Baroness Ludford (LD): My Lords, I am delighted that the Prime Minister has shifted to making the big, positive, patriotic case for our membership of the European Union; it is perhaps a pity that he has not been making that case over the last decade. Perhaps I may ask the noble Baroness, with a slight note of concern, how the Government will avoid the adverse consequences of what I might call the “be careful what you wish for” aspects. One is the special status she just talked about, which is in some respects a semi-detached

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status. How will we make sure that the UK truly is in the lead on EU policy areas such as security and climate change, where we want to be fully engaged? Secondly, although the red card is unlikely ever to be used, there is a danger that it could be used by national parliaments ganging up against the liberalisation of services in the single market in a protectionist way that would not be in our favour. Lastly, on the sovereignty angle—my noble and learned friend Lord Wallace referred to a constitutional court—if the UK Supreme Court becomes a constitutional court that can override Parliament, how will that increase British parliamentary sovereignty domestically?

Baroness Stowell of Beeston: The noble Baroness covered a lot of ground and she will forgive me for not dealing with all those points, in order to allow other noble Lords to get in. She suggested that the Prime Minister is only now making the positive case for Britain’s membership of the European Union; I disagree. It is also very important for us to acknowledge that there has been a great deal of frustration among the people of this country about the way Europe has operated for a long time. They have been frustrated at not getting the opportunity to have a referendum. The Prime Minister is being so positive about what he is putting forward to the United Kingdom because he has addressed people’s concerns through his renegotiation and is giving them the opportunity finally to have their say. That is an essential and important part of the message that we need to deliver.

On the noble Baroness’s other points, what is important about ever-closer union and what the Prime Minister was seeking to address in his renegotiation is that we now have the power—which we never had before—not to be involved in things we do not think are in Britain’s interests.

Lord Howell of Guildford (Con): Does my noble friend agree that, however one regards the details of the deal, there can be no doubt that our right honourable friend the Prime Minister has opened up huge new opportunities for the reform of Europe as a whole? As we have reached this point, will she encourage her colleagues in government from now on to put maximum brainpower, energy and imagination into working with the other peoples of Europe to achieve the fundamental reforms the European Union desperately needs in the face of its present crises, and for which most of the people of Europe are yearning?

Baroness Stowell of Beeston: My noble friend makes an important point which the Prime Minister, I and others in government are very conscious of. He is quite right, and as I think I said to him when I repeated the previous Statement, this is not the end but the start of a process of reform. We want Europe to work in the best interests of all its peoples. It started reforming. It started changing. It started reducing some of the regulation and burdens that we know are not in people’s interests, but more needs to be done and we will very much support that.

Lord Soley (Lab): Does the Minister agree that, important as the economic arguments are—and I am sure they will take pride of place in the coming

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months—we must not lose sight of the political and security arguments? Europe is facing challenges in the east from President Putin and in the Mediterranean area and Syria, and there are security problems between the nation states of Europe trying to unite to face those threats, so can she make sure that those arguments are heard? They are profoundly important to the stability of this country and of Europe.

Baroness Stowell of Beeston: I very much agree with the noble Lord. One of the advantages of being in Europe—and for us to make clear to the people of this country—is that we have led the way in some of the action that has been taken in the last few years to make sure that we are more secure, whether it is issuing sanctions against Putin or increasing the co-operation between member states on sharing information to defeat terrorism. That is a very good and powerful reason for us to remain in the European Union and an argument that we must continue to make.

Lord Lawson of Blaby (Con): My Lords, I declare an interest as the present chairman of Vote Leave. Is it not clear that the trivial and inconsequential changes that the Prime Minister has secured—subject to legal challenge, of course—fall far, far short of the fundamental, far-reaching reform which three years ago in his Bloomberg speech he said was necessary? Is it not clear that the referendum on 23 June will be about not whether we wish to remain in a reformed European Union but whether we wish to remain in an unreformed European Union, which, alas, it has proved itself to be? However, there is one thing that I welcome. In his Statement the Prime Minister has admitted—I think for the first time but, if not, it is the first time that I can recall—that the purpose of the European Union is to create full-blooded political union. That is clear in the Statement. However, he says that we shall not be part of it. Maybe we will not be but we will still be shackled to it and will have a quasi-colonial status—that is the closest parallel that I can think of. Is it not the case that the referendum on 23 June will be about whether we wish to be a self-governing, independent democracy?

Baroness Stowell of Beeston: As my noble friend knows, it always pains me to have to disagree with him, but I disagree in particular with his description of what the Prime Minister secured through his renegotiation in Europe. To describe it as trivial and inconsequential is just not accurate. My noble friend is right in that the Prime Minister acknowledges that the European Union is about political union, but he has secured that we are not a part of that—it is in a legally binding document. It is very clear that we are carved out of it. Furthermore—this point has not had much of an airing—not only do we have a United Kingdom carve-out but the document says:

“The references in the Treaties and their preambles to the process of creating an ever closer union among the peoples of Europe do not offer a legal basis for extending the scope of any provision of the Treaties or of EU secondary legislation”.

That is an instruction to the European Court of Justice and it will apply not just to us but to everybody else who is a member of the European Union and does not want to be part of a political union.

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Lord Wigley (PC): My Lords, I declare an interest as a board member of Britain Stronger In Europe. Does the noble Baroness agree that there is an overwhelming economic case for us to remain as a member of the European Union? Nowhere is that more the case than in Wales. Over recent years we have seen international companies from Japan, the United States and elsewhere locating there to sell to the European Union. Leaving the Union would destabilise that relationship and undermine our economy.

Baroness Stowell of Beeston: Yes, I agree with the noble Lord. We have to acknowledge the foreign investment that comes into this country and into Wales, a lot of which is from European Union countries. We benefit tremendously from our trade as part of that single market, and we would put that very severely at risk if we were to leave.

Lord Spicer (Con): My noble friend has just talked about a legally binding document protecting our interests. How do the Government then deal with the question of the acquis communautaire and the fact that the so-called watertight legislative protection of our rights in the past has never survived challenges in the court? These matters have to be addressed if some credibility is to be given to this so-called legally binding document.

Baroness Stowell of Beeston: In the interests of time and the fact that many people want to get in, I shall say to my noble friend Lord Spicer what I said to my noble friend Lord Lawson. The Prime Minister has secured, for the first time ever, a return of powers to a nation state. That has never happened before. He has secured that and we can now take advantage of it—something that we have never been able to do before.

Lord Campbell of Pittenweem (LD): My Lords, last week at the Munich security conference the United States Secretary of State, John Kerry, expressed the hope of having a strong United Kingdom within a strong European Union. In the opinion of the noble Baroness, why should the United States attach such significance to our continuing membership of the EU?

Baroness Stowell of Beeston: It does so because it sees how influential we are in the European Union. It sees that we not only have an impact on the very important international and global issues of the day but bring a lot to what happens in the rest of the European Union. That is why the US wants us to stay.

Lord Clinton-Davis (Lab): I speak as a former European Commissioner. It is absolutely essential that we remain in the European Union, expressing our point of view and being able to judge whether something that has been put forward is in our interests. We can say what we like there. To say that we have no influence—an argument advanced by the noble Lord, Lord Lawson—is absurd. I speak from experience. You have to go through all the institutions of the European Union, not only the Commission, and eventually you end up with a compromise. That is not a dirty word. In my view, it is absolutely essential that 28 countries should perform like that and come to a reasonable decision.

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To experiment in the way put forward by those who oppose remaining in the EU would be absolutely absurd. In my view, membership of the Union is essential and we should have no doubt about that. We do have a voice.

Baroness Stowell of Beeston: It is important not only that we make the strong case for membership of the European Union that the noble Lord has outlined, but that we stress that we are confident in making that case because of the reforms that the Prime Minister has been able to secure. We must not underestimate people’s frustration with the European Union, and we were not happy with the status quo.

Lord Bilimoria (CB): My Lords—

Lord Framlingham (Con): My Lords—

Lord Lamont of Lerwick (Con): My Lords—

Lord Taylor of Holbeach: We have not heard from the Cross Benches for some time.

Lord Bilimoria: My Lords, first, perhaps I may just build on what the noble Lord, Lord Campbell, said. Should not the Prime Minister make more of the fact that it means a lot to countries dealing with the United Kingdom that we are part of the European Union? Countries such as India see the UK as a gateway to Europe and I do not think that enough is made of that. Secondly, perhaps I may build on what the noble Lord, Lord Howell, said. The Prime Minister talks about the best of both worlds. You can be a Eurosceptic, as I think I am—I hate the way that the European Parliament works and the fact that it has to go to Strasbourg every month, and I hate the gravy train, the waste of money and the fact that nobody I am aware of knows who their MEP is—and still believe that it is the lesser of two evils, rather than the best of both worlds. Does the Minister agree that it is probably better to stay in the European Union because it is the best of both worlds and the lesser of two evils?

Baroness Stowell of Beeston: Or you might say, “Better the devil you know”. Basically, I agree with the noble Lord: you do not have to be a raging Euro-enthusiast and to have been so for donkey’s years to support staying in the European Union. As I said to the noble Lord, Lord Kinnock, this is patriotic. We believe very much in the power and sovereignty of the United Kingdom, and we believe that by being in Europe we can have, as the Prime Minister described it, the best of both worlds. As to the point of the noble Lord, Lord Bilimoria, about making more of the way in which we are a gateway to the rest of Europe, I agree with him, and the Prime Minister is already making that case. We have four months to go and he will keep making that case. I hope that the noble Lord and others will help us in that task.

Lord Lamont of Lerwick: Does the Minister recall an interview given some time ago by Jacques Delors in the German newspaper Handelsblatt in which he said this:

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“If the British cannot support the trend towards more integration in Europe, we can nevertheless remain friends, but on a different basis. I could imagine a form such as a European economic area or a free-trade agreement”?

Does not that show, without prejudging it, that there is an alternative available, or was Delors just completely wrong?

Baroness Stowell of Beeston: My noble friend is right to say that there is an alternative—of course there is an alternative. That is why there are two choices for the British people: to leave or to remain. The alternative—and it may be something like the Norway model—is not inconceivable, but it would not be without cost and is not something that we should walk blindly into without recognising that it brings with it its own disadvantages. We have to be clear what the alternative is. That is what the next few weeks and months will have to be about in this debate: if there is an alternative, what is it?

Lord Foulkes of Cumnock (Lab): My Lords, can I follow up on the particular point that has just been raised and the excellent point that was raised by my noble friend Lord Hain? Since the Minister and I are on exactly the same side—enthusiastically, and for the first time ever, I think—can I ask her a favour? Will she go back to the Cabinet and say, “Let us find some way of requiring these people who are against the present arrangement to put forward their alternatives so that we can examine them in detail”? They need to be required to do that so we can see clearly what the alternative is. If the Cabinet can come up with some kind of arrangement for that, I will give it and the Minister three cheers.

Baroness Stowell of Beeston: It is for those who want to campaign to leave to come up with their arguments and the case for that. It is not for me, on the opposite side of the argument, to try to find a mechanism for them to do so; that is their responsibility. We will go through the process of formally designating the leave campaign and, as part of that process, I imagine that the respective group that is successful will be the one that the Electoral Commission feels has covered all the requirements set out for it.

Lord Framlingham: My Lords, I am sure the Leader of the House will agree with me that the most important thing in the next four months will be to put the arguments—all the arguments—as fairly as possible before the British people. All the Front Benches in this House are for staying in and all the Front Benches in the House of Commons are for staying in. This afternoon, the Prime Minister confirmed that he is going to use the whole power of the Civil Service to campaign to stay in. Does the Leader of the House think that that is entirely fair and right, and should it be of some concern to our House?

Baroness Stowell of Beeston: On the last point that my noble friend makes, the Government have adopted a position and are not neutral on this. We are arguing to remain in a reformed European Union because we believe that that is in the best interests of the people of this country. But, ultimately, it is for them to decide. Like the noble Lord, Lord Foulkes, my noble friend is

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right to say that the people who would advance leaving have to make their case and be clear in their arguments. To be honest, the inclusion in the campaigns of some very significant figures—potentially from this House and from the other place; I do not know how everybody is going to vote—means that there will be a serious debate over the next few weeks. I think that that is a good thing.

Lord Taylor of Holbeach: My Lords, I wonder whether we might hear from the noble Lord, Lord Low.

Lord Low of Dalston (CB): My Lords, it would be entirely appropriate for the Government to make the case which they support for remaining in the European Union with all the strength at their command. The case for remaining within the European Union does not stand or fall by the details of the deal that the Prime Minister negotiated in Brussels at the weekend. Nevertheless, it is very clear from the Prime Minister’s Statement, which the noble Baroness the Leader of the House has repeated for us, that the deal tends much more to the substantial and significant, as was depicted by my noble friend Lord Hannay, rather than the trivial and inconsequential, as portrayed by the noble Lord, Lord Lawson. However, it is probably fair to say that the balance of the media comment and their portrayal of the deal has tended towards the trivial and inconsequential. Given that, will the Minister provide an assurance that the Government will spare no effort to get across to the British people the substantial and significant progress that the Prime Minister has made in persuading the European Union to accommodate the British position and that it does not remain within the Westminster bubble, as we have heard it described this afternoon?

Baroness Stowell of Beeston: I certainly think that the Government have a responsibility to be clear about what they are advancing and to communicate that directly to the people. But I also think that the media play an important part in our democratic process. Noble Lords have been arguing about other people making their case, and it is important as well that, through the media, people get to hear the arguments for and against. I would never stand at this Dispatch Box and criticise the work of the UK media.

Lord West of Spithead (Lab): My Lords, the noble Baroness the Leader of the House will be well aware that there is no doubt whatever that the people of our nation are safer in terms of terrorism and serious organised crime because we are part of the EU. We lead Europol and have the European arrest warrant and all sorts of things. At the grand strategic level of defence, there is no doubt that NATO is most important to us. However, does the noble Baroness agree that Europe is very important to our nation? We have twice saved its bacon in the last 100 years and there is no doubt that, at the moment, there are huge threats. If we left the EU, I think there would be a certain flakiness within it. Does the noble Baroness agree? This is a very bad moment for that to happen. Europe needs us and, if it becomes flaky, the risks from people like Putin and the southern flank would be huge. We need to bear these things in mind.

