Scotland politics

Why the F-word matters in Scottish politics

F is for framework. Fiscal framework. But what is it and why does it matter so much?

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Is this about new powers?

Yes. Holyrood is due to take on new tax and welfare powers when the Scotland Bill 2016 becomes law.

The bill includes the extra devolution recommended by the Smith Commission after the 'No' vote in the independence referendum.

The financial arrangements underpinning these new powers are what is known as the fiscal framework.

Why is it important?

There are two reasons. Firstly, no fiscal framework - no new powers. You can't have one without the other.

If the UK and Scottish governments can't reach agreement, SNP ministers have made clear they will use their Holyrood majority to block the Scotland Bill.

Secondly, the framework will help determine the amount of money the Scottish government receives from the Treasury in future years.

No wonder they're haggling. The Scottish government has an interest in maximising its share of UK resources. The Treasury has an interest in minimising it.

Formally, both governments are committed to achieving a deal that is fair to both Scotland and the rest of the UK.

Is a fair deal possible?

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It's tricky. The Smith commission included an important principle - that there should be "no detriment" to either side.

In other words, neither the Scottish nor UK government should be worse off financially as a result of the devolution of extra powers.

There are two parts to this. "No detriment" as a result of the decision to devolve a power and "no detriment" for either government as a knock on effect of the policy decisions made by the other.

Researchers for the Institute for Fiscal Studies concluded that this was impossible to achieve.

It hasn't stopped the Treasury and the Scottish government trying to find a solution.

What is the most contentious issue?

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How to adjust Holyrood's block grant from the Treasury to take into account the new tax and spending responsibilities - that's the biggie!

The more money raised directly in Scotland, the less the devolved government needs from UK resources (which include Scottish contributions).

So, when Holyrood's tax powers grow, its grant from the Treasury is cut accordingly.

This is achieved by tweaking the Barnett formula, which determines Scotland's share of UK spending.

That's relatively straightforward in the first year. The amount of tax that's expected to be generated in Scotland is deducted from the block grant.

For future years, a system of indexation is needed to reflect changing economic circumstances.

Finding indexation arrangements that both sides are happy with is easier said than done.

What are the indexation options?

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There are three main options:

Indexed deduction - the cut to the Scottish block grant is adjusted by the percentage change in income tax revenues in the rest of the UK

Per capita indexed deduction - a version of indexed deduction that protects Scotland from the effects of having slower population growth than the rest of the UK

Levels adjustment - the cut to the Scottish block grant is adjusted by Scotland's population share of any change in cash raised in income tax in the rest of the UK

It is understood the UK government favours a form of levels adjustment, while the Scottish government prefers per capita indexed deduction.

Academics disagree about which model would produce the "fairest" outcome.

Articles by Prof Jim Gallagher and Prof Anton Muscatelli give a flavour of the debate.

What else is at stake?

  • Borrowing - The fiscal framework will determine the extent of the Scottish government's borrowing powers. It can already borrow up to £500m for revenue spending and £2.2bn for capital investment but the Smith Commission recommended an unspecified amount of "additional" capacity. The framework will need to take into account the UK government's existing financial rules - those set out in the fiscal charter.
  • Costs - Setting up and running a devolved welfare system is not without cost. Agreeing exactly how much is needed for this and who pays what is part of the negotiation.
  • Scrutiny - As Holyrood's financial clout increases, so does the element of risk involved in managing devolved public finances. As a result, a system of independent scrutiny needs to be agreed, to make sure ministers get their sums right. There is a debate about whether the fiscal commission created by the Scottish government is up to the job.

What is the timescale?

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The two governments had hoped to agree a deal in Autumn 2015. That deadline came and went.

The first minister, Nicola Sturgeon, anticipated a deal being struck in February of 2016.

The schedule of talks has intensified since the New Year.

The chief secretary to the Treasury, Greg Hands and the Scottish finance secretary, John Swinney, held their ninth round of talks on February 8th.

But time is running out.

The Scottish Parliament breaks for the election campaign on 23 March.

The convenor of Holyrood's devolution committee, Bruce Crawford, has informed both governments of the time MSPs will need to consider and any agreement.

The deputy first minister, John Swinney, has talked of a 12 February deadline.

The Scottish secretary, David Mundell, has already pushed back Lords consideration of the Scotland bill in anticipation of talks taking longer.

What if there is no deal before the election?

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Standby for a big election row, with the SNP and Conservatives blaming each other for the failure and Labour blaming them both.

The Tories will be accused of trying to short-change Scotland. The SNP will be accused of running scared of additional responsibility.

The deputy first minister, John Swinney, has foreshadowed this scenario by announcing his intention to publish "all the key papers" from the fiscal framework talks.

Who would have thought a fiscal framework could cause so much fuss?