Leaders defend tax divergence – a report on SNP

This is part of a series of reports on tax policy discussions at the main party conferences. A round-up of the Conservative conference can be found here, Labour conference here and the Lib Dem conference here.

Income tax – leaders defend divergence

In government, the SNP has sought to differentiate itself from Westminster in many ways, with the tax system the latest to feel the impact of devolution. Scotland’s finance secretary Derek Mackay used his keynote speech to defend the Scottish Government’s income tax changes, which mean lower earners (income of less than £27,000 a year) in Scotland are paying slightly lower tax than people on the same salary living elsewhere in the UK, while higher earners are paying more. “For the majority, the lowest taxed part of the UK, for all the fairest taxed part of the UK,” Mackay told the conference. “While [Boris Johnson’s Conservatives] plan tax cuts for top earners, we will always prioritise the communities who continue to bear the scars of a decade of Tory austerity,” he vowed.

His comments were echoed by the first minister, Nicola Sturgeon, in her closing speech to delegates, where she claimed that her government’s early learning and childcare agenda was ‘worth more than any tax cut any Tory government is ever going to deliver’ to Scotland.

The new regime (introduced in 2018) of five rates and bands of Scottish income tax (levied on non-savings, non-dividend income) has its critics on the left – who say it doesn’t go far enough on progressivity and redistribution – and from the right, who chide Holyrood ministers for setting Scotland and the rest of the UK on increasingly divergent fiscal paths. However it is expected to remain the settled policy of the present Scottish Government in the lead-up to the next Scottish Parliament elections due in 2021.

Divergence between the rest of the UK and Scotland could be further exacerbated though, if the Conservative government in London presses ahead with plans to cut income taxes in its upcoming budget (currently set for 6 November). This is widely expected to include increases to the higher rate threshold, a measure that the Scottish Government is likely not to follow.

Speaking to business leaders in Edinburgh in September, Mackay acknowledged that he may need to adjust his future tax plans if Scotland were to reach a ‘tipping-point’ on divergence, where higher earners are put off from coming to Scotland. However he did not think this was happening yet.

Budget problems on the horizon?

Derek Mackay has signalled his intention to publish the Scottish Government’s tax and spending plans on 12 December, but this is a date dependent on the timing of the next UK Government Budget.

In recent years, a November Budget at Westminster would be followed by Holyrood’s in December. This would be followed by two to three months of parliamentary scrutiny, before it becomes law for the start of the new tax year in April.

Chancellor Sajid Javid has pencilled in 6 November as the date of the next UK Budget, but potential Brexit delays – not to mention the possibility of a UK General Election – could see this date delayed further. Indeed last month, the chancellor floated the possibility of a post-election Budget, a move that Mackay has said makes Scottish budget planning “immeasurably more difficult”.

Irrespective of the budget date, the SNP may face an uphill battle to get its tax and spending plans approved before the start of the new tax year. Since the 2016 Scottish Parliament elections, the SNP has relied on the support of the Scottish Green Party to ensure that its proposals have become law. This arguably reached its crescendo last year when, in return for budget votes, the government conceded to the Greens on plans to introduce new taxes on tourists and workplace car-parking, in addition to the promise of further discussions on council tax reform (see below).

Speculation is building that should the Greens decide not to support the upcoming Scottish budget, the Scottish Government may not have the votes necessary for it to be become law, throwing open the door to the possibility of an early Scottish election. 

Concern over coherence of devolved powers

The challenges of managing a partly devolved income tax regime were highlighted at the CIOT’s fringe event on ‘Tax at Twenty’ (reviewing the operation of devolved tax powers 20 years after they came into effect). Tom Arthur MSP, a member of the Scottish Parliament’s Finance and Constitution Committee, described the devolution of tax-setting powers to the Scottish Parliament as piecemeal and reactive, the result of decisions taken at Westminster to ‘stem the tide of nationalism and sate the appetite for further devolution’. This had resulted in a tax system that lacked coherence and presented a number of legal and political challenges, a point also referred to in opening remarks by the CIOT’s Tax Policy Director, John Cullinane.

Arthur also drew attention to ongoing legal issues around the devolution of the Aggregates Levy and the devolved replacement for Air Passenger Duty – Air Departure Tax. He said the policy of assigning a proportion of VAT revenues to the Scottish Parliament was an incomplete power.

Arthur particularly noted the challenges surrounding the anomalous 53 per cent marginal tax rate that has resulted from the misalignment between the Scottish higher rate of income tax and the upper earnings limit for National Insurance as examples. He suggested that this anomaly raised the question of whether NICs should be devolved and/or merged with the income tax regime. If divergence continues to grow in the months ahead this issue is likely to grow in salience.

