With October 20th and the detail of George Osborne’s Spending Review now less than one week away, the pressure on Finance Secretary John Swinney to point out where the requisite savings in Scotland’s budget will be made is building. Education Secretary Mike Russell has tried to take the sting out of the growing media focus on the spending problems facing Scotland by delaying a decision on university funding until after the election. However, procrastination of the big decisions will not work forever, particularly as the SNP has stated a big generous giveaway for the next parliamentary term in the shape of a continued Council tax freeze, a decision that has led to much of the press, unfairly I reckon, to attack the SNP’s supposed ‘lack of wisdom’.
It is difficult to predict where in Scotland’s budget a largely left wing public would accept significant slicing, particularly when the cost of policies is difficult to pin down (does abolition of student fees cost £15m or £1.5bn?). Consequently, if savings simply politically can’t be made, the growing pressure will result in having to let off some steam through tax rises.
Is it for financially squeezed moments like these that Scots decided to give the Scottish Parliament tax-varying powers for? Should political parties start looking at raising tax by 1p or 2p in the pound north of the border? It would be an enormously difficult decision.
Again, the numbers are hazy, but an undated Scottish Office document states that raising income tax by 1p in the pound would raise around £150m a year. I am, of course, happy to be corrected on that but if it is pensioners, students and the unemployed who deserve the most protection from cuts, then surely the employed are fair game. The question is, who is most likely to adopt this high-risk strategy in the election campaign.
For me, the SNP would be the most likely of the main five parties to resurrect their ‘tartan penny’ tactic from the 1999 election campaign. Alex Salmond has the most to lose from reversing policies that he presided over in the past four years and, over and above potential reversals, the FM will struggle to avoid committing to policies such as tuition fees, free care for the elderly and the latest Forth Bridge before May 5th. Increasing tax may well be the least worst option as the SNP seek to find that coveted fine line between financial credibility and public popularity.
The Lib Dems may join the SNP in pushing for an increase in tax rates, rekindling the party’s ‘Penny for Scotland’ campaign of 1999. Tavish Scott needs something as he must be keen to mark his party out in this election campaign for fear of anonymity or, worse, being seen only as Cameron’s little helpers down south. Mimicking an SNP penny in the pound would mark them out as frontrunners for coalition partners.
The Green Party may also consider campaigning on this extra tax. It’s not my position to say but investment in a renewable industry, keeping tuition fees abolished and bringing housing stock up to a higher standard of insulation appear to be top priorities, and expensive ones too.
The Conservatives, needless to say, will not be in favour of a tax rise in Scotland. The UK Tories preferred an austere 80/20 blend of cuts/tax rises to combat the deficit and will no doubt continue to ‘trust hard working families to spend their own money rather than the state’. Pah, the Scottish Government Finance Secretary can spend our hard-earned money better than any of us, everyone knows that… (I jest, sort of)
Labour, I would expect, will be staunchly against any use of the tax varying powers which would throw up an interesting dividing line for the voters if they had the choice of the SNP (higher income rates and frozen Council tax) or Labour (consistent income rates and increased Council Tax). Iain Gray would doubtless try to attack the SNP as both ‘cutters’ and ‘tax raisers’ which, while incongruous to me, may well go down well with certain parts of the electorate.
In short, will the 2011 election be 1999 all over again?
I personally hope so but with a different result. Scotland can be bold, brave and follow Finland and Sweden down the path of high tax, wide provision services, all the while climbing the regular ‘happiness indices’ that Scandinavian countries find themselves near the top of as a direct result of their relatively higher taxation levels.
(Update – It seems the SNP has already categorically denied raising income tax rates in the Parliament chamber, in response to a direct question from Lord George Foulkes. Courtesy of NewsnetScotland. I still have the Nats favourite to increase the income tax though. It is, after all, the right thing to do….)
#1 by Alasdair on October 15, 2010 - 3:21 pm
Sturgeon was on radio 4 this morning and denied that there would be any tangible benefit from a hike in income tax levels in Scotland, she stated that it would impact the lowest earners worst of all and would be extremely regressive. She also stated that it would not generate a particularly great deal of extra revenue for the government (which ties with the £150m figure you quote here).
I actually can’t see any party using the tax varying powers, except to maybe reduce taxes (as a pre-election bribe), but under the current circumstances I can’t even envisage that! We all know the tax varying powers are pointless and are unlikely to be used … ever.
#2 by Jeff on October 15, 2010 - 3:33 pm
Thanks Alasdair, I am regrettably out of the loop with such developments (re: Sturgeon) so interesting to hear that.
I do wonder how it all adds up though – no raise in C Tax, no raise in I tax, keep free care for elderly, keep NHS spending at same levels, build a £2bn bridge….
