Oral evidence: Revising Scotland’s Fiscal Framework, HC 660Monday 25 January 2016

Oral evidence, 25 January 2016.

Witnesses

John Swinney MSP, Deputy First Minister and Cabinet Secretary for Finance, Constitution and Economy, and Sean Neill, gave evidence.

Chair

Welcome to the second evidence session of the Scottish Affairs Committee’s fiscal framework inquiry at Perth College UHI. I do not think I have mentioned it but we are eternally grateful to UHI Perth College for allowing us to have this session here today. I think it is an excellent facility and hopefully this will not be our last visit to Perth. It is a great pleasure now to take evidence from the Deputy First Minister, who has been leading the negotiations on behalf of the Scottish Government, and we have Mr Neill also. Mr Swinney, is there anything you want to say to the Committee by way of an opening statement, and if Mr Neill would like to contribute too.

John Swinney

Thank you very much, Chair, and I welcome very much the invitation to provide evidence to this session of the Scottish Affairs Select Committee. Paragraph 94 of the Smith commission report recommended that the devolution of further tax and spending powers to the Scottish Government should be accompanied by an updated fiscal framework for Scotland. In paragraph 95(9) Smith further recommended that the Scottish and United Kingdom Governments should jointly work together via the Joint Exchequer Committee to agree this revised fiscal and funding framework for Scotland. This is the process in which I am currently engaged with the UK Government, and the Joint Exchequer Committee has met seven times to date. Our overarching aim is to ensure that the new fiscal framework is fair and workable and is in line with the Smith commission report. Crucially, Smith identified that Scotland’s budget should be no larger or smaller simply as a result of the initial transfer of powers. We seek a fiscal framework that gives the Scottish Government the flexibility it needs to create a fair and prosperous Scotland and the ability to use the powers we have in an effective way. This has to be about genuine autonomy and choice. We know this must be done in a responsible and sustainable manner, in the same way that we have used all of our existing fiscal powers. We need a fiscal framework that will ensure that further devolution provides the right incentives and increases accountability, linking the Scottish Government’s budget to Scottish economic performance. On 7 October I set out to the Scottish Parliament our areas where we need to reach agreement as part of an acceptable fiscal framework: on the block grant adjustment for tax, financial transfers to meet implementation and administration costs in full, and the questions of additional capital and resource borrowing. I have made it clear that I consider index deduction per capita to be the only block grant adjustment mechanism that meets the Smith criteria and that is fairest to Scotland. There have been useful discussions on the other issues and progress is being made, but I believe we still have some significant distance to travel to resolve these matters. The negotiations need to conclude so that both Parliaments have time to scrutinise the framework and the Scottish Parliament can consider it alongside the Bill and the legislative consent motion, and that effectively has to happen by 12 February. This will require a lot of hard work and good faith to make sure it can be done, and I continue to operate in this manner. The Scottish Government have made it clear that we will not bring a legislative consent motion to the Scottish Parliament without an agreed fiscal framework that is fair to Scotland and that remains the case. I am very keen to be helpful to the Committee in its inquiry today, but I would add the caveat that I have to respect the confidence of negotiations that remain underway with the United Kingdom Government.

Chair

I am very grateful to you, Deputy First Minister. Does Mr Neill want to add anything? I know that you will tell this Committee that you cannot provide any commentary on the intergovernmental conversations and discussions and negotiations that are currently ongoing, but is there any way that you could perhaps update the Committee about how far we have come in terms of progress? Is there anything you could say to characterise some of the difficulties that are still to be negotiated and dealt with between both Governments?

John Swinney

Chair, I think all of the issues are out on the table. The issues are presented and they have been well aired within the Joint Exchequer Committee. As well as seven meetings of the Joint Exchequer Committee involving Ministers, there have been a range and very substantial number of official discussions to undertake detailed preparatory work to support those ministerial discussions. I think all of the information and all of the detail is essentially out there. We are in a position where we need to conclude what agreement is possible on these questions and that, for me, is the best way to characterise where we have reached in these discussions.

Chair

I have noted that in some of the statements that have come from the Scottish Government, and you have said it in your opening statement, that you are not prepared to sign up to any agreement that may be to the detriment of Scotland’s financial and fiscal position. How serious is the Scottish Government about this? Would that, therefore, mean that the Scotland Bill that is currently being progressed through the House of Commons would effectively fall? Is this something that the Scottish Government are serious in doing, that they would knock back the Scotland Bill on the basis of this?

John Swinney

We have said that we would not put the question of legislative consent to the Scottish Parliament without being able at the same time to recommend an acceptable fiscal framework for implementation alongside the Scotland Bill provisions. The answer to your question is yes. The Government will not put forward a legislative consent motion until such time as we have an acceptable fiscal framework in place. It has been a very clearly advertised and communicated position of the Scottish Government. That has not stopped us going into these discussions in good faith, in participating in a whole range of different discussions to try to get to agreement, and it sums up and captures the basis and the approach that we will take for the remaining period available to us. There has been some commentary about the significance of the date of 12 February, and essentially that is there to signal the last moment at which we can then embark upon effective parliamentary scrutiny of the fiscal framework within the Scottish Parliament as part of the legislative consent process. Also, to be fair to the process in the United Kingdom Parliament, the existence of the fiscal framework and its requirement to be in place has been a very material part of the discussion within the House of Lords on the consideration of the Scotland Bill, and I think the expectation of the House of Lords would be that a fiscal framework would be in place before the House of Lords moves to consider the Bill at report stage.

