Can fiscal framework join dots between billions and reality?

If you’re depressed by the sodden summer weather, take heart. 

You could be immersed in the new fiscal framework instead.

After more than two years of back and forth between Edinburgh and London, the second version of this chewy but incredibly important document has just been published.

An even denser academic report on the choices that informed it has also come out, as well as a flurry of expert commentaries and political soundbites. 

It has all been heroically ordered and condensed for The Herald by my colleague David Bol.

The upshot is that the framework – which determines how Holyrood’s budget is calculated – will function much as the 2016 original which was created in response to greater devolution.

In particular, the formula used to adjust the annual block grant from the Treasury in light of extra tax and welfare powers will continue to cushion Holyrood’s budget. 

There are also some changes, notably Holyrood being allowed to borrow more.

Rather than go into the fine details (there are equations to endure), it’s worth considering some of the wider points raised by the document. 

One is that, despite all the noisy political rhetoric slung across the border, the Scottish and UK Governments operate overwhelmingly on the basis of cooperation not conflict.

The framework is a long-term agreement that works to Holyrood’s advantage.

There are many ways to calculate the annual changes to Scotland’s £50 billion budget, but the method enshrined here, known as indexed per capita, hits a sweet spot.

If one of the alternative methods had been imposed, Holyrood’s budget would be £2.5bn lower per year by 2026/27, according to the Institute for Fiscal Studies.

SNP Finance Secretary Shona Robison, said it was a “finely balanced agreement” with “some extra flexibility”. And while not all she wanted, she was nonetheless grateful to Chief Secretary to the Treasury John Glen for it.

There was also some myth-busting about the Smith Commission, the rapid response to the No vote of 2014 that has taken on the status of Holy Writ for some nationalists. 

The academic report on the framework diplomatically pointed out some of the Commission’s thinking was a mess. It laid down a series of principles, including fairness to taxpayers and Holyrood not losing out purely as a result of some tax being devolved.

Alas, the academics noted, “some of the principles are mutually incompatible”.

Thankfully, the main principle applied to Holyrood is also the most advantageous.

There was more myth-busting on borrowing. 

SNP politicians often complain that Holyrood has no borrowing powers.

In fact, as the new framework should remind them, it does – and now they’re getting bigger.

Since 2016, Holyrood has been able to borrow up to £3bn in total for capital spending, £1.75bn for resource spending, and £300m to cope with forecasting errors caused by iffy estimates from the Office of Budget Responsibility and Scottish Fiscal Commission. 

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The capital and resource limits, which had been set in stone, will now increase by inflation, meaning the Scottish Government could be borrowing billions fairly soon. 

There are greater flexibilities in other forms of borrowing as well, including full freedom to borrow from Holyrood’s rainy day fund at the Exchequer, known as the Scottish Reserve.

Finally, the framework is a reminder of the centrality to politics of tax and spending. 

Culture wars make people angry, but bills make them vote. 

This was reinforced in a well-timed column by Kate Forbes in The Herald’s sister paper, The National. 

The former SNP finance secretary didn’t name the Scottish Government’s consultation on hiking council tax for Band E to H houses by between 7.5% and 22.5% next year.

Nor did she specify Humza Yousaf’s enthusiasm for a new sixth Scottish income tax band of 44p in the pound between £75,000 and £125,000. But it was hard to miss her targets.

“There are some who think that raising taxes exponentially or complicating the system further will somehow get us out of the hole of difficult public finances,” she wrote. 

“I don’t advocate unfairly low rates of taxation. But I do know that raising taxes exponentially high stymies economic growth, shrinks the number of taxpayers and altogether results in less public finance. It’s short-termist when we need long-term vision.”

A veteran of fiscal framework negotiations, Ms Forbes is steeped in the theory of Holyrood finance. But more important – and her challenge to her SNP colleagues – is joining the dots between abstract billions and the reality of the cost-of-living crisis.  

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