The Scottish Budget 2017

“70% of taxpayers get a tax cut as a result of yesterday’s budget” – Nicola Sturgeon

“One million Scots to pay more income tax than rest of UK” – The Scotsman

Yesterday saw the unveiling of the first draft of the Scottish budget for 2018-19. You can read the proposals by clicking here or on the graphic below.

Budget image

My own brief comments have already been published via Common Weal and in The National but I wanted to expand on a few of the points here too.

Income Tax

Of course, this is the big headline grabbing policy change. Last year was the first year that Scotland had the power to adjust rates and bands of income tax and it used those powers then to not uplift the Higher Rate by inflation as was done in the rest of the UK. Cue howls of outrage from the Tories that for folk earning more than £44,000 per year, Scotland was now the “highest taxed part of the UK”.

This year, the Scottish government spend a good deal of time consulting with the other parties about their proposals for what to do next with income tax as well as offering several options of their own.

tax plans.png

In the end, the government has written their budget around a plan which doesn’t quite look like any of the proposals brought up before. From next year, Scotland’s income tax bands will change from this

Income up to Tax Rate
£11,500 0%
£43,000 20%
£150,000 40%
>£150,000 45%

to this

Income up to Tax Rate
£11,850 0%
£13,850 19%
£24,000 20%
£44,273 21%
£150,000 41%
>£150,000 46%

Two new bands have been added – one “Starter Rate” on income between £11,850 and £13,850 which offers a 1% tax cut and one on income between £24,000 and £44,273 which offers a 1% tax rise compared to last year – and the Higher and Additional rates have been increased by 1%.

Folk online have been arguing about who will be better or worse off under this plan. The truth is, it depends on what you’re comparing to. You could compare to the Scottish tax rates last year. You could uplift the bands by inflation and leave the rates as they were last year or you could compare to the 2018-19 UK rates.

Chart

Impact Percent

At my most cynical, I can see immediately that the comparison to the rest of the UK gives the Scottish Government a soundbite with which to counter the Tories. For folk earning less than £26,000 per year, Scotland now has the lowest income tax rate in the UK.

These changes are quite small though. Only about 1% up or down across the income scale.  The overall changes are projected to bring in only about an extra £160 million per year and greater increases in the upper rates were ruled out for fears that those on higher incomes would leave Scotland or otherwise evade or avoid the tax increase. This idea is, of course, subject to a great deal of dispute by the various parties.

There is substantial evidence that tax does not cause a great deal of migration across borders. The rich are people with friends, families and connections to the place they live just as much as everyone else.

On the other hand, the frankly Byzantine tax code in the UK does make it easy to move money around so the experience of other states and countries may not reflect onto Scotland and the data about upper income tax flight in the UK is very limited (see from 50min in the video above and from 56min for information about Scotland). The bold might say that there’s only one way to find out…

Far more important than the actual revenue impact of the income tax changes is the willingness to change itself. Scotland now has a more progressive tax system than the rest of the UK and has now set a precedent for adjusting tax to suit the needs of Scotland rather than to just constantly look over the shoulder at what the UK is doing. It will be interesting to see how this idea beds in and develops in coming years.

It remains a shame that Scotland still can’t have a comprehensive discussion about taxation and we’re reduced to either lumping everything on income tax or tinkering around with the more minor devolved taxes. I’ve spoken at length about the Air Departure Tax but even I can’t work up much excitement about the prospect of radical change to the Aggregate Levy.

Public Sector Pay

There was a pleasant addition to the budget here. After years of pay being capped at 1%, public sector workers will be getting a pay increase of 3% if they earn less than £30,000 per year, 2% if they earn less than £80,000 per year and a flat increase of £1,600 if they earn more than that.

Of course, their taxes are likely to be changing too but only if said worker is earning in the region of £170,000 or more would the increase to their taxes exceed their pay rise (and I’m reasonably certain that there won’t be too many in that position).

