My Lords, it has been a pleasure to listen to this debate and to the excellence and importance of all the contributions that have been made—not least that of my noble friend Lord Campbell of Pittenweem in his maiden speech. I look forward to the rest of the contributions and, in particular, to the speech of the noble Baroness, Lady McIntosh of Pickering.
I decided to speak in this debate for two reasons. First, the Bill concerns the whole of the United Kingdom and not just Scotland. Secondly, there is the principle of no detriment, which remains the central issue and is clearly not yet resolved.
The Bill has to be considered, not just from the perspective of the two Governments—the Scottish and UK Governments—but from the perspective of those parts of the United Kingdom that share a border with Scotland. Living in Newcastle upon Tyne, I have an acute awareness of cross-border issues.
I make it clear at the outset that I support the principles behind the Bill. The people of Scotland want enhanced devolution with the tax-raising powers that come with it, and it is also clear that devolution commands broad support from the UK’s political parties. But the no-detriment principles are primarily seen as a matter for the two Governments. We have had a lengthy debate as to what those two no-detriment principles mean and whether they are deliverable. I suggest, as part of this Second Reading, that a no detriment principle must surely extend to ensuring no detriment to those parts of the United Kingdom that share a border with Scotland and which could lose out—if, for example, the Scottish Government reduced air passenger duty by 50% or 100%. The impact of such a decision on airports south of the border might be significant. A small outflow of passengers chasing lower fares in Scotland could cause a movement of carriers. It would be of little help to the connectivity of the north-east of England if air passenger duty was not reduced there in line with whatever decision was taken to lower it in Scotland.
There is a further issue. If Scotland reduces APD, who meets the cost of it—the Scottish Government or the UK Government? Logically, the answer is the Scottish Government. If it is the Scottish Government, presumably it will come from the block grant, but the adjustment of the block grant is currently unknown. How will we know that it is fair to the rest of the United Kingdom or that an APD reduction is paid for by Scotland, rather than by the rest of the UK?
I am puzzled, as are many others, as to why this Bill is being considered before the fiscal framework has been agreed. I read the report from the Institute for Fiscal Studies questioning a process in which the new fiscal framework is not part of the Bill. I want to quote from it, because it is highly material. Last week’s report said that,
“it is impossible to design a block grant adjustment system that satisfies the spirit of the ‘no detriment’ from the decision to devolve principle at the same time as fully achieving the ‘taxpayer fairness’ principle at least while the Barnett formula remains in place”.
As part of our discussions on the Bill, it needs to be clear how the block grant is to be calculated in future. The indexation of the Barnett formula during the last 36 years has resulted in serious anomalies. These must be addressed. If they are not, there is a real possibility that increases in taxes in the rest of the UK, which fund higher spending in the rest of the UK, could end up funding higher spending in Scotland through the block grant system without a corresponding increase in Scotland’s tax levels. The Smith commission talked in terms of taxpayer fairness. We must ensure that this is fulfilled for the whole of the United Kingdom.
Perhaps the reason the block grant adjustment system has not been agreed is that there have been very few formal meetings to get on with doing it. Papers for and reports of meetings are not in the public arena. However, in a Written Statement earlier this month, the Secretary of State for Scotland said that the Joint Exchequer Committee had met four times since June 2015, that work was continuing and that both Governments aimed to complete this work as soon as possible to give the respective Parliaments time for due consideration of both the fiscal framework and the Scotland Bill. Broadly speaking, that is a meeting a month. It is hard to see how the timetable will be met, since the Bill is with us now and Committee stage approaches. We have, however, received ministerial assurances that we will have a fiscal framework by the time we reach Committee in the new year. I hope that proves to be the case.
In a compelling report, the second conclusion from the Institute for Fiscal Studies is very important. It says that,
“it may now be time for a more fundamental reassessment of how the devolved governments are financed”—
that includes Wales and Northern Ireland—
“including whether the Barnett formula should be retained. Reform of Barnett may remove some of the conflicts between the Smith commission’s principles. The Smith Commission parked these issues to one side by stating that the Barnett formula should be retained. Making the UK’s fiscal framework sustainable for the long term may require reopening the debate”.
We have heard that this problem over the Barnett formula has also been pursued by the Economic Affairs Committee in its excellent report published last Thursday. It too concluded that the Barnett formula should be replaced with a needs-based funding formula. That has to be right. It would be in line with the report published by the Select Committee of your Lordships’ House on the Barnett formula in 2009.
In conclusion, we have a Bill to consider which, in principle, I want to support and which should be supported. However, we lack the information we need
to consider it and which is central to getting the legislation right. I hope we will have the fiscal framework to consider at some point during Committee and that the Government will take seriously the need to revisit the Barnett formula as part of the block grant agreement that is reached.
6.35 pm