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Lord Dean of Beswick: I am sorry that the noble Earl takes the view that I want to engender antagonism between the Scots and the English. The point I am trying to make is that I do not want any money from Scotland if it has been apportioned to them, even on the increases

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that have been stated. I am making the case that unless the same things are done for the English regions there will be hell to pay. I hope that the Government are listening. I do not want any aggro over it. The entitlement for those areas should be there, and it should be a fair one. That will remove the animosity. Nothing else will.

Baroness Carnegy of Lour: I am sure that we all agree that the noble Lord, Lord Dean, has made a splendid speech. He has expressed the views and fears of a great many people both north and south of the Border. We should all be grateful to him. I agree with him that this is the part of the Bill that will play most immediately into the hands of the people who want to tear Scotland out of the United Kingdom unless something can be done about it.

It also shows what the Prime Minister meant when he compared the Scottish parliament to a parish council in England. On finance, this parliament will not have anything like the power of even a local government council over its own finances. Local government councils, apart from the money they can raise through their own taxation, can buy and invest on the market; they own and control their own funds. Not so this parliament. Its funds will be raised in the way that the Bill says--of course with the extra tax--but the funds will be held in the Scottish Consolidated Fund, not in its charge but in the charge of the Paymaster General.

If the parliament receives interest, that interest has to go back into the UK Consolidated Fund. If the Scottish parliament wants to borrow, it can only borrow for a short-term need to keep the books in balance. Again, any interest that it has to pay has to be at the Treasury rate, not the market rate.

Apart from the tax which the parliament can raise through increased income tax, everything will depend on the size of the Treasury grant that we are discussing. The calculation which is underlying the Bill, with only the Secretary of State for Scotland in the Cabinet to defend the calculated fund, will matter enormously to the people of Scotland. The speech of the noble Lord, Lord Dean, illustrates that.

There are two ways that it can be calculated. You can do it by a formula, openly stated either on the face of the Bill or published, which is seen to be fair. The amendment of the noble Lord, Lord Dixon-Smith, should not be underrated in this respect. It is a carefully thought-out formula and there is much to be said for it. It may be that the Government will wish to consider something like this over the summer.

Alternatively, one could have internal arrangements, used for their own convenience by the Treasury and the Cabinet, which of course is what the Barnett formula is. My noble friend Lord Mackay of Ardbrecknish has explained that the Barnett formula does not set the rate of the block but is about increases in Scotland, Wales and Northern Ireland related to the spending in England. That is probably becoming a very old-fashioned way of proceeding. Most local government councils gave up that way of budgeting a long time ago, as I am sure the

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noble Lord, Lord Sewel, will agree from his experience. They go in for zero budgeting whereby they decide what they need to do and what it will cost, and start there. There is something of that in the amendment of my noble friend Lord Dixon-Smith. It is an old-fashioned way.

Are the Government prepared to put anything more definite on the face of the Bill? That is the question that we are discussing. Before long other ideas will emerge about this. There is some thinking going on already. There is an interesting pamphlet, published by a group in Scotland called the Tuesday Club, which relates to one method. You can take what the Scottish Office spends at the moment in the way that it calculates it and then calculate what is needed for the reserved powers. You could collect all the money into the Scottish Consolidated Fund, which is raised by taxes in Scotland, and you would then pay over what is required for reserved and other functions.

I asked the Library to analyse that booklet and it was explained to me that there are certain aspects of it which are somewhat vague. You could question how it calculates what the spending needs are. It is a very interesting approach. Other groups are thinking in the same way. In time the Government will have to think of better ways of deciding how the Scottish parliament can receive its money and spend it so that it is more stable.

My noble friend on the Front Bench has suggested that the Bill should have on its face the fact that the Scottish block is related to needs. It is a small change, but at least it indicates that what the noble Lord, Lord Dean, was complaining about would not be the case. There would be no mystery about percentages as applied through the Barnett formula.

There is a rumour that the noble Lord, Lord Barnett, wishes to change his name to Lord Barnett of the Formula in order to perpetuate this marvellous part of history, where his name is attached to what we in Scotland depend upon. I do not know whether he will do that. I do not think that the Barnett formula should be on the face of the Bill. It is out of date. Although it is gradually having a diminishing effect on the difference between spending in Scotland and the average over the UK, it is not the right way to do it now.

My noble friend has a good point. I hope that the Government will think about this over the Recess and perhaps at least put in the Bill more information on how the whole thing will be worked out. Otherwise the separatists will have a great time with this part of the Bill.

