TOP Scottish economists have rubbished claims from Westminster that Scotland has been given a bailout to cover a shortfall in income tax receipts.
The Fraser of Allander Institute said that a widely-reported rise in funding of more than £700 million was not additional money, but simply an expected rebalancing of finances through the new fiscal framework brought in to manage the devolution of income tax collection.
Figures released last week showed that the Scottish Government raised £941 million less than it had forecast, and Chief Secretary to the Treasury Liz Truss - now named Trade Secretary in the recent cabinet reshuffle - issued a press release claiming that the shortfall was being offset by a £737 million "increase" to the block grant from the UK Government.
However, in their latest blog, the Institute say it was "puzzled" by the use of language, and warned against using the new tax relationship between the Scottish Government and the Treasury for political point scoring.
READ MORE: Scotland faces £200m budget cut as income tax generates £941m less than forecast
The blog said: "To argue that Scotland has been ‘bailed out’ to the tune of over £700m because of a slump in the Scottish economy is clearly wrong. And the use of the phrase ‘additional funding’ is odd."
Some taxes have now been devolved
April 2017 saw the Scottish government start using new powers to set the rates and bands for income tax in Scotland, with a new system in place to amend the longstanding Barnett Formula.
This recalculates the block grant Scotland receives from Westminster by subtracting money raised from devolved taxes.
However, a "reconciliation" process is built into the system which would limit the amount of funding Scotland could lose.
During the 2017/18 tax year - the first year the new powers have come into affect - the Scottish Government raised less than it had forecast, meaning the reconciliation had to swing into action.
Instead of the expected £941 million being subtracted from the block grant it was only reduced by £737 million - reducing the funding shortfall to £204million.
This sum is the result of the arcane calculations which go into controlling the reconciliation process, which uses data from both Scotland and HMRC.
The blog adds: "In essence, there was an overestimate of what should have been deducted for this purpose, whilst protecting the integrity of the Barnett formula. This has been amended.
READ MORE: Boris Johnson’s tax plans ‘could cause rift between Scotland and rest of UK’
"We’re puzzled why the UKG[overnment] chose such language, particularly given the way it has been subsequently interpreted."
The blog continues "If the exact opposite scenario was to occur next year – i.e. outturn data for both Scotland and the rUK happened to turn out ahead of forecast – can we expect a similar press release titled ‘Pick-up in Scottish income tax revenues offset by UK Government funding cut’?
"Yes, there is a reconciliation gap to the tune of £204m that Scottish Government now needs to manage (not to mention potential further negative reconciliations in the future), but that’s it."
Liz Truss
The blog goes on: "One of the key challenges with the new fiscal framework is its complexity. The onus must be on both governments to articulate how the framework is operating, the various changes from year-to-year and any risks, in a straightforward and transparent manner.
"The risk of not doing so – and seeking to score political points at every turn – is that confidence in the underlying process of fiscal devolution could be eroded.
READ MORE: Think tank - low income tax growth could cost Scotland £2bn
"There are legitimate issues to be discussed about the Scottish budget, including the performance of Scotland’s tax base; the Scottish Government’s long-term fiscal strategy; and the adequacy of its tools to manage fiscal risks.
"Searching for phantom ‘bail-outs’ is not one of them."
The Treasury declined to comment directly, but maintained that the funding as an increase on the block grant for 2017/18.
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