Chair

We will come into some of the deeper issues about the block grant adjustment, but I think it is fair to say—and you can say what you want on this—that a lot of the sticking point does seem to be around this. We know the Scottish Government’s favoured position when it comes to the block grant adjustment and the per capita as a means to approach this. We asked some of the academics who were looking at it and who have studied it in great detail. There does seem to be an emerging consensus about the per capita index deduction, and it seems to be the way that meets the principles of Smith, and I think you said that in your opening statement too. What is stopping everybody just agreeing to this as a means of meeting the spirit of Smith, the no detriment principles and the issues about making sure there is going to be no great impact on Scotland’s budget as we go forward? What is sticking? Is the UK Government dragging their feet when it comes to considering the per capita?

John Swinney

On the first point that you make, Chair, it is very clear to me from the academic analysis that has been undertaken on this matter, and you heard from a selection of the academic experts just a moment ago. Emerging out of the contribution that has been made by Professor Muscatelli and Professor David Bell and the analysis of the Institute for Fiscal Studies is that the fulfilment of the no detriment principle inherent in the Smith commission report essentially is the application of index deduction per capita. That strikes me as a pretty overwhelming consensus in the academic analysis, having looked at the three possible options of index deduction per capita, index deduction and levels deduction. The consensus appears to me to be gravitating very much towards that point. On the negotiations, I think all I could say at this stage is that we have not reached agreement. I believe that the Smith commission report is fulfilled by the agreement of index deduction per capita. It means that the Scottish budget is no better or no worse off as a consequence of the devolution of these powers, which is one of the central principles of the no detriment arrangements. It is then really a matter for us to conclude on this question as part of these discussions.

Mr Hepburn

What is the reason for the hold-up?

John Swinney

We have not concluded the discussion yet.

Mr Hepburn

We have had some very good visitors in today and they were as bemused as we were about the lack of transparency in this process. Why do you not just tell people what the issue is and, if it is the British Government, let people know that it is the British Government that is holding it up?

John Swinney

I think I am supported in the academic analysis that is put forward that index deduction per capita fulfils the details of the Smith commission report. If there was an agreement to that being the approach, then I would happily sign up to that. I do not have that agreement to sign up to yet, so the discussions go on to try to get to that point of view.

Mr Hepburn

So it is the per capita issue?

John Swinney

It is the fact that we do not have an agreement on the block grant adjustment mechanism. That is the difficulty, and that is what we are trying to resolve as part of this process.

Mr Chope

Can I ask you to put this in context? Is it correct that the Scottish Government are in favour of full fiscal autonomy?

John Swinney

We are, yes.

Mr Chope

What timescale do you have for implementing full fiscal autonomy?

John Swinney

That would depend on the political arrangements being in place to enable us to do that. Clearly the Scottish Government’s position on the constitutional question is that we believe in independence for Scotland and we would like Scotland to be an independent country, but I have to accept the fact that there was a referendum fairly recently that took the view that was not to be the case. We have argued as part of the discussions around the Smith commission for there to be a wider range of powers than we currently have, but that has not been agreed by the United Kingdom Government.

Mr Chope

Short of independence, you could have full fiscal autonomy, and surely consequent upon that would be taking responsibility for both the risks and rewards coming from the policies that were applied and implemented in Scotland?

John Swinney

That is correct, but what would also come with it would be a very broad range of powers to be able to do something about addressing those risks and making the most of those rewards. In the Smith commission report there is an acknowledgement, and the principle of economic responsibility is enshrined in the Smith commission report, because what Smith says—and this is an issue that really applies beyond the initial block grant adjustment—is that where the Scottish Government takes a decision, let us say, for example, on income tax, it has to live with the policy consequences of that, be they good or bad. The principle that Mr Chope raises with me of economic responsibility is actually enshrined within the Smith commission propositions. It is enshrined in a fashion and all the other arrangements are enshrined to reflect the fact that there are a certain number of powers being transferred to the Scottish Parliament to enable us to take policy choices, to improve economic performance or to take other decisions, but they are quite limited compared to the powers that would be available to us if we were to exercise full fiscal autonomy.

Mr Chope

If you had full fiscal autonomy, you would be bearing the risk in relation to the size of your population.

John Swinney

That would relate to whatever fiscal framework was put in place around those arrangements, because under full fiscal autonomy Scotland would still retain some degree of financial relationship with the rest of the United Kingdom. It would not be independence because there would still be areas in which there was a funding arrangement between the Scottish Parliament and the United Kingdom Parliament under full fiscal autonomy. There would still have to be a full fiscal framework that would have to be available to Government to navigate the issues that would arise out of such a constitutional arrangement.

Mr Chope

If your Government is re-elected in May, do you see full fiscal autonomy being implemented before the next Scottish Parliament elections?

John Swinney

That would depend on a whole series of questions around the constitutional debate and the interaction between the Scottish and United Kingdom Governments on the constitutional question.

Mr Chope

What is happening at the moment in these discussions that you are having at intergovernmental level is that it is basically an interim position that you are getting to. This is not going to be something that is going to last for very long because it is going to be superseded by full fiscal autonomy.

