Discussing the deficiencies of FFA is futile

I have come to the conclusion that the SNP are opportunists who take advantage of a pernicious and serendipitous streak which runs through Scottish society.  It explains why despite the dire warnings from the other parties, allegedly supported by the IFS, that the SNP plans for more fiscal control has no effect on the outstanding level of popular support they apparently enjoy.  Scots have an innate belief that they are winners even when it’s obvious they cannot be so.  I question whether in Scotland “the fat lady ever sings” – because she too realises the end may be tragic.

I am on record for doubting the appointment of Lord Smith to lead the commission for more devolution.  Subsequently I declared that I was wrong to do so.  I thought his report to be worthy of praise.  So it is. But I now realise that it leaves too many loose ends, to the extent that the “fat lady” hasn’t even arrived at the auditorium.

For me the SNP Manifesto – “Stronger for Scotland” – doesn’t tell me when to expect her to sing or even when she will make a public appearance.  It is long on what the UK can do for Scotland and short on what Scotland can do for the UK. The last paragraph on the penultimate page supports my thesis.  The SNP say:

“As we set out in our submission to the Smith Commission, the Barnett Formula should continue to be used to determine Scotland’s resources during the transition to full fiscal responsibility and for as long as the Scottish Parliament’s financial powers fall short of full responsibility.”

One could be forgiven for thinking that the SNP are referring to the SNP’s submission to Smith.  But wait, in that submission they “formally associate” themselves with the Scottish Governments proposals.  By which I think they are referring to “More powers for the Scottish Government”.  From which I think it reasonable to assume that by Scottish Government read SNP.  Moreover the rather thin SNP submission – for maximum self-government leading to independence – is predicated on a Panelbase survey.  If I remember correctly the same on-line polling body which was so out of step with others on the referendum and the eventual result.  As a consequence we can reasonably assume that the Scottish Government’s proposals are at least to some extent similarly questionably based.

So are we to believe that “full responsibility” means independence?  I think we must.  But the SNP’s proposals last year fell far short of what is conventionally thought “independence” means.  The fat lady was not needed because the SNP wanted to retain the pound and the support of the BoE.  In which case the majority were convinced that fiscal responsibility at the end of the show rested with the UK taxpayer.

The SNP are therefore confirming an inescapable fact that the UK Government will have the right to determine the fiscal rules to determine Scotland’s resources – whatever “resources” encompasses – until such time as Scotland has its own currency and Central Bank.

I think we should be clear that the SNP agree that Scotland is and will remain a sub-central Government to the UK – at least for an indeterminate time.  It would be helpful if the SNP entered into dialogue with Central Government accepting this as a fact.  Because then it would be possible to design a system of fiscal autonomy for Scotland which allows its government to determine efficient outcomes for the functions devolved to it.  Such a system may well recognise that drawing a dividing line between tax sharing and grants is difficult and that own taxes are more important than grants for sub-central governments.[1]

If Smith had gone that far he may have avoided the debate about what “no detriment” means and how Barnett will be refashioned to suit the tax raising powers designated to Scotland.  It may also have obviated some of the competiveness which is and will emerge between the Treasury and Holyrood on tax levels.  Without the ability to control interest and exchange rates it appears manifest that tax powers alone will not level the playing field between Scotland and its much larger neighbour (that incidentally isn’t another sub-central government).  The ability for Scotland to control its own rate of inflation or growth as a quasi-federal state within a national state which has devolved governments which are not asymmetrically federal states must be severely limited. 

So what we have as a consequence from Smith is a formulae to apply to a formulae in order to “determine Scotland’s resources” as the SNP Manifesto puts it.  But before considering that there is an uncomfortable but important principle to be decided.  Would Scotland be allowed to go bankrupt or will the UK taxpayer always stand guarantor?

No doubt the SNP will argue that it would be to Scotland’s detriment.  If they succeed in that argument – as its economy is so deeply integrated into the rest of the UK they must – the fiscal rules covering the new powers must include or not prevent provisions for sanctions, up to and including reversion.  Retaining the level of stability required to maintain the UK’s position as a low credit risk is of the essence to our collective economic success.  Moreover lower debt will be needed when we are next hit by a cyclical recession. (This decade would be the first since WWII not to have a period of recession)

The premise of the Draft Scotland Bill is that the Scottish Parliament will continue to run an annual balanced budget and not exceed their powers to borrow either from the UK Government “National Loan Fund”, commercial banks or bonds.

