Scotland's politicians agree tax rates for the year ahead and hint at future reforms

26 Feb 2021

MSPs have agreed to the Scottish Government’s income tax plans for the coming year and have hinted at the prospect of more substantive reforms to the Scottish tax regime in future years.

In a vote in the Scottish Parliament on Thursday, MSPs agreed to a Scottish Rate Resolution that will increase the starter, basic and higher rate thresholds by inflation and freeze income tax rates at their present level.

MSPs also started to pivot the discussion on Scotland’s tax regime towards a more fundamental evaluation of its scope and purpose, something that is likely to happen following May’s election, driven in part by the Finance and Constitution’s call for a more strategic approach to Scottish tax policy earlier this week.

In a letter to the Scottish Parliament’s presiding officer at the start of the week, committee convener Bruce Crawford (SNP), who is retiring from the parliament in May, said the committee wanted the next parliament to begin a ‘national conversation’ about ‘the role of tax policy in achieving a just, sustainable and strong economy as we recover from COVID. They would like to see this work conclude by September next year, so that it informs Budget planning in 2023-24.

Opening the debate on behalf of the government, Ivan McKee, Scotland’s third tax minister in as many years, said that the government’s tax plans would provide taxpayers with ‘certainty and stability’ as the country recovers from the Coronavirus pandemic.

He told the chamber; “During our pre-budget engagement, we heard a clear message from stakeholders across the country that now is not the time to make significant changes to taxes and that, instead, we should focus on supporting the people and businesses that are hardest hit by the pandemic.”

In a nod to possible future tax policy development after this year’s Scottish Parliament elections, McKee cited the government’s engagement with ‘taxpayers, industry representatives and professional bodies’.

He said that the Scottish Government was ‘committed to ensuring that tax policy is understood and informed by a diverse range of views and perspectives’, and as a result of dialogue during this year’s Budget process, said that there was ‘a broad-ranging interest in the devolution of further tax powers and an appetite for broader engagement on tax’.

He continued: “We believe that broad-based engagement of that kind should not be limited to the annual budget cycle, but should form part of a wider conversation about the purpose of tax in our society, and what tax is designed to achieve.”

Some of the powers that Scottish Ministers are expected to call for, if re-elected, include the devolution of full income tax powers, VAT devolution and control over capital gains tax and National Insurance, powers McKee said would ‘enable the Scottish Government to shape a recovery that is best suited to Scotland’.

The Scottish Conservatives focused on the SNP’s ‘broken’ manifesto pledge not to increase income taxes during the 2016-21 Scottish Parliament term, but welcomed the decision not to widen the income tax gap with the rest of the UK any further.

Murdo Fraser welcomed the fact that the government’s income tax policy for the coming year would not contain further tax increases, and echoed McKee’s point that now was not the time for tax rises; “In that respect, the minister and I are in the same place”.

But he added that the Scottish Government’s decision to diverge from the UK income tax regime in 2017 had resulted in increased taxes for some basic rate taxpayers.

In particular, he said; “Everyone who earns more than around £27,000 pays more tax than their equivalent south of the border. Many of those who are paying much more are basic-rate taxpayers.”

He continued; “There is also, as we have often raised, particular concern about those who earn between £43,000 and £50,000, who pay tax at a marginal rate of more than 50 per cent. That is a disincentive to people in that tax bracket to work harder.”

Jackie Baillie (Labour) called for the government to be ‘more radical and more innovative’ with the public finances.

She accused ministers of a ‘timid’ approach to taxation and of ‘tinkering around the edges’ of the tax system.

Baillie said: “For years, the SNP demanded that income tax rates should be devolved so that it could introduce more progressive policies…This year, we see the conclusion of that timid approach, with the lowest earners being given a tax cut that is effectively worth 12p, while the top earners—those bringing in more than £150,000 per year—get a cut worth £33. How is that progressive?”

She concluded: “For future prosperity, we must grow our tax base, help low earners and small businesses, and ask those with the broadest shoulders to contribute a fair share.”

Willie Rennie (Liberal Democrat) called for better evaluation of the impact of tax policy decisions: “When we introduce tax rises, we need to make sure that their intended effects follow. We need to measure the impact and the outcomes for individuals and examine any behavioural change.”

Patrick Harvie (Green) said that the Scottish Government’s approach to taxation had been ‘closely modelled on what the Scottish Greens proposed at the previous election.’

He too called out ministers for their timidity, and called for a ‘deep re-examination of tax policy’ in the new parliamentary term.

Harvie said his party would ‘make a case for radical proposals’ that could involve ‘looking again at income tax for high earners…finally addressing the long-overdue reform of local taxation (and) kill off the SNP’s absurd decision to back Tory free-market extremism with free ports – a system that is designed to remove economic activity from the tax base’.

During the open debate, John Mason (SNP) backed calls for an in-depth examination of the Scottish tax system after the election, a position backed by his SNP colleague Stuart McMillan.

Mason said: “I very much support the call for the incoming members of Parliament and the incoming finance committee to consider an inquiry and a wider debate”. McMillan argued that tax policy was ‘fundamental’ to economic recovery and said that “The time is right to consider the devolution of additional tax powers to Scotland.”

Additional Conservative contributions focused on the higher tax burden for Scottish taxpayers. Bill Bowman accused the government of treating ‘hard-working Scots as a golden goose’ while his colleague, Maurice Golden, said the government’s ‘high-tax strategy’ was impacting economic performance and eroding the tax base.

At decision-time, MSPs agreed to back the Scottish Government’s rate resolution by 88 votes to 1, with the Greens and Conservatives abstaining.

The UK Budget next week will determine whether further changes may be required. For example, there has been speculation that the chancellor will freeze the personal allowance and the UK higher rate threshold, the latter of which may be seen by Scottish Ministers to be politically challenging, given their proposal to increase the Scottish higher rate threshold by inflation.

There are also suggestions that the chancellor will extend the Stamp Duty Land Tax holiday in England. Both Scotland and Wales have already agreed that devolved equivalents will stop at the end of March, but they may also feel political pressure to follow suit.

By Chris Young