How should we pay for water and sewerage services in Scotland?

The design and structure of both income tax and council tax have  been extensively debated in recent years. But the design of charging structures for water and sewerage services, which represent a lesser but nonetheless significant expense for many households, have received less attention.

The average household bill for combined water and sewerage services in Scotland was £360 in 2017/18. However, there is significant variation in the charge paid by different households. What are the principles on which the water and sewerage charges are based? And is the distribution of charges across households fair?Continue reading

February 22, 2018

Will increasing income tax rates harm Scottish economic growth?

It seems a near certainty that the Scottish Government will seek to increase income tax revenues in tomorrow’s budget – through a combination of changes to rates and thresholds. If this happens, it will kick-off a hotly contested debate about the impact on the Scottish economy.

The Scottish Chambers of Commerce have got their response in early, arguing that “at a time of sluggish growth and faltering business investment, a competitive Scotland cannot afford to be associated with higher taxes than elsewhere in the UK”. The Federation of Small Businesses has also warned about the impact of tax increases on the economy.Continue reading

December 13, 2017

Will slower economic growth in Scotland necessarily mean slower growth in income tax revenues?

David Eiser, Fraser of Allander Institute

The slowdown in Scotland’s rate of economic growth relative to the UK has been well documented. Whilst growth in UK GDP per head has been weak, growing at just 2.3% between Q1 2015 and Q2 2017, Scottish growth has been weaker still, with per capita GDP growing just 0.57%, over the same period (Chart 1).

Revenues from non-savings, non-dividend (NSND) income tax now form part of the Scottish budget. Under the Fiscal Framework, the Scottish budget will be better off than it would have been without tax devolution, if revenues per capita grow more quickly in Scotland than they do in the rest of the UK (rUK). Conversely, slower growth will translate into a smaller Scottish budget.

A critical question therefore is what slower growth in GDP per capita – in Scotland relative to rUK – might mean for the growth of income tax revenues per capita in Scotland relative to rUK. Does slower growth in GDP per capita necessarily mean slower growth in income tax revenues? How strong is the relationship and what factors might influence it?Continue reading

December 11, 2017

Income tax increases on their own are not a solution for Scotland’s spending challenge

The Scottish budget faces a substantial challenge. Between now and the end of the parliament in 2021/22 the resources available to the government are projected to decline by about 3% in real terms.

This might not sound like much. But at the same time as the budget is declining, the health budget (which accounts for almost half of government spending) will increase by 3%. Whilst this might sound generous, a 3% increase is only just sufficient to keep up with a growing and ageing population (notwithstanding the general inflationary pressures facing the health service).

Furthermore, a range of other spending commitments have been made, on services ranging from childcare to policing, tuition fees to care for the elderly.Continue reading

November 2, 2017