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Baroness Stowell of Beeston: That is why the Prime Minister has said that perhaps the only person who would cheer if we were to vote to leave would be Putin. Clearly, we do not want to do anything that is going to brighten up his day.

Lord Pearson of Rannoch (UKIP): My Lords, will the Minister tell us how this pathetic deal is in any way the fundamental reform of the EU itself that we were promised? For instance, can she tell us how it has reduced the hugely undemocratic powers of the Luxembourg court and the European Commission? The Prime Minister tries to frighten us by talking about leaving the European Union as being a leap in the dark that will, for example, lose us our present access to the single market. Does the Minister accept that Europe sells us very much more than we sell them, that we have 3 million jobs exporting to them but they have 4.5 million jobs exporting to us, and that we are in fact their largest client? Does she accept that they need our free trade very much than we need theirs? Can she tell us why that trade will not continue, because they will come running after us to have it?

Baroness Stowell of Beeston: No, I am afraid I do not agree with the noble Lord’s description of who benefits most, Europe or us, from the relationship. I shall not take up time rattling through all the statistics, but I say this to the noble Lord: in the end, it is about what is of greater benefit to all of us—to the UK and to the rest of Europe. As a trading bloc, we all benefit from the UK being in the European Union. It is not just about how we benefit in this country—although we do. As for the noble Lord’s questions about sovereignty, I refer him to what I said to my noble friend Lord Lawson. I really do disagree with what he says about that.

Lord Cormack (Con): My Lords, as we begin four months of campaigning, should we not just gently reflect that the most publicly apparent achievement of eight years of amusing, dynamic, flamboyant leadership in London has been gridlock?

Baroness Stowell of Beeston: No, I do not agree with my noble friend.

Lord Maclennan of Rogart (LD): My Lords, is not the greatest achievement of the European Union, to which we have belonged since the 1970s, the fact that we have had 70 years of peace? After the two world wars Britain was financially at a loss. We lost our empire and we lost our ability to spend, and this is the whole purpose of the European Union being saved. If we left the European Union we would destabilise it, and that might lead to a break-up.

Baroness Stowell of Beeston: The noble Lord certainly puts a clear case for the European Union and for our remaining in it. Much as I agree with what he has said, there is something that cannot be repeated often enough, particularly for those who are undecided—and we must always remember that a lot of people are unsure of which way to vote. So although the noble Lord is right, we also need to emphasise that the European

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Union does not work quite as we want it to in all areas. That is why we have been renegotiating the terms, and we are now confident enough to advocate staying in.

Lord Blencathra (Con): My Lords, I declare an interest as a supporter of Vote Leave. Does my noble friend agree with me—she probably does not—that the real threat we face, and the huge frightening leap in the dark, would be if we now remained in Europe? Europe has seen that Britain is a bit of a paper tiger. A few years ago we were saying that we wanted fundamental and far-reaching reform. Then we asked for very little, and I am afraid we settled for a lot less. When Europe comes to implement the next treaty change and the Five Presidents’ Report, and as it heads for being an ever-tighter federalist superstate, will we not be ignored, mocked, sidelined and completely stitched up?

Baroness Stowell of Beeston: As my noble friend predicted, I do not agree with him. One area that I would point to in order to illustrate my disagreement is what the Prime Minister secured around economic governance. Again, I do not think that it has been properly understood yet how significant the protections that he has secured are—not just for our currency, but for the City of London and our financial services. I assure my noble friend that the other member states, and particularly the French President, were in no way shy about fighting hard to prevent us getting what we wanted, but we secured a good deal for Britain in the end.

Lord Harris of Haringey (Lab): Will the Minister convey to the Prime Minister the relief that we on this side of the House feel—indeed, our sincere congratulations—that he is beginning to put such an unequivocal and clear case for our membership of the European Union? Will she urge him, in the months that lie ahead, to put that case to the whole country, including Labour supporters and people of no party affiliation, and not just to conduct a desperate internal debate inside the Conservative Party?

Baroness Stowell of Beeston: I can certainly reassure the noble Lord that the Prime Minister will do exactly what he has just outlined. This is not about the Conservative Party; it is about the future of the United Kingdom. What we are doing here is what we believe is in the best interests of the people of this country.

Lord Stoddart of Swindon (Ind Lab): My Lords, if the country votes out on 23 June, should not the first action the Government take be to repeal the European Communities Act 1972? That would enable negotiations to take place under Article 50. Secondly, is the Minister aware that earlier this month the original six leaders of the EEC came out and said that it was absolutely essential for Europe to proceed to ever-closer union, including fiscal union? In those circumstances, if Britain is not to be in that particular club, will we stop talking about being at the heart of Europe?

Baroness Stowell of Beeston: As I have already explained, what the Prime Minister has secured on ever-closer union means is that we, the United Kingdom, can be a member of the European Union in a way that

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properly reflects what we want from being a member. As the Prime Minister said in his Statement, we never wanted to be part of a political union, and now we have a legally binding agreement, which will be amended in the treaties, to show that we will not be part of an ever-closer union even if other members of the EU decide that is what they want.

Lord Willetts (Con): My Lords, we are rightly told that Britain’s future is as a global trading nation. But often, on trade missions abroad, one would find that other EU member states such as Germany and France had been there before us. So will the Minister confirm that membership of the European Union is not an obstacle to fulfilling those ambitions, and that we should not use our membership as an excuse for failing to tackle problems in our own performance?

Baroness Stowell of Beeston: My noble friend makes an important point. I very much agree with him that we have a responsibility always to get the best for Britain, whether we are acting independently and unilaterally or as part of the European Union, and we should never use the European Union as an excuse for our own inefficiencies or inadequacies.

Scotland Bill

Committee (3rd Day) (Continued)

5.58 pm

Amendment 74 not moved.

Clause 19 agreed.

Amendment 75

Moved by Lord McFall of Alcluith

75: After Clause 19, insert the following new Clause—

“Non-budget expenditure and the Scottish Consolidated Fund: further provisions

Before the end of the first month of each financial year, the Secretary of State must lay before Parliament a full record, including minutes of meetings and Ministerial correspondence, of discussions between the Secretary of State, the Treasury and Scottish Ministers relating to the non-budget expenditure to be voted by Parliament authorising the payment of grants to the Scottish Consolidated Fund for that financial year.”

Lord McFall of Alcluith (Lab): My Lords, Amendment 75 provides for the process leading to annual settlement between the Treasury and Scottish Ministers of the block grant to Scotland, to the Scottish Consolidated Fund. In tabling the amendment, we focus on transparency and accountability.

I will also speak to Amendment 75A, in the names of the noble Lords, Lord Kerr and Lord Turnbull, on borrowing powers. They may already be in place for all we know and I would like the Minister to enlighten us on that.

Amendment 79F in the name of the noble and learned Lord, Lord McCluskey, seeks the publication of the fiscal framework within 30 days of the Act being passed, if not before. Amendment 79G would expand the role of the Scottish Fiscal Commission,

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which is welcome, and Amendment 76 in the name of the noble and learned Lord, Lord Wallace, establishes the commission as per the recommendation by the Scottish Affairs Select Committee and the need to review the fiscal framework at least every five years. For that, we need a timetable and we ask: why is a review needed?

The Joint Exchequer Committee chaired by the Chief Secretary to the Treasury, Greg Hands, has met 10 times already. It has been clouded in secrecy and we have heard already this afternoon about the need to lift the veil on that, particularly on the area of the sticking points. Up to this weekend, there was a daily, unattributed briefing from the Scottish Government, which was largely negative and unspecific in tone, but nothing from the UK Government, for which they should be commended. But that highlights the problem raised by the Economic Affairs Committee, which is that nobody knows what is going on. We need a deal securing Barnett because the powers that are being given to the Scottish Parliament are too important to walk away from. If I have one message for the Minister, it is that we cannot down tools at the moment.

We have had artificial deadlines, the latest being Valentine’s Day, or 14 February. This side is telling the Minister to negotiate right up to the end—to 23 March if need be. The powers that the Scottish Parliament will receive are without parallel elsewhere. Keep in mind that the Scotland Act 2012 devolved income tax, stamp duty, land tax and landfill tax, established Revenue Scotland and provided the Scottish Parliament with borrowing powers. Smith has now added income tax, with unrestricted power to set rates and thresholds for tax on non-savings and non-dividend incomes. There is also the receipt of the first 10% of the standard rate of VAT. If the Scottish Government grow the economy, the extra revenue coming from that will be for the Scottish Government and Scottish people alone, and we must not forget the aggregates levy and the airport duty tax.

The income tax that has been devolved is £11 billion. The VAT generated will be, as I mentioned earlier, for the Scottish economy alone, so Smith will result in the amount of revenue that the Scottish Parliament is responsible for being raised to double the amount that it has at the moment, from £8 billion to £16 billion, with an extra £5 billion in VAT revenue. Together, those revenues will account for more than half of the Scottish Government’s annual budget and around 40% of all revenue raised in Scotland.

The question that is still pertinent for the Joint Exchequer Committee is: how do we adjust the block grant to take account of the devolution of tax and spend powers? The Scottish Affairs Committee’s report, which was excellent, stated that Smith’s unanswered question, which we all agree with, was how to index the adjustment to the block grant so that the principle of no detriment and taxpayer fairness is satisfied. That question is unanswered at the moment.

Amendment 75 has to be seen in such a context, where transparency and accountability should be the primary considerations. On transparency and accountability, borrowing is extremely important, as was mentioned in the amendment of the noble Lord,

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Lord Kerr. Dr Angus Armstrong, said in his evidence to the Scottish Affairs Committee that the question of Scottish borrowing powers is perhaps the most important in the whole debate. In that regard, we support the amendment of the noble Lord, Lord Kerr.

Let us remind ourselves of the capital borrowing powers, which are currently £200 million per year with a £500 million cumulative ceiling. It would be helpful, as the Scottish Affairs Committee recommended, if a prudential capital borrowing regime were introduced and put on a statutory basis. We are mindful that the Scottish Government can borrow from the UK Government, the National Loans Fund and commercial lenders, and can issue their own government bonds. That is important as the bedrock because the National Loans Fund allows the Scottish Government to borrow on very favourable terms. If the Scottish Government can find even more favourable terms, they can go there, but the bedrock is the National Loans Fund. Again, the Scottish Affairs Committee asked for a specific limit on current capital borrowing to be set and for the criteria on which that limit is based to be published. We agree with those recommendations completely.

The amendment in the name of the noble and learned Lord, Lord Wallace of Tankerness, asks for the establishment of a commission, which is another recommendation of the Scottish Affairs Committee. Therein, the need for transparency and independence is essential. We thought a number of weeks ago that the Scottish Government were going along with that line of independence when the Finance Committee under the chairmanship of its convener, SNP member Mr Gibson, said,

“we are strongly of the view that not only should the Scottish Fiscal Commission be independent, but it is vital that it is perceived to be independent. That is why we are calling for the Bill to be amended to strengthen the Commission’s role and to give it responsibility for producing the official forecasts”.

Only a month later in the Scottish Parliament, the Scottish Government reversed their view on that issue and Mr Gibson did not fulfil that cross-party recommendation from the Finance Committee. The need for a Scottish fiscal commission to be given responsibility for setting the finance and the forecast that the Scottish Government budget is based on is hugely important. We ask the Minister to look at that issue again.

We should remind ourselves of today’s report from the Treasury Committee in the House of Commons that secured, under a freedom of information request, emails from the Treasury to the Office for Budget Responsibility. There is a perception that the Government were leaning on the OBR to ensure that the wording in the terminology was changed to favour Her Majesty’s Treasury. I made that point a number of weeks ago in this Chamber when the Chancellor of the Exchequer found £30 billion behind the sofa and the OBR came up with that particular figure. I said then that it was important for Robert Chote and the OBR to underline its independence. If trust in the statistics is questioned at all, trust in the whole of government also crumbles. What applies for the Treasury must apply for the

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Scottish Parliament, and when we are starting afresh with the Scottish Parliament, the need to underline that independence is really crucial.

Amendment 79G, tabled by the noble and learned Lord, Lord McCluskey, is also crucial, because it asks for the independent scrutiny of the public finances. That recommendation by the noble and learned Lord was preceded by an article he wrote in the Herald a number of weeks ago, for which I commend him. It was an excellent article. From what we have heard today and from what the noble and learned Lord, Lord McCluskey, has proposed, it is clear that the scrutiny that we are giving to the Bill is happening only in this House; it is not happening elsewhere. Therefore, the article by the noble and learned Lord, Lord McCluskey, and the amendments have to be taken very seriously.

The Minister presented us with the letter from the Chief Secretary to the Treasury, Greg Hands, at 1 pm today. I commend the Government and the Chief Secretary for that letter, but we were rather disappointed to receive so late in the day such a detailed letter, which we have had insufficient time to scrutinise. We welcome the fact that it tackles the thorny issue of Scotland’s population growth and possible disadvantage to Scotland’s revenues if its population grows more slowly than in the rest of the United Kingdom. However, the population in Scotland will grow more slowly than in the rest of the United Kingdom because—and the historian, the noble Lord, Lord Forsyth, can correct me here—it has been doing so since the very date of the Act of Union, and it will continue to do so. That needs to be looked at and therefore we commend the Government for doing so.

I refer to paragraphs 13, 14 and 15 in the letter, which tackle this issue. Paragraph 14 is very clear that, using the Scottish Government’s own forecast, Scotland would benefit from around £4.5 billion of growth in taxes from the rest of the United Kingdom in the next decade alone if the proposal that the Chief Secretary to the Treasury put to the Deputy First Minister is accepted. Paragraph 14 also states that if the Scottish Government grow the economy then Scotland will keep those revenues. Paragraph 15 states that the proposals offer a fair deal for taxpayers in Scotland; they are fair for taxpayers in the rest of the United Kingdom; and, to use a Clydeside expression, they are built to last. If that is the case, the only thing missing is the Scottish Government’s response. Why are they not agreeing that proposition? I ask for the veil to be lifted a little today. Regarding paragraph 15, and given the short notice and the cursory examination we have had of it, it is important that the Minister responds to this.

