Banking: Offshore Accounts

Lord Forsyth of Drumlean Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Newby]

I obviously agree with the noble Lord’s latter statement. Many recent examples clearly are unacceptable, which is why we have taken a great interest in, and are looking forward to hearing more about, the initiative that the EU Commission has taken this week in terms of reformulating what constitutes a tax haven. He is right that we can do a certain amount ourselves but we are going to deal with this international issue only through international co-operation.

[Lord Forsyth of Drumlean]

My Lords, will my noble friend clarify the position, as I genuinely do not know the answer to the question? Are we able to deal with companies such as Google and Starbucks and others which are not paying the tax that they should pay in this country or are we constrained by European law from being prevented from doing so?

[Lord Newby]

I can reassure the noble Lord that we are being constrained not by European Law but by international accounting standards. There is no suggestion that Starbucks and the other companies are breaking the law but the accounting standards allow them to manipulate the point at which they take a tax charge on revenues that they raise.

Taxation: Avoidance

Lord Forsyth of Drumlean Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, the important broad picture here is that on the latest annual figures, those for 2010-11, HMRC collects approximately £469 billion a year. The estimated tax gap is 7.9%, a percentage that compares favourably with, for example, the USA at 14% and Sweden at 10%. Nevertheless, there is a gap of £35 billion and it is very important that HMRC does all that it can to close it, which is why it is prioritising this area in many respects. I hear what the noble Lord says about a specific issue and I will take his suggestion away, but I can assure the House that HMRC is prioritising it right across the board.

[Lord Forsyth of Drumlean]

My Lords, does my noble friend agree that if Treasury Ministers wish to minimise avoidance and maximise revenue they should leave delivering moral guidance to the church and concentrate on delivering simpler, lower, flatter taxes as our manifesto promised?

[Lord Sassoon]

My Lords, the lowering of the top rate of tax, for example, makes my noble friend’s point very clearly. By putting the top rate of tax at 50%, the previous Government, as the analysis has now shown, delivered absolutely nothing—or very little at best—in terms of revenue, and made this country uncompetitive. So we need wherever possible lower and broader taxes. I agree with my noble friend on that.

Ulster Bank

Lord Forsyth of Drumlean Excerpts

Thursday 5th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, I do not know the cause of this significant failure. The noble Baroness may be right but, as I said, the FSA expects RBS to provide it with a complete account of the issues. I welcome the fact that the chief executive of RBS, Stephen Hester, has made a commitment to a full and detailed investigation overseen by independent experts and publication of those findings. In due course, we will know what the explanation is.

[Lord Forsyth of Drumlean]

My Lords, is my noble friend satisfied with the role of the FSA? Surely it is not enough for the FSA to say, “We want a report”. The FSA is supposed to satisfy itself that people with banking licences have back-up systems to prevent what has happened, which is causing not only distress to families but real damage to commerce in our country. Surely the FSA should be far more active and should be giving an explanation to the Minister for why it has allowed this to happen.

[Lord Sassoon]

My Lords, we delude ourselves if we think that there will ever be a no-failure regime in financial regulation. Regrettably, issues will arise. We want the FSA to do what it is doing: not getting in the way but doing whatever it can to ensure that RBS solves the immediate problems. Then it will get the full explanation and, on the back of that, the lessons for all concerned, including, I am sure, the FSA, will be learnt.

Economic Policies

Lord Forsyth of Drumlean Excerpts

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

I did not bring my IMF quote book today to trade on this one, because the Question is about the Government's assessment of the success of their economic policies, not what the IMF is saying about them. I am sure that we will come back to that on another occasion.

[Lord Forsyth of Drumlean]

My Lords, although reducing the deficit, and even more so the debt, is important, is not relying exclusively on reducing the deficit a bit like playing golf with only one club? Do we not have to have more emphasis on supply-side measures that will encourage the private sector to create the jobs and wealth that the country desperately needs?

[Lord Sassoon]

My noble friend is completely right, and it would be a one-club game if we were not doing all sorts of things on the supply side, such as reducing corporation tax from 28% to 22%, the national loan guarantee scheme of £20 billion, cutting red tape for the first time in living history, enterprise zones, the Regional Growth Fund, the largest number of apprenticeships ever funded by any Government and completely overhauling the planning system, to name a few supply-side reforms.

Taxation: Avoidance

Lord Forsyth of Drumlean Excerpts

Thursday 28th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, I certainly agree with the noble Lord, Lord Clinton-Davis, about the seriousness of the problem. That is why the Government—and HMRC in particular—are tackling it with all the available weapons. I stress that the Disclosure of Tax Avoidance Schemes regime, which was introduced by the previous Government in 2004, has been a successful part of that. Of the total tax gap, that is estimated to be around £35 billion, £5 billion is estimated to be as a result of avoidance. It is important to be clear on the figures.

In relation to schemes of wealthy individuals, the K2 and Icebreaker schemes, which have had much recent publicity, are under investigation by HMRC. HMRC and, of course, the Government want to make sure that everyone, wealthy or not, pays a fair amount of tax. HMRC has rolled out some very specific initiatives within its High Net Worth Unit in order tackle even more vigorously the particular challenges around individuals of high net worth.

[Lord Forsyth of Drumlean]

Does my noble friend agree that the best way to avoid people coming up with complex tax avoidance schemes is to have simpler, lower taxes—which will maximise revenue and obviate the need for people to use their energies in this way—and concentrate on creating wealth and growth in our economy?

[Lord Sassoon]

As a general proposition, I very much share the view of my noble friend.

Wales: Barnett Formula

Lord Forsyth of Drumlean Excerpts

Wednesday 20th June 2012 Lords Chamber

[Lord Sassoon]

No, my Lords, the Treasury is not remotely casual about the national finances, and what the noble Baroness says about the Scottish funding situation might well be challenged by others in other devolved parts of the nation.

[Lord Forsyth of Drumlean]

My Lords, it would not be challenged by me—and, indeed, the Select Committee came to that unanimous view. But what is the difficulty with finding an agreed needs-based formula for funding when the money that Scotland receives is distributed to health and local authorities using precisely a needs-based formula for funding? Surely it is time to deal with a matter that is creating division in the United Kingdom at a time when we need unity.

[Lord Sassoon]

My Lords, one difficulty is that there is no consensus on the appropriate way in which to measure needs for any replacement. As the previous Government said in response to the Select Committee report,

“the Barnett formula has a number of strengths, among them the merit of allowing the devolved administrations to determine their own assessment of needs and priorities in devolved areas”.

Financial Services Bill

Lord Forsyth of Drumlean Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing this important Bill. Its importance can hardly be in doubt, given the core dilemma presented by the place of financial services in the British economy. On the one hand, Britain is a world leader in financial services and a considerable measure of our future prosperity depends on that industry. On the other hand, as we have seen, it is the industry that has greater potential than any other to inflict severe damage on Britain’s economy. The goal of regulation is to secure the benefits while minimising the costs and to achieve that in a manner that passes the tests of accountability, clarity, efficiency and transparency. Regrettably, the Bill fails all those four tests.

It certainly fails the test of clarity, being both complex and incomplete. The Bill is unnecessarily complicated because, instead of drafting a new template for the financial services industry, superseding all past relevant Acts and incorporating the new banking Bill that is yet to be published enacting the Vickers proposals, the Government have constructed a dog’s breakfast of amendments to earlier legislation.

Last week, noble Lords were no doubt surprised to receive a passionate entreaty from the Treasury Committee of the other place insisting that the Bill had been cobbled together with undue haste and had not received adequate consideration—in the case of some clauses, no consideration at all—and providing a checklist of serious failings in the legislation as currently drafted. From these Benches, I can assure the Treasury Committee that its despairing plea will not go unanswered. We intend to devote just as long as it takes to sort out this flawed Bill and thank goodness that the procedures of this House will allow us to do so. I am sure that all sides of the House will support this commitment, since this is essentially a non-partisan Bill. We all have a strong vested interest in getting it right. I hope that the Government will approach our deliberations in that spirit, although their negative performance in the other place was not encouraging.

The noble Lord, Lord Sassoon, referred to the regulatory failures that have been all too evident in the financial crisis. That there were serious failures is beyond doubt—most notably in the operation of the tripartite memorandum of understanding. But these were less failures of structure and more failures of the then conventional wisdom with respect to regulatory theory and practice. As the Joint Committee on the Bill noted:

“Successful regulation depends more on the regulatory culture, focus and philosophy than on structure”.

That point was made even more forcefully by Mr. Alan Greenspan in his evidence to the US House of Representatives in October 2008. Referring to the intellectual framework that guided the regulatory stance of the Federal Reserve System, Mr. Greenspan said:

“This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year”.

That was as true of the thinking of British institutions as it was of the United States.

In this context it is worth remembering why the tripartite system was created in the first place. One of the key reasons was that the Bank of England had proved to be such a fallible regulator. The cases of Johnson Matthey, BCCI and Barings come to mind. In the latter instance, the Bank’s performance was so bad that the Board of Banking Supervision was moved to comment that it would be a good idea if the Bank of England understood the products that it was supposed to be regulating.

Nonetheless, on the basis of what we have all learnt over the past four years, the fundamental thinking behind the reforms set out in this Bill is clearly well-founded, even if the execution falls a little short. The key thing that we learnt was that focusing on the stability of individual institutions, however large—so-called microprudential regulation—is not enough. The whole is bigger than the sum of the parts; systemic risk is all pervasive and by its very nature cannot be managed by individual firms. Hence the need for macroprudential regulation, spelt out so clearly in the FSA’s Turner review. But macroprudential regulation poses major new challenges to economic and financial policy-making. It will necessarily involve measures that cross what has previously been deemed to be the boundary between actions that might reasonably be left to unelected officials and actions that are necessarily the province of politically accountable decision-makers.

The essence of the macroprudential structures as set out in this Bill is that the Treasury cannot be trusted. Just as it was feared that the Treasury might approach the setting of interest rates with an inappropriate eye to political advantage, and hence the Bank of England was given control over interest rates, so now it is feared that the Treasury will fail to take away the punch bowl of loose credit in order to reap the short-term political benefits of a debt-fuelled boom. Accordingly, the Bank of England is given, via the new Financial Policy Committee, virtually autonomous control over a variety of instruments to manage the supply of, and perhaps later the demand for, credit. In addition, microprudential regulation is also taken into the Bank, in the form of the Prudential Regulation Authority.

This agglomeration of powers in the Bank of England poses two vital questions. Is the governance of the Bank of England such as to result in accountable, clear, efficient and transparent utilisation of these extraordinary powers? Equally, does the relationship between the Bank of England and the Treasury, as set out in the Bill, meet the test of these four principles? The answer given by the Treasury Committee to both of these questions is a resounding no. We on this side broadly agree with the Treasury Committee, though we differ in some details. We certainly agree that the governance of the Bank should not be a matter for the Bank itself. Our major disagreement with the Treasury Committee’s proposals is that they do not go far enough.

First, with respect to the governance of the Bank, the Government have responded to the evident lack of co-ordination in the crisis by designing a model of perfect co-ordination; namely, that one person should be responsible for everything. The Governor of the Bank of England will chair the Monetary Policy Committee, the Financial Policy Committee and the Prudential Regulation Authority, as well as being in overall charge of the Bank of England’s special resolution unit and its payment and clearing and settlement systems oversight department. When he or she has some spare time, this individual will also chair a number of important international committees. Even if it is possible to find the exceptional individual who can effectively take on all these tasks simultaneously, that person will be driven mad, for many of these activities will demand contradictory policies. Moreover, if ever there were a structure likely to result in the dangers of group think, this is it, since the group is a group of one.

