

I am sure that the Government will say that we need more powers over areas such as immigration, but that cannot be used as an excuse to do nothing to address the chronic lack of housing, poor skills and training opportunities, poor access to public services such as health, and the lack of an industrial strategy for Scotland’s future.

Although welcome, the review has come in for criticism in relation to the way in which it has been dealt with and the lack of wider inclusion in the discussions. Professor David Bell of Stirling University raised the issue by stating:

“This review is of substantial importance for the Scottish budget and therefore for the services it delivers to the public during the cost-of-living crisis.”

He went on to ask:

“Why, then, has the review attracted so little interest, from the public and the media, other than from the Finance Committee of the Scottish Parliament? Especially when our report—produced alongside colleagues from the Institute of Fiscal Studies and the University of Strathclyde—shows that different approaches to the fiscal framework could cause Scotland’s budget to vary by hundreds of millions of pounds in the medium to long term.”

It is therefore fair to ask the Scottish Government: is this a short-term fix for the short-term budget pressures?

Jim Cuthbert, writing for Common Weal, argues that the review leaves Scotland exposed to the likelihood of being forced into a cycle of relative economic decline in comparison to the rest of the UK. He argues that, because the review was conducted in secrecy, we do not know how those damaging outcomes came about.

Shona Robison

Let me answer the two fundamental points that Alex Rowley is making. First, we were keen to have transparency and openness, but the Chief Secretary of the Treasury wanted the review to be conducted in a confidential space. Given that there had to be an agreement, I do not think that we would have made progress had that not been the case.

Secondly, on the wider point about the narrowness of the review, we would have wanted it to be more expansive. However, again, if it is a negotiation, you can land only where there is negotiating space.

Will Alex Rowley recognise the constraints that we were operating under?

Alex Rowley

A number of committees in this Parliament should have been engaged and involved at an earlier stage. The previous finance secretary, Kate Forbes, wrote to the finance and social justice committees in June 2022, informing them about the review and how it was planned to proceed. At that point, she was definitely saying that there would be engagement and consultation with a number of parliamentary committees as the review progressed.

The Government should have been pushing and engaging with those committees. We have seen how experts in academia have criticised the lack of that in relation to the review. We need to stand up and be much firmer in defending the democratic rights of the committees of this Parliament and in relation to the wider consultation that should have taken place.

The fair question for me is: what changed? The cabinet secretary just said that the UK Government changed its view, but I do not think that we simply have to cave in every time that the UK Government says how it wants to deal with these issues.

I note that the Deputy First Minister welcomes the agreement and says that we have a challenging situation going forward. I would like to hear more from the Government about what it will do to address our poorly performing economy in Scotland. How will we use the budget to address that? What is the plan? Does the agreement with the UK Government support or hinder economic growth and investment in public services?

Will Alex Rowley give way on that point ?

No. Alex Rowley is beginning to conclude.

Alex Rowley

Likewise, there is no doubt that we are facing a challenging situation in which many core services in local and central Government are buckling. In such circumstances, the Government must ask whether we are spending the money that we have in the most effective and efficient way. We know that it will be tough, but we must ensure that every penny of taxpayers’ money in Scotland is spent in the most effective and efficient way.

I look forward to the budget.

16:05  

John Mason (Glasgow Shettleston) (SNP)

The fiscal framework is an extremely important topic, although I accept that some people find it a bit dry and technical and would prefer to leave the Finance and Public Administration Committee and a few other anoraks to sort it out.

We had expected that the initial report by David Bell, David Eiser and David Phillips would first be published and discussed and then followed by a wider-ranging review with at least some public input and debate on the options before the two Governments negotiated and reached an agreement. The Finance and Public Administration Committee was probably willing to accept that, as happened in 2016, at least some of the negotiations would be carried out in private between the two Administrations. However, we did not expect the sudden announcement in August that the report was being published, the review had been greatly narrowed in scope and agreement had been reached all in one go. That meant that the opportunity for input and scrutiny by either Parliament or its committees was very limited.

Shona Robison told us that the Westminster Government made it clear that a wider review was not on the table. That is the first problem. Even without Scotland being independent, if we had a federal system, which Gordon Brown suggested we might be close to, there would be a written constitution with certain checks and balances. However, the severe downside of devolution is that, ultimately, Westminster is judge, jury and executioner. What Westminster says goes, and if Wales, Scotland and Northern Ireland do not like it, that is tough luck. If Westminster says that a wider review is not on the table, it is not on the table.

We are left in the position that there are some improvements over what was in place during the first five years. In particular, some of the restrictions on borrowing are being eased. However, it would have been good to see the introduction of a prudential borrowing framework. Local government has that system, which means that it can borrow what it can afford to service instead of being limited by a fixed ceiling. It has generally worked for local government and I see no good reason why the Scottish Government could not have it as well. In fact, the Smith commission said that both Governments should consider a prudential borrowing regime. Capital borrowing cannot just be spent on day-to-day expenditure. It is for the likes of building houses and electrifying the railways, which benefit Scotland’s people and economy in the longer term.

Perhaps the more serious implication of the second agreement is that we seem to be locked into a system that is weighted against Scotland. As economist Jim Cuthbert and Common Weal point out, the block grant system, even under the indexed per capita method, means that Scotland is engaged in a fiscal race with the rest of the UK. Generally speaking, we match or outperform regions of England, Wales and Northern Ireland—for example, on inward investment. The problem is London and the south-east of England, as Ash Regan pointed out. No other region of Europe has been able to match that region, so it should be little surprise that Scotland toils to do so as well.

