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Fiscal framework: What is Scotland's new funding deal? Fiscal framework: What is Scotland's new funding deal?
(2 months later)
Let's talk about Scotland's new fiscal framework.Let's talk about Scotland's new fiscal framework.
Okay, okay but before you nod off, it is worth pointing out this is a vital issue which goes to the heart of new powers for Scotland.Okay, okay but before you nod off, it is worth pointing out this is a vital issue which goes to the heart of new powers for Scotland.
The Scotland Bill, currently making its way through Westminster, stands to transform Holyrood into one of the world's most powerful devolved parliaments - or so we're told by the UK government.The Scotland Bill, currently making its way through Westminster, stands to transform Holyrood into one of the world's most powerful devolved parliaments - or so we're told by the UK government.
Edinburgh is on course to gain major new tax and welfare powers - but that's currently being overshadowed by a debate about whether it can be done fairly.Edinburgh is on course to gain major new tax and welfare powers - but that's currently being overshadowed by a debate about whether it can be done fairly.
Barnett barneyBarnett barney
At the moment, most of Scotland's £30bn annual budget is funded by the UK Treasury - known as the block grant - and the amount of cash which goes into the pot is worked out under the Barnett Formula.At the moment, most of Scotland's £30bn annual budget is funded by the UK Treasury - known as the block grant - and the amount of cash which goes into the pot is worked out under the Barnett Formula.
Once Holyrood gets more power to raise its own tax money, the amount of Barnett cash which comes north of the border will be cut.Once Holyrood gets more power to raise its own tax money, the amount of Barnett cash which comes north of the border will be cut.
Year One of these powers is straightforward enough - if you get £10bn worth of cash-raising powers, £10bn is then deducted from the block grant.Year One of these powers is straightforward enough - if you get £10bn worth of cash-raising powers, £10bn is then deducted from the block grant.
But things start getting complicated in future years, where tax policy in Scotland and the rest of the UK could begin to look very different.But things start getting complicated in future years, where tax policy in Scotland and the rest of the UK could begin to look very different.
Potential optionsPotential options
The Smith Commission, set up by UK ministers to agree which new powers should be transferred from Westminster to Scotland, said the final solution shouldn't put Scotland, or the rest of the UK, at a disadvantage. The Smith Commission, set up by UK ministers to agree which new powers should be transferred from Westminster to Scotland, said the final agreement shouldn't put Scotland at a disadvantage.
But some argue that's a near impossible task. It's been called the "no detriment" rule - but some experts argue that's a near impossible task.
Economist Prof David Bell, said: "Neither side will be entirely happy - one will probably be more unhappy than the other. Economist Prof David Bell, said: "You have to have detriment.
"It's not clear which way it would go and there's none which I would say is demonstrably superior." "If you are taking on new powers, then you take on the risk that something goes wrong in the economy and you don't get the tax revenues that you expected.
Prof Bell, of Stirling University, has just co-authored a report by the IFS economic think tank, which has looked at various ways of adjusting the block grant. "You cannot have a situation where, under all states of the world, things will be no worse than they would be under the current Barnett Formula."
Prof Bell, of Stirling University, has co-authored a report by the IFS economic think tank, which has looked at various ways of adjusting the block grant.
Each has its pros and cons - and getting your brain around the economic theory isn't easy.Each has its pros and cons - and getting your brain around the economic theory isn't easy.
But one way would be linking the block grant level to economic performance. But three different options for working out how to cut the block grant have emerged:
Prof Bell explained: "If Scotland manages to grow its tax revenues faster than in the rest of the UK, it will be able to expand its budget relative to the rest of the UK. Getting it right is crucial.
"If its tax revenues don't grow as fast, then the likelihood is that the Scottish budget will contract a bit. The economist and Glasgow University Principal Anton Muscatelli has warned a bad deal could leave Scotland hundreds of millions of pounds worse off within a few years.
"And then there's arguments about whether that should be adjusted for population and how it should be adjusted on a yearly basis, and so on."
To focus on the more straightforward conclusions of the IFS report, not only does it say it cannot be guaranteed that new powers will cause no detriment to Scottish and UK budgets, but failure to find an appropriate funding mechanism could cost Scotland £1bn a year.
Separately, the economist and Glasgow University Principal Anton Muscatelli, writing in The Herald newspaper, warned a bad deal could leave Scotland hundreds of millions of pounds worse off within a few years.
All this has prompted the House of Lords - which is currently poring over the Scotland Bill to deliver new Holyrood powers - to call for a delay until the fiscal framework can be agreed.
Lord Hollick, of the Lords Economic Affairs Committee, said: "Until we know what the rules are, we simply don't have a clue about how this will impact the government of Scotland, the government of the rest of the UK and the people of Scotland and the UK."
'Messy fudge''Messy fudge'
The UK and Scottish governments are committed to keeping the Barnet Formula - which partly allocates money based on population - despite much debate over the years on replacing it.The UK and Scottish governments are committed to keeping the Barnet Formula - which partly allocates money based on population - despite much debate over the years on replacing it.
The political scientist, Prof Michael Keating, has a view on the ultimate outcome - and because politicians are involved, you've probably heard this one before.The political scientist, Prof Michael Keating, has a view on the ultimate outcome - and because politicians are involved, you've probably heard this one before.
"It will be a political compromise - it always is," said the Aberdeen University academic, adding: "They'll get something in between and then they'll give it a name, like the Barnett Formula."It will be a political compromise - it always is," said the Aberdeen University academic, adding: "They'll get something in between and then they'll give it a name, like the Barnett Formula.
"A lot of people said we should have a formula based on need, and you raise some of your own revenue."A lot of people said we should have a formula based on need, and you raise some of your own revenue.
"But politicians have shied away from that one, and they're going to back away from it this time, because they'll never find it easy to agree what that formula should be."But politicians have shied away from that one, and they're going to back away from it this time, because they'll never find it easy to agree what that formula should be.
"So we'll get a messy fudge.""So we'll get a messy fudge."
Meanwhile, talks over Scotland's fiscal framework are being conducted behind closed doors between the Scottish and UK governments. And time is now running out.
Scottish ministers aren't keen on a delay but, at the same, say they won't approve anything which doesn't deliver a fair deal. Talks to agree Scotland's new funding deal, being conducted behind closed doors between the Scottish and UK governments, have so far not produced a result.
UK ministers say they're committed to exactly that - but it does look like talks over Scotland's new funding deal will go on for a while yet. However, everything needs to be wrapped up well ahead of the Scottish Parliament election in May.
Without a proper fiscal framework, there remains a question mark over the prospect of Holyrood getting new financial powers.