Finance
Scottish Policy Forum Paper no. 16
Dear Colleague,
This Scottish Policy Forum paper deals with one of the most vital topics at the Scottish
Parliament – Finance. The decisions made in allocating roughly £30bn in Departmental
Expenditure Limits affect all aspects of Scottish public policy, from education through health
to capital infrastructure. The revenue-raising powers of the Scottish Parliament, significantly
extended by the Scotland Act 2012, affect our daily lives (e.g. through income tax) and the
business environment (e.g. non-domestic rates).
Scottish Conservatives have traditionally been very active in this portfolio, scrutinising
spending decisions, opposing anti-business policies and aiming for an efficient and effective
public sector. The forthcoming revenue-raising powers in particular give us an
unprecedented chance to show our strengths based on Conservative principles.
This paper summarises the portfolio on both sides of the equation – revenue and
expenditure – and poses questions throughout. Your answers will help guide our approach
as we look towards the 2015 and 2016 manifestos and I hope many of you will find the time
to respond.
The deadline for submissions is 16 May 2014.
I look forward to reading your comments.
Yours faithfully,
Gavin Brown MSP
Economy & Finance Spokesman
1. Scottish Finances Overview
We felt it would be useful to start this paper with an overview of Scottish finances as a
whole and an introduction to the main components of the annual Scottish budget. In
sections 2 and 3 we will explore the various sources of revenue available to the Scottish
Government as well as the different items of expenditure it chooses to spend its budget on.
Conservatives have always been the party of fiscal responsibility. In Government we have
taken steps to clear up Labour’s mess – through some hard choices we are reducing the
deficit and the Chancellor made it clear he wants to run a budget surplus by the end of the
decade so we can start bearing down on our debts too.
a) Government Expenditure & Revenue Scotland
The independence referendum has resulted in increased scrutiny of Scotland’s finances, but
inevitably also brought different interpretations of Scotland’s fiscal position. Most of the
data available is classed as ‘experimental’ as exact agreed models do not exist – this applies
to the geographical allocation of UK spending (e.g. defence), North Sea oil revenues or Gross
Domestic Product. Nonetheless, the Scottish Government uses this data annually to release
the Government Expenditure and Revenue Scotland publication which offers a comparative
snapshot of Scottish and UK public finances.
North Sea Oil & Gas
Unsurprisingly, Scotland’s fiscal balance sheet depends heavily on the revenue raised from
North Sea Oil & Gas activity and the allocation thereof. The Scottish
Government/SNP/YesScotland exclusively use a geographical allocation of oil revenues,
based on maritime boundaries. This allocates approximately 85-95% of all revenue to
Scotland. An alternative allocation would be per capita, which would be a significant
reduction to around 8.4% of revenue.
In terms of overall North Sea revenue, it has proven to be highly volatile due to its
dependence on global oil and gas prices. Total UK revenues reached their peak in the 80s,
falling sharply throughout the 90s and picking up again 2005 onwards. Long term
projections are almost exclusively downwards, mainly due to the anticipated costs
associated with the extraction of oil from marginal fields.
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Fiscal Balance
Offshore tax receipts influence the overall fiscal balance of both Scotland and the UK. Oil
price volatility is, self-evidently, better absorbed in a larger entity. The latest GERS figures
show that Scottish oil revenues dropped from £10bn in 2011/12 to £5.5bn in 2012/13. The
£4.5bn drop is the equivalent of the entire Scottish schools budget.
Table 2.3 shows a breakdown of all Scottish revenue, regardless of who collects it.
Expenditure (public spending by all tiers of government) is harder to identify since there are
items of expenditure that are not geographically based – most importantly defence. GERS
uses complex models to estimate these figures for Scotland.
3
The summary tables below, combining long-term GERS data, show that the last time both
UK and Scottish finances were running a fiscal surplus was in 2000/01. Both have run a net
fiscal deficit ever since then.