The Scotland Act 2012 sets out borrowing limits for both Current and Capital Expenditure and these are not increased in the Draft Bill.  Rather than increase borrowing to cover current expenditure it is intended that the Barnett Block Grant will be adjusted to take account of:

  • devolved or assigned taxes;
  • devolved welfare programmes;
  • Scottish Government cash reserve; and
  • Scottish Government borrowing.

The intention being that where the Scottish Government increases tax receipts or reduces public spending they will keep the benefit, whilst being responsible for managing the consequences if tax receipts are lower or public spending is inefficient. HM Revenue & Customs (HMRC) and Revenue Scotland will be responsible for collecting devolved taxes and paying the proceeds into the Scottish Consolidated Fund. HM Treasury will continue to pay the sums due under the Scottish Block to the Scottish Consolidated Fund, via the Secretary of State for Scotland.

As the SNP accept that Scotland’s revenue will be balanced by the Barnett Formulae and they appear to hold fast to the principle of “non-detriment” – unless Scotland becomes fully fiscally responsible as discussed above – it seems to me that what level of deficit Scotland will have is somewhat gratuitous.  We should be discussing how low we can reduce Scotland’s deficit.  Unless of course it is decided that Scotland would be allowed to go bankrupt as the IFS appear to think they would be in danger of doing by adopting the SNP’s plans.

What is more pertinent is whether Scotland should be expected to contribute towards reserved issues they disagree with, such as defence.  Are they suggesting Scotland’s contribution should be limited to a share of 2% of GDP on all defence issues including Trident?  Maybe Scotland should get some recognition for housing our nuclear deterrent.

In my mind the unbalanced share that Barnett grants Scotland (10.08% for 7.9% of the population) needs reviewing.  The system of “Consequentials” also seems incompatible with giving Scotland more control over their own tax affairs, health and increased welfare powers. By changing these current subsidies Scotland can be placed on a level base with its neighbours.  From that base it can then increase spending on the devolved public services it controls to what it desires and to the extent that Scottish tax payers will bear the additional cost.  They can do so with the comfort that the UK taxpayer will bail them out if they fail to balance Scotland’s budget but accepting that the austerity required to correct any deficit would not be shared. 

“Stronger in Scotland” concludes that that “the Westminster parties have the wrong priorities” and that the SNP alone know what the ordinary people of the UK need.  Arrant arrogance or a belief that Scots are entitled to win even when they are not in a position to do so?  The SNP may do well to realise that the Westminster parties they are referring to are likely to poll collectively in excess of 26 million votes whereas they may at the most reach 800,000.

Worrying about hypothetical deficits from a proposal which is unlikely to be delivered is futile.  What is relevant is that constitutionally no UK Government can tie the hands of a future government.  The scrutinising House of Commons Committee[2] considered this very point when they reported in late March.  The report inter alia recommended UK wide consultation on the implications of implementing the Smith Agreement as translated into the Draft Bill.  Explaining how the Smith Agreement is to be implemented and the fiscal rules which will be attached are much more important for the voters understanding of how the changes in our political structure will affect them.

In the words of the Committees Report, “Orthodox constitutional theory rests on the notion of parliamentary sovereignty …no Parliament can pass laws that future Parliaments cannot change and Parliament cannot relinquish any part of its sovereignty”. 

In summary whilst a Scottish Parliament may be de facto a permanency the provisions of the enabling Scotland Act may be changed.  Voting to reject a very large proportion of the UK electorate on the premise that the SNP can influence another party to pass laws which favour Scotland has the danger of unpleasant consequences.  Put simply – Scots are poorly advised to presume that whilst ever they need Barnett they should seek to exercise more power than their strength in numbers entitles them to.





[1]OECD – Fiscal Autonomy of Sub-Central Governments Working Paper no. 2

[2]HoC Political and Constitutional Reform Committee – Constitutional implications of the Government’s draft Scotland Clauses.