Oral evidence: The Smith Commission: Proposals for Further Devolution to Scotland, HC 835Wednesday 3 December 2014

Oral evidence, 3 December 2014.

Witnesses

Lord Smith of Kelvin KT and Jenny Bates, Head of the Smith Commission Secretariat, gave evidence.

Chair

I welcome you both to this meeting of the Scottish Affairs Committee. This is the first time that we have ever had in front of us the man who sells me my electricity. I don’t know whether that is right, or how many other people here are in that situation. Think of this as a customer complaint session as much as anything else. I hope that is not an inflammatory remark, but we will come to that in a moment. I will start by asking you to introduce yourselves for the record.

Lord Smith of Kelvin

I am Lord Smith. I am a business man, but I got a phone call a few days before the referendum asking if I would chair this commission. I have been chairing it for the last 10 weeks, and you see the results before you.

Jenny Bates

I am Jenny Bates. I have been head of the secretariat for the Smith commission for the last couple of months.

Chair

Fine. Can I start by asking you a little bit about the process? It was obviously a pretty tight timetable. You had staff, but were they enough? We want to clarify whether the time constraints meant that you could not do as thorough a job as you would have wanted, or whether the time taken would simply have expanded to fill the time available. Did you feel, with the resources you had, that you had sufficient information?

Lord Smith of Kelvin

I felt I did have sufficient information. To start at the beginning, I was given 18 full-time civil servants, headed by Jenny. They came from the Scottish Parliament, Scottish Government and UK Government; there were experts on Treasury issues, taxation and so on, people who knew about social issues—so we had a whole range of expertise. On top of that, they were able to call for papers. I spoke to the head of the constitutional staff down in London, in Scotland House, and he said there is a cottage industry going in this thing, so there were hundreds of civil servants producing paper. We took the original proposals from all five parties. You remember I asked them to produce it in two weeks, and they all delivered within two weeks. A lot of this material was coming from the Strathclyde commission, Ming Campbell’s work, stuff the Labour party had done—a lot of work had already been done, so they were able to produce a digest of it within two weeks. That was given to the UK Government and the Scottish Government. I remember the analyses that came in from the two Governments; the UK one was 330 pages, and I cannot remember how many the Scottish one was, but I think it was even bigger. By the way, exactly the same material and exactly the same analyses, but different answers—but at least we got them. Just so you know, the coalition obviously had access to all this information, as did the Scottish Government, but the Labour party and the Greens did not have that backup, so we arranged with the UK Government and the Scottish Government that everybody got all the information. As for the time scale, because a lot of pre-work had been done on the thing, the time scale actually was not an issue. In many ways, it was a benefit because I was able to say, “We’ve got a very short space of time to do this.” We had nine plenary sessions and about four or five individual sessions where I went to see people on their own. In amongst all that, we asked civic society to send in. I wrote to, I think, 129 civic society bodies. There were third sector, unions, business organisations, charities and so on, and 407 sent us really quite voluminous replies. They were analysed and, again, we had our secretariat doing that. We had 18,000 e-mails from the public. I went walkabout in Inverness, Dundee, Sterling, Aberdeen, the Borders—I covered the Borders—and Glasgow. I met with people from education, local councillors, citizens advice bureaux—a whole group of people. That information was fed in—they did not get special treatment; I just wanted to get the voice on the street. But the 10 weeks was enough. Towards the end, as you would imagine with anything, we were moving very quickly in the last week or two weeks to arrive at a conclusion, but can I just say that all five parties signed up to every word that is in that document?

Chair

I just wanted to clarify, first of all, in terms of the process, that there should be no unhappiness from anybody about the process that was undertaken. We read before about the thoroughness with which this was done, but I just want to clarify that you yourselves were happy with both the time and the resource that were available to you.

Lord Smith of Kelvin

I personally was. Let me tell you: whatever has been said outside since, all five parties came to me and said that they were happy with my chairing and with the process, and they felt that we had arrived at conclusions properly. I have not actually heard anyone criticise the process since.

Chair

Fine. It is always useful to just establish what people agree on at the very beginning, as I am sure you know.

Lindsay Roy

Lord Smith, well done on achieving a mammoth task. Can you tell us what weighting you gave to the details submitted from the 18,000 people and organisations?

Lord Smith of Kelvin

This is difficult to be very definitive about. You have to remember that there is a very wide range of things. We actually had a few who wrote and said that the existing powers should be transferred back down to Westminster, so this is free-range comment from people. Did we give that a lot of weight? I can’t remember. But anyway, we were there to talk about more powers going down. A number were in the form of petitions—just one format with lots and lots of signatures at the bottom or lots and lots of the same pre-printed material—but several thousand of them were well thought out things. We took all of those, analysed them into themes and presented them to all the parties. When we got the submissions from civic society—I am talking about trade unions, both TUC and STUC, and various other organisations—we immediately put them up on to a website, so that the whole world could see it, and of course we shared it with the people who were going to be sitting round the table. We started from the submissions that the parties had made, because that is clearly what they brought to the table, but that was added to by the material we got from civic society. We had one full session where we talked about everything that had come from civic society and from the e-mails that had come in. We put weight on them, but it was informing a discussion rather than saying, “There’s 17,000 in favour of that and 1,000 against.” That would not have been a very fair thing. It was their ideas that we were more interested in. We talked quite a lot about those ideas. In fact, a lot of the stuff that you will see—the four recommendations that I made personally are very much from what I heard from the e-mails, civic society and the walkabout that I did.

Lindsay Roy

And nobody was unhappy with the methodology you used?

Lord Smith of Kelvin

No one was unhappy with the methodology used. It was very transparent; it was out there for people to see. We actually had two meetings with civic society in Holyrood, where we had the 10—I was going to say protagonists, but will say instead the 10 members who were helping me with this. They faced civic society and asked them questions about why they wanted various things and so on. That was informative as well. No one complained about the process.

Lindsay Roy

Given that this came from the Edinburgh agreement, and given the agreement of all five political parties, why is the report not entitled “Smith Commission Agreement” rather than “Smith Commission Report”?

Lord Smith of Kelvin

Well, I think it should probably be called the agreement now, whether it is eponymous and has “Smith” on it or not. It is an agreement; there is no question about that. The people who were in that room signed up to an agreement.

Lindsay Roy

They all signed up to it?

Lord Smith of Kelvin

Absolutely. They all signed up.

Chair

Following on from that, is this a package or a menu? To what extent was it drawn up in a way that was deliberately intended to hang together, as it were, and to what extent was it there to be amended subsequently if people didn’t like bits of it?

Lord Smith of Kelvin

As far as I am concerned, it is a package, and one that I expect to be implemented as it is set out now. There might be details or technical complications that make some things difficult to implement, but I can tell you that as we were going through this, we were checking with the Treasury, Department for Business, Innovation and Skills and Department for Work and Pensions to ensure that the thing was implementable. We genuinely believe that it is implementable so I would be surprised if there is some detail that is not.

Chair

We just wanted to clarify that the intention is that it is a package.

Lord Smith of Kelvin

This is not, “Here’s a shelf of goodies. Decide what you think would be appropriate out of that.” It is supposed to hang together. It is a complete package.

Chair

You were quite strong yesterday, when you were speaking to the Scottish Parliament, about calling this the Smith agreement. You have stressed several times already that this was unanimous, accepted by everybody and so on. How then can you explain that almost as soon as it was announced, some of the participants were attacking it?

Lord Smith of Kelvin

Look, I have only been in politics 10 weeks. I don’t understand these things.

Chair

You didn’t become the head of the company that you run and chair of the Commonwealth games without a few of the black arts.

Lord Smith of Kelvin

The people around the table absolutely signed up to that agreement. The fact that some have gone out afterwards and said things that are not in the agreement, I would characterise like this: people might have lifelong ambitions—for example, for an independent Scotland—and they might leave that meeting and say, “I still have ambitions for an independent Scotland. I still think these powers are not enough. I still think that one day we might get all those powers,” but all the people around the table signed up in the end. We had some vigorous debates, but they all signed up to every word that is in that agreement.

Graeme Morrice

I understand that it is an agreement in the sense that all those who participated in it, signed up to it, as you said, Lord Smith. Is it the understanding, and is it implicit in the report—or the agreement—that the proposals contained therein were implementing the vow that was given by the three main UK party leaders during the referendum campaign?

Lord Smith of Kelvin

Can I just refer you to quotes at the time? The day after we published our report, David Cameron said he was delighted and that “We are keeping our promises…we made a vow of further devolution…we are keeping that vow.” Alistair Carmichael, Secretary of State for Scotland, said, “We back the agreement and its recommendations, and will produce draft legislation in January” and that the recommendations “will be implemented without hesitation, reservation or equivocation.” Ed Miliband said, “Elect a Labour Government”—a slightly different twist, even I notice that—

Mike Crockart

How many times have you said that? [Laughter.]

Lord Smith of Kelvin

“Elect a Labour Government in May and we will implement the Smith Commission in our first Queen’s Speech.” Nick Clegg said, “I back it and I back it fully.” That sounds to me pretty unequivocal from all the Westminster party leaders.

