Scotland politics

Scotland Bill powers 'may be unworkable'

scottish banknotes Image copyright Thinkstock
Image caption Talks between the Scottish and UK governments aimed at agreeing the fiscal framework for the Scotland Bill powers are continuing

Scotland's new package of powers may not be workable and could require an entirely new method of funding devolved governments, according to economists.

The Institute for Fiscal Studies (IFS) said it was not possible to guarantee the powers would not adversely impact on Scottish or UK budgets.

It also said the Barnett formula that calculates Scotland's share of UK spending should be reformed.

This would defy a key recommendation of the Smith Commission.

But in a joint paper, co-written by the University of Stirling and the Centre on Constitutional Change, the IFS said different ways of calculating the block grant Holyrood receives from Westminster, after the new powers contained in the Scotland Bill are devolved, could mean differences of more than £1bn a year to Scotland's budget.

First Minister Nicola Sturgeon has said she will block the bill, which will hand new powers over areas such as income tax and VAT, unless it comes with an appropriate funding formula that is "fair for Scotland".

Design principles

Her stance has been backed by Lord Smith of Kelvin, who chaired cross-party devolution talks after the independence referendum.

The House of Lords economic affairs committee has also argued the process for determining the fiscal framework is flawed and that its design principles may not be workable.

Talks between the Scottish and UK governments over the fiscal framework are continuing, with both sides having said they are hopeful an agreement can be reached.

The IFS said that the precise way in which the remaining block grants are calculated and indexed over time could mean differences of more than £1bn a year in the Scottish government's budget in the space of a decade or so.

If an unreformed Barnett formula remained in place it would be impossible to design a system that satisfied the Smith Commission's principle that there should be "no detriment as a result of the decision to devolve a power" while also fully achieving the "taxpayer fairness" principle, the IFS said.

'Major effects'

David Bell, professor of economics at Stirling University and co-author of the report, said: "The options available for calculating the block grant adjustments and other elements of the fiscal framework will have major effects on the Scottish government's budget and the fiscal risks and incentives it faces.

"These issues should be part of the public and parliamentary debate, as much as the tax and welfare powers set out in the Scotland Bill itself have been."

David Phillips, a senior research economist at the IFS and co-author, said: "It may now be time for a more fundamental reassessment of how the devolved governments are financed: including whether the Barnett formula should be reformed.

"Reform of Barnett may remove some of the conflicts between the Smith Commission's principles that we have identified.

"The Smith Commission parked these issues to one side by committing to the current Barnett formula. Making the UK's fiscal framework sustainable for the long term may require reopening the debate."

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