Logic dictates that we need everything to be cleared up today, and that was argued very skilfully by the noble Lord, Lord Forsyth. However, in this area logic is not everything. There is political reality, and the political reality is that we must encourage this process in every way possible. That is why the Labour Party has bent over backwards to be helpful to the Government over the past few months and, even today, will provide no impediment or give any hint that it will delay or obstruct the Bill. We have a fractured union. That was expressed in the report by the Select Committee on

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Economic Affairs, very skilfully chaired by my noble friend Lord Hollick. Therefore, we do not wish to add even one iota to any further cleavage in that area.

The UK in its present form is not an old state, but it is a state comprising ancient nations. We have to be very sensitive to that. I mentioned political reality. An article in the Daily Record last Friday by a good friend of mine, Professor Jim Gallagher, looked at the second aspect of no detriment—namely, taxpayer fairness—but the headline for the article was “sleight of Hands”, obviously a play on the name of the Chief Secretary to the Treasury. Hopefully, that gives Members an insight that there is a grievance mentality, and it is something we must be very sensitive of. In particular, as an unelected Chamber we must do everything to be positive. That is why, in moving Amendment 75 and supporting other amendments, we hope that the Minister makes progress. As the noble Lord, Lord Forsyth, said, if that progress is to be made before Report then we would welcome the information being put in the public domain as soon as possible. In that spirit, I beg to move.

6.15 pm

Lord Kerr of Kinlochard (CB): I rise to speak to Amendment 75A. I was in meetings in Glasgow this morning and came in during the earlier debate on the amendment to the Motion in the name of the noble Lord, Lord Forsyth of Drumlean. I heard his rousing peroration; I agreed with it. Had I been in the Chamber in time, I would have wished to speak in support of it. I agree with his “sunrise” Amendment 79H, which I guess he will speak to in a moment.

Mine is a much more mundane matter. My amendment concerns borrowing limits. I find that one of the difficulties of handling the Bill in the absence of the fiscal framework is not so much dealing with what is in the Bill as understanding why things are not in it. I do not know why no provision or regime for borrowing is set out. That is why my amendment proposes the principles for such a regime. It is a key element of the Smith commission report that there should be enhanced borrowing powers for the Scottish Government, and I agree with that. The core of Smith is paragraph 95, where the fiscal framework is discussed. The most crucial element for me, apart from indexation, is the borrowing limits—how is borrowing to be done?

We discussed this in the Economic Affairs Committee, and the report of the noble Lord, Lord Hollick, brings out that the committee did not believe that anybody would believe a no bail-outs rule. The committee firmly believes that it is necessary to be seen to stand behind Scottish borrowing. Scottish borrowing will be cheaper. It is clear to all that the United Kingdom Government stand behind it. The clearest way of spelling that out is to have a provision on borrowing in the Bill. I do not argue that we should set out specific limits in the Bill—that, clearly, is a matter for subordinate legislation, as my amendment suggests. However, it seems clear that we must set out the two categories of borrowing in the Bill, that they will be subject to ceilings, and that these will be negotiated and agreed in consultation with the Scottish Government but will be set by Her Majesty’s Treasury. That seems practical and commonsensical. It makes for cheaper borrowing

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for Scotland, which is, of course, also cheaper for the United Kingdom, since the United Kingdom will stand behind the borrowing.

If the borrowing is properly conducted, it will be as part of the United Kingdom’s programme. It will get slots in the programme if the United Kingdom wishes to issue bonds. I have no idea how big the increases needed are and what the current limits on Scotland’s borrowing powers are, and the Smith commission does not help a great deal on that. It states that,

“to reflect the additional economic risks, including volatility of tax revenues, that the Scottish Government will have to manage when further financial responsibilities are devolved”—

I agree with that—

“Scotland’s fiscal framework should provide sufficient, additional borrowing powers to ensure budgetary stability and provide safeguards to smooth Scottish public spending in the event of economic shocks, consistent with a sustainable overall UK fiscal framework”.

That is clearly true, but it does not help to define what “sufficient” means. I do not know if this is a matter of controversy in the current fiscal framework talks, but I think we should be told. Is it agreed that there should be ceilings on Scottish borrowing? Is it agreed that that level should be set by the United Kingdom Government in consultation with the Scots? Has that level been set; that is, has it been agreed?

This is talking about current borrowing, but I must say that I think there will be the need for a considerable increase. My view is that “sufficient” is going to be quite a lot more than the Scots now have, although it is inconceivable that it would be sufficient to deal with ensuring “budgetary stability” and providing,

“safeguards to smooth Scottish public spending in the event of economic shocks”.

Let us remember that the oil price on Scottish referendum day was $115 a barrel. That is quite an economic shock, and borrowing in the markets is not a credible way of dealing with it. However, there is a common-sense case for a large increase because of the seasonality of tax income and the need to smooth over the year. That element is clear, but there could be controversy about what the level is, in which case I think we should be told because transparency does matter.

The second kind of borrowing, also covered in my amendment, is borrowing to support capital investment consistent with the sustainable overall UK fiscal framework. I agree that that makes sense. There will be public investment which should be financed by the markets, but I do not know if that is controversial for Her Majesty’s Treasury. I do not know whether the UK Government buy that bit of Smith, or whether there has been a discussion about how much. I do not know whether this is one of the reasons for the hold-up on the fiscal framework, and I think we should be told.

Lord Forsyth of Drumlean (Con): I wonder if the noble Lord could help me. When he talks about setting a limit on borrowing, are we starting with a new baseline or is it assumed that the existing level of debt has part of it somehow imputed to the Scottish Government, so that we then start from that baseline?

Lord Kerr of Kinlochard: I have not the faintest idea.

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Lord Forsyth of Drumlean: Neither do I.

Lord Kerr of Kinlochard: I hope that the noble Lord, Lord Dunlop, knows, but I do not think that any of the rest of us knows what this means in the Smith report. Alas, the noble Lord, Lord Smith of Kelvin, is not here today to tell us.

It could be argued that there is no need to have any of this in the Bill, and I would like to hear from the Government if that is their view. After all, they could have brought forward a Bill which said nothing about borrowing, despite the fact that it was a key part of paragraph 95 of the Smith report covering the fiscal framework. If it is their argument that there is no need to say anything about borrowing, I want to know why. As I said at the start, I believe that borrowing will be cheaper for Scotland and therefore better for the United Kingdom and Scotland if it is clear beyond doubt that the United Kingdom stands behind it. If it does, it is then clear that the United Kingdom has the right and the duty to set limits on that borrowing. I repeat that those limits should not be in the Bill. They should be set by affirmative resolution of both Houses, but the provision to require that should be in the Bill, and that is why I have tabled Amendment 75A.

Lord Wallace of Tankerness (LD): My Lords, I shall speak to Amendment 76. The points made by the noble Lord, Lord Kerr of Kinlochard, beg questions which I am sure the Minister will seek to answer in terms of the Government’s understanding of how the Scottish Parliament’s borrowing powers will operate after the passage of this Bill. The Scotland Act 2012 also contained borrowing provisions and I would be interested to know what the dynamic between them is and how they will fit together. This is an important part of the overall arrangement because specific borrowing limits might not necessarily appropriately appear in statute. It is therefore important that the Committee be made aware of what is in the Government’s mind.

The amendment I have tabled with my noble friend Lord Stephen seeks a review of the fiscal framework. We tabled it some time ago, perhaps even before the Scottish Affairs Committee came up with a similar recommendation. That was done on the basis that, by the time we reached it and could debate it, the fiscal framework would have been published. Noble Lords will remember that even at Second Reading there was much concern about the fact that we did not have any detail on the fiscal framework. There is a recognition that however much work goes into this—I do not dispute the good will that the Minister has indicated on a number of occasions—there is a possibility, I put no stronger than that, that it might not actually be perfect. It therefore makes sense that somewhere down the line there should be a review of how the fiscal framework is operating. We say that it should be given at least four years to run, but not much longer. We also propose that this should not be done by one Parliament or the other. In fact—although it is probably quite a novelty, we should not be scared of that—it should be reviewed by a committee that involves Members of the Scottish Parliament and of both Houses of the United Kingdom Parliament. A report should be published with recommendations that are submitted to both

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Houses of the UK Parliament and the Scottish Parliament. Quite simply, this tries to ensure that once the fiscal framework has had an opportunity to operate, a better judgment can then be made of how well it is living up to expectations.

I do not want to repeat all the points made earlier by my noble friend Lord Stephen in the debate on the amendment to the Motion moved by the noble Lord, Lord Forsyth, but it is absolutely right to talk about transparency. For example, the First Minister of Scotland released a letter to the press in which she set out the Scottish Government’s view of the no detriment principle, but we do not have a clue about the United Kingdom Government’s view. Anyone who knows the workings of the Scottish Government and the Scottish National Party knows that they are very adept at this. They will get in first so that their definition of no detriment suddenly becomes the currency. The United Kingdom Government will then try to come up with a different definition, but they will be told that they are selling out and that because the Scottish Government got in first and have defined the terms of the debate, that puts everyone else on the back foot. That is why we have been arguing both privately and in the Chamber with Ministers that we need far more information and that the Government need to be much more transparent—not necessarily about the nitty-gritty, small-print detail of where they are at any particular moment, but about what they understand by the no detriment principle, for example.

An amendment in this group from the noble and learned Lord, Lord McCluskey, also provides for the fiscal framework by way of a Scottish fiscal commission, modelled on the Office for Budget Responsibility. It is a very worthwhile idea, which the Scottish Parliament have been looking at. However, it falls short of the independence of the OBR that we would like to see, although the noble and learned Lord does seek to address that. Indeed, paragraph 16 of the letter we received at lunchtime today from Mr Greg Hands, the Chief Secretary to the Treasury, to Pete Wishart MP, the chair of the Scottish Affairs Committee, indicates that, “All elements of the fiscal framework are being discussed with the Scottish Government, including the important recommendation of the Scottish Affairs Committee that there is a clear consensus that forecasting should be done by a body independent of Government. We agree with the conclusions of the Finance Committee of the Scottish Parliament and recommend that an enhanced Scottish Fiscal Commission be made responsible for forecasting in Scotland”. Perhaps the Minister would care to elaborate on that and how he sees it developing.

6.30 pm

As we move forward on fiscal arrangements for Scotland, Wales and Northern Ireland and on fairness for the whole United Kingdom—including England and its cities and regions—what we probably ultimately need, which is beyond the scope of this Bill, is an independent body, akin to those operating in other federal countries such as Canada and Australia, which tries to take an objective view of how resources should be fairly shared among the constituent parts. I admit that we are not quite at a federal position yet—it is

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what my party aspires to—but even before we get there, there is a very strong case for an independent body that would be able to examine such issues.

It may be beyond the scope of the Bill, but it would be good to think that some thought is being given within government to how these longer-term issues may be addressed. Although we are focusing on Scotland and the rest of the United Kingdom and that particular fiscal framework, there is no doubt that, whatever is agreed and whatever position is reached, there will be implications for Wales, Northern Ireland and the cities and regions of England. The sooner we start examining how we can get a more independent body that will try to ensure fairness between all the constituent parts of the United Kingdom, the better. In the mean time, a review of whatever the present negotiations produces four or five years after it becomes operative is surely a very modest proposal.

Lord McCluskey (CB): My Lords, I shall speak to Amendments 79F and 79G. I have in my hands substantial notes. They were designed to enable me to present an elegant speech full of witticisms, insights and—though I did not realise I needed the permission of the noble Lord, Lord Forsyth—even some political comments. I took part in 1978, from the Front Bench, then occupied by a Government of a different hue, in the first Scotland Bill. I have had a long and lasting interest in these matters. Since I prepared this speech on 13 January much has happened. The field which I hoped to plough has become a dustbowl—so many people have walked through it, including in these debates today.

I shall try to keep my comments short, in light of the well-developed arguments, but clearly the fiscal framework has not been resolved. People have alleged that that is because of the complications. I do not believe that for one second. The civil servants involved are highly skilled and competent and have resolved all the complications. The difficulty is that there is a chasm between the UK Government and the Scottish Government in relation to a simple matter: how much? How much is the UK taxpayer going to have to provide to win the approval of the Scottish Government and, secondarily—the point raised by the noble Lord, Lord Kerr—in relation to borrowing powers? That is also very important.

As has been pointed out, the Smith commission report recorded that the representatives of five Scottish Holyrood parties had agreed the devolution of certain powers. Very well. It also said, at paragraph 95:

“Barnett Formula: the block grant from the UK Government to Scotland will continue to be determined via the operation of the Barnett Formula”.

That is not entirely surprising, considering the make-up of the Smith commission. Turkeys do not vote for Christmas. The members were voting for a continuation of the Barnett formula. The report also contained what was plainly a compromise, namely the so-called no-detriment principle in two manifestations, the first of which is vaguely comprehensible and the second of which is certainly not.

The Scottish representatives on the commission—and they were all Scots—were voting in favour because the Barnett formula was plainly very favourable to Scotland and everyone was afraid of the needs test. In fact,

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noble Lords who have read John Swinney’s evidence to the committee of this House on the Barnett formula in 2009 will know that that committee tried to pin him down on that. He would not answer, but simply kept repeating, “We want full fiscal autonomy”.

Lord Forsyth of Drumlean: Till he found out what it meant.

Lord McCluskey: Yes—that was, of course, part of the purpose of the article I wrote for the Herald, which the noble Lord, Lord McFall, was good enough to refer to.

Plainly, the Scottish Government were perfectly entitled to try to secure the most favourable deal they could. It was they who created this timetable that we are being asked to stick to. The timetable was to enable them to go to the electorate in May and present themselves as having achieved a great victory. They created the timetable and we are all supposed to bow to it. I just wonder about that. In relation to the rush to get it through, it also puzzles me that John Swinney is so anxious to get his hands on extra tax powers because, when the Labour Party in Scotland proposed an extra penny on income tax, he replied, “Over my dead body”. Now, we would not wish any harm to the Deputy First Minister, but he has obviously no intention of exercising these tax powers, so what is the rush? It is all to do with the electoral process of the Scottish Government.

