On 20th July 2023, with very little fanfare, the Westminster and Scottish Governments announced that they had reached agreement on the review of the fiscal settlement: that is, a review of the financial arrangements which govern the funding of the Scottish Government. This fulfilled a pledge made at the time when the original post-referendum fiscal settlement was agreed in 2016, that the arrangement would be reviewed in five years. As we will see, however, the way this review has been conducted is highly unsatisfactory: and the outcome is damaging for Scotland.
― The process for conducting the recently announced review of the fiscal settlement was not conducted in line with the arrangements set out by the then Finance Secretary in June 2022.
― The outcome of the review – which largely amounts to continuation of the status quo – leaves Scotland exposed to the same dangers as the original settlement. These include being forced into sub-optimal decisions on capital expenditure. Most serious, however, is the likelihood of Scotland being forced into a cycle of relative economic decline, comparative to the rest of the UK.
― Because the review was conducted in secrecy, we do not know how these damaging outcomes came about. It appears likely, however, that inadequate consideration has been given to the risks to Scotland resulting from the sub-optimal performance of the UK monetary union which is inherent in the implementation of the review measures.
― The following steps should now be implemented:
The Scottish and Westminster Governments should explain why the fiscal settlement review was not conducted along the consultation lines originally outlined. They should also release a full account of the negotiations leading to the agreement.
One of the original Smith Commission recommendations – consideration should be given to a wider scheme of prudential borrowing in Scotland – should be carried out.
There should now be a wider debate about the extent of the detriment Scotland will incur through the sub-optimal performance of the UK monetary union which is implied by the current fiscal settlement: and how this should be compensated for under a reasonable interpretation of the Smith Commission principles.
And the fiscal settlement itself should be re-opened, as allowed for under the Joint Exchequer Committee arrangements: and this should be done in a way which allows properly for public consultation and transparency.