Graeme Morrice

That’s right, and even the Daily Record said that on its front page on the Thursday. In terms of the two other participants—the Scottish Greens and the SNP—was it their understanding and specifically said by them that the eventual agreement honoured the vow?

Lord Smith of Kelvin

Yes. They are expecting that what we have in here will eventually become draft clauses and then law.

Chair

Sorry, there are two different issues here. One is, is this going to be implemented? I think we have heard that. The second is, does the agreement that has been produced meet the terms of the vow that was given beforehand? There is now a vow to implement the agreement, but does the agreement, in your view, meet the vow that was given in the run-up to the referendum?

Lord Smith of Kelvin

It is difficult for me to comment on that, but if all the leaders of the parties that made the vow are saying, “We believe that is the vow—”

Chair

But they are not here, and you are. You chaired the commission, and you were in charge of implementing—translating—the vow into an agreement. I think it is reasonable for us to clarify with you whether you believe the vow as given in the Daily Record before the referendum has actually been met.

Lord Smith of Kelvin

The vow had a lot less detail in it—a lot less. There is a huge amount of detail in here, but what was said there—meaningful powers to the Scottish Parliament and, and, and—it is all here. So I believe that to that extent it has been met.

Chair

When you say “to that extent”, it implies a reservation. The vow has either been met or it hasn’t. Leaving aside the fact that some people want independence and have a different view of what should have been done, the question is that, in the run-up to the referendum, a vow was given. I am seeking clarification as to whether, in your view, the agreement that has been produced—leaving aside the consequential decision to implement—meets the terms of that vow.

Lord Smith of Kelvin

Jenny, you’re better at these things than I am. What is the direct answer to that?

Jenny Bates

I think it is what you said, really, which is that the three political parties are the parties that made the vow, and they have said that they will back it and implement it.

Chair

Sorry, but there are two different questions. One is the question of whether this is subsequently going to be implemented. That, in a sense, is a second-order question. The issue is whether the content of this meets the terms, in your view, of the vow that was given in the run-up to the referendum. As you will be aware, there were accusations of betrayal, treachery and so on, even before the whole thing started. People in Scotland are entitled to know whether you, the chair of this structure, believe that the terms of the vow are actually being implemented by what is being offered.

Lord Smith of Kelvin

Look, I really do not want to sound equivocal—okay? I know you are accusing me of being that, but my job here was not to determine what the outcome was; my job was to get five political parties to agree, and that is what I have managed to do, but it is their agreement, not mine.

Graeme Morrice

I understand that. In terms of the vow made by the three UK party leaders, all of them are saying the vow has been kept, and the vow specifically talked about “extensive new powers for the Scottish Parliament”, and I don’t think many people will disagree with the fact—

Lord Smith of Kelvin

I am prepared to say I believe these are extensive new powers.

Graeme Morrice

Therefore the vow has been kept. The point I was raising initially was with regard to the Scottish Greens and the SNP, who obviously take a different line, in that they support independence and are not naturally devolutionists. Were they saying during the course of the deliberations in your commission that the vow was being implemented?

Lord Smith of Kelvin

They did not use words like that, but the test of the thing is, did they sign this agreement? And they did—both parties.

Graeme Morrice

Presumably, they signed it on the basis that it was providing extensive new powers to the Scottish Parliament.

Lord Smith of Kelvin

Yes. I don’t think anyone can disagree that these are extensive new powers.

Graeme Morrice

Thank you, Lord Smith.

Jim McGovern

I have quite often read books and watched documentaries about pre-war Germany. In one of them, the National Socialist party—the Nazis—burned books. Yesterday, apparently, SNP elected Members filmed themselves burning copies of the Smith commission report. How would you view that?

Lord Smith of Kelvin

I am chairman of the Green Investment Bank. I’d rather they had recycled them. [Laughter.]

Jim McGovern

Good answer.

Chair

And you say you’ve never been involved in politics before. Well, well, well. Perhaps I can turn to another issue of process. You have already touched on the commitments given by the three leaders to implement all this. Are you satisfied that the timetable that was laid out beforehand in terms of the vow and the report that you have produced can be meshed together in a way to allow things to be implemented within the time scale promised to people in Scotland?

Lord Smith of Kelvin

Yes, I am. People thought that my timetable was the most difficult. Draft clauses to be produced by 25 January sounds tight as well, but actually all departments of the civil service are aware of our document coming forward. For example, there were effectively four bits—there are three pillars, but the first bit is about constitutional reform. That is about 16 and 17-year-olds voters; it is about voting; it is about the permanence of the Parliament to the extent you can make a Parliament permanent within UK law; giving Holyrood the power to decide boundaries, after advice from the Boundaries Commission and to decide by a two-thirds majority how many MSPs they have—extensive new powers. That was effectively agreed very early in the day, and the constitutional lawyers in the civil service elsewhere in the UK have no doubt been working on that, because they knew that was where that was coming from. A lot of the tax areas were agreed relatively early, though there were still things being discussed towards the end, and in welfare as well. The final bit, about borrowing powers and fiscal responsibility, is quite complicated—even the 2012 Act is still being worked through on that. That has again been fairly obvious to people who were going to draft Bills later. So I think they will be able to come up with the draft clauses. It is not the final version of the Bill, because that will have to go through the House of Lords eventually.

Chair

Bad luck there.

Lord Smith of Kelvin

I thought I would just mention that. I think that they had already been looking at our work so they will be well down the track and able to produce draft clauses. People like you have to look at the heads of agreement, the agreement that has been made, and at the draft clauses and see if they match up. After that, Ian, it comes straight down to when whatever hue of Government we get enact this. If you are in power in May, there are immediate things to think about. I guess this would be quite high up the list of priorities but there are holidays in July and August, so I guess September or October will be the earliest this Bill could probably come in. I think that would be enough time to prepare a final Bill as well. I think they will meet the deadlines.

Chair

Fine. I think that is helpful because, again, accusations of betrayal, treachery and so on have been flying around in relation not only to content but to timetable. It is helpful to have the assurance that you think it can be done within the times promised. I see two elements to this. One is the question of the words, where I can see that that can be done easily enough. The other is the issue of the big sums—there is an awful lot of big sums involved in this, which that might take longer to work out in detail. In a sense, those are also issues of implementation rather than principle, aren’t they?

Lord Smith of Kelvin

Yes, they are.

Chair

The fact that the lady from the Treasury is nodding gives us great reassurance.

Lord Smith of Kelvin

She thinks in terms of years rather than months.

Chair

She thinks of very, very big sums, bigger than we would normally think of. That is very helpful. There is only one other issue around implementation. We are conscious of the seven points of principle that you made. It is the question of whether you expect that Scottish MPs will continue to vote on the entirety of the UK Budget, as you have recommended that they should?

Lord Smith of Kelvin

We have said in here that the recommendations of the agreement we have arrived at does not preclude—in fact, allows—Scottish MPs to continue to vote on UK budgetary matters. That is why we have put it in, and I will remind you that all five parties agreed that that wording should go in—all five parties. Can I bind anything, even the permanence of the Parliament, in perpetuity? Of course I can’t. That is a matter for Westminster and it is way outside my remit. We wanted to be clear that what we were proposing, the agreement we arrived at, would not stop Scottish MPs voting on UK budgetary matters. That is why it was said and that is why all five parties signed up.

Pamela Nash

Lord Smith, I would like to turn to income tax. You commented in the report that there is not a wide understanding of the current devolution settlement within Scotland, and certainly those of us who campaigned in Scotland are aware of that. I don’t think there is a strong understanding at the moment among the Scottish public about the benefits and risks of the full devolution of income tax. Could you put on the record why it was decided that income tax should be completely devolved and what the benefits to the Scottish people might be?

Lord Smith of Kelvin

I am sorry; say that again?

Pamela Nash

In terms of income tax, I don’t think there is a strong understanding among the Scottish people about what the benefits of the devolution of income tax to Scotland might be.

