Finance Secretary Derek Mackay’s latest budget fulfilled some expectations, frustrated others and provided a few surprises. CommonSpace breaks down the big developments.
THE DRAFT SCOTTISH BUDGET for 2018/19, presented before the Scottish Parliament on Thursday afternoon, has promised significant reforms to Scotland’s income tax system, wrong-footed many opposition politicians with unexpected developments, attracted criticism from some quarters for failing to live up to earlier SNP rhetoric, and continued the debate over what the limitations of Holyrood’s powers under current constitutional arrangements.
Much attention was paid to new proposals regarding income tax, widely trailed and speculated upon in the media prior to their announcement, along with the Scottish Government’s plans to lay the groundwork for a Scottish national investment bank, debates concerning the dispersal of funds for public services, and specifics on pay increases for the public sector following the Scottish Government’s unilateral cessation of the public sector pay cap.
Below, CommonSpace takes you through some of the most significant developments from the Scottish budget, and what they mean in practice.
Addressing the chamber of the Scottish Parliament, Mackay said that the Scottish Government “do not take decisions on tax lightly”.
Quoting the four key tests that any potential change in income tax would need to pass – protecting low earners; making tax “fairer”; generating additional revenue for public services; protecting the Scottish economy – Mackay announced that there would be an increase in the charge of 21p for those earning more than £24,000 per year. The higher rates of income tax will also see increases, going from 41p to 46p.
Mackay also announced the introduction of a new “starter rate” of income tax of 19p. This new rate will apply to the first £2,000 of taxable income between £11,850 and £13,830. Combined with an increase in the personal allowance, Mackay said that those earning up to £33,000 per year would be protected from any increase in income tax.
Regarding his decision to increase income tax for Scotland’s top earners by 1p – i.e. those earning £150,000 a year or more – Mackay argued that expert advice had convinced him that a restoration of the 50p top rate would result in the Scottish Government losing revenue.
Mackay said: “Had we gone further, our modelling indicates that once behavioural effects of forestalling are considered a higher rate could actually reduce income tax revenue next year and that’s not a decision any sensible government would take.”
He continued: “I will freeze the basic rate at 20p but to make the system more progressive I will introduce a new intermediate grade of 21p.”
This may be a disappointment to the Scottish Greens, who had advocated a 60p income tax rate for those in the highest earning bracket, and attracted condemnation from the Scottish Conservatives, with shadow spokesperson for Finance Murdo Fraser later arguing Mackay’s new budget told the people of Scotland “don’t be hardworking, don’t be successful”.
Mackay went on to announce that his tax reforms would, in practice, lead to some of Scotland’s lowest earners paying less in tax than they do under the current system. As a result, Mackay argued, Scotland will not just have the fairest tax system in the UK, but for the majority of tax payers, the least expensive.
Constitution and block grant
Debates preceding the budget regarding income tax had been unavoidably tied to the limitations of Scotland’s tax powers, given that the Scottish Government has no control over VAT, corporation tax, fuel duty or the basic personal allowance, all of which remain reserved to Westminster.
Mackay hammered home the Scottish Government’s often-repeated point that, despite claims by Chancellor of the Exchequer Philip Hammond in the UK Treasury’s autumn budget, there have been real-terms cuts to the Scottish block grant, which determines the Scottish Government’s spending limits.
To back this up, Mackay quoted the Independent Fraser of Allander Institute, which recently stated that “by 2019-20 the resource block grant will be around £500 million lower than in 17-18”.
Despite Hammond’s claim that Scotland would enjoy roughly £2bn increased spending power following the autumn budget, Mackay again pointed out that much of this would be in the form of Financial Transactions. “But the reality is,” Mackay went on, “you cannot spend Financial Transactions on teachers, nurses, or police.”
Mackay said that the Scottish Parliament “must also reach a consensus on the powers we need to increase the number of working age people in Scotland”.
This appears unlikely, as the Scottish Conservatives remain opposed to any further powers for Scotland, while Scottish Labour’s Richard Leonard has stuck to a refrain that the Scottish Government should use the powers it already has.
