WITH new taxation powers at its disposal, the Scottish government’s 2018-19 Budget is the most significant since devolution and afforded a real opportunity to begin to reverse Westminster austerity, to invest in public services, raise public-sector pay and stimulate the economy.
While the draft Budget presented to Parliament on December 14 offered some relief from austerity and public-sector pay restraint, its lack of ambition was distinctly disappointing — a characteristic evident in its income tax options paper published in advance.
It is commendable that the Scottish government has sought to stimulate a debate on income tax, something that is long overdue and which the STUC urged the First Minster to do earlier in the year.
Unfortunately, none of the options presented in its paper were sufficiently ambitious to protect public services or public-sector pay or to meet the objective of stimulating inclusive growth.
What’s more, the paper illustrated a confusion in government thinking over the concepts of progressivity and redistribution, which ultimately fed through to the income tax proposals set out in the draft Budget.
A focus on progressivity alone is not enough. The British tax system is already relatively progressive.
What really matters is the overall amount of tax revenue generated and how it is redistributed.
Some of the most equal economies and societies — Sweden, for example — have tax systems that are more regressive than Britain’s, but generate more tax overall and distribute wealth more equitably.
In its 2018-19 draft Budget, the Scottish government proposed an increase in the number of tax bands from three to five, with rates ranging from 19 per cent for the lowest band to 46 per cent for the highest. The level of savings made by the lowest earners is less than 1 per cent.
Similarly, there is little change for the highest earners. Even those earning more than £200,000 per year will be less than 1 per cent worse off.
While it can be argued that this creates a more progressive tax system, its positive impact on inclusive growth is highly questionable.
The Scottish Fiscal Commission, the independent body responsible for forecasting Scottish tax revenues, expenditure on social security and onshore GDP, estimates that just £164 million will be raised in the year ahead as a result of the government’s income tax proposals.
The STUC’s pre-Budget analysis illustrated that it was possible to generate somewhere in the region of £800m while seeing no tax increases for anyone earning below the median income, with only a modest and affordable impact on earners.
What’s more, the commission also estimates that the revenue raised in income tax is offset primarily by tax breaks for business of around £96m.
When added to support for first-time housebuyers and funding to raise the carer’s allowance, only £28m in additional revenue is available for investment in public services.
There is no evidence that these tax breaks for business are an effective means of stimulating the economy and creating jobs — a view confirmed by the Scottish Fiscal Commission’s own analysis.
This stands in contrast to its views on the stimulus that could be generated by the government’s proposed changes to public-sector pay policy.
Specifically, the government committed to a guaranteed minimum increase of 3 per cent for public-sector workers who earn £30,000 or less; set a limit of up to 2 per cent for those earning above £30,000 and below £80,000; and a limit to the pay increase for those earning £80,000 or more to £1,600.
While the government’s pay policy will be the benchmark for all major public-sector workforce groups, including the NHS Scotland, firefighters and police officers, teachers and further education workers, only around 50 per cent of public-sector workers are likely to be covered and, of those who are, around half will receive the 3 per cent pledge. Nearly 50 per cent of NHS staff, including 20 per cent of nurses, will have their pay award capped at 2 per cent.
Furthermore, these modest proposals exclude local government and, for those to whom it does apply, the government has stressed that pay awards “must be affordable.”
Without the necessary funding, its pay policy is no more than an aspiration. With local government facing a real-terms cut in funding, and with the 3 per cent maximum allowable increase in the council tax equivalent to around a 1 per cent increase in pay, it is difficult to see how councils can match the government’s pay aspiration without further jobs and service cuts.
The pay cap may have been lifted, but with inflation running at 3.3 per cent when housing costs are taken into account, every public-sector worker in Scotland faces another a real-terms pay cut next year.
With its 2018-19 Budget, the Scottish government had the opportunity to chart a different course, to fund public services, raise public-sector pay and stimulate inclusive growth in the economy.
Instead it proposes to fund tax breaks for businesses, for which there is no evidence of a positive economic impact, and to implement modest personal tax and public-sector pay policies that will have minimal effect.
Given the parliamentary arithmetic, there remains some scope, albeit limited, to amend the Budget before the Finance Bill is approved in February.
For the government to secure the support of the Greens necessary to pass the Bill, an increase in funding for councils — paid for by a further increase in the tax rate for the highest band — appears to be the minimum requirement.
The STUC will, of course, continue to press for a guaranteed real-terms pay award for all public-sector workers as the first step in restoring what has been lost during the years of austerity, for adequate funding for public services and for all support to business, including tax breaks, to be based on objective evidence of its positive impact on inclusive growth and fair work.
Achieving inclusive growth, by reducing poverty and inequality and the adoption of fair work practices, will need a bolder policy programme than is evident in the current Scottish government’s approach to taxation and public spending priorities.
Grahame Smith is general secretary of the Scottish Trades Union Congress.
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