Lord Smith of Kelvin

Before I address income tax, I will preface my remarks by saying that there are a lot of people everywhere, including in Scotland, who do not quite understand which matters are already devolved, never mind the effect of income tax. That is why I said in my opening remarks in the report that we all owe it to everyone to make sure that people do understand. Some people do not understand that the health service is devolved, some people do not understand that education is devolved and so on. I am just making a plea, because we are bringing in much more complex things—tax raising powers and so on—and we need to work really hard to ensure people understand what that means. Income tax is a shared tax. The measure of income tax will not change. That is something that all of us were very strong on. We felt that if we started to change reliefs and allowances, it would become too complicated for people to understand in different countries. Personal allowance is still a shared tax; then there is complete freedom on rates and bands of income tax. Any responsible Government will think very carefully about what they do with those rates and bands. If you increase them, you raise more tax. Incidentally, this all comes out of the block grant on day one. That is £6.8 billion you are now raising as a Scottish Government, so it has come out of the block grant, subject to Barnett and all that. It is now a number—a tax base. That tax base, by nature—the measurement of what income is, and of reliefs and allowances—does not change. It is unlike previous powers, where you are allowed to vary by 3% or 10 points; there is a lockstep, so you have to change each tax rate. The 20%, 40% and 45% rates would all have to be varied by, say, 10%. If, say, you reduced taxes and took 20% down to 10%, you would have to take 40% down to 30% and 45% down to 35%. If you increased taxes to 55% for the 45% payers, 40% would have to go to 50% and 20% would have to go to 30%. What we agreed on here is that you can vary tax threshold and tax rates, and you can vary the areas in which they come in. So you could drop your lower rate of tax and increase your upper rate of tax, or vice versa. Let’s suppose we have a lockstep, because it is easier. You have got a total tax take of £6.8 billion. You increase that by 1%, so you have got more money in. It may, however, have effects somewhere else in the economy. Things happen when you increase taxes. If you reduce taxes, it may spread more benefit around the economy, and so on, but you have raised less tax, and you can no longer say of the block grant, “We’d better have more money from that.” With power comes responsibility. Parliament becomes more accountable to the electorate, if you like. It has the freedom to move the taxes, but it has to live with the consequences, and that brings risk. If you have risk, you have to be able to deal with risk, which is why we put in borrowing powers in another part of the paper. Scotland will have to be able to borrow to take out fluctuations in tax revenues due to economic circumstances or due to whatever the Scottish Government decide to do with tax, so we are going to allow the ability to borrow. We could not, in the 10 weeks that we are talking about, decide what that threshold should be, how much they can borrow, how they can borrow and so on. There has to be fiscal responsibility, because down in the UK, you have credit rating agencies saying, “This is your borrowing relative to GDP.” We have not had time today, but I believe that today is the autumn statement, and a lot of those numbers will be in there. Rating agencies are saying, “Be careful how much you borrow. Watch that you are living within your means.” Anything that Scotland does will have to be in consultation with what is happening down in the UK. Do not ask me to go down the route of asking me to outline what consultation means. With another hat on, it is like asking, “What is significant? What is material?” All I know is that the two Governments will have to work closely together so that the sterling position is protected, but also so that Scotland, having been given the freedom to change taxation, can even out fluctuations. There is risk, but with power comes responsibility, and with responsibility comes an element of risk.

Pamela Nash

You mentioned a couple of things. One of my colleagues will ask more in-depth questions on borrowing later, but I wanted to check something. You said that there was not a threshold specified in the report. My understanding was that there would not be a threshold. I think you just said that there was not a threshold put because you did not have time to calculate it.

Lord Smith of Kelvin

Do you mean a threshold for taxation?

Pamela Nash

For borrowing.

Jenny Bates

The report says that it needs to be consistent with the UK framework, and that is something that the two Governments will have to sort out in implementation. You are right that there are limits. The precise form of borrowing in future is something that the Governments will have to agree as part of implementation, but it would need to be consistent with the overall UK framework.

Lord Smith of Kelvin

I think we used the words “increase” and “sufficient” somewhere in the document, unless they were taken out by someone.

Chair

But that should not pose a difficulty, because I remember that those parties that were pressing for independence agreed, as part of their plans for a shared currency, that there would be a pact on borrowing limits. The principle of a borrowing limit being agreed is not something that should cause any problem, I would have thought.

Lord Smith of Kelvin

I would not have thought so. Consistently through the document, we talk about two Governments talking together and showing respect for each other.

Chair

Yes. Jim, you wanted to follow on.

Jim McGovern

Lord Smith, on the subject of income tax, the report indicates that there is possibly a weak understanding by the general public about income tax, and I freely admit that I have a weak understanding. Following the report, last week my wife Norma said to me, “Jim. Who employs you?” I said, “I think I’m self-employed.” She said, “You live half your life in England, so if Scotland changes its income tax, will you pay the Scottish tax or the UK tax?” I said, “I don’t know.”

Lord Smith of Kelvin

Where are you domiciled?

Jim McGovern

Dundee.

Lord Smith of Kelvin

So that is your home.

Jim McGovern

But I spend more time in London than I do in Dundee.

Lord Smith of Kelvin

I spend my life everywhere around the world. That is your home. I will not go into MP expenses, but—

Jim McGovern

I hope not.

Lord Smith of Kelvin

If that is where home is, you will pay the Scottish rate, and you will pay income tax whether you are self-employed or not. It will be the Scottish rate.

Jim McGovern

If that is my main home.

Jenny Bates

Yes. So the point is that rules are already in place as a result of the Scotland Act 2012. There are options to vary income tax between Scotland and the UK, and the presumption is that that would continue under the new approach.

Jim McGovern

I can tell my wife when I get back.

Lord Smith of Kelvin

Is that good news or bad news?

Jim McGovern

I think it is probably good news.

Chair

You are very lucky that Norma is not here asking these questions. She would want a full explanation.

Lindsay Roy

You have already said that there has been a weak understanding of the current devolution settlement.

Lord Smith of Kelvin

Can you speak up?

Lindsay Roy

Sorry, I have a sore throat. You have already said that there has been a weak understanding of the existing devolution settlement. How can we enhance understanding of the new one? It is very complex.

Lord Smith of Kelvin

It is complex. I cannot solve all the world’s problems at once. I am just seeing that even with the existing settlement, people are unsure what is there. This is much more complicated. We all have to try quite hard to get the messages across to people on exactly what the Scottish Parliament will be responsible for in the future as well as now.

Lindsay Roy

Who would you say would have key roles in that?

Lord Smith of Kelvin

Schools, but also political parties and both Governments, because people in other parts of the UK need to understand it, too. If there are further plans for Wales and Northern Ireland, it becomes ever more important to understand exactly what is there. Look, I don’t have an answer and I don’t want another commission, okay? But genuinely we have to find ways of making sure people understand it, because they do not at the moment.

Lindsay Roy

Not an idiot’s guide, but a simplification?

Lord Smith of Kelvin

Yes, a simplification, and actually it can be stated fairly simply. I was very pleased that a lot of the tabloids in Scotland got behind what we were doing, by encouraging the public to write in and so on. They have an amazing ability to take what is difficult to read in some of the broadsheets and put it down in very simple terms. It is people like that who can actually spell these things out. I was reading some of these newspapers to understand what we were doing!

Lindsay Roy

You are doing a good marketing job for the popular press.

Lord Smith of Kelvin

I read big newspapers as well, but the tabloids state a lot of things very simply and people do need that; even I need it. They are very good at just setting things down in nice, simple terms.

Chair

You are doing very well for someone who is not involved in politics, I must say, as you stroke the tabloids as well. You’re really good!

Graeme Morrice

This is just a follow-up point from what Lindsay was saying. When you were engaged in public consultation on your report, did you find that members of the public or organisations out there—civic Scotland or whoever—were aware that there was a Scotland Act 2012? Since the establishment of the Scottish Parliament back in 1999—obviously, that followed the referendum and the Bill that was passed by the newly elected Labour Government in 1997—we have had another Act of Parliament to give even more powers to the Scottish Parliament that clicks in in the next and subsequent financial year. I find that people just don’t seem to know about that Bill or Act and the additional powers.

Lord Smith of Kelvin

Some people knew and some people weren’t even clear that Calman was the 2012 Act—

Graeme Morrice

Exactly that—Calman.

Lord Smith of Kelvin

This is a different thing. That is another point that we need to get across to people. Calman, a year later or whatever, became the 2012 Scotland Act. That, in many respects, is only now and next financial year going to be implemented. It just takes that time for various tax powers and so on to come in. I hope we are agreeing here. If this goes through in September, October or whenever with the new Government in Westminster, you can tell your wife, Jim, that it will be 2018-19, perhaps, before some of these things happen. They could happen earlier. One thing we have asked, as you probably saw, is for 16 and 17-year-old voting to be fast-tracked, and that is something a Westminster Government could do to a Scottish Government. They could say, “You will be empowered if you should choose to do this.” It still has to go through the Scottish Parliament, but if the Scottish Parliament votes for 16 and 17-year-olds to have that, it could be implemented in time for the Holyrood elections in 2016. If it is left until after the Act that goes through to put this on the statute books, that will be too late.

Graeme Morrice

Well, an incoming Labour Government next May will obviously reduce the voting age to 16 for all elections.

Chair

Let’s leave that aside and come back to Pamela.

Pamela Nash

To be clear, one of the reasons why the Scotland Act 2012 has taken so long to implement is that the infrastructure for the collection of income tax did not exist in Scotland previously. That will obviously help to speed up the implementation of your report, Lord Smith. I will move on to more detailed questions on income tax, but we were discussing, using income tax as an example, the risks and benefits of the transfer of responsibility to the Scottish Parliament and Scottish Government. How does that fit in with the very important principle of the commission not to cause detriment to the UK or any of the constituent parts? How wide-ranging is that clause and how could any detriment to Scotland or any other part of the UK as a result of that be balanced?

