Lanark and Carluke Gazette Column – Fiscal Framework and the importance for Scotland.

The Scottish Government and the UK Government are currently negotiating the fiscal framework surrounding the new powers to be devolved to the Scottish Parliament.

Now, you would be forgiven for not having a clue what it going on.

Some of the jargon used in these debates is difficult for political anoraks to grasp, never mind the casual observer.

So let me try and explain:

The Scottish Parliament is funded by a Block Grant, altered each year by the Barnett Formula.

In simple terms, the Barnett Formula applies either an increase or a decrease in the level of funding Scotland receives. The calculation takes into account the level of devolution of each Government department and allocates Scotland a population share on that basis.

For example, education is devolved. So if England increases spend on education, Scotland will get an increase in that section of our block grant.

On the contrary, defence is reserved. So any increase in defence spending has no effect on the Block Grant provided to the Scottish Parliament.

That is where we are at the moment.

But the referendum changed Scottish politics. In the last few days of the referendum campaign, all three of the UK party leaders signed a vow to deliver more powers to the Scottish Parliament. This resulted in the Smith Commission convening and reporting on what powers they believe should be transferred to Scotland.

The commission agreed that the Barnett Formula should be retained and that Scotland should continue to be funded by the Block Grant.

But they also recommended the devolution of some VAT receipts and further income tax powers to Scotland.

So if Scotland is accountable for raising some of its expenditure, then Block Grant needs to be decreased. At the moment, the Scottish and UK Governments are both negotiating the best way decrease the Block Grant.

Decreasing the Block Grant in year one appears to be relatively straight forward.

Whatever the Treasury is due to collect from the newly devolved powers should be removed from the block grant we receive. Simple.

But what happens in year two is more complex.

Income tax receipts vary year on year as the economy grows and shrinks. The Smith Commission was clear that a method of indexation needed to be agreed between the Scottish and UK Governments to determine how the Block Grant Adjustment would be calculated each year.

Smith was also clear that no powers devolved to the Scottish Parliament should be of any detriment to Scotland’s finances.

They also recommended that whatever method is chosen should be suitable for the long term, rather than needing to be renegotiated year on year.

There are various methods of indexing the Block Grant Adjustment. The one favoured by the Scottish Government, the STUC, the majority of the Smith Commissioners and a number of highly regarded academics, is Per Capita Index Deduction.

The Per Capita Index Deduction method is, according to the some academics, the closest indexation method to Barnett.

Per Capita Deduction indexes the adjustment in the block grant to the change in revenues of the equivalent tax per person in the UK. This method insulates Scotland from negative effects caused by a comparatively slower rate of population growth.

This is important because, since the Act of Union in 1707, Scotland has had a lower rate of population growth than England and, as there is no suggested devolution of powers that would allow us to grow our population at a different rate to the rest of the UK, the only fair way to index the Block Grant adjustment is by a method which takes into account the limited powers of the Scottish Parliament.

Any method chosen must take into account that Scotland will only have limited powers to grow its population and so to grow its economic output and income tax take.

If the wrong formula is chosen, the Scottish Parliament could lose up to £7 billion.

That is why it is so important that we get the right deal.

This is about the long term financial health of our country – the Scottish Government are digging their heels in for the very best of reasons.