Public sector pay
As was widely expected, Mackay announced that he would bring an end to the Westminster-mandated austerity measure of a one per cent pay cap on public sector employees, guaranteeing a minimum pay increase of three per cent for all public sector workers earning £30,000 per year or less.
Public sector workers earning more than £30,000 will see their wages increase by two per cent, while those earning £80,000 a year or more will have their pay rise capped at £1,600.
These reforms, Mackay argued, demonstrate the Scottish Government’s “commitment to closing he gap between the lowest and highest paid”.
However, a statement from the Scottish Trade Union Congress – which had participated in a demonstration of workers and activists from multiple trade unions earlier in the day calling for public sector pay increases and an end to cuts – said that the budget “falls short of the commitment to our public workers and services that Scotland deserves”.
The STUC continued: “We recognise that the Finance Secretary has a difficult job in protecting Scotland’s budget against UK austerity. The smug self-satisfaction of the Scottish Tories belies the havoc that their government is wreaking on public services across the UK.
“Scottish workers have made their demands clear, and dialogue between the STUC and Derek MacKay has emphasised the urgency of a real-terms pay rise for all public workers.
“He can expect to see a sustained campaign from public workers to begin a real process of restoring their livelihood. The issue of public sector pay will not disappear.”
National Investment Bank
The groundwork for a Scottish National Investment Bank, first announced at the SNP’s autumn conference in October, will have £340m set aside for initial capitalisation.
Commenting on the announcement, Friends of the Earth Scotland head of campaigns Mary Church said: “It’s encouraging to see a timescale and capital commitment for the Scottish National Investment Bank laid down in this budget. The bank must be given a remit that enables it to have a real impact in tackling inequality and building the zero carbon economy, investing in the transformation of our transport, heating, housing and electricity.
“Going forward the Scottish National Investment Bank should work closely with the recently announced Just Transition Commission and government-owned energy company to deliver a joined up economic strategy that puts tackling climate change at its heart.”
Despite widespread concerns throughout the Scottish arts sector that a budget squeezed by protecting public services, combating Tory austerity and the looming threat of Brexit would see cuts to government funding of Scottish arts and culture organisations, the new budget confirmed reports from earlier in the day that arts funding would be protected.
Creative Scotland, the development body for Scotland’s creative industries that has faced an overall drop in funding of £12m since 2014/15 – in part due to reduced funding from the UK National Lottery – saw its budget go from £52.1m in 2017-18 to £70.5m in 2018-19, and increased overall culture funding by almost 10 per cent.
Commenting, SNP MSP Ben MacPherson said: “Against a backdrop of Tory government austerity and their blind pursuit of a hard Brexit – this budget, the most challenging budget in the history of the Scottish Parliament, will maintain provision for Creative Scotland over the next three years and invest a further £6.6m to help protect the arts in the face of declining Lottery receipts, as well as providing £10m in a dedicated screen unit.”
Scotland’s universities and colleges will see a real terms increase in their funding via approximately £1.8bn extra in investment.
Pursuing its commitment to a low-carbon economy, a further £60m will be committed to a low-carbon innovation fund and £20m will go towards electric vehicles. Environmental concerns will also inform the £1.2m invested in transport infrastructure.
Total infrastructure spending for 2018-19 will amount to £4bn, part of a promised £20bn investment over the course of the current parliament.
Investment in NHS Scotland will increase by over £400m – roughly £200m more than inflation called for. Mackay also pledged that attention would be paid to developments in the NHS elsewhere in the UK, so that settlements for NHS employees remains “at least” as fair as elsewhere in the UK.
£243m will be further invested in the Scottish Government’s policy of free nursery education and childcare, which Mackay has also pledged to maintain.
Funding for Police and Fire services in Scotland will be protected, and the services in question will retain VAT refunds recently secured from the UK Treasury’s U-turn in full, though whether this satisfies recent demands from the Fire Brigades Union Scotland remains to be seen.
£600m will be invested in superfast broadband to ensure that every Scottish home and business has access to superfast broadband by 2021.
Picture courtesy of Petras Gagilas
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