IPPR Scotland: The '£2 billion question' facing Scotland

8 Mar 2016 02:04 PM

A new IPPR Scotland report, New powers, new Scotland?, has analysed how new Scottish Parliament tax and benefit powers could be used following the recent fiscal framework agreement between the UK and Scottish governments, and the forthcoming passage of the Scotland Bill.

Ahead of May’s Scottish Parliament elections, the analysis looks at how much revenue using the powers would be raised/lost, and who would win and lose on the income spectrum, looking at the new options available to the Scottish Parliament and the challenges it faces.

The thinktank’s analysis sets out six challenges for the next Scottish Parliament (see below) finding the next Scottish Parliament is facing a '£2b question':

• UK-wide benefits cuts will cost recipients in Scotland £600m per year by 2020 - what, if anything, should the next Scottish Parliament do to reverse these cuts?
• Public spending cuts to the overall Scottish Parliament budget will be £1.2b per year by 2020 (and higher for non-protected departments) – what could the next Scottish Parliament do to reverse these cuts?
• The UK Government plans to increase the higher rate threshold to £50k, doing the same in Scotland would cost £300m per year - at what level should the higher rate threshold be set in Scotland on devolution of new powers?

It also shows that the next Scottish Parliament will face the challenge of how, if at all, to reshape the income tax system in Scotland, how to ensure earnings grow at least in line with the rest of the UK, and how to boost Scotland's working age population over the short and long-term.

The report finds that the new powers will see Scotland receive almost half of its budget from devolved tax revenues. The report outlines some of the flexibility offered by the full devolution of income tax on earnings (above the personal allowance) including the effects of varying the higher rate and basic rate only and the effects of varying the current income tax thresholds (as now afforded under new powers). It also considers some options offered by the devolution of a number of disability benefits, and the ability to top-up existing benefits.

On tax the report concludes:

• Increasing income tax rates would raise more revenue from higher earning households than lower earning households - a 1p rise would raise £500m across all bands, or £100m for an increase in 1p only on the higher rate of tax.
• Income tax thresholds could raise or cost similar sums - matching UK Government plans to raise the higher rate threshold to £50k would cost £300m in Scotland per year, whereas freezing the higher rate threshold in cash terms (at its 2017/18 £43,600 level) would raise £300m per year by 2020. This would mainly affect the highest earning households, and would not effect the tax rates of the poorest 30% of households.
• Reducing the additional rate threshold in Scotland from £150,000 would raise £8.5m per year for a £10k reduction (costing someone earning over £150,000 a year £500).
• Increasing council tax by inflation or earnings would see an additional £100m and £200m per year respectively by 2020.

On benefits the report concludes:

• The UK Government's proposals for benefits cuts will see a reduction in spending in Scotland of £600m. Increases in the personal allowance and the introduction of the National Living wage will not offset cuts. Taken together, these will see 700k households lose out by an average of £730 per year.
• To reverse the cuts to the Universal Credit working allowances (the point at which the UC payment is tapered away) would cost £200m in Scotland per year by 2020, with increases in income focused on those in lower deciles (200,000 households benefiting by on average £990 per year year).
• To reverse the freeze in in-work benefits would cost £200m per year by 2020, with increases in income focused on lower income deciles (900,000 households gaining on average £230 per year).
• To increase disability benefits in line with earnings rather than inflation would cost around £100m a year, and see disability benefits increase by 11% in real terms by 2020.

Russell Gunson, Director of IPPR Scotland, said:

“Our analysis shows that Scotland is facing a ‘£2b question’. With public spending cuts, benefits cuts and proposed tax cuts in the rest of the UK, the scale of the decisions facing the next Scottish Parliament are very significant.

“Ahead of May’s elections all the political parties need to be clear how they will meet this funding gap, what balance of tax rises or spending cuts they will look to make, and the reforms they consider necessary to services in Scotland.

“The scale of the challenge means tax rises alone are very unlikely to make spending and benefits cuts go away entirely, but they can certainly make a contribution. Our report shows the new powers open up some possibilities on reforming tax and benefits that weren’t there before.

“To avoid this next parliament being just about mitigating austerity and managing decline, we must explore all the options available. We need to use the next few months ahead of the election, and the first few years of the next parliament, to open up a substantial debate with the people of Scotland on how to reshape our tax system, new approaches to benefits, and to look at reform of how our services are funded and delivered in Scotland.”

Contacts:

Russell Gunson – r.gunson@ippr.org 07766 904 332
Ash Singleton – a.singleton@ippr.org 07887 422 789

Notes to Editors

IPPR Scotland is a new, non-partisan think-tank working on public policy in, and for, Scotland.

Copies of the report are available from: http://www.ippr.org/publications/new-powers-new-scotland

IPPR Scotland will conduct and publish research, hold events and engage in widespread dialogue on the issues that really matter for Scotland’s social, economic and political future. In all its work, it will be guided by the goals of social justice, democracy and sustainability.

Its programme of research will take shape in the coming months, but early reports will focus on the Scottish labour market, the country’s future skills needs and the tax and spending choices available to the Scottish Government.

IPPR Scotland’s first director is Russell Gunson. Russell previously worked for NUS Scotland for six years, joining as Head of Policy and Public Affairs before taking up post as NUS Scotland Director in 2014. Prior to working for NUS Scotland, Russell worked in parliament, government the voluntary sector and the private sector. Russell is also a Commissioner on the Commission on Widening Access, an independent commission Chaired by Dame Ruth Silver and announced by Nicola Sturgeon, Scotland’s First Minster, late last year. http://www.ippr.org/news-and-media/press-releases/leading-think-tank-ippr-appoints-first-scotland-director

Modelling for the IPPR's tax-benefit calculations were also used in our recent report on the impact of George Osborne's budget and his choices in next months' spending review. See 'The chancellor’s choices: How to make the spending review as progressive as possible while still delivering a surplus' http://www.ippr.org/publications/the-chancellors-choices

The IPPR’s tax-benefit calculations include the following measures announced at the Summer 2015 budget:

- Cuts to the income disregard in tax credits and the work allowances in Universal Credit
- Freezing working-age benefits for four years from April 2016
- Removing entitlement to the family element for new claims or new families entitled to UC or tax credits from April 2017; and
- Limiting support from Child Tax Credit or the child element of UC to two children for new claims or births from April 2017
- The introduction of a National Living Wage, expected to rise to £9 an hour by 2020
- A rise in both the personal allowance and the higher rate threshold of income tax

We assess the combined impact of these measures (before housing costs) on Scottish households in 2020, with our figures deflated to 2015/16 prices. The model looks solely at the initial impact of the summer budget announcements, before considering any change in household’s behaviour (such as the National Living Wage as an incentive for individuals to move into work).