Difficult decisions await Holyrood, but experts urge tax policy caution
The Scottish Parliament faces ‘difficult tax and spending decisions’ in its upcoming budget, according to a report published last week by Holyrood’s Finance and Constitution Committee, as an expert group set up to advise ministers on their budget planning called for a cautious approach to tax policy making.
The committee’s pre-budget report said that the UK Government needed to bring more stability to the economy following then Chancellor Kwasi Kwarteng’s fiscal event in September, a statement that has now been largely abandoned.
The committee does not go into great detail about Holyrood’s tax powers in its recommendations but welcomes the commitment from the Deputy First Minister to bring forward a discussion document on taxation and public spending, which John Swinney confirmed would be published following the 17 November UK Government Autumn Statement.
The Chartered Institute of Taxation provided evidence to the committee as part of its inquiry in September. The evidence provided by the Institute and quoted in the document includes CIOT’s support for the Scottish Government’s ‘Framework for Tax’ as well as its suggestion that an annual Finance Bill for the Scottish Parliament be explored. On this last point, the report quotes the Deputy First Minister as telling the committee last month that he is “not persuaded of the need for more legislation”.
Amid concerns around the prospects of further income tax divergence that could have resulted from September’s mini-budget, the report notes comments made by CIOT around the lack of evidence of sustained behavioural change as a result of existing differentials, but notes the concerns raised by other organisations around the potential for the tax system acting as a disincentive to investment and relocation.
It also acknowledges comments made by CIOT and the David Hume Institute on the prospects for reform of council tax which, as the report notes, Public Finance Minister Tom Arthur acknowledged earlier this year was unlikely by the time of the next Scottish Parliament elections in 2026.
Committee convener Kenneth Gibson said the report’s findings showed the need for there to be “(a)n open and honest debate with the public about how services and priorities are funded…including on the role of taxation in funding wider policy benefits for society.”
Tough budget choices, but tax caution recommended
The publication of the committee’s report came the day after Deputy First Minister John Swinney updated MSPs on the government’s emergency budget review to parliament.
Alongside proposals to further reduce and reprioritise public spending was the publication of the findings of an expert working group of economists set up to provide advice and recommendations to ministers to help with budget planning.
The paper – titled Expert Panel Interim Commentary on the Implications of the UK Government Fiscal Statements for the Scottish Government Budget – recommends the Scottish Government take a cautious approach to tax policy.
The economists say that the Scottish Government will need to consider the impact of future tax changes on competition and “tax-induced migration between Scotland and England, particularly of top-rate taxpayers” when setting future tax policy measures. Alongside behavioural changes, the interconnectedness of UK and Scottish tax changes through the fiscal framework, uncertainties around UK tax policy and the time lag between tax changes and behavioural responses have led the group to recommend that ministers take a cautious approach to making tax policy.
Speaking in the Scottish Parliament, Deputy First Minister John Swinney said he would set out the Scottish Government’s approach to tax policy in the upcoming budget by way of a tax discussion paper that will be published after the UK Autumn Statement on 17 November. Swinney also signaled an openness to work with other parties in Holyrood on future tax policy proposals in response to a question from the Labour MSP Paul Sweeney, who suggested Ministers could do more with the tax powers already under their control.
Swinney said the Scottish Government was expecting the UK Government to announce further tax rises and warned that the Scottish Budget would face significant challenges in the coming financial year.
Time to talk new taxes?
Following the statement, Swinney’s former ministerial colleague and ex-health secretary Alex Neil, suggested that the Scottish Government could introduce new taxes by next October in order to alleviate the need for public spending cuts.
Neil – who was an MSP between 1999 and 2021 – proposed the introduction of a tax on land owners with more than one acre of land. He said the £100 per acre charge could raise up to £2 billion to help “avoid the most damaging cuts”.
He also said ministers should consider a mansion tax, a derelict property tax and a council tax surcharge on homes worth more than £350,000.
In response, a Scottish Government spokesperson said ministers would “continue to take a responsible approach towards developing tax policy in line with the principles of fairness and progressiveness set out in our Framework for Tax.”
The Herald on Sunday reported Mr Neil’s comments and its article can be found here.