Chamber and committees

We would definitely want to reflect on the process. My predecessors engaged with the committee and stakeholders in the early days of the review, and the independent report was jointly commissioned, which was important for its credibility and acceptance as part of the process. There was then the rapid opportunity to conclude matters. The CST made it very clear that he wanted that to happen in a confidential space. I would not have had any issues at all with having further engagement with the committee and stakeholders but, given the CST’s very clear position, that would have been very difficult. Sometimes in a confidential space, agreements can be reached that might otherwise be difficult. Those are balancing acts.

Going forward, our clear preference would be to have the engagement that preceded the reaching of the agreement, not just with the committee but with external stakeholders, and to have that in a more open and transparent way.

I do not think that the UK Government would want to do that, to be fair. I think that it understands the risks, and I do not see any appetite for a unilateral imposition of VAT assignment. In the light of all the evidence—from HMRC and major influential organisations, which all say the same thing—I do not see any Government wanting to impose something in the full knowledge of the harm and risk that it would cause.

What I was getting at earlier was that what we end up saying about VAT assignment post-review will be discussed at a future joint Exchequer committee. The point that I was making is that I foresee us reaching some kind of joint position on what we do with VAT assignment in future.

That goes back to what was said earlier, which is that we need a more general look at the fiscal powers. Even with further tweaks to levels, resource borrowing does not change some of the fundamental weaknesses in our ability to respond to an economic shock, whether that comes from a pandemic or for any other reason. We have very limited levers, so tweaks to some of the levels do not suffice.

Our ambition is to have the policy levers to be able to manage VAT. The problem with VAT assignment is that you are assigned the revenues but you have none of the levers to be able to deal with risk: you get the risk but none of the benefits. If VAT and all the controls over it were devolved, that would be a very different proposition, but that is not what was on the table.

Assignment brings all the risk but none of the benefit of being able to use VAT as a tax lever to raise revenue. As I explained earlier, the evidence on that is so compelling that both Governments need to reach a position on what we do with VAT assignment in future, but we continue to want full devolution of VAT, along with the policy levers, so that we can manage that.

Yes, but the question is whether any model could remove the risk of having the assignments but no levers to be able to manage the risk. Earlier, someone made the point that, in the current fiscal climate, that risk would be at its greatest, so if we had gone forward, the impact on the Scottish budget would have been profound. If a model that would de-risk that situation exists, it has not yet been found. Therefore, the model is theoretically part of the discussions but, so far, none of the wise heads that have been considering the matter has managed to find a way to de-risk it. I come back to the point that there needs to be a joint conclusion on what we do next.

Over the years, we have set out many of our asks around fiscal powers, including potential borrowing powers. You mentioned at the start of this evidence session the disconnect whereby local authorities have, in many respects, a more straightforward borrowing capacity than the Scottish Government has.

There have been some fundamental asks, and we can add to them the other financial levers that we have asked for. VAT devolution is one example. That is a much more expansive ask, and one that would require a different political environment and a willingness to look beyond the confines of what we have been looking at.

I do not know whether that will come or not, but we will continue to put forward the proposition that Scotland needs that basket of fiscal powers in order to be able to deliver on our ambitions on both capital and resource in a sustainable and affordable way, but also in a way that recognises the economic shocks that we have been dealing with, and are still dealing with, in the midst of a cost of living crisis. The levers that we have are very limited. I think, looking back, that this is a good point at which to say that we need a more fundamental review of the powers that we have.

You made the point that it takes two to tango: it absolutely does. That is why we would have to find a landing space that is acceptable to both Governments. The use of the United Kingdom Internal Market Act 2020 is not covered by the fiscal framework, so it was not part of the negotiations. However, it is a major issue because it creates the ability to bypass transparency about how public money is allocated in Scotland in areas for which this Parliament is responsible. That really cuts to the heart of devolution. Our ask—and, I am sure, the ask of the Welsh Government—is that that be recognised. I guess that a reset is required.

We are keen to take advantage of any new thinking on how we could get into a different space.

