The Scotland Bill, currently making its way through the Houses of Parliament, will transfer a range of tax and spending powers from Westminster to the Scottish Parliament. At the same time, an adjustment will have to be made to Scotland’s block grant funding from Westminster. Alongside things like changes to borrowing powers and fiscal institutions, these block grant adjustments (BGAs) form a key part of the new “fiscal framework” Scotland will require when these powers are transferred.

 

Unlike the tax and welfare powers, the fiscal framework is not part of the Scotland Bill. The report of the Smith Commission, on which the Bill is based, did not have the time (or perhaps the expertise) to design the fiscal framework. Instead, it laid down a number of principles for its design. This paper focuses on the effects of different options for determining the BGAs, and how these fit in with the Smith Commission’s design principles. It finds that the precise way in which the BGAs are indexed over time could mean differences of over a billion pounds a year in the Scottish Government’s budget after a relatively short period of time. Its analysis suggests that the Smith Commission’s principles may not be workable and are not mutually compatible. It also argues that there would be real merit in a more fundamental reassessment of devolved government finance – including the Barnett Formula. A more radical reform might help address some of the difficulties this paper identifies.