Thank you, convener. I welcome the opportunity to provide an update to the committee on the block grant adjustment for the devolved taxes. I last appeared before the committee on this subject on 7 May, when I presented the Scottish Government’s second section 33 annual implementation report concerning the financial provisions in the Scotland Act 2012. Since then, work has continued with HM Treasury to consider the issue and to make progress towards being able to reach an agreement. I have emphasised that an agreement needs to be made in time to inform the Scottish Government’s draft budget for 2015-16.
In my written submission to the committee I set out an update on progress since April. I will take this opportunity to quickly summarise that note. The position on the intended block grant adjustment for the devolved taxes is clearly set out in the “Strengthening Scotland’s Future” command paper as a one-off cash adjustment. However, because of the need to move the issue forward, I offered a proposal that the initial adjustment could be indexed to the gross domestic product deflator, as I indicated to the committee in April. That approach is simple and easily understood and it would maintain the value of the initial one-off block grant adjustment over time.
As the committee is aware, the UK Government has proposed an approach that applies an additional deduction to the block grant, coupled to a reduction in all future Barnett consequentials. We do not believe that that methodology has any basis in the command paper, as is demonstrated by the Treasury’s need to refer to the Wales command paper, published in March this year, to explain the approach. In our view, the proposed Barnett abatement mechanism fails also on the principle of increasing the accountability of the Scottish Parliament, which the Scotland Act 2012 is supposed to improve.
Under the proposed approach, a substantial factor affecting the Scottish Government’s spending power in relation to the devolved taxes will be the policy choices of the United Kingdom Government on growth in public spending, over which the Scottish Parliament has no influence. For example, in order for the Scottish budget to benefit from the tax choices that the Scottish Parliament makes, revenue growth would need to exceed growth in public spending, which would be determined by the United Kingdom Government.
Since I last met the committee, officials in the Scottish Government and in HMT have analysed how each mechanism might perform under a range of scenarios and have set out the implications for the Scottish budget. That work has proved useful in understanding how the different mechanisms may perform. The analyses have also highlighted further areas of concern.
Principally, I see a fundamental flaw in a central assumption in the Treasury’s analysis. They have suggested that, on a set of assumptions produced by the Treasury on future tax revenue growth and on growth in UK public spending, there should be no cumulative gain or loss to the Scottish budget over a long period extending to 2030. It is the case that if devolved tax receipts outperformed those assumptions, then the Scottish budget could be better off. However, I have strong doubts about the validity of the assumptions used, especially around the likely path of taxes, as HMT has used the Office for Budget Responsibility’s forecasts.
A further concern is the negative path that the HMT assumptions set the Scottish budget on following the end of the observed time period. That trend means that the longer the time period considered, the increasingly worse off the Scottish budget would be. We also do not accept that there is a basis for implementing such a constrained approach. The command paper made no mention of such an approach.
Despite this disagreement over the analysis conducted, I am very aware that my draft budget for 2015-16 requires certainty over the block grant adjustment for the devolved taxes to ensure a complete budget.
To that end, I had a constructive discussion with the Chief Secretary to the Treasury last week, with positive engagement around the key issues in being able to agree a mechanism. There was an equally good understanding of the pressing need for an agreement and, to that end, the chief secretary and I agreed a number of issues, which my officials and Treasury officials will follow up on. Following the conclusion of that additional work, the chief secretary and I will have a further meeting to seek an agreement.
I previously made the commitment to seek the approval of this committee for the final choice of the block grant adjustment mechanism. I remain committed to doing that. In the meantime, I look forward to discussing the issues with the committee this morning.