Kate Forbes: Scotland's fiscal straitjacket is holding us back

Every Budget feels like it’s the worst ever, until the next one. Economic circumstances have seldom been tougher. We should be long past expecting anything less than austerity from the Tories. It would appear that Labour isn’t going to break that mould, with Sir Keir Starmer last week lauding Margaret Thatcher and promising not to turn on the taps.

The Scottish Government is wearing a straitjacket though, in the form of the fiscal framework. No other government would tolerate the limitations imposed on it by the fiscal framework.

In fact, the citizens at large, irrespective of their political view, would be up in arms.

It makes no fiscal sense whatsoever to partially control income tax, with only the rates and bands under review. It is financially impossible to budget on the basis of your relative performance to another, very different economy. And yet that is what we expect the Scottish Government to do.

This week, the Scottish Government held a debate on the reviewed fiscal framework which was agreed between the current Finance Secretary Shona Robison and the UK Government over the summer – that concludes the process I initiated in 2021.

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Back in late spring 2022, I set out the arrangements by which the fiscal framework would be reviewed.

My first objective was to secure a broad review, so that nothing would be discounted from the outset. This would allow us to make our case and maximise the powers available to the Scottish Government.

Equally, I hoped we could secure a more sensible toolbox of powers – because the patchwork of powers made no sense. I had my eye on new tax powers, like national insurance or capital gains tax. I wanted to see us acquire prudential borrowing powers. And I wanted to end the inconsistencies and vulnerabilities in the present fiscal framework.

There had been extensive engagement with the UK Government up to that point, and I felt we had a strong hand.

During Covid-19, I repeatedly illustrated the constraints of the current fiscal framework, to the extent that even the most ardent proponent of the United Kingdom could see its inadequacies.

In fact, a number of people who don’t share my views on the constitution had publicly argued for more fiscal powers, including borrowing powers. Indeed, the former permanent secretary to the Treasury had indicated support for greater borrowing powers for Scotland during the pandemic.

Why should Scotland put up with fiscal limits set by Jeremy Hunt? (Image: PA)

So, I felt like we had the moral high ground and widespread support for a thorough review of the fiscal framework and I was confident we could make ground with the right approach. It was understandable that the UK Government might want to agree terms and conditions at the beginning that ensured they could control the process.

Instead, I wanted a wide-ranging review and debate so that everything was in play – and that is what I thought was agreed.

My second objective was to ensure maximum public scrutiny. To that end, I intended to undergo extensive consultation in the public square. That would include academics, the parliament and the general public. There is no doubt that there is ongoing public interest in the fiscal framework. Every citizen cares about how the Government spends public revenue.

Usually that conversation only relates to how much is raised and where it is spent.

In Scotland, there is an additional consideration: how much do we lose due to differences in forecasts between the Scottish Fiscal Commission (on which the Scottish Government’s tax revenue figures are set) and the Office of Budget Responsibility (which provides the basis on which our block grant adjustments are set). That is one of the ridiculous consequences of the fiscal framework.

This matters – it isn’t just an academic issue. It really determines how much money goes to our NHS and local government. And the rules are dictated by the fiscal framework.

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I also wanted to keep all the other political parties close to the process. I did not want any party to be let off the hook on their responsibilities for the fiscal framework.

I wanted them to be seen to be involved in the debate, and therefore held accountable for their role in agreeing or disagreeing with the requests for improving our public finances.

To do that, there needed to be maximum scrutiny and transparency of the options on the table and how every political party responded. I engaged early with the other political parties, meeting several times in advance of negotiations with the UK Government.

MY third objective was to prepare Scotland for assuming greater financial responsibility. Of course, nothing short of full independence will allow Scotland full autonomy over its budget.

However, we are on a journey. Having assumed responsibility for some borrowing (resource only) and some taxes, I thought that Scotland should now go further. My primary goals were a prudential borrowing scheme and greater protection for Scotland’s relative performance to the rest of the UK.

We had proven during Covid-19 how vital borrowing powers were, but in Scotland there were extensive restrictions as to when such powers could be used – for example, for forecast error (even though the forecast was of a magnitude greater than the powers).

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These reasons were irrelevant during a pandemic, when we needed to borrow to smooth the budget over peaks and troughs. It was for the good of the nation ultimately.

And surely, the good of the nation is precisely why we needed a prudential borrowing scheme that could be used in times of need.

In fact, my argument was that if we could trust Scottish local authorities with a prudential borrowing scheme, then why not the Scottish Government?

Of course, every government considers the pros and cons of all reviews. Embarking on this review in the first place was not without risk – engaging with the UK Government always carries risk.

I felt however that there was sufficient scope to significantly improve the fiscal framework and, in so doing, improve the position of our public finances to ultimately deliver for the people. The fiscal framework did anything but.

That is not to criticise the previous negotiation – it was the first time for everybody and they had built in a review precisely because it was likely that changes were required.

After concluding my last discussion with the then chief secretary to the Treasury in July 2022, I went on maternity leave and therefore didn’t participate in further negotiations.

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However, it is interesting to weigh up the final, concluded review of the fiscal framework.

Clearly there are improvements in terms of indexing and minor expansions to borrowing powers. It might be that the UK Government was unwilling to negotiate beyond these points. After all, negotiation is a form of diplomacy.

Unfortunately, the Scottish public will continue to suffer the injustice of a partially devolved income tax, an unfair marginal rate of tax and less power over borrowing than our local authorities.

While I commend the Scottish Government negotiators for their efforts, I think the end result does not meet my original objectives and leaves us with nothing but the greater incentive to secure the full fiscal powers of independence.

To get there, however, we do need to maximise scrutiny of how the UK economy is failing Scotland and how other parties in Scotland are complicit in this arrangement.

Perhaps my original objectives therefore still stand – but the purpose isn’t reviewing the fiscal framework but securing our freedom to establish fiscal rules that are right for Scotland without reference to another economy or government.