Year
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
Scotland
onshore
31,082
31,769
32,332
34,575
36,811
39,689
42,063
44,815
43,772
42,054
44,318
46,315
47,566
Year
2000/01
2001/02
2002/03
2003/04
2004/05
2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
Total Tax receipts (£ million)
Scotland
offshore geographical
share
UK
3,756
381,528
4,506
388,391
4,478
394,956
3,727
421,856
4,541
451,332
8,017
485,800
7,505
517,082
7,112
546,968
11,577
536,271
5,679
516,109
7,454
555,506
10,000
576,933
5,581
586,925
Total Expenditure (£ million)
Scotland
revenues as
UK %
9.13%
9.34%
9.32%
9.08%
9.16%
9.82%
9.59%
9.49%
10.3%
9.2%
9.3%
9.8%
9.1%
Net Fiscal Balance (£million)
Scotland
UK
2,323
39,979
-730
-802
-3,910
-25,974
-5,664
-33,343
-5,314
-41,143
-2,301
-37,933
-3,293
-33,076
-3,998
-36,719
-4,091
-99,354
-14,354
-157,294
-12,322
-139,199
-8,554
-117,382
-12,058
-114,756
Scotland
(identifiable +
nonidentifiable)
32,515
37,005
40,720
43,966
46,666
50,007
52,861
55,925
59,440
62,087
64,095
64,869
65,205
UK
341,549
389,193
420,930
455,199
492,475
523,733
550,158
583,687
635,625
673,403
694,705
694,315
701,681
Scotland
expenditure
as UK %
9.52%
9.51%
9.67%
9.66%
9.48%
9.55%
9.61%
9.58%
9.4%
9.2%
9.2%
9.3%
9.3%
Net Fiscal Balance (%GDP)
Scotland
UK
2.47%
4.05%
-0.76%
-0.08%
-3.92%
-2.39%
-5.48%
-2.89%
-4.81%
-3.39%
-1.92%
-2.96%
-2.64%
-2.45%
-2.87%
-2.56%
-2.90%
-6.90%
-10.70%
-11.00%
-8.50%
-9.30%
-5.80%
-7.60%
-8.30%
-7.30%
The Scottish Government/SNP/YesScotland have all recently argued that Scotland is not
getting her fair share of spending. They point out that in 2011/12 Scotland raised 9.9% of all
taxes1, but only received 9.3% of all spending. However, the percentages do not relate to
the same number as expenditure comes from borrowing too and not just tax receipts. 9.9%
of receipts equals £57bn and 9.3% of spending equals £64bn, leaving a deficit of £7bn.
With the publication of the latest GERS figures, the situation was completely reversed, with
figures for 2012/13 showing Scotland raised 9.1% of all taxes, but received 9.3% of all
spending. The Scottish Government/SNP/YesScotland started pointing out 5-year-averages
to counter this change – the oldest trick in the book. Picking different time-periods would
support the opposite arguments too.
1
GERS 2014 revised this down to 9.8%
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b) Scottish Budget
Making sense of the Scottish Budget can be a challenging exercise due to different powers
and responsibilities of various tiers of government. Presently, the overall pot of money
available to Scotland comes to a large extent via a block grant from HM Treasury with the
remainder topped up through local taxation (business rates and council tax). The Cabinet
Secretary for Finance sets the budget for all areas under his responsibility, as well as
providing a grant to local authorities. These, in turn, set their local budgets by combining the
grant with locally-raised income (council tax, asset sales, etc.). Business rate income is
included in the central budget as they are collected centrally and redistributed.
The Scottish Budget presented to Parliament annually is made up of three main elements:
revenue Departmental Expenditure Limit (DEL), capital DEL and Annually Managed
Expenditure (AME). Without going into specifics, the Government only has discretion over
the DEL elements.
The present constitutional settlement means that Scotland has to balance its annual budget,
although the Scotland Act 2012 devolved limited borrowing powers (discussed below).
Negotiations are still ongoing on how the block grant will be adjusted in the future. Recent
years have seen real terms cuts to the block grant as part of the deficit reduction strategy by
the Coalition Government, although it has been going up in cash terms.
5
The Scottish Government has complete discretion to allocate its DEL budget across its
portfolio responsibilities, subject to some practical constraints like multi-year funding plans.
The table below shows how the draft 2014/15 budget is spread across the different
portfolios.
