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Scotland's funding deal unfair on rest of UK, report says

The Institute for Fiscal Studies do agree the deal meets the Smith Commission principles.

Holyrood: Scotland's funding deal has been criticised by an economic think-tink.
Holyrood: Scotland's funding deal has been criticised by an economic think-tink. © Deadline

Scotland’s new funding deal is unfair on taxpayers in the rest of the United Kingdom, an economic think-tank has found.

In a report conducted by the Institute for Fiscal Studies (IFS) on the new “fiscal framework” deal the think-tank has judged that the deal fails to deliver“taxpayer fairness”. However, the IFS do believe that the deal meets the “no detriment” clause to Scotland which was part of the Smith Commission’s report on more powers to the Scottish Parliament.

The report says: "This is the approach that the Scottish Government wanted and satisfies its interpretation of the Smith Commission's principle that there should be 'no detriment (simply) from the decision to devolve' a power.

"But it does not satisfy the commission's 'taxpayer fairness' principle, which the UK Government placed more weight on. Scotland's budget could fall a little if income tax rates are cut (or thresholds increased) in rUK and vice versa."

The IFS also argue that Scotland will continue to receive redistributed revenues from taxes in the rest of the UK which are devolved. It states that by 2021/22 around £900m of extra revenues from the rest of the UK could make its way to Scotland.

David Phillips, a senior research economist and one of the authors of the report, said: "It was never going to be possible to design a fiscal framework that satisfied all the Smith Commission's principles.

"In the end, the Scottish Government's preferred approach was chosen, which prioritises the 'no detriment' principle.

"During the negotiations, the UK Government had claimed this approach was unfair because it violates the "taxpayer fairness" principle. This begs the question of whether the UK Government has changed its mind or merely conceded the point."

Both the Scottish and UK Governments however stated that they believe that the fiscal framework is both fair to Scottish taxpayers and to those in the rest of the United Kingdom.

Deputy first minister John Swinney, who led the Scottish Government’s fiscal framework negotiation team, said: "The fiscal framework agreement implements the principles of the Smith Commission and is fair to taxpayers in Scotland and across the UK."

"This analysis by the IFS demonstrates Scotland's budget could have been cut by #300 million a year by 2020/21 if the UK Government's preferred model had been implemented.

"That is why we ensured that Scotland's block grant will be adjusted annually, by indexed deduction per capita, to ensure no detriment to Scotland as a result of having new powers.”

A spokesperson for the Treasury said: “The historic fiscal framework is fair for Scotland and fair for the rest of the UK. It takes all of the Smith Principles into account and paves the way for the Scottish Parliament to become one of the most powerful and accountable devolved parliaments in the world. It means that the debate can shift to what really matters – how these powers will be used to create a stronger Scotland.

“The Scottish Government will be responsible for managing the economic and demographic opportunities and risks associated with its new powers. It will be responsible for raising more than half of its own funding and it is right that the UK government provides transitional support.

“To ensure that the fiscal framework is consistent with all the Smith principles, including taxpayer fairness, on an ongoing basis both governments have agreed that it will be reviewed by independent experts by the end of 2021.”

The negotiations on the fiscal framework were extended as both governments could not agree the funding index system. Both parties agreed to use the Scottish Government’s preferred index until a permanent agreement is found following an independent report in 2021.

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