Tax: Draft Scots Budget now awaited

Scottish Parliament
Donald-Drysdale By Donald Drysdale for ICAS

30 November 2016

Following the Chancellor’s Autumn Statement, Donald Drysdale anticipates the next major fiscal event in Scotland.

Now that Philip Hammond has presented his long-anticipated UK Autumn Statement, Scots are waiting for their minority Scottish National Party administration to publish its draft Scottish Budget for 2017/18.

Scotland’s Budget may not be as gripping an event as Westminster’s annual spring (but soon to be autumn) Budget, with its UK-wide repercussions.  Nonetheless, the draft Budget at Holyrood is of crucial importance to businesses and individuals north of the border as it will reveal what lies ahead.

Scottish Budget process

For each financial year, the annual Budget (Scotland) Act provides resources for the Scottish government and certain bodies whose expenditure is payable out of the Scottish Consolidated Fund (‘the Fund’).

It sets maximum borrowing limits for certain statutory bodies, and provides for payments out of the Fund.  It also makes temporary provision for payments from the Fund for the succeeding financial year until the Budget Act for that year is passed.

The draft Scottish Budget for each financial year has generally been published early in the preceding autumn, allowing time for adequate parliamentary scrutiny at Holyrood before the start of the year in question. For example the draft 2015/16 Budget was presented in October 2014, and the resulting Budget (Scotland) Act 2015 was passed at Holyrood on 4 February 2015 and given Royal Assent on 11 March 2015.

Things were different for 2016/17.  Given the uncertainties in UK economic policies following the Westminster general election in May 2015, the then Scottish Finance Secretary John Swinney delayed his draft Budget until mid-December, after the Autumn Statement.

2017/18 timetable

Again this year the Finance Secretary, now Derek Mackay, persuaded his Finance and Constitution Committee that the draft Budget should not be presented until after the recent Autumn Statement, and Thursday 15 December is the date that has been chosen.

Mackay argued that fiscal and economic uncertainties caused by the Brexit vote called for this delay. He also suggested that, in the context of devolution generally, delaying each annual Scottish Budget until after the UK Autumn Statement would help manage the risks and volatility presented by the relationship between the Scottish Budget, the Autumn Statement and related forecasts from the Office for Budget Responsibility (OBR).  With a later draft Budget, the Scottish government’s forecasts will be prepared as near as possible to the start of the year to which they apply.

The Chancellor’s newly-announced decision to deliver the UK Budget each autumn will aid this in future, especially if changes to UK tax at each Spring Statement are avoided or kept to a minimum. The revised timetable should help the Scottish Finance Secretary to do his sums accurately in plenty of time before the beginning of each financial year, and for these to be subject to appropriate parliamentary scrutiny at Holyrood.

Budget tax measures expected

Devolution is gathering speed. From 6 April 2017 Holyrood will have wider powers over income tax.  Also from that date the process of devolving certain welfare powers will begin, with the first employment support schemes starting to operate and new powers to create new social security benefits or top up existing benefits.

A key focus of attention in the forthcoming draft Budget will be on income tax.  From 2017/18 onwards the Scottish parliament will set the rates and thresholds applicable to the non-savings non-dividend income of Scottish taxpayers.

Before this year’s Holyrood election, the SNP said they wanted to freeze Scottish income tax rates at existing levels, while helping the lower paid by raising the personal allowance to £12,750 by 2020.  They have no specific power to increase the personal allowance above the UK level, but can achieve the same effect by introducing a narrow nil rate band for the lowest slice of taxable income.  A messy solution – but it might prove politically expedient.

They also said that, instead of lifting the higher rate threshold by £2,000 to £45,000 as in the rest of the UK, they would restrict the increase in Scotland to an inflationary rise of only £387.  They also wanted to increase the additional rate from 45% to 50%, but rejected this lest it put significant Scottish revenues at risk by encouraging behavioural changes – for example, incorporation of business activities, or migration south.

Even if Scotland adopts different income tax thresholds from the rest of the UK, uniform thresholds for National Insurance contributions will apply UK-wide.  This may create a complex structure of combined marginal rates in Scotland, as explained in my article on Aligning income tax and national insurance in a partially-devolved world.

Land and buildings transaction tax (LBTT) and Scottish landfill tax (SLfT) are wholly devolved to Holyrood. No specific changes to LBTT are forecast, although aligning with the three-year window for stamp duty land tax (SDLT) that helps homeowners avoid the 3% supplement on moving house would be welcome. SLfT rates are likely to stay broadly in line with those south of the border to discourage cross-border landfill disposals.

The Budget will also address local authority funding, and will set the level of non-domestic rates.  However, the government has postponed a fundamental reform of council tax that had been recommended. Instead, council tax rates generally will rise by 3% while properties in the top four bands (E to H) will see larger increases.

The draft Budget measures for 2017/18 and those finally enacted may differ from the SNP’s original intentions, because they no longer have a majority and therefore have to seek support from other MSPs.

Independent Budget scrutiny

The Scottish Fiscal Commission (SFC) was established in 2014 as an independent, non-statutory, fiscal institution with a key role in enhancing the credibility and transparency of fiscal projections prepared by Scottish Ministers.

Currently the SFC scrutinises and reports to the Holyrood parliament on the Scottish government’s forecasts of receipts from LBTT and SLfT and the Scottish rate of income tax, and the economic basis for its forecasts of non-domestic rate income.

The SFC also assesses the reasonableness of Scottish Ministers’ borrowing projections and may report on other fiscal factors too.  Forecasts are required twice a year – first, in time for Scottish Ministers to formulate the draft Budget, and second, in time to support scrutiny of the Budget Bill by MSPs.

From 1 April 2017 the SFC will become a statutory body with extended powers, as proposed in the Fiscal Framework. As a non-ministerial government department, it will be responsible for producing the official forecasts to underpin the Scottish Budget, and will have a Scottish role modelled closely on the OBR’s UK-wide function.

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