What's the deal with the Fiscal Framework?

It is true that Kezia Dugdale has helped kick-start a vital debate on tax-raising powers in Scotland. And for this, she should be commended.

But because of her timing and the imperfect nature of what she has proposed, she has also helped drive what should be a dynamic and informed discussion about Scotland’s approach to its future finances into a political cul-de-sac.

And so, after years of schtum from the Labour Party on using the tax powers that Scotland already had, Dugdale’s plan to increase the Scottish Rate of Income Tax, which comes into play in April, by 1p to raise £400m to pay into council coffers, has unleashed a cacophony of political commentary that has deliberately been conflated with a debate about a local government funding gap, job losses, and who is the true party of the Scottish left.

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It has also helped traduce the vital issue of local taxation into one solely centred on a council tax freeze.

One can only assume the politics that drove such a cack-handed attempt to plug an immediate financial hole with a time-limited income tax plan, which had begun to unravel almost as soon as it was spun, were all to do with exposing the SNP as a left-wing sham and not to demonstrate the fiscal elegance of the Labour Party.

At best, it was a snap reaction to a political opportunity that she felt couldn’t be missed. But it demonstrates the short-termism that so often characterises our politics.

However, there is one central point to this which is pertinent to the ongoing and somewhat stalled discussions between the UK and Scottish governments about the fiscal framework which will underpin the current Scotland Bill. That is this: taxation is something that Scottish politicians are going to have to start talking about.

Now I have always argued that the Smith Commission was a flawed knee-jerk reaction to the referendum. There was little technical support applied to complex issues of policy overlap and a timeframe that was simply unrealistic and left much of the 18,000 submissions to it unread.

It was a political gimmick in response to a constitutional divide. Scotland had voted No but had been promised so much more.

The Scotland Bill was, for that reason, always going to have a gremlin at its core. Lord Smith may have thought he was clear that there should be ‘no detriment’ to either Scotland or the rest of the UK with the transfer of new powers, but what ‘no detriment’ meant has been left to interpretation.

Economists like Professor Anton Muscatelli, the principal of Glasgow University, and those big brains at the IFS, have argued that the Scotland Bill could leave Scotland £7bn worse off because of the way the Scottish block grant allocation would be calculated; a point up until now disputed by the Treasury.

However, Treasury officials this week undertook a round of private briefings to journalists, making public a proposal that it put on the table to the SNP Government two weeks ago that it would offer a £4.5bn ‘subsidy’ to Scotland to close the deal, while still claiming that the £7bn fiscal hole was untrue.

However, this revelation of the Treasury’s unexpected kind-heartedness still leaves the question of a £2.5bn funding gap which UK Government sources say the Scottish Government could surely swallow, if, of course, the gap was indeed true.

There are others in the Scottish Finance Secretary’s team who obviously see it differently. They say, a £2.5bn reduction in the Scottish coffers over 10 years might just equate to rounding up figures on a UK Treasury balance sheet but would be critically important to Scotland’s public services.

John Swinney has little choice. If the deal remains the same, how can he possibly accept a contract on behalf of Scotland that locks us into a long-term fiscal arrangement that flies in the face of the Vow and that he says fails the ‘no detriment’ clause in terms of its economic fairness to Scotland?

Next week, the Treasury will pore over a further response from Swinney that will offer to move on the ‘no detriment’ to the UK side of the deal. So, if for instance the UK Government put up income tax and used it for the English health service, that would be seen as the English taxpayer paying for an English service and Scotland would not get a bean.

Meanwhile, the Devolution (Further Powers) Committee at the Scottish Parliament has called for both Swinney and David Mundell, the Secretary of State for Scotland, to come before it later this month to make all papers related to the fiscal framework negotiations public in advance.

All sides are saying they are prepared to make a deal, but with none yet forthcoming there are some in the Scottish Government puzzling over the Treasury’s stance. They see no logic in a Conservative-led UK Government allowing the SNP to go into May’s election claiming Scotland has been let down and, crucially, being able to show how they would have used the new tax powers if only their hands weren’t still tied.