UK Government principles for devolved fiscal frameworks

View this post in Welsh | Darllenwch yr erthygl yma yn Gymraeg

Introduction

On 22 January 2015 the UK Government published their response to the Smith Commission in a command paper ‘Scotland in the United Kingdom: An enduring settlement’. Chapter 2 of the command paper outlines the UK Government’s principles for national and devolved fiscal frameworks (paragraph numbers shown below). This blog shows how these may be of relevance to Wales. A further blog will explain the UK Government’s proposed changes to the current framework and how this may be of relevance to Wales.

Purpose of the fiscal framework

Image from Flickr by Joe Anderson. Licensed under the Creative Commons.

Image from Flickr by Joe Anderson. Licensed under the Creative Commons.

UK Government position in Command Paper

2.2.5. UK Government must take overall control of the fiscal framework to ensure that UK-risks are managed appropriately.

2.2.5-6. As there is a presumption that central government will underwrite lower levels of government (including their debt) the fiscal framework of Scotland must contribute proportionally to the wider fiscal aims of the UK. Failure to do this would mean unequal treatment of citizens across the UK. Fiscal decisions in Scotland would lead to trade-offs in the public finances of the rest of the UK.

2.2.9. Fiscal constraints are widely used across federal countries to control the fiscal policy of sub-central governments.

2.2.10. The OECD average for sub-central government responsibilities is 30% of spending and 20% of taxes. Following the Smith Commission, Scotland Parliament will control 60% of spending and 40% of tax.

Relevance to Wales

  • Although central fiscal control is required, the Holtham Commission has argued that weaknesses in the Barnett formula already lead to unfair treatment of citizens across the UK, and Wales in particular.
  • It is useful to have clear confirmation that UK Government will underwrite the borrowing of lower levels of government.
  • As the budgets of the devolved administrations are a small proportion of the UK economy it could be argued that modest differences in their borrowing positions are unlikely to lead to a direct impact on the UK’s overall fiscal position.
  • It is interesting to note that the UK Government is recommending following the models used by federal countries for managing fiscal relationships.

Existing UK and Scottish fiscal frameworks

UK Government position in Command Paper

2.3.1. The UK fiscal framework is based on the Charter of Budget Responsibility which is assessed by the Office for Budget Responsibility.

2.3.7. The Scottish fiscal framework is currently based on the Scotland Act 1998 requirement for an annual balanced budget. Funding is through the Barnett formula block grant.

2.3.8. Scottish fiscal framework will be amended by Scotland Act 2012 from 1 April 2015. Block grant will be reduced to take account of devolved tax powers (stamp duty and landfill tax), and there will be wider borrowing powers.

Relevance to Wales

  • The powers in the Scotland Act 2012 are similar to those in the Wales Act 2014 which will be implemented in 2018.
  • The Finance Committee’s Budget Process inquiry is considering how to scrutinise the equivalent fiscal powers.

Article by Richard Bettley, National Assembly for Wales Research Service.