Jenny Bates

I think that, as Lord Smith was saying, once income tax is devolved—some of the other principles that are set out in a bit more detail in the fiscal framework section of the document go into a bit more detail about how this would operate under the principles the commission would like to see. The key thing on income tax, as Lord Smith said, is that once the power is devolved, the block grant is adjusted and what happens then is a function of what decisions a future Parliament in Scotland makes. So, if taxes were to be put up, more revenue would flow to the Scottish Parliament; if taxes were cut, less revenue would flow to the Scottish Parliament. And that is something that a future Scottish Parliament would have to make decisions around, based on what it judged the right balance to be. This is really about devolving the power and then it is up to the future Parliament and future Government to decide where they want to draw that line in terms of how much revenue to raise, or not raise, in future. So it is devolving the power and then the revenue that flows from that is a function of what decisions a future Parliament makes.

Pamela Nash

But it could end up causing a detriment, too. However, you are saying that would be the responsibility of the Government and not of the decisions that have been made.

Jenny Bates

Exactly. The transfer of the power is not saying—

Lord Smith of Kelvin

At the time of transfer, no detriment. After that, you are devolving powers and it is about how they use the powers. So, you could have changes in taxation either side of the border, but the actual move of giving them the power doesn’t bestow any benefit or cost either way.

Pamela Nash

Okay. So the principle is that it will not cause detriment to the UK as a whole, nor to any of its constituent parts, at the time of transfer?

Lord Smith of Kelvin

Yes.

Jenny Bates

Just in terms of how this operates within the fiscal framework section, there are some more detailed principles that kind of work through how this would operate once the power is devolved.

Pamela Nash

Was the obvious risk of tax competition within a UK with different tax rates considered by the commission and its members when this was being discussed?

Lord Smith of Kelvin

It was talked about, but all five eventually signed up for the income tax to be devolved in its entirety, save only measurement of tax, which is very important. Once you get into that kind of tax competition, it is very difficult. And personal allowance.

Pamela Nash

May I just ask: was horizon scanning being done for different possibilities of devolving income tax? There is concern about higher-rate taxpayers, being mobile, leaving Scotland if income tax goes up; indeed, if income tax drops for them, maybe there will be a movement in from other parts of the UK. So, was horizon scanning done by the civil servants in order to provide that information to the commission?

Lord Smith of Kelvin

In general terms, but it is up to Governments—the Scottish Government of whichever hue it is then. They have to look at what they will do with those powers. Whenever you move tax rates, you have to think of the long-term consequences of that. I just believe that people will be more responsible when they have the authority and they have got the accountability.

Pamela Nash

There is no point in devolving the power if we are not considering the fact that it might be used at some point; that is the point of devolving it. So what I am asking is this: was horizon scanning done prior to that decision being made, and did the commission have that information?

Jenny Bates

The decision was about the devolvement of the power rather than how it would be used once it was devolved, but there was discussion around what the long-term implications of having this power would be. And in paragraph 95(7), which refers to the fiscal framework, there is a specific point about the need to have greater independent fiscal scrutiny of the decisions that will be made by a future Parliament, which reflects the sense that people were of the view that there would need to be a good understanding of what the operation of this power would look like over time when those decisions are made. That was part of the point of looking at fiscal scrutiny.

Pamela Nash

Okay. So that information was given. Why has the personal allowance remained reserved at UK level?

Lord Smith of Kelvin

It was felt that Scotland is still part of the UK, that income tax would still have elements of it where it is a shared tax, so the measurement of income, very importantly, remains a shared and a UK-based system, and personal allowance also showed that it is a shared tax, but the elements of rates and bands—absolutely devolved. So it was to show we are still part of a shared taxation system, and parts of it—a substantial chunk of it—involve £6.8 billion of variation.

Pamela Nash

I’m sorry but I’m still not clear on this. I can understand the argument for reserving some elements of income tax and devolving others, but why was it felt that the personal allowance specifically should be calculated at a UK level?

Jenny Bates

I think, as Lord Smith says, it was a reflection of the sense of where the shared element of income tax is. One way to think about the personal allowance is that it defines the point at which people start paying tax, because it is the element of income that is untaxed. I think there was some sense that having a common definition of where people start to pay tax should be part of the shared element of income tax.

Chair

Notwithstanding that, presumably it would still be open to the Scottish Government, with these powers, to circumvent that, if necessary by creating a nil tax band above the level of the personal allowance, which effectively would increase the personal allowance but would not use those words.

Lord Smith of Kelvin

Yes, they could, but “circumvent” is not right. Above the personal allowance, yes, you’re right; they could have a zero-rate tax band.

Chair

Similarly, if the UK Government decided to increase the personal allowance, my understanding of the “no detriment” principle is that because it would result in a loss of tax income to the Scottish Government due to some people being taken out of tax, the Scottish Government would have to be compensated for that, because it would be a decision taken elsewhere whose financial impact they would feel.

Jenny Bates

You are right that there is an element in the more detailed definition of “no detriment” in the fiscal framework that talks about after the point of devolution of the policy, but it is about what happens to the operation of policy after devolution. That is section 4 of paragraph 95. Again, this is principles, because the commission operates in terms of principles. The principle exactly is that where one Government makes a policy decision after devolution that has a revenue effect on the other, in either direction—whether it increases or decreases—either way, symmetrically, it will be offset.

Chair

Can I just clarify, though, that there would still be a way for the UK Government effectively to get round that? Instead of increasing the personal allowance and then incurring an amount that they had to pay to the Scottish Government, they could, if they wished, create their own nil tax band, which would have the same effect as expanding the personal allowance. If they created a nil tax band, it would have no effect in Scotland and avoid the need to pay compensation.

Jenny Bates

I think the way you have explained that is right, yes. The UK Government could affect rates and bands in the rest of the UK that would not directly affect Scottish taxpayers.

Chair

There is a need to clarify for people what the “no detriment” principle means. I was struck by one of the exchanges that took place yesterday with one of the MSPs. I think you, Lord Smith, said, “If the Scottish Government wanted to bring additional benefits, it would have to find some way of paying for them”, which seems reasonable. The MSP responded, “But that being the case, one could argue that the Scottish Government could be put in a negative position or at a disadvantage compared with the current situation.” They obviously had not quite grasped the principle that if you make a decision, you have to pay for it. To be fair, you went on to explain that to them. The policy on cake of having it and eating it has been prevalent in the Scottish Parliament for quite some time. The idea that you have to pay for your decisions might be quite a novel one. How will you make sure that the reality of the new situation is conveyed without people howling that they are being betrayed, sold down the river, disadvantaged or something similar?

Lord Smith of Kelvin

I think we are being pretty robust in our language. You talked about additional fiscal scrutiny, I talked in general terms about scrutiny and we talk about scrutiny in the body of the report. By that I mean Committees like this, but I also mean scrutiny in plenary sessions. If you have power, you have responsibility. All MSPs are going to have to realise that these are amazingly big new powers, and they have to be used responsibly. I have said a lot on this in talking about external, independent scrutiny, the power of Committees like this and so on. I think Holyrood will have to ensure that there is proper scrutiny. These are very big decisions.

Mr Reid

Lord Smith, in answer to the Chair’s question about the personal allowance you said that under these powers the Scottish Government could effectively increase the allowance by having a zero rate. Would I be right in saying that the only additional power that the Scottish Government and Parliament would have if the personal allowance was devolved would be to cut the personal allowance?

Lord Smith of Kelvin

We never went into that in detail.

Mr Reid

If, under the powers that they are being given, they can effectively increase the personal allowance, as you’ve said, then if the personal allowance was to be devolved surely the only additional power that would give to the Scottish Government and Parliament would be the power to reduce the personal allowance. Is that right?

Lord Smith of Kelvin

You could logically say that.

Mr Reid

I think that is a yes.

Lord Smith of Kelvin

No, it is not. The point is that that sort of discussion never came up. The feeling was that the personal allowance is part of this uniform tax base system that we have in the UK, and Scotland is still part of the UK. It was important to keep that and the measurement of income. I hear what you are saying, because if they can produce a zero rate tax, what else would you need except the ability to reduce it? I hear you.

Mr Reid

Is the answer not yes?

Lord Smith of Kelvin

What do you think? You’re a mathematician; I am only an accountant.

Jenny Bates

I think there is a technical term in law, in that some things are referred to as the personal allowance, whereas it would be referred to as a zero rate band if you were doing it on top of the personal allowance.

Mr Reid

But in practical terms, I am right that the only additional power the Scottish government and Parliament would have, if the personal allowance was devolved, would be that they could reduce it?

Jenny Bates

The effect of it would be more symmetric, yes. With the personal allowance set where it is, the thing you can do is to take more people out of tax by adding a zero rate. Under this model there isn’t a way to do that the other way round, whereas if you devolved the personal allowance you would be able to increase it or decrease it.

Lord Smith of Kelvin

It is difficult to argue with your logic. The only reason I’m being a bit precious is that I don’t think that any of us think the personal allowance ought to be devolved so that it can be reduced. I don’t ever remember that kind of conversation.