John Swinney

I think that depends on your point of view. I do not think that is an absolute point. There would be a body of opinion that would say what the Smith commission represents is the line in the sand; that is the definition of the constitutional arrangements. That is not my view because obviously I believe in Scottish independence. There will be people who will view the Smith commission report as a substantive transfer of responsibility that then becomes a settlement that they would want to see lasting for a very long period of time. Therefore, the fiscal arrangements must be able to support such a proposition and not to be in need of constant revisiting.

Mr Chope

One of the problems with the Smith report is that there is an inbuilt ambiguity into this whole issue about the nature of the fiscal framework, and that is the cause, is it not, of the dispute and discussions that you are having at the moment? With that ambiguity, different interpretations can be put upon the wording of Smith, and some of the experts that we have heard from have said it is impossible to implement all the Smith principles together because they are mutually incompatible.

John Swinney

I do not agree with that analysis because I think the Smith commission report is very clear on the questions that underpin the issues around the block grant adjustment. Also, I have the advantage that I was one of the members of the Smith commission, so I sat through the entirety of its deliberations. As well as seeing what is in the report, I also know what was in the thinking of my colleagues around the table of the Smith commission as the report was being put together. The position that I take is about making sure that the substance and the sentiments that are implicit in the Smith commission report are the ones that then see their way into the fiscal framework. I think the Smith commission report was very clear on the principle of no detriment as it relates to the core of the fiscal framework, which is that the Scottish budget should be no better or worse off as a consequence of the devolution of these responsibilities but, once exercised by policy, the Scottish Government must be held accountable and responsible for the successes and the failures of the exercise of that policy.

Mr Anderson

John, can you explain exactly why the deadline of 12 February has been put in place? My understanding is that Parliament is dissolved on 23 March, so you have something like six weeks. Why is that so tight, and why has it taken so long? My understanding is that originally the timetable was looking to get this resolved by the autumn, and in December your leader said that she would expect that it would be finished by mid-February. We might still get there. What if we do not? Why has it taken that long and why is that block there?

John Swinney

The discussions on the fiscal framework effectively started when I had a conversation with the Chancellor of the Exchequer. I might have to write to the Committee with the exact dates of this, but I am pretty sure the conversation was before the UK Budget in March 2015. The Chancellor and I had a meeting in which we decided to kick off the whole process of taking forward the fiscal framework arrangements. The UK Parliament was being dissolved for the Westminster election and we agreed that that would be undertaken at official level. My officials interacted with that. Then I think in about early June I met again with the Chancellor to take stock of the work that had been undertaken at official level and to start the ministerial discussions. Those ministerial discussions went on pretty regularly over the course of the late summer, getting us to a point whereby in about late October we came to the conclusion that we were not going to be able to resolve the issues in advance of the UK spending review, which is what had been our intention and we had not got to agreement before that time. After the UK spending review, in December we recommenced the discussions, albeit I was also wrestling with setting a budget in the Scottish Parliament at the same time but we pressed ahead with the discussions and we have had a number of them since. Fundamentally—this goes back to my answers to Mr Hepburn—we are involved in a discussion to try to get to agreement, but we have not got to agreement yet and that is the challenge that remains. In relation to the timescale of why 12 February matters, our Parliament has to undertake scrutiny of the legislative consent motion that will surround the Scotland Bill and the fiscal framework, and that would be the case in relation to any piece of legislation that requires legislative consent. Our Parliament, like the United Kingdom Parliament, goes into recess on 12 February until 21 February. There is then a window from 21 February until, we reckon, about 17 March, in which our Committee of Parliament can consider the details of the legislative consent motion and then for Parliament to have a plenary debate about that, to conclude by 17 March, to enable the third reading at the Lords by 24 March, which is the interaction between the parliamentary timetable in Scotland and the parliamentary timetable in the United Kingdom Parliament.

Chair

We have the Chief Secretary of the Treasury appearing before this Committee a week on Wednesday and we will ask him this too, but just your view: do you get the sense that the Treasury get the seriousness of this? Are they aware of the timelines that are involved? Do they understand that without a proper, full agreement there might be massive issues about the Scotland Bill being passed before the end of this parliamentary session at Westminster?

John Swinney

I cannot see into the minds of the Treasury, Chair, but what I would say is that nobody in the Treasury could be in any doubt about the significance and the seriousness of the timetable that I have outlined to the Committee today.

Chair

I am grateful. We will move on to some of the bigger issues about all this. I want to first of all ask you about exposure to risk, which is something that has come out in a number of discussions and debates about fiscal frameworks. It is particularly something that came out when David Phillips gave evidence in the House of Commons last week, and this was about who bears the risk of exogenous shocks. I think an example that was raised and the one that we have not had a sufficient answer to is that these are shocks that affect Scotland but over which the Scottish Government have no control. Who bears the risk of these exogenous shocks? Is that something that you would expect would be the UK Government or would that be the responsibility of the Scottish Government?

