Taxing Times: Derek Mackay’s First Budget

The Cabinet Secretary for Finance and the Constitution, Derek Mackay unveiled his first Budget setting out the Scottish Government’s tax and spending plans for the year ahead. It was an “historic” occasion, with the Scottish Government now responsible for raising half their budget in 2017/18, with the plans being underpinned by the powers devolved by the Scotland Act 2016 as well as taxes already fully devolved.

The Scottish Government’s Budget is usually outlined in September but this was delayed in order to take into account the UK Government’s Autumn Statement. Mackay faced strong criticism from opposition parties (as well as from the Convener of the Finance Committee) for this decision as many feared it would leave insufficient time for proper parliamentary scrutiny.

On Budget day itself, Mackay was also criticised on social media for his oratory – one top political journalist likened the style of delivery to the narrator of a primary two nativity play – but what really matters is the substance of his Budget and whether the Scottish Government can secure the support of other parties.

Budget Key Points

Mackay insisted that his Budget provided “support for the economy, for jobs and for household incomes, through a fair and balanced set of tax and spending proposals.” All in all, it contained few surprises, with the Scottish Government’s U-turn on using council tax revenues to tackle the attainment gap being trailed on the front-page of the Herald on the morning of the Budget.

Some of the headline Budget figures included:

Income Tax: the basic rate was frozen at 20%; the higher rate was frozen at 40%; the higher rate payment threshold was frozen at £43,430; and the additional rate would remain at 45%.
Land and Buildings Transaction Tax: LBTT remains unchanged.
Scottish Landfill Tax: the standard rate will increase to £86.10 per tonne and the lower rate to £2.70 per tonne.
Business Rates: the poundage will reduce by 3.7% to 46.6p, while the Small Business Bonus was extended.
Air Passenger Duty: a new Air Departure Tax will replace APD and will be cut by 50% by the end of the parliament as set out in the Programme for Government.

From a political perspective, one of the more intriguing aspects of the Budget was the sole income tax differential between Scotland and the rest of the UK. With the higher rate being set at £43,430, rather than rising in line with that set by Westminster, it means an estimated 420,000 workers will pay £314 more tax than their counterparts elsewhere.

However, that remained the only divergence. While noting he was “sympathetic” to calls to increase the top rate from 45p to 50p, Mackay spoke of the need for a “balanced approach” and later told Scottish Labour’s James Kelly that increasing the top rate risked losing revenue.

Perhaps the Cabinet Secretary has started to swot up on the Laffer Curve after previously admitting ignorance of the theory

What’s Next?

The Scottish Government’s Budget will be assessed by parliament and committees (which have already engaged in some pre-Budget scrutiny), with the final vote taking place in late February 2017.

In the week prior to the final budget vote, there will also be a separate vote on tax. But as Wednesday’s vote at Holyrood showed, we are far from achieving a consensus on tax policy amongst Scotland’s political parties.

Political Horse-Trading

As a minority administration, the SNP will require opposition support, or abstentions, for its Budget to pass. However, as things currently stand, none of the opposition parties will support the Mackay’s Budget in its present form:

• Shadow Cabinet Secretary for Finance Murdo Fraser argued the measures outlined would turn Scotland into the highest taxed part of the UK;
• Scottish Labour Leader Kezia Dugdale accused the Scottish Government of ripping the heart out of local services;
• Scottish Green Leader Patrick Harvie said Mackay would have to “do a lot more listening”, asserting that he had to be more progressive on taxation;
• While Scottish Liberal Democrat Leader Willie Rennie said the SNP “had miles to travel” before they could count on his party’s support.

Just like with the last minority SNP administration, Mackay has dangled the threat of an early election if the opposition seek to scupper his plans. In 2009 when the Scottish Government’s budget was defeated by one vote, the then First Minister Alex Salmond threatened an election if MSPs blocked the budget on the second vote. A week later, the Scottish Government secured near-unanimous support for their revised Budget.

The Scottish Government have between now and February to convince their opponents. Let the political horse-trading commence.