Something’s got to give?
Of course, Local Income Tax is one way to raise income tax without technically using tax varying powers. Maybe that’s the play…..?
Gordon Brown lost an election by being unbelievable with the economy. I’d regret to see the SNP going the same way.
#3 by Jeff on October 15, 2010 - 5:10 pm
Also, while I would say that the tax powers are inflexible, I wouldn’t say they are altogether pointless.
#4 by CassiusClaymore on October 15, 2010 - 6:05 pm
There is no chance of any of the parties standing on a platform of raising tax – and quite right too. It would be calamitous for the Scottish economy were Scotland to become the most highly taxed part of the UK. Every pound taken in tax is a pound not spent in the real economy (I was delighted to learn that we paid for 26 BBC folk to go to Chile, for example, all on £5K business class airline tickets no doubt).
We should be doing the reverse – cutting tax, and encouraging an inflow of talented people rather than the reverse. Scotland runs a budget surplus. It’s time we stopped subsidising England. Under fiscal autonomy I will be expecting tax to be cut, not raised.
If we want to spend more on frontline services that actually matter to people, perhaps our beloved governmental and municipal penpushers could try not constantly wasting our tax money – bearing in mind procurement debacles such as the Parliament building and the Edinburgh Tram, try to imagine how much money they’re wasting on the million little things which don’t get scrutinised in the public eye!
If our civil servants and council officials were acknowledged as being experts at getting value for (our) money, then folk would be happier to pay tax. At present, the reverse is true.
I reckon that, once indirect taxes are factored in, I pay the Government over half my income in tax. I ask them for virtually nothing, and I am happy to pay as much tax as I need to in order to make sure that my fellow citizens are fed, sheltered, clothed, educated, kept healthy and protected from crime. My issue is with how profligate they are with our money (which of course, they regard as theirs rather than ours). If they’re going to take it from us under threat of imprisonment, which is what they do, they could at least do us the courtesy of not pissing half of it up the wall!
All non-essential spending should cease, immediately, and the proceeds returned to the people by way in an increase in the personal allowance, thus favouring the poorest most.
CC
#5 by Allan on October 15, 2010 - 9:18 pm
I might be wrong, but i suspect that there is an inbuilt disincentive to tax raising powers in terms of how much is sliced off the block grant from Westminster. I certainly think that the block grant does not stay the same when the tax raising powera ate activated – the same type of calculations have been extrapulated (i think) in Calman.
#6 by Steve on October 15, 2010 - 10:44 pm
This is exactly the thought I’ve been having over the last few days, will you indulge me a fairly long post copied and pasted from contributions I’ve been making to Brian Taylor’s Blog, Cal Merc, and Newsnet Scotland:
A recent BBC poll seemed to suggest that Scottish Taxpayers appear to favour an increase in income tax. If the majority are in favour of cutting budgets more slowly, and in favour of increasing income tax, why not put 3p on basic rate income tax to take the sting out of the cuts over the next couple of years, and then potentially phase out this increase as the block grant starts to increase again? This would deliver exactly what people seem to want, a slower rate of reductions, and although an extra temporary tax burden, more sustainable public services, and more people in work through the difficult times ahead.
This would be done by the SVR – the “Scottish Variable Rateâ€. The Scottish Variable Rate applies to earned income taxed at the basic rate only, so is progressive up to an income of £43,875, and capped at a maximum contribution of £1,122 or just under £100 a month (assuming the full 3p is applied).
According to a PQ answer in John Swinney’s name from Feb this year, 3% on income tax using SVR would raise “approximately £1 billionâ€. Clearly 1p would raise a third of a billion, and 2p would raise two thirds of a billion.
My understanding of the (SVR) is that any additional revenue is passed direct from HMRC to Scotland, not via the treasury and with no consequential impact to the block grant. If we raised an extra billion or so by increasing the basic rate of tax by 3%; that would be extra money to be spent by the Scottish Government in whatever way it wanted.
I believe that sacking enough workers to save £1billion will have a much more detrimental impact on the economy and the tax base than a small (and potentially temporary) increase to basic rate tax, but I realise there is a debate to be had about this.
But in addition to the economic and jobs argument, we need to give thought to those who rely on public services, and the impact the cuts could have on their education, their health, their quality of life and their dignity.
I want people to work out what they’d pay, and ask themselves whether it’s worth it. For the full 3p increase:
If you earn 10K you’d pay an extra £105.75 a year, this is just over 1% of your gross salary.
If you earn 20K you’d pay an extra £405.75 a year, this is just over 2% of your gross salary.