John Swinney

The question of a shock that was a United Kingdom-wide, general economic shock clearly rests with the United Kingdom Government, given the provisions of the Scotland Act 1998 and the fact that that carries specific reservation around the issue of macroeconomic stability. Those issues are essentially reserved for the United Kingdom Government, and nothing in this legislation on the fiscal framework would change that. The relevant question is what happens to a Scotland-only shock that takes place outwith any shock to the rest of the United Kingdom. The point to me is that we have to accept that there will be that assumption of responsibility here in Scotland as a consequence of that fact, but we have to be able to take effective action to mitigate that. I think the distinctive economic levers that we can utilise to try to deal with such an economic shock are limited within Scotland, but I do think there is a necessity for us to have sufficient financial flexibility to deal with the implications of a Scotland-only economic shock for which we should be responsible and for which we should handle and manage the issues that would be implicit in that. Although we would undoubtedly, in a Smith commission process, given the tax issues that will now be devolved as a consequence, increase the volume of risk being carried by the Scottish Government, I think we need to have sufficient financial flexibility to be able to handle that. I would also like us to have sufficient financial powers to be able to handle that, but I think that is a limited factor in the conclusions of the Smith commission.

Chair

I am grateful.

Chris Law

I want to touch a little bit more on flexibility. Given that you have to run balanced budgets every year at the moment, under the new devolved powers do you think that should continue?

John Swinney

I think running a balanced budget generally is a pretty good thing and instils a degree of fiscal discipline into the choices that have to be made by any administration. What we have to recognise, however, is that with the assumption of a much greater degree of risk that the Scottish Government will be assuming as part of the Smith commission process, there also is a requirement for us to have some counterbalancing flexibilities to enable us to handle that. For those reasons we have been discussing, as part of the fiscal framework arrangements, the implementation of the arguments inherent in the Smith commission report about the importance of us having sufficient capacity and capability to handle fluctuations in volatility and revenue to enable us to operate within that context.

Chair

It has been mentioned that the figure that we see for the increase in borrowing is up to a maximum of £500 million. I do not know if that is a figure that you recognise and whether that is something you feel would be sufficient to mitigate against any shocks that may be Scottish-based.

John Swinney

There has to be sufficient borrowing capability to enable the Scottish Government to manage their circumstances. There also has to be sufficient flexibility around issues in connection with the utilisation of budget exchange facilities that will transfer financial resources from one year to another to enable us to maximise spending power and to ensure that at no stage is spending power ever lost from the process of the advantage of the Scottish Parliament. These are obviously details that are the subject of active negotiation, but there has to be an agreement around an acceptable level of resource borrowing.

Margaret Ferrier

On the sources and cost of Scottish borrowing, currently the cost of Scottish Government borrowing is borne by the UK Government. Under the new framework, how will Scotland contribute to the cost of both UK borrowing and its own borrowing, and would it be going down the route of the National Loans Fund?

John Swinney

Essentially Scotland’s contribution to supporting United Kingdom borrowing will be funded by the existing constitutional and financial arrangements where tax income from the individual and corporate sector in Scotland is channelled into the United Kingdom Treasury, which makes strategic decisions about the macro finances of the United Kingdom and supports the appropriate level of borrowing from those resources. That would not change under these arrangements. Under the devolution arrangements, we already have a borrowing facility through the Calman commission, and this is the first year in which that borrowing power is being exercised. I have signalled in my budget for the current financial year that we expect to borrow about £304 million, although we have not as yet borrowed that money given the fact that we will only get around to borrowing it when we actually need the cash to support investment programmes. That will be supported by the public finances of Scotland, for which I am responsible, so when the Scottish Government take on any borrowing it will be up to the Scottish Government to service that borrowing arrangement. I suppose the clearest way I can answer the final point that Margaret Ferrier has raised with me is that we will raise the borrowing at the cheapest price we can get, so that is what will be uppermost in my mind as we seek appropriate borrowing to support capital programmes.

Margaret Ferrier

The Chancellor currently delivers borrowing forecasts twice a year, which are scrutinised by the OBR. Would the Scottish Government be prepared to make a similar commitment?

John Swinney

I certainly recognise the importance of independent scrutiny of our fiscal decisions and fiscal plans. For that reason I established, in shadow form, the Scottish Fiscal Commission, which is a panel of three members appointed by Parliament to scrutinise the forecasts that are made of tax that would be generated within Scotland. The Fiscal Commission has exercised its responsibilities now on two occasions for the 2015-2016 budget and is just as involved in the scrutiny around the 2016-2017 budget. The Scottish Parliament is currently considering the Scottish Fiscal Commission Bill, which will put the Fiscal Commission on to a statutory footing to enable it to exercise its full responsibilities.

Chair

Kirsty Blackman has some questions on the block grant and some of the indices that we have already discussed.

Kirsty Blackman

I am going to start off with one about borrowing, and then I will move on. In terms of the constraints on the Scottish Government’s borrowing, do you have a final position or an agreed position, that you can tell us, on what will constrain the Scottish Government’s borrowing levels? Will it be constrained by the UK Government’s fiscal charges, for example? If the UK Government over borrows, will that reduce the ability of Scotland to borrow?

John Swinney

I do not think it should. Essentially where the United Kingdom Parliament provides, by statute or by agreement, a certain amount of borrowing capability for the Scottish Government to undertake then that should be an end to the matter from the perspective of the United Kingdom Government. The issue the UK Government would have to wrestle with, given the changes that have been made through the fiscal charter, is to ensure that the UK Government can fulfil their commitment to the Scottish Parliament to enable the Scottish Government to borrow within the limits that are set. Clearly, if a limit is set we have to live within that limit, and I have no issue with that. That is a perfectly reasonable proposition for the UK Government to put forward. What would constrain it would be the fiscal decisions that we make about whether we are able to support that level of borrowing with revenue support to make sure that the borrowing was effectively supported and repaid accordingly.

