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IFS: Scotland to get billions of English income tax
First Minister Nicola Sturgeon will publish her taxation plans today but the Institute for Fiscal Studies says that the recent deal between the UK and Scottish governments is unfair to taxpayers in England, Wales and Northern Ireland.
Income taxpayers in the rest of the UK will continue to subsidise Scotland by billions of pounds every year even after the Scottish Parliament wins control of the levy, a major new report published today has concluded.
First Minister Nicola Sturgeon will publish her taxation plans today but the Institute for Fiscal Studies (IFS) says that the recent deal between the UK and Scottish governments is unfair to taxpayers in England, Wales and Northern Ireland.
Around £900 million of devolved tax revenues from the rest of the UK could be “redistributed” to Scotland every year by 2021/22, the economic think tank forecast, increasing to £2.8 billion annually by 2031/32.
But the IFS said this was “something that the UK Government said should no longer happen once a tax is devolved” as ministers had insisted the system used should be fair to taxpayers on both sides of the Border.
Its analysis also said the deal “largely insulates” Scotland from economic “shocks” that hit the whole of the UK, such as another global financial crisis, because when UK tax revenues fall so does the reduction in the block grant.
David Phillips, a senior research economist at the think tank and one of the report’s authors, questioned whether the UK Government had “thrown in the towel” during months of tortuous negotiations with their SNP counterparts.
The Scottish Government’s intransigence, which saw them reject a series of increasingly generous offers, paid off as UK ministers were under pressure to deliver the powers promised during the independence referendum.
The major sticking point between the two sides was the mechanism for calculating the reduction in Scotland’s block grant from the Treasury, which is calculated using the Barnett formula, in return for control over income tax.
With the talks on the verge of collapse, George Osborne last month signed off a deal that means this figure will be linked to higher population growth in the rest of the UK. This effectively means that part of any increase of income tax in England will continue coming to Scotland.
Although the arrangements will be reviewed after the 2021 Scottish Parliament election, both governments have to agree if the system is to be changed.
The report was published as the First Minister this morning unveils details of Scotland’s new income tax rates and bands when the levy is devolved in April next year.
She disclosed last week that she intends to make the middle classes pay more income tax than their peers elsewhere in the UK by not copying the Chancellor’s decision to increase the 40p threshold to £45,000 next year.
The powers were agreed in the wake of the independence referendum by the cross-party Smith Commission, which said there should be “no detriment” to either government solely as a result of the “initial decision” to devolve a tax.
Although this was not included in the wording of the agreement, the Scottish Government said this principle should also apply to subsequent years, thereby protecting its budget from lower population growth in the future.
However, the commission also said there should be “taxpayer fairness” – that neither government should lose or gain financially from policy decision made by the other.
The IFS concluded the two principles were incompatible because no method of calculating the reduction in the block grant can satisfy both.
Mr Phillips said: “In the end, the Scottish Government’s preferred approach was chosen, which prioritises the ‘no detriment’ principle.
“During the negotiations, the UK government had claimed this approach was unfair because it violates the ‘taxpayer fairness’ principle. This begs the question of whether the UK government has changed its mind or merely conceded the point.”
A Treasury spokesman said: “The historic fiscal framework is fair for Scotland and fair for the rest of the UK. It takes all of the Smith Principles into account and paves the way for the Scottish Parliament to become one of the most powerful and accountable devolved parliaments in the world.”
John Swinney, the Deputy First Minister, said: “The fiscal framework agreement implements the principles of the Smith Commission and is fair to taxpayers in Scotland and across the UK.”