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Holyrood Crunch

Douglas Fraser | 18:42 UK time, Monday, 16 February 2009

The demise, for now at least, of Local Income Tax from the SNP Government's legislative plans for Holyrood has excited much political comment. But what about the implications for public finances?

Much of the row revolves around the warning in Alistair Darling's pre-Budget statement last November that he was planning £5bn of spending cuts (or efficiency drive, as some prefer to call it) across UK Government spending.

On the back of a St Andrew's House fag packet, it was reckoned that Holyrood might face a £500m cut in its 2010-11 Budget, which was duly presented as another sign of Old Albion coming over all perfidious.

But if the SNP administration is basing its estimates on last year's pre-Budget statement, it must be about the last group doing so. Not even Alistair Darling is willing to defend it, knowing that a very different picture will have to be presented with his Budget on 22 April.

If all the other forecasts are any guide, that will mean the recession is much deeper than it looked to the Treasury in November, and that recovery is going to come much later.

The £5bn figure, due to kick in during 2010-11, was based on the projection that the UK economy would be pulling out of a fairly shallow recession by the end of this year.

But with the CBI today adding to the independent evidence that the Treasury will have to borrow much more deeply than it already estimated - to the tune of £100bn, according to the business organisation - it means that balancing the Treasury books will mean much more debt needs paying off, and the crunch on tax take may have to be delayed until the economy is in a less fragile state than it will surely still be by spring of next year.

So the Holyrood debate over money is missing at least four points. One, that the £5bn has not yet been allocated to Whitehall departments, and until it is, it is hard to see how it would impact on the Scottish Parliament block grant.

Two, that there will probably have to be much deeper public spending cuts if the debt is to be paid off over the next ten years or so.

Three, that the Government's fiscal stimulus, of tax cuts and spending push, may have to be retained into the fiscal year 2010-11, meaning the public spending cuts won't crunch until later than Alistair Darling planned or than John Swinney feared.

And four, that all the countries facing recession and using a fiscal stimulus, large and small, are having to plan for the eventual pain when the bills come in. This is far from unique to Westminster and Holyrood.

Add to that one downside of the Local Income Tax proposal that has been exposed by the economic downturn. The indications from November and December of HM Revenue and Customs collection of income tax (bracketed with capital gains tax) are of rapidly falling revenue.

In November, it was down 4.6% on the previous November, and December was down 5.3% on the year before. That means the decline was acclerating. This Thursday, we should see the January income tax take, which will reflect the fall in Christmas bonuses across the economy.

The figures bandied around the Local Income Tax debate were open to dispute, but the decline in revenue so far, if applied to a local income tax, would leave an additional gap in council funding of at least £60m.

That's the downside of a tax which is buoyant, in that it goes up and down with income, causing a lot of pain for council budgets.

The other way of looking at it is that council tax fails to adjust to falling income, so it's more likely to be individual householders who feel the pain.

That's why this might be an opportunity for everyone at Holyrood to think again about council funding, and to start by pulling the Burt Report off the shelf, which looked at the options and came up with a property-based plan more closely allied to ability to pay.

That's named after Sir Peter Burt, by the way - the same former Bank of Scotland chief who's been a lead player in the HBOS saga of late.


  • Comment number 1.

    The Burt Plan was rejected by Jack McConnell on the day it was published. I suppose this was a sign that Labour (and all politicians) are scared of local government finance. But the plan seemed to me better than any of the other plans being touted.

  • Comment number 2.

    The council tax has to be abolished one way or another, it is an iniquitous tax controlled by unelected civil servants in council offices and passed by councillors who for the most part will nod their heads at whatever the chief executive or the finance director tells them, because in the main they are incapable of making decisions for themselves which might rock the gravy train. There seems to be no way of curbing the growth of council employement or indeed any control over council spending. The only way to fund councils is centrally , paid for by national income tax so that everybody pays their share for the services they use. The government would then be able to control (hopefully ) the excess spending or poor performance of councils. Sadly no national government has the will or the courage to take on the mandarins who run councils or the councillors who pay lip service to them and the upper echelons of the political parties to which they belong. If in fact the burden of tax to fund councils was excessive, then at least the electorate can at some time remove the government.


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