Even the devolution of a minor thing, such as the introduction of air passenger duty, could turn out to be worth nothing because, as was pointed out very widely at an earlier stage of the passage of the Bill, Newcastle Airport is going to suffer considerable detriment if all the Scots in the north of England flock to Prestwick, Glasgow, Edinburgh or even further north to take advantage of reduced prices. They are going to suffer a detriment and that detriment is going to have to be met by whom? By the Scottish taxpayer. In other words, the Scottish taxpayer is going to have to find the money to send to Newcastle that has been saved by whom? By the airlines. It is bizarre. The whole thing is slightly mad.

Lord McFall of Alcluith: If I remember correctly, the Chancellor of the Exchequer appeared before the Treasury Committee in January 2015 and, asked about the no-detriment principle for Newcastle and Manchester airports, said it did not apply to them. He pointed to the fact that in the previous year Newcastle Airport had increased its traffic by 12% and Manchester Airport had increased its traffic by 3%, so there was no problem whatever. So we are all in the dark yet.

Lord McCluskey: I fully accept what the noble Lord says; however I argue that there is room for argument as to whether there is a detriment to Newcastle. I just do not know. The Select Committee on Economic Affairs said, as has been quoted already by the noble Lord, Lord Forsyth:

“We agree … that the second no detriment principle is unworkable. It is a recipe for future disagreement”.

The only problem is the word “future”. It is a recipe for constant disagreement, including future disagreement.


My Amendment 79F includes the provision that the new fiscal framework should be published in full.

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That is very important. The noble Lord, Lord McFall, mentioned that we have to face political reality: I would not challenge his judgment on that, but I add something else. We also have to face the truth—not just the truth but the whole truth—in relation to the fiscal agreement. We need to know the background and I am sure that if it is not published in full, as it should be, then various means can be found, whether in debate here, by means of questions or by freedom of information requests, to discover the full background. What were the people bargaining about? What was the cause of the delay? My guess is that the cause of the delay was what I suggested before—namely, that they could not agree on amounts of money, so the complications are not real complications but deep disagreements.

As I mentioned in the article to which the noble Lord was kind enough to refer, lying behind these discussions and the problem for the Scottish Government is the following. If the present discussions about the fiscal framework reveal, as I suspect they will, that Scotland needs a substantial subsidy from the taxpayers in the rest of the UK—or at least in the rest of Great Britain—that is a demonstration that Scotland cannot exist without such a subsidy. Therefore, the economic case for independence, which was so bizarre in the original White Paper by the Scottish Government, disappears. In other words, we now know, because of the discussions going on—although we do not know the detail—that the economic base in Scotland is such that the tax yield will be very disappointing. The Barnett formula would, of course, disappear on independence and the oil bonanza confidently predicted at the time of the referendum campaign will continue to prove to be a mirage.

As I say, events have perhaps rather overtaken this amendment but it is time that the Scottish electorate were told the whole truth about the Barnett formula. That is part of this amendment. I have read with great care, and more than once, the proceedings of the Lords committee on the Barnett formula. It was a very powerful committee and the questioning was extremely good. The witnesses who gave evidence were of the highest quality and the lesson of that has to be that if we want to move to a just and fair system, we ought to move to one which is not based on a formula that was never invented for the long term but rather as a device to get through a problem existing in the midst of an economic crisis. We should move to a system based on need in terms of welfare and other things. It is time we were told the truth about that. That is the purpose of the second part of this amendment—proposed new subsection (2).

Detriment is said to be a principle in the Smith commission report. I am afraid that I do not recognise it as a principle. The principle that underlies public expenditure should in my view be the question of need. Public expenditure in different regions should be determined largely in relation to need. It is not a straightforward matter and I need not discuss the difficulties involved in that; we are all well aware of them. Therefore, the information that I seek is to give people the truth. The truth is more important than the political reality.

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I can deal briefly with the other matter relating to Amendment 79G. The noble Lord, Lord McFall, has already referred to this and I simply adopt what he said. It is vital in Scotland that we have independent scrutiny of, and reports on, economic forecasts. One of the problems with the referendum campaign was that the government White Paper had some very dodgy statistics and forecasts and the Opposition did not question it sufficiently. In a sense, the Government got away with what they said. We need an independent body. I have suggested the model of the Office for Budget Responsibility. It is not ideal but it is the best model that we have. I deal with the question of independence in the way set out in the amendment. I do not pretend that this is an ideal way to amend the Bill, but the ideas here are such that the draftsmen could with ease convert this into a workable amendment.

The Smith commission talked repeatedly about strengthening the Scottish Parliament. One of its principles was strengthening the Scottish devolution settlement and the Scottish Parliament within the UK, including parliaments’ levels of financial accountability. The commission referred repeatedly to independence. I need not quote all the relevant paragraphs. As the noble Lord, Lord McFall, pointed out, the Bill which was before the Scottish Parliament—the Scottish Fiscal Commission Bill—contains a clause which states:

“In performing its functions, the Commission is not subject to the direction or control of any member of the Scottish Government”.

However, the Bill declines to give the commission responsibility for providing independent assessments and forecasts for the Scottish economy. So if they are not made by an independent commission, who makes them? The Scottish Government make them.

Kenny Gibson was cited, but it is worth doing so again. He was the SNP chairman who expressed the unanimous view of the committee:

“We are strongly of the view that not only should the Scottish Fiscal Commission be independent, but it is vital that it is perceived to be independent. That is why we are calling for the Bill to be amended to strengthen the Commission’s role”.

Those who want to read the detail of this will find it in an article in the Scotsman of 11 February by Bill Jamieson. When the vote came, the SNP people voted down that proposal by four votes to three. Bill Jamieson’s article in the Scotsman drew attention to North Korea. I think the SNP is more like a North Korean drill squad: if a commander says, “Do a backward somersault”, the words are hardly out of his mouth before they are back on their feet, having done a backward somersault. It is a classic example of the exercise of this rigid discipline within the SNP. If we do not have an independent fiscal commission, we are in trouble.

We have had enough talk of dodgy dossiers and I have had enough of reading out my notes. I hope that I shall move these amendments in due course.

6.45 pm

Lord Forsyth of Drumlean: My Lords, I wish to speak briefly to my Amendment 79H, which I hope provides a way out for my noble friend on the discussions which we have had this afternoon, in so far as it suggests that the Bill, when enacted, should not commence until we have had the fiscal framework laid before both Houses of Parliament and there has been an

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opportunity to debate it. If I were the Minister, I would grab that because the prospect of moving another amendment proposing that we should not proceed to Report but should reconvene the Committee stage on Wednesday is something that I do not relish, as I am sure he does not either. However, if we get the fiscal framework tomorrow, there will be an opportunity for us to discuss it and therefore there will no need for this amendment. I very much hope that we will have it.

When I was Secretary of State and the noble and learned Lord, Lord McCluskey, was a very distinguished judge, he gave me a bit of a hard time on the reforms which we planned for the criminal law, which I am delighted to say the Labour Party subsequently implemented when it was in power in the Scottish Parliament. He said that I chided him about getting involved in politics—however, I would encourage him to get involved in politics. He has made a brilliant case for why we need clarity on the fiscal framework. I am prepared to support all the amendments that have been suggested because I have no idea what the Government’s position is on what the fiscal framework will be. As regards the proposal to have no detriment, it is the only time in 30 years in Parliament that I have seen witnesses reduced to laughter in giving evidence when they tried to explain what the no detriment principle actually means. Ministers cannot tell us what it means. The noble Lord, Lord Smith, cannot tell us what it means. My noble friend Lady Goldie was on the Smith commission. Perhaps she could tell us what she thinks the no detriment principle means. Without having the fiscal framework and without having a definition of that no detriment principle, it is meaningless.

However, my right honourable friend the Secretary of State for Scotland hit the nail on the head when he said that the Scottish Government want to have their cake and eat it. Perhaps that is what the no-detriment principle means. Perhaps during the recess, instead of negotiating and getting agreement in time for us to discuss it, they have all been off to see Mary Berry so that they can produce more than one cake. The difficulty is that you cannot produce more than one cake. When we were in government a long time ago and, faced with an onslaught from the Labour Party, we struggled to find a way of making devolution work, I had two problems. The first was that I could not solve the West Lothian question. I could not find a way of doing English votes for English laws that would not threaten the union and create all kinds of problems about voting on income tax and the Barnett formula. My second problem was that my officials said that if we were to create a Scottish Parliament and give it these powers, it would have to be responsible for raising its own money. That would mean it would have to be funded on a fair basis, compared to the rest of the United Kingdom, which would mean having a means-based system of funding of the same kind that we use to distribute money to local government, the health service and so on. That would mean the Secretary of State’s budget being cut by £4.5 billion.

We were pretty unpopular in Scotland, thanks to the efforts of the Labour Party, which presented us as anglicising Scottish education et cetera—but we will not go there. I thought that coming up with proposals which gave Scotland the ability to pass its own laws

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and raise its own revenue, but which would result in a reduction in the budget of 25% or so—£4.5 million—would not be particularly popular. I think the Smith commission and others have played around with ideas which seem politically attractive but they have not actually done their homework on the impact these would have. Amidst the language of fiscal frameworks and everything else, it is all very simple: the tax base in Scotland is slightly lower than that in England. Therefore, if you are going to raise your money from the tax base in Scotland you are going to have less to spend. The Barnett formula provides 20% more per head for Scotland than England. It was 25% in my day, but there has been some narrowing. If you take a grant that is 20% higher and replace it with a tax which is 20% lower, there will be a gap. It has suddenly dawned on the Scottish nationalists that their proposal will actually result in less money for services.

It has also dawned on the nationalists that if you give welfare services and the like to Scotland, they have to administer them. They are demanding £600 million to administer welfare services. My goodness, the Labour Party wants to get rid of the bedroom tax; so do the nationalists. There are all kinds of welfare benefits that people would like to see improved. The plan is to spend £600 million on administration, instead of on the benefits. That is crazy, and for what? So that we can say that it is misery made in Scotland because we are spending it on civil servants and a bureaucracy. That is what is being proposed here.

Lord McCluskey: I hope the noble Lord, Lord Forsyth, will forgive me for interrupting him. It sometimes happens the other way round. Does he appreciate that the £600 million is more than twice the amount that the Scottish Government indicated, in the White Paper, as the cost of running the whole of Scotland after independence on 24 March 2016?

Lord Forsyth of Drumlean: I do love the noble and learned Lord, Lord McCluskey, as a politician making these penetrating points. He is absolutely right; it is real. I am relying on what I read in the newspapers, but that is what they are asking for welfare, behind closed doors. They would rather spend the money on superannuated civil servants, just for the sake of saying, “This is being done in Scotland”. The money is the issue.

By the way, why is the Secretary of State not doing these negotiations? I was going to ring him up last week to talk to him and he was in Africa on Friday while these negotiations were going on. They are being run by the Treasury. If you are in a spending department like Scotland, the very last thing you want is the Treasury running your negotiations. Unusually, the Treasury appears to be being very generous. It is suggesting that the Barnett formula, which gives Scotland 10% of any increase in expenditure in England, should be extended to income tax and that Scotland should get, as of right, 10% of any increase of income tax that is raised in England. How is that going to go down in England? While the Scottish nationalist Government—who want to put up the top rates of tax—force all these top-rate taxpayers to move south and reduce the size of the tax base, the English are expected to send

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them a cheque to compensate them for the loss of revenue resulting from people moving out of Scotland. They run the benefit system for the disabled and unemployed. If they fail to get people back into jobs or to provide the support, England has to pick up the cost because those benefits are based on performance. No wonder they cannot reach agreement on no detriment or a fiscal framework. This is an argument about having a cake and eating it.

As the noble and learned Lord pointed out, if it agrees the fiscal framework, the SNP is now faced with the horrible prospect of going into a Scottish election and saying either, “We are going to have a bit more independence but we are going to have to make cuts in public services and put up taxes”, or, “We could not get these terrible people at Westminster to give Scotland a fair deal”. The truth is that there were years of lies when people said that Scotland got a bad deal out of the union and that the Barnett formula was unfair: those same critics now cling to that formula like a life-raft. All those people said that Scotland would be better off if it had more powers. By the way, that is not everyone in the Labour Party or elsewhere. All those people turned a deaf ear when people like Gordon Brown and the noble Lord, Lord Darling, who is in his place, warned that if you move to a system which is completely dependent on income tax—an idea which was, incidentally, produced by the Tories to overstep the Labour Party and the Liberals, but was not thought through—you create a situation where you are dependent on a lower tax base and there is no real electoral connection with defence and other UK-based expenditure. Throw in English votes for English laws and you are damaging the United Kingdom.

The fiscal framework, and how it is agreed, is central to whether or not we get a glue, a cement—a fair and balanced system. That is why the Bill should not become an Act and come into force until both Houses have had an opportunity to discuss it openly and fairly, with people in Scotland—who are entitled to fair dealing—seeing what the realities are and being able to make their choice. It is utterly wrong to go into an election pretending it will be all right on the night. If, at the end of the day, the SNP is able to say, “We got a fantastic deal out of Mr Greg Hands. We got extra money over and above Barnett. Vote for us again”, when what matters is long-term future stability, I do not know how long that deal will last; I do not know how it will operate. The Barnett committee, which I served on, and to which the noble and learned Lord, Lord McCluskey, has referred, suggested that, because there is a gap, there should be a 10-year transitional relief and we should move to a needs-based system of funding. I do not know whether that is being proposed or not, but it is essential that we have the opportunity to discuss it.

Why would my noble friend not agree to Amendment 79H, which prevents the commencement of the Bill until we have agreement? What possible reason could he have? The noble Lord, Lord McAvoy, will say that it will be misinterpreted in Scotland and we will be presented as wrecking the Bill. I say to him that it will be proceeding in parallel with the consideration by the Scottish Parliament which is, quite rightly,

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insisting that it should look at the Bill in the context of the fiscal framework. What is wrong with us proceeding in parallel with it and having a proper debate on both sides of the border? I beg to move.

