The changes in the way Scotland is taxed

We have heard a lot in the last few years about the desire for Scottish independence.  This has often been couched in general terms as a desire for a fairer and more prosperous Scotland based around a social democratic consensus.  Specific large scale points of difference from current UK policy, however, have been largely elusive.  While the Scottish Parliament has substantial powers, so far the Scottish government has been quite tentative about how it has used them.  Positive policies first introduced in Scotland include the indoor smoking ban (borrowed from Ireland), a charge on plastic bags (also borrowed from Ireland), free personal care for the elderly and a reorganisation of the police into a single national force.  Scotland’s points of departure from the rest of the UK have often been more negative than positive – declining to introduce student fees and not updating NHS structures being good examples.  Taken as a whole, successive Scottish governments have been small c conservative administrations.

Scottish nationalists may argue that the scope of powers devolved has to date been quite limited.  However, some tax-raising powers have been devolved for many years, but have been left largely idle.  So far as the last few years are concerned, this could be interpreted either as timidity on the part of the SNP or as an unwillingness to make devolution work for fear that a successful devolution might weaken the demand for independence.  The one foray that the Scottish government has taken into tax affairs, remodelling the stamp duty regime, has apparently proved a flop so far, with revenues falling far short of those anticipated when it was launched.

As from the next tax year, the UK basic, higher and additional rates of tax will each drop by 10 pence in the pound for Scottish taxpayers as budgetary responsibilities are being transferred from Westminster to Holyrood.  The Scottish Parliament can decide to levy a Scottish income tax rate.  It must impose the same Scottish income tax rate for all Scottish taxpayers (whether basic, higher or additional rate). On 16 December the Scottish government announces what the proposed Scottish income tax rate will be.

The structure of a Scottish income tax has been much-criticised: it is a flat rate tax, which means that the Scottish government can’t yet increase the amount that top rate taxpayers pay without also increasing the amount that basic rate taxpayers pay.  So it is likely that John Swinney will announce that the Scottish rate of income tax is 10% when he delivers the Scottish draft budget.  So the only practical difference will be that the administration systems of every organisation that has to deal with those subject to Scottish income tax are being revamped.

Change is coming.  Following the Vow made immediately before the referendum and the Smith Commission recommendations that followed it, substantially more powers are being devolved to the Scottish Parliament, including much greater tax-raising powers.  As from 2017/18, the Scottish government will get considerably greater powers.  It will be able to set its own bands and rates of income tax (it will also get control over some of the VAT raised in Scotland, air passenger duty and new powers in relation to benefits and welfare payments).

The SNP disputes whether the Smith Commission recommendations have been met in full but on any reading the Scottish government is going to be able to do a lot more if it decides that it wants to.  Does it want to?

The SNP is not going to be able to duck this question indefinitely.  Holyrood elections are due in May and the SNP manifesto is going to need to set out how it intends to use these new powers.  Meanwhile, the unionist parties will each be seeking to use these powers for their own positioning.  Labour is already proposing to raise the top rate of tax to a UK/Scottish combined 50%.  Will the Conservatives advocate reducing basic rate tax in return for spending cuts?  Will the Lib Dems push for an increase in the Scottish zero rated band?  And how much discussion will each such position generate?

All the discussion about the SNP to date has focussed on whether they will call for another referendum in the next Scottish Parliament.  But come the referendum campaign, the parties’ policies on taxation and spending are likely to be at least as important.  So far there has been little discussion about this, which is pretty amazing really.  Five months before a UK general election, the parties would be knocking seven bells out of each other with scares about tax bombshells and countdowns for saving the NHS.  In Scotland so far, almost nothing.

That’s partly a reflection of the SNP’s dominance, partly a reflection of the unionist parties’ irrelevance and/or ineptness and partly a reflection of the immaturity of Scottish political debate.  This will not last.  The unionist parties have little to lose and the opportunity to seize the headlines through an insurgent campaign built around tax and spend will surely be irresistible to at least one and probably all of them.

If the SNP are not going to be caught flat-footed, they are going to need to take a position of their own.  Promising to stick with the status quo will beg the question what independence is going to offer and would sit uneasily with the SNP’s proclaimed anti-austerity stance.  Equally, promising to raise taxes substantially would hit some SNP supporters in the wallet.  For now the SNP will probably steal Labour’s policy of a 50% top rate of tax from 2017 but not commit to much else.  It will all look a bit small scale.

In practice I anticipate that the SNP are sufficiently dominant this time round that they will get through the elections without being derailed by a tax and spend controversy, but I would rather be backing “No Overall Majority” at 7/1 in the Holyrood elections (available with Ladbrokes) than laying it.  I’ve placed a small bet accordingly.

In the longer term, with Holyrood assuming a steadily increasing importance in decision-making in Scotland, the Scottish public are going to become increasingly concerned with pocket book decisions when voting in Holyrood elections.  The next Scottish government is going to have bigger decisions to take and bigger decisions lead to more disaffected voters.  The SNP has successfully for many years positioned itself as a party for all Scotland.  That time may well be drawing to a close in the next couple of years.

Alastair Meeks