29 Oct 2013 10:50am

IFS warns of Scottish tax hikes

The Institute for Fiscal Studies has warned that an independent Scotland could be forced to make substantial tax increases to compete with the rest of the UK

The independent think tank says that Scotland could be forced to increase taxes, particularly on property, due to competition with the UK pushing down other revenues

Scotland, it says, could face a conflict between the need to fix its public finances and the pressure to lower taxes to compete with the rest of the UK. Scotland currently receives more than its population share of UK public expenditure.

“Significant” tax increases would be needed to make a substantial contribution to possible fiscal tightening, it warns, adding that pressures on Scotland in the future would be at least as strong as those faced by the UK as a whole.

The institute estimates that a one percentage point increase in all rates of income tax, or in the main rate of VAT, would raise about £430m in Scotland. It has predicted that £2.5bn of tax rises - or spending cuts - would be needed during 2016/17 and 2017/18.

The IFS also warns that the future of offshore revenues are “highly uncertain.”

Independence would give Scotland an opportunity to design a much more efficient tax system than the one we live within the UK

Stuart Adam

Stuart Adam of the IFS said, “Independence would give Scotland an opportunity to design a much more efficient tax system than the one we live within the UK.  But to do so would require tough political decisions. And independence does not give any government a completely free hand.

“On the one hand, tax competition will create pressure to reduce tax rates. On the other an independent Scotland will need to look to fill a substantial fiscal gap.”

There are already marked differences between the tax systems above and below the Scottish border. Because there is a less unequal income distribution in Scotland compared to the UK, there is less need for the tax system to focus on redistribution of income taxation, while the difference in road congestion also means there is less rationale for heavy motoring taxation.

Freezes on council tax since the Scottish National Party (SNP) came to power mean that the property tax on similar valuations of homes are now 20% lower in Scotland than in England. Today's study suggests both the UK and the Scottish governments should levy tax on the current value of a home.

The IFS report concluded, “There would be a strong case to focus taxes more on immobile tax bases such as property. This would involve a reversal of long-standing policy which has seen council tax rates in Scotland fall well below English levels.”

The SNP has also said it will cut corporation tax to 3 percentage points below the rest of the UK in an independent Scotland. The IFS examines these proposals in the study and concludes that claims this would help to create up to 27,000 jobs and boost growth are "highly speculative" and involve a "large dose of guesswork".

The leader of Better Together, Alistair Darling, said the report confirmed "what SNP ministers know to be true in private but won't admit in public. Billions of pounds worth of cuts would be needed just to stand still".

A Scottish government spokeswoman said the IFS report supported the fact that Scotland was in a relatively stronger fiscal position, with higher tax receipts per person than the rest of the UK as a whole. It will shortly publish a report laying out where it sees the opportunities in designing a new Scottish tax system.

The IFS report appeared in a study of options for an independent Scotland. The people of Scotland go to the polls in September next year to vote in an independence referendum.

Helen Roxburgh


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