A rift has emerged between Conservative and Scottish National party ministers in their secretive talks over the future of the Treasury grant that funds the Scottish parliament.



As the 12 February deadline set by Nicola Sturgeon, the first minister of Scotland, approaches, the UK Treasury minister Greg Hands confirmed the two governments still did not agree on which formula to use once Holyrood’s new tax and borrowing powers come into force next year.

Hands, the chief secretary to the Treasury, is travelling to Edinburgh on Monday for a fresh round of talks with the Scottish finance secretary, John Swinney.

In a further development late on Wednesday, Swinney indicated that the date for that final deal could yet slip past 12 February. In a statement, he said that as much time as possible was needed for MSPs to study the deal before May’s Scottish elections.

Earlier, Hands said he was “hopeful to confident” that a deal would be struck before Sturgeon’s deadline. He told MPs on the Scottish affairs select committee that he backed a funding formula that Sturgeon’s government has firmly rejected.



Soon after he gave evidence in Westminster, the SNP and Tories rejected calls from Labour and Liberal Democrat MSPs in Holyrood for an immediate 1p rise in Scottish income tax rates in the next Scottish budget.



Questioned publicly about the talks for the first time, Hands said the Treasury preferred a model known as “levels adjustment”, where Scotland gets a population share of any tax changes at the UK level.

Scottish ministers want a system known as “per capita indexed deduction”, which takes account of Scotland’s slower population growth and movements in income tax receipts at UK level. That would increase Holyrood’s reliance on Treasury subsidy, if Scotland’s tax receipts are lower per head.

Hands rejected warnings this week from Prof Anton Muscatelli, an economist and principal at the University of Glasgow, that the system preferred by Sturgeon’s government was the safest one for both Scotland and the UK.

Muscatelli said the wrong deal could see Scotland lose £3.5bn in UK funding over 10 years because its population was growing more slowly, at 3% over the last 30 years against 14% for the rest of the UK, and ageing faster.

Writing in the Herald, Muscatelli said the UK government was in danger of ignoring one of the central principles of the Smith agreement – that Holyrood should suffer no detriment as a direct result of its new powers. The Institute for Fiscal Studies and a Lords committee have already said it is impossible for the fiscal framework to be fair to both sides in the long run.

Hands said other senior economists disputed Muscatelli’s criticism because it was based on fixed and negative assumptions about Scotland’s future population growth and productivity. English taxpayers had the right to know Holyrood was taking full responsibility for its policy decisions.

He denied charges from Pete Wishart, the committee chairman, that Scotland’s inability to control its own immigration policy and overseas students rules made it far harder to boost its population.

Hands said new tax powers added to Holyrood’s already powerful set of economic tools and the UK government would protect Scotland from global economic shocks it could not control. “I think Scotland should have incentives to boost population and take advantage of the increased taxation, use those powers more extensively and I think that’s in the best interests of Scotland,” he said.

Wishart said the Treasury’s stance on which formula to use still left both governments “miles apart”. The current Scottish parliament is dissolved on 24 March for May’s Holyrood elections, adding to the pressure for a fast agreement.

Ministers in both governments agree that a deal on the so-called fiscal framework – which will set billions of pounds in UK funding each year – is crucial to the future of the new devolution settlement agreed by the Smith commission after the 2014 referendum on Scottish independence.

The new fiscal arrangements come into force from April 2017 when the Scottish parliament gets near-complete control over £11bn worth of income tax rates and bands in Scotland, control over £2.2bn in welfare payments and the power to borrow and fix new taxes.

The new powers will give Holyrood direct control of raising taxes for about 50% of its spending; the remainder will still be funded by the Treasury. The dispute focuses on whether future Treasury funding is influenced by population changes, UK tax changes or both.

If the highly complex settlement penalises Scottish taxpayers and leads to cuts in UK funding for Holyrood, pro-UK parties fear that will increase support for independence. But they also worry that a deal that allows Holyrood to overspend or waste money using UK taxes will undermine English confidence in the union.