Mr Reid

But that appears to me to be the only practical power—

Lord Smith of Kelvin

Well, that’s fine. If you’re sure of your logic there, then I’m sure—

Chair

I think, to be fair, a number of people subsequently have said a number of things about the proposals you are making—“If only we had x, then such and such.” Alan is raising the entirely legitimate point that, effectively, had the personal allowance been devolved the only difference would be that they would have been able to cut it, because we have already identified that effectively, they could increase it under the scheme you are proposing. The answer is yes, but it wasn’t a trick question in the way that it might have appeared.

Mr Reid

May I just ask another question on income tax? Lord Smith, earlier on you gave an estimate of 2018-19 for when the new powers over income tax could be devolved to the Scottish Parliament.

Lord Smith of Kelvin

It may be that Pamela is about to correct me, because you were saying that was because of systems as much as anything else.

Mr Reid

The point I was going to make was that because of the Calman commission’s proposals, which became the Scotland Act 2012, the power to vary all the rates up or down by 10p in the pound comes into effect in 2016-17. It would appear to me that introducing the Calman proposals and that variation is the complicated part of the administration. Surely the extra powers being devolved to vary the bands, although extremely significant politically and in terms of setting a tax policy, are fairly straightforward in administrative terms, and just require a simple change to the HMRC computer programme. I do not really understand why those powers cannot come in at the same time as the Calman proposals in 2016-17.

Lord Smith of Kelvin

I may have been misleading the Committee, because I do not know how long it will take to implement. It is simply that each time we change things, it takes an awfully long time to come in.

Jenny Bates

To be honest, that is a practical question that I think you will have to address to the Governments that are implementing this. We didn’t look at—

Mr Reid

I thought that you were here to answer these technical questions.

Jenny Bates

We were looking at the powers that are being devolved. That is quite a specific question about how something would be implemented.

Mr Reid

Have you had any feedback from the Treasury about when this would come into effect?

Jenny Bates

Not specifically on that, no.

Lord Smith of Kelvin

But I was told, very much in outline terms, that it is not difficult to do that and it could be that it comes in earlier than that—by a Treasury official, actually. I said, “Is this impossible? Would it mean whole new systems?” Varying allowances, reliefs and so on are just a nightmare, because there are thousands of them, but varying just rates and bands is apparently not too difficult technically, so it may be that you are right. If Pamela’s right, as I am sure she is, that the systems have already gone into place for different rates, it may be that it could be done an awful lot more quickly. But we can maybe find out about that.

Mr Reid

Would you write to us, if possible?

Lord Smith of Kelvin

Let’s see what we can find out about that.

Mr Reid

Okay.

Chair

As long as it can pass the Norma test with your colleagues.

Lord Smith of Kelvin

Listen, I am not signing up for that.

Pamela Nash

Just to be clear, with all this legislation and the current Scotland Act, it could be quicker. The point I was making was that setting up the infrastructure was an added thing that had to be achieved this time, but that won’t be the case next time. On that point, these powers are coming in in April—the devolution of 10p in income tax is coming in this April. Do you think that should be going ahead at this stage, or do you think we should wait until we are in a position where we can devolve all income tax?

Lord Smith of Kelvin

I think the Act has gone through and it has to be implemented. We certainly have not come in here and said, “Can we just put the Scotland Act 2012 on hold, while this works its way through?” It is an Act and it will be implemented. Do you agree, Jenny?

Jenny Bates

indicated assent.

Graeme Morrice

May I turn to VAT? Obviously, one of the proposals in your report is to have devolution of half of the VAT receipts raised in Scotland; they would go to the Scottish Parliament. Why that particular figure?

Lord Smith of Kelvin

The feeling was that we wanted to devolve more tax. The thing about VAT is that this is controlled by Europe; it is not something that you can play around with. Scotland could not have entirely its own VAT ability to change rates and so on. That is just absolutely impossible. It is slightly more subtle than half of receipts; it is 10 points of VAT income. If you imagined a future UK Government reduced to 17% or 18%, the 10% would still be collected on behalf of Scotland—right? It is 17%, so we will get 8.5% of that under the block grant. It comes out of the block grant and 10p on every VAT-able item comes into the Scottish Exchequer, collected by the UK. Where do you fix that? Do you say it should be 15 points? That was talked about. Five points was talked about, and it just seemed a reasonably chunky number and a meaningful assignment of additional revenues, and that is where we came out.

Graeme Morrice

But did you look at other options, for example, Scotland’s population compared with the rest of the UK, or the GDP share of receipts?

Lord Smith of Kelvin

We looked at a lot of these things. We thought about something relatively simple, rather than a percentage of total revenues. It means that if the Scottish economy prospers, that 10% will go up. It will just go up through natural prosperity. If things that the Scottish Government are doing reduce the amount of VAT activity, that take will go down, but there is a possibility, supposing that there is austerity at UK level and there is more cutting, say, of the block grant, that that money would still be in place. As long as your economy is tracking reasonably well, you would still be getting 10 points of whatever sales tax is being collected, outside something happening to the block grant, which may or may not be being reduced, for other reasons. It is an opportunity for Scotland to rise or fall on the prosperity of the economy that is there. We just felt that although this is not something that can be devolved, it can certainly be assigned, and that it would make the Scottish Parliament responsible for a bigger take. Very roughly, income tax is about £6.8 billion of what we are talking about, and about £4.5 billion is 10 points on VAT for Scotland, so that is an £11 billion transfer of money.

Graeme Morrice

Okay. Did you consult HMRC on that conclusion about the 10 points, or on any of the options that you considered?

Jenny Bates

We got input from HMRC on that assignment, in terms of the different ways that it could be done.

Graeme Morrice

Okay, and how easy or difficult will it be to implement?

Jenny Bates

The general advice that we received was that assignment of VAT would be more straightforward than some of the other taxes that were under discussion for assignment at various points. Obviously, the detail of how that would be done is something that needs to be done in implementation by HMRC, but we were certainly not told that it was not implementable or could not be done.

Graeme Morrice

Okay, so we will need lots of black Fridays and cyber Mondays to increase the tax take through a sales tax. You don’t need to answer that—it was a joke.

Chair

Can I come back to VAT, just before we move on to corporation tax, which I think was going to come next, wasn’t it?

Graeme Morrice

Yes.

Chair

I want to come back to the question of “no detriment”. If the UK Government increases VAT to, say, 30%, you would imagine that they would get more revenue, but also that there would be a choking off of demand, so the Scottish Government’s 10-point take could possibly fall as a result. In those circumstances, would the Scottish Government be compensated because of the “no detriment” clause? What would happen if it was the other way around? If the UK Government cut VAT from 20% to 15%, there would presumably be an expansion of sales, but although the UK share—as it were—would fall quite drastically, the Scottish Government’s share would not. Indeed, it could be expected that the Scottish Government would get a boost because sales would increase since tax overall had been cut. In those circumstances, would something be taken off? How would VAT flexibility and “no detriment” work together?

Jenny Bates

Again, it is in the explanation of “no detriment” in the fiscal part of the document, paragraph 95(4). The principle is as you described: where either Government makes a decision that directly affects the tax revenues or expenditure of the other, you would expect to see a reimbursement in either direction.

Chair

Fine. So you might end up with the Scottish Government having some of the gain taken from it on the “no detriment, no gain” principle.

Jenny Bates

Yes. You would have to look at the evidence behind it. Some of that is policy and some of it is the economy, so the principle says very clearly that there would need to be a shared understanding of the evidence for that, for that very reason: to be able to understand which of those effects was operating.

Mr Reid

What happens with the 5% rate?

Jenny Bates

The Commission was not specific in detail on that, in part because it is a very small share of VAT revenue. That is a small part that would need to be looked at as part of the implementation.

Lord Smith of Kelvin

Am I right in saying that the intention was that the Scottish Government would get the 5% rate and 10 points of the other rate?

Jenny Bates

I would need to check what the agreement actually says—I think that it only refers specifically to the 10%.

Mr Reid

Yes, it just says 10%—it doesn’t mention the 5% rate at all.

Lord Smith of Kelvin

As Jenny just said, the actual take from the 5% rate is very small indeed, but perhaps we should get back to you. It may be a drafting issue.

Mr Reid

Okay.

Mark Menzies

Changes to air passenger transport duty are highly political and highly sensitive—in fact, the issue has even featured in this afternoon’s autumn statement. Under your proposals, if the Scottish Government were to abolish or reduce air passenger duty, would the UK Government cover the loss of income or would the Scottish Government have to raise taxes to cover it?

Jenny Bates

Again, it is about the operation of the first part of the “no detriment” principle. At the point of transfer, an adjustment would be made to the block grant for the revenue lost by the UK Government—the equivalent revenue that is raised in Scotland would be adjusted in the block grant. After that, once the Scottish Government have authority to have APD, they could increase it, decrease it, or have a different format for the tax. If they increased it, they would keep the revenue, and if they decreased it, they would lose the revenue. If they got rid of it completely, they would lose all the revenue that came from that tax.

