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Video by Dr Alan Convery (The University of Edinburgh) and David Eiser (The University of Stirling) on tax/spend powers of the Scottish Parliament.
OK, David, we start off by talking about what type of tax powers the Scottish Parliament had in 1999. Did it have extensive tax powers from the beginning? No, the Scottish Parliament had fairly limited tax powers. The only two taxes that were determined within Scotland were the council tax and business rates, or non-domestic rates. In today’s money, each of those taxes raises about two billion pounds of revenue per year in the context of a total Scottish Government budget of about 35 billion, so fairly limited taxes when the Scottish Parliament was established. And how did it use its powers over tax in that first period? Pretty limited, really.
In terms of council tax, properties in Scotland were last valued in 1991. There’s never been a revaluation of properties since then. So when properties are built now, assessors have to try to evaluate what they would have been worth in 1991. It’s all a bit funny. The rates haven’t changed, either. So, we’re in a situation now where perhaps as many as half of the properties in Scotland might be in the wrong band because house prices have grown in some parts of the country more than they have in other parts of the country. So, there’s been no reform, really, on council tax – nothing really on business rates, either.
There have been some changes to the reliefs that are available to certain types of business, or businesses occupying low-value properties have had their reliefs varied a bit. But it’s very, very marginal, the changes that we’re talking about. And did the Scottish Parliament have any power over income tax in that original period? They did. Technically, they had the ability to vary the rate of income tax in Scotland by up to 3p in the pound. So, they could have – if the basic rate was 20p, they could have made that 23p or 17p. Again, that was never a power that was implemented.
And why did some people argue after the first term of the Scottish Parliament and beyond that perhaps the Scottish Parliament needed more power over tax? Well, the argument was really very much about the financial autonomy of the Scottish Parliament and of Scottish politicians. So, as I said, the budget of the Scottish Government is about 35 billion. And, when the only two taxes that were determined within Scotland were council tax and non-domestic rates, which raised in total around four billion, you’ve got this very big gap between the revenues that are raised by the Scottish Parliament and the spending responsibilities of the Scottish Parliament. And that gap is filled by a grant from Westminster.
And the feeling was this wasn’t really very good in terms of supporting the fiscal autonomy of the Scottish Parliament, didn’t really make Scottish politicians, Scottish ministers responsible or sufficiently responsible for the decisions over how they spent the money. And if they had more control over tax, it would sort of strengthen this link between revenues raised and the spending that takes place in Scotland. And did the 2012 Scotland Act give the Scottish Parliament more power over tax and the money that it spent? Yes, it did. So, the Scotland Act 2012 devolved a number of taxes to Scotland. The most important of these was something called the Scottish Rate of Income Tax. So, this was a partial devolution of income tax.
The way it works is that each rate of income tax in Scotland is reduced by 10p. So the 20p tax rate becomes 10p, the 40p tax rate becomes 30p, and the 45p rate becomes 35p. And it’s then up to the Scottish Parliament to decide whether to put that 10p back on, in which case tax rates are exactly the same in Scotland as they are in the rest of the UK, and the Scottish Government retains all of the income from that 10p band. Or, alternatively, the Scottish Government can decide to put more than 10p back on or less than 10p back on and face the revenue consequences.
The important thing to note about that is that it is a flat-rate band, a 10p flat-rate band. So what the Scottish Parliament can do under the Scotland Act 2012 is it can increase the basic rate to 21p, but only if it increases the upper rate from 40p to 41p and the additional rate from 45p to 46p. It can’t change the thresholds at which you pay those different bands, and it can’t vary those bands differently. So it can’t increase the additional rate to 50p unless it increases the basic rate to 25p. And how far did the Scotland Act 2012 close the fiscal gap – what you were talking about, between the amount Scottish Parliament raises and the amount that it spends?
So the Scottish Rate of Income Tax that I’ve just been talking about raises about five billion pounds for the Scottish Parliament. In addition, there are one or two smaller taxes that were also devolved as part of the Scotland Act 2012 – most importantly, what were stamp duties. They’ve now been renamed to Land and Buildings Transaction Tax. But it’s effectively a tax on purchases of new property. That raises around half a billion. And then there are one or two very small additional taxes, as well. So, basically, the Scotland Act 2012 powers a raise around 5 and 1/2 billion pounds extra for the Scottish Parliament. So, before the Scotland Act 2012, revenue raising by the Scottish Parliament was around four billion.
