Finance committee report should be wake up call to Scottish Government

Today's findings by a cross-party group of MSPs make for difficult reading for the Scottish Government.

The report, which examines financial planning by ministers, reached a series of hard-hitting conclusions, perhaps made all the more salient as the Holyrood committee in question counts three SNP MSPs and a Scottish Greens MSP among its seven members. The three SNP MSPs include the committee convener Kenneth Gibson.

As we reported, in their 56-page document MSPs warned that "affordability does not appear to be a key factor" in government decision making processes; that ministers "missed opportunities" to reform Scotland's public services and there was "little evidence to suggest a shift away from a short-term approach to financial planning".

One of the central issues which the finance and public administration committee identified as needing closer scrutiny will resonate with many observers of Scottish politics.

How can the Scottish Government raise more revenue for public services and what are its plans to do so?

The issue has become of particular interest since First Minister Humza Yousaf made a number of major spending announcements to the SNP conference last month including that council tax would be frozen across all of Scotland's 32 local authorities next year.

Some of the party faithful loudly proclaimed their delight at the move but since then a more uneasy mood has surrounded the policy – estimated to cost £400m – with questions persisting about how it is going to be funded. The FM has made clear councils will be fully compensated with no local authority losing out on additional revenue they had planned to raise through large council tax hikes.

Scotland is already expected to face a spending gap of up to £1 billion in the 2024-25 fiscal year and forecasts have suggested the funding shortfall could be as much as £1.9 billion by 2027-28.

The committee demanded answers to this thorny question of how it would raise funds to pay councils for the freeze as well as calling for ministers to move on with the long promised root and branch changes to council tax.

In their probing, MSPs also picked up on another potential way of raising extra public cash and asked if the income tax system be further reformed to make people on higher incomes pay more tax.

The committee welcomed the setting up by ministers of an advisory group on taxation "as a step" towards the creation of a clear strategy for taxation in Scotland but warned that "given the complexity of the current tax system, as well as the scale of the financial challenges ahead, it is imperative that this work progresses at pace".

Forecasts have suggested the funding shortfall for Scotland could be as much as £1.9 billion by 2027-28 (Image: Newsquest)
It also examined particular proposals put to ministers by the STUC (Mr Yousaf signalled close interest in these) for a 44p levy rate on earnings between £75,000 and £125,140. The STUC estimated the new band would raise £200 million a year. A second proposal by the think tank IPPR Scotland suggested a 45p rate on earnings between £58,285 and £125,140, which they estimated would raise £257 million a year.

MSPs were sceptical, urging ministers to examine possible knock on effects of changes to people's behaviour. These can include people deciding to work fewer hours to avoid moving into a higher band or choosing to be paid partly in dividends which are subject to a different, UK, tax rate.

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They suggested ministers should pay attention to modelling by the Fraser of Allander Institute which pointed to "about a third of the tax yield is likely to be lost through behaviour" (30% in the IPPR’s proposal and 36% in the proposal from the STUC).

Nevertheless the committee did conclude that, even taking account of people's possible changes in behaviour, two sets of proposals would still raise significant sums (some £56m from the STUC's next year while IPPR Scotland proposal's would raise around £161m).

However, the MSPs also pointed to a further complication warning that increased income tax levels could also have an impact on economic growth and the potential for investment.

The report cited Professor David Bell who told the committee that "if Scotland does end up with higher tax rates than other parts of the UK, that will be seized upon by those other parts of the UK whenever potential inward investment opportunities arise in an attempt to ensure that they do not come to Scotland but go instead to their regions, wherever they happen to be".

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Professor Bell also told the Committee that, rather than tax changes, it was "economic growth… [that] will drive revenue and the income side of Scotland’s balance sheet more positively".

Of course, though, turning around slow economic growth takes time and is harder to fit into neat news headlines than a plan to freeze council tax.

But the committee underlined that ministers should think more for the long term, highlighting the importance of business creation as a key driver of economic growth, while raising concerns that "Scotland currently has its lowest business birth rate in 11 years, and that more than 2,300 fewer businesses are operating in Scotland now compared with the number at the start of the pandemic".

None of the issues highlighted by the MSPs are straightforward or amendable to quick fix solutions, but reading the report it is clear substantial work needs to be done to help improve Scotland's finances if there is any chance of funding the ever increasing demands on public services.