Mark Menzies

I am unique among the people around the table because I represent a north of England constituency. It is something that colleagues who represent north of England constituencies are particularly concerned about. For example, I have Blackpool airport in my constituency. If you speak to people from Newcastle, Liverpool, Leeds Bradford, Durham Tees Valley and, indeed, as far south as Manchester, they are concerned that this could have medium to long-term implications, and impact on decisions of airlines. Does that bring them into conflict with one of the principles of your commission, which was for any conclusions not to cause detriment to the UK as a whole or for its constituent parts? Do you accept that if the Scottish Government chose to cut or abolish APD, that might cause detriment to some of the airports that I outlined in northern England?

Lord Smith of Kelvin

I think again that the transfer of the tax would not cause detriment. What happens—we were talking only about powers—is about what people do with those powers afterwards. You may find that a green party wants to increase APD but we have huge representation from people and civic Scotland to reduce or abolish it. It was on the grounds of tourism, and the cost of doing business—you have to go down to a hub to do things—but the effect on, for example, Newcastle, or on Bristol if Wales was to follow suit was talked about. At the point of transfer, there is no detriment. Thereafter, whatever the Scottish Parliament does with things could create different tax regimes for airports. The knock-on effect and what would happen was talked about, but we were talking about powers, not what you do with the powers.

Mark Menzies

As part of this work, has any modelling been done to try to anticipate, were a reduction in APD to take place, what impact that is likely to have on airports to the north of England? I had the discussion with the Chancellor a few months ago and he was not prepared to budge on APD from small regional airports on the grounds that, potentially, a large sum of revenue was affected. If we are starting to see this creep in by the back door, that would be a concern for MPs who represent north of England constituencies.

Jenny Bates

The commission did not do any modelling in terms of looking at the impact on airports in the north of England of future use of APD. As Lord Smith says, it was about the devolution of the power and the discussion around the table was a mix of views on what you might do with APD were it to be devolved. Certainly, people were arguing in both directions about whether it would go up or down. We were looking at the point of transfer. In terms of the point that we made earlier on the wider fiscal scrutiny for the Scottish Parliament, as and when it receives the power it would need to look forward for itself in terms of the revenue effects of having a tax and changing it, and what the long-term effects of that would be. That is why the commission was keen to see that there was greater fiscal scrutiny of the decisions that the Parliament would make.

Lord Smith of Kelvin

Several hundred million pounds are involved in this; it is not a trivial tax. There is a push for it. A lot of people have done some modelling for Scottish airports and tourism receipts. Does that really pay for the several hundred million pounds—£270 million pounds or something in tax—that would be lost?

Chair

That is right, but that is a decision for the Scottish Government. The question of review and supervision that might be undertaken in the Scottish Parliament would not, understandably, cover the impact on north of England airports, because they would not see that as being their responsibility. Therefore, there would be a detriment, quite clearly, to another part of the country. However, that would not be part of the Scottish Government’s or Parliament’s remit to examine. Somebody else would have to pick that up.

Jenny Bates

That is probably right.

Graeme Morrice

Okay. So we are devolving 100% of income tax. Why not national insurance as well? It is not a criticism.

Jenny Bates

The general point remains that this is the view of the parties that came together and agreed on which things should be devolved and which things should not.

Graeme Morrice

I take that as a given. What was the reason for their excluding it?

Lord Smith of Kelvin

Let me put it this way. It is all part of a package. Relatively early on, the decision was taken that pensions should not be devolved. National insurance is quite tied in with pensions. Pensions have to be paid for, and national insurance has a link—a pretty direct link in some areas and an indirect link in others—with pensions. So it was felt that you should not break the relationship between those two. That is the bottom line.

Chair

So effectively national insurance followed pensions. That is the logical way to think of it.

Lord Smith of Kelvin

I said I would not give you a blow-by-blow account of things, but we started off saying that pensions would not be devolved, and then it was a case of, “But they have to be paid for”.

Chair

Do I take it, then, that the question of devolving pensions was not a big issue and not particularly argued for? I take it people did not go to the wire on it and nobody threatened to fight anybody else for it or anything like that. Is that reasonable?

Lord Smith of Kelvin

I think I do not want to go into the detail of it.

Chair

No, I think you do not, but I think we do. We want to clarify the matter. Unless I am mistaken, you are saying that effectively the question of pensions was given up. There was nobody really battling for that.

Lord Smith of Kelvin

That is not what I said at all. The idea that pensions would not be devolved was arrived at before the national insurance area.

Graeme Morrice

I understand your explanation with regard to national insurance and its link to pensions. I am sure we will cover pensions and other issues later, but I want to turn to corporation tax. The suggestion is that that is not being devolved. Why?

Lord Smith of Kelvin

First of all, it was the five parties that decided this.

Graeme Morrice

Of course. I understand it is not your decision.

Lord Smith of Kelvin

Just in case the question is about to come up, because I understand there was something in the autumn statement about Northern Ireland, there were rumours around at the time that there might be something. You must be aware of this. It has been talked about for some time that Northern Ireland may or may not get powers over corporation tax. We discussed this and we agreed that the fact that Northern Ireland, or indeed anywhere else, might get corporation tax devolved, did not get us away from thinking about Scotland and about what is right for Scotland, and whether corporation tax be devolved to Scotland. The five parties agreed that we would not devolve corporation tax. In that, we were assisted a great deal by information we had had from civic Scotland, where a lot of people understand corporation tax. The STUC and business organisations strongly said, “Do not devolve corporation tax”, and unimpeachable organisations such as the Institute of Chartered Accountants of Scotland, of which I am a member and which understands tax, said, “Do not devolve corporation tax.” There was a very strong body of evidence from all these people that devolving corporation tax would lead to behavioural issues, if I can put it that way, and it would not be in the interests of Scotland to devolve. That was the STUC and business organisations all coming together to say that, and the five in the room all agreed it should not be devolved.

Graeme Morrice

So all five parties agreed—

Lord Smith of Kelvin

Absolutely.

Graeme Morrice

Despite the fact that it was in the Scottish Government’s White Paper on the independence referendum that it should be, and the fact that they were looking at reducing it by 3p in the pound. Nevertheless, John Swinney, the Scottish Finance Secretary, signed up to that.

Lord Smith of Kelvin

All five parties signed up to that. On a matter of procedure, may I say that we did not sit taking votes—4 to 1, 5 to 0, 3 to 2 and so on. If I felt that that was where it was, I kept talking to people about coming together to find common ground, and either someone would make a concession or move ground a bit, and every decision in there was agreed by everyone.

Graeme Morrice

No, I am sorry, and it seems like a very mature process that you presided over. You mentioned Northern Ireland earlier and rumours that the Chancellor, in his autumn statement today, might have been devolving its corporation tax. That is exactly what he did say today, so what is the difference between Northern Ireland and Scotland in that regard?

Lord Smith of Kelvin

I am not an expert on Northern Ireland. I believe that they have a long border with the Republic of Ireland and there are corporation tax issues there. But let me tell you that I agree with what the five parties and Civic Scotland said: I do not think it would have been in the interests of Scotland to devolve that. I think you would have ended up with behavioural issues.

Graeme Morrice

Thanks, Lord Smith; that is very clear indeed.

Mike Crockart

Turning to another omission from the report, oil and gas tax receipts, which we talked about almost constantly during the referendum campaign. Looking through the Smith Commission report—or agreement, as we are calling it—

Lord Smith of Kelvin

Smith agreement—good.

Mike Crockart

There is stuff there on onshore oil and gas extraction and that is the only point at which it says, “The licensing of offshore oil and gas extraction will remain reserved.” Was there any discussion about the potential for devolution of oil and gas tax receipts being assigned instead of VAT? Why did you go down the VAT route rather than oil and gas, since oil and gas has an obvious link to Scotland?

Lord Smith of Kelvin

It was talked about and it was agreed by all parties that we would not devolve that. I think some of the thinking around that would be on volatility. By the way, when we started these discussions, oil was nearer $100 a barrel and today it is nearer $70, so these decisions were being made with a slightly different oil price regime, but I think it was largely to do with volatility and we all agreed that that should not be devolved.

Mike Crockart

I accept that you do not want to go into blow-by-blow accounts, but was it pretty much an easy agreement among the five parties that the volatility—

Lord Smith of Kelvin

If I make anything sound easy in this commission—believe me, nothing was easy. People were arguing very strongly on this.

Mike Crockart

Equally, there are degrees of ease with which agreement is reached for various things.

Lord Smith of Kelvin

There was quite a discussion and eventually all parties agreed: no devolution of oil revenues.

Mike Crockart

And with the benefit of hindsight, it is obvious that that is a pretty good decision for Scotland, given the current oil price.

Lord Smith of Kelvin

Hindsight is a wonderful thing, but, never mind hindsight, it is a very volatile tax because it is subject to market supply and demand. You have got America totally self-sufficient in gas and just about to become totally self-sufficient in oil—it may even be an oil exporter if it finally decides to do that. And you have seen what is happening in other areas with OPEC and so on, so it is quite politically sensitive as well internationally. If you are choosing a tax, it probably would not be an easy one to choose, because it is subject to—

Mike Crockart

And that was the view of all parties in the negotiations?