Chair

Before we leave borrowing entirely because I know that we are coming on to block grants, could you let this Committee know: are we closer to an arrangement that deals with borrowing? Is that still outstanding, your conversation with the UK Government? Is that a bit easier to deal with than some of the bigger things about the block grant adjustment?

John Swinney

I probably should have put a caveat or shared with the Committee the parameters within which we are operating on the Joint Exchequer Committee. Essentially we operate on the principle —and I think Members of the House of Commons may have heard this through the Chief Secretary—that nothing is agreed until everything is agreed. Therefore, it makes it difficult for me to answer specifically. I know exactly why you are asking the question. Some of the issues are easier to resolve. There are issues around revenue borrowing, for example, where it is clear to see how we can make a way through some of these issues. Other issues are more challenging.

Kirsty Blackman

A few questions now on the adjustment of the block grant. The first one is about the initial deductions from the block grant. What is your point of view on how the initial deductions should be agreed from the block grant?

John Swinney

In relation to the steps that have to be taken—I have said to the Committee already—we have a view about the most appropriate mechanism for adjustment and that the arrangement should be put in place to enable that to happen. Obviously that will have made, in the course of the last two years, specific one-off agreements with the United Kingdom Government upon block grant adjustments for the devolution of the smaller taxes, in both 2015-2016 and 2016-2017. Essentially, we would put in place for those arrangements to be arrived at and then implemented as part of our budget saving process.

Kirsty Blackman

Is it your position that the per capita index deduction should be used for all of the revenue streams or is it just for certain ones?

John Swinney

That would be appropriate for all revenue streams, yes.

Kirsty Blackman

In terms of the budget of one Government not being affected by the other in getting on to the second no detriment principle, we heard from the academics earlier about how you could index production per capita in order to take account of those things. What is your position on that?

John Swinney

One of the things I have recognised as a consequence of the Smith commission decisions is that there will be circumstances in which there may be the potential for decisions to be taken, let’s say, by the United Kingdom Government or a tax that is a devolved tax to the Scottish Parliament whereby there may be a benefit to Scotland, if you apply index deductions per capita to that change. If that tax has been devolved to Scotland already we have to take account of the fact that by the normal run of the updating financial arrangements there might be a benefit that would come to the Scottish Parliament. That issue has to be addressed as part of the discussions. We are perfectly happy to address that.

Mr Chope

Following on from that, if the UK Government wanted to increase spending in a reserved area such as international development, how would Scotland’s contribution be captured under the new fiscal framework?

John Swinney

Essentially by the fact that we will be making our financial contributions to the individual and the corporate sector in Scotland into the public finances of the United Kingdom. The UK Government will then make their decisions across 100% of their public expenditure, some of which may affect devolved areas, some of which may affect reserved areas. The Barnett formula essentially will take account of that point, as it currently does. The Barnett formula determines what are the proceeds for the public finances of Scotland as a consequence of decisions taken quite properly by the United Kingdom Government. The balance between reserved and devolved areas of expenditure has a material effect on the budget available to the Scottish Government as a consequence of applying the Barnett formula.

Mr Chope

Is it as simple as that? We have heard that the United Kingdom Government say that there will need to be a shared understanding of the second principle in the Smith agreement, the no detriment principle. There will need to be a shared understanding of this principle in order to deliver a workable outcome. Do you think there is a shared understanding between the Scottish Government and the UK Government on that?

John Swinney

When it comes to the Smith commission report—and it is quite helpful here—in section 95(4) it talks about, “No detriment as a result of UK Government or Scottish Government policy decisions post devolution”. We can quite clearly chart what are policy decisions by the United Kingdom Government for the Scottish Government. It would be possible to design a set of arrangements that would take due account of that factor and to see that applied through the financial arrangements. That is perfectly possible to be achieved. It is preferable if that can be achieved in a mechanistic fashion. If I give the Committee a comparable example: the Barnett formula includes a whole series of compatibility factors between lines of public expenditure in the rest of the United Kingdom, right across public expenditure and the rest of the UK. For example, on defence the compatibility factor is zero whereas on health it is 100%. When the United Kingdom Government take their decisions on putting however much money into defence, however much money into health, it is entirely mechanistic about what then flows through into Scotland as a consequence. In my eight and a half years as a Finance Minister I struggle to think of an occasion where I found it necessary to take issue with a Barnett application, because it is mechanistic. I can look at what the Treasury shows in the Red Book about the policy change decisions. I can see where it then flows into the spreadsheet on the Barnett formula. I can look at compatibility factors and there is the answer. It takes a bit of interrogating and the word “transparent” might be a bit of an exaggeration of its simplicity but it is perfectly open as a piece of analysis.

Mr Chope

What you are saying is that the no detriment principle is basically another way of expressing the retention of the Barnett formula? It does not add anything beyond what is already in the Barnett formula?

