The Scottish Budget We Should Have Had

Craig Dalzell – 9th December 2022The Scottish budget debate has come round year after year with a familiar ring to it. Every year, we’re told that the budget is highly constrained, Scottish Government can’t do anything to help, but look, by their generosity, here’s a couple of things to please a few target voters or placate an Opposition who were never going to vote for the budget anyway, then there’ll be a perennial story about the “budget underspend” (itself an inevitable feature of the Scottish budgetary framework) and the rolling over of that underspend into the next budget...and the cycle begins again.A lot has already been trailed in the media about what may happen in the budget. Much of it focuses on Income Tax – which is unambiguously almost completely within the control of the Scottish Government who have had unlimited powers over all rates and bands since 2016 with the notable exception of the zero-rate Personal Allowance and income tax due on savings and dividends (the latter of which comprises around 10% of all income tax receipts in Scotland). In the UK Autumn Statement, Chancellor Jeremy Hunt made some significant adjustments to the rates and bands around the top rates of income tax and I expect the Scottish Government to broadly follow them (if only to avoid giving the very richest in Scotland a comparative tax cut). This, however, won’t raise a huge amount of money simply because there aren’t a huge number of people in Scotland who take home that much in income (the fact that Capital Gains Tax is generally lower than Income Tax and is itself reserved limits the ability of Scotland to prevent rich folk avoiding income tax by transferring their pay into dividends or setting up accounting units south of the border). There has been a more heated discussion about the prospect of increasing Scottish income tax by 1% on those earning around £40,000 plus – kicking off an argument over whether such folk are really “rich”. As I said on Radio Scotland earlier this week, I think this argument betrays just how low paid and how unequal Scotland is if someone on £40k can be significantly above the median pay of about £26,000, can be within touching distance of the top 10% of earners and yet still not be considered particularly well off. In any case, the Scottish Government estimates that these income tax changes will bring in only about £129 million over the next year.The political capital involved in changing income tax at all is quite high, the benefits fairly modest and there is a further complication that the complexities and inherently paradoxical nature of Scotland’s Block Grant calculations mean that changes to national taxes such as income tax can, in certain circumstances, lead to Westminster removing Block Grant funding as a result of additional revenue from Holyrood taxes – partially nullifying the effect of the rise. The Fiscal Framework governing this is currently up for review and all parties involved should have a vested interest in ensuring that paradoxes like this are removed but, quite frankly, it’s probably not possible in a system that is explicitly designed to maintain the supreme sovereignty of Westminster even in devolved areas.But there’s a very large loophole in the Scotland Act that Holyrood seems to want to do anything but talk about.It is true that the devolved Scottish budget is far more constrained that any reasonable national budget and even many regional budgets (ignore the UK’s cry of Scotland having “the most powerful devolved government in the world” – most countries that aren’t completely centralised use a federal framework of power distribution but “The most powerful devolved government in the world” sounds more impressive than “marginally more powerful than Wales and Northern Ireland”) but there are avenues of opportunity as well. The Scotland Act strictly reserves many areas of tax to Westminster and Scotland cannot act on them without permission but the same Act also offers a blanket exception to all taxes that fund local government expenditure.This is core to a lot of what we are Common Weal have called for in terms of tax reform in Scotland – a call recently echoed by the STUC in their paper on the subject.I wish this budget had made a bold statement about two local taxes in particular.The first is the replacement of Council Tax with a proportional Property Tax. Instead of banding houses based on what their value was over 30 years ago (imagine you paid Income Tax based on your salary in 1991!), it should be paid based on the present market value of the property. In 2019, we calculated that the overall “revenue neutral” point for this tax would be 0.63% - a house worth £100,000 would pay £630 per year or £52 per month. Since then, house prices have continued to rise and it’s possible that 0.63% would bring in potentially a couple hundred million pounds extra (or the revenue neutral rate could be revised down further). The vast majority of households in Scotland would get a tax cut under this plan. The reason for this is that so many of Scotland’s houses are “misbanded” for various reasons. If a house was built before 1991 but the area has since gentrified and prices have disproportionately exploded, then that house will be paying far less Council Tax than it would be due if it was revalued but the converse is also true – many areas that were comparatively well to do in the 90s have been left behind and those houses now pay more than they should. Similarly, houses built after 1991 are valued “as if” they had been built in 1991 – when the housing market was simply a very different creature to the speculative chaos that it is now. Folk in those houses have often been paying too much tax for decades now and the case for change has been ignored time and time again. That must end.The second major tax that this budget should have implemented is a Land Tax. Now, this might well be the same as the Property Tax extended beyond just a house (Council Tax only covers a building and its “curtilage” – its garden and immediate surroundings. It covers the manor house but not the surrounding shooting estate) or it might be a separate Land Value Tax but the effect would ultimately be roughly the same. The vast majority of Scotland’s land is not adequately taxed and this has made it easy for spivs and speculators to extract vast profits from Scotland from everything from selling carbon credits by promising to not cause an ecological disaster unless people buy them to selling fake Lordships to naïve Americans in exchange for square foot sized plots in a scheme that is literally identical to an NFT but for the cryptocurrency. If Scotland implemented a Land Tax closely modelled on the Danish tax system then we could be looking at an additional source of revenue on the order of £500 million per year with the additional – even primary – benefit of arresting land speculation in Scotland and helping to bring land prices back down into the realm where ordinary communities can afford to buy back the land under their own feet.There is a commonality to these taxes which reveals the reason that Holyrood is so reluctant to talk about them except to say “we don’t have the powers”. Both of these taxes would be entirely controlled by Local Authorities (actually, ideally, they’d be controlled by municipal councils as the Danish Land Taxes are but Holyrood has decided that Scotland – alone in Europe – shouldn’t have actual local democracy). Holyrood must learn to trust Local Authorities and to start treating them with the autonomy they deserve. “We don’t have the power” shouldn’t mean “And therefore no-one else should have it either”. John Swinney’s comment that he’d take the budget to the “maximum extent that is responsible” carries the obvious implication that if he won’t reform local tax then he thinks that the concept of local democracy and local autonomy is an irresponsible thing. That would be an entirely undemocratic and quite frankly contemptuous attitude to hold and one that I’m sure he’d be the first to complain about if Westminster ever even implied that that was their attitude towards Holyrood’s devolved budgets. His line in the budget today "allowing" Local Authorities to change Council Tax as they see fit but that they should "think carefully" about doing so would be seen as a severe breach of protocol if Westminster said similar to Holyrood and would be an outright breach of Constitutional law protecting the subsidiarity of decision-making in many normal European countries.Breaking the cycle of Scottish budget news will obviously take something even more drastic than we’ll see in this iteration – it’ll take independence or some devolution reform that far more radical than UK Labour is evidently willing to contemplate – but that is not an excuse for inaction where action is possible just simply not desirable because it means giving power away rather than hording it to oneself. There is, or should be, a natural majority for radical change in the Parliament right now. The SNP will obviously be whipped to agree with the Government proposals no matter what they are. Unlike the previous Parliament, the Greens are now treaty-bound to agree with this budget too. There should also be natural allies in pro-localism parties such as Labour and maybe even the Lib Dems. The Tories will likely oppose regardless of anything. In fact, they’re likely to complain about anything that doesn’t involve Holyrood effectively giving up its powers of devolution entirely and aligning itself with UK tax rates even when doing so would be disastrous. But there’s power in that too. If the opposition can be counted on to complain about radical change just as hard as they would about minor change then it turns out that there is no political capital cost to making that radical change instead of the minor one. The Scottish Government could have and should have taken this opportunity to be bold. The only reason remaining that they haven’t is that they simply don’t want to.