The largest budget component by far is taken up by the Health budget accounting for
around 40% of all spending. This is followed by the local government grant (much of which
goes on Education) and the central Education and Justice budgets. We will look at the kinds
of spending in section 3 below.
Q1: In light of recent budget pressures, should the Scottish budget be balanced
through higher taxation, lower public spending or a mixture of both?
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2. Scottish Revenue
It is not the purpose of this paper to debate constitutional issues and the fiscal powers of
the Scottish Parliament in any shape or form. We will look at the situation as it is now and
following the full implementation of the Scotland Act 2012 and we seek views on what our
approach should be to the fiscal powers available. All party members were invited to send in
their views on the devolution settlement as part of the Strathclyde Commission evidencetaking process.
Current Scottish fiscal levers were already discussed in SPF 8 on Local Government, so we
provide a summary of responses from last year. We felt, however, that it would be useful to
ask SPF members for further views on some of the specifics of business taxation.
a) Current fiscal levers
Apart from levying user charges (e.g. bridge tolls, prescription charges or the planned 5p
plastic bag charges), the pre-Scotland Act 2012 fiscal powers of the Scottish Parliament are
limited to property – council tax on domestic property and business rates on non-domestic
property.
While the poundage rate paid by businesses is set centrally, council tax levels are a matter
for local authorities. However, the council tax freeze in place presently has effectively
overridden council discretion.
Several exceptions and extra levies have been put in place for both of the above by
devolved governments since 1999.
i. Local domestic taxation
Council tax and council tax freeze
The SNP minority Government introduced a council tax freeze in 2007. It was introduced as
part of a redesigned relationship between local and central government, where councils
agreed to a specific set of outcomes and requirements in return for more autonomy in
spending choices. While so-called ring-fenced grants (central funding that could only be
used for a specific purpose) were reduced, Scottish councils effectively lost the power to
increase their main source of income – council tax.
Local authorities, in theory, still have the option to increase council tax and formally reject
the offer from the Scottish Government, but they know their revenue grant would be cut
elsewhere.
The Scottish Government has since 2007 provided £70 million annually across Scotland to
cover inflation increases.
The SNP has also signalled its intention to continue with the freeze until the next Scottish
Parliament elections in 2016, which translates into a cumulative cost of over £3 billion.
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Some local authorities have claimed that the funding provided is not enough to cover the
increased budgetary pressures for service delivery.
SPF 8 Summary
There was a relatively mixed response to the question of the council tax freeze, reflecting
the fact that it is politically difficult – as acknowledged by many. A good few respondents
argued that the freeze was financially unsustainable in the long term and was clearly
undermining local democracy. Some have recognised that individuals in higher council tax
bands benefit disproportionately from this policy. On the other hand, those in favour argued
that for all its shortcomings, it does provide direct help to struggling families in difficult
economic times. Others have argued that the policy might actually force councils to think
about efficiency and cutting superfluous services. A few options for reform were also
mentioned, including inflation-linked caps or freezing low tax bands only.
Overall there was little opposition to examining alternatives to council tax, even though only
a few respondents expressed their particular preferred option.
ii. Local business taxation
Scotland’s councils collect over £2 billion in business rates every year, which accounts for
around a fifth of their expenditure. It is a common misconception, however, that councils
have complete control over this revenue. In actual fact, until recently Scottish councils had
no control over business rate income and therefore little incentive to promote business
growth in their areas.
Business rates are paid to local authorities based on the poundage rate (set yearly by the
Scottish Government) and the rateable values of the properties (revaluated every 5 years).
These are then pooled centrally and reallocated to councils. Until recently this was done on
a population basis, meaning that most authorities received much more than they collected.
The Scottish Government postponed the planned revaluation of business property until
2017, which means that businesses are still paying ‘good times’ rates even though property
values clearly dropped following the global economic downturn. The fact that business rates
are unresponsive to sudden changes in property values adds to the criticism of the rates
system as a whole.
Since business rates are linked to property rates, the system itself discriminates against High
Street shops to the benefit of online (‘dotcom’) businesses. The business rate system
essentially dates back centuries predating any online trading. Furthermore, there are several
categories of business which are treated differently for the purposes of business rates and
are either exempt completely (e.g. agricultural land and property) or draw different levels
of discount (e.g. small businesses, rural businesses, etc.).