Side by side with the inefficient, unaccountable and untransparent role of the governor is the now anomalous position of the court of the Bank. The Financial Policy Committee is to be a committee of the court. It is envisaged that primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will sit with the court, although the court will be required to consult the FPC and Treasury, and the FPC may at any time make recommendations to the court. On a moment’s reflection, it is clear that the court’s composition and powers are simply not up to the job.

In Grand Committee we will propose wide-ranging reform to the governance of the Bank of England to ensure that it has a structure of decision-making appropriate to the first half of the 21st century, rather than to 1694. In particular, we will require a more collegiate form of decision-making and propose measures to improve the accountability of what is, after all, a public institution. I was delighted to hear from the Minister that the Government are searching for good ideas in that area. I think that we have some.

Given that the governance of the Bank, as the Treasury Committee puts it, falls,

“well short of what would be expected in a modern institution, whether public or commercial”,

and that this is,

“especially important given that vitally important decisions made by the Bank’s executives, especially during times of financial instability, may not reasonably be made public and therefore be immediately available for scrutiny”,

the next question obviously arises. Are the powers of autonomous action endowed on the Financial Policy Committee and, accordingly, the Bank, appropriately balanced with the need for political oversight by the Treasury of the overall conduct of economic and financial policy? Does the Bill provide for sufficient parliamentary scrutiny to endow the FPC and the Bank with an appropriate level of legitimacy? Again, we believe that the Treasury Committee does not go far enough. The FPC is described by the Government as,

“a powerful new authority sitting at the apex of the regulatory architecture”.

The mechanisms to ensure democratic accountability of the FPC need to be commensurate with the strength of its powers.

The most important aspect of the relationship between the Bank and the Treasury is what should be done in a crisis. After all, it was in a crisis that the system failed. This is spelt out in Part 4 of the Bill and in the draft memorandum of understanding on crisis management. The draft memorandum of understanding, which, by the way, is in general far less clear than the old tripartite memorandum, at least makes clear that the Bank is the gatekeeper, defining when the Treasury may play a crisis management role. It is worth quoting the MoU. It states:

“The Bank has primary operational responsibility for financial crisis management. The Chancellor and the Treasury have sole responsibility for any decision involving public funds. When the Bank has formally notified the Treasury of a material risk to public funds, and either there is a serious threat to financial stability, or public funds are already committed by the Treasury to resolve or reduce such a serious threat and it would be in the public interest to do so, the Chancellor may use powers to direct the Bank. … Where the Bank is able to manage a financial crisis without public funds being put at risk, it will have autonomy in exercising its responsibilities”.

This is the most extraordinary nonsense, a fetishisation of the use of public funds. First, whatever is happening, the Treasury must wait for notification by the Bank of England before it can act. Given the Bank’s record on Northern Rock, that notification will come far too late. But secondly, and more seriously, households may be losing their savings, businesses may be collapsing, and economic activity may be in precipitate decline as the result of financial instability, but if there is no threat to public funds the Treasury is shut out of any active financial stability role until the governor invites it in.

This betrays a lack of understanding of the mutually reinforcing co-operative role that the Bank and the Treasury need to adopt to tackle macro-risk. This was put very clearly by Jacques De Larosière to the Economic Affairs Committee of your Lordships’ House three years ago. He said:

“Let us not hide ourselves from reality. Often ... fiscal policies can be part of systemic risk”.

The only sensible solution seems to be for a fundamental rewriting of Part 4 of the Bill to allow the Treasury to act when severe financial problems arise without the Bank acting as a gatekeeper. In 2008, the problem was not that the Treasury was too strong but that it was too weak. To ensure that the roles of the Bank and the Treasury are clear beyond all reasonable doubt and given that the MoU will evolve in the light of operational experience, the MoU itself must be the subject of enhanced parliamentary scrutiny. By the way, the definition in the Bill of the objectives of the Financial Policy Committee, with its peculiar emphasis on leverage, debt and credit growth in the UK, also betrays a worrying lack of understanding of the nature of systemic risk in a global financial system.

Many other aspects of the Bill require substantial revision by your Lordships’ House, ranging from procedures for consultation at all levels, the role of the tribunal in disciplinary cases, to the duty of care that retail financial institutions should exercise towards their customers, and the range of access to financial services and to the procedures for parliamentary scrutiny of the avalanche of secondary legislation that the Bill will stimulate. My noble friends and I are committed to playing a constructive part in that revision. However, at the core of the Bill—the core that we must get right—are the new procedures for macroprudential regulation. If an open and successful financial services industry is to be sustained, it is imperative that an accountable, clear, efficient and transparent mechanism for the management of systemic risk is established. Moreover, that mechanism must have as its ultimate objective the promotion of employment and growth in this country.

[Lord Forsyth of Drumlean]

The noble Lord has made a passionate and powerful speech about the importance of the Bill. Why have the Opposition agreed that it be referred to Grand Committee for its Committee stage?

--- Later in debate ---

[Lord Sharkey]

My Lords, I shall speak about two aspects of the Bill regarding two areas that it needs to cover but does not. I think that it is commonly accepted on all sides that a significant problem facing the economy is the question of lending to small and medium-sized businesses. It is generally accepted that we have been unsuccessful in getting sufficient lending to take place. The Bank of England confirms that the UK’s biggest banks failed to meet last year’s lending targets. The five banks that signed up to Project Merlin lent £1 billion less to SMEs than their 2011 target—and the Merlin deal has of course not been renewed. The Bank’s trends and lending report for April this year reports that in the three months to February 2012 the stock of lending to small and medium-sized enterprises continued to contract, and had in fact been negative since late 2009. In January this year, BIS published a report on SME access to external finance. Among its findings, the report states that 21% of SME employers that sought finance from any source did not achieve success, which was a significant increase on the 8% seen in 2007-08.

These figures are bad enough, but they conceal areas where there are more significant problems. The effects of the financial crisis are being most keenly felt in those areas of the country that have long been the most deprived. Workless households are concentrated in the old industrial areas of the north of England, the Midlands, Scotland and Wales, as well as in a number of seaside towns and inner-city urban areas. We urgently need to stimulate demand for SMEs in our deprived areas and to make finance available to help them develop. At the moment, according to a 2012 report by the Centre for Responsible Credit, just 4% of all lending to SMEs goes to businesses in the most deprived areas.

The only data provided by the six largest banks concerning their lending to SMEs are produced on an aggregate basis. This means that there is no information available to allow local economic development agencies, including local enterprise partnerships and community development finance initiatives, to enter into effective dialogue with the banks with a view to assessing and improving performance, nor any way of knowing which banks are performing better than others. Similarly, the current dataset provided by the banks tells us nothing about the terms on which credit is being made available to SMEs. There are other indications that the shift by banks from term lending to overdraft lending will probably lead to a significant increase in financing costs, but we do not know how much or where. We also do not know to what extent, if at all, the banks are supporting the third sector to take advantage of the new rights under the Localism Act. The Act provides for local communities to take over the running of local authority services to build new homes, businesses, shops, playgrounds and meeting halls.

All this requires planning and funding. That means the active involvement of the banks. We need access to information to show us what the banks are doing, area by area, bank by bank, to support this agenda. All this can be achieved by making a couple of simple amendments to the Bill. I believe that we should consider adding a fourth operational objective to the three set out for the FCA. This new objective could be called something like “the sustainable economic growth objective” and could be defined as ensuring an appropriate level of financial services provision in disadvantaged areas by having regard to the needs of SMEs and third-sector organisations in deprived communities for affordable loans, savings and insurance products.

[Lord Forsyth of Drumlean]

How are the banks expected to provided more lending at the same time that they are being required to make greater provision for capital and liquidity purposes? Surely that is asking them to do two contradictory things.

[Lord Sharkey]

I had a more minimalist objective: to make it plain that that is the case with the banks at the moment. We need to make sure that we know that they have an obligation to support SMEs and third-sector organisations in deprived communities. I add in passing that the need for some growth objective is evident not only in this part of the Bill, but in the objective set out for the FPC itself. Stability is a necessary objective, but stability without growth is, at best, a recipe for stagnation.

The existing objectives for the FCA include a competition objective. This competition objective includes the statement that the FCA may have regard to,

“how far competition is encouraging innovation”.

Apart from noting that the word “may” should read “must” if the paragraph is to have any real meaning, I also want to note that this is the only time that the word “innovation” appears in the 330 pages of the Bill.

That brings me to the second area that I want to address. Innovation in the provision of traditional retail financial services is obviously important. The Breedon report, commissioned by BIS and delivered in March this year, estimates that by 2016 there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. In their response, the Government acknowledged the problem and said,

“The Government welcomes the development of new and innovative forms of finance such as peer-to-peer lending and recognises the potential of these models to have a positive impact on the SME lending market”.

Currently, the total amount of peer-to-peer lending in the UK is small, but growing rapidly, and even more rapid growth is projected. The Government are encouraging growth in this area with a £100 million investment. Earlier this year, Andy Haldane, head of policy at the Bank of England, even suggested that these non-traditional lenders could eventually replace banks, but if these new models are to succeed in providing real and substantial competition for the banks, they need more help from the Government than £100 million in pump priming. At the moment, the non-traditional peer-to-peer lending sector is unregulated. As the Daily Telegraph said two weeks ago,

“if it is serious about encouraging the growth of a genuine long-term alternative to bank lending for SMEs, the Government also needs to address the thorny question of regulation. At present, alternative funding providers are not regulated by existing financial services legislation, leaving both borrowers and lenders vulnerable to rogue players entering the market”.

Alternative funders are in favour of regulation. They recognise the dangers to their business model of a scandal generated by some rogue entrant to their market. This is not a theoretical danger or a distant prospect and is certainly not a trivial problem. There is nothing to stop such an event occurring and permanently destroying confidence in the peer-to-peer model. As the Daily Telegraph also said:

“SMEs desperately need a genuine alternative to borrowing from banks and those using alternative funders must be protected so that both they and the market can flourish”.

The Government need to take action now, and this Bill provides the perfect opportunity.

Debt

Lord Forsyth of Drumlean Excerpts

Tuesday 29th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, there are all sorts of good ideas and lobbying that come from all sorts of quarters, but if the Government were to treat £1 billion here or there as petty cash, the British public would be absolutely appalled with what we were doing with public expenditure. As for business investment, yes, we talk to the CBI—it comes up with a lot of good ideas—but what is important is that the provisional data for the second quarter of 2012 indicate that business investment is showing a stronger recovery than forecast by the Office for Budget Responsibility. The OBR did not expect business investment to reach the level that we have seen in the second quarter until 2013. It is good that business investment is rising.

[Lord Forsyth of Drumlean]

When the Deputy Prime Minister made his speech in the tractor factory and said that the Government had a moral duty to the next generation to wipe the slate clean for them, that we had set out a plan that lasts six or seven years to wipe the slate clean, to rid people of the dead weight of debt that had built up over time, what was he talking about? Will not the debt have gone up in six or seven years’ time by half a trillion pounds?

[Lord Sassoon]

My noble friend is right to point out quickly the confusion that many of us occasionally suffer on the difference between debt and deficit. Of course, the two things are different.