If London and the south-east are such a huge cash cow for Scotland, why on earth does John Mason want to sever ties with them?

John Mason

If Mr Whittle waits, I shall get to a quotation that he might remember in a paragraph.

For example, if we look at output per hour or output per job, only London and the south-east are above the UK average. Scotland comes third but is still below the UK average while being ahead of every other part of the UK. I am reminded of Vince Cable’s words in December 2013, when he said:

“One of the big problems that we have at the moment … is that London is becoming a kind of giant suction machine, draining the life out of the rest of the country.

More balance in that respect would be helpful.”

I agree with him.

Although we have the per capita method, a lack of immigration to Scotland holds back our economy, and I would certainly argue that whether we get our fair share of immigration is outwith the Scottish Government’s control. One reason for that might be that people already have family connections in London or the English midlands, so they want to stay there.

The independent report noted that the Smith commission said that the Scottish budget should bear the risk of not all divergence in tax revenue growth, but only the divergence that is the result of policy decisions. However, because it is so difficult, or even impossible, to identify the causes of divergent revenue growth, we end up taking all the risks—even those relating to things outwith our control.

It is also worth noting the Barnett formula at this point. The other week, I asked about the convergence in spending that the Barnett formula was intended to have. The answer from David Phillips of the Institute for Fiscal Studies was that that convergence had not really happened before 2020 but it is happening now. In 2019, per capita spend for devolved services in Scotland was about 129 per cent of the average for England. It is now about 125 per cent, and David Phillips expects that, by the close of this decade, it will be about 122 per cent and that it will fall below 120 per cent by the mid-2030s. In the longer term, given current population projections, he expects that to converge to around 115 per cent.

All in all, we were promised a union dividend if we stayed in the UK, and some people probably voted no in the 2014 referendum believing that we would be better off financially if London paid the bills. We now see that any union dividend is being increasingly eroded and any advantages of being in the UK are being lost year by year and day by day.

While we are at it, Westminster seems to be taking an increasingly arrogant and disparaging attitude towards this Parliament. In the past, as Kenny Gibson said, Treasury ministers appeared before finance committees and constitution committees a number of times, but they adamantly refuse to do so now, saying that they are answerable only to MPs. Even ministers who agree to come keep postponing the date.

As the motion says, we recognise the limited improvements to the Scottish fiscal framework, but there is something fundamentally flawed in the relationship between Scotland and Westminster. One of these days it will have to be sorted.

16:12  

Ivan McKee (Glasgow Provan) (SNP)

I am delighted to speak in the debate. I agree with Michael Marra—it is probably the only thing that I will agree with him on in my speech today—that it would be good to have more economy and finance debates in the chamber.

I recognise the progress that has been made in securing the deal on the fiscal framework, and I thank all those who were involved in the negotiations, particularly for the much mentioned securing for the long term of the indexed per capita methodology versus the comparable method. Of course, that is all based on Scotland’s population growth, or lack of it, and I will return to that later in my remarks.

We have secured a welcome increase in borrowing limits and the use of reserves is as welcome as it is inflation proofing. It is, however, not enough, given the scale of the fiscal shocks that have occurred and those that might occur in future, whether it be through Brexit, Covid-19, austerity or whatever else is around the corner. As Mr Swinney referenced, it is hugely important that we have as much flexibility around fiscal measures as possible.

As the DFM has highlighted, the key point is that we are still very much at the mercy of UK policy decisions that are taken at Westminster, very often not with Scotland’s interests at heart. The DFM has outlined the impact that Tory austerity will have on future public service funding as a result of the recent autumn statement. Signals from Labour are not encouraging. Keir Starmer is now praising Margaret Thatcher, which does not bode well for any potential future UK Labour Government and its approach to those policies.

It is important to remember what levers are not devolved. We talk about income tax, but much of income tax—that from dividends and savings—is not devolved. That limits the possibility and options for Scottish policy to mitigate behavioural impacts that have impacted significantly on the tax measures that we have taken recently. The full range of business taxation, corporation tax, investment breaks and so on is not devolved, which limits the Scottish Government’s ability to direct support and take taxation measures that will help to stimulate and support economic growth in our economy and tailor them to the sectors and the opportunities that we have in the Scottish economy.

Liz Smith made it clear, straight out of the blocks, where it is that we are trying to get to. Our ultimate goal is for there to be no need for us to have the fiscal framework, which will be the case when Scotland has full control over economic policy. SNP members are working very hard to secure full control over economic policy as soon as possible. It is helpful to see the fiscal framework as a stepping stone to our having the full powers of economic independence. Frankly, we will be glad to see the back of the framework’s complexities, which have been referenced, when we move beyond the need to negotiate such complex matters with the UK Government, as we will do once we have full economic powers.

Until we have full powers over borrowing, which will come with independence, it will be interesting to see how, in the meantime, the issuing of Scottish bonds—or “kilts”, as I think we can call them—will be taken forward over the next period. I look forward with interest to seeing how that idea develops.

Of course, while we are under devolution, the Scottish Government must continue to negotiate with Westminster to get the best deal. At the same time, we must have a focus on the preparations that we need to make in order to use to best effect the full powers of independence when they come to this Parliament, which I hope will be in the not-too-distant future.

I turn to immigration powers and the impact that the issue of population has had on potential funding solutions. If we had full immigration powers, we could focus on growing Scotland’s population in the way that it needs to grow. Our approach would be very different from that of the UK Government, which is obsessed with reducing immigration. We have seen that again this week, along with Labour’s mirroring of the UK Government’s policies and approach, which is clear from the clarity that it has provided on its support for the misguided policy of Brexit.

