Scottish First Minister Nicola Sturgeon. Photo: Russell Cheyne/PA Wire/PA Images
Until recently, the Scottish Parliament’s budget was almost entirely determined by a block grant from Westminster.
But Scotland now has major new tax raising powers. Over £11 billion of income tax was devolved in April 2017; the UK’s stamp duty system for property transactions had already been replaced by a Scottish-only Land and Buildings Transaction Tax; from next April Air Passenger Duty will no longer apply on flights from Scottish airports and will be replaced with a new Air Departure Tax; whilst from April 2019 around half of all VAT revenues raised in Scotland will be assigned to the Scottish Budget.
Soon, half of the Scottish Parliament’s day-to-day discretionary spend will be determined by revenues raised in Scotland. These new powers give the Scottish Parliament much more autonomy to do things differently. With SNP conference round the corner, and with the devolved budget under pressure, it’s worth asking just how much change has been made—and how much more is required.
This year we have seen the new income tax powers used to create a tax differential between Scotland and the rest of the UK. The threshold at which taxpayers start to pay 40 per cent on earnings in Scotland is now £43,000 compared to £45,000 in the rest of the UK—meaning a higher rate taxpayer in Scotland pays £400 more in income tax than someone earning the same living elsewhere in the UK. The upcoming Scottish Budget is likely to be dominated by a debate over how much further Scotland’s politicians are prepared to go on setting a different tax policy relative to the rest of the UK—and this will certainly be debated at Conference also.
We know that Scotland faces considerable public spending restraint in the coming years. Through a combination of ongoing UK fiscal consolidation and a relatively fragile economic environment, overall resources will continue to be squeezed.
“Per capita spending on non-health areas in Scotland is on track to fall 20 per cent from 2010-11 to 2020-21”Additionally, major new policy commitments to boost investment in the Scottish NHS, double childcare provision, to tackle the attainment gap in education and to unilaterally lift the public sector pay cap, will increase pressure on other public services. In our Scotland’s Budget Report published last month, we highlighted how per capita spending on non-health areas in Scotland is on track to fall 20 per cent from 2010-11 to 2020-21.
Such pressures are not restricted to the near-term. With an ageing population and rising health costs, more money will be needed just to help our public services stand still.
Of course the UK faces similar—albeit perhaps less acute—challenges. But with Scotland’s new tax powers, many will argue that Scottish policymakers can and should take a different path to politicians south of the border.
Last month, three of the opposition parties in the Scottish Parliament—the Greens, Liberal Democrats and Labour—backed the principle of raising income tax. The SNP abstained, with the Scottish Government instead promising to bring forward a paper outlining options for raising revenues in advance of December’s Budget.
Scotland’s Finance Secretary Derek Mackay would no doubt welcome more money to help pay for some of the government’s big commitments. But at the same time, he is likely to be nervous about how much he can put up taxes in Scotland vis-à-vis the rest of the UK without negatively impacting on the economy or the Scottish tax base.
We know that, largely as a result of the sharp fall in the oil price, Scotland’s economy has been fragile recently. Over the last year, Scotland grew at a third of the rate of the UK as whole.
We also do not yet know how taxpayers in Scotland might respond to a significant tax differential between Scotland and the rest of the UK. Will some taxpayers choose to switch some (or all) of their earnings into dividends and savings (still set by the UK Government and not within the remit of the Scottish Parliament) to avoid higher taxes in Scotland? Will higher income individuals choose to re-locate? Will higher taxes discourage new investment in Scotland? Or will better public services make Scotland more attractive economically and allow more resources to support enterprise and growth?
No-one yet has the definitive answer to these questions which may mean that the Scottish Government will adopt a gradual approach to raising taxes in the short-term. But with pressures facing public services only increasing, tough choices over public service priorities and how much revenue is raised to pay for them are likely to be required sooner than later.