Eurozone

Lord Forsyth of Drumlean Excerpts

Thursday 17th May 2012 Lords Chamber

[Lord Sassoon]

My Lords, we are not excluding ourselves from very important decisions; we are saying that it is for members of the eurozone to take the lead in sorting out the problems with the euro. We are very much at all the discussions. As well as questions of potential and past bailouts, we are discussing growth strategies and the completion of the single market, which will put Europe back on a sustainable growth path.

[Lord Forsyth of Drumlean]

My Lords, what is complicated about our country borrowing at an increasing rate so that the national debt will be 50% larger in seven years’ time? What is complicated about ruling out providing money to the eurozone that we do not have to spend?

[Lord Sassoon]

My Lords, I have been completely clear that as of this July, the mechanism in the eurozone, which the previous Government signed us up to, will no longer make any future commitments. The new permanent mechanism that is being put in place is a eurozone-led mechanism and the UK is not part of it.

Scotland Bill

Lord Forsyth of Drumlean Excerpts

Wednesday 28th March 2012 Lords Chamber

Moved by

[Lord Forsyth of Drumlean]

15: Clause 27, page 19, line 34, leave out from beginning to end of line 24 on page 20

[Lord Forsyth of Drumlean]

My Lords, the noble Lord, Lord Browne, can probably rest easy as far as Amendment 16 is concerned. We have been around this course a number of times. I find it very difficult to understand, especially given the announcement just made by my noble and learned friend. He has just told us that there is a recommendation for legislative consent. We have heard repeatedly during the course of the deliberations on this Bill that it implements the recommendations of the Calman commission. Nowhere does the Calman report suggest that there should be an open-ended power to create new taxes of any kind, to be introduced by order in both Houses.

I have two objections to that. First, the taxes which are intended to be given to the Scottish Parliament, like the aggregates tax—we have a later amendment on that, which I do not propose to move because I know that the Government will say, “We are not ready to do that”—are not in the Bill. We have this open-ended power. My objection to this open-ended power is constitutional. It cannot be right that we have an order-making power for the imposition of taxes through the House of Commons and the House of Lords. I know that the Minister will say, “Oh, but this will be discussed in the Scottish Parliament”. This is the sovereign Parliament and the House of Commons is the sovereign body. Its history is one of voting means of supply. To create a procedure that enables taxes to be imposed without going through the requisite finance Bill and Committee stages in the House of Commons is a huge step which is in no way justified by the manifesto commitment or by anything that the Calman commission said.

I urge my noble friend to think again about this. It is an enormous change to our constitutional processes. I cannot think of any example where it has been possible to impose a tax by Order in Council. The very early history, with the arguments over ship money and everything else—I do want to repeat arguments that I used in Committee—was about this very principle. It is a dangerous precedent to create. One of the things that worries me about this Government and the previous Government is that there does not seem to be an understanding that we have no written constitution in our country. Our constitution, in so far as it exists, exists in the procedures and conventions of the House of Commons and of this place. To ride roughshod over them in this way for the sake of convenience is a very retrograde step, which has certainly not sprung from any commitments or recommendations that have been made externally. I can see how it is for the convenience of Ministers and the Executive, but it is utterly wrong in principle. Even at this stage, I ask my noble friend to think again and find some other method of achieving his objectives which does not ride across the very nature and existence of our parliamentary procedures. I beg to move.

[Lord Lang of Monkton]

My Lords, I support the amendment of my noble friend Lord Forsyth. Like him, I am concerned about the constitutional aspect of it. Here is part of a structure to set out a tax-levying power within the Scotland Bill which represents an abrogation by the United Kingdom Government of their obligation to promote financial stability, efficiency and good government across the whole of the United Kingdom.

Of course, it is one thing to devolve a tax-raising power to a specific area, as is contained in the Bill; I have my own views about that, which I will say a little about in this context. However, it is also the duty of the United Kingdom Government to ensure that the policies which they espouse and the priorities that they hold for the good financial and economic government of the kingdom should be as capable of implementation in Scotland as in the rest of the United Kingdom. The capacity of any Government of any complexion to fulfil other, broader financial and economic obligations against the background of the impact of the tax provisions specifically contained in the Bill is seriously jeopardised.

I see the whole Bill as a Trojan horse. I think that the commission and those who prepared the Bill and brought it forward were, perhaps, not fully aware of the potential damaging impact on the Scottish economy. It will create major challenges. I raised a couple earlier in the passage of the Bill, at Second Reading and again in Committee. The first is the situation affecting the tax base. The Scottish tax base will be smaller and weaker than the tax base on which provision for Scottish expenditure is currently based. Scotland’s economy has a higher proportion of company failures and a lower proportion of company formation. It has a smaller and weaker entrepreneurial class. It has a higher proportion of public sector employment. All these points have been made already, but they have to be made again because they feed into this problem of lower growth and expansion and a weakening private sector. However, it is on that weakening and small private sector, relative to the rest of the United Kingdom, that the impost of the 10 per cent tax rises will fall.

The study to which I referred earlier showed that the United Kingdom public expenditure base had expanded by 94 per cent in the previous 10 years, while the Scottish tax base, which will form the basis of this 10 per cent tax, had expanded by only 48 per cent. That may not be continued at the present time when the Government’s public expenditure programme is much more disciplined, but what will happen in a future Parliament, in future circumstances, when the economy nationally—by which I mean across the United Kingdom and, indeed, in the world at large—is expanding and once more on an efficient growth track? That is when the divergence will reappear. At that stage, of course, if Scotland were separate from the United Kingdom, the added burdens of dependency on a volatile oil price and reducing oil production, which are now generally agreed to be likely for the next few years, would come to bear.

The 10 per cent tax rate would have to take a massive degree of strain. This is where the gearing feature comes into it, just as we have seen with local government taxation where the bulk of funding comes from the United Kingdom Exchequer and only a small proportion is raised locally by local councils. So, if a local council wants to make a 2 per cent increase in spending, it would have to increase taxation by a multiple of that, perhaps a large multiple.

I remember the referendum that took place in Quebec about 10 years ago. When I was in Toronto last year, it was pointed out to me that, although the referendum to separate Quebec from the rest of Canada failed, the economy of Quebec went into a grey, dismal period from which it has not yet emerged. I was even told that the Bank of Montreal had moved its headquarters to Toronto in Ontario. That is an example of the kind of problem that we may face.

We talk about the importance of inward investment but, against this kind of background, in the future we will have to talk about the loss of existing companies from Scotland—outward investment. Where will the major Scottish companies choose to locate against the background of the economic troubles that will develop within Scotland? Where will the Royal Bank of Scotland choose to locate? Where will Standard Life go? These companies have 95 per cent or 98 per cent of their business outside Scotland, and they will be thinking very carefully about their future taxation residence.

Corporation tax, which the Scottish Administration at present claim they want to reduce, is already coming down very sharply. It is 24 per cent now and there is a plan to reduce it further. If the Scottish economy in a separate Scotland were to try not only to keep up with but to exceed that, it would find that the Laffer curve does not work as efficiently as might be hoped in an economy that is otherwise deeply strained, and that it faced a race to the bottom. It would be extremely difficult and very serious.

The danger there is that, against the background of this Bill and these tax provisions within it, people in Scotland would demand further taxation concessions, and so one more step down what we used to call the slippery slope but is now called the continuing process of devolution would take place. It is not devolution that is a continuing process—it is separation. The salami slicing of Scotland’s place as an equal partner in the United Kingdom is taking place.

The Government should give an answer as to why, against that background, they have put these tax provisions in the Bill without contemplating the effect they will have in reality. I have not had an answer to the questions I raised earlier; my noble friend Lord Forsyth also raised them. I see that we are privileged to have my noble friend Lord Sassoon from the Treasury in his place. I hope that he may be able to enlighten us or, if nothing else, admit that there is a problem and say, “We accept it and we regret it but we have abrogated our position as Her Majesty’s Treasury for the United Kingdom”. I support the amendment.

[Lord Kerr of Kinlochard]

My Lords, I do not want to repeat what I said in Committee on this. Although I am sure there is much force in some of the points made by the noble Lord, Lord Lang, they are no doubt points that the Scottish Parliament would have in mind, were it minded to exercise the power that this clause would confer upon it. I do not agree with the noble Lord, Lord Forsyth of Drumlean, that there is some constitutional impropriety. I do not understand his constitutional argument.

The constitutional principle in regard to taxation is that those paying the tax—those on whom it will be levied—should have voted for it. I see no constitutional objection to the Scottish Parliament having the power to levy another tax, given that only Scots or people resident in Scotland will be paying it. As I said before, I see no difficulty about them having the power to vary an existing tax, for example the rate of VAT. I do not see a constitutional principle there. I referred in Committee to the example of differential sales taxes across the United States of America. There are many taxes that are different between states.

I conclude my remarks by saying that I see a lot of sense in the amendment we will come to in a moment, which suggests a procedure and safeguards that could be built into the system, which I could support. I also understand the economic arguments that the noble Lord, Lord Lang, advanced and it is very important that they should be in the minds of the Scottish Parliament when it chooses whether to exercise the power conferred on it here, but I cannot see the constitutional principle. I do not follow the ship money argument.

[Lord Forsyth of Drumlean]

It is very straightforward. We are talking about devolution here, not about establishing a federal system. As someone said, although I cannot remember who, power devolved is power retained. The ability to create a completely new tax—a window tax, or whatever—has to reside with the other place down the Corridor. Within our constitution, in order to create a new tax, you have to have a finance Bill. It used to have to be on the Floor of the House of Commons when it came to Committee, and there is a set of procedures that needs to be followed. It is completely different from devolving the power to set a rate of tax, which this Bill purports to do and is the commitment made in the manifesto.

My constitutional problem is that that ability of the House of Commons to discuss, through a long-standing procedure, the imposition of taxation is being undermined because all that it requires now is an Order in Council, which by convention cannot be voted on in this House and cannot be amended. That is no basis upon which to create new taxes on the people. It is the nature of the procedure that is the constitutional outrage as far as I am concerned, not the nature of giving the Scottish Parliament the ability to raise a particular tax.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I will just try to clarify the position here, which might be helpful to this ongoing debate. This is a very important point. We should be clear that we are talking about a power to devolve taxes, which is a constitutional provision that it is perfectly proper for Parliament, including this House, to have a role in. That is quite separate from the creation of the new tax, which will be the responsibility—if it is given it under the provisions of this Bill—of the Scottish Parliament. I suggest to my noble friend that it is misleading to say that somehow we are driving through the creation of new taxes via some improper provision of this Bill. The clauses we are talking about seek to devolve a tax, a power that is retained by this Parliament and around which there will be all sorts of safeguards, as we will come on to. There will be a joint assessment by the Government here and in Scotland before such proposals come forward. But the creation of the new tax will be for the Scottish Parliament and will go through a proper, full parliamentary process of that Parliament.

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[Lord Browne of Ladyton]

I might just respond on this point and leave the Minister to deal with the matter if he thinks I have not dealt with it adequately. My response to the noble Lord, Lord Pearson, is that I think I answered his question by pointing out where he was misreading the provision that he himself chose. He now asks another question and I am happy to answer it.