In the meantime, it is very important that we use the powers that we already have. I make this point again, because it is well worth making: people tend to forget that more members of the working-age population of the rest of the UK move to Scotland than move in the opposite direction. We need to encourage more of that within the current context to maximise Scotland’s population. Frankly, by pulling all the right levers, I believe that, even under the current settlement, we can secure population growth in Scotland that matches that in the rest of the UK.

When it comes to economic powers, we can, of course, focus those on growing Scotland’s economy. If I have understood Jim Cuthbert’s very helpful paper correctly—I apologise to him if I have not—I take issue with its apparent assumption that tax cuts are the only way to grow our economy. I would argue that tax cuts are absolutely not the only way to grow the economy. That can be done by having an intelligent focus on business growth, stimulating businesses in that regard and supporting the sectors that are the future of the world economy, in which Scotland has great potential. Of course, we should do as much as we can of that under the current settlement, while continuing to argue for more powers.

I take issue with Brian Whittle’s comment—if I heard him right, I think that he said that it is in our interests for devolution not to work. Quite the contrary is the case. At the end of the day, the people of Scotland will support independence. That will become the settled will of the people of Scotland when they see excellent delivery from the Scottish Government, using the powers that it has. We need to continue to move forward and deliver on that, while arguing for more powers to come to this Parliament.

16:18  

Richard Leonard (Central Scotland) (Lab)

If devolution is a process, not an event, the long-awaited outcome of this fiscal framework review is less like an advance and more like a stoppage. The Government motion before us this afternoon speaks of “limited improvements” and “limited progress”. It is a quite deliberate, calculated selection of vocabulary that is intended to con us into talking about the limits of devolution and why devolution does not work, why devolution cannot work and why devolution should be scrapped, because, if we are honest, that is the Government’s policy—that is what is in today’s Government motion.

But the real limits that the outcome of the fiscal framework review lays bare are the limited ambition and limited horizons of this Government on fiscal reform. It lays bare once again the limited acquaintance of this Government with transparency and openness, with engagement and scrutiny, and with meaningful consultation, and I am bound to say that it lays bare the limited negotiating skills of the Deputy First Minister and the unlimited mediocrity and complacency of the Cabinet that surrounds her.

Our starting point is that the fiscal framework, which the cabinet secretary’s predecessor signed up to in 2016, was both a rushed deal and a bad deal.

Will Mr Leonard give way?

Richard Leonard

No.

Of course, it is good that Scotland benefits in full from tax revenues that are raised as a result of Scottish Parliament fiscal policy decisions, but what is not so good is that, if the Scottish economy performs poorly compared to the rest of the UK, including London and the south-east, if we have no economic plan, no industrial strategy and no jobs-first just transition plan but leave it to market forces, and if we experience a downturn in a sector like oil and gas, then the block grant is cut.

What is also defective and what is also bad about the deal is that, if more people are in receipt of social security payments in Scotland relative to the rest of the UK, then there is another cut in the block grant. We are told that that is applying the “economic responsibility” principle, but I have to say that it is a so-called principle that is morally irresponsible, socially counterintuitive and economically counterproductive. Block grant adjustments on social security should not be downwards—they should be upwards, on the principle of to each according to their need, from each according to their means.

Let us be clear that what we have before us are what the Institute for Fiscal Studies describes as these “modest changes” to borrowing and revenue powers. We have got to be more radical and bolder. We have got to be better than that. It is my view—it may not be Labour Party policy any more, but it remains my view—that the Scottish Government should be able to borrow and issue bonds prudentially for both revenue and capital spending without restriction. Why should this Parliament not at least have parity with our local councils?

It also remains my view that the Treasury’s cap on the amount of reserves that can be held by the Scottish Government should be completely removed, and that those decisions should be entirely devolved.

In its medium-term financial strategy, which it launched back in May, the Government set out its negotiation aims for the fiscal framework review. It said that

“The planned review of the Fiscal Framework ... is an important opportunity to address the limitations of borrowing and reserve powers”,

but those limitations have not been addressed at all. There has been limited engagement, because this nationalist Government does not want it to be reformed and does not want it to be successful. The Deputy First Minister would rather appear on national television and announce public service job cuts—that the public sector workforce will have to shrink—than come to this Parliament and hold a proper debate and find solutions.

These matters are not complicated—they are simple. They are not technical—they are political. This is no time for tinkering around the edges. The Government has negotiated a bad deal. The Deputy First Minister’s depiction of the changes as balanced and pragmatic—that is what she told me when she wrote to me on 2 August—is selling the people a long way short.

In the end, it is a review with an agreement between two Governments that we as a Parliament are being asked to assent to. We should not, in all conscience, agree to these terms, to this limited vision or to this abject abandonment of any fighting spirit. We need a new deal, a new fiscal framework and a fresh start—and this is not it.

16:24  

Stuart McMillan (Greenock and Inverclyde) (SNP)

I have a wee comment for Richard Leonard. Devolution, not independence, limits ambitions.

I have a comment for Mr Marra. In his comments on the fiscal framework, Mr Marra said that, if Labour were to win the next UK election, there should be further discussions. However, Mr Marra did not say that more money would come to Scotland as a result of those discussions.