7 pm

Lord Darling of Roulanish (Lab): My Lords, in the earlier procedural debate we touched on many of the issues regarding whether we should consider the proposals of the fiscal commission. In some ways I am surprised that a number of your Lordships who have spoken tonight have talked almost favourably of the Barnett formula. There is something notable about the Barnett formula. One of the reasons that no one has ever touched it, from 1978 when it was first conceived until now, is that, despite its imperfections and despite the fact that many people in different parts of the UK might have said that it was unfair, it actually worked, because it was designed to pool and share resources across the United Kingdom. One of the major arguments that I and others made during the referendum campaign over the last few years is that one of the strengths of the United Kingdom is that you could make sure that when things turned against one part of the UK, because of its workings, in particular the Barnett formula, you could compensate for that. The Bill, which is soon to be an Act, will fundamentally change that because devolving to the Scottish Parliament the power to raise income tax will require a major adjustment to how Barnett has worked in the past.

One of the problems of reaching an agreement between the parties to change the constitution of our country over a four or five-day period is that it will inevitably result in unforeseen consequences as well as the foreseeable ones. One of the reasons that I want to see this fiscal framework as quickly as possible is that we are going into a completely new era. The Scottish Parliament will have more powers than most other devolved parliaments anywhere in the world. However, in many ways we are going into this new era with our eyes closed, because the debate that ought to be taking place about the consequences of what we are doing in Scotland as well as in other parts of the United Kingdom is simply not taking place. Part of the reason that it is not taking place is that the very framework on which all this will hang will not be published until possibly later this week, or possibly next week, when, as I said earlier, we will be in the equivalent of the 11th hour of the debate here.

I will touch on three areas covered by the amendments. One is income tax. I can see that in year one you can do a calculation that shows how much money will be raised by income tax in Scotland and therefore by how much the block grant is reduced. That is easy, give or take £1 million or £2 million. I pose the obvious question: what happens in five or 10 years’ time? How do you apply this no-detriment rule, or try to work out to whose credit it is or whose fault it is that the tax take was not quite what was expected, because Scotland collected either more or less? Any idea, such as that suggested in the White Paper published last year by the previous Government, that somehow you could do this mechanistically and it would not be subject to any politics or anything nasty like that is just for the birds. If we are not careful, what we produce will provide

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fodder for all those who want to feed off grievances and find grudges for years to come. As I said earlier, I struggle to see how that is going to be resolved.

The noble Lord who will reply for the Government will probably know the answer to this because presumably he has seen the fiscal document. The rest of us have not seen it. This is pretty fundamental. If you are going to say, as we have agreed, that the Scottish Parliament should have all the money that it raises by income tax and there is a consequence on the ground, what is that consequence?

I make one further point. I do not know the ins and outs of this argument about indexation for ageing. I have every sympathy with concerns about the fact that Scotland’s population is ageing faster. Being a supporter of the United Kingdom, I believe that we should pool and share resources. If the Scottish population is ageing more quickly than that of the rest of the UK, the whole point of the United Kingdom is that you can compensate for that. I hope the present Conservative Government are not taking the view that they will devolve and Scotland can live with the consequences.

If you had complete independence, which the noble and learned Lord, Lord Wallace, said would have happened in about three weeks’ time if we believed in the nationalist timetable, then we should be in a situation where Scotland was cut off from the rest of the UK and consequences would follow. However, we have not left the United Kingdom. That is why it is important that we continue to maintain the principle that we pool and share resources, but we should be clear as to the basis on which that is done.

This brings me to the point on borrowing on which the noble Lord, Lord Kerr, touched. I agree with him that we need to be clear about under what circumstances and in what amount the Scottish Parliament can borrow. There is a further point. Borrowing to invest is well understood. That is not problematic. The Scottish Government have the power to do that at the moment if they want to. It is borrowing to fund a shortfall in current expenditure that will cause a problem. There is nothing wrong with the Government borrowing when there is an economic downturn, as I know. The present Government know that as well, since they have had to do exactly the same thing. However, suppose the situation was that the Scottish Government had the power to borrow and, as now, there was a shock to the oil price system. If you believe the shock to be temporary—if it is only going last for a year—as the nationalists maintain when you ask them why oil is not, as they told us it would be in the White Paper, $113 a barrel but around $30 or $40 a barrel, it makes perfect economic sense to borrow to make up that shortfall. That is what you would do. However, if it is a structural change—and many people believe that it is a structural change that will go on for maybe five or 10 years—does borrowing then make sense? Under what conditions could the Scottish Government continue to borrow to cover that shortfall as opposed to making other more difficult decisions, such as putting up taxes or cutting spending?

This also begs the question that the noble Lord, Lord Kerr, raised, as to on whose account do you borrow? Are you borrowing on your own account? With the best will in the world, a new Scottish Government

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are bound to start with a lesser credit rating than the UK simply because they are a new kid on the block and have no track record. Again, being in favour of the United Kingdom I am quite happy that borrowing ought to be done on a UK basis, but if that is to be the case the consequences need to be spelled out. None of these things can be left in the hope that it will all work out okay on the night.

The White Paper published last year assumed that there was good will. You have to bear in mind here that the Scottish National Party exists to make Scotland independent. That is what it is for. That is what it is looking at all the time. Therefore, if you have something that is opaque, where there will inevitably be difficulties, you are simply storing up problems—I should like to say for the future, but no, it is not for the future; they will be there from day one.

Exactly the same points are being made on welfare. As I said during the referendum, I have never understood the argument that Scottish taxpayers, of whom I am one, would want to pay money to people to administer a benefit system, a lot of which is, ironically, being administered in Scotland for the rest of the United Kingdom and providing useful employment. Why do I want to pay more for someone to do that or, for that matter, to collect my taxes?

Leaving aside the collection cost, if you take the actual expenditure on mainstream benefits, a lot of benefits have been devolved to the Scottish Government and that is absolutely fine. However, again, it is unclear to me who in five or 10 years’ time would bear the cost if, for example, the policies north and south of the border were different. It is entirely acceptable that they should be different. We are bound to have, as we do now, Governments of different political complexions. However, if, for example, you have an ageing population, all other things being equal, your disability benefits will start to go up. Is that okay? Is that built into the settlement or will taxpayers in other parts of the United Kingdom have something to say about it? I am sure these problems are resolvable, although I note that Professor Bell of Stirling University said recently that no one else in the world has done this.

As an aside, my own preference, having got to the stage that we have, is that we should look at countries such as Canada—big countries that have a federal settlement in many senses but have provinces with different powers. One of the advantages is that when you pay your income tax you can see that some of your tax is going to pay for things such as health and education, but you pay tax to the federal Government for things such as pensions or defence and so on. It is then easier for other things to slot into place—borrowing to fund various activities and so on. We have not looked at that.

It is often said that the British are good at compromising, but what we have here is not devolution being done to any overall template—it is being done on the hoof. When you do things on the hoof, sooner or later you trip up. As I said earlier, this is not just a matter between one political party and another. If this fiscal framework had been published, others from outside could have looked at it and said, “There is a better way of doing this”, or, “Have you thought of the consequences of that?”. Instead, the public

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north and south of the border have been kept largely in the dark. That is simply going to cause considerable difficulties.

Other issues have been raised as well, such as bailouts and the question of no detriment, which we will need to come to. Equally, the White Paper published last year had examples of what would happen if the UK Government were to raise or decrease expenditure. What would the consequences be? Could you have a situation where more taxes are being paid in one part of the United Kingdom to fund expenditure somewhere else? Again, these are problems to which I have not yet seen the answers.

I heard people say in the earlier exchanges that having an EU referendum campaign lasting some four months was an awfully long time. Having lived through a referendum campaign that lasted some two and a half years, frankly, I would have killed for four months. I fully accept the right of the Scottish National Party to campaign for independence but what I bear in mind is that the majority of people in Scotland were clear that they wanted to stay as part of the United Kingdom. What worries me about this, and until I have seen the fiscal framework I cannot pass a final judgment on it, is that rather than resolving the matter and saying, “That is the settled will of the Scottish people”, we have put something in place here that will lead to opacity, confusion and eventually grievance. That is not a way to get a secure settlement. Perhaps the Minister will have words that reassure us on all these points. So far I have not heard them but I look forward with great interest to what he has to say.

Lord McCluskey: The noble Lord said that the Barnett formula works. I doubt that anyone would contradict that. It works, and does so from the point of view of the Treasury for the reasons given: it is simple and clear, and so on. First, does the noble Lord suggest that it works fairly throughout the United Kingdom? Secondly, because of the future governed by this Bill, does he support subsection (2) of the new clause that I propose in Amendment 79F? It calls for the Secretary of State to publish,

“a full description of any agreement whatsoever reached between the … Governments relating to the future of the Barnett Formula or its application, amendment or replacement in the future”.

We need to know not whether it worked in the past but whether it worked fairly and how it will work in the future. Does he support that amendment?

Lord Darling of Roulanish: In relation to the Barnett formula, I chose my words carefully. I said that it worked; I did not go on to say “terribly well” or “extremely well” or “without any complaint”. If you look at the north-west of England, there is a legitimate complaint there that Barnett treats it the same as it does the south-east of England, when their economies are clearly very different. I know that successive Chancellors looked at the Barnett formula. I looked at it in the halcyon period of the three weeks between taking office and discovering that Northern Rock was on the horizon, which presented me with rather more pressing problems that I had to deal with. But I can see why, it having been there for so long, no one has touched it. I am sure that others in this House will

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know that the late Joel Barnett often said that he never intended it to last. It was a fix but it worked. However, where I agree with the noble and learned Lord—I will confess to not having studied his proposed new subsection (2) in the detail I perhaps should have done—is that if we are having a new system, we really need to know how it works. What we do not want is what happened in the aftermath of the Smith commission, when everybody signed up to it and the next day it was denounced. That will not work. If we have something that does not work, let us find out now rather than coming to that awful realisation over several months and years to come.

Lord Bruce of Bennachie (LD): I support Amendment 76 but I have sympathy with all these amendments. I think the noble Lord, Lord Darling, has just touched on the value of a federal system, which I suspect the UK will have to come up with if it is to find a stable solution. In the context of Canada, where I spent some time last summer, I was well aware that for years the Albertans complained that they were subsidising Quebec. But right now the Albertans are grateful to have the support of Ontario, as the oil price has collapsed. That is the benefit of being part of a union with the ability to move fiscal transfers around, as the shocks hit different parts of the economy. I suspect that the majority of people in Scotland voted to stay in the United Kingdom because their heads told them that was the reality.

Apart from simple practice, the other issue with the Barnett formula is that, as the noble Lord, Lord Forsyth, said, as a formula it has narrowed the gap between Scotland and the rest of the UK. That is why while it was 25% when he was Secretary of State, it is now 20%. When people talk about the Barnett formula, they are not really talking about that but about the historical difference in spending in Scotland, which predates the formula and has arrived for a variety of reasons. Again, the noble Lord, Lord Forsyth, mentioned the difference in per capita spending but I am sure he would recognise that the whole point of a needs-based formula, if that is what we move to, is that it is not based simply on per capita spending but on needs. We should reflect on the fact that Scotland has 40% of the land area of Great Britain and less than 10% of the population so, for example, the unit costs of delivering services such as small schools to remote islands and highlands are inevitably higher. Any formula must at least acknowledge that.

7.15 pm

Lord Forsyth of Drumlean: It might be worth having a look at the committee report that was done on the Barnett formula, which includes a full analysis of these issues. What is traditionally said about Scotland’s broad geography does not actually justify it. The conclusion was actually that Wales gets a rubbish deal, while Scotland is oversupported. But of course, that cannot be changed overnight and it therefore said that we should move towards a transitional system and that funding should be based on needs, in the same way as the Scotland Office—and later the Scottish Parliament—has distributed money to local government, the health service and the rest.

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Lord Bruce of Bennachie: I certainly do not repudiate that point, but it is still worth acknowledging the fact because it is often presented in a glib way—by saying that there are not legitimate reasons why some expenditure in Scotland is significantly higher. I have represented a rural constituency and seen the rural schools which people want to keep open, for example. The unit costs for those are much higher than for urban schools, and such examples need to be taken into account.

We are all frustrated by the fact that we are asked to enact the Bill without the fiscal framework being in place. In the earlier debate the noble Lord, Lord Hain, made the point that some 40% of the UK’s wealth is concentrated in the south-east. In the run-up to the referendum, when the oil price was very high, the SNP was keen to say how much oil had sustained the United Kingdom, but it conveniently forgot the extent to which the United Kingdom had had to bail out the Royal Bank of Scotland and the Bank of Scotland, which an independent Scotland simply could not have done. The SNP’s response was that they were of course no longer Scottish banks, but it would have found some difficulty in arguing that case, had Scotland been independent and those banks been headquartered within their system. There are inequalities of argument in that context.

There is another point that needs to be made absolutely clear. If, in future, taxes fund a significant proportion of what was previously provided by the block grant, and if there is a divergence and different circumstances arise, the reality is that a Scottish Government can do only one of two things: put up taxes or cut services. In fact, they could do both those things. It is right that the people of Scotland should recognise that if they vote for independence, they will find it difficult to maintain what they have at the moment, never mind what the Scottish nationalists promise them, on the basis of the current tax-and-spend regime, and I suspect that that is why the majority voted no. The implications of that are significant.

There is one argument that I find really confusing. I am in favour of the European Union and of the United Kingdom, which I find a very consistent argument, and I am puzzled by people who are in favour of the European Union and against the United Kingdom, or vice versa. At least I and my party have a fairly consistent view on these things: they both involve compromise and negotiation, and both require some form of treaty agreement or contract to settle them. The Minister has to acknowledge that we are getting very close to voting through an Act of Parliament literally in the dark—one that has serious implications for the people of Scotland and is not being properly debated in Scotland. I completely understand the position taken by Labour Front-Benchers—I would not have supported the amendment of the noble Lord, Lord Forsyth, for the same reason—but we are in danger of allowing the argument to be run by one side; we need to hear a balanced argument. We need to hear generosity from the United Kingdom, because the people of Scotland have said that they want to be part of the United Kingdom. I think the UK will say to the people of Scotland, “We want you to stay; we want to find a settlement that works for both of us”. It is not good enough simply to say, “You are going to get that

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tax. It is up to you what you do with it. If it falls short, that is your problem”. That is why I support Amendment 76, and the other amendments in the group have a similar intention. Never mind no detriment: we have to recognise that we need a basic, practical, working arrangement that says, if there is clearly an unsustainable disadvantage to the people of Scotland from a formula that has been openly and honestly agreed, we are prepared to revisit it. Amendment 76 gives a framework for doing that.