Scotland is a representative democracy, just as the rest of the United Kingdom is. It has two levels of parliamentary democracy: the Scottish Parliament and the UK Parliament. The Scottish Parliament, which speaks for the people of Scotland, and all parties overwhelmingly approve of the provision. I have no doubt that we will see that in the second legislative consent Motion, which I am confident will be passed unanimously by the Scottish Parliament.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Browne of Ladyton]

Perhaps the noble Lord will allow me to finish answering one question before he poses another one. I am asked where the democratic support for this comes from. It comes in the unanimously expressed will of the Scottish Parliament. The noble Lord, Lord Pearson, may not think that sufficient, but I can tell that the people of Scotland think it is.

[Lord Forsyth of Drumlean]

I do not mean this in a cheeky way, but my recollection is that when we discussed this at an earlier stage the noble Lord indicated that he had not appreciated that these powers were quite so wide-ranging. If he, with all his brilliance and his close study of the Bill, did not realise that, surely the noble Lord, Lord Pearson, is right in suspecting that the people of Scotland might not know that these powers were being provided, or indeed the people of England, Wales or Northern Ireland who could be affected by them?

[Lord Browne of Ladyton]

The combination of cheek and flattery is so appealing that I can barely resist it. The noble Lord’s recollection of what I said when we discussed these provisions before is not my recollection, but the Official Report will have recorded it. I think that I said it was not fully appreciated how significant these provisions were—not by me; I thought that I had helped those who had not fully appreciated that, but maybe this was a process of education in which I was a pupil, not the educator.

In any event, I am not suggesting that the significance of this important provision of the Bill is widely known and appreciated by the people of Scotland, whatever that phrase means, but I was asked a different question by the noble Lord, Lord Pearson—where the constitutional democratic support lay for this from the people of Scotland. The noble Lord, Lord Forsyth, will recall that I referred to a representative democracy; I did not suggest that all the people of Scotland understood this.

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[Lord Sassoon]

My Lords, I shall try to address some of the further points that have come up, although I have addressed one of the key points so I will not repeat myself. Although my noble friend Lord Lang of Monkton went rather wider—I thought we were going back to Second Reading—he provided some important context for the clause. We do not want to leave ourselves with the impression of a weak Scottish economy that my noble friend paints. It is right to remember that with 8.4 per cent of the UK’s population, the gross added value contributed by Scotland was 8.3 per cent, which is almost in line with the percentage of the population. I could cite many figures, including some which show that Scotland’s economy outperforms that of the UK as a whole. We should not think that we are making Scotland too reliant on the 10 per cent of tax base. I think my noble friend suggested that we were relying excessively on that 10 per cent. To be clear, under the Bill about 60 per cent of Scotland’s budget will still come from the block grant, so that context is important.

I wish to address one or two of the issues specific to this clause and the amendment. It is important to realise that the power we are talking about allows for the Scottish Parliament to be given full control over a specified tax. It does not allow for the Scottish Parliament to be given control over particular aspects of taxes such as the rate. It is a power to devolve complete control of a specific area. As I have explained, it will then be for the Scottish Parliament to go through a process to create a new tax to fill the space.

[Lord Forsyth of Drumlean]

On a point of information, is my noble Friend saying that the Scottish Parliament cannot think up a completely new tax, such as a window tax, for example?

[Lord Sassoon]

First, this Parliament needs to devolve the power to create the space and then the Scottish Parliament can move into it.

There are two reasons why we need this power. One is to enable those taxes and duties which are already in contemplation to be devolved. Then there is the question of future specified taxes, which relates to Calman. We may or may not come back to the question of an air passenger duty and an aggregates levy, which we discussed at length in Committee. However, this power is needed under the construct which the Government propose whereby we have APD and an aggregates levy to be devolved in due course. We are not in a position to do so at the moment and the power is required to enable that to happen. However, I completely accept that that is a separate matter from the identification of future taxes and how that relates to the Calman recommendation. It is clear that there are different interpretations of what Calman recommended, as we have heard this afternoon. I could read out large chunks but I suspect that would not lead to our agreeing on the precise construction of the words. I repeat that I believe that Calman envisages the devolution of future specified taxes rather than just taxes that have been specified up to this point. I agree that the words are not easy but I will quote a chunk from Calman:

“We see no reason why the Scottish Parliament should not be able to legislate to create new taxes that affect the whole of Scotland uniformly and not just via local taxation, if it does so with the agreement of the whole UK Parliament”.

I believe that that is the context in which this central power should be seen.

I will not repeat our previous discussion but I remind noble Lords that, whether they have noticed it or not, a very similar power is embedded in Section 30 of the Scotland Act. Therefore, like it or not, it is simply a fact that that power has existed for a number of years and there is a record. That relates to one of the points made by my noble friend Lord Lang of Monkton about abrogation or abnegation—whichever or both—of responsibility by HM Treasury. It is already clear from the operation of Section 30 and requests made under it to devolve tax and non-tax powers that the Government have a record of looking carefully at the evidence and rejecting any proposals that do not meet the tests that, in the context of the Bill, we will come on to talk about a little later.

I say to my noble friend that there will be no shirking of responsibility by the Treasury or any other part of government. The tax, and evidence base for any proposal to devolve responsibility for a particular tax, will be agreed between the UK and Scottish Governments before the Government bring any order before the House under the affirmative order procedure. We will come on to this, but the impacts will have to be assessed in line with the guidelines set out in the Command Paper. We will discuss what the standing of those guidelines should be, but that is how any proposal will be assessed.

The power is necessary and appropriate as regards the two taxes that have been identified but which we are not in a position to devolve at this time. The power is consistent with the construction of Calman, which I believe is appropriate, and consistent with the spirit of Section 30 of the Scotland Act. The evidential base will be properly assessed against the criteria set out in the Command Paper that we will discuss in more detail shortly. After this useful discussion, I ask my noble friend Lord Forsyth of Drumlean to withdraw the amendment.

[Lord Forsyth of Drumlean]

My Lords, I am most grateful to my noble friend for that very unsatisfactory response. He has not answered any of the points that have been made, particularly as to whether he could give an example of where taxes have been imposed by secondary legislation, subject to a vote in this House. His comparison with the Section 30 procedure in the Scotland Act to justify this is ridiculous. On that basis, Ministers could impose taxes on England using the secondary legislative procedure because there is a precedent of secondary provision in other legislation.

My noble friend did not read out the bits of the Calman report to which he referred because I suspect that they are crystal clear. It talks about specified taxes, and when I have repeatedly asked the Minister to specify the taxes that could be imposed using this power, we have been told that the aggregates levy and other taxes could be written into the Bill, with a commencement provision by order. I would not have a problem with that.

My noble friend says that he does not understand what the constitutional difficulty is, because the Scottish Parliament will follow its procedure in deciding on the tax. However, the ability to raise taxes on the people of this country should reside with the House of Commons. The House of Commons, having gone through the proper procedures may delegate decisions to the devolved institutions, but what my noble friend is doing is turning that principle on its head. I do not wish to embark on the debate on the next set of amendments and the sensible amendment of the noble Lord, Lord Browne, but one has only to look at the first subsection of his amendment, which states that the use of the section,

“shall be assessed against the following criteria … the potential for the new tax to create or incentivise economic distortions and arbitrage within the UK … the potential the new tax might create for tax avoidance across the UK”.

These are matters of interest to people not just in Scotland but in the rest of the United Kingdom, and should be debated properly in the normal way that applies to tax policy—on the Floor of the House of Commons, not in this place by order. We have no business in relation to the imposition of tax, and have not had any since 1911.

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[Lord Sassoon]

I understand that my noble friend feels very strongly about these matters, but does he agree that the Scottish Government, in the process leading up to the Bill, asked, among other things, for the assignment of excise duty revenues and the devolution of corporation tax, but have not got them? With all due respect to him, the idea that the Government will somehow roll over to every request from the Scottish Government is simply wrong, as evidenced by the perfectly proper negotiations leading up to the Bill, where the Scottish Government have not remotely had all their asks granted.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend for the stand that he has taken on corporation tax. That is an example of an existing tax. We are not talking about existing taxes. My noble friend has confused the issue—I am sure not deliberately. We are talking about the creation of completely new taxes that would apply only in Scotland but which might have an impact on the rest of the United Kingdom.

I am simply saying that the procedure included in the Bill, which requires that to be dealt with by order, is inadequate. It should be dealt with by primary legislation. My noble friend is, in effect, enabling Ministers, by Order in Council—without having to go through the whole difficulty of introducing primary legislation—to give consent to new taxes that might be proposed by the Scottish Parliament. In doing so, he is driving a coach and horses through the way in which we levy taxation in this country. That is a huge step and that is why I feel strongly about it.

What is particularly irritating is that it is unnecessary to do that to achieve my noble friend’s objectives. In his reply, he said, “Of course, we have these agreed criteria”. Everything he said has been about how the Executive will ensure that there is protection. The whole point of our parliamentary democracy is that Parliament should provide protection for the people, because it is accountable to people in a way that the Executive are not. The Executive are accountable to Parliament. This procedure suggests that we should have an order. In this House, not only is it unamendable but, by convention, we do not vote against it.

That is a big step for no apparent reason other than administrative convenience—unless, of course, it is in the Government’s mind that they want to give more powers to raise taxes or create new taxes without the bother of having to go through the procedure of having another Scotland Bill. I can well understand, given the time that I have devoted to my noble friend, why he might wish not to have another Scotland Bill and prefer the convenience of this procedure, but that is not right. Therefore, I am not satisfied with his response. I can see that I am not going to change his mind, and I am certainly not going to win a vote on this, so I beg leave to withdraw the amendment.

Amendment 15 withdrawn.

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[Lord Browne of Ladyton]

My Lords, I beg to move Amendment 16 standing in my name and that of my noble and learned friends. It provides an opportunity for the Minister to make his own contribution to the new-found relationship between the House and the ministerial Front Bench and show that the Government are not only listening but responding positively to positive and helpful amendments that are being tabled to this legislation. We have had two very positive responses on Report today. I think that this is the time for a third positive response, and the Minister has the opportunity to make his own distinct contribution to that.

As I said in a previous debate and as has been apparent in the discussion about Clause 27 thus far, the provisions of the clause are of great significance, constitutionally or otherwise. However, the tenor of the debate in this House, both in Committee and today on Report, demonstrates that it is precisely because of the significance of this provision that there are legitimate concerns over democratic accountability in the exercise of the provision as presently drafted.

In creating the mechanism for the devolution of future taxes to the Scottish Parliament, the Government are providing a stable framework for the continued development of the devolution settlement and, in many ways, for the natural progression of the Calman commission project. It is significant that the commission did not at any point suggest that any new taxation powers should be devolved using the Section 30 order mechanism, which I agree with the Minister could be used for the devolution of taxation. Any of the taxes provided for in the Bill, or indeed any future taxes, could be devolved through a Section 30 order. However, I am not proposing to open a debate about that because, from the way they have chosen to proceed, the Government have clearly come to the view that that is not desirable and that in fact another mechanism should be framed in primary legislation for the devolution of any new or specified taxes. I imagine that the Minister will be able to confirm that that was a deliberate decision as they thought that it would be inappropriate constitutionally to make these significant changes or to allow them using the existing mechanism, and that there needed to be a separate and well understood distinct mechanism for doing so.

For that reason, we on these Benches believe it is important that the conditions which we have debated at some length—I shall not go into the detail of them—and which will be applied to any proposed devolved tax should be clearly understood and set out. Not only do they need to be transparent but the Executive—in the exercise, through Order in Council, of the specification of taxation in the future—needs to be accountable to Parliament. At the very least, there needs to be some mechanism to make the Executive accountable in their future dealings with the Scottish Government against the criteria that the Government themselves set out in the Command Paper, informing how they will exercise this power. Therefore, we support the mechanism but we believe that Parliament should have the right to debate and, if necessary, to amend the criteria to be applied in assessing the convincingness of the case to be made for the devolution of taxation in the future.

