Income tax cut

SLG · Income tax cut

So Holyrood has the power to cut income tax by up to the 3p. Would the total revenue lost to Westminster based on that be cut from the block grant to Scotland?

Economist

You would think so, but there is absolutely no link between revenue collected and the "Barnett Formula" which allocates Scotland's block grant. The BF gives Scotland a population based share of any increase in spending in England. The Tories are desparate to trim Scotland's budget anyway. I read somewhere that varying the tartan tax amounts to about £700m (loss or gain) to the Treasury of the Scottish Parliament varying it. Shaving about £3bn off Scotland's budget and offering us an income tax cut, still renders them more money.

You can just imagine the outrage of the Scots getting a tax cut with little or no effect on their overall level of spending. There would surely have to be a massive change in the spending arrangements.

SLG

Well that's what I was thinking. I'm sure that we wouldn't be able to cut 3p of income tax with no cuts in the block grant. As you say, there would be outrage south of the border.

I just assumed that there must be some mechanism for this. I know the devolution settlement was fairly ill thought out, but I can't believe they provided the power to cut income tax by 3p without the mechanism to reflect that in the block grant provided for using the Barnett Formula. Will it really need a full re-evaluation of funding for the Executive if these tax powers are used?

Economist

Politicians change things to suit themselves as often as the wind changes direction, so I'd imagine they'd have to.

Although, take Labour. Been in power for 7 years at Holyrood and hasn't even contemplated using that tax varying powers that it has. Compare that with Labour in Westminster, specifically Gordon Brown, who has no intention of reviewing the Barnett Formula whilst he's in charge.

Then take the Tories (both Holyrood and Westminster versions) have actively said that they would seriously consider varying income tax. Compare that with the Tories (some of the senior ones at least) who actively want to review Scotland's funding arrangements.

There must be a link there somewhere.

IF Convenor

Scotland's block grant is not entirely decided on the basis of the Barnett Formula, which means there is room for adjustment.

Section 77 of the Scotland Act 1998 (see here) stipulates that the amount of money paid into the block grant will be adjusted to take account of variations in Scotland's basic income tax rate. Each 1p change in the tax rate is calculated to be worth 150 million quid to the block grant.

SLG

Cheers for clearing that up IFC. £450 million a year for a three pence cut then. Doesn't seem that much. Has the Executive not been running at quite a massive underspend most years that could cover much of this?