We have heard a lot in the debate from members across the chamber, but it will come as no surprise that I do not support any of the amendments to the motion. I note that the Lib Dem amendment speaks positively about the Smith commission report of 2014, which is the report that, in paragraph 18, would not prevent

“Scotland from becoming an independent country in the future, should the people of Scotland so choose.”

It is a pity that the Lib Dems are on the same page as other pro-union parties, and are wanting to prevent people in Scotland from having their say.

I welcome the modest, or limited, improvements in the fiscal framework, such as the indexed per capita mechanism for calculating block grant adjustments, which is to be adopted on a permanent basis. I welcome that the amount that the Scottish Government can borrow to mitigate errors in forecasting will increase from £300 million to £600 million, with no limits to the amount that can be drawn from the Scotland reserve, and that borrowing and reserve limits will grow in line with inflation.

However, the sad reality of the situation is that those changes will not be able to protect Scotland’s economy or social fabric in the years ahead. Only independence and access to the full range of powers will be able to do that. Since the fiscal framework was agreed in early 2016, it has been thoroughly stress tested.

Michael Marra

Does Stuart McMillan recognise, as any objective academic looking at the issue would, that there would be significant immediate fiscal costs to independence? We are having a fiscal debate, so I ask for a little bit of honesty. There would be an immediate cost of between £10 billion and £14 billion in the amount of money that would be available to Scotland.

Stuart McMillan

Look at our situation since the 1970s and the amount of money that Scotland has put into the Treasury that is additional to what we have received. Independence is the only way forward for Scotland, and it is the only way for Scotland to deal with many of the issues that we face as a society. We cannot do that with the limited powers of devolution, and certainly not under the situation that we had pre-devolution, when all the powers were reserved to Westminster.

I genuinely believe that it was right to review the arrangements. Taken together, and in the context of the narrowly scoped review that was on offer, the improvements to the framework and the financial management tools that are available to the Scottish Government are meaningful but limited. We should not lose sight of the scale of the fiscal challenge in the aftermath of the Covid pandemic, the on-going cost of living crisis and the urgent need to tackle climate change—in addition to the economic shock of Brexit, which was brought on by the Tories.

Although the changes to the framework are welcome, they are not of the size that is needed to offset the broader fiscal challenge that we face. That requires action by the UK Government. The Scottish Government will still need to make tough choices, within the context of the poorly performing UK economy and the constraints of devolution, to ensure that finances remain sustainable. It is sad that Scotland is again at the mercy of poor UK Government decisions that compound the pressures on our public finances and increase the misery that struggling households face.

Neither Rishi Sunak nor Keir Starmer will change course from the damaging Westminster policies that got the UK into this mess in the first place. As a result of the UK Government’s disastrous handling of the economy, projected growth is just 0.7 per cent next year, and inflation is still running at more than twice the UK Government’s target. Living standards are forecast to be 3.5 per cent lower in 2024-25 than they were pre-pandemic, which would be the largest reduction in real living standards since records began in the 1950s.

Ultimately, Westminster is holding Scotland back. Brexit is making us poorer, and continued Westminster control is making the situation worse. This week, we heard from Labour’s Sir Keir Starmer, who is the newest member of the Margaret Thatcher fan club. He said:

“Anyone who expects an incoming Labour Government to quickly turn on the spending taps is going to be disappointed.”

He also said that

“this parliament is on track to be the first in modern history where living standards in this country”—

that is, the UK—

“have actually contracted.”

Household income growth is down by 3.1 per cent, and Britain is worse off.

I encourage people in Scotland to pay attention to this point, because it will change the minds of many people in Scotland on independence. Keir Starmer said:

“This is Britain going backwards.”

He also said that the situation is

“worse than the 1970s. Worse than the recessions of the 1980s and 1990s. Worse even than the global crash of 2008.”

With an economic record such as that—going back to the 1970s according to Labour, but back to the 1950s according to official records—why on earth would Scots want to continue living in a political environment in which the only things that will be guaranteed are more poverty and the desperation and misery that are so prevalent in the so-called union?

Britain is bankrupt and broken. It is also morally bankrupt considering many of the policies that the Tories have imposed on many of our people in our country. One example is women against state pension inequality—the WASPI women—who have been robbed of their pensions, which is absolutely shocking.

I could go on, but I know that I do not have time. The fiscal framework might help a little, but it still falls far short of what is needed—independence.

We move to the wind-up speeches.

16:30  

Ash Regan

In my opening remarks, I set out the concept of having responsibility without power being a very dismal situation in which to find oneself. My amendment speaks about VAT, so I will take a little bit of time to talk about that, because it goes some way towards reinforcing that concept.

The Scotland Act 2016 states that receipts from the first 10p of the standard rate of VAT and the first 2.5p of the reduced rate of VAT in Scotland would be assigned to the Scottish Government’s budget, which would make VAT the second-largest source of tax revenue for the Scottish Government after income tax. However, despite that, the new framework has not managed to navigate a path that would deliver that. Of course, the key word is “assigned”.

Liz Smith

Is Ms Regan aware of the fact that, when the current Finance and Public Administration Committee and our predecessor committee, the Finance and Constitution Committee, took evidence on VAT assignment, there was, I am afraid, unanimity that VAT assignment is far too difficult and complex to do?

Ash Regan

I understand that, but there is a metaphor in that for the fiscal framework as a whole. It is complicated and difficult to get the framework to work in Scotland’s favour, which we have heard from across the chamber during the debate.

