Pounds and pence - a year in Scotland's economy

Economy - PA

The last 12 months may have seen some of the greatest change in Scotland’s economics and finance, both positive and negative, since devolution.

From oil prices plummeting to a record low of less than $30 a barrel, shaking one of the bedrocks of the Scottish economy, particularly in the North East, to the advent of new powers over income tax, borrowing and social security, the Scottish fiscal landscape has been far from flat and uneventful.

The process of getting to agreement on the fiscal framework that would underpin the Scotland Act by detailing how the funding for the new devolved deal was to be calculated became a long, drawn-out battle between the Scottish Government and the Treasury over interpretation of the Smith Commission’s principle of no detriment.

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The Scottish Government eventually got its preferred indexed per-capita model, where Scotland’s funding is unaffected by differences in population growth from the rest of the UK, at least until 2021, when the funding model is to be reviewed. 

The Scottish Rate of Income Tax, agreed under the previous Scotland Act of 2012, came into effect in April 2016, but John Swinney was clear that he would not be using the power since it does not allow for variation between bands: all have to be raised by the same amount or none.

Next year, though, Scotland gains complete control over income tax, with the power to have a different rate on some bands and to change the bands themselves.

Questions of how best to use Scotland’s new fiscal powers dominated the Scottish Parliament election in May. Labour and the Lib Dems both pushed for a penny to be added to income tax across all bands, which was to be passed on to local government for education, and Labour also proposed changing the top rate of income tax from 45p to 50p from April 2017.

The Greens went further with a proposed 60p top rate of tax on earnings over £150,000, raising the upper rate to 43p and splitting the basic rate into two, an 18p and a 22p rate. The Conservatives, meanwhile, warned against making the tax in Scotland higher than the rest of the UK and proposed leaving it unchanged.

The SNP opted for a fairly conservative change, leaving the upper rate threshold at £43,000 rather than raising it to £43,387, as George Osborne had announced for the rest of the UK, but otherwise keeping it the same as other parts of the UK.

The party backed out of raising the top rate to 50p in April 2017, even though it had supported the policy in the 2015 general election, after Scottish Government research suggested that if even seven per cent of the highest rate taxpayers fled Scotland to avoid the tax or otherwise avoided it, it could cause a £30m hole in the budget. 

In a BBC debate before the election, Nicola Sturgeon said: “I think there should be a 50p top rate of tax, but you don’t set tax rates if it is going to lose you money. I don’t want to turn around in two years’ time and say we have less money to spend on our health service.”

There will still be further discussion about this when it comes to the Scottish Parliament passing next year’s budget, for which it will need the support of at least one other party. Scottish Labour forced a Scottish Parliament debate on the top rate of tax at the beginning of June, but its amendment calling for a 50p top rate was voted down.

However, the issue called into question the purpose of having devolved tax powers if the Scottish Government will not use them for fear of the effects of behaviour change and avoidance.
The economy and spending has been a challenging area for the Scottish Government recently, and even before the EU referendum result caused a new downturn, there were some difficult figures to justify. 

Scotland currently lags behind the rest of the UK for economic growth. In Q4 of 2015, annual GDP growth in Scotland was 0.1 percentage points lower than the UK as a whole and in Q1 of 2016, it was 0.5 percentage points behind the UK. In Q1 of 2016, annual GDP growth in Scotland was 3.3 percentage points behind the growth rate of small independent European countries, which the Scottish Government has a target of matching by 2017.

Last month, Audit Scotland criticised the Scottish Government for not being clear enough about how it intended to achieve its targets for economic growth.

The government expenditure and revenue (GERS) figures published in last week made for difficult reading. They showed Scotland’s spending to be £14.8bn above its revenue in 2015/16, 9.5 per cent of its output and more than double the level of the UK as a whole. This is similar to the previous  year’s deficit and well above the EU maximum of three per cent.

Several think tanks including the IFS have warned that UK growth may stall in the wake of Brexit and with Scotland’s rate of growth already projected to be behind that of the UK as a whole, this is even more of a concern.

Local government funding was another source of conflict, with councils threatening to defy the Scottish Government’s promise to continue the council-tax freeze, while cutting central funding and tying parts of the budget to maintaining teacher numbers.

Derek Mackay as finance minister is a popular choice with some in local government, having been leader of Renfrewshire Council and of the SNP group in COSLA, as well as 12 years as a councillor and a stint as both local government minister and minister for transport and islands, he has a strong relationship with local authorities.

But given the UK Government of Theresa May is unlikely to reverse the trend of spending cuts, the financial news for Scottish local authorities may be just as difficult for next year as it has been this time around.

And given that his remit also includes the constitution, if the Brexit negotiations don’t go to plan, there may be more work on the constitutional side of his role if a second indyref moves from a possibility to a certainty.

With the economic and monetary aspects of independence widely acknowledged to be the weakest links in the SNP’s case in 2014, Mackay would have a vital role in making a compelling case for Yes in any rerun.

And the fact that the First Minister has split the cabinet responsibility for economy and finance in this new parliament, which was previously borne by the broad shoulders of John Swinney alone, into two separate roles, with Derek Mackay taking on finance and Keith Brown responsible for economy, jobs and fair work, is an indication of both the expanding workload and challenges expected to come.

In a Scottish Parliament debate on economic growth in May, Keith Brown said: “My appointment as a dedicated cabinet secretary for the economy should send a clear signal of this Government’s focus on stimulating growth, protecting and creating jobs and promoting Scotland as a great place to do business.”