Scotland's fiscal affairs - the search for an agreement continues...

09 February 2016

As another meeting between the Scottish government and their UK counterparts about the Scottish fiscal framework ends without agreement, it’s worth reminding ourselves what all the fuss is about.

In order to do so, you need to know what the Scottish tax system currently looks like with regard to the Scottish Rate of Income Tax (SRIT). From 6 April, Scotland can set its own rate of income tax. Under current legislation, this means if the basic rate of 20 per cent increases or decreases, then the higher rate and additional rate of 40 per cent and 45 per cent must do the same.

In his budget last December, John Swinney set SRIT at 10p so that tax rates remain the same as the rest of the UK for 2016/17, believing basic rate taxpayers shouldn’t pay more tax and, conversely, additional rate taxpayers shouldn’t pay less. The position would change if the present Scotland Bill passes through Westminster by devolving the power to set income tax rates and bands to the Scottish parliament. This means Mr Swinney could reduce the basic rate of income tax and increase the higher and additional rates. But to pass the Bill, there must be an agreement on the new fiscal framework for Scotland as set out in the Smith Commission.

There are a number of aspects to the framework discussion, but one of the main elements is the method of calculation of the block grant to replace the Barnett Formula in determining the proportion of the Scottish government budget provided by the UK Treasury. In addition, whatever formula is used must not be detrimental to Scotland or the UK government budgets.

And here’s the problem. The existing block grant comprises about 90 per cent of Scottish government spending, and when the SRIT is enacted, it’ll reduce to around 80 per cent. But if the Smith Commission recommendations in the Scotland Bill come into force, then that could reduce to say 50 per cent. In numbers, if the Scottish government spends £40bn then eventually the fiscal framework formula could account for £20bn of the budget. Scotland can’t afford to get this wrong.

Only if negotiations are successful will the Scotland Act and its powers come into play. The Scottish parliament dissolves on 23 March, with elections held on 5 May. How each political party’s manifestos will look is anyone’s guess, but time’s running out to get this matter sorted if we’re to make the decision to stick or twist.

For further information please contact your usual RSM contact.

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