Arthur also complained about the opacity and complexity of the fiscal framework Scotland is constrained by. We don’t have the borrowing powers to manage the risks we face, he said. These concerns around the framework - which is due to be reviewed in 2021 - were shared by Derek Mackay at Holyrood magazine's 'Economy Hub' reception. Mackay said that the framework was not fit for purpose, represented a 'serious threat' to Scotland's public finances and was in urgent need of review.

Frustration over Westminster’s Finance Bill process

Holyrood can learn what not to do from Westminster, at least when it comes to debating tax legislation, said Kirsty Blackman MP, reflecting on her experience as the first female politician to lead on economic issues for her party in the House of Commons. Blackman spoke of her frustration at the ‘archaic’ Westminster process that stymied debate and constrained scrutiny. In particular, she highlighted the inability of MPs on the Finance Bill committee to take oral evidence from external experts and the government’s failure to table ‘amendment of the law’ resolutions, thus restricting the ability of opposition and backbench MPs to table amendments to legislation.

Blackman told the CIOT’s fringe event that sitting on the committee of MPs considering the Customs Bill in 2018 had made her realise quite how beneficial expert evidence sessions were and how much was lost by not taking them for the Finance Bill, thus shutting external experts such as CIOT out of the Finance Bill process. She acknowledged that organisations could provide written evidence, but she said that this still constrained the ability of MPs to ask questions and probe ideas. She reiterated her commitment to making the case for external expert bodies such as the CIOT to have the ability to provide evidence to MPs during their consideration of the Finance Bill, hinting that she may once again try to amend the agenda of the next Finance Bill committee to allow this to take place.

Tax - what do the Scottish public think?

Despite the changes of recent years, the public remain largely unaware of the intricacies of the devolved tax regime. Pollster Mark Diffley presented evidence to the CIOT fringe event from the latest poll of Scottish voters to be conducted for the CIOT.

He identified four emerging themes from the 2018 and 2019 surveys. These were:

•  Awareness of Scottish Taxpayer Status and where respective tax powers lie is low, and has fallen compared with 2018
• Scots find the tax system in Scotland and between Scotland and the rest of the UK hard to understand and need more information
• The majority of people who pay income tax think that the amount they pay has gone up in recent years
• There is broad support for Scottish government to have tax raising powers though the public is split on whether there should be national or more local rates

Eyes on the prize of independence

Delegates arriving in Aberdeen for the conference (and getting their conference agenda booklet - see image on left) will have been heartened by a reported increase in support for their ultimate objective – Scottish independence. A poll published on the first day of the conference put support for Scottish independence at 50%. The Panelbase survey for The Sunday Times Scotland also found more respondents than not believe the Scottish economy would be better off with independence in the EU than in the UK after Brexit.

The SNP leadership clearly feels that momentum is on their side. Both the first minister and the SNP’s Westminster leader, Ian Blackford, used the conference platform to signal their strong desire to see the UK government grant their request for a vote to be held in 2020, a move that the present Conservative government is unlikely to entertain.

The party is preparing hard for the vote whenever it comes. For example former MP Angus Robertson has set up a company, Progress Scotland, to carry out polling and focus group work to support the independence campaign. He presented to a fringe meeting at the conference on the work the firm is doing to identify voters who could go either way on independence and test what messages are most effective in winning them over. We won’t win just by turning up the volume, he told delegates, but we are starting from 45% this time when it was in the 20s last time. More than two thirds of undecideds on the independence question have Brexit as a key issue, the meeting was told, and nearly two thirds of them think Brexit makes independence more likely. The most persuasive voices in winning over ‘open-minded’ No voters will be former No voters themselves, said Robertson.

Looking ahead to elections

In the short-term the prospect of a forthcoming UK General Election has heightened the potential for the SNP to emerge as possible kingmakers for a Labour government and the opportunity to demand an independence plebiscite in return for their support.

Medium-term challenges will include the need to prepare for the next Scottish Parliament elections that are scheduled to take place in May 2021. The promise of a referendum and a proposal to make at-home social care free at the point of use were the two principal policy announcements to emerge from the Aberdeen gathering. There remains the expectation that the party’s pillars of tax policy will continue as is for the time being, barring any significant policy changes at Westminster that require a reaction.

Tax after independence

In the longer-distance are considerations over what taxation policy would look like in an independent Scotland. The May 2018 report of the SNP’s Sustainable Growth Commission was pitched as a reset to the economic case set out in the government’s 2014 White Paper on Scottish independence. The commission recommended a ‘comprehensive review’ of the Scottish taxation system after independence to improve the “simplicity, neutrality and flexibility” of the country’s future taxation arrangements. But it considered that the current revenues raised through tax were ‘sufficient at present’ to fund all devolved services plus welfare and pensions.