Lord Thomas of Gresford: The indignation that was expressed by the noble Lord, Lord Dean of Beswick, and supported by the noble Earl, Lord Onslow, arises out of the way in which the funds that were devoted to Scotland and Wales were spent in the past. To a very large extent the Secretaries of State for Scotland and Wales were prepared to, in effect, bribe overseas companies to come to their areas, and to attract inward investment in this way.

One hopes that the Scottish parliament and the Welsh assembly will spend the money that is made available to them on removing the disadvantages of those respective

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countries. If the money is spent on improving communications, education and technology and encouraging indigenous industry in Scotland and Wales, then those countries will have their economies improved to the extent that they will no longer be, as they are now, suffering a low wage level.

Lord Dixon-Smith: Does the noble Lord accept that his argument may well be applicable to Wales, which is his own country, where the GDP per head is well below the United Kingdom average, but that it is a much more difficult argument to sustain for Scotland, where the GDP per head is now, thanks to 20 years of successful development, virtually at the United Kingdom average?

6.30 p.m.

Lord Thomas of Gresford: I am grateful to the noble Lord for his intervention because it enables me to make a point. The Barnett formula has brought Scotland up to a degree which no other mechanism could perhaps have done.

In Chapter 7 of the White Paper Scotland's Parliament, under the heading "Financial Arrangements", I see that the objectives of the financial arrangements of the Scottish Parliament are said to be that Scotland will continue to benefit from its appropriate share of United Kingdom public expenditure and that the Scottish parliament's assigned budget is to be determined by a method which is "objective, transparent and widely accepted". When one turns to the Bill itself, all one sees is:

    "The Secretary of State shall from time to time make payments ... of such amounts as he may determine".

That does not seem to express a method which is "objective, transparent and widely accepted".

When one looks further at the White Paper one sees the Government's view that arrangements based on the block and the formula have produced fair settlements for Scotland in annual public expenditure rounds and have allowed the Secretary of State for Scotland to determine his spending decisions in accordance with Scottish needs and priorities. The White Paper goes on to say:

    "The Government have therefore concluded that the financial framework for the Scottish Parliament should be based on these existing arrangements with, in future, the Scottish Parliament determining Scottish spending priorities".

More than that, an appendix is devoted to explaining the Barnett formula in terms.

That being the case, I do not see how the Government can now resist the amendments proposed from these Benches which seek to have as a starting point the Barnett formula and its revision over a period of some 10 years, after one sees how the formula is put into effect and when one has had an opportunity to see whether the Barnett formula is working in accordance with what the White Paper said. So the very least the Minister can do in response to the arguments put forward today is to give an assurance that, from the beginning, the Barnett formula will be applied. I am looking to hear that from the Minister when he replies at the end of the debate.

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Perhaps I may move on to Amendment No. 287, which stands in the name of my noble friend Lord Thurso but has not been addressed by anyone so far. It is a probing amendment. The Bill gives the parliament the right to vary income tax upwards or downwards by 3p in the pound. When tax in Scotland is varied upwards, the Bill provides that the surplus revenue generated is to be paid into the Scottish Consolidated Fund and thereby increasing the amount of money available to be spent. Clause 74, to which Amendment No. 287 refers, provides that where tax is varied downwards the shortfalls in receipts are to be deducted from the Scottish Consolidated Fund and paid back to the Treasury.

The argument in relation to how tax-varying powers are treated is relatively simple. The Government take the view that there is a Scottish block which in the estimation of the United Kingdom Parliament is sufficient for the financial needs of Scotland. However, they have recognised that the Scottish parliament may take a slightly different view as to the needs of the Scottish people. Indeed, when one looks at the amendment moved by the noble Lord, Lord Mackay of Ardbrecknish, one has to ask the question: who estimates the needs to which he refers? Is it the Scottish parliament or is it the United Kingdom Parliament? If hidden within that amendment is the suggestion that it is entirely the United Kingdom Parliament's determination which counts, the Scottish parliament will be entirely at the mercy of what happens at Westminster.

All those who support tax varying are in agreement with the Government that the Scottish parliament should have this tax-varying power. The Bill provides that the parliament can vary the tax downwards by up to 3 per cent. If that happens, it is the Government's view in Clause 74 that Scotland does not need the total fund voted to it and, consequently, any moneys lost to the central Exchequer from such a downward variance should be reimbursed to the Exchequer out of the Scottish Consolidated Fund. The result of Clause 74 must be that no future government of Scotland would ever vary the basic rate of tax downwards because the money would simply go back to the United Kingdom Parliament. It would be returned to the Treasury.

What one is looking for in the amendment is a means by which the funds granted under the block grant could be retained in Scotland and used for other purposes. That is the purpose of the amendment in the name of my noble friend Lord Thurso.

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