In their Command Paper on the Scotland Bill, the Government provided a helpful sketch of the criteria to be applied when considering any future new devolved taxes. However, unless these criteria are placed in the Bill, Members of this House and the other place will have no ability to comment on or amend that list; they will just have to accept it. It is on that consideration that I tabled Amendment 16, which would place in the Bill the list of criteria to be considered for the use of an order to add a new devolved tax, so that Parliament can vote for Clause 27 in the full knowledge of how it will be applied in practice. I imagine that the Minister will not wish to argue with any of the specific criteria listed in the amendment as it transposes verbatim the list in his own Command Paper, so we cannot have a dispute about the criteria. I must assume that if he does disagree, which I hope he does not, his disagreement will lie in an attempt to increase the democratic accountability of the clause.

I am coming to the end of this argument because it is comparatively simple, without going into the detail of it. The Government have given us the makings of a full and properly accountable Clause 27 but they have not brought them together. I recognise that there may be a deficiency in the drafting and that there is an opportunity to take it away and correct it, but all I seek is to bring the two parts of the Government’s thinking together and to put them into a legal framework in such a way that in future—well, actually we can debate now whether these are appropriate criteria or whether they should be augmented or further explained, and if not, we can settle them—we will know transparently that the test has been properly applied.

I am doing this for one other reason, which is very important, too. The Bill will not become active unless there is a legislative consent Motion in the Scottish Parliament. If these criteria are in the Bill, the Scottish Parliament will have to approve them. When the Scottish Parliament has approved them by a legislative consent Motion, which I am confident it will, we will have agreement. We will then have a framework against which to test any future decision we make on whether it complies with the agreement and the Scottish Parliament will know whether the criteria are met. It cannot say in future, “This is a set of criteria that those people in London thought up and imposed on us. They didn’t even have the good grace to put the criteria in the Bill, so they don’t apply to us. We don’t feel ourselves bound by them because they are in your Command Paper and not in ours; whereas, if the criteria are in our agreed legislative framework, we may have a dispute on whether they are met but at least we will know what they are and we will be able to make the argument that you have failed to meet the criteria that you voted for yourselves”.

[Lord Forsyth of Drumlean]

My Lords, I support the amendment. It is not even half a loaf. I hate the procedure but I agree that it is a great improvement for the reasons that the noble Lord put forward—the last one, in particular: that it would make it clear where the boundaries were in the use of this extraordinary open-ended power.

I have not seen my noble friend’s brief, but I am prepared to stick my neck out and make a prediction, which is that he will not accept the amendment. Writing it in the Bill will create the opportunity for judicial challenge, and the Treasury loves being able to decide the rules and not be subject to challenge. I do not think that my noble friend will like the amendment because it will constrain what he seeks, which is for the Treasury to decide what will and will not happen. He underestimates the extent to which there will be a political challenge from north of the border. I accept that this is an advance so I support the noble Lord’s amendment.

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[Lord Sassoon]

Then it was a no for a very good reason.

My Lords, I thank the noble Lord, Lord Browne of Ladyton, and the noble and learned Lords, Lord Davidson of Glen Clova and Lord Boyd of Duncansby, for the amendment, which exposes an important issue that it is quite right that we should debate. As was well anticipated, I say at the outset that it does not find favour. However, in the spirit in which the noble Lord, Lord Browne of Ladyton, led me on, I will be positive in my response, because there is further reassurance to be given here about what I hope your Lordships will think is a pragmatic and proportionate way forward.

I am not sure whether we are talking about Amendment 17 at this point. My noble friend did not speak to Amendment 17, which is a fundamental one about removing the ability of the Scottish Government to legislate on any taxes that are devolved. Perhaps I will not need to say very much about that; it links to our previous discussion.

[Lord Forsyth of Drumlean]

I have not moved Amendment 17.

[Lord Sassoon]

I thank the noble Lord for that clarification.

Amendment 16 inserts the conditions and procedures required prior to the devolution of further taxes. It would put the considerations required for the devolution of a new tax outlined in the Command Paper on a statutory basis. Of course I confirm at the outset that the Government still fully agree that the criteria in our Command Paper are the right ones. In that sense, the words were picked up correctly and I am afraid that I have to hold up my hand to my noble friend Lord Lyell and remind him that the criteria came from the Government, so there is no way for me to avoid the accusation of Monty Python-speak—I cannot pass on the responsibility to the noble and noble and learned Lords who tabled the amendment.

I hope that my noble friend recognises the serious point that in devolving responsibility for taxes, we do not want knowingly to set up a massive opportunity for tax avoidance because of a mismatch in the tax systems between two parts of the United Kingdom. That is rightly what the criteria are intended to prevent. There is no question about the criteria; we endorse their aims. I think that even my noble friend, Lord Forsyth of Drumlean, would accept that if there are to be criteria, he has not suggested any better ones. So that is a good starting point. The question then becomes about the statutory basis or otherwise. First, I suggest that because we all agree about the nature of these criteria without debate, perhaps they are self-evidently the criteria which any Government would use. They are common-sense criteria which any Administration or Parliament would address in looking at these matters. They are self-evidently reasonable and have not been challenged. That questions why we need to state the obvious in statute. However, I appreciate the concerns and let me come to the positive of how we can reassure noble Lords on this point.

This links to Amendment 29, which we will come to later: the proposal to place a statutory requirement in the Bill for both Governments to provide updates to their respective Parliaments on the implementation of the Bill. That is the mechanism under which the Government propose these criteria should be properly considered. The criteria themselves can be debated and discussed before any proposals come forward to this House and another place, and to the Scottish Parliament.

This provision recognises that the implementation of these measures will be very important. Under the proposal that we will come to in Amendment 29, there is a requirement that both Parliament and the Scottish Parliament be well informed after the Bill completes its passage through your Lordships’ House but before further and future proposals come forward for taxes that might be devolved. I can specifically commit that the first report under this new power, which we will propose later, will be published within 12 months of Royal Assent and will include the criteria set out in the Command Paper. So the criteria will come in the first report that will be presented. They will be included in the detail of the report, which will allow consideration and possibly debate in this House if your Lordships consider it appropriate. In that way, I believe we will go as far as reasonable or necessary to have a specific debate, to make it absolutely sure for the avoidance of doubt in a paper which comes forward to both Parliaments that the criteria are indeed the criteria following passage of the Bill.

[Lord Forsyth of Drumlean]

Before the Minister draws this red herring across our path, it will be interesting to discuss these proposals when we come to that point in the Bill. As we all agree that this is a model set of criteria that in some way circumvent the use of this power, what is his objection to putting them in the Bill? Nothing he has said explains why he should not accept the noble Lord’s amendment and put it in the Bill. It is written by his Treasury staff, they are his own words, everyone agrees that they are sensible criteria and it will offer reassurance to us, so why is he not prepared to accept this amendment? Is it because he is worried about judicial challenge?

[Lord Sassoon]

No, I am not specifically worried about judicial challenge. I just think that it is reminiscent of debates I am becoming increasingly used to in your Lordships’ House. I am sure many noble Lords are much more familiar than I am with these arguments that regularly come up: if it is so obvious, we do not need to put it in because everybody understands it; or, if it is so clear and everybody accepts it, let us put it in. I have suggested to your Lordships that the criteria, based on the limited discussion that we have had here, are widely accepted. They should be debated if your Lordships want to debate them properly.

We do not have the opportunity here, and have not had it in Committee, to debate the criteria in detail because we have a “take it or leave it” provision to put them in. I believe that the proportionate, appropriate and sensible way forward is to set them out in the first report that we will require, if the House agrees, under Amendment 29. At that point, if your Lordships want it, there could be a specific debate on the criteria.

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[Lord Sassoon]

My Lords, let me give a brief response to the noble and learned Lord’s question. If we take the example, say, of stamp duty land tax, we have not set out the new tax framework for land tax in Scotland, which will be for the Scottish Parliament to do. We have devolved the policy space. It will be for the Scottish Government to design a new system that suits the requirements of Scotland, which will go through the tax-making procedures of the Scottish Government and the Scottish Parliament. That is exactly the approach which will apply to any new tax devolution proposal. It is as simple as that.

[Lord Forsyth of Drumlean]

It is not as simple as that. The SDLT tax is in the Bill. Here, we are talking about taxes which are not in the Bill and could be completely new taxes. That is why the criteria are so important.

[Lord Sassoon]

We are going back to another question. I am answering the question about the empty space that is created. It is easiest to do that by reference to a specific example of where we are creating the space within which the Scottish Parliament will have the ability to create a new tax framework to fill that space. That example is specifically envisaged. By analogy, that is how I anticipate it will work for possible other taxes in the future if they meet a number of thresholds and requirements, legislative and otherwise, including meeting the requirements that we have been discussing in the Command Paper.

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Moved by

[Lord Forsyth of Drumlean]

18: After Clause 27, insert the following new Clause—
“Changes to United Kingdom income tax which are detrimental to the income of the Scottish Government
(1) In this section, a “change to the United Kingdom income tax system” refers to any change to the operation of personal income taxation in the United Kingdom, including but not limited to personal allowances and tax rates, introduced by an Act passed by Parliament.
(2) The Office for Budget Responsibility shall assess the impact of each change to the United Kingdom income tax system and publish its assessment of whether the change decreases the total income tax take.
(3) In preparing a report under subsection (2), the Office for Budget Responsibility shall choose the number of years in which it wishes to assess the impact of each change to the United Kingdom income tax system.
(4) If any assessment conducted under subsection (2) indicates that the United Kingdom Government’s income tax take in any tax year will decrease, then—
(a) there shall be no related increase in grant funding provided to the Scottish Government;(b) a Scottish rate resolution under section 80C of the Scotland Act 1998 may not be passed or replaced solely to reflect any consequent decrease in income accruing to the Scottish Government;(c) the Scottish Parliament may by resolution (a “Scottish allowance resolution”) adjust the personal allowances set out in sections 35 to 37 of the Income Tax Act 2007 to increase the income of the Scottish Government up to the level it would have been prior to the change assessed in the report made under subsection (2).(5) A Scottish allowance resolution made under subsection (4)(c)—
(a) applies for only one tax year, and for the whole of that year,(b) must specify the tax year for which it applies,(c) must be made before the start of that tax year,(d) should set personal allowances for each of sections 35, 36 and 37 of the Income Tax Act 2007, and set no other allowances, and(e) may only apply to a tax year which has been the subject of a published assessment by the Office for Budget Responsibility in a report prepared under subsection (2).(6) If a Scottish allowance resolution is cancelled before the start of the tax year for which it is to apply—
(a) the Income Tax Acts have effect for that year as if the resolution had never been passed, and(b) the resolution may be replaced by another Scottish allowance resolution.(7) Standing orders must provide that only a member of the Scottish Government may move a motion for a Scottish allowance resolution.
(8) The provisions of subsection (4)(a) and (b) shall apply to any tax year that has been the subject of an assessment conducted under subsection (2).
(9) The Income Tax Act 2007 is adjusted as follows.
(10) In section 35 (personal allowance for those aged under 65), at the end insert—
“(5) If the individual is a Scottish taxpayer under Chapter 2 of Part 4A of the Scotland Act 1998 then the personal allowance in subsection (1) may be adjusted to any amount set out by the Scottish Parliament in a Scottish allowance resolution.
(6) Section (Changes to United Kingdom income tax which are detrimental to the income of the Scottish Government) of the Scotland Act 2012 makes provision about the setting of the personal allowance for Scottish taxpayers.”
(11) In section 36 (personal allowance for those aged 65 to 74), at the end insert—
“(4) If the individual is a Scottish taxpayer under Chapter 2 of Part 4A of the Scotland Act 1998 then the personal allowance in subsection (1) may be adjusted to any amount set out by the Scottish Parliament in a Scottish allowance resolution.
(5) Section (Changes to United Kingdom income tax which are detrimental to the income of the Scottish Government) of the Scotland Act 2012 makes provision about the setting of the personal allowance for Scottish taxpayers.”
(12) In section 37 (personal allowance for those aged 75 and over), at the end insert—
“(4) If the individual is a Scottish taxpayer under Chapter 2 of Part 4A of the Scotland Act 1998 then the personal allowance in subsection (1) may be adjusted to any amount set out by the Scottish Parliament in a Scottish allowance resolution.
(5) Section (Changes to United Kingdom income tax which are detrimental to the income of the Scottish Government) of the Scotland Act 2012 makes provision about the setting of the personal allowance for Scottish taxpayers.””