This is welcome news although it should be tempered by the fact that inflation is now running at 3.1% and rising. This pay increase still represents a wage squeeze for public sector workers and doesn’t even begin to start undoing the damage caused by the years of the cap. This increase certainly isn’t news to be condemned but it’s still not much more than a short term salve.

Housing

The housing policies in the budget don’t seem to be making too many waves. There’s extra money for housing but a good deal of it seems to be aimed at the private market which has already been the recipient of substantial subsidy.

The proposal to cut the Land and Buildings Transaction Tax for first-time buyers is a major error of judgment. Unlike the divergence with the rest of the UK on income tax, this proposal is a mirroring of the UK policy. Under this cut, 80% of first-time buyers will no longer pay LBTT on properties priced below the threshold. At least they recognised the lower house prices in Scotland and set the threshold at £175,000 instead of the UK’s threshold of £300,000.

But the logic of the tax relief is similarly misplaced though. If you can afford a house at £175,000 without the tax relief, you can afford the house with it. But if you can’t afford the house at £175,000 then it’s very unlikely that a £600 discount is going to make any difference.

This means that there is absolutely no barrier at all to the seller increasing the price of the house by £600 and swallowing up the tax. This cut will merely cause £5 – £7 million per year worth of tax revenue to transfer to those who are selling property.

Regional Council Funding

When the UK budget came out last month and we were told by Westminster that the Scottish government was gaining money in the capital budget but losing it in the revenue budget but if the Scottish Government wanted to make up the different by raising taxes then it was absolutely free to either do so otherwise it could take responsibility for passing on the cuts.

Block Grant change 2017

Well, this same rhetoric appears to have been repeated from the Scottish Government with regard to our regional councils. Their revenue budgets will be frozen in cash terms but with inflation running at 3% this means quite a substantial real terms cut. In addition, the public sector pay increase will likely have to come out of that regional authority resource budget which will further increase pressure on councils. The have the “freedom” to increase council tax to make up the shortfall but it remains to be seen how many choose to do so, especially now with every council in Scotland governed by coalitions of various stripes.

This is the area where I expect most of the fighting to occur during the negotiations before the budget is actually voted on in Parliament next year. The SNP can’t pass it on their own. They’re going to need another party to either vote for it or at the very least abstain to get it through.

The Greens were fairly enthusiastic about the approach to income tax but have set this funding freeze as a red line against their support for the budget as a whole. I don’t believe the Lib Dems are any happier with it and with the Tories certain to oppose and Labour not much less so, there’s going to be a bit of trading required to gain enough support to pass the final bill. I wouldn’t be surprised if Derek Mackay has another rummage down the back of the sofa for some extra cash as he did last year.

One more radical solution would be to recognise that wealth inequality is far higher in Scotland than income inequality and that maybe it is time to explore news forms of local taxation like local land taxes or other taxes on wealth.

Scottish National Investment Bank

Now here is a real good news story. The SNIB is on its way! The first two year tranche of funding, totaling £340 million, has been included in this budget as has the planning and infrastructure to continue that funding beyond the first two years. The Common Weal plan called for the bank to be capitalised to a total of £2 billion over several years so this is a very good first step. If we were a fully sovereign nation with full control over monetary policy it would, of course, be trivial to fully capitalise this bank but we’re not and Scotland only has limited capital spending powers so we need to build up the funds over several years. This is fine though, the bank still needs to be set up and ramped into operation anyway.

The bank is still in the very early planning stages but discussions with the government about its design and the need for it to look out for the common good have been received very positively.

In the long term, this bank will be a major factor in supporting local economies and helping Scotland’s overall economy remain flexible and adaptable in a rapidly changing world. This, if we stick at it and do it right, could be the most transformational policy of the decade.

Conclusion

In terms of political maneuvering, this budget sent out many of the right signals. Increased progressiveness on taxes, more money for public sector workers, the start of better economic investment. They are all good moves and show a willingness for Scotland to not just be different from the rest of the UK but for Scotland to be Scotland without having to compare itself to the UK in the same way that the UK doesn’t constant compare itself to Ireland or France when setting budgets.

