The Implementation of the Smith Agreement - Scottish Affairs Contents


54. The Smith Agreement represents the best of both worlds. It presents Scotland with much greater powers over taxation, meaning for the first time the majority of the money the Scottish Government spends will be paid for by its own taxation. This will it make it more fiscally accountable to the people of Scotland for how it spends their taxes. On the spending side significant powers over welfare will be devolved including a potentially important power to increase each and every benefit. At the same time, Scotland will continue to benefit from pooling risk and resources across the wider tax base of the whole of the United Kingdom, which will protect it from any shocks in Scottish revenues or expenditure.

55. As our analysis of full fiscal autonomy, an alternative option to the Smith Agreement, makes clear, while it would deliver additional powers and responsibilities to Scotland it would also expose the country to greater risks. Under full fiscal autonomy Scotland would benefit in full from any better than expected revenues from taxes that are currently reserved but it would also have to bear the consequences were such revenues to collapse. As the recent fall in the oil price demonstrates such a scenario is not fanciful and without the protection of the wider and more diverse UK economy the consequences for Scotland would have been disastrous. The Barnett formula gives Scotland more resources than its share of population currently warrants: in 2012-13 this was worth £8 billion to the Scottish Government, equivalent to approximately £1,500 per person. Full fiscal autonomy would result in the loss of this transfer and, without sufficient oil revenues to mitigate such a loss, a sizeable fiscal gap would be created that would need to be filled by increased tax revenues, cuts to public spending, increased borrowing or a mixture of all three.

56. The collapse in the oil price is a stark reminder of the risks that face economies which rely on a volatile revenue stream to fund a large proportion of their public spending. The conclusion of the Smith Commission not to devolve such a volatile source of revenue, nor to recommend full fiscal autonomy, but instead to retain the system of shared benefit and pooled risk across the United Kingdom has already proved to be a wise decision, and one that is of obvious and immediate benefit to the people of Scotland.

57. It is clear that the Smith Agreement faithfully fulfils the "vow" to devolve substantial powers that unionist party leaders made in the lead up to the referendum.[87] It is now important to focus on its implementation and the draft clauses are one further step in that process. Tougher and more complicated negotiations will follow, particularly in developing an effective fiscal framework to govern the new economic relationship between Scotland and the United Kingdom Exchequer. With fiscal rules in place that are fair, robust and transparent, and which allow Scotland to bear the consequences of its decisions, then the Smith Agreement has the potential to be an enduring settlement. Get them wrong and the potential for grievance, from either side, will be huge. We look forward to both Governments working together constructively and in good faith to deliver a new devolution settlement for Scotland, one that devolves significant powers to the Scottish Parliament and Government and does not cause detriment to either Scotland or the United Kingdom.

87   The 'vow' was published on the front page of the Daily Record newspaper on 15 September 2014. Back

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