Several think tanks and business groups have proposed a whole-sale re-think of nondomestic taxation. Most recently in February 2014 the British Retail Consortium suggested
linking local business taxation to a different measure than property – for example energy
usage. This would be both indiscriminate and incentivise energy efficiency.
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Q2: What can be done to address the disparity between High Street and ‘dotcom’
businesses?
Q3: Are there good reasons for treating different businesses differently in relation
to taxation – be it exemptions or discounts? If there are, which ones should be preferred?
Poundage rate
The amount businesses
pay is linked to property
values, but is calculated by
multiplying the rateable
value of a business
(roughly the amount that
the property would be
expected to raise in annual
rent) with the poundage
rate.
It is the responsibility of
the Scottish Government
to set the poundage rate
annually. Since 2007 the Government has decided to match the UK Government’s rate and
is committed to do so for the lifetime of this Parliament, whereas before the poundage rate
was about 11% higher in Scotland. The table shows the poundage rates across the UK over
the last few years.
Peculiarly, the poundage rate always increases by September’s RPI, although it has this year
been capped at 2% by the Chancellor. The fact that it is based on one month’s inflation data
means that businesses are vulnerable to unpredictable monthly shocks and are also more
limited in long-term forward planning.
Q4: Should our aim be matching UK poundage rate levels or should we aim to
lower the rates when conditions allow?
Q5: Would you prefer an alternative poundage rate setting based on, for example,
a 12 month average as opposed to a monthly snapshot?
Business Rates Incentivisation Scheme
The Scottish Government introduced a Business Rate Incentivisation Scheme in April 2012,
where each council is given a business rate target (approximately the amount they are
estimated to take in) and if they exceed this target, they will be able to keep 50% of the
extra income. Scottish Conservatives have argued that councils should be able to keep 100%
of the extra income.
Recently, the National Review of Town Centres External Advisory Group Report proposed
the creation of a BRIS+ for town centres, where local authorities would be allowed to keep
100% extra of what is collected in town centres – agreeing with our approach on a more
limited scale.
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b) Scotland Act 2012
Following the Calman Commission recommendations, the Coalition Government passed the
Scotland Act 2012, which gradually devolves significant fiscal powers to the Scottish
Government. This section looks at these powers and seeks views on what our approach to
these should be. Scottish Conservatives have a very good opportunity to differentiate our
approach from our left-leaning political opponents
i. Scottish Rate of Income Tax
The most significant proposal to come from the Calman Commission is the devolution of a
proportion of income tax to the Scottish Parliament. The Scotland Act 2012 establishes a
Scottish Rate of Income Tax, which will be up to the Scottish Parliament to determine
annually from 2016. Scottish income tax receipts across all bands will be topsliced by 10
pence and the block grant adjusted accordingly (although the exact method has not been
agreed yet).
The powers over thresholds, bands and allowances have not been devolved and continue to
be determined UK-wide. The Scottish power is also constrained by the so-called ‘lock-step’,
which means that the SRIT has to be set equally across all tax bands:



should SRIT be set at 10, it would apply to all bands bringing income tax in line with
the UK (20, 40, 45)
should SRIT be set at 5, it would mean a cut for all tax bands: 15, 35, 40
should SRIT be set at 15, it would mean a tax rise for all tax bands: 25, 45, 50
Income tax receipts in Scotland amount to over £10bn every year. GERS provides estimates
of the revenue that would have been raised had a SRIT regime been in place over the last 5
fiscal years:
Any changes to the rate of income tax would have a significant budget impact in Scotland.
Very crude estimates show that a one percentage change in income tax rates could add or
remove at least £500million in the Scottish budget. We have indicated that we would like to
see a reduction in the level of income tax in the future, prioritising family budgets over
government budgets.
Q6: Do you think we should aim for a reduction in income tax once Scotland gains
the powers in 2016?
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ii. Land and Buildings Transaction Tax
The second most significant fiscal power devolved via Scotland Act 2012 is the power over
land and building sales – stamp duty. UK stamp duty will be disapplied in Scotland from April
2015 and the Land and Buildings Transaction Tax (Scotland) Act will come into force.
