The Scottish Parliament and Government control most major public services and around 60% of public spending north of the border. The health service, schools and universities, local government, criminal justice, housing and more has been devolved to Holyrood since 1999. Unlike in many federal systems, the block grant Scotland receives from the Treasury has no strings attached. The Scottish Government is largely free to distribute its budget as it chooses across this broad devolved landscape.
As well as creating scope for policy differences such as the reversion to free university tuition and medical prescriptions, devolution has enabled Scotland to restructure its overall approach to government and public service reform. As Leslie Evans, Permanent Secretary to the Scottish Government, discussed, in 2007 the Scottish Government went from having a list of more than 300 specific policy commitments to a single overarching ‘purpose’ to guide the activity of the entire public sector. This is defined as ‘creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth’. The government purpose – and the outcomes, indicators and performance agreements sitting beneath it – were described by Evans as ‘the bedrock of the Scottish approach’, underpinned by the ‘four Ps’ of People, Partnerships, Prevention and Performance.
Up until now, however, the Scottish Parliament and Government have had very few tax and borrowing powers, and therefore no ability to use fiscal policy to boost economic growth. With welfare benefits and employment support also largely reserved to Westminster, Scotland’s job-creating powers have been similarly limited.
This week’s agreement between the UK and Scottish Governments on the terms of a new fiscal framework changes this picture. The negotiations had been deadlocked on the obscure-sounding but fiscally important issue of how Scotland’s block grant will be adjusted in future to account for its new tax powers. The Scottish Government pledged to block passage of the Scotland Bill if a satisfactory offer was not put on the table. The tough negotiation stance paid off and the UK Government appears to have largely conceded on the key points of disagreement (as explained by Jim Gallagher for Democratic Audit).
Over the coming years, assuming the bill completes its passage through the House of Lords and gains the consent of the Scottish Parliament, the Scottish Government will gain control of air passenger duty, income tax rates and bands (except for investment income), and will receive half of VAT revenue collected in Scotland. On the welfare side, a number of benefits (particularly those relating to disability) are being devolved. Other benefits (including those being rolled into Universal Credit) will continue to be controlled by Westminster, but Scotland will gain top-up powers and other flexibilities. It also gains powers over employment services such as the Work Programme.
As Evans put it, these powers change the nature of the Scottish Government from a simple spending body to a tax-raising authority, changing its relationship with voters. It will also directly administer a range of cash payments within the welfare system for the first time. These important new levers will give the devolved government greater ability to achieve its purpose – but with the extra accountability that goes with this. For the first time, the Scottish Government will have significant ability to determine its overall level of spending, and will have to make a public case for the balance it decides to strike between taxes, borrowing and public spending.
Preparations are already under way to set up the necessary new capacity and systems to take on the additional powers, following the creation of Revenue Scotland to administer two smaller devolved taxes (landfill tax and the replacement for stamp duty). HM Treasury, HM Revenue & Customs (HMRC) and the Department for Work and Pension (DWP) will need to work with the Scottish Government to ensure that the powers are transferred smoothly and that the new devolved systems operate effectively and without disruption for citizens.
The Scotland Bill is creating new ‘ragged edges’ in the division between Scottish and UK powers, Evans argued, referring to policy areas where there is shared responsibility between the new administrations. In the case of income tax and VAT, the systems will continue to be operated in Scotland by HMRC. Similarly, the benefit flexibilities (and possibly some of the devolved benefits themselves) will be run by DWP. These UK departments will operate as de facto Scottish Government agencies for these functions, requiring the development of new governance and accountability mechanisms. And with Scotland now able to tax and borrow, the Treasury will take a much closer interest in the Scottish Government’s budgetary plans than it has previously needed to.
There is therefore an interesting paradox. As further powers are devolved, the interdependency between Westminster and Holyrood is increasing. As the IfG has long argued, this will increase the importance of networks and mutual understanding between the two governments at both political and official levels.
With the bill now set to become an act, the political parties in Scotland can now enter the fray of the Holyrood election campaign. But once a new government emerges in May, a key task facing it will be to strengthen relationships with Westminster and Whitehall as the new era of devolution gets under way.
Watch the full event with Leslie Evans, Permanent Secretary to the Scottish Government - Leading the Scottish Civil Service at a time of change