VAT being assigned rather than devolved means that, even if the promises of the Smith commission were delivered on, the Scottish Government would not have any direct policy control over VAT. If the framework allowed for VAT to come to the Scottish budget, as it is supposed to, VAT would continue to be collected by His Majesty’s Revenue and Customs at UK level, and the amount of tax that would be assigned to Scotland would require to be estimated using a model to be developed by HMRC, the Treasury and the Scottish Government. Liz Smith just made a point about VAT assignment being complex.

Another 15 per cent of the Scottish budget would be based on VAT revenues that were raised in Scotland, but we need to think about that. That would be 15 per cent of the entire Scottish budget, but there would be no control—that is the key point—for the Scottish Parliament and the Scottish Government over the level at which VAT should be set. That illustrates somewhat the difficulty for Scotland of the fiscal framework—the previous version or the revised one.

I remember, some time ago when I was a member of the Finance and Constitution Committee, as it was called in 2016, listening to presentations from experts who were setting out the previous fiscal framework. I understood that the way in which the framework was constructed made it extremely difficult, if not impossible, for Scotland to succeed under it. I am afraid that nothing that I have heard since then and nothing that I have heard in the debate today has convinced me otherwise.

I will take a little time to talk about the debate. Michael Marra gave a fairly dispiriting speech. However, he made some interesting and important remarks about timing, secrecy and scrutiny of the review process.

I know that we have said that the subject is quite dry, but it is very important to Scotland. Potentially, there should be more involvement by the public, parliamentary committees and experts. That was picked up by Kenny Gibson, who spoke about the need for more involvement by the Scottish Parliament and—I am sure—the committee that he is on.

Michelle Thomson echoed my comments when she spoke about PPP and the poor value for the public purse that it represents, and the fact that, although the UK is now in the privileged position of being able to move away from that model of funding public infrastructure, Scotland is not, and the fiscal framework is locking Scotland into a position in which it must use PPP. That should be of interest to everyone in the chamber.

Ivan McKee spoke about Jim Cuthbert, and referred to Mr Cuthbert’s view that tax cuts are the only way to grow the economy. He admitted that he is not sure whether that is what Mr Cuthbert meant, and I do not believe that it is. I think that, in the relevant comment in his paper, Mr Cuthbert was reflecting the Treasury’s view: the Treasury believes that the only way in which Scotland can minimise economic harm to itself via the fiscal framework is to accept the economic straitjacket that the Conservatives offer Scotland.

In my earlier speech, I focused on my view that, compared with the full flexibility that fiscal autonomy would give us, the fiscal framework review represents a bad deal for Scotland. No amount of tinkering around the edges will change my view on that. I am sure that members on the Scottish Government party’s benches will agree that only with the powers of independence can Scotland truly flourish and grow, and that only with economic separation from Westminster can we ensure that our policy priorities—those of the Scottish people—are matched by the fiscal levers of the Scottish Government. However, we can have those levers, and Scotland can have that power, only by becoming an independent country.

16:36  

Alex Cole-Hamilton

I have welcomed this afternoon’s robust debate. I broadly welcome the steps that the Government has taken to get the framework to where it is, particularly around embedding the per capita nature of the framework. The Deputy First Minister and I agree on several aspects of the conduct of the UK Government and, in particular, the decisions taken by HM Treasury, which have held our economy back and cost our constituents dearly. The disastrous incompetence of the Truss-Kwarteng plan will have ramifications for household budgets for years, particularly in relation to mortgages and the prices that people pay in the shops. However, they are not alone in being to blame. Much of the blame also lies at the door of St Andrew’s house, because the Scottish Government is principally to blame for the stagnant growth outlook for our economy.

In her motion, the Deputy First Minister asks for the devolution of all fiscal levers to the Scottish Government, but she does not inspire us with confidence that the Scottish Government would know what to do with them if they were so offered. I remind members that it has taken a decade and more to establish a welfare system, which the Scottish Government said would take only 18 months.

Liz Smith was quite right to say that the debate and the framework really matter, not just with regard to the mechanics of financial interplay but in the co-operation that should always exist between our two Governments. We need grown-ups at the helm, and we need those grown-ups to be in a room talking about the interests of the people whom we are all sent here to represent. It is the Scottish ministers’ duty to use the fiscal framework to get the best deal for all our constituents.

The fiscal framework is about respect across levels of Government. There is an irony there that members might find hard to escape. I return to the Verity house agreement. That is not a fiscal framework, but it points to a fiscal framework that it is hoped will be established between central Government and local government in the coming months. It talks about a presumption against ring fencing and about allowing authorities to take creative control over the financial levers and make robust decisions in the interests of their communities, and, as I said, it calls for the establishment of its own localised fiscal framework. However, that respect and trust were shattered by the Government at the SNP conference with the announcement about council tax. Laying aside the merits or otherwise of that policy, it shows the level of contempt that the Government has shown for local authorities not just in the policies that it enacts, but in the way that it has asset stripped them over the years in the budget block grant.

Michael Marra’s excellent speech brought us back to the topic of growth—or the lack thereof, because much of that failure is entirely home grown. The environment for business investment is hardly inviting at the moment. Indeed, Green ministers, who are manifestly uninterested in national growth, have presided over things such as a deposit return scheme that, had it not been abandoned, would have seen Scottish products removed from Scottish shelves.

I do not have time to go through all the other speeches, but I thank Richard Leonard for injecting a bit of life into an otherwise stuffy debate.

