BUDGET 2015: A Scottish alternative to austerity?

We knew a lot of the context before John Swinney stood up to deliver his Draft Budget on Wednesday. The Scottish Government’s grant from Westminster for day-to-day spending would be 1 per cent smaller in 2016/17 as it was 2015/16. Its grant for capital spending on the other hand would increase by almost 5 per cent.

Looking slightly longer term, the block grant from Westminster to the Scottish Government for resource spending will fall by 5% in real terms over the period to 2019/20. So the next few years will continue to be about austerity.

However, rather than set detailed spending priorities for the next few years, the Budget that Swinney delivered on Wednesday sets detailed spending priorities for 2016/17 only. With elections to Holyrood in May next year, setting longer term priorities in detail would be inappropriate.

But Mr.Swinney’s budgets are no longer simply about how to allocate a block grant. This budget was the first to set a Scottish Rate of Income Tax – the flat rate income tax that will come into force in April 2016. Together with the Land and Buildings Transactions Tax (LBTT) that was introduced in Scotland in 2015, and the ongoing debates about local taxation and council tax reform, there was as much anticipation about tax announcements as spending plans.

The Budget was billed as a ‘Scottish alternative to austerity’, built around the twin pillars of ‘inclusive growth’ and ‘protecting and reforming public services’. The UK Conservative Government was criticised for its ‘ideological obsession with austerity’, and Mr. Swinney said he would not let the poorest bear the biggest burden of spending commitment.

Spending protections and public service reform

What does this alternative to austerity look like? On the spending side, the Scottish Government will continue to fund the reversal of some UK-Government welfare cuts, including the ‘bedroom tax’ and the cut to Council Tax Reduction, and it will continue its commitment to various flagship universal policies such as free concessionary travel, free prescriptions, and free tuition.

On the spending side the Budget contained one substantial spending increase. Day-to-day spending on health will rise by 1.5 per cent in real terms next year (almost 400m). This reflects growing pressures on the health budget, combined with some recent criticism that health spending in Scotland has not kept pace with that in England. A large part of this funding increase however is accounted for by a £250 million investment to be directed to Health and Social Care partnerships, to ensure improved outcomes in social care. Capital spending on health will increase significantly.

The Scottish Police Authority sees its resource budget frozen in real terms. This mirrors the protection of police spending in England announced by George Osborne in the Autumn Statement. At the same time however it opens the Scottish Government to criticism that the ‘efficiency savings’ that we anticipated from the merger of Scotland’s police authorities into one have not materialised.

Health spending accounted for 44% of the Scottish Governments resource spending in 2015/16, and this will increase to 46% in 2015/16. In the context of a falling resource grant from Westminster, it is inevitable that the real terms increases to health spending will result in spending cuts to many other departments.

Other than the Police Authority, every other major department experiences a spending cut. Resource spending on education for example (other than spending on schools which is funded through local government) falls by 2%.

But the largest spending cut is reserved for local government. The resource grant for local government will fall by 3.5% in 2016/7. This figure is taken from Local Government Finance Circular 7/2015, released on the same day as the Budget but not part of the Budget documents. (The Budget itself suggests an even worse settlement for local government, but this is largely because the relevant budget line for local government in the Draft Budget does not include various accounting adjustments; it thus exaggerates the scale of cuts).

Playing it safe on tax

The Budget contained virtually no revenue-raising measures. This was the first budget to set a Scottish Rate of Income Tax (SRIT). As of April 2016, each income tax band in Scotland will be reduced by 10p. If the Scottish Government sets the SRIT at 10p, then income tax rates in Scotland will be no different from those in the rest of the UK, and the Scottish Government will retain the revenue raised from the 10p band. But the Scottish Government could if it wanted set a SRIT at less, or more than, 10p. If it had set a SRIT of 11p for example, then income tax rates in Scotland would be 21p on the basic rate, 41p on the upper rate, and 46p on the additional rate, and the Scottish Government would retain whatever additional revenues were raised.

