I NOTE that the Lords select committee on economic affairs compared the Scotland Bill, built on the Barnett formula and Gordon Brown’s toxic “Vow”, to the Schleswig-Holstein question (“Lords: Cameron must halt his flagship Scotland Bill”, The Herald, November 20).

Constructing a fiscal framework to underpin the Smith Commission’s constitutional changes while retaining these controversial elements will involve complex economics.

As with so many features of Scotland’s perilous leap in the dark, the bill lacks coherence and logic but imprecision at this stage will prove fatal to our fragile devolution.

The Scotland Act of 1998 was easily understood and stood the test of time, so impatient nationalists would do well to recall that its clarity resulted from scrutiny by the Lords.

The second chamber has highlighted inadequacies which need to be addressed and, if these problems are hastily brushed aside, serious trouble lies in wait for us in the future.

Rev Dr John Cameron,

10 Howard Place, St Andrews.

PROFESSOR Anton Muscatelli performs a service with his highlighting of adverse technicalities in the implementation of the new tax powers under the fiscal framework (“New tax powers lay down budget challenges that must be addressed”, The Herald, November 19).

I can understand why, in the fiscal framework, indexing of income tax could be relevant, but that might depend upon how Barnett and the new tax proceeds are blended.

We first have to spell out the existing situation. The way it works is, if England’s block grant, central Westminster per capita funding, is £100, then ours is £120. If England receives five per cent year-on-year enhancement, it would receive £5, so, on a straight population basis (say, 5m to 50m), we would also receive £5, but that would represent only four per cent on our block grant of, say, £25 billion, so there is a shortfall of £250m.

If we have transferred to Holyrood, say, the first year tranche of £10bn of tax proceeds, that becomes the element that would determine our responsibility and accountability into future years, hence Professor Muscatelli’s indexing theory; that should be simple given the ease of identifying salary inflation factors, and hence, income tax projections.

Emphasis is given by Unionist politicians to all the extra money we could access, if we wished, from increasing the rate of taxation. However, it is apparent from their narratives that these proceeds would be offset by an equivalent reduction in block grant, therefore there would be no extra money. If that is so, they have a bit of explaining to do. If we did increase our tax rate, and consequentially there is a block grant reduction, then all we would be doing is taking money out of our pockets and transferring it to the UK exchequer via the block grant reduction, to spend as they like – for example using it to shore up any tax shortfall they had from their own economic mismanagement. A major flaw here would be that, were HMRC to overstate our first tranche, we would have no flexibility to make up the shortfall, which the UK Government has.

The only option would be to cut services, or to borrow the money to cover the deficit. When we add to that the £250m shortfall we have from the normal operation of Barnett, then the prospects are not as rosy as claimed

Our block grant funding is, simply, the return of the taxes we have shipped off to the UK exchequer, to help fund the Holyrood devolved services – it also covers the services reserved to Westminster such as foreign affairs, defence and welfare. It has been decreed that Barnett should continue. Our year-on-year Holyrood funding enhancement, to cover growth and inflation, is predicated upon what the comparable English departments receive. So the baseline formula would have to continue, even as a paper parallel calculation, as in my illustration above. Once that is established, the consequences of the “new powers” would click in, including the reduction representing our tax-take from adopting the new Scottish tax proceeds – that takes us back to Professor Muscatelli’s conundrum for forward years.

However, welfare presents a major problem. Welfare is not a devolved topic so it is not in the block grant – so the claim that we could increase tax to enhance UK set levels is disingenuous. The tax could not come off the block grant, but how would HMRC identify tax that would come off the grant, and tax that did not?

The impression I have is that the SNP is biding its time by going along with all this, expecting that it will all fall apart.

Douglas R Mayer,

76 Thomson Crescent, Currie.

WITH his customary clarity Iain AD Mann (Letters, November 20) points out that the current inter-government negotiations on a reformed fiscal framework are absolutely critical and if we don't get that right then Scotland's new tax and benefits powers could turn out to be a long-term financial millstone. Agreed.

And if we hadn't got the referendum right on September18 last year Scotland could have been faced with long-term financial millstones.

Agreed?

R Russell Smith,

96 Milton Road, Kilbirnie.