Before I move on to the substance of my remarks, I will speak to Ash Regan’s remarks. I welcome her to her place as the leader of the Alba Party in the Parliament. I am interested in aspects of her amendment. We will not support it, but I am interested in hearing more from the minister about the discussions on VAT that were had between the two Governments. Our approach is that we should not devolve just for show and that changes to how we are governed should be underpinned by a clear framework and an understanding of how the changes would make people better off, grow our economy and make a difference. I am not clear that the comments on VAT in Ash Regan’s amendment adequately explain that.

Can I help Mr Cole-Hamilton on that point?

Absolutely. [Interruption.]

Can we have Mr Swinney’s microphone switched on, please?

John Swinney

I am grateful, Presiding Officer.

It may help Mr Cole-Hamilton on the point about VAT assignment if I note that the drift of the conversation in the Smith commission was entirely about assigning VAT for the purposes of show, so that the proportion of revenues that were supposedly under the control of the Scottish Government and the Scottish Parliament could be demonstrated to be more than 50 per cent. That was a fig leaf.

Alex Cole-Hamilton

That was certainly worth the wait. [Laughter.] I am grateful to the former Deputy First Minister for his intervention. As he sat on the Smith commission, I bow to his superior knowledge. He underscored my point that there is no point in devolving powers if they do not mean anything.

To create opportunity and grow the tax base, we need to end the era of meagre growth that we have been living in. Scotland has all the necessary ingredients to be at the forefront of industries such as life sciences, green energy and fintech, but in the SNP we have a chef who cannot be trusted to bring those ingredients together.

We need to start by investing in our people, and nowhere is that more important than in education. Scotland needs the best skills if we are to compete with the world, make and imagine things again, and create opportunities for our young people. However, in the PISA statistics that came out yesterday, we saw a worrying trend against that. Michael Marra was quite right to bring our attention to that. On national television yesterday, it was an insult to hear Stephen Flynn, the leader of the SNP at Westminster, tell Sky News that it was not the SNP’s fault. He sought to blame the decline in our international standards on a Liberal Democrat-Labour Government that left power 16 years ago. Our teachers and pupils deserve so much better than denial and deflection. We have now seen the worst-ever results across reading, science and maths, with England performing better on every measure. Under the SNP, performance has slipped. If Stephen Flynn cannot accept that, people will have no faith in the Government’s ability to get us back to where we could be.

I see that the Presiding Officer wants me to conclude. I had a lot more to say—not least on health, because when we do not have a healthy workforce, we cannot grow our economy—but I will rest on my remarks.

16:43  

Michael Marra

I thank all the members who contributed to the debate. I will start with Stuart McMillan’s speech. I very much agree with him about the huge challenge and wake-up call that we face with regard to the falling living standards across the whole of the UK and what they should tell us all about the direction that our economy has taken. We entirely agree about how poor the terrible Tory autumn statement was. It came from a Government that is, thankfully, running out of time. The Tory Government has left our economy in a parlous and stagnant state, and nothing that Jeremy Hunt said or did in the autumn statement will change that. The Tory Government bears a huge responsibility for the record fall in living standards and the woeful outlook for economic growth in this country.

However, I am afraid that, in Scotland, we have been lumbered with two incompetent Governments, and each is more interested in stoking division and blaming the other than in facing the consequences of their respective 16 and 13 years of decision making. It is on that basis that we will not support the Tory amendment, as we do not believe that either Government is delivering

“the best outcomes for the Scottish economy”.

Alex Cole-Hamilton made some very good points on the importance of economic growth and how vital it is to the future of our citizens, our country and our public finances. If we are to change the state of our public finances—

Will the member give way?

Michael Marra

Not at the moment. I am just getting started.

If we are to change the state of our public finances, we must see growth in our economy and make sure that we can raise the wages of Scots.

Labour will also—

Will the member take an intervention?

Michael Marra

No, thank you.

Labour will not vote for the Alba amendment either, which gets the party off to a flying start in the chamber. As various members said, the Finance and Public Administration Committee has heard a considerable amount of evidence on VAT assignment over the years. At the most recent round table, on 14 November, witnesses and members were in broad agreement that it would involve significant practical barriers and have fairly limited benefits for Scotland.

My experience of the Alba Party is limited to the internet, but it seems to be untroubled by evidence or reality. I am sorry that Ash Regan found my earlier speech slightly dispiriting. I have thoroughly enjoyed her contributions, and particularly her reflections on her time in Government and the paucity of the record of her erstwhile colleagues. She talked about the trap of the fiscal framework, which was perhaps designed by Michelle Thomson’s zombies. The two of them share a common concern, but they had nothing to say about the £11 billion economic cost of independence or the £14 billion fiscal cost that would be immediate.

Had Mr Marra been in the Deputy First Minister’s shoes, would the Labour Party have signed up to the fiscal framework?

Michael Marra

That is a good question. We have supported much of what was agreed. We are certainly supportive of the framework in those broad terms. I do not believe that we would have liked to have come from the original starting point that the Deputy First Minister found herself at, which involved making a rushed decision to try to grasp the borrowing requirements that were there.

That brings me to the points that Kenneth Gibson made, speaking as convener of the Finance and Public Administration Committee. I share his regrets—they are the regrets of all members of the committee—about the process, some of which John Mason laid out. However, Kenneth Gibson does not necessarily share my analysis of why the agreement was reached so hastily. I say to Liz Smith that I do not really understand fully the dynamics of striking an agreement to which there are two signatories, where one of those signatures can be withheld—perhaps indefinitely, should the Deputy First Minister have chosen to do so—for a better deal. There was something in the Deputy First Minister’s motivation to get that deal done, and quickly. In that respect, I believe that the Government has sacrificed long-term prospects for its short-term political benefit.

