Scottish experts expect tax freeze won’t last

Tax specialists across Scotland have reacted to yesterday’s budget announcement that saw finance secretary John Swinney rule out an increase in Scottish income tax when Holyrood gets new financial powers next year.

Mr Swinney made the announcement as he unveiled his draft budget to MSPs in the Scottish Parliament in which he also warned that the Scottish budget was set to continue to reduce in real terms until the end of the decade - as he said it had done since 2010.

Mr Swinney noted that with the UK Treasury set to deduct from the Scottish block grant a sum equivalent to the product of 10p worth of income tax north of the border, income tax in Scotland would be pegged to off-set that loss of revenue until new powers come in as a result of the new Scotland Bill next year.

Making the widely-predicted announcement, the finance secretary told the Holyrood chamber: “I propose that the Scottish Rate of Income Tax will be set at 10p in the pound - the rate people pay this year will be the same rate that they will pay next year.

“I hope that from 2017/18 this parliament will have more flexibility in setting income tax rates. However, that will depend on reaching agreement on a new fiscal framework and final passage of the Scotland Bill.”

Holyrood will be given limited powers over income tax rates next April under the 2012 Scotland Act, and reacting to yesterday’s announcement, David Glen, head of Tax at PwC in Scotland, predicted the continued freeze, and the mirroring of Westminster fiscal policy, will not last past the coming of the new powers.

Mr Glen explained that it was “likely that this will only be a one year reprieve” and he expected changes once the long-awaited fiscal framework agreement is reached. “We are likely to see both rates and bands diverge from the rest of the UK from April 2017 giving a more progressive outcome. Expect to learn more about what this will entail before the dissolution of Scottish Parliament in March next year”, he said.

That view was echoed by Martin Bell, head of tax with BDO LLP in Scotland, who said: “As predicted John Swinney has kept the Scottish rate of income tax (SRIT) at the same level as the rest of the UK. He was hampered in how much he could do but did state that he hoped that the system for adjusting rates would be more flexible by 2017-18. This hints at increases in taxation for higher earners when the Scottish government has greater fiscal powers.”

Among the other measures proposed by Mr Swinney were:

More controversial was Mr Swinney’s decision to cut local government revenues by 3.5 per cent for 2016/17, a move that local government body Cosla said was “totally unacceptable”.

The minister was forced to defend the plan.

He said: “If you compare the situation of Scottish local government with English local government - English local government over the last few years has gone down by 27 per cent in its funding and Scottish local government has essentially had flat cash from the Scottish government for a number of years, so it starts from a much higher baseline figure for the provision of local authority service.”

Citing a “significantly constrained” public spending environment, Mr Swinney argued that the revenue reduction had to be seen in the context of funding increases elsewhere.

He explained: “Now the reduction of 3.5 per cent is in resource terms, but that is not the only thing you have to look at.

“You have to look at the fact I announced one of the largest reforms in the delivery of health and social care there has been since the foundation of the National Health Service in 1948 with an injection from the health resources of £250m into the delivery of health and social care services at local level.”

Mr Swinney added: “As a consequence of UK government austerity, the Scottish budget will continue to fall in real terms, as it has done since 2010, until the end of this decade.

“The reality of the public finances are such that if we want to improve our public services, we must be prepared to continually reform the way in which we deliver them.”