It is essential that the Minister address two issues. First, he must explain how we can enact this legislation without having formally acknowledged the formula written in both Houses of Parliament and the Scottish Parliament. Secondly, and more to the point, if we are not able to deal with the matter here and these amendments are not accepted, that leaves the Scottish Parliament as the only arbiter of whether this goes ahead. We all know that it is likely to say, “We couldn’t get a deal so you have to vote for us, because nobody else will give you a decent deal”. However, the truth is that it was offered a pretty generous deal that would have protected Scotland’s position in the United Kingdom and given it more powers and control, which it rejected for the simple reason that it was terrified of the responsibility of having to take these issues up with the people of Scotland and explain the reality of the resources it had and how it was going to balance them out. That is the everyday debate of politics everywhere—except, at the moment, Scotland. We are debating this issue in a vacuum, without facing the fundamental reality that Scotland benefits from being part of the United Kingdom. Scotland wants more control over its own affairs. We have an agreement in principle to deliver that, but we do not have a fiscal framework. Whatever framework is introduced, we need to make sure that we have a mechanism for reviewing it genuinely to reassure the people of Scotland and ensure that it will be fairly and independently assessed, and that if there is a clearly unacceptable and unsustainable disadvantage, as determined by independent commissioners, action will be taken to put that right. If we can get that right, we can win the argument.

Lord Turnbull (CB): My Lords, I support Amendment 75A moved by the noble Lord, Lord Kerr, on debt and borrowing. The amendment is founded on the principle that the UK is a union, constitutionally and financially. There is a common currency, single monetary policy, single exchange rate and a banking union. We have some banks that pretend their headquarters are in Scotland, but they are not really. The public finances of Scotland and the rest of the UK are inextricably intertwined. A large part of public services has been financed—even under the new arrangements, when they are unveiled—by grants in the UK or assignment of revenues. Departments of Her Majesty’s Government have large budgets that they spend directly in Scotland.

The SNP may not like the fact that the union exists, but it does, and certain consequences follow. When the Economic Affairs Committee took evidence on post-referendum arrangements, there was little appetite by then for full fiscal autonomy. It was always an illusion, but it was thoroughly punctured by the gaps in the oil price. Some witnesses argued that, in addition to sensible

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arrangements to deal with short-term fluctuations, Scotland could operate a separate borrowing regime, financed by borrowing in its own name. In effect, that would be policed by financial markets and underpinned by a no bail-out rule. As noble Lords have mentioned, debt issued by the Scottish Government would have its own credit rating with its own risk assessment, and if debt issuance was thought to be excessive its cost would rise and the Scottish Government would be forced to respond. However, most witnesses did not believe this model, given the extent to which the two economies are interlinked, and no one really thought that a no bail-out clause was plausible. Most notably, the noble Lord, Lord Darling, told the Committee that the eurozone has a no bail-out rule that we can see “works very well”. I think he was being ironic, but I cannot be absolutely sure. He thought that a no bail-out rule would be,

“unnecessary and downright provocative and actually sound very patronising … I am part of the UK as well; do not tell me I cannot be bailed out by a country that I happen to be a citizen of”.

That was strongly endorsed by the Committee.

During the course of the referendum, there was some loose talk that said, in effect, “Vote for us and we will put an end to austerity”, but even now in Holyrood there is a recognition that although borrowing policy does not have to be identical to that of the UK, it nevertheless has to be consistent with it and supportive of policy for the UK as a whole. Two things follow from that. First, the amount of borrowing year by year cannot be such as to undermine the Government’s overall borrowing objective. Secondly, the stock of debt, relative to some measure of capacity to repay, cannot be such as to raise the spectre that the UK Government might have to intervene. As the noble Lord, Lord Kerr, stated, this amendment does not seek to specify what those various ratios should be. They should rightly be in secondary legislation. Why, then, is the amendment needed? It is needed to entrench the principle that Scottish fiscal and debt policy cannot be decided unilaterally in Scotland. It has to be related to the policy of the UK as a whole and the limits must be set by the Treasury, consulting the Scottish Government, and should be approved by Parliament. In that way, the amendment fills one of the holes in the Bill, although many are left.

The noble Lord, Lord McFall, mentioned an article, “Sleight of Hand”, by Jim Gallagher, who, as many noble Lords will know, is a former Scottish civil servant and is now a professor. However, the noble Lord did not read the last paragraph:

“So I wonder if this is less about fiscal formulae and more about nationalist politics. It’s becoming pretty clear that the SNP won’t promise another referendum after the next Holyrood election. They think they’d lose. But without it they’ll have nothing to talk about. So maybe their aim is to reject the fiscal framework, whatever is offered and so derail the new powers in the Scotland Bill. Then they can spend the next five years arguing about power, not exercising it”.

Lord Thomas of Gresford (LD): My Lords, I feel obliged to intervene for Wales for a moment, because there is a very solid Welsh dimension in this. I also feel that I can do so because I was married for 39 years to a

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lass from West Lothian and I have always known the answer to the question—which is, “Yes, of course, dear”. The point that really concerns me is that a deal is being done in secret in Scotland, involving the fiscal framework, which will have implications in Wales. As the noble Lord, Lord Forsyth, said, the Welsh deal on the Barnett formula is rubbish. Every political party in Wales recognises that. The Welsh Labour Government refuse to exercise their tax-raising powers until that formula, or some formula, is revised. I fear that this secret formula or framework that is being arrived at in Scotland will be used as a precedent in Wales when we come to deal with tax-raising powers under the draft Wales Bill, and that we will be stuck with the same sort of system, arrangements and mechanisms as there are in Scotland—but it will be entirely different.

Therefore, I urge Ministers, as my noble friends have done, to allow transparency, so that we may actually have some input. Many speakers in this debate have said that it is unfair on other parts of the United Kingdom. Certainly, it may very well be unfair on Wales: the impact of this fiscal framework in Scotland could devastate Welsh funding for the future. I hope that your Lordships will excuse me for putting in a Welsh voice.

The Earl of Kinnoull (CB): My Lords, I support Amendments 76 and 79G. Like many other noble Lords, I have found much that is attractive in many amendments in this debate, but I am confining my remarks to those two. I note that all the amendments and speeches have been wholly consistent with the Smith commission report.

I support Amendment 76 totally, of course, but I fear that it is something that is needed more than once; in fact, I would repeat it every five years. I see it as part of what, in commercial terms, one would call a feedback loop, which I think one needs to set up for every single devolved Administration. It could be well-structured and formal and allow for a frank examination of every aspect of devolution between Westminster and those devolved Administrations. If we do not set up a feedback loop now, as sure as eggs are eggs, when things go wrong we will set one up in the future. I feel strongly, and I think this will come back in further debates, that a feedback loop is required.

Secondly, I was much attracted by the thinking behind Amendment 79G. However, I would not in fact set up a Scottish fiscal commission; rather, I would expand the OBR to include this. As we expand the number of devolved deals, the problem is that we could potentially end up with a massive number of these commissions, all of which would essentially be umpires and all of which, one assumes, would umpire according to slightly different rules. There would be a great advantage to having one umpire in the UK—it has been pleasing to read today in the press how the OBR has resisted political interference in the recent past—which used one set of rules to examine figures and to report generally to the United Kingdom.

7.30 pm

Lord Purvis of Tweed (LD): My Lords, I add support to my noble and learned friend Lord Wallace of Tankerness’s amendment in this regard. It was Baldwin

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who said that democracy was government by explanation but, as we discussed in the previous debate, there has not been much explanation of the development of the fiscal agreement. We need to ensure that when it comes to two broadly competing interests—the Scottish Government and the UK Treasury—there are mechanisms for the agreements and their operation to be reviewed in future.

I was a member of the finance committee in Holyrood for five years when it did not have the role of scrutinising the revenue powers of the Scottish Parliament, and I think it will be a positive thing for it to have those powers. In many regards, though, the processes that exist in Holyrood are not fit for the purpose of the powers that are coming its way. The operation of this power, especially and most importantly in the first five years of operation, will therefore be critical. That is why the amendment is of value.

Of course, I agree with the noble Earl about the benefit of building longer-term structures; my party has proposed one potential option for that, which is what the Canadians would recognise as a federal fiscal commission. When there has been a protracted process of discussions between the Scottish Government and the Treasury, not wholly because of a difference in fiscal policy or a different approach to budgetary discipline but because of a political imperative, that is not going to disappear once agreement has been reached. Indeed, it may be compounded once it is in operation, given the difficult situations that may arise.

This afternoon we have all been reading at pace from the Chief Secretary’s letter, and I think we have all registered with the Minister our complaint that we should not be having to do that as well as discussing the relevant legislation. However, the recommendation to take forward the Scottish Fiscal Commission into a more independent body is worth while, and I would be interested to hear what the Scottish Government’s position is. The problem with is that it has already been legislated for in Holyrood, and we will be asking the Scottish Parliament to go back on what it has just agreed to establish a structure that this Parliament will perhaps argue is not fit for purpose. It makes for an interesting dynamic that the SNP chair of the Scottish Affairs Select Committee is proposing this to the SNP chair of the Holyrood committee, which has a different view on this, but that is for them to resolve and we will be interested in their conclusion. Ultimately, as has been referred to before, the experience of the referendum is that the people are asked to believe figures and facts that are put forward by one Government and those that are put forward by a competing one. That puts civil society and the public in an invidious position. If we are locking this into a long-term approach, that does not bode well for the future.

My final comment is that I know it has been hard to separate the politics from the constitutional practice in this. It has been very hard for those who argue for independence, because this is the final aspect of their arguments. They have lost their argument through the people of Scotland voting for Scotland to stay part of the UK, and in many respects they have lost the argument for full fiscal autonomy. The only argument that is left on the table is the long-term form of devo-plus that we have with this Bill. It is quite hard

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for those who are passionately in favour of independence to recognise that there are structures that could be long-term and stable and could work for the union, because if they accept it then they are undermining their own fundamental approach, so we are asking them to do something that is exceptionally hard for them. So I am not surprised that, to some extent, there has been this to-and-fro.

However, do we want that to be a permanent feature of our constitution and of the relationship with the Scottish Parliament, of which taxpayers on both sides of the border will be the victim? In common with all colleagues in this House who are resident in Scotland, I have received my letter from the Inland Revenue saying that we are now designated Scottish taxpayers and that this is now a real process that is under way. If we want to move away from the situation where the two blocs perpetuate this interest, then we need a regular review mechanism, combined with joint working between the Parliaments, not the Governments—the critical part of my noble and learned friend’s amendment. In addition, by taking out the only bodies that are responsible for making the forecasts for revenue and population growth being the two respective Governments, we will be locking in the kind of difficulties that we have been seeing over the past nine months. I hope that the House endorses my noble and learned friend’s amendment.

The Parliamentary Under-Secretary of State, Scotland Office (Lord Dunlop) (Con): My Lords, we have had a detailed debate with many authoritative contributions, and I welcome the contributions from all parts of the House. We have covered a lot of ground. I will try to do justice to all the issues that have been raised. No detriment, block grant indexation, borrowing, review, scrutiny, commencement—there is a plethora of them, and I hope that the House will bear with me as I try to cover each one. I shall pick up on the points that individual Peers have made on each of those issues.

To start off, I shall remind us of what we are trying to achieve here. We are trying to rebalance the devolution settlement and to give the Scottish Parliament greater responsibility for raising more of what it spends. Currently that is around 10% of the Scottish budget and, once the Bill is in operation, it will be over 50%. That will lead to a Scottish Parliament that is more financially accountable to the people who elect it. The Scottish Government should be able to reap the rewards, and bear the risks and costs, of the policy choices that they make. That is something that the UK Government think is important, and something that John Swinney, the Deputy First Minister of the Scottish Government, has publicly accepted. The noble Lord, Lord McFall, talked about grievance politics. This is an opportunity to move Scottish politics on from the familiar blame game.

Why does the fiscal framework matter? A lot of noble Lords have said that this is central. I certainly agree with the House of Lords Economic Affairs Committee, which said:

“The fiscal framework will be central to future devolution arrangements”.

It is the fiscal framework that provides the financial tools and controls to support the operation of the Scottish Government’s new powers. As with the Smith

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agreement as a whole, this is about striking the right balance: giving the flexibility to the Scottish Government to take their own decisions, while retaining those fundamental UK strengths. That is what the people in Scotland voted for in September 2014 by a clear and decisive majority. Therefore, it is our duty to deliver a Scottish fiscal framework that is sustainable and consistent, as the Smith agreement says, with the overall UK fiscal framework.

I am sure that noble Lords are on the edge of their seats because we have talked a lot about my next topic: the no-detriment principles. The noble and learned Lord, Lord Wallace, said that he had no idea of what the UK Government’s view was of no detriment. Other Peers—the noble and learned Lord, Lord McCluskey, and my noble friend Lord Forsyth—raised the no-detriment principles. The House of Lords Economic Affairs Committee highlights the importance of principles, and the Smith agreement sets out a range of principles against which the fiscal framework must deliver. I would be the first to recognise that these principles set out in the Smith agreement are high level, and it is for the two Governments to agree on how to apply them in practice. Central to the negotiations that have been taking place is how the Scottish block grant adjusts to account for new tax and welfare powers and meets these no-detriment principles.

The first no-detriment principle is that the Scottish Government and the UK Government budgets should be no larger or smaller simply as a result of the initial transfer of tax and spending powers. As the noble Lord, Lord Darling, said, in many ways this is a very straightforward calculation. We have the data, can use actual figures for the final year prior to devolution and apply whatever indexation method is finally chosen.