But, and it is a big but, many of changes aren’t themselves going to do all that much. A <1% change in take home pay isn’t going to save the day or break the bank for many folk.

As a stepping stone though? As a definite signal that Scotland is willing to be better? I’ll take that. Let’s try to build on it next year and beyond.

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Senatus Populusque Caledoniae

(Apologies if my scant Latin has mangled that translation. If someone corrects it, I’ll see about writing it out 100 times on the walls of the Palace.)

It seems that all news is canceled this week. All of it. There’s nothing happening. Our state broadcaster (which is totally unlike other state broadcasters in that when it promotes its state’s national interests, this is a good thing and not the most hideous evil to ever despoil the airwaves) has told us that the only thing of note happening anywhere is that someone is marrying someone with Magic Blood.

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This is to be a ceremony that we’ll all proudly take part in, by which they mean that we are to pay for it, despite not even being invited to the party. We’re not even getting a day off work because that would apparently cost too much.

Those in power are definitely not going to use this event to sneak out the devastating news that benefits are to be frozen again this year – that’s effectively a 3% cut after adjusting for inflation. I’m certain that they’ll be bending all effects towards sorting the gaping holes in the UK VAT system which allows more than £1 billion to be evaded every year.

They absolutely wouldn’t be cutting HMRC’s budget by £400 million per year RIGHT before the UK is going to leave the largest Customs Union in the world, would they?. They certainly would be breaking ground on all the new checkpoints and infrastructure that are going to be needed. The department should be awash with capital spending in preparation, shouldn’t it?

HMRC.png

They certainly wouldn’t big up their having done some furiously detailed groundwork on the impact of Brexit when they hadn’t actually done any such thing and were just hoping that no-one would ask to read them…till they did.

The UK has some seriously skewed priorities and it goes from the bottom right to the top of the structure of governance. Scotland needs to have a good, hard discussion about what role it plays in all of this.

The Scottish Parliament already has a far fairer voting system than the one used for UK elections (despite the comparative complexity of the former) but should we take the step of becoming an independent country then we’ll have to have a think about some other levels of government too.

I’ve already said a fair amount about the state of Scotland’s local government so today I’d like to look at what we’d want to do ABOVE the level of the present Scottish Parliament.

For instance, we may well decide to create an Upper House to scrutinise legislation but what we absolutely shouldn’t do is copy the UK method of stuffing it full of Lords and paying them to sleep off their hard day of…doing what ever they do for £300 a day.

Image result for house of lords sleeping foulkes

Far better would be a Citizen’s Assembly. Think of it as Jury Duty writ large. We’ve already decided that the best way to determine if someone has transgressed our laws is by a jury of randomly selected citizens so we could easily set up a method by which randomly selected citizens can determine if the laws themselves are just, fair and easily understood.

And for above that? How do we represent the nation of Scotland to the world?

If you had asked me in 2014, I would have said that I didn’t really mind too much and was pretty content with the Scotland’s Future plan of keeping the monarchy in the same way that Canada and Australia have.

But I’ve shifted somewhat since then. I’m not sure I’d really welcome the appointment of a Governor General as Scotland’s nominal Head of State nor am I completely clear on what duties they would actually have in practice. The First Minister already does most of the Head-of-State meet-and-greet stuff when folk come to Scotland and it seems a little strange for that to stop.

Nor do I want a restored and separate Scottish monarchy. Again, I’ve no time for someone to tell me what to do by dint of their divine appointment or Magic Blood even if Scotland does maintain a tradition of the Scottish Monarch being subordinate to the people of Scotland. Nor should a country professing to be a democracy pride itself on  its locking citizens out from ever obtaining any governmental office even in theory.

So, if we choose to have an official Head of State separate to the First Minister then it’ll have to be an elected President and that seems straightforward enough to arrange.