[Lord Forsyth of Drumlean]

My Lords, the amendment seeks to outlaw the practice, which my noble friend laid bare before us at an earlier stage of the Bill, whereby the Scottish Parliament is able to raise 10p in income tax but, if the tax base is narrowed, the Treasury sends it a cheque.

The current Budget, quite rightly, raised the threshold at which people pay income tax, which will be very beneficial to people in Scotland. If this system were in operation today, not only would everyone enjoy a lower tax on their income in Scotland but the Treasury would send a cheque for the equivalent amount in the reduction in the tax base to add to the block grant—which drives a coach and horses through the whole idea behind this Bill, of bringing accountability to the spending practices of the Scottish Parliament. It should not be compensated for a reduction in the tax base that arises from a reduction in income tax in the rest of the United Kingdom. It is an absurd proposal.

I am very nervous that my noble friend may accept this amendment, because it extends the powers of the Scottish Parliament very considerably, in a constructive way. I know my noble friend, at an earlier stage in the Bill, said that the Scottish Parliament cannot change the allowances, and therefore the reduction in revenue would be as a result of something that was done in the United Kingdom. The amendment provides for the Scottish Parliament to be able to change the allowances and gives it more power. I listened to the noble Lord, Lord Kerr, and can see the logic of that.

My noble friend may not like that at all, because it adds to the complexity of the devolution of income tax. I noticed he said earlier that the block grant would be about 60 per cent of the expenditure. We keep hearing that the Parliament will be raising 35 per cent of its own expenditure through tax—but that is a dishonest figure. The amount that will be raised by the 10p on income tax is about £4.5 billion. We are looking forward to discussing this later today, but it just so happens that when the Barnett committee, which was established as a result of the efforts of the noble Lord, Lord Barnett, looked at this, the estimates of the additional grant that Scotland had over and above what would be based on needs was about £4.5 billion. That is what 10p on income tax, broadly speaking, will raise. It is about 15 per cent of the block grant and it has all the problems that we have with local government finance, where a small increase in expenditure needs a large increase in income, because of the gearing effect. Therefore, it may be sensible to broaden the tax base, which is another reason for having additional sources of revenue other than income tax, such as the aggregates tax and so on and so forth. I can see myself being sucked into this process of additional tax-raising powers. It is the slippery slope that my noble friend Lord Lang referred to.

The purpose of this amendment is to deliver what all those advocates of this Bill, whom I have spent most of my life opposing, say that the Bill is about and to remove this extraordinary idea that Scotland should benefit both ways—and no self-respecting Scot would want this—by getting both the reduction in the tax and the additional grant. It is very straightforward and because the hour is late, I will not elaborate on it any further. I beg to move.

[Lord Eatwell]

My Lords, in the enforced absence of my noble and learned friend Lord Davidson, I rise with considerable trepidation to speak on these clauses. Having spent some time reading myself into the debates that your Lordships have had on this Bill, I cannot feel that they have been entirely enlightening.

With respect to the amendment proposed by the noble Lord, Lord Forsyth, I am afraid that he shot his own fox in his remarks, when he pointed out that by varying the tax base as well as tax rates he will increase enormously the complexity of any tax changes that might affect Scotland. On top of that, when you increase complexity you reduce transparency and accountability. To have proper accountability we need to have clarity. By changing both the tax base and tax rates or putting both into play, within a very short period of time we could have enormous complexity in the Scottish tax system relative to that in the reset of the United Kingdom. The notion of accountability would be lost.

[Lord Forsyth of Drumlean]

I am grateful to the noble Lord and I sympathise with him if he has had to read all our proceedings, but this is not my fox. I am opposed to having these tax powers for the very reason that, to make it work, it would be excessively complicated. It is the fox of his noble friend Lord Browne, not mine.

[Lord Eatwell]

By introducing tax allowances, the noble Lord seems to be adding to the creature to be chased.

I pose a couple of questions about this issue, which comes under the general heading of “no detriment”. As I understand it, the whole concept of no detriment is to require all government departments—and, in this case, the UK Government with respect to the devolved powers in Scotland—to take account in their decisions of any detriment that they might impose on the Scottish Parliament and its revenues.

As I understand it, any proposal of this sort would be intra-budget in the sense that it is within a budgetary year. In a letter from the noble Lord, Lord Sassoon, to the noble Lord, Lord Forsyth, dated 19 March, he stated that,

“it is highly unlikely that a UK Budget would announce a change in income tax policy to be implemented within the same fiscal year”.

I understand that he is referring to something within a budgetary period—in other words, not from one budget to the next, when the negotiated taxes, allowances and block grant are made clear—but to some amendment that takes place within a budgetary period. Perhaps he could clarify exactly what he meant by that part of his letter.

On another element of clarification, I turn to the Written Statement made by the noble and learned Lord, Lord Wallace, on the Scotland Bill, on 21 March, when he referred to the application of the model recommended to the Welsh Assembly in the Holtham report on the tax and budgetary arrangements between the UK and the Scottish Government. I would be grateful if he could clarify exactly what is meant by the Statement that it,

“will help protect the Scottish Government’s budget from wider macroeconomic shocks”.—[Official Report, 21/3/12; col. 62WS.]

Given that in the face of a macroeconomic shock any change is unlikely to be reflected in the tax base, because that takes so long to implement, what does this actually mean? Could he give us an example of how a macroeconomic shock would in some way lead to a change in the tax base affecting Scotland within a fiscal year? I am completely puzzled by that; it does not seem to make any sense at all.

There is one other area of puzzlement that I have with respect to this question, in the reference to the OBR, which appears in the amendment from the noble Lord, Lord Forsyth, and in government statements about the assessment of the impact of a change in taxation. In the report published on 21 March, the OBR said:

“We are therefore not able to produce a Scottish macroeconomic forecast to drive the Scottish tax forecast. Instead the methodologies we intend to use … are generally based on Scotland’s historic share of the relevant UK tax stream. We then generally assume that this share will be maintained at the recent average level in the future”.

However, if there is a change in allowances that assumption is invalidated, and therefore the OBR is not competent because it does not have the information it needs to perform the task which both the noble Lord, Lord Forsyth, and the Government wish it to perform.

In those circumstances the OBR says that, in due course and with a long lag, it can assess this. If the block grant is changed in the way that the Government have suggested, in response to a change in tax base—I agree with the Minister that that is how it should be done and not with the noble Lord, Lord Forsyth—and if the OBR finds that its preliminary assessment was misguided, will that be adjusted in future years or will we proceed with a methodology which the OBR admits is imperfect?

--- Later in debate ---

[Lord Sassoon]

My Lords, let me first thank the noble Lord, Lord Eatwell, for confirming what I and the Government strongly believe but clearly have not communicated to my noble friend Lord Forsyth—that the no-detriment principle simply does not have the sort of double-benefit effect to Scotland that he seeks to portray that it has.

[Lord Forsyth of Drumlean]

Of course it does.

[Lord Sassoon]

It is not a matter of “of course it does”. I regret that not all noble Lords seem to have been able to come to the briefing for all Peers that we had earlier this week to go through the Holtham-style block grant adjustment, because it is complex. Regrettably, under the conventions of the House, I cannot hold up charts and explain the money flows. However, that was precisely why we had an all-Peers meeting earlier this week, when we were able to go through the mathematics of this in detail.

[Lord Forsyth of Drumlean]

I am grateful to my noble friend. However, he organised that meeting in the middle of lunchtime on Monday. We were given a few hours’ notice of the meeting, and some Peers did not even know that it was happening. Some Peers were travelling down from Scotland. This Bill has been around for 18 months, so if the suggestion is that we have not been considering the arguments or been open to briefing, it is not correct.

[Lord Sassoon]

I am sorry—I have been very patient with my noble friend—but we had a very short window. We were asked to set up a meeting and we did so as quickly as we could. I appreciate that not all noble Lords could come but we did respond to the request for a meeting. If any other noble Lords had wanted a one-on-one explanation of the detail of how the adjustment works, my officials or I would have responded. I am not aware that any request was made because the meeting time was inconvenient. We have tried to be—

[Lord Forsyth of Drumlean]

My Lords—

[Lord Sassoon]

I am sorry, but—

[Lord Forsyth of Drumlean]

My noble friend has made an accusation; perhaps he will let me respond.

[Lord Sassoon]

I am sorry. I was merely trying to suggest that we have been as accommodating as possible in the very short time that we had available. I am not aware that there were any further requests for a detailed explanation of the complicated series of adjustments that would need to be made to make sure that the no-detriment principle works in a symmetric way, and is not a double hit to either the Scottish or the UK taxpayer.

[Lord Forsyth of Drumlean]

If my noble friend will allow me, the meeting was organised at 1.30 pm on a Monday when I was hosting a lunch. I replied to his officials saying that I might be able to do something at three o'clock. He will recall that the Scotland Bill came on later that day and that I had tabled a number of amendments to it. I was not able to attend, and other Peers were not able to attend because they were travelling. This is, by the way, not an argument about the technicalities. However, it is really quite unacceptable to suggest that we do not understand the arguments because we disagree with my noble friend, or to criticise us for not coming to meetings that were organised at short notice.

[Lord Sassoon]

My Lords, I do not want to prolong this but I resent the suggestion that we have not tried to be accommodating on this issue. We have all been considerably inconvenienced by the difficulties of the parliamentary timetable. I merely want to make the point that that timetable has been difficult and we have all sat around waiting for things to happen. I am sorry that we have not had an opportunity to take some of that time to discuss the details of this very technical series of adjustments under these arrangements. I say at the start of my response to this discussion that it is simply not possible to go through the adjustment line by line, but I shall make some points on it.

For those who have looked through the adjustment carefully—the noble Lord, Lord Eatwell, clearly has, as he does at such things—I believe that the way that the adjustment works means that the block grant is protected in the way that it should be. Scotland is exposed to the effect of decisions that are taken by any variation in the 10p rate, and that is all it should be exposed to in this case. That is entirely as it should be.