John Swinney

No, I am using the Barnett formula as an illustration of something that can be designed mechanistically to try to address this point. That is the only comparison I am making there. There are two no detriment principles. The first is that the Scottish budget should be no better or worse off as a consequence of the devolution of their powers. That is why index deduction per capita is the right solution to that. The second no detriment principle is the one I have just rehearsed with the Committee, which is no detriment as a result of UK Government or Scottish policy decisions across devolution. That will take a bit of defining but it can be defined. It would be preferable if it was defined mechanistically.

Mr Chope

You say you want to get this all sorted out by 12 February—two or three weeks away—and it does not seem as though you and the UK Government are anywhere near having a shared understanding of the principle in the Smith agreement, like no detriment.

John Swinney

I said in an earlier answer to the Chair that all of the information, all of the detail is out on the table. It is a question of coming to conclusions about it. That is the space that remains to be resolved and filled between now and 12 February.

Chair

You were on the Smith commission and I think you have said several times now that what underpinned most of the discussion, arrangements and agreement is the Barnett formula. In response to Mr Chope, you said that it is relatively straightforward and transparent; people can see what is happening with the Barnett formula. Was there ever any conversation that suggested that Barnett should not have been at the heart of all this? We have had conversations in the Westminster Parliament, particularly from some Government Back-Benchers, that we should be moving towards a needs-based formula across the United Kingdom. Was that ever a feature of the conversations you had and is Barnett central to every arrangement we have when we come to the fiscal framework?

John Swinney

Barnett is utterly central to this process. The reason for that is very simple. In the last few days of the referendum campaign the three United Kingdom party leaders agreed the vow, as it is known, and shared that widely with the electorate in Scotland. One of the key elements of that was the maintenance of the Barnett formula as the means of determining public expenditure within Scotland. That was essentially followed up by being anchored in the Smith commission report, which at paragraph 95(1) says, “The block grant from the United Kingdom Government to Scotland will continue to be determined via the operation of the Barnett formula”, and that was agreed by all participants in the Smith commission. It was one of the areas where the members of the Smith commission were at their strongest, clearest, most specific that that had to remain the case. Why? Because it emanated from the vow that was so central to the promise that was made to people about additional powers after the referendum. It was, of course, part of the current United Kingdom Government’s manifesto at the 2015 election.

Chair

Why I am asking you this—and again this is something we will put to the Chief Secretary when he does appear before the Committee—is that maybe the hesitation and failure to reach an agreement in the Treasury is because they are looking possibly at how they could undermine Barnett because of some political pressures that may be coming to the Government about this. I do not know if you want to respond to that. Is there any sense that Barnett is central, as you said, to all this and it runs through every single principle, but we must recognise that there is a hostility to Barnett that is expressed several times in the House of Commons? Do you think this might be informing some of the Treasury’s approach to some of these issues?

John Swinney

There would be no basis upon which that could be the case because the agreement that was made by the three party leaders to essentially reaffirm to people in Scotland that the Barnett formula would determine public expenditure in Scotland was central to the vow. It then became central to the Smith commission. It would be an act of very bad faith if there was an attempt to walk away from that commitment. We can row forward—and academics have done this, the Institute for Fiscal Studies has done this, Professor Muscatelli has done this—to what does the application of the Barnett formula look like to the public expenditure of Scotland in the years to come? We can apply to that the different mechanisms—index deduction per capita, index deduction levels—and can see what is the difference. Only with index deduction per capita do you get to a point where the public expenditure that would have been envisaged under the Barnett formula will come if you apply index deduction per capita. That essentially fulfils the first no detriment principle that the Scottish budget should be no better or worse off as a consequence of the devolution of these powers.

Mr Anderson

Could I get to the bottom of this: are the obstacles to moving forward political or technical? If they are political, surely that should be shared with parliamentarians across both Scotland and the UK so we can disassociate the people concerned. Scotland politics is too important. If it is technical—and this came up in earlier hearings—surely we should be allowing other people to have a look at the problems that you are hitting so that they can give a view on whether there is another way or address the problems you are having. My understanding is that both your Government and the UK Government refuse to produce papers, share minutes with the Joint Exchequer Committee on what did happen, by the sounds of it, in 2012 plus the 2012 Act. If we were allowed to give people like Professor Muscatelli and others access to these, could not there be a debate about is there no relevance or there is no other way to know what you are doing is correct? Without that clear understanding, from my point of view, the transparency is not there, but also a possible wrong way. I keep thinking back that 25 years ago the same people who were probably advising the UK Government are the same people who are advising the Conservative Government and the Labour Government in the 1990s, the private finance initiative is the greatest thing since sliced bread, and other people on the side were saying, “No, you are not right”. If you are not opening up access to what is going on you are potentially missing a chance to get this resolved.

John Swinney

On your point, Mr Anderson, on the private finance initiative, I could not agree with you more about your observations on that. Consider yourself with an ally over here on your concerns about that. First, on the issue of transparency, I have to accept 50% of the responsibility for it. When we started this process we agreed that we would respect the confidence of that negotiation, that we would not provide an external running commentary. I signed up to that, so I have to accept in front of the Committee that I am part of that agreement that said we will respect the confidence of this agreement. That is very clear acceptance of responsibility on my part. Secondly, I do not think there is a technical obstacle here, because you have had the technical experts in front of you. You have had Professor Muscatelli, Professor Bell and the IFS who have been across all of this. I do not see any evidence in the commentary from further afield that suggests in any way there is a technical impediment to this issue being able to be resolved. Ultimately it comes down to agreement. Your point, Mr Anderson, about the issues being viewed and considered and a judgment being made about where the impediments lie, that moment will come if we are unable to get to an agreement. We are not at the moment of no agreement yet. We have a couple of weeks in which we have to conclude this process. If we do not conclude this process then we will not be able to advise Parliament to support a legislative consent motion. We are not at the end of the road yet. We are getting close to the end of the road and we still have a lot of distance to travel, but the material that we need to inform the decision-making that will get us to an agreed position at the end of the road is available to all of us.