If you earn 30K, you’d pay an extra £705.75, this is just under 2.4% of your gross salary
If you earn £43875 you’d pay an extra £1122, this is just under 2.6% of your gross salary.
If you earn more than £43875, you still pay £1122, as it’s on basic rate only, and not higher rate.
As can be seen above, the fact the tax is capped makes it regressive from £44K onwards. Ordinarily I would have a problem with this, but perhaps it has the potential benefit of being capped at a level low enough not to create incentives to work less or relocate elsewhere at a time when the economy is fragile. People have said an increase would be bad for the Scottish Economy (although worse than cutting a billion form the block grant?).
But as I said in response to someone on another blog, the capped nature of the SVR means that the so called “fiscal flight†argument doesn’t stack up. If you earn £50K plus and you have connections to Scotland such as family, kids in school, or even just a mortgage, the upheaval and cost of moving just isn’t worth it. I just don’t believe that many people would move to England for an extra £100 a month (max). In fact a lot of people move the other way and are willing to take a much larger pay cut than that to do so.
It also avoids hitting all those poor higher rate taxpayers who lost their child benefit, poor things!
To conclude, here’s my pitch – 3p on income tax for an average earner working 8 hours a day equates to 10 minutes of that day’s wages. Are we willing to give 10 minutes a day to protect services and jobs in Scotland?
I am, who’s with me?
#7 by Jeff on October 16, 2010 - 8:43 am
Hi Steve,
I’m with you, or at least I would be if I still lived in Scotland.
There’s a lot of detail and technical aspects in your excellent comment and it’s heartening to know that the money would flow straight up to Scottish budgets.
I reckon the public will be poorly served if no party offers a choice such as the one that you outline.
#8 by CassiusClaymore on October 16, 2010 - 11:28 am
Steve
I’d be with you if I thought that the current tax take was being efficiently spent. But I don’t.
CC
#9 by DougtheDug on October 16, 2010 - 8:22 pm
Jeff, a penny on income tax would have brought in an estimated £350 million increase in 2009/2010 in Scotland in the funding for the Scottish Government.
That’s a Treasury estimate in the Budget 2009 Report, Chapter A, A10, p156.
http://www.hm-treasury.gov.uk/d/bud09_completereport_2520.pdf
So 3p extra would bring in roughly a billion for the Scottish Government for each year of its implementation. A 3p in the pound rise in Scotland would cover the anticipated billion pound cut for next year easily.
The problem is that it is estimated that the Scottish budget will continue to be cut for the next five years at an average of 2.6.% per year from 2009/10.
“From the 2009/10 peak, this would imply a five year real-terms contraction in Scottish Government DEL expenditure of 2.6% per annum. Consequently, by 2014/15, the Scottish Government DEL would be £3.7 billion lower in real terms than it was in 2009/10, equivalent to a cumulative decline of 12.4%.”
This is from, “Outlook for Scottish Government Expenditure”, Dr Andrew Goudie, Chief Economic Adviser, April 2010.
http://www.scottish.parliament.uk/business/financialscrutiny/documents/OutlookforScottishGovernmentExpenditure22April.pdf
12.4% is about a £4 billion pounds less in the block grant in 2014/2015 compared to 2009/2010
As the cuts continue to bite council tax and business rates, which are the only other revenue streams Scotland controls, would have to rise by about 90% in year five in addition to Holyrood keeping the 3p in the pound extra to cover the hole in the block grant if services were not to be cut. Even a permanent rise of the 3p in the pound variable rate won’t cover the cuts beyond year 1, 2010/2011, and it will also take money out of the economy. If it was as simple as raising taxes then I’m sure Westminster would also propose that route.
The cuts are unavoidable as long as Westminster doles out the cash, whether or not the 3p in the pound rate is used. It comes down to how much any Government in Scotland wants to pull money out of the economy to maintain, not improve, just maintain current services and how much of a political risk that is.
#10 by Baron Sarwar on October 17, 2010 - 4:31 pm
The SNP’s Penny for Scotland policy in 1999 was slightly different in that it was in the context of a UK-wide basic rate reduction and was therefore presented as a freeze rather than a straight-forward increase. Advocating the latter at the moment could be electorally risky, and given Allan’s point above, may not even raise any extra money under the current fiscal transfer set-up.
#11 by Jeff on October 17, 2010 - 4:46 pm
Thanks for that Baron. I would say that is only a slight difference though, even more slight than you say yourself.
After all, with 25-40% cuts on their way to Scotland’s budget from the Treasury, the increase in income tax rates could be argued as effectively being a freeze.
Either way, it is, as you say, electorally risky so even if it is the right thing to do I could understand any party blanching from the policy if it meant getting hammered at election time by an understandably selfish an short-sighted electorate.
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