It has been a feature of the debate that members across all parties share concerns about the lack of scrutiny and public debate that would have assisted the Government in doing its job. There is welcome news from the courts this afternoon, as the Scottish Government was defeated in its attempt to shut down freedom of information in this country. However, as the Labour amendment states, we regret the approach that it has taken around the fiscal framework. It is an approach that has become far too common with this Government. It might be too technical, in the words of the Deputy First Minister, but that should not preclude proper public scrutiny.

No matter what John Swinney might say or his posture around my contribution, we luckily have the Official Report, which can show that his remarks, although they might not have been curious, were spurious in that regard.

Touchy.

Michael Marra

Touchy, indeed.

We are speaking about very serious matters. They are significant for the future and the fiscal health of this country and for the budget that we will see in a few weeks’ time. I am sure that the Deputy First Minister will use the powers to their full extent.

16:49  

Liz Smith

I begin my summing up by again thanking the officials behind the scenes, who did a very difficult and complex job. Although I know that there are scrutiny issues—those points have been made well, and the Finance and Public Administration Committee has already expressed concerns about that scrutiny, so we will perhaps look to rectify that when we update the fiscal framework in future—the officials worked incredibly hard for a long period in order to come to an agreement. John Swinney is right to point to the word “agreement”, because that is what it has to be: an agreement. Despite the fact that we have fundamental differences in our constitutional approaches—we want different things, obviously—the fiscal framework is about the current constitutional set-up. That is why it is important that it is an agreement and that both Governments do their best on behalf of Scotland—that is why my amendment says what it does.

John Swinney

On Liz Smith’s substantive point about the welcome nature of having a process for agreement, does she reflect on our experience of the Sewel convention since Brexit? Up until 2019, the UK Government indicated that it would not normally legislate against the consent of the Scottish Parliament. That has been breached on, I think, nine occasions since Brexit. Is that in the spirit of what we should reasonably expect of our intergovernmental relations between the Scottish and UK Governments and Parliaments?

Liz Smith

Intergovernmental relations could be improved, and there are messages for both sides as to why they could be improved. That message is just as important for this Parliament as it is for Westminster.

The debate was perhaps more interesting than some of us thought that it would be. In fact, in some cases, it was quite entertaining. Mr Leonard likes to take the back seat at the top of the chamber. I have a little bit of advice for him. Perhaps if he moved a bit further to the front, he would be able to see the face of his party’s front-bench team when he is making points in his Arthur Scargill-esque terms. I do not think that Mr Marra was in agreement with what Mr Leonard was saying. I may be wrong, but I have a hunch that there is no agreement there at all. Perhaps a framework agreement between the two of them might be a good thing.

We have talked a little about trust—that is “trust”, not “Truss”. Trust is very important. My colleague Brian Whittle mentioned it, and Alex Cole-Hamilton mentioned trust between the Scottish Government and local government. This Parliament has a duty and a responsibility to think about how that trust can be built on and enhanced. Clearly, as Alex Cole-Hamilton rightly said, there are issues in local government just now in which trust has been undermined. If we are going to have better relationships between the Scottish Government and the UK Government, they have to be built on trust.

I want to say a little bit about the three Davids who put together the independent report, because not enough has been said about them. Their report took out the politics as much as was possible, which is difficult to do when it comes to the fiscal framework. Their report was extremely important in getting behind the politics. In their executive summary, they said something very interesting: that both Governments have a duty

“to set out transparently the rationale”

for fiscal framework decisions. That is important, because the three Davids were doing their level best in very difficult circumstances and using a very complex formula to do that. They deserve great praise—they certainly paid every attention to detail when it came to the Finance and Public Administration Committee’s scrutiny. I cannot thank them enough, and I am sure that I speak on behalf of my colleagues in committee in saying that we owe them a debt of gratitude for producing a report that is more intelligible than many people think the fiscal framework is.

Mr McKee made some interesting points in his speech. When Mr McKee was a minister, he listened to business. I am quite sure that, when people in the business community speak to Mr McKee now, they are putting to him quite a lot of points about taxation, which is a topic that he raised in his speech. I would put a lot of money on it being a fact that the business community is now telling Mr McKee that the last thing that business wants is a high-tax Scottish economy, in which people who are coming to work, live and invest here feel slightly aggrieved about that. That is the last thing that Scotland needs.

The fiscal framework is so important for this Parliament and for the Scottish economy. Putting constitutional politics aside is very difficult, but it really matters that we look at the fiscal framework with as objective an analysis as we can. We must take on board the advice that is given to us by the independent economists and academics on whom we rely so much for information, and on the Scottish Fiscal Commission.

The debate is very important and it is definitely to be continued. Once again, I thank those who were involved in signing the agreement and all those who worked behind the scenes, because it really means an awful lot.

Thank you, Ms Smith. I invite the minister to wind up the debate for up to nine minutes.

16:56  

The Minister for Community Wealth and Public Finance (Tom Arthur)

I join the Deputy First Minister and colleagues from around the chamber in paying tribute, and expressing my thanks, to Scottish Government and UK Government officials for their work in ensuring that we have reached the agreement in the revised fiscal framework. I join Liz Smith—and I am sure that others would want to join me as well—in thanking the authors of the independent report. I also pay tribute to the work of the Deputy First Minister in securing the deal, and to John Swinney for his work on progressing both this deal and the original fiscal framework, along with my colleague Kate Forbes when she had that responsibility.