Such decisions happen on two levels. One is the Government-to-Government level, so we are preparing some of the groundwork for that. Some of the work will be done by the Scottish Government, and some of it—this relates to key asks and getting on the front foot with what the proposition will be—will be shared with the Welsh Government. Clearly, some of our priorities will be a bit different from those of the Welsh Government, but there are some shared aims, such as on resetting the respect agenda and on issues to do with the Sewel convention and the United Kingdom Internal Market Act 2020. The Welsh Government is in a different position in respect of its fiscal powers, but it wants enhanced fiscal powers and it wants enhanced social security powers. The devolved nations are pushing for more power and responsibility, and for more levers to be devolved.

The other level on which such things happen—political-party level—is a bit trickier, because communication happens through personal connections and is done more privately. Therefore, whenever there is an election and there is the potential that a new Government will come in, there is an opportunity to be seized.

However, the convener made the point that it takes two to tango. The work would require different and new thinking. Opportunities for Governments and the civil service to get together to talk about doing things differently and taking a different approach are led by political willingness to avoid business just continuing as usual. That applies in the Scotland Office, the Treasury and any other UK department, and what happens depends on how each department regards the Scottish Government.

Political steer and appetite will be important, but there is, without doubt, an opportunity that the Scottish Government is keen to seize, because otherwise we will not get the maximum benefit for Scotland's public services and its people.

On your first point, there are huge issues relating to population growth in Scotland relative to population growth elsewhere. The key levers over migration, as well as some of the key economic levers, lie elsewhere, so being able to address the fundamental issue of lack of population growth without having the levers to do so is very difficult. Of course, that impacts on how the block grant adjustment is applied.

If we look at tax take and anticipate the growth in tax revenues that is due to tax policy that is set here in Scotland, from the HMRC data, the signs are that performance continues to be strong, but that all needs to be put through the block grant adjustment machine, which is based on population growth, and what pops out the other end is what we know to be the case.

That is a challenge. Addressing it would require a pretty fundamental change, which would need to be part of a bigger, more fundamental review. The Barnett squeeze is definitely reducing the spending that is available over time. If you want, I can bring in Matt Elsby or Niall Caldwell to say more about that.

On the Crown Estate, we strongly argued that, over many years—I am talking about the pre-devolution period and the early years of devolution—the investment in the Crown Estate has been particularly focused on London and the south-east, with no focus on investment in the Crown Estate in Scotland. We have made that a success story by focusing on investing in the Crown Estate and, in particular, offshore wind. The fact that that was part of the negotiation was a recognition of that success. The success of the Crown Estate since 2016, when the fiscal framework agreement was reached, has been recognised by the UK Government.

We made the point that the underinvestment in the Crown Estate in Scotland compared with the Crown Estate in London and the south-east had to be part of the understanding of the position that we ended up in on the Crown Estate. To some extent, we had to compromise a bit, but I think that we landed that point reasonably successfully.

Economic performance relative to that of London and the south-east is not just an issue for Scotland; it is also an issue for parts of England, too. Of course, it has major consequences for us in terms of the funding adjustments that are made as part of the fiscal framework. We were never going to be able to unpick any of that as part of this review. It is very much an issue of what comes next. It would mean a fundamental look at how the relationship between our budget and UK finance is constructed.

I accept that. However, had we held out to say that we were not going to make the agreement unless we could have that, we would not have got the agreement.

You can be assured that our key asks on a number of matters will be put to any new Government that emerges after a general election, not just on fiscal powers but on things such as the United Kingdom Internal Market Act 2020, the Sewel convention, the way in which Governments interact and the respect agenda—trying to get back to a position of respect. The days of the memorandum of understanding seem a long way away. A lot has happened. The internal market act in particular is a real impediment to devolution and is an erosion in so many respects. It makes the day-to-day interaction with the UK Government very difficult. That is not just a Scottish Government position, I hasten to add, but a Welsh Government position.

There is important work to do on what the devolved Administration’s relationship is with the UK Government. Rather than that being a party-political issue, there is a more fundamental issue of the relationship between the devolved Administrations and the UK Government. The balance of power has shifted away from the devolved Administrations in so many respects. There is an opportunity to reset and refresh that. The element of fiscal powers that we have been talking about is a part of that.