Smith Commission aims were ‘mutually incompatible’, says IFS

Designing a fiscal framework with all of the Smith Commission's principles was "never going to be possible" according to Institute for Fiscal Studies (IFS) analysis.

Researchers found that while the model to be used to calculate Scotland's block grant satisfies the Scottish Government's demand of "no detriment [simply] from the decision to devolve", it fails to adhere to the "taxpayer fairness" principle, sought by the UK government.

David Phillips, a senior research economist at the IFS and one of the authors of the report said: In the end, the Scottish Government’s preferred approach was chosen, which prioritises the ‘no detriment’ principle.

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"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."

The fiscal framework deal, reached by the Scottish and UK governments as part of the next stage of devolution, means that if Scotland's devolved revenues and welfare spending per person grow at the same percentage rate as those in the rest of the UK, then the Scottish Government’s budget will be exactly the same as if devolution had not happened.

The joint IFS and University of Stirling report also found that use of the index per capita (IPC) method means Scotland’s budget may be around £300m a year more by 2021–22 than it would have been had the UK government’s proposed comparable model been used instead.

The agreement also means that part of the growth in devolved tax revenues in the rest of the UK will continue to be redistributed to Scotland to help fund its higher levels of government spending: something that the UK government said should no longer happen once a tax is devolved. This means that compared to today, by 2021–22 around £900m of additional revenues from rUK could be redistributed to Scotland (as would also happen without tax devolution). 

The method agreed for adjusting the block grant also largely protects Scotland from the impact of any shocks that hit the whole of the UK – such as the global financial crisis and associated recession.

The report also found that the deal will protect the Scottish budget from revenue and welfare spending risks associated with Scotland’s lower population growth. Equally, Scotland will not benefit from the higher revenues that might result if its population grows more quickly than expected.

David Eiser of the University of Stirling, another author of the report, said: "The Scottish budget will be protected from the effects of UK-wide economic downturns and the Scottish Government will have some powers to borrow during short-term shocks that hit Scotland disproportionately.

"However, the fiscal framework agreement offers virtually no protection against the risk of Scotland’s devolved revenues under-performing, or its welfare spending growing more rapidly than in the rest of the UK in the longer term."