Income tax decentralization is expected to cost the Scottish government a fortune. So why is nobody talking about it? – John McLaren
In practice this does not mean there will be less funding available, rather it means that taxes – mainly on households – will be much higher in Scotland than elsewhere in the UK, but with next to nothing to show for that.
According to Scottish Government estimates, £1.5billion is roughly equal to 9p on the basic rate of income tax, or nearly 4p on all income tax rates – from the starting rate to the highest rate.
So rather than the revenue generated from higher taxes being used to increase spending, which might have been rather helpful, it instead had to be used to help fill the funding gap due to slowing economic growth in Scotland. .
This is in fact the end result of the partial decentralization of tax powers since 2017-2018. Why is that? For three reasons.
First, the growth of the economy has been slower than in the UK. Second, the growth of top tax bracket incomes – which account for a disproportionate share of total taxes – has been slower. Third, the population is aging faster, which affects the size of the workforce.
Could this have been foreseen? To some extent, no. For example, the decline of North Sea oil and its high-wage jobs was difficult to predict with precision, even if the general direction was known. But to a large extent, yes. So why go ahead with the transfer of such powers? Political, of course, the Scottish government and parliament wanted more powers, whatever the outcome.
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It took some time for the negative consequences of fiscal decentralization to become apparent, but now they seem quite clear, if little discussed.
The Scottish Tax Commission’s (SFC) latest report from the end of last month highlights that “slowing income and employment growth in Scotland has contributed negatively to the net position”, where the “net position” is determined by the extent to which Scottish income tax per capita increases. faster or slower than the rest of the UK.
“This is offset by the divergence in Scottish and UK income tax policies, which has helped keep the net position positive in most years. We believe that in the absence of differences between Scottish and UK income tax net position would have been minus £1,004 million [£1bn] in 2022-23. By having relatively higher tax rates in Scotland and lower thresholds for higher rate taxpayers, the net income tax position drops to minus £157m in 2022-23,” adds the SFC report.
This negative net position is then expected to reach over minus £1.5 billion by 2026-27, mainly due to demographic effects.
While the Scottish Government may be concerned about rising energy prices and highlight it as a humanitarian crisis in its latest program for government, there is not a word in this document about the higher tax burden. that Scottish households are inflicting on themselves due to the transfer of income tax powers.
No doubt the SNP-led government, and perhaps others, would argue that slowing economic growth is largely beyond their control as Westminster retains key powers. This may, to some extent, be true, but then why negotiate for more powers when you think the UK government’s economic policies will end up costing the Scottish budget dearly?
The strange thing about all of this is that the ‘higher tax no benefit’ position that Scotland currently finds itself in is not part of the political debate. When the SFC recently released the £1.5billion figure, there was no political furor, only silence.
If we can expect that the SNP did not want to discuss the figures, what about the other parties? This is certainly a clear and obvious deficiency that needs to be highlighted and the government challenged on this.
The analytics providers we have – the Fraser of Allander Institute, the Scottish Parliament Information Center (SPICe) and the SFC itself – have highlighted the emerging problem, but to no avail to give it greater political visibility. What does this say about our government and our parliament?
While many may lament the UK government’s many shortcomings, it is at least held accountable and challenged in various ways. Whether through strong opposition parties, the House of Lords, the Commons committee system, think tanks or the media, bad policies are exposed and debated, especially in terms of the economy.
In Scotland, there is no such broad system of political accountability. As a result, the economic debate suffers, as does the debate around other important areas of public policy like health, education and beyond.
All of these omissions have costs, it’s just that in the case of economics we see those costs explicitly defined, in terms of a smaller budget that has to be supplemented by higher taxes. When it comes to education, international results from the OECD Pisa suggest that education is also suffering. No doubt health in some ways too.
At the moment, Scottish politics is in a bad way, with the state of the economy being just one of the casualties. Clearly there is no turning back on devolution so the choices are to rejuvenate the Scottish Parliament as it is or push for independence which would force a change in approach, for better or for worse, on economic and other issues.
For now, we remain in an unhealthy position, with a parliament that pontificates at length but brings little change in practice. Meanwhile, as the Scottish Revenue Commission continues to illustrate, the costs of such disengagement continue to mount.
John McLaren is a political economist who has worked at the Treasury, the Scottish Office and for various economic think tanks.