The Scottish Government will publish its draft Budget next week, setting out how it plans to use its devolved tax powers in the coming financial year.
This year, finance secretary Derek Mackay heads into his statement with one hand tied behind his back, the result of the UK Government’s decision to postpone its own Budget until 11 March.
This means that UK tax and spending decisions – upon which the Scottish Budget still relies – will be unknown when Mr Mackay stands up in front of MSPs next Thursday afternoon.
Despite the challenges associated with preparing the Scottish Budget before full sight of the UK’s overall fiscal picture, Mr Mackay has signalled his intention that the Scottish Budget process be completed before Sajid Javid unveils his own statement in six weeks time.
The Chartered Institute of Taxation set out the problems of holding a Budget in the absence of UK tax and spending choices in an article for The Times last month.
The Budget timetable, as proposed by the Scottish Parliament’s Finance and Constitution Committee earlier this month, is as follows:
- February 6 – Budget (Scotland) Bill introduced to Parliament
- February 12 – Finance and Constitution Committee evidence session with Finance Secretary and Scottish Fiscal Commission
- W/c 17 February – Subject committees take evidence on proposals
- W/c 24 February – Committee conveners debate proposals
- 27 February – Stage 1 debate on Budget
- 4 March – Stage 2 debate
- 5 March – Stage 3 debate
The Scottish Rate Resolution agreeing rates and bands of Scottish Income Tax will take place prior to the start of the Stage 3 debate on the Budget Bill. This vote must take place before the final Budget vote in order to guarantee that Scottish income taxes can be collected in the coming year.
What to expect?
Scottish Income Tax rates and bands will be the invariable focus of media and political attention on Thursday. Derek Mackay has previously hinted at his intention to ensure that the present system of five rates and bands of Scottish Income Tax (starter, basic, intermediate, higher and top) remain the Scottish Government’s income tax policy prior to next year’s Scottish Parliament elections.
This means that it is unlikely that we will see the creation of new rates or bands. We may see some movement in respect of the level of income at which these rates apply, but this may be limited to increases in line with the rate of inflation.
Deal or no deal?
In order to ensure that the government’s tax and spending proposals are approved, Scottish Ministers will need to secure the support of at least one opposition party to achieve a majority in the Holyrood chamber. Budget horse-trading has already begun, with both the Scottish Conservatives and Scottish Greens setting out publically what they would expect in return for their Budget votes.
Murdo Fraser, the Conservatives’ lead spokesperson for finance, has said that there is ‘no justification’ for extra tax rises or spending cuts as a result of forthcoming increases to the Scottish block grant from Westminster. It means that further income tax increases will lessen the likelihood of a Budget agreement with the Conservatives.
In recent years, the Scottish Government has secured the support of the Scottish Greens by agreeing to policies such as the introduction of new taxes on workplace car parking and tourism, as well as freezing the level at which people start paying the Scottish higher rate of tax. This year, the Greens have called on the government to take action to tackle the ‘climate emergency’, but have so far said little on what they would expect from tax policy.
The UK picture
The prospect of further, significant income tax divergence between Westminster and Holyrood has somewhat subsided since the Conservatives walked back a pledge during the General Election campaign to increase the higher-rate UK income tax threshold to £80,000.
While there have been various hints from now Prime Minister Johnson to ease the tax burden on working people, the likeliest response from the chancellor will be to achieve this by increasing the level of income at which people start paying National Insurance contributions.
These changes will impact taxpayers across the UK (including in Scotland). But north of the border, the full value of this benefit will start to be cancelled out by higher rates of income tax (compared to the rest of the UK) for those paying the intermediate rate of income tax and above.
Nevertheless, the absence of the UK Government’s income tax proposals for the coming year means it isn’t completely possible to rule out further changes. This has been acknowledged by the finance secretary himself. He has hinted that he may need to revisit his plans if the UK Government’s tax proposals are found to have a material impact on Scottish public finance.
The independent Scottish Parliament Information Centre has suggested on its website that, should the UK Government propose further changes to income tax, the finance secretary could ‘propose that the SRR (Scottish Rate Resolution) is cancelled and propose a new one, provided he does so before the start of the tax year’.
Of the other taxes under the Scottish Government’s control, consideration may need to be given to if/how the Scottish Government should respond to proposals from the UK Government that are expected to introduce a stamp duty surcharge on non-resident buyers within the Land and Buildings Transaction Tax regime.
The devolution of the Scottish replacement for Air Passenger Duty – Air Departure Tax – remains on hold pending clarification of the impact of state aid rules on exemptions for airports in the Highlands and Islands. Plans to assign a proportion of VAT revenues directly to the Scottish Budgets are also in a holding pattern, pending agreements on the methodology that will be used to collect and apportion receipts.
Scottish Landfill Tax rates have tended to mirror the wider UK regime (in an effort, among other factors, to prevent so-called ‘waste tourism’) although the ‘climate emergency’ declared by the government last year may prompt further thinking on new and existing efforts to tackle waste.
Legislation enabling the introduction of taxes on workplace parking has already been introduced, while plans for a tax on tourists will take a further step forward later this year when legislation is introduced. However, as these are discretionary levies for councils to introduce, they would not form the centrepiece of the Scottish Budget.