I turn to some of the questions about how the adjustment will operate. The first point related to when announcements are made and in-year adjustments or adjustments within the fiscal period. It is consistent with the Government’s approach to tax policy-making that we would seek normally to make any relevant tax adjustments and announcements well in advance. For example, the adjustments to the personal allowances that were announced in the Budget this year come into effect in just over a year’s time, giving time for any adjustments of a sort that will be needed to be worked up in future. So there is nothing more behind this than simply confirming that we are conscious that an adjustment will need to be made and it will be better if it can be made in advance. That is consistent with the normal approach that we now have to tax-making.

On the question about the OBR’s description of where it is at, the important point is that the OBR will use the period between this year, 2012, and the time when the new tax powers are transferred to refine its approach, including moving from historic to actual data, so that the impact from UK policy decisions will be refined and the methodology will evolve in the periods between 2012 and 2016. I am sure that, as it has done to date, the OBR assessments will set out transparently in successive reports how its methodology is changing. In the spirit of that—although I think this anticipates a situation that we are not remotely in—notwithstanding that there are four years to refine the methodology, if we get to a position where the OBR data are used to make some block grant adjustment and it subsequently discovers that it was misguided, something has changed and it refines that adjustment, I am sure that that will be taken into account. The more important question for the moment is the time period that it has to refine its methodology over the next few years before any question of block grant adjustments comes in.

On the question of macroeconomic shocks—

--- Later in debate ---

I could carry on, but my noble friend’s proposal raises all sorts of technical questions and goes directly against some key considerations in Calman. I am conscious that this is a complex area. I hope that my reassurances have helped my noble friend in some respect, and I ask him to consider withdrawing the amendment.

[Lord Forsyth of Drumlean]

My Lords, perhaps I may begin by commenting on the shortage of time and the pressure that has been put not just on Ministers but on Members of this House. That is nothing whatever to do with people who are not members of the Government. It is the Government who introduced the Bill more than 18 months ago; it is the Government who chose to wait so long between its introduction in this House and its Second Reading and Committee stages; it is the Government who decided to produce a consultation paper in the middle of the Committee stage, which meant that we had to delay consideration of part of the Bill; and it is the Government who landed us in a position where we were in Committee on Wednesday last week and had only one day in which to table amendments for Report.

The noble Lord, Lord Browne, raised the question about the formula that none of us, apparently, understands, and we received from the Bill team an invitation to come to a briefing at 1.30 pm on Monday. I travelled down from Scotland on a plane that arrived at London City Airport at 10.30 am. I did an interview with the BBC. I had a lunch to host. I got here at 3 pm and responded to the invitation to come to the briefing, saying that I could not come because I was hosting a lunch. I received a response asking whether I would like an individual briefing. I pointed out that the Report stage was happening at 3.30 pm but that I could do something at 3 pm. I received no response because, I would guess, the Bill team were preparing for proceedings on the Bill just as I was. Frankly, for the Minister to criticise us for not attending those briefings is, perhaps I may say, unfair. As it happens, his briefing is completely irrelevant to the argument. He seems to be satisfied with the technicalities. My argument is one of principle. The principle is clear. He asks: do I really expect the Scottish block to be reduced as a result of changes in taxation here? Yes, I do. That happens at present.

My noble friend shakes his head. I have been doing this for the best part of 20 years. When I was Secretary of State, I negotiated with the Treasury. I understand how Barnett and the block works, along with my noble friend Lord Lang. I also know how you can get round that and how you can pull the wool over the eyes of the Treasury. We spent some six or seven years of our lives doing that. I understand how it works.

My noble friend shakes his head to say that reductions in taxation do not actually result in a change to the block. Of course they do. How does my right honourable friend the Chancellor achieve reductions in taxation? He has to do it by reducing expenditure. If expenditure is reduced, the formula consequences are translated to Scotland. For example, when it was decided to privatise water, which helped the then Government to continue with their tax reduction programme, the Scottish block lost the block consequences of the money made available for the provision of water by public services. Of course there is a relationship between the size of the block and the spending decisions taken down here.

My noble friend is muttering. I am happy to give way to him if I am saying something that is incorrect.

[Lord Sassoon]

I completely agree with my noble friend about his last statement: there is a clear link through the Barnett formula to spending decisions here. There is not the same hardwired link between tax decisions on, for example, income tax and personal allowances and the block grant. I completely agree with him about the link between UK spending decisions and the block grant. That is clear, but it is very different from linkage between decisions about income tax matters and what is already agreed in the settlement for the block grant in a spending review period.

[Lord Forsyth of Drumlean]

Indeed, but I described the present situation. My noble friend proposes in the Bill to change it and to take part of the block grant, which is the equivalent of 10p on income tax, which, we agree, is £4.5 billion out of £28 billion, set it aside and say that that is the product of 10p on income tax. He suggests that that bit of the block grant is completely insulated from the effects of tax changes made at a UK level from which people will benefit. He says that I should have come to the briefing so that I understood it. I understand it. He is creating the illusion that the tax-raising decisions of the Scottish Parliament—whether it decides on 10p, 9p, 11p or whatever—will be directly related to its spending decisions if, at the same time, as a consequence of reductions in taxation down here, the block is automatically topped up to compensate the Scottish Parliament as a result of changes in allowances.

For example, if the threshold at which people pay tax was raised to £25,000, so everyone in Scotland who earned the average wage would not pay any income tax, that would have an enormous cost. As I understand it, under my noble friend’s equalisation proposals, the Government would say, “Your 10p on the basic rate no longer raises any money at all. That is a result of a decision that we have made here in the UK. Therefore, you have to be compensated for that and we will send you a cheque”. Do I misunderstand this? I will give way to my noble friend if he tells me that I am talking nonsense, but am I not correct in that understanding of the situation?

[Lord Sassoon]

My noble friend is positing a completely unrealistic situation. I do not see that that is ever going to happen.

[Lord Forsyth of Drumlean]

I agree. Of course it is not going to happen because our public expenditure commitments are so immense. I posit that in order not to get bogged down in complexity, formulae and detail because the principle here is quite clear. The idea that this is about Scotland raising its own revenue and being accountable for it is an illusion. My noble friend is simply recreating the block and saying that Scotland will in any event get the equivalent of the Barnett formula consequences because it will be compensated as a result of any changes in the allowances. That is what he is saying. Therefore, it is not what we are being sold; we are being sold—

[Lord Sassoon]

My Lords—

[The Deputy Speaker (Lord Brougham and Vaux)]

I remind the House that we are on Report, not in Committee, so I ask noble Lords to stick to the rules of the Companion.

[Lord Forsyth of Drumlean]

I think that my noble friend was going to give me some helpful information. This is an important point. I sense from his irritation that he is getting tired of my making this argument, but I do so because it is absolutely central to the issue. I do not believe in giving the Scottish Parliament tax-raising powers. I do not think that you can have two tax-raising bodies in a unitary state, as it will result in disaster, but that is the Government’s policy and it is being justified on the basis that it will increase accountability. However, this principle of equalisation does not provide that accountability.

I agree with my noble friend and with the noble Lord, Lord Eatwell, that it would not be sensible to adopt my amendment and give the Parliament the ability to fall to the thresholds because of the complexity, costs, uncertainty and difficulties that that would create. I simply seek to illustrate that the core basis or philosophy on which this whole thing is based does not stand up. The Government are creating an opportunity for a substitution for the block grant which has one very unfortunate side-effect—here, I declare an interest as someone who lives, and will always live, and pay tax in Scotland—and that is that we will end up being the highest tax-paying part of the United Kingdom in order to carry out a political con trick. I beg leave to withdraw the amendment.

Amendment 18 withdrawn.

--- Later in debate ---

I support the amendment. I have no idea whether my noble friend the Minister intends to accept it. At any rate, the noble Lord, Lord Barnett, may look forward to the fact that he has a very good chance of outliving his own formula one way or another.

[Lord Forsyth of Drumlean]

My Lords, I do not want to speak at length as I spoke about this in Committee, but I will make a couple of points. I agree with everything that my noble friend Lord Lang has said about this apart from one thing. I am not sure that I would have pressed for a needs-based system to replace Barnett. Indeed, the briefing I got from the Treasury officials was, “Whatever you do, do not agree to a needs-based assessment”. In those days, they said that it would cost us £2.5 billion off the block. Given the evidence we had in the Barnett committee—which, incidentally, was unanimous—we were lucky to have on the committee the noble Baroness, Lady Hollis, who understands the needs-basis system that is applied in local government in other parts of the public service.

If my noble friend Lord Steel is right, the Barnett formula will be replaced by a new one which will be called the cold Steel formula. That is because, if my noble friend has his way, there would have to be huge reductions in the Scottish budget. The idea that by 2016 Scotland can be responsible for raising all the income it spends would mean catastrophic reductions in expenditure or huge increases in tax. This is not alarmist: the figures are all there in the report; the work has been done by people such as Professor Bell at Stirling University.

For historical reasons, Scotland is probably funded to the extent of about £4.5 billion more than it would be on a needs basis. It is not sustainable to argue against the needs-based system for funding the Scottish Parliament when the Scottish Executive distribute the bulk of the money they receive to local government and the health boards using a needs-basis system of funding. The idea that this is somehow alien to Scotland is wrong.

We have a huge political problem in that the overfunding is probably of the order of £4.5 billion. My noble friend Lord Sassoon said earlier that the product of putting 10p on income tax in Scotland would raise about £4.5 billion. So we are talking about the equivalent of half the income from the basic rate and 10p of the income from the higher rates being the additional grant that Scotland enjoys over and above that which would be provided on a needs basis. This is why the amendment of the noble Lord, Lord Barnett, is so important and why, I regret to say, the report produced by this House under the excellent chairmanship of the noble Lord, Lord Richard, has not been implemented and why it needs to be implemented.

If we are going to make this change, it will need to be phased in over a long period. That was the key recommendation of the committee. We need consensus and agreement on this. It is no good this Government or another Government saying, “This is what needs to be done” because everyone will say that they have done it for political reasons. We need an independent and objective group of people to look at the issue and make recommendations, which we then need to implement over time.

It is particularly—I keep saying this—irresponsible to introduce a system of funding which relies on putting up tax while not dealing with the underlying problem. We are heading for a train crash. We will reach a position where the Scottish Parliament will say, “Well, you can raise income tax if you want to spend more”, while they find not only their baseline for income tax but the whole of the element of the block grant which relates to Barnett disappearing as the pressure for moving to a needs-based system of funding becomes impossible.

There is one element of the Calman commission which all the enthusiasts for its recommendations conveniently forget to notice; that is, the recommendation —my noble and learned friend Lord Wallace will remember it well—which acknowledges that this issue of funding will have to be addressed and that we will have to move, in time, to a formula based on needs. That is one of the points made in the Calman commission report. The noble Lord, Lord Barnett, is saying, “Look, accept this amendment and set up the commission. It will take two or three years to work out the methodology and to get agreement on it. Get consensus and then, if the noble Lord, Lord Steel, wants to get to a position where the Scottish Parliament raises all its own revenue, recognise that it will take 20 years if it is not to result in a huge gradient between Scotland and England and huge damage to our public services”.

Who is going to make capital out of that situation and who is going to get the blame? It will be meat and drink, even if Alex Salmond loses his referendum. If you have just won the referendum for the union but then whip away the money and introduce a tax-raising power that makes Scots pay more tax than others, do we really believe that will settle this constitutional question once and for all?

