THE Scottish Government could lose billions of pounds in revenue once the current fiscal formula with the Treasury is renegotiated after 2021, a leading economic think-tank has suggested.
When last year the so-called fiscal framework was agreed between Whitehall and Edinburgh - to take into account how Holyrood was getting more tax-raising powers and the consequent annual block grant adjustment[BGA] - the SNP’s preferred formula, the per capita indexed deduction, was, after a deal of wrangling, adopted.
This took into account the fact that Scotland’s population was growing at a slower rate than the rest of the UK’s.
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At the time, Nicola Sturgeon told MSPs the deal meant there would be “no detriment” to the Scottish budget. She noted how when discussions with the Treasury began in 2015 the SNP Government was faced with a potential cash-grab amounting to £7 billion over 10 years.
But the First Minister said the final agreement meant this would not happen and it would “not allow a single pound or even a penny to be taken from the Scottish Government’s budget”.
The Institute for Fiscal Studies[IFS] calculated that by 2021 the cost of Whitehall “throwing in the towel,” would be £900m to taxpayers across the UK. When asked if this was true, the Treasury said it was “unable to share figures”. David Mundell, the Scottish Secretary, said there would be a report on the process - by the end of 2021.
However, now a report by Cardiff University’s Wales Governance Centre in conjunction with the IFS suggests that, once a renegotiation starts following the Holyrood elections of 2021, the Treasury could begin to seek to claw back some of this money by using a different formula.
The report considers primarily the fiscal framework deal between the Treasury and the Welsh Government.
It explains: “The fact that HM Treasury were willing to concede a generous financial deal for Wales - even as funding per person in Wales remains well above 115 per cent[that] of England - may suggest it has one eye on the renegotiation of the Scottish fiscal framework, set to take place after the 2021 Scottish parliamentary elections.
“The initial Scottish agreement implemented the Scottish Government’s preferred method of BGA - per capita indexed deduction - which will insulate the Scottish Government from population-related revenue risks.
“That the Welsh Government has agreed to the Treasury’s comparable model provides some precedent for the Treasury to take into the renegotiation.”
However, the reported noted, as devolved revenues were more than five times greater in Scotland than in Wales, the population-related revenue risk would be that much greater for the Scottish Government, especially since slower population growth was a much more entrenched and persistent phenomenon in Scotland.
It goes on: “On current projections, moving from the per capita indexed deduction method to the comparable model[the Welsh system] after 2021/22 would cost the Scottish Government £380 million per year after just five years, growing to £740m per year by 2031/32.
“There has also been little call or rationale for a need-based element to determine Scottish block grant changes, which would mitigate these losses, as will be the case in Wales. What will probably be a good financial deal for Wales may not be so good for the Scottish Government,” adds the report.
A financial loss of £380m a year over a five-year parliament would amount to £1.9bn; one of £740m over five years would total £3.7bn; over 10, it would be £7.4bn.