Lord Smith of Kelvin

All parties agreed.

Chair

Can I just clarify? One of the issues about the oil price is, to some extent, when you fix it. If you fix it at the mid-point and that is what is considered in terms of no detriment, there is an upside and a downside. If, however, you manage to fix it at the very bottom price, presumably it is all upside. That to a lesser extent applies to a number of the other taxes and spending items where there will be degrees of variation. Will a snapshot or a moving average be taken, or will that be a technical issue for subsequent discussion?

Jenny Bates

I think it is an issue for a subsequent decision on how you do that.

Chair

As soon as I gave you an option, I realised that that was what you were going to say.

Jenny Bates

The parties were not specific on that in the way that they set out their principles.

Lord Smith of Kelvin

She is a Treasury girl through and through.

Jim McGovern

Lord Smith, I am not entirely sure what the Commission’s terms of reference were, but I believe that the Barnett formula was to be excluded. Did that hinder the Commission’s work?

Lord Smith of Kelvin

I was told that the Barnett formula would stay in place.

Jim McGovern

I think I am saying that any discussion about the future of the Barnett formula was to be excluded.

Lord Smith of Kelvin

We didn’t discuss it. We just assumed the Barnett formula would stay. It is a very complicated formula, incidentally.

Jim McGovern

I’m sure. It is not one I understand.

Lord Smith of Kelvin

It is like the Schleswig-Holstein question; someone said only three people in the world understood it. One was dead, one was mad and the other had forgotten the answer. I have got to know a lot about it, but we did not go there. We believe that Barnett will be applied as it has been applied until someone decides not to. Barnett stays. That was said very explicitly so we didn’t go near it or tinker with it. Barnett is Barnett.

Jim McGovern

I think my colleague, Pamela, mentioned the block grant earlier. It must be crucial.

Lord Smith of Kelvin

The block grant is what Barnett applies. When income tax is taken out, that amount—£6.8 billion—will come out of the block grant and appear as directly raised tax. The VAT assigned amount will come out of the block grant, and 10 points of VAT will be assigned in future out of the block grant. That is £11 billion of tax-raising powers now out of the block grant, which is the amount that comes from the UK.

Jim McGovern

On borrowing powers, which I think Pamela mentioned, if Scotland is to have increased borrowing powers, that would need to be funded almost by the UK taxpayer. Could that have an impact on the rest of the UK?

Jenny Bates

In principle, there is an interaction between what Scotland does on borrowing and the rest of the UK.

Jim McGovern

Does interaction mean impact?

Jenny Bates

Impact, interaction, yes. Lord Smith talked about that earlier in terms of the potential impact on the credit rating that the UK Government have for overall debt in the UK, which is why the Commission has said it would need to be consistent with the UK framework, and something that was sorted out between the two Governments, recognising that there is that potential linkage.

Jim McGovern

The notes I have here say that Brian Hilliard of Société Générale has said that it is not something people are talking about. I probably believe that. It is not a burning subject in the pubs and clubs of Scotland, but it could impact on the people of Scotland and the people of the UK. Is that right?

Jenny Bates

I think that it could potentially, which is why you would need to have the principles in the Commission recognising that there are interactions between what Scotland does on borrowing and what the rest of the UK does, so it needs to be done within a framework in a managed way and consistently with what the rest of the UK is doing. The scale of that impact depends on the scale of the borrowing and how any power was used in future. At the level of principle, therefore, there is recognition that these things can interact with each other, so it needs to be done in a framework that brings that together rather than done separately. That is the sort of principle that the Commission operated under.

Jim McGovern

Okay, so when someone says it is not something people are talking about, that is probably quite accurate, but if it starts to impact on people, they will start talking about it.

Lord Smith of Kelvin

It will have to be talked about. You can’t have those sorts of tax-raising powers, which may create some volatility and the risk that Pamela was talking about earlier, without being able to smooth some of these things out by borrowing money. But you can’t have unfettered borrowing powers without having regard to the UK’s credit rating. It has to be done by quite skilful communications.

Jim McGovern

Skulduggery.

Lord Smith of Kelvin

Don’t lead the witness.

Jim McGovern

Alan, you wanted to ask about that.

Mr Reid

On reforming powers, are the Scottish Government effectively getting the money from the UK Government? I will rephrase the question. Are the UK Government going to the market, borrowing the money and then lending it on to the Scottish Government, with the Scottish Government paying the same rate of interest as the UK Government paid to the borrowing market?

Lord Smith of Kelvin

I thought they were borrowing direct from market, but let me—Jenny, you understand these things.

Jenny Bates

So this is a question about how it currently works—the Scottish Government—

Lord Smith of Kelvin

No, how it will work, or—

Mr Reid

If you could explain how it currently works, and then the changes that your agreement would mean. That might be the best way.

Jenny Bates

So my understanding of the way it currently works is that the Scottish Government can either borrow directly from the UK Treasury or could issue its own debt. It hasn’t chosen to do the latter yet, but has the power to do that. In terms of how it would operate in future, the Commission has gone as far as setting out principles, but has not set out the precise detail of how that would work. So it has said that it thinks that the borrowing powers, as Lord Smith said, should be sufficient—that they should be increased, recognising that there is a wider level of risk, potentially, that the Scottish Parliament would need to manage—but the precise mechanism by which those borrowing powers would operate is something to be sorted out by the Governments in future. So the Commission itself has not been specific to that level of detail about how that should operate.

Mr Reid

If the Scottish Government was going out to the money markets and borrowing money at an agreed rate of interest with security being, presumably, assets that the Scottish Government has, what implications are there for the UK Government?

Jenny Bates

Again, it depends a bit on how the borrowing powers were operating. The reason that people think about the need to link these things together is about whether there is a sense that there is any kind of implicit guarantee, or otherwise, being offered by the UK on any borrowing that Scotland may be doing. So that is the reason that needs to be thought about within a framework.

Lord Smith of Kelvin

I think that is quite important, because if you go out and borrow direct, and people feel there is no implicit UK Government guarantee, the chances are you will pay more for the money—it is like a public loan board, or something. Probably the Scottish Government would have a natural tendency to say, “We need another £1 billion”, or something, would go to the British Government—the UK Government—and they would go into the money market with the UK credit rating. If you go too far in the other direction—California, I think, went bust and there are other examples: this is the United States of America we are talking about, and individual states can actually go bust. To me, it is inconceivable—and I think to anyone in these islands it is inconceivable—that a UK Government would allow a devolved Scottish Government to go bust because it over-borrowed. So if that is the case, there is effectively an implicit guarantee and, if there is an implicit guarantee, you have to talk very closely together, because no UK Government would say that the Scottish Government is completely free to go out with an implicit guarantee from the UK Government and borrow potentially recklessly. It just would not work. The UK Government would eventually say, “Hold on. That did not have our implicit guarantee”, and then you are into all sorts of— I think: trust people to be grown up and work together in a mature fashion, saying, “Look, we’re going to have to smooth this out. You did say you’d give us sufficient and increase borrowing powers. We now need these and the way we’ll do this—the smartest way to do this with the lowest interest rate—is to come through you.” Or, “We are going to do this direct, but we’re absolutely saying as we borrow, ‘We have your implicit guarantee. Are you prepared to say that that’s there?’”

Mr Reid

Yes, but if UK Government give the guarantee, then effectively the UK Government is the borrower.

Lord Smith of Kelvin

Yes.

Mr Reid

This is where I am not clear what the agreement is: whether everything that the Scottish Government borrow will be guaranteed by the UK Government and therefore effectively is UK Government borrowing, which as you indicated earlier would probably be at a lower interest rate than the Scottish Government could get by going out directly. I am not clear whether the agreement is that all borrowing would be done that way or whether the Scottish Government would have additional powers to go straight to the money markets, borrow its own money at a higher rate of interest, presumably giving its assets as security.

Lord Smith of Kelvin

It is to be discussed, right? All we have said is, “You cannot devolve tax powers and not allow the Scottish Government to be able to borrow money, to ease out fluctuations.” We heard, when Mike was talking earlier, about North Sea oil revenues, and so on, that if something happened—you get economic shocks and wee tides come in, and various things. You have to be able to iron out these things. You have to be able to iron out these things. You have to be able to borrow to do that. Scotland has to be able to borrow against its tax base, but they can’t do it, so they have to find a mechanism. Ten weeks is not long enough. I told your Chair that 10 weeks was long enough to arrive at these principles, but 10 weeks is not long enough for me to sort out with the Treasury exactly—I don’t want that job either.