The Scottish Government are also setting up a new body to collect and administer the tax –
Revenue Scotland. Compared to income tax, the LBTT only accounts for a fraction of Scottish
receipts, as can be seen below. The overall revenue is split roughly 50:50 between income
raised from businesses and individuals.
The power is not constrained in any way and Scotland can set thresholds and rates
according to Scottish priorities. The Scottish Government has refused to publish the first set
of rates ahead of the referendum even though the Scottish Conservatives pressed them to
reveal their approach by April 2014. This is of particular importance to businesses, some of
which are making long-term investment decisions right now.
One crucial change introduced in the LBTT Act was to replace the old ‘slab’ approach (where
overall property values are charged at the same rate) with a progressive approach similar to
income tax (where slices of value are charged increasing rates).
Q7: We have considerable leeway in using this new power. Do you have any
suggestions for us in terms of rates, thresholds or exemptions for domestic transactions?
Q8: Do you have any suggestions for us in terms of rates, thresholds or exemptions
for commercial transactions?
iii. Landfill Tax
The smallest of the three SA12 devolved taxes is landfill tax. It is estimated that landfill tax
receipts will generate £107m in the year of introduction (2015/16) falling to £40.5m in
2025.2
2
SPICe – Landfill Tax (Scotland) Bill Briefing – 13/32
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The UK Government introduced landfill tax in 1996 to ensure that landfill waste was
properly priced and to discourage the disposal of waste to landfill. It has contributed to a
reduction in waste sent to landfill of 59% between 2000 and 2010. In Scotland, the landfill
tax will be collected (administered) by SEPA on behalf of Revenue Scotland.
Most of this tax is actually paid by local authorities. In 2010/11 £86m out of £97m was paid
by councils. Two rates currently exist:


£72 per tonne for active waste
£2.50 per tonne for inert waste
There is relative consensus that the tax works as designed and the Scottish Government has
indicated that it broadly intends to keep the same rates regime.
Q9: Do you have any suggestions in relation to landfill tax?
iv. Borrowing Powers
The Scotland Act 2012 enables Scottish Ministers to borrow for capital purposes up to a
cumulative maximum of £2.2 billion and a further cumulative maximum of £500 million for
revenue spending. Negotiations are ongoing on the exact details of these powers, but there
are certain to be limits on how much can be borrowed annually as well as cumulatively.
These powers should be fully in place from April 2015. Recently it was announced that the
Scottish Government will be allowed to issue its own bonds, provided this is done within the
same limits.
The 2014/15 draft Budget set out Scottish Government plans for borrowing the full amount
of £296 million in capital borrowing in 2015/16, when the powers come in.
Q10: What should be our approach to capital and resource borrowing in Scotland?
v. Further Taxes
One of the most significant provisions in the Scotland Act 2012 is often overlooked. SA12
amended the Scotland Act 1998 to provide for a simpler mechanism that allows further tax
devolution and the creation of new taxes (by Order in Council). In practice this means that
only subordinate legislation is required for the creation of new taxes.
Q11: Should we pursue the creation of any new taxes in Scotland?
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3. Scottish Expenditure
The other side of the coin in the Finance portfolio is where and how money is spent –
Scottish Expenditure.
The budget for the financial year 2014/15 was passed in February 2014. We have criticised
the draft budget for its lack of business support.
a) Scottish Resource Spending
It is not in the remit of this paper to provide a detailed breakdown of all Scottish spending.
The 2014/15 budget spending breakdown (level 4 detail) consists of an overwhelming list of
more than 1,000 items of spending across all portfolios. The table we provided above in
Section 1 shows a level 2 spending breakdown to give you a rough idea of the spending
envelopes per portfolio.
We invite you to identify the most appropriate approach you think we should take in looking
for budget savings, or indeed whether we should look for budget savings at all. Most
importantly, we would appreciate views on whether any budgets should be protected from
reductions. For example, despite a focused deficit-reduction strategy the Coalition
Government ring-fenced several areas of spending from any cuts, most importantly the
NHS.
It is worth pointing out that a majority of all the spending in Scotland goes on staff salaries.
