What on earth is Scotland doing accepting this fiscal framework?

by | 21 Aug 2023

It's dense and technical, but it is super-important. Scotland has lost billions of pounds because of poor negotiation by the Scottish Government and we're all going to pay a price.

Sorry, you have to read this, like I had to write it. It’s boring and complicated, but it is really important and you need to have a basic working grasp of this if you’re interested in Scottish public life. Scotland has just agreed (again) a fiscal rules deal which is crucifying the country and causing devolution to fail.

In what I’m going to write here I am simplifying mercilessly, partly because I don’t completely understand all of the implications of what has just happened, or the maths (I’m awaiting a full briefing from national treasure Jim Cuthbert who has the patience and knowledge to go through this with a fine-tooth comb). Allow for the crudity of my simplification, but the following will give you the basics – read more here to understand this in more depth.

There are fiscal rules which are built into devolution. The Scottish Government only has limited fiscal autonomy – what taxes it can raise, what borrowing it can undertake, how the Scottish block grant is calculated and so on is constrained.

You think you know about this, and you think it’s called ‘the Barnett Formula’. But that’s not really true anymore – after the independence referendum, ‘the Vow’ promised us a new deal and so the Smith Commission was set up. It proposed a host of changes which mean the system we now have for funding devolution isn’t really the Barnett Formula at all.

This is where it gets mind-numbingly complex and boring for most people. Instead of just getting a set population-based proportion of relevant expenditure at the UK level and adding it together with any tax the Scottish Parliament chooses to raise to form the Scottish budget, a bunch of ‘adjustments’ were added in to the system.

These have changed the system entirely. Now we start off with a roughly population-based formula as it was under Barnett, but then it gets adjusted with another formula which is based on GDP-change. Basically Scotland gets rewarded if we can grow our economy faster than the UK and is punished if we don’t. There are a bunch of messy things done with VAT as well.

The Smith Commission recognised that this was a full-on nightmare, because no region of the UK other than London and the South East ever ends up with higher GDP rises than the UK average, so an additional clause was added to the Smith Commission report – a ‘no detriment’ clause.

This was meant to recognise the fact that, for the most part, Scotland’s economic performance has a lot more to do with reserved economic policy than it does with anything Holyrood does. It was also just plain there because the post-referendum settlement was meant to make things better for Scotland, not worse.

But the Scottish Government made such a hash of the negotiations that their negotiators were utterly turned over. There is no real ‘no-detriment’ provisions at all and the version implemented is basically as painful a version as possible. It is flat-out worse for Scotland than before the whole damned thing started. The Vow ended up screwing us, with direct help from the Scottish Government

The result of this is pretty devastating. The Scottish Government increased tax slightly. Over three years the Scottish public paid £900 million in higher tax – but the Scottish Budget only rose by £170 million. The difference (£730 million) was lost because of this new formula. We’re raising tax to fill a giant new hole in the block grant.

But what is so dreadful about this is that the Scottish Government were willing partners in creating this giant hole. The night before he signed the deal John Swinney got a lengthy phone call from Jim Cuthbert who warned him that this was an act of incredible self harm and that no Scottish Government should consider signing up to this. He told Swinney that in no uncertain terms.

What we now have is a relationship which treats Scotland less like a nation and more like a big regional authority that gets what it gets and can damn well like it

So why did they go ahead? It isn’t clear to me that everyone involved (on the Scottish side) fully understood what they were doing. But I suspect there was a bigger problem. I know people think I just don’t like Nicola Sturgeon but it is more than that; I realised early on that she was a fatuous leader, interested in PR rather than the grinding detail of government.

Because along with the fiscal rule changes, the Scottish Government also got a bunch of new powers, including over social security (which Shirley Ann Sommerville promises us will actually be enacted some time this decade). I have increasingly come to the view that Sturgeon literally didn’t care, she just wanted to wave ‘new powers’ around in the media to look heroic.

The slow, dawning realisation of what they’d done started to filter through to some of the cleverer people at Holyrood, and as the squeeze Jim Cuthbert tried to warn Swinney about started to bite, a number of people started pressuring the government to look again at this. Previous Finance Secretary Kate Forbes promised to do that when it came up for review and seemed to understand the issue properly.

So First Minister Yousaf fired her and replaced her with Shona Robison, a woman not known either for a successful Ministerial career (even Sturgeon fired her over her performance at health) or for numeracy. And then the next thing anyone knows, the reviewed fiscal framework came out a couple of weeks ago – and it appears to be worse.

The Scottish Government crowed about ‘rising borrowing cap’ in its media response – but this was only raised to recognise inflation, meaning the Scottish Government were actually running around shouting ‘brilliant – they’ve stopped cutting our borrowing powers’.

