Scotland needs more devolved powers before it can hike income tax – think tank

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Scotland needs more powers to be devolved before income tax can be increased, a think tank has warned.

Reform Scotland has urged the Scottish Government to resist increasing income tax until it has control over additional levers such as VAT and corporation tax.

Finance Secretary Derek Mackay is widely expected to announce tax rises when he sets out his draft budget at Holyrood on Thursday in a bid to raise more cash for public services.

First Minister Nicola Sturgeon has already set out four alternative options which would see ”modest” rate rises for higher earners, indicating that those on salaries of more than £31,000 could be affected.

The options include having anything up to six income tax bands, with three of the four featuring a 50p additional rate and incremental changes to the basic and higher rates.

The approaches could raise between £80 million and £290 million in additional revenue.

But Reform Scotland called for income tax to be pegged to the Westminster level until more powers are devolved, arguing that ” coherent” reform is not possible while the Scottish Parliament still raises only around 40% of what it spends.

The organisation said there was a “disproportionate dependence” on income tax, which accounts for around two-thirds of all the tax raised by Holyrood.

Chairman Alan McFarlane said: ” Altering the income tax rate to make it different from Westminster, far from being beneficial, could be detrimental to Scotland’s economic performance and lead to a drop in revenue available to spend on public services.

“The Scottish Government has itself acknowledged the potential for adverse behavioural change in response to income tax policies. We need more tax levers to equip us to introduce coherent reform.”

Meanwhile a Survation poll of 1,006 adults for the Sunday Post found that almost half (46%) backed a rise in income tax to raise money for public services, with 28% opposed and the remainder saying they either did not know or did not care.

But when asked what the government should do first to provide extra cash for public services, 61% backed a spending review and 22% said income tax should be raised while the remainder said neither or didn’t know.

The minority SNP government will need to win the support of either the Liberal Democrats or the Greens to get its budget through the Scottish Parliament.

The Lib Dems want to add 1p to the basic, additional and higher rates while t he Greens have proposed a four-band system which would see those on low incomes pay less and those on higher incomes taxed more.

Scottish Labour proposed increasing the basic rate and higher rate by 1p, and an increase in the additional rate to 50p, but the Tories have argued against raising tax in Scotland beyond the rates paid elsewhere in the UK.

A Scottish Government spokeswoman said: “The serious economic threat posed by Brexit, coupled with continuing UK Government austerity following the UK Government’s budget last month, means we are seeing increasing pressure on our public services, and the time is right for a discussion about how we protect these vital services.

“That is why we have started a conversation, including the publication of our discussion paper, to look at how best to use our income tax powers.

“Our income tax discussion paper outlined four key tests that we feel any change in income tax must meet. One of those was that, when combined with our spending decisions, any change in tax policy should support the economy.

“Following this careful and considered discussion, we will publish a balanced package of tax and spending proposals as part of the draft budget on December 14.

“In relation to the range of economic interventions we would like to make to support the Scottish economy, we are limited in what we can do, but that’s no reason not to use the powers we do have.”

The Scottish Conservatives have called for the Government to cut public sector waste rather than raise taxes.

The party released analysis of budget overspending by the SNP Government, claiming that “poor fiscal management” had cost the taxpayer almost £1 billion.

Finance spokesman Murdo Fraser said: “The case for tax rises gets weaker by the day.

“The Scottish Conservatives have found almost £1 billion for the SNP within their current budget that has simply been lost due to poor financial management.

“This is obviously money that could be spent on schools and hospitals and all public services that must be properly financed.

“Rather than tackle their own spending habits, the SNP would prefer to inflict unnecessary and punitive tax rises on hard-working Scottish taxpayers.”

A Scottish Government spokeswoman added: “We manage our budgets and resources very effectively and our latest annual accounts for 2016-17 show the accounting underspend was the lowest since devolution.

“For the 12th consecutive year, the Scottish Government accounts were given a clean bill of health by Audit Scotland, who highlighted our effective management of public finances.”

The spokeswoman added that the UK Government was cutting the Scottish Government’s block grant by £2.6 billion in real terms over the 10 years to 2019-20.

SNP MSP Ivan McKee said the Tories were ” the last people who can talk about financial responsibility”, adding that the UK Government ” has wasted hundreds of millions over the past decade on fruitless spending – and the biggest waste of public spending of all are the tens of billions they want to waste on Trident.”

Meanwhile Scottish Green co-convener Patrick Harvie told the BBC’s Sunday Politics Scotland programme that while talks had taken place a deal had not been struck with Mr Mackay on the budget.

He said his party’s priorities were a minimum pay increase of at least inflation in the public sector, protecting local government services by reversing cuts and fairer taxation.

Mr Harvie said he believed his party had ” won the argument” that the income tax system needed restructuring rather than just tweaking in order to protect low earners while making higher earners pay a bit more.

He said: “I don’t see how Derek Mackay can present a budget that even meets SNP policies if it’s a standstill on tax and seeing a reduction on the revenue side from the block grant. It just doesn’t add up.

“I think we’re very likely to see more rates and bands of income tax being proposed by the Scottish Government because we seem to have won that argument.”

Speaking on the same programme, Scottish Liberal Democrat leader Willie Rennie, who wants £500 million for colleges, schools and nurseries and more investment in mental health, said his party had also had discussions but had not made a deal .

Asked if he would trade support for the budget in exchange for the SNP backing a referendum on the final Brexit deal, Mr Rennie said it was an “interesting idea” that he might raise with Mr Mackay but added: “That on its own is simply not sufficient. We need to have that transformational investment in education .”

He said talks had taken place between Scotland’s Brexit Minister Mike Russell and Lib Dem MSP Tavish Scott, adding: “We’ve been encouraging them to move from just considering to fully supporting our proposal.

“We think it’s the best way of avoiding a dangerous Brexit and the impact on the economy that would come with that. But we’ve got to get the SNP over the line to fully support it yet.”

Mr Rennie added that he was open to further discussions on the issue.

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