The public sector pay bill (including pension costs) amounted to £15.2 billion in 2010/11,
representing 59 per cent of the Scottish Government’s Resource Departmental Expenditure
Limit budget (Resource DEL). The Scottish Government has the authority to determine pay
policy in public bodies which are devolved. Together, these bodies account for 82.5 per cent
of total public sector employment in Scotland.3 In effect, the Government has direct control
of only some of that, with the rest mostly depending on negotiations (pay bargaining).
One area of spending which
Conservatives
traditionally
focused on is the spending and
organisation
of
so-called
‘quangos’
–
quasiautonomous
nongovernmental organisations.
These bodies assist in the
delivery of public services in
Scotland including culture,
healthcare, the environment
and justice. They have a long
history of operation in the UK
and
have
become
an
established part of public
3
Scottish Government – Independent Budget Review – July 2010
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sector delivery. In particular, quangos carry out statutory, regulatory and advisory functions
and are managed by a Board whose members are directly appointed by Government
Ministers.4 It is often argued that there is an accountability deficit due to quangos being
unelected and facing limited scrutiny.
In 2010 Reform Scotland published Democratic Power in which it looked at the number of
quangos over time. Although the number has dropped significantly, much of this was due to
mergers, as illustrated by a long term comparison of staff levels:
The accountability deficit is highlighted when one considers the amount of money spent on
quangos in Scotland. Reform Scotland followed up its 2010 report with another bulletin in
December 2013. In it they highlighted that £12 billion was spent on quangos in Scotland in
the financial year 2013/14. This is around 34% of the whole Scottish budget. The salaries of
Chief Executives in particular highlight a few bizarre situations5:


19 quango Chief Executives are earning as much as or more than the First Minister
the Chief Executive of every health body earns as much as or more than that of the
Cabinet Secretary for Health and Wellbeing
Q12: What approach should we take in looking for savings across the Scottish
budget? Are there any areas of expenditure that should be protected from these
considerations?
Q13: Do you have any other suggestions on where expenditure could be curbed?
4
5
Reform Scotland, Democratic Power, 2010
Reform Scotland, Quango Salaries, 2013
14
b) Scottish Capital Spending
Capital spending includes spending on fixed assets, either to create new assets (e.g. roads,
bridges) or improve existing assets (e.g. council buildings). This type of expenditure is
treated differently in budgets since it is seen as investment for the future, which would
return some of the investment in revenue in the long-run.
All large-scale investment projects are listed in the National Planning Framework, which is
published regularly every five years – NPF 3 was laid before Parliament in January 2014. You
can find a list of the proposed projects below.
Non-Profit Distributing
The much-trumpeted NPD scheme was specifically introduced to replace PFI and PPP
projects. Launched in 2010, the Scottish Government promised £500 million annually. Last
year, we revealed that the actual spend so far had been £20 million and only 4 out of 49
projects were currently under construction. The excuses used by the Scottish Government,
citing problems with the Aberdeen Bypass, the Border Railway and the new Edinburgh Sick
Kids hospital, have also proven to be untrue.
Publicly-owned assets
Alongside capital spending, Scotland still has a significant amount of publicly-owned assets.
Some of the smaller airports in the Highlands & Islands are owned by the Scottish
Government and more recently Prestwick Airport was nationalised for a symbolic £1.
15
In contrast with England, Scottish Water is a publicly-owned company, which was not
privatised in 1989. Its estimated asset value is around £5.4bn, but it also carries an
estimated £2.7bn debt. Several options exist for Scottish Water reform – mutualisation,
public benefit company or privatisation – with our favoured mutualisation approach
(making customers owners) releasing around £120m annually to be used elsewhere.
There are also large numbers of buildings and land owned by local authorities or other
public bodies, especially in the NHS. One of the options for these assets is to allow
community bodies to take them into community ownership and bring them back into use.
Provisions that would allow for this are included in the Community Empowerment and
Renewal Bill. Similar provisions were introduced in England and Wales by the Coalition
Government’s Localism Act 2011.
Q14: What capital infrastructure projects would you like to see in the next NPF?
Q15: Do you have any comments on the operation of the NPD scheme?
Q16: Do you have any suggestions on our approach to publicly-owned assets? Feel
free to give us specific examples.
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