The second no-detriment principle is that there should be no detriment as a result of Scottish Government and UK Government policy decisions post-devolution. There are two legs to this no-detriment principle. The first is that decisions by one Government that directly affect the revenues or spending of the other should be compensated. What does that mean in practice? It means direct effects: so if the UK Government were to increase the personal allowance, that would obviously have an impact on the tax revenues of the Scottish Government that was totally outwith their control. Looking at it in another perspective, if the Scottish Government used their welfare powers in a way that automatically and in a direct way affected benefit passporting in the reserved welfare system, that would be a direct effect. However, the principle is explicitly not to compensate the Scottish Government for the economic consequences of the policy choices that they make: so, for example, if higher tax rates lead to an increase in net migration from Scotland, that would be a consequence of the decisions that the Scottish Government had taken.

The Smith report is very clear about economic responsibility, saying that,

“the revised funding framework should result in the devolved Scottish budget benefiting in full from policy decisions by the Scottish Government—”

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Lord Wallace of Tankerness: If there was migration from Scotland as a result of higher tax rates, clearly the population ratio would change, and we are being told that there was much discussion around the concept of per capita. How would the United Kingdom Government and the Scottish Government agree on how many of those who have left Scotland have left as a result of higher taxation as opposed to having to look after elderly parents?

Lord Dunlop: As I was saying, that is an indirect, or behavioural effect. It is not a direct effect: that is the point that I was making. What the adjustment mechanism takes into account is these direct effects. They are things that can actually be calculated, but I will come on to talk about behavioural or spillover effects, which is what I think the noble and learned Lord is talking about.

7.45 pm

Lord Forsyth of Drumlean: Before my noble friend does that, will he actually answer the question? It was, how do you tell which is a direct effect and which is an indirect effect?

Lord Dunlop: One is a direct consequence of a policy decision, so in the example I gave of personal allowances, that is a direct consequence of a policy decision that is outwith the control of the other Government. It is not the behavioural or indirect effect, which is about how people react to a decision that is taken. That is the distinction that we are making.

Lord Forsyth of Drumlean: I am most grateful to my noble friend. May we just take the example that he gave—that was raised by the noble and learned Lord, Lord Wallace—of people leaving Scotland? If we have an SNP Government who decide to put the top rate of tax up to 60% and a lot of the WILLIEs and other people decide, “We are going to move south” and they tell their neighbours, “Actually we are moving south because we want to be closer to our children”, how will the Government know how much of the tax base has been reduced as a result of the Scottish Government putting up tax and how much as a result of domestic or other normal movement? There is no way that you can tell that effect. Why would it be appropriate to compensate in those circumstances?

Lord Dunlop: My noble friend misunderstands what I am saying. I am not necessarily saying that those should be compensated for. In the evidence that the Chancellor of the Exchequer gave to the Treasury Select Committee, he said:

“My personal view is that tax competition is something that we should allow”.

He is effectively saying that if there are different tax rates north and south of the border, that is something that we should not automatically try to compensate for. Another example relates to childcare. We all remember that at the time of the independence referendum White Paper, central to the retail offer being made by the SNP at that time was its childcare policy. It was a matter of complaint that, were that policy to be successful and increase income tax revenues, the benefit of that would actually flow to the Treasury and not to the

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Scottish Government. Under the Smith package, if such a policy succeeded in increasing participation by women in the labour market, the benefits of that would flow to the Scottish Government.

Lord Wallace of Tankerness: Teasing this out, may I give an example that is hypothetical in one sense, because it is historic? During the 1990s, the Conservative Government privatised the water industry in England, and, I think, in Wales. Clearly, the decision was taken by the then Conservative Government not to do so in Scotland. However, after that privatisation had taken place, there were no further consequentials under the Barnett formula for Scotland. The money had to be found to fund the water industry in Scotland in public hands. If the arrangements that we are now talking about had been in place then, and the UK Government had decided to take the water sector into private ownership in England and Wales, which would have led to a decrease in the funding for Scotland, would that have been a detriment for which the Scottish Parliament would have had to be compensated?

Lord Dunlop: No, I do not believe that that would be a no detriment in the sense that the UK Government would have to compensate the Scottish Government. The situation would apply; the Barnett formula would apply; the equivalent departmental spending from England would flow through to Scotland. I do not think that this package changes that at all. Although the ownership structure north and south of the border is different, the cost of this on both sides of the border is met in water bills.

Lord Forsyth of Drumlean: The Smith commission report says in paragraph 4a:

“Where either the UK or the Scottish Governments makes policy decisions that affect the tax receipts or expenditure of the other, the decision-making government will either reimburse the other if there is an additional cost, or receive a transfer from the other if there is a saving. There should be a shared understanding of the evidence to support any adjustments”.

On my understanding of what these words mean, with the precise example of the water industry, which I have repeatedly asked about in the past, how can my noble friend say what he has just said from the Dispatch Box when the words have a different meaning? Are we to understand that the Government are departing from the meaning of the no-detriment principle as set out there?

Lord Dunlop: No; we are not departing from the Smith agreement at all. It is the function of the negotiations. As I say, these are high-level principles, and the two Governments have to work out how these principles are applied in practice. That is what we are doing. The Barnett formula will continue to operate and determine departmental spending and how that flows through in Barnett consequentials. That will not change.

Lord McFall of Alcluith: The noble Lord mentioned the issue of WILLIEs—people who work in London but live in Edinburgh. If the Scottish Parliament put up the rate of tax and these individuals then decide to pay themselves in dividends, that would be tax competition, therefore the Scottish Government would not be compensated. Am I correct?

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Lord Dunlop: As I said, as regards tax competition, that would not be counted for in terms of compensation. I hope that I have made that clear.

Lord McCluskey: May I ask about a point on the language used by the Minister? He drew a distinction between direct and indirect detriment but I look in vain in the Smith commission report for these adjectives. I know that my noble and learned friend has a copy here, as do I. What is the basis for the Minister drawing a distinction between direct and indirect detriment?

Lord Dunlop: As I said, the Smith agreement is a set of high-level principles. The negotiations are about how the two Governments apply those principles in practice. When, as I hope, the fiscal framework is agreed shortly, the noble and learned Lord will see how the two Governments have reached an agreement as to how these principles will apply in practice. That is what the discussions that have been going on for the past months have been all about.

Lord McCluskey: Is that expression “high-level principle” a euphemism for low-level politics?

Lord Dunlop: No; it is the responsibility of the two Governments to work out this package of powers and how the fiscal framework will work in practice, which is what we are doing.

Lord Purvis of Tweed: I am anxious to make time before the Minister moves on from this specific aspect of indirect detriment—I know that he will come on to behavioural aspects soon. Will there be one body which will define what these indirect impacts are, with choices north and south of the border, or will we see a perpetual process of two Governments having disputes about how they will define what the indirect consequences are of policy choices north and south of the border?

Lord Dunlop: No; we will not see disputes, because that is the process we are involved in at the moment, which is to reach an agreement on how all these aspects operate. That is what we are doing. When I say that I am optimistic that we will reach an agreement, that is on the basis of the discussions we have had so far and the issues that remain outstanding.

I will move on to the second leg of the second no-detriment principle, which is to do with taxpayer fairness. Changes in devolved Scottish taxes—for example, income tax—should affect public spending only in Scotland, and vice versa for equivalent taxes in the rest of the UK. What does that mean in practice? It means that taxpayers in Newcastle and Liverpool will not fund even higher levels of public services in Scotland not available to them. The noble and learned Lord, Lord McCluskey, touched on some of these issues in his recent Herald article, which has already been referred to. The other aspect is that Scotland does not inadvertently gain a double benefit, via Barnett consequentials and a fixed proportion of any growth in tax revenues from the rest of the UK.

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In conclusion, therefore, in this part of what I intend to say, some block grant adjustment mechanisms work better against different principles, and the UK Government’s approach is to find a mechanism that performs well against all of them. Each principle is not perfectly met in every respect, which is what we are trying to deal with in the negotiations that are going on at the moment.

Lord Kerr of Kinlochard: Has the Minister looked at that bit of the Economic Affairs Committee report, where the committee comes to the view that it is easy to understand the first no-detriment principle at the outset—the ab initio principle—but that the attempt to legislate for or to operate a no-detriment principle down the years is a will-o’-the-wisp: it cannot work? If this is what is holding up the fiscal framework, call it off—it will not work. You cannot distinguish over time whether the tax take went down because of the tax measure, a change in the Scottish economy or in the world economy, or in the oil price, so you have a recipe for a continued debate, with the argument going round every time if you are trying to say that there must be no detriment down the years. Abandon it—it will not work. The Smith commission did not say how it would work, and I do not for a moment believe that it thought it would work. It is a lovely principle to get people to agree and then they can go home, but we are doing something different now.

Lord Dunlop: We very much recognise what that report says, which is that if you interpret the no-detriment principle as applying absolutely literally to all effects, whether behavioural or indirect, it is very difficult to arrive at a single solution. However, these are the issues that are being addressed in the negotiations, and when the framework agreement is published the noble Lord will see how the two Governments have addressed those issues.

On the block grant indexation mechanism, Smith says that,

“future growth in the reduction to the block grant should be indexed appropriately”.

There has been much talk about the need to avoid endless wrangling. We are therefore trying to make this process as mechanical as possible. The issue is how much of the growth in relevant taxes in the rest of the UK will benefit Scotland post-devolution.

With new powers come new responsibilities, and, as has already been mentioned this evening, the debate is around appropriate allocation of responsibilities between the UK and Scottish Governments and what is a fair division. The UK Government continue to manage UK-wide risks and the Scottish Government manage marginal Scotland-specific risks. To give an example, if there is a UK-wide recession, there will be a smaller block grant deduction to shield Scotland from UK-wide impacts because the growth in UK taxes will be lower. We have achieved agreement before with the Scottish Government for the Scottish rate of income tax, which is indexed against movements in corresponding UK Government tax.

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The key issue, which has been raised in the debate by the noble Lord, Lord McFall, and other noble Lords, is how population change is managed. The UK Government will continue to manage the impact of UK-wide population change in all devolved areas. We are looking for the Scottish Government to manage marginal Scotland-specific changes. The Scottish Government already manage these changes within Barnett, and John Swinney, when he appeared before the Scottish Parliament Finance Committee last summer, accepted this.

The UK Government’s proposal, which is contained in the Chief Secretary’s letter, addresses this population concern and we are prepared to share the risk. The model we have tabled recognises that Scotland’s share of income tax revenue is less than its population share and it ensures that, like Barnett, the tax adjustment takes account of changes in Scotland’s population. So if Scotland’s population share falls then so will the tax deduction.

However, let me be clear: we cannot agree something where the Scottish Government are not accepting their fair share of population risk. Why? If it is right that Scotland retains all the growth in its own tax revenues, then it is difficult to explain as fair that a fixed proportion of growth in the rest of the UK’s own devolved tax revenues is added to the Scottish budget irrespective of how good or bad are the policy choices of the Scottish Government and the relative performance of the Scottish economy as a result.

8 pm

Lord Wallace of Tankerness: This is the point I was trying to get at before. The Minister has just said it; he may correct me, and I apologise as it is complex. He said that, if the Scottish population falls and is a lower proportionate share of the population, there would be a lower tax deduction. But if that population has fallen because of the tax policies of the Scottish Government, why should there be a lower tax reduction?

Lord Dunlop: I think we are reflecting at the outset that Scotland produces a lower proportion of total UK income tax. We are applying that comparability factor from the outset. The Scottish Government will still bear population risk. If there is deviation from that initial situation—whether it is a result of their policy choices—that is how they would bear the population risk.

Lord Darling of Roulanish: Can the Minister explain another point he raised? I am puzzled how it will ever be possible within a reasonable timescale to properly assess whether a measure taken by either the UK Government or the Scottish Government resulted in higher growth and therefore a higher tax rate or the other way round. The Minister must know that most of these matters are in dispute, sometimes for years, because no one can be really sure why a tax take went up or down. There can be a hunch or a feeling, but these things are contested maybe even decades after they happen. Given that this is a settlement that has to fix the grant every year, I am just wondering how you do it.

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Lord Dunlop: As I said, the agreement will set out the mechanism by which these matters are determined, so in that sense we will have reached agreement. That will avoid the perpetual wrangling. If you like, that is one of the complexities that we have been wrestling with and why it is taking time—

Lord Darling of Roulanish: I have one more observation. I am just wondering how, in the case of the SNP, perpetual wrangling can be written out of the script.

Lord Dunlop: A good start is if we actually get an agreement that, I hope, we can announce in the not too distant future.

Lord McFall of Alcluith: Can I press the Minister on this? We have three models in front of us—the per capita index deduction, the index deduction and the levels deduction. Do I take it that the Minister has ruled out the per capita index deduction because there is too much of a bias to Scotland in terms of its population going down and it being rewarded excessively? Looking at the Chief Secretary’s letter, it would seem that the Government from paragraph 13 onwards have looked at the levels model and the index model and decided to provide another hybrid model to the negotiations for the SNP. Is that what the Government are doing? Given paragraph 13, I asked earlier what the response of the Scottish Government has been. Are they warm to that hybrid model now?

Lord Dunlop: The Committee will understand that at a very delicate time in the negotiations I do not want to comment on the state of the negotiations in detail. It is clear from the Chief Secretary’s letter that we have indeed tabled what the noble Lord described as a hybrid model.

I shall pick up on a point made by the noble Lord, Lord Forsyth. We are seeking to avoid—I think the Secretary of State for Scotland put it this way in a recent debate—the Scottish Government wanting to have their cake and eat it and have a slice of everyone else’s cake while they are at it.

I now turn to borrowing, which was raised by the noble Lords, Lord Kerr, Lord Darling and Lord Turnbull. I should say at the outset that we have a lot of sympathy with what this amendment seeks to achieve.