But they also seem to have done something else, which I’ll need to explain. I raised it above; it was recognised by everyone that there was a problem in the theory of the 2015 fiscal framework. That is basically a ‘Trussonomics’ framework. It thinks governments should be punished or rewarded only for GDP and all its internal mechanisms push towards a low-tax, small-state approach to government.

The problem is the one raised above about who is being rewarded or punished for what – because untangling what economic impacts have come from UK policy and what from Scottish policy is basically impossible. And the Scottish Government seems simply to have accepted that, yes, it’s too tricky – so Scotland just accepts it will be responsible for both. Forever.

It is hard to overemphasise how stupid this is. Because of how crushingly boring a lot of this is, people have just ignored it. But this has all been a massive change. We used to be in something that looked like a ‘monetary union of nations’, where one nation was mainly governed by another so it was given national-level protections for its funding base.

That is more or less gone. What we now have is a relationship which treats Scotland more like a big regional authority that gets what it gets and can damn well like it. This isn’t much more of a monetary ‘union’ than the UK’s relationship to Cornwall is a monetary union – Scotland and Cornwall are just funded through different formula.

And this new ‘regional authority’ status is clearly designed to impose that neoliberal political revolution that Scotland is supposed to have resisted. To give you an idea about what this means; the UK no longer uses PFI because it is horrendously inefficient. But now Scotland has (almost) no option but to stick to PFI for most of its public infrastructure because the Scottish Government has agreed to it.

I want you to understand this properly. We didn’t have perpetual PFI imposed on us. We didn’t have a sort of loose Trussonomics forced into our fiscal settlement. We didn’t have a monetary and fiscal union of nations status taken away from us against our will. We were willing partners to all of this.

Scotland’s cabinet has very little professional experience between them and none in finance, accounting, maths or economics

Why? How? What on earth is going on? Discussing that is taking up quite a lot of my time, because no-one really knows. We’d been pushing hard for a load of things to change in this round of negotiations (for example, allowing the Scottish National Investment Bank to capitalise properly and to permit Scotland to stop using PFI in the same way London has stopped).

But not only did we get none of that, we didn’t get a formal chance to suggest it. There was a consultation paper (for an independent review) a year and a bit ago which I must admit I missed. It got six responses – though we don’t know from whom or what those responses were.

That’s it. That’s all that anyone knew before this was announced. No parliamentary committees, no consultation, no reach-out or engagement that I’m aware of, just total surrender at the first available opportunity.

So why? Here’s my guess. First, this would all have been going on during the transition from Sturgeon to Yousaf so things may have been missed. But this is so important that basically I think the bigger issue is that I don’t think there is a single person in cabinet with the intellectual capacity and specific skills to engage with this. They have very little professional experience between them and none in finance, accounting, maths or economics.

Nope, this is almost certainly a product of the civil service – and the available evidence suggests Scotland’s civil service is struggling to achieve competence. I wouldn’t let them negotiate with some jakey at the Barras given their recent performance.

So was this only incompetence? I don’t think so. If you’ve not noticed that corporate Scotland has sniffed how weak the Yousaf administration is, you’re not paying attention. So far he has basically backed down and bottled it when any domestic industry (with power) has challenged legislation.

You cannot have missed the property sector, the oil and gas sector and the Edinburgh financial sector throwing their weight about. They have all infiltrated the civil service at just about every level, either via revolving doors, through networking or through what is effectively bribery.

There are hard-core right-wingers all over Scotland’s public agencies. They are constantly in pursuit of privation, of the protection of PFI, of corporate procurement and all the rest of it. When government is weak (or in Sturgeon’s case, uninterested) and the core part of the civil service is poor quality, vested interests run the roost.

Remember, it wasn’t really Transport Scotland that privatised the car charging network, it was Scottish Enterprise. They also re-wrote the national hydrogen strategy on behalf of the oil and gas industry. PFI for trees is what right-wingers think ‘just transition’ looks like.

Why? Because the people involved have all given influential board positions to the corporates and are all going to get lucrative Board positions in the private sector in return when they retire (which I think is basically bribery). Those of you worrying about secret service infiltration of the SNP should worry more about corporate infiltration of the Scottish public sector at almost every possible level.

We are the turkeys which voted for Christmas. Twice. At the very least we’ve lost well over a billion pounds from Scottish public services already and will lose billions more over the coming decade. This is because the Scottish Government is weak and bad at its job. And now we’re stuck with this all for another decade, or until independence.

Sorry, I know this is boring. I know it’s too long. But this is why I set this website up – to try and draw your attention to important things you may have missed because they really, really matter. The fiscal framework is decimating Scotland’s budget and therefore its public services.

We should never, ever let this happen again. And yet we just did. Again.

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