As anticipated, Mr. Swinney chose not to deviate from UK rates. He set the SRIT at 10p, meaning that income tax rates in Scotland will continue to be 20p, 40p and 45p on the basic, upper and additional rates.

The Land and Buildings Transactions Tax (LBTT), the replacement for Stamp Duty in Scotland which was introduced in the 2015 Budget, remains largely unchanged. But  Mr Swinney followed the policy announced by George Osborne in the Autumn Statement, and has imposed a 3% premium on LBTT rates for buyers of second homes and buy-to-let properties. This might be symbolic of a commitment to inclusive growth, but it will not raise substantial revenue.

The Deputy First Minster welcomed the report of the Commission on Local Tax Reform which was delivered earlier this week and recommended the abolition of Council Tax. Mr. Swinney announced that the Government would set out its plans for the reform of Council Tax in the New Year, but in the interim the Council Tax will be frozen for a ninth year, with local authorities being compensated for the freeze by an additional £70m grant funding from the government.

There was little short-term change in Non-Domestic Rates (NDR). Non-Domestic Rates are forecast to raise £2,768.5m in 2016/17, representing little increase on the expected 2015/16 revenues. There will be some minor changes to reliefs, and an increase in the large business supplement. Details of the Business Rates Incentive Scheme of 2016/17 (which enables local authorities to retain a proportion of local NDR revenue growth above a particular target) will be confirmed subsequently.

A Scottish alternative to austerity?

This was billed as a Scottish alternative to austerity, but it was only marginally different from George Osborne’s Spending Review last month. Health and police spending were protected, as in England, leaving other departments to bear the brunt of cuts. The headline measures to counter austerity are the continuation of the policies to ‘un-do’  the UK Government’s bedroom tax and cut to the Council Tax Reduction, and the ongoing commitment to fund various universal services – prescriptions, concessionary travel, tuition fees. The main tax raising measure – the levy on LBTT for purchasers of second homes and buy-to-let properties – mirrors George Osborne’s rise.

Coming just a few months before the Scottish elections, the fact that Mr. Swinney did not use his new income tax-raising powers is hardly a surprise. It opens him up to attack from Labour and the Liberal Democrats that his rhetoric on social justice and inclusive growth is just bluster. But the truth is we know little yet about what the other main parties would deliver if they controlled the purse strings – we will have to wait until the manifestos next year to get a clearer sense of that.

And there is some truth in the argument that most of Swinney’s tax raising options would have been regressive, although this issue is not as straightforward as is sometimes perceived. A rise in the flat-rate SRIT would result in lower-income individuals seeing a larger percentage increase in their tax bill, but a smaller proportionate change in their net income than higher earners. And freezing Council Tax is only a progressive policy because take-up of Council Tax Reduction is quite low – if all those entitled to it took it up, then a rise in Council Tax would not hit the poorest.

There was an emphasis on public service reform throughout the Budget statement. Building on the principles of the Christie Commission, there will be an emphasis on sharing and integration of services, continued moves towards digital public services, and a continued emphasis on preventative policy. These are well-intentioned objectives, but can be difficult to deliver in practice, and do not always yield the type of long-run budgetary savings that are hoped for.

Whilst not making any significant changes to local taxation in the short-term, the Budget statement hints at some future reforms. The Deputy First Minister welcomed the work of the Commission on Local Taxation that reported earlier this week, and announced that the Government would set out its plans for the reform of Council Tax in the New Year. He also said that the Government would begin consultation with local authorities about the possibility of assigning some proportion of income tax revenues raised locally to local government budgets.

The Budget also announced a review of NDR in the next parliament. This was welcomed by business organisations who – after nine years of a Council Tax freeze – argue that they are making a disproportionate contribution to the Scottish Government’s revenue growth.

In many ways this was a Budget of few surprises, and that in itself is not surprising given the proximity to Holyrood elections in May. Opposition parties criticised the Budget along predictable lines. But until we see the detail of the parties’ manifesto commitments, it remains unclear how different the parties policy proposals are in reality.

This is an edited version of a briefing for LGiU Scotland.

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