Lord Forsyth of Drumlean: I have a question before my noble friend moves on. I accept we have had a good go on this but I am still—perhaps I am just not smart enough to understand this—struggling to understand the Government’s position. It once was that, if Scotland is responsible for particular services, it should be responsible for raising the money and have direct accountability. What appears to be happening now is that the Government are trying to find some kind of Barnett-like top-up to the tax base. How is that going to go down with people in England? How will it take account of changes in England? For example, suppose a large number of migrants come into the country and live in the south-east of England and increase tax revenues and the tax base relative to Scotland, will that mean that there has to be money

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sent north of the border to maintain some kind of parity? I just do not understand how this will work. Can my noble friend explain?

Lord Dunlop: If there is faster population growth in the rest of the UK, that obviously will not just increase tax revenues. It will also increase demand for public services. This negotiation is all about a fair allocation of risk. As I said, at this delicate time of the negotiations I do not want to comment in detail about particular aspects. We will publish this agreement if and when we can get it and I will be very happy at that point to discuss and debate with my noble friend on these matters.

I have great sympathy with what the amendment tabled by the noble Lords, Lord Kerr and Lord Turnbull, seeks to achieve. It is centred on the Scottish Government’s resource and capital borrowing powers and this is an important part of the negotiations. The noble Lord, Lord Kerr, asked whether this is a matter of great controversy. I do not anticipate—if we can reach agreement soon—that this issue will cause great controversy. In detail on resource borrowing, Smith talks about sufficient and additional powers to,

“ensure budgetary stability and provide safeguards to smooth … public spending in the event of economic shocks”.

The current powers of the Scottish Government are that they can borrow up to a total cap of £500 million for this purpose and an annual limit of £200 million for cash management and forecasting error in devolved tax revenues. The rationale for more in this area is the increased risk and volatility from a greater scale of tax devolution, although I again stress that this a marginal Scotland-specific risk. This needs to be proportionate. Mindful of the need to deliver sustainable UK public finances, as the noble Lord, Lord Turnbull, said, Scottish borrowing is included in UK borrowing.

When we look at these borrowing powers, we need to look at the other tools that are available to help manage the risks—the possibility of building up a rainy-day fund and the block grant adjustment mechanism itself. We also need to cater for Scotland-specific shocks if the Scottish economy is in recession while the UK economy continues to grow. That is a relatively rare event—I think it has happened three times in the last 20 years. We need to do this to protect against relative underperformance leading to worse economic outcomes through higher taxes or lower spending during recession. I pick up on a point that the noble Lord, Lord Darling, made: it is explicitly not a facility for the Scottish Government to borrow to fund current spending in normal times. That would absolutely undermine fiscal responsibility and accountability.

On capital borrowing, Smith talks about sufficient borrowing powers to support capital investment. He asked the two Governments to look at a similar prudential borrowing regime used by local authorities. The current powers involve a total cap of £2.2 billion and an annual limit of 10% of the capital grant, which is currently about £3 billion, so we are talking about £300 million per annum. All borrowing needs to be complemented by fiscal rules to ensure consistency with the overall UK fiscal framework.

The noble Lord, Lord Kerr, specifically asked about legislation. The Scottish Government’s existing borrowing

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powers are provided for in the Scotland Act 1998 as amended by the Scotland Act 2012. Any changes to the purposes and circumstances for which the Scottish Government have permission to borrow to reflect the transferred risks may require amendments to primary legislation. I assure noble Lords that we will review further what primary and secondary legislative changes may be needed in the light of a fiscal framework agreement, including additional independent scrutiny of the Scottish Government’s public finances, to which the noble and learned Lord, Lord McCluskey, referred. Both Houses of the UK Parliament will have an important scrutiny role.

Lord Turnbull: Will the Minister clarify a matter for me? When he talks about additional primary legislation, is he talking about bringing forward an amendment to this Bill or about a new Bill to be brought forward on some other occasion? It really belongs in this Bill.

Lord Dunlop: As I said, it depends on the timing of an agreement. Obviously it would be preferable, if possible, to provide amendments for this Bill, but that depends on our reaching an agreement and the timing of that agreement.

Lord Kerr of Kinlochard: The noble Lord said that this is not the most controversial element. In fact, he implied that it was not controversial at all. In that case, do we have to wait for all the difficult bits of the fiscal framework to be agreed before we see the easy bits coming out if there are outcomes there? My noble friend Lord Turnbull is right that this Bill would be better if there were a provision in it on borrowing. I do not know whether my language is correct but this is different from the 1998 Act. We are explicitly laying down the mechanism for settling these limits because it is a reasonable assumption that there will be much more borrowing. I think it is desirable to amend the 1998 Act and, if we are going to do that, why not do it in this Bill?

Lord Dunlop: The difficulty is that you cannot separate out one element of what is an overall package. Both Governments have agreed that nothing is agreed until everything is agreed. Therefore, I do not think it is possible to pluck out just one aspect and to move ahead with it on a different timescale.

Lord Forsyth of Drumlean: Perhaps I might get the politics of this right. The proposal is that we absolutely have to get this Bill on the statute book before the Scottish elections but, come those elections, we will be able to say that there is another Bill coming down the track to deal with these matters, and we may or may not have the detail on that. Is that not going to defeat the object? Was not the position of both Front Benches earlier this afternoon that we had to deliver the vow and say that we had delivered it? If another piece of primary legislation is coming and as yet we do not know what it is going to say, does that not undermine the whole strategy?

Lord Dunlop: No, I do not believe that it does. My noble friend is asking me to comment on hypotheticals. We are engaged in trying to reach an agreement in as

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timely a fashion as we can to ensure that we have proper scrutiny of the fiscal framework in the context of the passage of this Bill.

I am conscious that time has been moving on and I shall be very happy to return to some of these topics on another occasion. However, I just want to pick up on a couple of points.

8.15 pm

Lord McFall of Alcluith: There does not seem to me to be a need for separate legislation on borrowing. It is very important that the Minister clarifies that point now, otherwise we will just be chasing shadows afterwards.

Lord Dunlop: As I said, what we require in terms of legislation for borrowing depends on the final agreement. I do not think I can say more than that at the moment.

I shall conclude on a couple of points. Smith calls for a review and the Government support that idea. We are in a new world and it is right to assess how the fiscal framework and fiscal devolution work in practice and whether they impact fairly and equitably on the finances of Scotland and the rest of the UK.

I have already mentioned independent fiscal scrutiny, and the amendment from the noble and learned Lord, Lord McCluskey, addresses this. It is certainly the case that the UK Government strongly support a robust independent Scottish Fiscal Commission. That would include the capacity for that body to undertake independent forecasts—it would not just, as it were, be marking the Scottish Government’s homework. That is one of the key issues in the fiscal framework negotiations.

Finally, on commencement, my noble friend’s amendment is relevant in proposing a sunrise clause if we are unable to agree a fiscal framework. As we have already discussed, we are working hard to agree a fiscal framework. As I said earlier, I do not think that it is helpful to speculate what options would be open to us if an agreement cannot be reached. My noble friend suggested one option, and other options have been suggested as well. We will take those ideas away and set out our conclusions on Report. I therefore ask noble Lords not to press their amendments.

Lord McFall of Alcluith: I beg leave to withdraw my amendment.

Amendment 75 withdrawn.

Amendment 75A

Tabled by Lord Kerr of Kinlochard

75A: After Clause 19, insert the following new Clause—

“Borrowing powers

(1) Section 66 of the Scotland Act 1998 (borrowing by the Scottish Ministers etc.) is amended as follows.

(2) For subsections (1A) and (1B) substitute—

“(1A) Subject to subsection (1B), the Scottish Ministers may borrow by way of loan or by the issue of bonds (but not bonds transferable by delivery) any sums required by them.

(1B) Borrowing by Scottish Ministers shall be subject to—

(a) annual limits; and

(b) an overall ceiling.

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(1C) The annual limits and the overall ceiling shall be set by regulations made by the Treasury, following consultation with Scottish Ministers.

(1D) Regulations under subsection (1C) may not be made unless a draft of the regulations has been laid before and approved by a resolution of each House of Parliament.””

Lord Kerr of Kinlochard: I understand the Minister’s point about nothing being agreed until everything is agreed. That seems to me a very reasonable point to make. However, that applies to the numbers, the levels and the ceilings; it does not apply to the principle of limits and having them in the Bill. If that is not controversial, I really think that on Report we ought to see it, not necessarily in my language but in some language, in the Bill.

Amendment 75A not moved.

Amendment 76 not moved.

Clause 20: Disability, industrial injuries and carer’s benefits

Amendment 77

Moved by Lord Davidson of Glen Clova

77: Clause 20, page 23, leave out lines 4 to 12 and insert “a disabled person or person with a physical or mental impairment or health condition in respect of effects or needs arising from that disability, impairment or health condition.”

Lord Davidson of Glen Clova (Lab): My Lords, I rise to speak to Amendments 77 and 79 in my name and that of my noble friend Lord McAvoy. The focus of Amendment 77 is the current definition of “disability benefit” used in the Bill. The concern is that this may place unnecessary limits on the kind of replacement benefit that the Scottish Government have the power to introduce. The fear is that it may not allow the Scottish Government to introduce a benefit to assist people with very low-level disabilities or those for whom the effect of their disability is largely financial.

We moved this amendment in relation to carer’s allowances at Committee stage in the other place following concerns raised by third-sector organisations. The concern from both Inclusion Scotland and Citizens Advice Scotland has been that the definition of disability might,

“restrict the autonomy”,

of the Scottish Parliament,

“to construct a new system based on empowering disabled people to lead active and productive lives and promoting the human rights of disabled people and independent living”.

Amendment 77 would offer an alternative, broader, more flexible definition of “disability benefit” that would, among other things, allow the Scottish Parliament to introduce a benefit to assist people with low-level disabilities or those for whom the effect of their disability is largely financial.

The Government brought forward an amendment on Report in the other place regarding the “carer’s allowance” definition. However, they do not appear to have done the same in relation to the “disability benefit” definition. True it is that the Ministers, the noble Lords, Lord Dunlop and Lord Freud, have both written

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to this side of the House trying to clarify the Government’s position. The letter we received from the Minister includes the following,

“by including the phrase ‘normally payable’ at the head of the definition, the provision gives the Scottish Parliament the necessary flexibility to create exclusions or create special categories, for example to enable provision for people who are terminally ill or those with lower needs”.

I do not, of course, doubt in any way the accuracy of the Minister’s statement, but on this side we are still keen to get assurances from the Minister on the Floor of the House and confirmation that the Scottish Government could introduce a benefit to assist people with very low-level disabilities or those for whom the effect of the disability is largely financial. That, in a nutshell, is the position that we adopt in relation to Amendment 77.

Amendment 79 provides for the devolution of the Access to Work scheme. This was an amendment that we moved at Committee stage in the other place. As my honourable friend the Member for Edinburgh South observed in the other place:

“Access to Work provides practical advice and support to disabled people, and their employers, to help them to overcome work-related obstacles resulting from disability”.—[Official Report, Commons, 30/6/15; cols. 1429-30.]

The devolution of the programme to local authorities would certainly allow there to be better tailoring to local needs.

Access to Work is closely aligned with employment support. Several charities, including Inclusion Scotland and the Wise Group, are in favour of Access to Work being devolved to Scotland. ENABLE Scotland observes that the Access to Work scheme is one of the most important elements of the employment support system for disabled people. It gives various examples, such as the British Sign Language interpreters working for deaf employees.

ENABLE Scotland states its position as believing that,

“the devolution of Access to Work is necessary to deliver integrated and accessible Employment Support in Scotland”.

Its position, which we share, is that Access to Work,

“does not currently integrate well with employability programmes”,

that are sometimes not fully delivered by the Department for Work and Pensions. It continues:

“For example, if you are a person on Work Choice you can use Access to Work to get pre-employment support in interviews or agree support whilst transitioning into work. Persons supported by the Employability Fund … do not have access to that support and face increased negotiation and bureaucracy to get the support … Given that post-devolution the employability programmes will not be delivered by the DWP, failure to devolve Access to Work in parallel will limit access for Scottish jobseekers and increase bureaucracy for specialist support organisations and employers”.

The Scottish Council for Voluntary Organisations also supports the devolution of Access to Work. It takes the view that that is necessary to create the integrated accessible form of employment support that it considers, as do we, should be created in Scotland. A women’s charity in Scotland, Engender, has also identified support for devolution of the Access to Work scheme, which it says is necessary for improving overall support for disabled people.

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There are four questions that the Minister could assist us by answering. I do not expect immediate direct answers to them all; an answer in writing, in the usual terms, would be fine. These questions are as follows. An integrated package of employment support measures is essential to ensure the best outcomes for disabled people—I assume that there is no disagreement about that. So what effect will absence of Access to Work in the devolution package have on outcomes for disabled people?

Secondly, will the Minister address the points raised by ENABLE, supported by the SCVO? It says that failure to devolve Access to Work in parallel with the Work Programme and Work Choice will,

“limit access for disabled jobseekers in Scotland and increase bureaucracy for specialist support organisations and employers”.

Thirdly, does he believe that Access to Work complements the employment support programme already being devolved to Scotland? Finally, if the Government are committed to keeping this programme as a reserved matter, does that not make an even stronger case for a Joint Committee on welfare devolution to be set up? That idea is covered in a further amendment, tabled by my noble friend Lord McAvoy.

A number of amendments tabled by the noble Lord, Lord Kirkwood, seem to have a broadly similar intent—to prevent the UK Government from clawing back top-up benefits paid by the Scottish Government through means-testing reserved benefits. We on the Labour side have similar concerns. The Scottish Government should be able to make top-up payments to individuals who have had their payments unfairly reduced, suspended or withdrawn under the UK Government’s sanctions regime.

We accept that Her Majesty’s Government have tabled a significant number of amendments for Report stage that mean that the Scottish Parliament appears to have complete power to create new benefits in devolved areas and top up existing benefits—which, of course, we fully support. However, Labour outlined in the other place our wish for the Scottish Government to be able to make payments to those who have been sanctioned. The Minister may well have already covered that position. Certainly in meetings with him, which were extremely helpful, it has been suggested that the question in relation to sanction is already covered by the legislation. None the less, as with the previous amendment, it would be extremely useful for us if the Government were to confirm that for the record.