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The new Scottish Rate of Income Tax, the council tax freeze and student grant: how they connect

June 22, 2015

As discussed here, the Scottish Parliament’s Finance Committee is currently gathering evidence on how the new Scottish Rate of Income Tax should be used from April next year.  More on the SRIT here.

In this submission to the committee (SRIT for Finance Cttee June 2015), I argue that the immediate priority should be making good the loss of tax revenue due to holding the council tax at the same cash level since 2007-08.

The Scottish Government is providing £560m to councils in 2015-16 in lieu of lost council tax revenue (rising to £630m next year if the freeze continues). Something originally planned as short-term has grown into a large spending commitment in its own right, costing more than free personal care.  While the benefit of the freeze to individual council tax payers is clear, its cost is hidden. The Scottish Government’s description of the freeze as being “fully funded” obscures that the policy carries a large cost in spending lost on other things.

The spending is likely to have been lost from a mixture of services outside local government and general funding to councils, whose total funding from central government has fallen, despite the growing element identified as funding the freeze.  The cost of the freeze in lost public spending, particularly on local government services,  will tend be falling disproportionately on the poorest, while the largest benefits  fall disproportionately to the better off (many of the very poorest see no benefit from the freeze, due to the Council Tax Reduction – the replacement for council tax benefit).   The biggest gains in absolute terms have fallen to residents in Band H  properties in Aberdeen (which has the highest council tax).  They are closely followed by Band H dwellers in Glasgow, Dundee and Midlothian. Band  H properties are those worth over £212,000 in 1991:   0.5% of properties now fall into this group. Looking at the distribution of properties across the bands and the impact of Council Tax Reduction brings out that a minority of households in higher-valued properties receive rather more than half of the total benefit of the freeze in absolute terms.

There are parallels here with the disproportionate impact on poorer students of the move away from grant to loan to support living costs, at the same time as free tuition has commanded most of the attention (and resources) and been by far the more visible element of policy to the better-off.

Using additional income raised through the SRIT explicitly for the purpose of funding the cumulative effect of the council tax freeze would immediately release £560-630m for additional spending on public servicesincluding – the submission argues – up to £100m on improved student grant. It would also recognise that there has been a loss to the total tax base, clarify the link between the freeze and its real long-term cost and mean that cost is borne more fairly, while a long term solution to local taxation in Scotland is worked out (currently the task of the Commission on Local Tax Reform).  The submission also converts spending on various elements of student funding into an equivalent cost in SRIT – current spending on grant is the equivalent of around 0.15p on the income tax rate, while every £1,000 per head of funding for tuition works out around 0.3p.

It is not very likely that this suggestion for a dedicated levy is going to get very far.  Arguably, however, the first £560-630m of any extra income from the SRIT will always in effect be replacing lost council tax revenue, if any government chooses to put the rate up from its fiscally-neutral starting point – whatever the official presentation.

The Committee’s deadline for submissions on the SRIT is 28 August.



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