Implications and consequences of new Scottish tax powers

The end of 2015 saw the Scottish Government announce the first Scottish annual budget before new tax varying powers are given to the Scottish parliament in April.  This represents the first major post referendum event in Scottish politics.  It marks the first time a Scottish Parliament has had any control over the rate of income tax since 1707.  While the long term influence this will have on the Scottish budget remains to be seen, it will have a measurable effect.  With less money coming from the treasury every year, the Scottish government cannot rely on the status quo to fund the mechanisms of government.  The SNP were elected at Westminster in 2015 on a mandate characterised by social justice and economic equality, so the pressure is on the Scottish Government to deliver this with the planned devolved powers.    

Since the 1707 Act of Union, subsequent UK governments in London undertook all budgetary decisions until the creation of a Scottish Parliament in 1999.  Even post devolution, the Scottish Government is restricted in terms of what it can financially control due to the Scotland Act, which outlines the full remit of the Scottish parliament.  Since its creation and arguable success, many have said that parliament should have greater fiscal control, with the SNP advocating independence or full fiscal autonomy. Post referendum, the political landscape is once again transforming, with more tax powers to be devolved over the next two years, such as the devolution of income tax powers with the potential for more in the future.

“The simple fact is this tax power does not enable me to target help to those on the lowest incomes”John Swinney

The original Scotland act granted the Scottish parliament the ability to vary the rate of tax by up to 3 pence in the pound.  If used it could raise an extra £350 million a year for the Scottish Government.  However as the tax rate was universal it would apply to all aspects of society, richer and poorer alike.  So it is understandable why no government used the Scottish variable rate to raise additional funds.  As the SNP never intended to use the power, they did not maintain the database required to properly implement the tax and as such the power is no longer available to the Scottish Government.  The new tax powers that come into play this year will reduce the current income tax rate by 10 percent, allowing the Scottish Government to make up the difference by setting a Scottish rate of income tax.  However, the government will not yet have the ability to set the income tax bands.  Without a direct link to ability to pay, it is difficult to foresee any economic benefit as a result of raising the income tax rate above the current level.  The new powers lack the ability to be flexible when making policy and fiscal decisions but from April 2017, the ability to control the bands of income tax will be fully devolved to the Scottish parliament, allowing for more accountable and responsible policy making.  The government could potentially use this power to raise the taxable threshold, taking thousands of low earners out of tax while raising the upper rate of tax so that the highest earners pay more into the system.  Up until now, the rhetoric of a fairer society has been just that, rhetoric.  This could represent the start of a massive economic shift as it would give the Scottish government the ability to fulfil promises and intensions made to the electorate.

Scottish Finance Secretary John Swinney’s budget has lasting implications for local councils as council tax has been frozen again for the ninth year in a row.  Once again, local government will need to reduce services or cut budgets to accommodate the rise in costs and reduction in funds.  It was always unlikely in an election budget that the government would push for an increase in council tax, yet it leaves many councils in a position where they will be forced to cut jobs in order to stay within budget.  While it is positive for taxpayers not paying annual increases on council tax, it means a significant reduction in council services, potentially thousands of job losses and damaging the local economy due to lack of investment in services.  The 2016/17 budget in many ways represents a missed opportunity to finally act on council tax reform.  There is already a cross party agreement for a fairer, progressive tax system for local government which will allow for a higher investment in local services.  The decision not to make any changes to the system must surely be a political decision by the SNP, especially this close to an election. 

“Let’s move beyond the rhetoric of a fairer Scotland and agree what needs to be done to achieve that” – Alex Neil MSP, Social justice secretary

In many respects, the gauntlet has been set out for the Scottish Government.  Being in control of raising taxation gives the parliament more accountability, but also a greater amount of responsibility not seen prior to the Act of Union in 1707.  While it remains uncertain what the long term significance of the recent budget will be, the status quo will not be an option for much longer.  New income tax powers devolved in April 2017 will allow the government full control over income tax rates and bands.  The introduction of these powers will require immediate action from the Scottish Government.  If Scotland re-elects an SNP government for a third term, the pressure will be firmly on the government to make good on promises of economic fairness and social justice which could be greatly achieved by the introduction of these powers.  The additional powers are a substantial step forward, but they carry significant risk if not used correctly.  In the near future, hard choices will have to be made to generate income so that spending doesn’t fall far below current levels.  The SNP now have a real opportunity to provide an alternative to increasing taxes or lowering public expenditure.  For the Scottish Government this should be seen as the chance to make good on promises to tax fairer and make social justice a reality in Scotland.

Author Bio

Alistair Hill currently has a Masters in Public Policy from the University of Strathclyde and is also a Social Sciences graduate of Glasgow Caledonian University.  His current research interests include Scottish party politics, Scottish environmental policy, social inequality, and Scottish and UK economic policy.

Cover image ‘fluttering flags‘ by byronv2

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