John Swinney’s contribution served as a timely reminder of just how hard fought-for and hard-gained the powers are that we now enjoy. We should always bear that in mind. Even when we are having a debate such as this, which at times can be dry and technical, it is of fundamental importance to the people of Scotland because it ultimately dictates the revenue that we have at our disposal to fund the public services on which we all depend.

Those powers did not arise by themselves. They are the result of hard negotiation, and they are also the result of clear views expressed by the Scottish people. Just as constitutional change in previous decades—whether through the Kilbrandon report and the Scotland Act 1978 in the 1970s or the constitutional convention of the 1980s—followed on from or coincided with significant SNP advances, the further devolution that we have seen come to this Parliament followed on from the SNP’s victory in 2007. The powers that we are debating today are a direct consequence of so many people choosing to vote for independence only 10 years ago, in the independence referendum.

In taking forward the review of the fiscal framework, we are operating within a number of contexts. I have heard some colleagues ask why more could not have been achieved. It is a fair question to ask, but at times it ignores the reality that there are two partners within a negotiation and we are ultimately limited by how much the UK Government wishes to concede. We have sought to engage in those negotiations in a mature way in order to deliver the best outcome, and in doing so we have sought not to make the perfect the enemy of the good.

Liz Smith

Does the minister accept that the UK Government listened to the Scottish Government’s requests when it came to inflation-proofing the change and to ensuring that there was greater flexibility on the borrowing powers that the Scottish Government has and that it was more responsive to exogenous shocks? That is the difference between the 2016 fiscal framework and the 2023 fiscal framework.

Tom Arthur

We recognise that this is significant progress. I pay tribute to the UK Government officials and to the former Chief Secretary of the Treasury. It is, of course, not all that we would want, but it responds to some of our concerns and I know that it responds to some of the concerns that Parliament has expressed.

We are also operating within the context of the Smith commission principles. Those principles are cross party in origin. I note the comments that Liz Smith made in her remarks, and, of course, the Government would listen with interest to any further considerations that members or any committees of this Parliament may have with regard to the Smith principles.

The final point about context that I want to make is on the fiscal context in which we are operating. We can discuss the fiscal framework in abstract terms but, in reality, it is about how resources are allocated. Ultimately, the outputs from any framework will only be as good as its inputs. As the Scottish Government’s motion makes clear, the situation that we find ourselves in is grave. We face the most profound set of fiscal challenges that any Government has experienced under devolution.

That is not unique to Scotland. We know that the situation in Wales is just as grave. In October, the Welsh Government set out that it needed to find £600 million in savings before the end of the financial year. Accounting for differences in the size of our budget, that would be the equivalent of more than £1 billion in Scotland.

On the context moving into the next financial year, the UK Government has not inflation-proofed its capital budget, which is forecast to result in a 9.8 per cent real-terms cut in our UK capital funding over the medium term, between 2023-24 and 2027-28. On resource, at the autumn statement, the UK Government delivered real-terms cuts to NHS England and to justice. That presents us with a grave set of choices. That is the context in which we find ourselves less than two weeks out from the budget.

I recognise that there has been a constructive tone to much of the debate. Liz Smith touched on the need for Scotland to get the best deal and, I think, a collective duty on this Parliament. I commend the work of the Finance and Public Administration Committee in its scrutiny of the fiscal framework, and the work of its predecessor committee in the previous session of Parliament, of which I was a member. It is incumbent on the Scottish Government and the UK Government to reflect carefully on the considerations that have been put forward by the Finance and Public Administration Committee on a range of issues, particularly on the matter of VAT assignment, which a number of members have touched on.

We will, of course, continue to engage constructively with the UK Government ahead of the next fiscal framework review. It is estimated that that will take place in five years’ time, and it has been set out that it will not happen more than once in any particular session. I recognise that members will have an interest in how the agreements that we have reached in the new fiscal framework review are implemented. Further information will, of course, be provided as part of the budget process.

Is it the minister’s understanding that, if there was a change of Government at Westminster, that could trigger another look at the fiscal framework?

Tom Arthur

I certainly hope so. I hope that a change of Administration at Westminster would afford an opportunity for a refreshed approach. I do not know whether the Labour Party has updated its position, but the Gordon Brown commission report, which I believe forms the basis for Labour’s constitutional offering, states on page 110 that

“A consultation should be held over updating Scottish capital borrowing ceilings”.

That has now been superseded by the fiscal framework review, so I hope that any incoming Labour Government, should that be the outcome of the election, would take a more ambitious approach, reflecting on many of the contributions that have been made today, including perhaps the contribution from Labour member Richard Leonard. I am sure that Mr Marra, on the front bench, listened to Mr Leonard very carefully and took copious notes to inform Labour’s constitutional position.

On Labour’s position, I note that Stuart McMillan highlighted in some detail the comments of Keir Starmer. We are facing austerity. It is austerity redux, but it is now in the context of 13 years of austerity, economic mismanagement from the UK Government and general political and economic chaos. What the UK Government has put forward cannot stand—it must be revisited. However, so far, we have heard not just obstinance from the UK Government but an embrace of that fiscal approach from the Labour Party.

What the UK is facing, and what Scotland is facing through no choice of its own, is austerity for the rest of this decade. Although the fiscal framework represents an improvement on our current fiscal arrangements, if we truly want to unleash the potential of the Scottish people and have an economy that can compete with Ireland, Norway, Denmark and other similarly small and medium-sized economies, the only way to do that is not through mitigation or a halfway house of a fiscal framework and devolution but by taking on the full powers of an independent nation.