Though we still need to have that discussion about what we want them to DO. As said, the First Minister already does most of the Head of State meet-and-greet stuff when folk come to Scotland so we’re faced with the choice of either actually empowering our Head of State and giving them executive controls like the power to veto laws, sign their own legislative orders or other such powers (i.e. similar to the President of the USA) or we continue to have a head of state with a ceremonial role but little actual power.

And as I think on it…whilst I think it would be an upheaval too far to actually empower a Head of State, I don’t think I feel so enthused about swapping an unelected but powerless leader with an elected but still powerless leader. It just doesn’t feel as if it’s a decision rooted in the practical. On the other hand, I’m somewhat nudged by the argument that a Head of State separate from the government may be able to say and do some things without constraint by that government (though it’s noted that our current monarch maintains a “strict” rule against saying anything at all unless they think they can get away with it).

But maybe I’m wrong.

So help me out here. What would you want from a Head of State of an independent Scotland? How would someone gain that position? And what kind of person would you expect to see in the role?

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Affording It

“Britain is not Great. Britain is Weird”

IMG_20171104_144549

The Usher Hall voting >90% in favour of Scotland adopting its own independent currency.

On the 4th of November I spoke at the Scottish Independence Convention’s Building Bridges to Independence conference. As with my SIC talk in January, it fell to me to be the one with the graphs and statistics – this time on the topic of public finances and the impact of independence on Scotland’s budget.

The livestream of my talk can be viewed thanks to Independence Live and is the first talk in this segment.

Below the fold are copies of my slides with comments drawn from my talk and references to the points made. The slides can also be downloaded here.

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SIC Build Conference Slides

Edit: This blog post has been expanded with commentary and references in addtion to the slides. You can read that version here.

build

This post is for folk attending the SIC Build 2 Conference.

If you want a closer look at the slides which go with my talk, you can download them here.

I also make extensive reference to my Beyond GERS paper which can be downloaded here.

All of the slides are also reprinted in sequence below the fold

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Scotland’s National Bank

The Croatian National Bank shall be the central bank of the Republic of Croatia.
The Croatian National Bank shall be autonomous and independent, and shall report on its work to the Croatian Parliament.
The Croatian National Bank shall be managed and its operations shall be conducted by the Governor of the Croatian National Bank.
The organisation, purpose, tasks and remit of the Croatian National Bank shall be governed by law.
Article 53, The Constitution of the Republic of Croatia.

Today sees the launch of my latest contribution to the Common Weal White Paper Project on the very important topic of Central Banking in an independent Scotland.

It has received a front page splash in The National which can be read here alongside a summary by me here.

And the paper itself can be downloaded here or by clicking the image below.

wppcentralbank

If, as I hope we should, Scotland uses the opportunity of independence to launch our own sovereign currency then one of the departments of government that we’ll need to set up is our own Central Bank. This paper outlines the principles that we’ll need to examine and follow as we design that bank.

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We Need To Talk About: GERS (2016-17 Edition)

“The GERS figures are not meant to be anything other than a way of showing the current position under the present arrangements.” – The BBC 

The annual Government Expenditure and Revenue report is out and, as with previous years, I’ve written an analysis of the report and what it means for Scotland. The GERS report itself can be downloaded here.

GERS banner

A more detailed analysis I have prepared for Common Weal can also be read here.

GERS CW Banner

The UK is a deeply unequal union and London continues to capture a greater and greater proportion of the wealth of the state to the detriment of everywhere else. This single fact has to frame everything we think and say about the finances of Scotland.

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Twas the Night Before GERSmas

‘Twas the night before GERSmas, and all through Scotland
The bloggers were screiving; their time near at hand.
The headlines were crafted with doom and despair
In hopes that Lord Darling soon would be there.
The MPs were nestled all snug in their beds,
While visions of oil money gushed through their heads.

santadarling

And Brown with his spreadsheet, and Mackay (who’ll fudge it),
had just settled accounts and balanced the budget –
When outside the office there came such a racket,
They wondered if Ewing had started to frack it.

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