Mr Anderson

Surely, before getting to the end of the road is the time to try to get it resolved. If we get to 12 February, unfortunately there is nothing we can do. I understand what you said about legislative process, so that means there is a hiatus for at least three months or whatever, instead of if we start from today saying it is time, collectively, we are going to work together, surely that is the time to start ringing bells.

John Swinney

I can assure the Committee—and I give this very clear assurance to the Committee—that I am absolutely committed to giving whatever time is required to secure the necessary deal between now and 12 February. That is my absolute commitment to the Committee today. It is my commitment to the Parliament of Scotland as well. I recognise the importance of this issue, I recognise the importance of getting it right, and I am prepared to spend the time to do so.

Chair

We will move on. As well as the block grant adjustment in terms of the budget in its totality, there is the devolution of significant welfare powers, 10 new welfare powers coming to the Scottish Parliament. Tell me if it is correct, but you would see the way that these were to be worked out is that the per capita index deductions to that would be how they would be applied in order to assume the responsibility for this. Given the level of welfare spending there is in Scotland compared to the rest of the United Kingdom, do you see particular difficulties in assessing how this should be accounted for in the Scottish budget and should the block grant be adjusted to take account of the devolution of these spending powers?

John Swinney

What is appropriate is to recognise the starting point for the levels of benefit payment and to adjust to respect and to protect; that was part of the process.

Chair

Margaret Ferrier has a question about the relationship between devolved and reserved benefits.

Margaret Ferrier

Third sector organisations state that a further complication is that a number of the benefits that were due to be devolved are used to determine eligibility for benefits that will remain reserved. An example is the carers allowance is going to be devolved and it reduces eligibility for other benefits such as income support and universal credit that are going to be reserved. What steps will you take to ensure that people who rely on benefits will be able to understand and not be disadvantaged by two separate systems and all the interdependencies that may well result from that?

John Swinney

We would have to be particularly attentive to making sure that that difficulty and danger is avoided and that we are careful to ensure that the dialogue between the Scottish Government and the Department for Work and Pensions is of such a nature that nobody suffers as a consequence of that approach.

Chair

Does anybody have other questions on the welfare? I know we are rushing through.

Mr Chope

In the Smith commission it was said that if a tax or spending decision causes financial detriment to the other party then compensation should be paid. Could you tell us how that is going to be resolved? Who is going to decide that compensation is due and how much?

John Swinney

The first point on that is we have to get the rules of engagement correct at the outset so that we know what is potentially in scope for that type of what I might call spill-over effect, so we define that correctly to begin with. Secondly, it has to be evidenced to substantiate a link between the actions of a Government and the direct increase in cost upon another. Thirdly, given the sensitivity of what is involved here, it would benefit from third-party scrutiny to ensure that there was an independent assessment of what are the implications of many of these issues and choices.

Mr Chope

All that is being worked on as part of this agreement?

John Swinney

Yes.

Chair

One of the things we explored with our academic guests was this idea of no detriment and how it is applied between Scotland and the United Kingdom. Given that we are only 8.7% of the population, what possible detriment could we inflict upon the rest of the United Kingdom? They have much more ability, given the size and the fact that there are so many reserved powers still in the hands of UK Government, to have a detrimental impact on Scotland. Do you have a view about how detriment in terms of balance should be shaped up as we approach these issues?

John Swinney

That is why it is so important—my first point in answer to Mr Chope is critical in this—that these issues are defined clearly and substantively to enable the gathering of evidence to substantiate it. I rather take your view, Chair, that there are going to be circumstances where the Scottish Government or the United Kingdom Government may take particular decisions. It is less likely for our decisions to have a significant impact on the UK Government, but there could be others, the other way around, which might be material. It is important that these issues are clarified better than they are just now. The Committee may well be familiar with the issue around free personal care where the Scottish Parliament a number of years ago decided to introduce free personal care. There was a beneficial impact then on the United Kingdom Government’s payments for attendance allowance for which we did not get any compensatory benefit. It is not all that it is just decisions in Scotland may cause detriment to the United Kingdom Government; we can create benefits from which we are entitled to have some form of recompense.

Chair

If we can briefly touch on VAT. I know that with the first 10% standard rate VAT will be devolved as part of this package, and Chris Law has a question on VAT.

Chris Law

It is a general question about VAT being assigned to Scotland. How will Scotland benefit as a result? How will it be measured effectively, given that a good percentage of VAT is done through online sales?

John Swinney

Again this is an area where we will be creating a new dataset to try to establish the levels of VAT that are appropriate to be allocated towards Scotland. There is a lot of official work that has been undertaken to try to get us to that position and to form a view of what is the best assessment mechanism for VAT assignment. Without breaching too much of the confidence of the process, there is a general agreement that the consumption method is the best way of doing exactly that and to essentially use that to determine the basis of the assignment process.

