Implementation of the Scotland Act 2016: third report

8. Chapter Eight – Fiscal Framework Implementation

This chapter covers further areas of Fiscal Framework implementation relevant to this Report: Audit and Accountability and Policy Spillovers.

8.1 Progress on Policy Spillovers

Key Development

• The Scottish Government has requested a spillover be considered in relation to the UK Government increases to the Personal Allowance in 2018-19 and 2019-20.

8.1.1 The Fiscal Framework agreed that "where either government makes a policy decision that affects 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." These financial consequences of policy decisions are termed "spillover effects".

8.1.2 The Fiscal Framework distinguishes between direct spillover effects and behavioural spillover effects. Direct effects occur directly and mechanically as a result of a policy change before any associated change in behaviours. Behavioural spillover effects occur as a result of people changing behaviour following a policy change.

8.1.3 As part of the Framework, the UK and Scottish Governments agreed to account for all direct spillover effects and behavioural spillover effects in material, demonstrable and exceptional circumstances. Any transfer for spillover effects must be jointly agreed by both Governments. The UK and Scottish Governments agreed guidance on how the process for direct effect spillovers would work in December 2017.^[12]

8.1.4 As part of this process, the Scottish Government has asked that a spillover be considered regarding the UK Government's decision to increase the Personal Allowance for 2018-19 and 2019-20. This is because UK Government's decisions to increase the Personal Allowance for 2018-19 and 2019-20 have a relatively larger impact on Scottish income tax liabilities, because Scotland has proportionally more basic rate taxpayers than the rest of the UK. This means that these decisions reduce the Scottish income tax base and income tax receipts proportionately more than the rest of the UK income tax base.

8.1.5 The Scottish Government and UK Governments will continue to discuss this matter through the Joint Exchequer Committee.

8.2 Audit and Accountability Framework

Key Development

• The Audit and Accountability Framework was agreed on 27 February 2019.

8.2.1 The Fiscal Framework contains high-level principles for how accountability to Parliaments and audit arrangements of devolved services should work. Scottish Government and UK Government officials agreed an Audit and Accountability Framework on 27 February 2019 to set out how these principles should be applied in practice.

8.2.2 This Framework contains clear and consistent principles that will allow UK and Scottish auditors to support their respective Parliaments in holding public bodies to account without unnecessary duplication, with clear and distinctive lines of accountability, and in a manner that respects and facilitates their status as independent bodies. Close attention has been paid to the Scottish Parliament and Audit Scotland's recommendations throughout the drafting process. UK Government officials have also shared the drafts with the National Audit Office and the UK Parliament and their feedback has also been taken into account.

8.2.3 The Framework will be examined in the course of the wider review of the Fiscal Framework, which will present the opportunity to revisit these issues with the benefit of experience of its operation in a real-world context.