Scotland's Fiscal Devolution Story
An account of how Scotland's fiscal landscape has transformed over the past 3 decades, with an overview what fiscal devolution has enabled, how the system now operates and the medium-term challenges ahead.
1999-2012: devolution of new public spending responsibilities
The creation of the Scottish Parliament and Scottish Executive (later the Scottish Government) marked the most significant transfer of powers to Scotland since the 1707 Act of Union. In 1999, following the passing of the Scotland Act 1998, they took over responsibility for many aspects of public spending in Scotland that had been the function of the Scottish Office, including health, education, justice, local government, police and fire, and economic development.
Over the next decade, the Scottish Parliament gained further powers through legislation, agreement and administrative changes. Devolution also fundamentally changed the nature of Scotland’s public sector ‘balance sheet’, with significant assets such as Scottish Water, one of the largest public sector water companies in the UK, valued at £6-8 billion, and the later establishment of ScotRail Trains, which has become a key part of Scotland’s transport infrastructure. Caledonian Maritime Assets Limited (CMAL) was formed in 2006 to consolidate ferry vessels, ports, harbours and related infrastructure, and the Scottish Government acquired Glasgow Prestwick Airport in 2013.
The global financial crisis triggered and accelerated fiscal innovations, with the Scottish Government leading a major investment drive to help boost the economy at a critical time and maximise the opportunities that devolution created. In 2008 the Scottish Futures Trust was established, and the Scottish Government also launched a new Non-Profit Distributing model to deliver infrastructure, with profits capped and surpluses reinvested into public services to reduce the long-term costs to taxpayers and improve value for money.
The significant increase in powers over public spending was accompanied by strengthened scrutiny. For the first time, a Parliament in Scotland was focused on spending in Scotland. The independent post of Auditor General for Scotland was created to help ensure that public money was spent properly, efficiently and effectively, reporting in public to the Public Audit Committee.[1] In addition, a dedicated Finance Committee would examine all spending plans, oversee annual budget bills and review the financial implications of proposed legislation. This was built on by its successors, the Finance and Constitution Committee (2016-2021) and Finance and Public Administration Committee (2021-present).
These changes also required significant development in the Scottish Government’s financial capability and capacity, to support the first specific Finance Ministerial portfolio and deliver annual Scottish Budgets. Its finance function was transformed into a directorate staffed more by professional accountants and other financially expert staff. The Scottish Government has produced annual financial accounts on the basis of international accounting standards since financial year 2009-2010[2] significantly changing key areas of Scottish Government accounting, aligning public sector reporting with private sector standards and bringing greater transparency.[3]
These fiscal innovations occurred within, and reinforced, a wider government drive to focus public spending on outcomes rather than more narrow inputs and outputs, and to work collaboratively with, and enable, individuals and communities to achieve these outcomes.
The National Performance Framework[4], introduced in 2007, provided a unified outcomes-based approach to measuring and improving government performance. The Concordat agreement between the Scottish Government and Convention of Scottish Local Authorities (COSLA)[5] in the same year redefined the relationship between central and local government and shifted the focus to outcomes. The Christie Commission’s report in 2011[6] emphasised the need for greater preventative spending, collaborative working, community empowerment, improved efficiency, transparency and accountability, principles that were embedded into legislation and Scottish Government policy documents and initiatives.
Despite these innovations, the Scottish Parliament and Scottish Government remained primarily responsible for spending rather than revenue-raising. Tax powers were confined to local taxes (including Council Tax) and limited flexibility on Income Tax (the ‘variable rate’, which was never used)[7]. Over 90% of the Scottish Budget continued to be funded by the UK Government via the block grant – the annual sum the UK Government allocates to the Scottish Government. The large disconnect between spending and revenues made it difficult for either MSPs or the public to see the link between their taxes and public spending and the performance of Scottish Governments.
Debate about these limitations intensified with the election of an SNP minority government in 2007 that was advocating for greater fiscal autonomy, while the global financial crisis and its aftermath highlighted both Scotland’s limited flexibility in responding to unexpected shocks, and the cushioning effect of the Fiscal Framework with the UK Government.
By 2010, there was cross-party support for giving Scotland more tax and borrowing powers, and a recognition of the need for greater accountability for public spending.