The commission also recommended a ‘careful’ assessment of the impact of business taxation on economic growth performance, with a recommendation that corporation tax levels remain on par with those of the rest of the UK. This particular recommendation was noteworthy at the time as it marked a significant departure from the SNP’s pre-2014 policy to reduce corporation tax levels as a means of attracting investment into an independent Scotland.

Local taxation

Delegates across a number of conference fringe events pressed SNP politicians for answers on their perceived inaction on council tax reform following the report and recommendations of the 2015 Commission on Local Tax Reform, with a number of policy options around land-value tax and local income and inheritance taxes being floated for discussion in the Scottish think-tank community.

Tom Arthur MSP, at the CIOT event, said council tax was the worst form of local taxation apart from all the others. He also drew attention to the power local councils have to introduce a workplace parking levy. This has to be accompanied by a demonstration of how it helps to deliver a local transport strategy, he added.

Tax minister Kate Forbes drew attention to the Additional Dwellings Supplement for Land and Buildings Transaction Tax, and won applause. She said it was right to use the tax system to clamp down on second homes. We need to disincentivise people from going down the route of short term lets, she told a rural economy fringe meeting. But empowering local authorities was the approach to take rather than nationally enforced legislation. Planning regulations, tax and other levers needed to be used together to shift the balance.

Towards a ‘wellbeing economy’

The Scottish Government is at the forefront of the international ‘wellbeing economy’ movement, having, alongside the New Zealand and Icelandic governments, established the Wellbeing Governments Initiative in 2018. A motion passed by the conference praised the New Zealand government for bringing in the world’s first wellbeing budget earlier this year and welcomed the Scottish Government’s commitment to making wellbeing central to its next spending review.

A fringe meeting at the conference discussed what a ‘wellbeing economy’ looks like. Katherine Trebeck, the Wellbeing Economy Alliance’s policy lead, said it required realignment of our economic system, changing how we tax, changing what businesses we subsidise. In response to a question she indicated that this might include greater taxation of resource extraction and wealth, and less of employment which we want to encourage. She suggested Costa Rica was doing good work in this area.

More widely a wellbeing economy seems to combine environmentalism (car free cities), with localism (participatory budgets, support for community projects) and tackling inequality. It is perhaps summed up in the phrase that ‘there is more to national prosperity than raising GDP’. Workers’ rights are also an element (see below).

A Charter for Workers’ Rights for Scotland

A fringe meeting sponsored by the SNP Trade Union Group made the case for the Charter for Workers’ Rights in Scotland. The charter was launched by the newly formed Institute of Employment Rights Scotland at the Scottish TUC conference earlier this year and is currently out for consultation.

The charter proposes a single employment status abolishing the distinction between employees and workers; a right to transparent and predictable working hours; a Scottish living wage; and steps to eliminate the gender and racial pay gap. These are mostly reserved matters, however the Scottish government can take steps as an employer and as a procurer of services, to encourage good practice in this area, and this was the main focus of discussions. The charter proposes that if these powers are to be used effectively there needs to be a Cabinet-level minister responsible for them within the Scottish Government. Campaigners want adherence to the charter to be a condition for all businesses seeking public sector contracts.

The idea of using procurement decisions to encourage good business practice was also promoted at the wellbeing economy discussion (see above). The minister for older people and equalities, Christina McKelvie MSP, said the public sector in Scotland has procurement spending of more than £11 billion a year and seeks to spend this with ethical organisations. Katherine Trebeck of the Wellbeing Economy Alliance said procurement officers would be the heroes of bringing in a wellbeing economy.

Brexit

The SNP’s determination to stay in the EU via the holding of a referendum of any EU-UK deal was a central theme of the conference. Nicola Sturgeon made clear in her keynote speech that SNP MPs would never vote for a deal of the type Boris Johnson was proposing. She said that, for Scotland, Brexit shows that the Westminster system is broken, and there was now “a cast iron mandate for an independence referendum”.

There was a widespread belief at the conference that an independent Scotland would be able to rejoin the EU relatively quickly and easily. Veteran MEP Alyn Smith told a fringe meeting that an independent Scotland should have no opt-outs other than perhaps on Schengen, where geography matters.

Brexit highlights the issue of immigration, on which the Scottish Government is significantly keener than its Westminster counterpart, but has few relevant powers. Tom Arthur MSP explained that demographic issues mean “we need more people to come and work in Scotland [but we] don’t have the powers we need to achieve that”. A City UK-led discussion on challenges and opportunities for the financial and related professional services industry also focused on the importance of post-Brexit visa regimes for these sectors.

By George Crozier and Chris Young