Finance-Secretary-John-Swinney-567593The secrecy surrounding the negotiations for the post-Smith Scottish fiscal settlement continues basically unbroken – apart, that is, from some recent articles in the mainstream media which have a suspiciously uniform tone. The thrust of these is that the Scots are holding out for a method of indexing the adjustment to the Scottish block grant which would avoid Scotland being penalised for having relatively lower population growth than England. (The method which the Scots are supposedly holding out for is the so-called per capita indexed deduction, or PCID, method – see my Jimmy Reid Foundation paper of 25 January, which can be accessed here, for more details on how this method is defined.)

In fact, these clearly Treasury inspired articles are not good news for Scotland. What is almost certainly the case is that the Treasury is preparing to agree to the PCID method – and then to present this as a major concession on their part: they could then say that the Scottish negotiators had won a victory. In fact, however, the PCID method would be a disaster for Scotland. If this is what emerges, then our negotiators would have allowed themselves to be manoeuvred into the following position – far from anything that was implicit in the original Smith agreement.

First of all, the PCID method, as envisaged by the Treasury, bases indexation of the abatement to the block grant on growth in tax revenues, (the aggregate of income tax collected in the rest of the UK), rather than on growth in tax base, (that is, the aggregate of taxable incomes in the rUK.) Use of tax revenues rather than tax base exposes Scotland to an additional tier of risk: the risk that the tax richness of the tax base in Scotland grows more slowly than in rUK – in addition to the risk that the size of the tax base grows more slowly: (again, see the Jimmy Reid Foundation paper referenced above for more details.) The move to indexing on tax revenues rather than tax base amounts to a huge concession by the Scottish negotiators, which has been slipped in during the negotiations: the coalition government white paper, Cm8990, which was the original proposal for implementing Smith, clearly envisaged tax base indexation. It is astonishing that the Scottish negotiators are apparently just nodding this concession through.

Secondly, and most damagingly, PCID indexation is still one of those methods which would involve Scotland engaging in an economic race with rUK – a race in which, to avoid being penalised, Scotland has to grow its income tax revenues per head as fast as rUK. Given Scotland’s lack of economic powers, and given that income tax is not Scotland’s strong suite, there is every chance of Scotland being pushed into a dynamic of relative economic decline, where it chronically lags behind rUK – a bit like Greece and Germany, but worse. And the penalties if we get into this situation are very severe. Ultimately, if Scotland’s growth rate in income tax revenues per head is consistently lower than the growth rate in rUK, then levels of public expenditure per head in Scotland on devolved services would reduce to about half levels in rUK. This would be a level of discrepancy it would be impossible to make up by raising Scottish tax rates: indeed, the attempt would make matters worse.

It is important to remember that this kind of desperate economic race was not implicit in the original Smith report: all it said was that some appropriate form of indexation should be used for the abatement to the block grant. Perfectly satisfactory alternatives exist, (see the JRF paper referred to above): again, it appears almost inconceivable that our negotiators seem to be being led into this damaging position.

Part of the problem is that our negotiators have allowed the flawed report produced by the Institute for Fiscal Studies to dominate the negotiations: (see my Bella article of 27 December.) There is plenty of evidence which could have been used against the IFS report, and to ensure that it did not set the agenda for the negotiation process. Despite this, our negotiators seem to have been hypnotised by the presumed authority of the IFS.

And finally, by weakly agreeing that the fiscal settlement negotiations are conducted in secret, the Scottish negotiators have thrown away what should have been their strongest card – namely, the anger of the Scottish people at a humiliating settlement which is being inflicted on a defeated, but potentially still defiant, Scotland.

Of course, the secrecy surrounding the negotiations means that John Swinney might still surprise us all. He might still produce, with a last minute flourish, an acceptable deal which safeguards Scotland’s interests. But on current indications, that would be much against the run of play: and PCID, or any similar approach, would be an unmitigated disaster for Scotland. If what is finally proposed is PCID, then John Swinney should certainly consider whether he should continue in office. And the Scottish Parliament should veto the proposed deal.