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The House of Lords Economic Affairs Committee in its report "A Fracturing Union?" has strongly recommended that the Scotland Bill, due for Second Reading in the House of Lords on 24 November, does not proceed to Committee Stage until the devolution fiscal framework is published.

• Report: A Fracturing Union? The Implications of Financial Devolution to Scotland (HTML)
• Report: A Fracturing Union? The Implications of Financial Devolution to Scotland (PDF)
• Oral and written evidence: The devolution of public finances in the United Kingdom
• Inquiry: The devolution of public finances in the United Kingdom
• Economic Affairs Committee

Fiscal Framework

The Committee states that the fiscal framework will be central to future financial devolution arrangements and Parliament cannot be expected to scrutinise the Scotland Bill without seeing the details.

The Scottish and UK governments are negotiating a fiscal framework to underpin the new tax and spending powers. This would include agreement on the funding of the Scottish Budget and how it is adjusted once powers are devolved, the scrutiny of public revenues and spending, borrowing powers, fiscal rules and fiscal institutions. 

In a report published recently, the Committee regret that MPs did not have the opportunity to scrutinise the fiscal framework before the Scotland Bill passed through the House of Commons and say that it should not move to Committee stage in the House of Lords, the first stage where amendments can be made to the Bill, until the framework is agreed by the UK and Scottish Government and published.

Conclusions

The Committee goes on to conclude:

• The decision to devolve almost all income tax revenue as well as almost full  power to set the rates of tax is unprecedented and something that no other central government has ever done. The Committee say it has been done with 'undue haste' and too little assessment of the economic and political consequences. It could risk weakening the connection between the Scottish electorate and UK government.
• The Committee do not believe a 'no bail out' rule between the UK and devolved governments would be believed by the markets. Instead the UK and Scottish Government’s should agree simple and clear borrowing rules and a maximum ceiling on Scottish Government debt.
• The Smith Commission suggested that there should be "no-detriment" as a result of Scottish or UK Government policy decisions post devolution. The Committee agreed with many of the witnesses that this is unworkable and a recipe for continuing conflict.
• The Committee considered options for how to adjust the block grant to Scotland to take account of the devolution of income tax. It states that as it is not currently clear what level of economic risk the Scottish Government should take on alongside its devolved income tax revenues it is impossible to recommend a preferred option. Again the lack of clear fiscal framework agreed by the UK and Scottish Governments is weakening the opportunity for Parliamentary scrutiny.
• The Barnett Formula is not a sustainable method to calculate funding. This is particularly true in the context of further devolution of tax powers.  It should be modernised and replaced with a needs based funding formula for distributing funds to devolved administrations.  This should reflect the additional needs of Scotland, Wales and Northern Ireland.
• There needs to be much greater transparency and scrutiny about how funding is allocated to the devolved nations. The Office of Budget Responsibility should scrutinise the funding of devolved governments alongside the Scottish Fiscal Commission in Scotland. In addition the Chairs of the Finance Committees of the Westminster and devolved Parliaments should meet regularly to ensure effective and coordinated scrutiny.

Chairman's comments

Commenting at publication of the report Lord Hollick, Chairman of the House of Lords Economic Affairs Committee, said recently:

“The Scotland Bill has the potential to fundamentally change the UK and impact on us all both politically and economically. It is crucial that what is proposed is stable and sustainable. Parliament is being asked to pass the Bill before we are told full details about the fiscal arrangements that will underpin this new era of devolution. That cannot be right.

“We are calling on the progress of the Bill to be halted until the details are agreed and published. That would at least allow Peers the opportunity that MPs were denied of scrutinising and amending this important legislation as informed participants.

“Our report today identifies some of the key issues the fiscal framework should clarify. For example what happens if any part of the UK borrows more than it can repay? 
A 'no bail out' rule isn’t credible so we need a firm agreement on how much debt Scotland can take on. We also need a proper explanation and investigation into the impact of proposals to devolve almost all income tax revenue to Scotland, some £11bn. That is unprecedented internationally and risks undermining the relationship between Scottish tax payers and the UK government and Parliament.

“The Barnett Formula is outdated and needs to be replaced. The further devolution currently proposed provides an opportunity for a new needs based funding formula to be devised.

“How the funding arrangements for Scotland adjusted to take account of further devolution is a highly technical but crucial issue. Choosing the wrong method could work to Scotland’s detriment.

“The second no-detriment principle agreed by the Smith Commission is unworkable and will simply create ongoing disputes.

“This whole process has been done with undue haste and not enough attention to detail or principles. We are calling for a pause until these key issues are addressed. Devolution and the future of the UK are too important for us to legislate in haste and risk repenting at leisure.” 

Further information

• About Parliament: Select committees
• Visiting Parliament: Watch committees