And now we’re talking about increasing that to 10 billion of a budget of around 35 billion. And it’s been a real period of change for taxpayers for the Scottish Parliament because after that, we had the Scotland Act 2016. How much further does that give more power to the Scottish Parliament over tax? What the Scotland Act 2016 does is it effectively devolves all of income tax, or certainly all of income tax on non-savings, non-dividend income – so all of income tax as it applies to employment income, pension income, self-employment income, but not on savings and dividends. And so that gives the Scottish Parliament substantial additional autonomy and responsibility for revenue raising.
It also brings more autonomy in how income tax rates can change in Scotland. There’s no longer this fixed band. The Scottish Parliament can vary each income tax band by as much or as little as it likes in an independent way. It can also change the income tax thresholds, so the rate that the point at which you move from the basic rate to the higher rate and from the higher rate to the additional rate and so on. It can even introduce new tax bands, if that’s what it wanted to do. The other new tax responsibility that’s being – well, it’s not quite being devolved, but it’s being what we call ‘assigned’.
So that’s half of the VAT revenues raised in Scotland are being assigned to the Scottish Parliament. What that means is that the Scottish Parliament will capture the revenues from half of the VAT raised in Scotland, but the Scottish Parliament has no control over the rate of VAT in Scotland. So it can’t change the overall rate of VAT or the goods and services that are VAT-exempt or anything like that. And so these changes will come in over a number of years, David. After these changes, how much of the Scottish Parliament’s revenue will it be responsible for raising, roughly? So, in total, around just shy of 20 billion out of this budget of around 35 billion.
And looking back over the Scottish Parliament and tax powers, how far has the Scottish Parliament used the tax powers that have been granted to over the years? Well, so as I’ve said, up until recently, there was certainly very little, very few changes made to council tax and business rates. The Land and Buildings Transaction Tax, when it was introduced in 2015/16, that was changed quite substantially from the predecessor stamp duty. So, a much more progressive schedule of tax rates was brought in, and actually a more sensible structure of tax.
The previous stamp duty had this strange what we call slab arrangement, whereby being one side or other of a particular threshold in terms of property value could increase the tax burden substantially, whereas the new Land and Buildings Transaction Tax is a more sensible structure. The Scottish Rate of Income Tax, this 10p band that was introduced in 2016/17, in this financial year, what the Scottish Government decided to do on that was to keep this band fixed at 10p. So, effectively, there is no difference in income tax in Scotland as there is in the rest of the UK.
It remains to be seen the extent to which we’re going to see tax changes in Scotland in future as a result of the new Scotland Act 2016 powers. Clearly, the Scottish parties are now beginning to publish their manifestos. And they nearly all propose some variation in income tax policy in Scotland relative to what’s happening in the rest of the UK, although in some cases, it’s a pretty small variation that’s being proposed. And looking to the future, David, finally, is the Scottish Parliament constrained in any way in how it can use these tax powers, because obviously Scotland still remains a part of the UK?
There are, I suppose, some economic constraints. So, clearly, it’s in the Scottish Parliament’s interests to raise the revenues it needs to finance spending on public services. But also there are political constraints, as well. And the interaction between what happens in Scotland and what happens in the rest of the UK is likely to determine how much flexibility the Scottish Government has to vary, in particular, income tax between Scotland and the rest of the UK.
And so we’ve seen a big debate recently about how sustainable, if you like, it would be for the Scottish Government to raise the additional rate of tax to 50p, if the additional rate of tax stayed at 45p in the rest of the UK, and would that mean that we have some kind of migration of taxpayers from Scotland to the rest of the UK as a result, and so the policy having relatively little revenue effect in Scotland.
We know that the Scottish Parliament will get new powers over tax in the coming term. So what exactly does the Scottish Parliament have the power to do in terms of tax and spending? How has this changed since 1999? Alan Convery gets to the bottom of this with fiscal expert David Eiser from the University of Stirling.
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