Chair

Can I just clarify a point? You mentioned over-borrowing. Over-borrowing, to some extent, is in the eye of the beholder. There are two things that the Scottish Government want to borrow for. One is the question of fluctuations in income. There can be genuine disagreements about whether downturns are temporary or structural. You can therefore have a tension about the figure that is arrived at. Secondly, there can be borrowing for capital expenditure, which again comes down to the question of aspiration versus economic sense. In this structure, there is scope for all sorts of disagreement and political tension to build up, with accusations flying back and forth about bad faith and so on. The only consolation I take from this is that the Scottish Government and those who wanted independence did agree to this sort of mechanism when they were saying that they wanted to have a shared currency. Implicit in the shared currency was the idea of negotiations over borrowing limits for a separate Scotland with a shared currency. Presumably, it is doable, but it would be unreasonable not to predict that there were going to be tensions, particularly if one side had a vested interest in provoking conflict because they want to make the case for independence. Does that all seem reasonable to you? I think “yes” would do fine, actually.

Lord Smith of Kelvin

I think I will go into politics after all, because I am finding it—

Chair

You’re doing fine. You praised the accountancy profession. You praised the tabloids. You have survived 10 weeks. You have obviously done well on it.

Lord Smith of Kelvin

Chartered accountancy is the only qualification I have, so it has done me okay in life. The two Governments have to talk together and they have to thrash out a workable way. If they are not going to respect each other, we are not going to get very far down the track on the borrowing powers, whether it is for capital expenditure or for smoothing. They just have to be able to talk to each other, and they will.

Chair

Of course they will, but there is an in-built tension because one side has a case for restriction—an in-built caution—and the other side has a natural tendency to want more because they have ambitions.

Lord Smith of Kelvin

But you could say that there is a natural tension within the UK Government between the Treasury and everybody else, because they are spending Departments.

Chair

To be fair, the Treasury do not stand for elections separately—at least, not to the best of my knowledge—from the spending Departments. There is a different sort of structural tension there.

Lord Smith of Kelvin

I know. I hear that; it is different. But they will just absolutely have to co-operate. Otherwise, the thing will become unworkable. The Scottish Government surely knows that, if it is taking on extra powers and the risk that Pamela talked about earlier, it has to have the power to smooth those out. Really, the UK has the credit ratings, so they have to talk.

Chair

Coming back to the other bit about the smoothing—it is also a question of capital expenditure, ambitions and so on. If there is a limited pool of capital expenditure available to the Treasury overall, it is a question of how that is then allocated. There is a tension there as well.

Lord Smith of Kelvin

I agree.

Lindsay Roy

So in effect, a memorandum of understanding is absolutely vital to see this through. In the past, we have had question marks over the strength of the MOU. People are saying that we need to put full faith in them and carry them through scrupulously.

Lord Smith of Kelvin

There will have to be a proper memorandum of understanding in a number of areas. The numbers that we talk about now are really quite material. The two Governments have to agree. Stakes are too high.

Lindsay Roy

They have to work together.

Lord Smith of Kelvin

They have to work together. It is in lots and lots of other areas. You will see that elsewhere in this document, we talk about Ofgem and Ofcom. As I was saying yesterday to the Devolution (Further Powers) Committee in Holyrood, it is not just about representation in Brussels on fishing and agriculture. There are huge areas: fuel poverty—just a whole lot of areas, and the Governments need to talk and respect each other.

Pamela Nash

You will not find anything but agreement here. I would like to move on to those areas of policy that currently lie with DWP, some of which it has been suggested should be devolved in the agreement. Before I go on to individual benefits and areas, can I just ask whether a set criterion was applied by the members of the commission when they were looking at whether to devolve areas of DWP policy? Did they go through each benefit and say, “This is why we should do this?”

Lord Smith of Kelvin

We went through a number of benefits and looked at them individually, but we split them into universal and non-universal credits. Then there is a whole row of other smaller things that we looked at. There was a lot of discussion and eventually it was agreed that Universal Credit was not something that you would devolve. You would have a Universal Credit box here and a separate one in Scotland. However, within Universal Credit it was felt that some things could be devolved for Scotland. It is not my specialist subject so I will keep deferring to Jenny for all this stuff, but within housing, housing benefit, timing of payments and the so-called “bedroom tax”—I hope that is not a political statement, but everyone knows what we are talking about—Scotland has different housing issues. Scotland does not perhaps have the “bedroom tax” sort of housing issue that perhaps the south-east of England has; so we will have levers in Scotland to address that. That is one big area, and that is also important because housing, largely, is already devolved to Scotland—having this extra housing bit inside universal credit. Timing of payments is another area. If you started to go beyond that—again, it is tapering and—

Pamela Nash

Can I just ask either yourself or Jenny—

Lord Smith of Kelvin

You are going to someone who knows what she is talking about, then.

Pamela Nash

Just on universal credit, when the report was first published, one of the first lines I was sitting looking at was on whether housing benefit was devolved or not. It is something that there has been a lot of discussion about. The headlines were that housing benefit had not been devolved, because it is still within universal credit; but from the heads of agreement, it seems that almost everything to do with housing benefit from within Universal Credit has been devolved. Am I right in saying that, or is an element of housing benefit being kept?

Jenny Bates

No, you are right in saying that. So paragraph 45, I think, talks about the housing aspects of universal credit; there was a lot of discussion about how best to achieve some measure of devolution of housing, and the agreement in the end was to devolve these flexibilities. Those are the housing flexibilities within universal credit.

Pamela Nash

Yes; there was debate when the bedroom tax was introduced as to whether the Scottish Government already had the powers to mitigate it. I will not go into that debate again. I am on the record with what I think; but the Scottish Government said at the time that they did not have full control over discretionary housing payments, and also that they did not have any power over housing benefit. They have both of those powers now, don’t they—or they will have if this is implemented?

Jenny Bates

Yes.

Pamela Nash

Thank you.

Lord Smith of Kelvin

That was a yes/no answer, by the way.

Pamela Nash

Yes, I very much appreciate it.

Lord Smith of Kelvin

It did not come from me.

Chair

Let me be clear; it was a yes answer. It was not a yes/no answer at all.

Pamela Nash

It is very clear in the report, but I think it is important to discuss this and get it on the record here as well that that has been devolved. Another element I was interested in that was devolved is the Work programme. I just wanted to know, going back to an earlier discussion about detriment and how that impacts on that principle, about the Work programme, or whatever the Scottish Government has as an incarnation of a Scottish Work programme. If that it is more or less successful than UK-wide or than what it is at the point of devolution, would that have an impact on the block grant that it might receive from the UK Government? How will that work in terms of the financial implications?

Jenny Bates

The same principle applies to the devolution of the employment programmes, which is that spending forgone by the UK Government on those programmes is what, in this case, is added to the block grant, because it is a transfer of a spending power at the point of transfer. There is reference here to some element of the administrative costs of delivering those programmes being transferred as well.

Pamela Nash

Sorry, I probably wasn’t very clear. It will have an impact not just on the cost of the programme; the success or failure of the Work programme will also have an impact on the cost of jobseeker’s allowance and the ESA in some cases, which has been reserved as part of universal credit. Is there any difference in how this will be treated in terms of detriment? Will it have an impact on the finances?

Jenny Bates

Back to my favourite paragraph 94(4)(a), just to be clear that that applies. It is in the funding principles, as we talked about before, in terms of operation of policy once a power has been devolved. That paragraph is clear that it refers to the operation of both tax policy and spending policy. In that sense, the employment programme would be included in that. That is a way of saying that, if in a future world the Scottish Government introduced a very generous employment programme that had the effect of keeping a lot more people on jobseeker’s allowance—and that could be shown through a shared evidence base, because it would need to be understood by both Governments that that was the case—that was increasing spending in the UK on the remainder of universal credit, the Scottish Parliament would need to compensate the UK for that. That is the principle, but it is subject to lots of policy decisions.

Pamela Nash

I take it that the reverse is also true if there were a very successful employment strategy in Scotland, with people coming off jobseeker’s allowance.

Jenny Bates

Yes, the reverse would be true. If it reduced the cost of Universal Credit for the rest of the UK, the UK would then need to compensate the Scottish Parliament in the case of providing savings. It is intended to be symmetrical in terms of whether it is a gain or a loss for the two Parliaments.

Chair

It is very easy in words, isn’t it? Some of this has got to come out of the very big sums, particularly when you start thinking about the second-level impacts and consequentials. Some of this is potentially enormously difficult. Again, it comes down to the spirit in which these discussions are entered. If people want to find conflict and disagreement, they can do it quite easily. If people enter into this with a grievance mentality, grievances are there to be found.

Jenny Bates

You are right that working out the effects will be complex. It will require the two Governments to agree. The commission tried to be clear that this should be based on evidence as much as possible, so that estimates could be made rather than having arguments without an evidence base. But yes, that will be a feature of implementation.

Pamela Nash

You said that you were not going to give us a blow-by-blow account of the debate on these issues, and I appreciate why. However, I am still going to ask this. I am interested in why the commission decided that Universal Credit in particular should remain reserved. Was it based on a political argument that the welfare state is one of the key structures, the backbone, of the Union? Or was it just seen as too technically difficult to devolve?

Lord Smith of Kelvin

Both, but more policy and political than administrative difficulty.