Chair

On VAT, we heard from Professor Muscatelli and Professor Bell that this could work to the advantage of the Scottish Government if they are able to grow the economy, and they cited tourism as an example of that. Is that a devolution of a power that you welcome? How would you see the Scottish Government being able to use the new responsibilities when it comes to collecting that first 10% of VAT?

John Swinney

We do not get any power over VAT. We have assigned to us the receipts, and clearly it is an incentive mechanism. It is an incentive for us to improve the performance of the Scottish economy because if we do that then there will be the potential for it to be a benefit as a consequence of more successful economic activity. You asked, Chair, if I saw it as a welcome power. I welcome the Smith commission report. I welcome the new powers that are proposed to come to Scotland. I can see in the assignation of VAT a mechanism and a means whereby we could be able to deliver stronger economic performance and gain a result as a consequence.

Chair

I am just noting the evidence from Dr James Cuthbert to the Lords Economic Affairs Committee where he says it is difficult to see where Scotland gets anything from the proposal to hypothecate to Scotland a share of VAT revenues. I am presuming that is not a view that you share.

John Swinney

I do not share that view.

Chair

We were going to go on to some of the issues around forecasting and transparency, and Mr Anderson had a question. We have dealt with most of these issues and questions, unless anybody else has anything in terms of forecasting and transparency. We know the Scottish Government’s desire to have the Fiscal Commission on a statutory basis. I have noted your comments that you do not want this to be read or be visited, but by its nature this is something that will inevitably arise as we go forward to see how it is working. I am presuming that you see the Fiscal Commission as having the oversight of this as it goes forward. Would it be a task for the Office of Budget Responsibility or a combination of them both to review this as we go forward?

John Swinney

To review?

Chair

The fiscal framework to see how it is working and assessing whether it is delivering the principles of no detriment; it is just an overview about how successful it has been.

John Swinney

I generally take the view that, given the nature of some of these issues, some independent scrutiny of the process would be a good thing. I am quite open to what that might be like, depending on the nature of the fiscal framework that emerges. There could well be a strong case for third-party arbitration but certainly independent scrutiny from independent fiscal institutions would be beneficial.

Chair

How would you see that taking shape? Would it be a combination of Fiscal Commission and OBR or exclusive responsibility to the Fiscal Commission?

John Swinney

It would have to be a degree of joint endeavour.

Mr Chope

What about the courts? Do you see scope for judicial review, court cases?

John Swinney

Generally not very keen on that.

Mr Chope

No, but will they be excluded by the agreement?

John Swinney

That is a good question. I was hoping I was coming here to shorten the list of questions, Mr Chope, but you have just expanded it. Generally these are issues that should be solved through appropriate intergovernmental machinery.

Chris Law

One of the main roles of the Scottish Affairs Select Committee is to scrutinise work in the Scotland House, but am I right in understanding that there has been no negotiation between the Scottish Government and David Mundell, particularly the negotiations on fiscal framework?

John Swinney

The negotiations on the fiscal framework have been taken forward between the Scottish Government and the Treasury, to the delight of the Treasury. My first discussion was with the Chancellor and my second was with the Chancellor. All of the subsequent discussions have been with the Chief Secretary to the Treasury and his officials. Lord Dunlop has been participating in those discussions. I think he has been participating in those discussions as a special adviser but the Committee is the best place to explore that point.

Chair

The last question from me: what happens next? Is there a timetable for further conversations and discussions with the UK Government? You have set the date; everybody clearly understands that 12 February is a critical date in the calendar for coming to an arrangement and agreement on this. Where do we go now and what is left of the conversations and negotiations?

John Swinney

Mr Anderson asked me about the longer timescale of this whole process. I generally think there has been enough time devoted to get us to where we are just now. I last met the Chief Secretary on Thursday last week to discuss these issues. My officials are involved in a teleconference with the Treasury in about an hour's time this afternoon to take forward that meeting. I am scheduled to see the Chief Secretary again at the start of next week, although I am always available for telephone contact and other discussions in the shorter term than that. There is a further discussion next week and obviously there is scope for interaction between our respective officials to take these issues forward.

Chair

Would it be fair to characterise conversations as intense and a real desire to get these things fixed out?

John Swinney

Yes.

Chair

Do you sense an emerging mood that wants to get these things resolved? Is there an understanding just how critical all this is?

John Swinney

I can only speak on behalf of the Scottish Government and we welcome the powers that are allocated to that and suggested through the Scotland Act 2015. We want to secure those powers and we want to secure the fiscal framework that enables us to exercise those powers consistent with the Smith commission report. As I indicated previously, I will allocate whatever time is required to make sure that is done to enable us to recommend to Parliament that legislative consent be given, but we have to make sure there is adequate time for that issue to be considered and that we have a fiscal framework that is appropriate and fair to Scotland.

Chair

I am grateful, Deputy First Minister. Unless there are any further questions, we are grateful for your evidence. You have shared with us a number of issues that we will be able to consider. We are looking to speak to the Chief Secretary of Treasury next Wednesday. If there is anything further that you feel would assist the Committee on this inquiry, I am sure you know where you will be able to give it. But we are grateful for your time this afternoon, and thank you.