The noble Lord, Lord Barnett, took a large part of a year of my life when I sat on what was a very interesting and fascinating committee. In pressing this matter now, we should listen to this sage advice and not run away from it. The argument put forward by the Government that we cannot deal with Barnett because we are concentrating on budget deficit reduction is a non sequitur if ever there was one. What has dealing with the deficit got to do with putting in place arrangements for funding, not only for Scotland but Wales and Northern Ireland, that are fair to all?

That is the other aspect of this—Wales is suffering quite considerably as a result of the inequity of this formula. If we are to maintain the United Kingdom, which appears to be under great pressure and will be under even more severe pressure because of the economic circumstances in which we find ourselves, it is important that we have a baseline that is seen to be fair and cannot be challenged. There are arguments about marginal seats and all the rest but, broadly speaking, when we distribute money to local government, health and so on, we use a well trodden path of formulas based on need. The Barnett formula, if I may say so, was a fix that followed great anxiety about the SNP winning elections in Scotland. We have been going down this track of appeasing the nationalists in a haphazard and piecemeal way.

It is important, as the Government embark on the huge constitutional change that is contained in this Bill, that we understand the importance of the finance. When my noble friend Lord Steel says, “We will do this”, he is saying what many people in Scotland and endless editorials say—that we must have more powers for the Scottish Parliament. However, I do not think they have looked at the numbers. If you do an opinion poll and ask people whether they would like more powers for the Scottish Parliament, of course the overwhelming majority say yes. However, if you ask them whether they would like to see public services having less money, higher taxes in Scotland or a financial crisis in public services in Scotland, you get a very different answer. The noble Lord, Lord Barnett, in proposing this amendment, is giving us a pathway that, over the next 20 years, will avoid that kind of dysfunction and dislocation within the United Kingdom.

[Lord Maclennan of Rogart]

My Lords, I add my words in support of the general view expressed in this short debate that the time has come for the Government to make clear their attitude to Barnett. However, I do not agree with the proposed amendments, since they are insufficiently explicit about the process that would need to be established to implement the Richard report effectively and fairly. Amendments 30 and 31, which are grouped together, speak of assessing Scotland’s needs. However, if you are to implement the Richard report then you have to assess the needs of the whole of the United Kingdom. Setting up a commission to look solely at Scotland will not necessarily produce a proper outcome.

I would strongly recommend therefore that the Government come forward with their proposals and do not postpone until the Greek kalends grasping the important issue of fairness, which is exacerbating the bad feeling between the different nations of this country; and recognise that it will take some time to establish the fair basis for making these calculations. Consequently, I cannot support the amendments in the form in which they have been drafted, but none the less believe that, as a backdrop to the constitutional developments we are seeing, we need to know that the Government firmly intend to recognise the validity of the principles enunciated by the Richard report.

--- Later in debate ---

[Lord Sassoon]

My Lords, this has been an interesting debate as we draw towards the end of consideration of the Bill. I am grateful to the noble Lord, Lord Eatwell, whose analysis I very much agree with. It has been a fascinating debate that has taken almost an hour. Sadly, as it has continued, more and more voices have been raised making all sorts of correct arguments that this is not the time and place for it. Many voices in this House accept the starting point of the noble Lord, Lord Barnett, which is that although his eponymous formula has stood the test of time, its time may nevertheless be coming. However, we are not at the point of having a ripe solution, and having a one-country answer within the vehicle of the Bill is not the way to address these proper concerns. I often find that noble Lords from all sides of the House are against me, but it is rare to find myself in substantial agreement with them.

Let me start by reminding noble Lords of one or two things that we should be clear about. First, one of the things that the Bill will do is devolve some of the financial management of income tax to the Scottish Government. However, it will not fix the Barnett formula in stone for the future, and we need to be clear about that, for the avoidance of doubt. It is also worth dwelling on Calman for a moment. My noble friend Lord Forsyth of Drumlean referred to the Calman report, but it is perhaps worth quoting at some length. Recommendation 3.4 states:

“The block grant, as the means of financing most associated with equity, should continue to make up the remainder of the Scottish Parliament’s Budget but it should be justified by need. Until such times as a proper assessment of relative spending need across the UK is carried out, the Barnett formula should continue to be used as the basis for calculating the proportionately reduced block grant”.

The Bill certainly does not therefore lock in the funding formula but, as a number of noble Lords, starting with my noble friend Lord Maclennan of Rogart, have pointed out, this is very much an issue for the whole United Kingdom and should be dealt with at the appropriate time.

Just before I come back to one or two more points on the broader issues, I should for completeness comment on the technical drafting of the amendments.

[Lord Forsyth of Drumlean]

No.

[Lord Sassoon]

My noble friend says no. Well, I will do so anyway—very briefly. I want to do full justice to the amendments of my noble friend and the noble Lord, Lord Barnett, even if they are so modest as to not want to go through the pain of my analysis.

Very briefly, I suggest that April 2016 is not the ideal timing—coming, as one would expect it to do, part way through a spending review. Timing is an issue. The noble Lord, Lord Barnett, himself pointed out that the current formula is an administrative procedure. It does not appear in legislation. The formula is not specific to Scotland. That goes beyond the purely technical question of the drafting into a wider debate, as I have mentioned. I suggest that it is not right to legislate for a United Kingdom formula that is not at the moment in legislation in a specific Bill related to Scotland that is about tax-raising powers rather than spending.

[Lord Forsyth of Drumlean]

My Lords—

[Lord Sassoon]

Of course I am always happy to give way to my noble friend.

[Lord Forsyth of Drumlean]

I am most grateful to my noble friend for giving way as we reach the end of these proceedings. I entirely accept, as I am sure that the noble Lord, Lord Barnett, does, that this may not be the ideal vehicle. I think that the House would be very happy to hear a commitment from the Minister that he will address the issue at some near date in future.

[Lord Sassoon]

This will not meet the stringent test that either my noble friend or the noble Lord, Lord Barnett, will set, but let me go as far as I can.

The Government understand the concerns expressed in this House and in another place about the devolved funding arrangements. The Government’s position is clear. As the noble Lord, Lord Barnett, recognised, there must be other priorities at this time. It is clear that the Bill does not rule out or in reform of the formula in future. The Government hear, loud and clear, concerns about the formula.

As is clear from our discussion, as well as to those who have followed the debate more broadly, most would concede that there is no consensus across the UK on how to measure the needs of the four countries. Therefore, it is not possible to say what the impact of replacing the Barnett formula might be. Within the devolved formula as it works now, the devolved Administrations determine their assessments of needs and priorities in the devolved areas. That is a strength of the Barnett formula—a point made by the previous Government in responding to the Select Committee’s recommendations then. It is a complex area. Successive Governments have acknowledged the difficulty both with the existing formula and of putting something else in place. The Government certainly do not dismiss that.

I will disappoint my noble friend and, I fear, the noble Lord, Lord Barnett, but I think that it is extremely useful—although not directly linked to the substance of the Bill—that we have had this discussion, because the linkages are clear. My noble friend Lord Steel of Aikwood points out one scenario in which it may all go away. Others have challenged that scenario but have nevertheless agreed that now is not the time to do it.

The issue will not go away. I am sure we will come back to it, if only because the noble Lord, Lord Barnett, will regularly ask me questions on it, and there may be other opportunities for more substantive debate. However, for the reasons that noble Lords from all sides of the House have given, important topic although it is, this is not the time nor the vehicle to address it. I therefore ask the noble Lord to withdraw his amendment.

--- Later in debate ---

[Lord Wallace of Tankerness]

My Lords, I am very grateful to the noble Lord, Lord Browne of Ladyton, and the noble and learned Lord, Lord Cameron of Lochbroom, for their general welcome for the position that we have reached with regard to these amendments and the role of the Supreme Court and issues of compatibility in criminal proceedings with European convention rights or European Union law.

I also pay tribute to the noble and learned Lord, Lord Boyd of Duncansby, who not only has made a very constructive contribution to this and other debates on this Bill but was a member of the expert group I set up under the chairmanship of Sir David Edwards; he has been contributing to this debate from a very early stage. I also welcome the 98 per cent satisfaction rate that I seem to have achieved from the noble and learned Lord, Lord McCluskey. I think that is a recognition of the amount of work that has been done by so many people in trying to bring this matter to a satisfactory outcome.

The noble Lord, Lord Browne of Ladyton, is right to recognise that this is part of the agreement that we reached with the Scottish Government. He and the noble and learned Lord, Lord Cameron, asked whether three years was sufficient. The noble Lord, Lord Browne, explained why we had resisted the idea of certification. The comparison with England and Wales was that certification was brought in under the Administration of Justice Act 1960 to stem a flood. If after three years, there have only been five or six cases, that would be a relevant factor to be taken into account; the flood has not happened. Without in any way prejudging any inquiry, the fact that there has not actually been a huge number of cases would have to weigh in to the consideration, if that is how it indeed turns out.

I do not believe that that the composition of the committee and its chairmanship is inappropriate. Many commissions are headed up by a judicial figure. I do not think that to head up a commission with the most senior judicial figure in Scotland is inappropriate, given that one can be assured that a figure of such stature will undoubtedly deploy the judicial qualities which have put him or her into that position. In moving the amendment, I indicated that there will be a number of views. We would expect bodies such as the Lord Advocate, Scottish Ministers, the Scottish courts and the Supreme Court and a number of representative bodies—and the bodies such as have responded to the consultations which I held, including, for example, the Scottish Human Rights Commission, Justice, the Law Society of Scotland and the Faculty of Advocates—to contribute.

We did not seek to put into statute that it should be the Lord Justice General, not least because—in answer to the point made by the noble Lord, Lord Browne—of what would happen if a future Lord Justice General does not want to be involved. When the time comes for the review to be held, should the Lord Justice General at that time not consider that it would be appropriate for him or her to undertake the review, of course the United Kingdom and Scottish Governments would work together to agree an alternative chair for the review.

By the same token, I do not think that we would wish to be constrained by specifying, as the amendment proposes, a Justice of the Supreme Court. For example, a recently retired Justice of the Supreme Court might be an appropriate person—either one from Scotland or one from another part of the United Kingdom. I hear the fair point that someone having had that experience might well be an appropriate person to be a member of the review body but I do not think that it would be appropriate to put that into statute. As I have said, it might not be a currently serving Justice of the Supreme Court but one who nevertheless everyone agrees is an appropriate person to serve.

When the time comes for the review to be set up, I am sure that soundings will be taken as to who would be appropriate to serve on that commission. With these words, I hope that I can reassure the House that the review will properly look at all the issues, not just those of certification but at how time limits have worked. I have no doubt that the issues of certification will be properly aired before that commission as they have been before your Lordships’ House and in the wider legal and public debate.

As this is the last group of amendments, I thank all noble Lords who have taken part in the debates on Report. I believe that in these two days of Report, and in Committee, this House has done what it is intended to do; namely, to give proper scrutiny to the measures brought forward in this Bill. I am very grateful to noble Lords, and to my noble friend Lord Sassoon for helping me in responding. I hope that colleagues in all parts of the House will enjoy and refresh themselves over the Easter Recess before returning to Third Reading.

[Lord Forsyth of Drumlean]

Perhaps I may say how much we have appreciated the way in which the noble and learned Lord and the noble Lord, Lord Sassoon, have handled this Bill. I do not think that, from all sides of the House, this has been a particularly easy time for them but we have certainly done our job and very much appreciate the way in which the Government have dealt with this.

Amendment 33 agreed.