Scotland's next constitutional fight won't be over a referendum

23 May 2021

4:00 PM

23 May 2021

4:00 PM

Get ready for a constitutional rammy during the first half of this, the sixth session of the Scottish parliament. Just don’t expect it to be over a second independence referendum.

Recent pollingshows momentum has moved back in favour of those wishing to remain in the UK, while signalsfrom the public also consistently suggest a lack of appetite for another referendum anytime soon. Nicola Sturgeon knows this, which means the phoney war over a repeat plebiscite will likely trundle on without bringing any great change to the country.

The real action is elsewhere. Specifically, the upcoming review of the Fiscal Framework Agreement, which is set to be fraught and, unlike the referendum debate, actually has the potential to impact Scotland.

The Fiscal Framework Agreement was established in 2016 following the devolution of further tax and welfare powers to Holyrood. It sets out how Scotland’s budget is calculated, including adjustments to the block grant (the funding that comes directly from the UK government) to account for new tax and spending responsibilities, and what borrowing powers the Scottish government has. In setting out the framework, the UK and Scottish governments agreed it should be reviewed in 2022 and that this will be ‘informed by an independent report with recommendations presented to both Governments by the end of 2021’.

As yet there is no word on who will produce that independent report, what the scope of it will be, and what type of analysis it will include. Already there are signs of tension on the review’s breadth and purpose. When the current framework was agreed, the intention was for the 2022 appraisal to focus on the block grant adjustment (BGA) methodology, as this was especially contentious. But Nicola Sturgeon’s government has made it clear it wants to see a much wider audit that could effectively lead to a complete re-writing of the existing devolution settlement.

In its 2021 Medium Term Financial Strategy report, the Scottish government argues the review ‘should consider not only how the Fiscal Framework has operated to date, but whether there is an appropriate balance between the risks to which the Scottish Budget is exposed, and the levers that the Scottish Government has to manage those risks, particularly in light of the Covid-19 pandemic’.

It insists the re-evaluation should not only cover the BGA methodology but, ‘as a minimum’, a range of other issues, including parameters on borrowing and the scope for further tax devolution on VAT, capital gains tax, National Insurance, and full powers over income tax.

This will obviously not happen. Neither government has the time, remit or capacity to oversee a new Smith Commission – the commission set up to establish the post 2014 referendum settlement. More reasonably, the review will cover the BGA mechanism and the limits around borrowing and cash reserves held to manage differences between budget forecasts and budget outcomes.

The Scottish government’s cap on annual resource borrowing (money for day-to-day spending) to handle forecast errors is £300 million, and a maximum of £250 million of resource spending can be drawn down from the reserve pool each year. The Scottish government argues, not unreasonably, that the borrowing cap is £200 million short of what is needed to cover potential forecast error, and so more flexibility is needed.

For its part, the UK government has demonstrated, via the new UK Internal Market Act, a determination to do more direct spending in Scotland. It will not wish for the review to lead to a dilution of UK spending power. And it will argue, again sensibly, that the revision should only cover the operational aspects of the established devolution settlement. It would clearly be inappropriate for the review to be used as a forum for rewriting the UK’s constitution.

If Sturgeon’s government engaged with the review on the basis of making reasonable points around the BGA and flexibility in handling budget forecast errors, then there would be every possibility of a positive outcome. The devolution settlement would be altered to improve budgeting processes, and bigger questions around devolution would be set aside for another day and a more suitable forum.

What we are likely to get though is a lot of noise, a good sprinkling of grievance, and yet another melodramatic speech from Ian Blackford in the House of Commons. A pity.


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