“NOT many turkeys get the chance to vote for Christmas twice: but the Scottish Government has managed it.”
That is the conclusion of a new report which argues that Scotland is now a part of a “malfunctioning monetary union” thanks to a fiscal deal struck with the UK Government over the summer.
Jim Cuthbert, an economist and former chief statistician at the Scottish Office, has penned the report – The Turkey That Voted For Christmas (Twice): How Poor Negotiation Of The Fiscal Settlement Has Failed Scotland – which argues that the Scottish Government agreed to detrimental terms in the 2016 fiscal review, before backing their continuation in a 2023 deal.
The think tank Common Weal, which has published the paper, have also raised concerns that the negotiations which led to the renewed settlement were “behind closed doors” and free from public scrutiny.
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It comes after an announcement in early August that the Scottish and UK Governments had agreed key changes to the funding model for the devolved administration.
Among the changes, borrowing and reserve limits were set to grow in line with inflation and the existing Indexed Per Capita (IPC) stop-gap method – used to calculate the funding received from the UK Government – was adopted permanently. The IPC method was chosen ahead of the Comparable Model (CM).
But Cuthbert (below) argues that the choice between the IPC and CM models was a “negotiating trick” from the UK Government that relied on the “unjustified” conclusion that Scotland should accept all of the risks associated with tax devolution.
He argues: “A standard feature of monetary unions is that the one-size-fits-all monetary policy implicit in a monetary union will not be optimal for all areas within the union at the same time. This means that fluctuations in relative economic performance between different parts of the union are a virtually inescapable feature.”
As such, Scotland could find its tax receipts and economic performance lower than expected due to no policy of its own – but will still be expected to foot the bill.
Cuthbert argues: "Acceptance of this principle, therefore, means that Scotland moves from being part of a fairly inefficient, but somewhat functioning monetary union, to being a member of a very inefficient and malfunctioning monetary union."
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The former Scottish Office statistician also argues that the limited borrowing powers held by the Scottish Government force it to make “sub-optimal” decisions. In one key example, he points to the use of public-private sector partnerships (PPPs).
Cuthbert writes that PPPs allow for a way around borrowing limits, but bring further problems: “Under this type of arrangement, the private sector builds the relevant asset, which appears on its books, and so does not count against the Scottish Government’s capital budget or borrowing limit…
“Such schemes were abandoned by the UK Government – but not in Scotland (or Wales, which is subject to similar fiscal settlement constraints).
“In Scotland, the Scottish Government retains the option to use a form of PPP called the Mutual Investment Model, which is acknowledged to be more expensive than conventional procurement.”
Speaking after the 2023 fiscal deal with the UK Government was struck, Deputy First Minister and Finance Secretary Shona Robison (above) said: “This is a finely balanced agreement that gives us some extra flexibility to deal with unexpected shocks, against a background of continuing widespread concern about the sustainability of UK public finances and while it is a narrower review than we would have liked, I am grateful to the Chief Secretary to the Treasury for reaching this deal.”
Speaking on the publication of the report, Common Weal policy chief Craig Dalzell said: "In 2016 the Scottish Government signed a bad deal that severely constrained Scotland's finances. This was a mistake but at least one made with the chance to correct it this year. The Scottish Government missed that chance.
“They should have negotiated an expansion of borrowing powers and a correction to the fiscal squeeze that devolution imposes. More importantly though, these negotiations should not have taken place behind closed doors but in the full view of public scrutiny.”
An exclusive In Common newsletter from the report’s author, Jim Cuthbert, will be sent out on Thursday evening. Sign up here to get it direct to your inbox.
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