Recent changes to Scotland’s tax raising powers can’t be ignored, says University of Stirling economist

2 August 2023

Changes today to Scotland’s tax raising powers come at a crucial time for the country’s economy, according to University of Stirling economist Professor David Bell.

Changes today to Scotland’s tax raising powers come at a crucial time for the country’s economy, according to University of Stirling economist Professor David Bell.

At a time of extreme economic pressure, Scotland’s fiscal framework have never been more important, says Professor Bell, who contributed to a review of the framework, announced today by HM Treasury and the Scottish Government.

The UK and Scottish Governments have just completed a review of the fiscal framework that was agreed in 2016 and has since largely determined the size of the Scottish Government budget.

“This review is of substantial importance for the Scottish budget and therefore for the services it delivers to the public. These are already constrained by weak economic growth, the energy crisis and the pervasive effects of inflation, including on interest rates,” writes Professor Bell in an assessment of today’s announcement.

In 2021-22, Scotland’s block grant from Westminster was £33,248 million. Devolved taxes contributed only £12,219 million. The report by Professor Bell, and colleagues from the Institute of Fiscal Studies and the University of Strathclyde, shows that different approaches to the design of the fiscal framework could have important implications for Scotland fiscally. “It could cause Scotland’s budget to vary by hundreds of millions of pounds in the medium to long term,” says Professor Bell, an expert in the Scottish economy and financing under devolution.

He continues: “Why, then, has the review attracted so little interest, from the public and the media, other than from the Finance Committee of the Scottish Parliament?”

David Bell
Professor of Economics

This review is of substantial importance for the Scottish budget and therefore for the services it delivers to the public. These are already constrained by weak economic growth, the energy crisis and the pervasive effects of inflation, including on interest rates.

The review addressed how to adjust the block grant from Westminster in the light of the tax and social security policies that have gradually been introduced since 2016, the last date of Scotland’s fiscal framework review.

The review asked Professor Bell and his co-authors to look at the principles that the Smith Commission had set out in 2016. The most important of these are “no detriment” and “taxpayer fairness”. “No detriment” means that neither the Scottish nor the UK Government should be better or worse off because of the transfer of tax or social security powers to Scotland. “Taxpayer fairness” means that the benefits or costs of policies introduced in one territory should not adversely affect the taxpayers of the other.

“Our report showed that it is not possible to satisfy these principles simultaneously,” said Professor Bell.

The outcome of the 2023 review is an agreement to continue with the current methods of determining the tax adjustments.

Professor Bell writes: “Our report shows that, had the “taxpayer fairness” driven approach rather than the “no detriment” version been applied, and based on reasonable assumptions about population and revenue growth, the adjustment to the block grant solely for income tax would have increased by around £500m between 2016/17 and 2026/27, leading to an equivalent fall in the Scottish Government’s budget.

He adds: “Within the options under consideration, the decision to continue the focus on the “no detriment” principle is beneficial to Scottish Government. However, the Treasury will be satisfied that the review’s additional provisions relating to borrowing are quite modest relative to the overall scale of UK Government borrowing.”

Read Professor Bell’s full blog here.

Read the full agreement on the fiscal framework here.