Scotland could be hundreds of millions of pounds worse off by the end of the decade even if it grows its economy unless its new powers are supported by a working financial settlement, a leading economist has warned.
Anton Muscatelli, a former UK Treasury special adviser and current principal of Glasgow University, said the fiscal framework underpinning the Scotland Bill is “arguably even more important” than the Bill itself.
First Minister Nicola Sturgeon has warned she will not approve the Bill without an appropriate fiscal framework, a stance which has been backed by devolution architect Lord Smith of Kelvin, who said politicians should not sign up to the Bill unless it is backed by a working framework.
Prof Muscatelli said Scotland’s block grant should not be eroded by inflation and warned that if deductions are simply linked to the size of Scotland’s population its budget will be worse off.
Scotland contributes less to UK spending (7.3%) than its population share (8.3%), but Prof Muscatelli pointed out most parts of the UK contribute less than they receive due to “in-built structural imbalances within the UK economy in particular, London’s dominance as a hub of corporate activity”.
Writing in The Herald, he said: “This means that, even if Scotland matched UK economic performance and grew its tax revenues by the same rate as the rest of the UK, the amount deducted from the block grant would always be larger than revenues collected from tax.
“Even within three or four years, the Scottish budget could be hundreds of millions of pounds lower as a result, and this loss would grow.
“Funding for public services would be cut, not as a result of changes in economic performance or policy but simply as a result of the new funding formula, which no-one in the Smith process intended.
“Scotland would be penalised even though it grew its economy in line with the rest of the UK.
“A much better alternative would be to index the block grant adjustment to the growth in income tax receipts per person in the rest of the UK.
“This would mean that, if the amount of tax paid by people in Scotland grew at the same rate as in the rest of the UK, the adjustment to the block grant would almost exactly match the growth in tax receipts. The Scottish budget would be no better or worse off.
“It would also ensure that future Scottish administrations retained the benefits and incurred the costs of policy decisions. The Smith principles of no detriment and economic responsibility would be satisfied.”