Scotland Bill

I thought that my remarks were always understandable. The problem is that we are dealing with the technical provisions—the fiscal and borrowing powers—of a Bill. It is necessarily technical. However, I shall try to summarise it in plain English, if possible, when I get towards the end of my remarks. In 2010-11, the difference between the Treasury's original forecast for UK income tax and the most recent estimate is about £35 billion. Under the Scotland Bill, an equivalent forecasting error would have reduced the Scottish Government's budget by approximately £1 billion. The implication of that and the four-year payback period is that had the system been in place during the last spending review period, repayment of the loan would have had to be made within what are now pressurised budgets—a £1.3 billion cut to Scotland this year, and over £3 billion in the comprehensive spending review—between now and 2014. In contrast, the UK Government can spread the repayment of cyclical borrowing over a significantly longer period to ensure that it does not adversely impact on the resources available for public services. That is important, because it is accepted in all parts of the House that in times of recession or downturn, tax revenue falls and borrowing goes up—that is an automatic stabiliser—but the same implicit provision has not been made in the Bill. That is a flaw that I know is now recognised by people in many parties. The inadequacy of the borrowing powers for this purpose was highlighted in the written evidence to the Scottish Affairs Committee from Professor Andrew Hughes Hallett and Professor Drew Scott. They said:"““Over the decade before the current recession, 1997-2007, the UK governments track record for income tax receipts is one of forecast errors that range between +7% to -4%, with an average of +1.1%””" a year. They continued:"““Since borrowing will follow from overestimates””—" the real amount will be less than the forecast—"““this means the Scottish Government will need to cut spending or borrow every year on average and should expect to exhaust its borrowing limit several times in a decade.””" To have such a flaw built into a Bill from the outset is profoundly unhelpful to the efforts of the Scottish Government to protect public services and grow the economy. The proposals also lack any ability to smooth the effects of cyclical downturns. Unlike the UK Government, the Scottish Government will have no opportunity to use borrowing to compensate for a forecast decline in income tax revenues in the event of, for example, an anticipated slowdown in the global economy. Scotland would have no option but to cut spending to match the reduction in revenue at precisely the time when we might want to invoke an economic stimulus—a policy of the previous Government that we supported. However, it would be impossible to do that, because cuts would be required to match a forecast fall in revenue. The Bill misses the fundamental point about being able to respond effectively to the natural volatility of tax revenues in managing public expenditure. Paradoxically, the more accurate the Office for Budget Responsibility is at forecasting falls in future revenue, the greater the volatility in the budget, because borrowing is permitted not against a forecast fall but only against a discrepancy between the forecast and the actual level. That is a huge problem with the borrowing powers at the heart of the Bill. If the Exchequer Secretary or his Scotland Office colleague wants to indicate that they intend to table the necessary amendments on Report or later to rectify that, I would be happy for them to intervene at any point. The need for appropriate borrowing powers for that purpose was identified by Professor Michael Keating, who said:"““Borrowing powers are needed for three purposes: to deal with short-term shortfalls, which the present proposals provide for; to deal with cyclical downturns; and for capital investment. There should be more scope for borrowing to deal with cyclical downturns.””" That point was also highlighted in the written evidence provided by Professors Hughes Hallett and Scott, who said:"““The current recession, for example, would according to calculations on the Scotland Office website have cut the Scottish budget by £748 million and £559 million in 2008 and 2009 respectively, sums that are beyond the entire borrowing ceiling—let alone the annual limit of £200 million. But no borrowing would be allowed in such cases anyway. Or, to put the point another way, given that there is a cycle and that adverse shocks do occur, the more accurate the tax forecasts the more volatile will Scottish revenues become and the more the Scottish government will be obliged to cut spending and social support in a downturn””—" precisely the wrong time for cuts to have to be made."““This is why we say the Bill's borrowing provisions offer only limited protection against forecast errors and none at all against unexpected economic shocks.””" Clause 32 amends section 66 of the Scotland Act, which deals with the borrowing powers of Scottish Ministers. Proposed new section 66(1)(c) of the 1998 Act specifies that revenue borrowing will be permitted when tax receipts fall short of the forecast, but contains no provision to permit it to deal with cyclical fluctuations in tax receipts, regardless of whether they are accurately forecast. That obvious gap in the Bill must be addressed. On Second Reading I raised the issue of revenue borrowing powers being further constrained because the first 0.5% of any shortfall—about £127 million forecast in 2014-15, say—would have to be found from cuts before any revenue borrowing could even take place if there was a forecast error. Again, cutting at that point, when budgets would already be pressurised because of the cuts from the comprehensive spending review, would be the wrong thing to do. I was pleased with a number of the recommendations made by the Scottish Parliament Committee, which said among other things that"““the Scottish budget should not be required to meet the cost if tax receipts fall below forecast levels. The Committee recommends that this condition be removed from the Bill.””" The Committee also recommended that"““the short-term annual borrowing limit should be increased from £500 million to around £1 billion,””" and welcomed"““the idea of a Scottish Cash Reserve, but proposes going further to ensure that this includes all Scottish End Year Flexibility saved in Scotland without the need for Treasury agreement, so in future Scottish ministers””—" of whatever party or Government—"““will have total discretion over the Scottish budget.””" That should be universally welcomed. I welcome those recommendations, and I hope that the Government will table amendments to reflect them. However, it would be so much better to ensure a code within which revenue borrowing—including repayment time scales and so on—could be organised. That is the fundamental purpose of the amendment, along with ensuring that borrowing for current revenue purposes is sufficiently flexible to cope with fluctuations in revenue over a whole economic cycle. The Bill as drafted has a number of weaknesses when it comes to capital borrowing. Our key concerns, and those of the Scottish Government, relate to the timing of the introduction of the repayment terms, the limits set by the Bill and the limitations on sources of borrowing, which the Scottish Parliament Committee recognised and made a positive recommendation about. The command paper that accompanies the Bill, ““Strengthening Scotland's Future””, sets out in limited detail how the proposals are intended to work. Borrowing is to be available for specific projects, subject to Treasury consent, from 2013, and we discussed that on Second Reading. From 2015, a capital borrowing of 10% of Scotland's capital departmental expenditure limit, around £230 million a year, up to a cumulative total of £2.2 billion, will be available. To put that into context, the Scottish Government could use up the entire cumulative limit by, for example, paying for the Forth bridge replacement crossing. If my memory serves me correctly, that cumulative amount of about £2.2 billion is less in capital terms than the Scottish Government have been spending in any of the past few years.