Our second item of business today is to take evidence from the Cabinet Secretary for Finance, Constitution and Economy on the revenue side of the draft budget for 2016-17. Mr Swinney is joined by Sean Neill and Graham Owenson from the Scottish Government.
This will be the first year in which the Scottish Government will have responsibility for setting the Scottish rate of income tax in addition to having full responsibility for setting and collecting the devolved taxes. The committee and the Scottish Government are agreed that, going forward, scrutiny of the draft budget will therefore take place over two separate oral evidence sessions. This morning, we will consider the revenue side, and on Monday we will take evidence on the expenditure side of the draft budget at our external meeting in Pitlochry.
I welcome Mr Swinney to the meeting and invite him to make an opening statement.
Thank you, convener, and good morning. I welcome the opportunity to discuss with the committee in the first of our two sessions the revenue measures that are associated with the 2016-17 draft budget. In the budget, the Government proposes a Scottish rate of income tax for the first time. I am grateful to all the individuals and representatives who have contributed to the discussions on the Scottish rate that have taken place at the Finance Committee over recent months.
From April 2016, the UK Government will reduce the income tax rates that are payable by Scottish taxpayers by 10p, and a rate agreed by the Scottish Parliament will replace that. I am proposing a Scottish rate of income tax of 10 per cent. The decision to set the rate at 10 per cent has been influenced by the limited nature of the income tax power that is currently available to the Scottish Parliament. The power only allows a single rate to be set and then applied to all three income tax bands—basic, higher and additional. That means that any increase would necessarily have inflicted an additional tax burden on lower income tax payers. I could not support that at a time when those people are already being adversely affected by the austerity programme of the United Kingdom Government.
For the Scottish taxpayer, the proposed 10 per cent rate is equivalent to the 10p reduction to be applied by the UK Government. That means that the overall rate of income tax for Scottish taxpayers will remain the same as that paid by other UK taxpayers in 2016-17. The proposed 10 per cent rate is also revenue neutral for the Scottish Government’s budget. The amount of tax that is raised by the Scottish rate of 10 per cent will be equal to the reduction in the Scottish block grant. During the transitional years for the Scottish rate, there will be no reconciliation of the actual amount of Scottish rate of income tax that is collected against the OBR forecast.
This is the second time that I have set out proposals for the devolved taxes in the draft budget. I plan to maintain the rates and bands of land and buildings transaction tax at existing levels in 2016-17. That will ensure that 93 per cent of home buyers will pay either less than under UK stamp duty land tax or no tax at all in the year ahead, and it will ensure that Scotland remains an attractive and competitive location for business investment.
In order to ensure that opportunities for first-time buyers to enter the market in Scotland are as strong as possible and to make certain that tax changes elsewhere in the UK do not make it harder for people to get on to the property ladder, I will seek Parliament’s approval to introduce an LBTT supplement on additional homes. I welcome the committee’s call for evidence on that measure and I look forward to engaging further with the committee on the issues once the legislation is before Parliament.
I also plan to increase the rates of Scottish landfill tax to £84.40 per tonne at the standard rate and £2.65 per tonne at the lower rate. That will ensure that the tax burden is increased in line with inflation and address potential concerns about waste tourism by maintaining parity with rates in the rest of the UK. The credit rate for the Scottish landfill communities fund will remain at 5.6 per cent in 2016-17.
The Scottish and UK Governments have agreed a provisional one-year block grant adjustment for the devolved taxes in 2016-17 of £600 million. The Scottish Government’s forecasts for the devolved taxes have again been independently reviewed and assessed as reasonable by the Scottish Fiscal Commission. In total, we forecast that the two devolved taxes will raise £671 million in 2016-17. For the first time, we have also published five-year revenue forecasts for the devolved taxes in order to provide transparency over a medium-term assessment of Scotland’s devolved public finances.
I welcome the challenge that the Scottish Fiscal Commission brings to bear on the Government’s forecasts, and we will respond by improving the robustness of our forecasting methodologies over the next year.
On local taxation, we have provisionally set the non-domestic rates poundage at 48.4p, which matches the 0.8 per cent inflationary increase in the English rate. We have also provisionally set the large business supplement, which is levied on properties that have a rateable value of more than £35,000, at 2.6p.
In addition, we propose to limit renewable energy generation relief to schemes that incorporate community ownership and to reduce the levels of empty property relief. For empty industrial property, 100 per cent relief is retained for the first three months of the property being empty, after which time the proposed level of relief is 10 per cent. For standard commercial property, 50 per cent relief is proposed for the first three months of the property being empty, after which the level of relief is 10 per cent.
We have committed to review the non-domestic rates system to ensure that it minimises the barrier to investment, is responsive to economic conditions and supports long-term economic growth and investment. We will confirm further details in due course.
I look forward to answering the committee’s questions.
11:15
Thank you for that opening statement. The first thing that I want to ask about is the Scottish rate of income tax. The Scottish Government’s decision on taxation levels is broadly in line with what we heard from the majority of people who gave evidence to us. For example, the Scottish Trades Union Congress’s view was that,
“having been through an historically unprecedented collapse in real wages over the past five years, 2016-17 is not the moment in which to increase taxes on the lower paid.”—[Official Report, Finance Committee, 30 September 2015; c 7.]
It also said that the SRIT is clearly a “regressive” tax.
Have you looked at behavioural responses in the context of taxation? One of the issues that the committee has deliberated on, particularly given the evidence from David Bell, is the impact of potential behavioural responses on the part of taxpayers. It is clear that that will be an issue in the years ahead, but as far as this year is concerned, has the Scottish Government carried out any analysis of potential behavioural responses to the SRIT?
The first thing to say is that it is important when we consider tax measures that we do as much as possible to develop our thinking and our methodology on behavioural responses. That is a general observation in relation to the tax powers that we will now exercise.
On the Scottish rate of income tax specifically, the analysis in that respect has been looked at by HMRC and the Office for Budget Responsibility, which have developed behavioural analysis in relation to the UK income tax system, over which the UK Government has had control for many years. We have had access to and considered that material, although it must be said that the behavioural response—given that the tax rate is the same across the UK—is negligible or non-existent.
I understand that. My question is whether, when you decided to set the SRIT at the same level as the UK level, the potential for behavioural response was taken into account. Obviously, there will be no real behavioural response if the rates are exactly the same. My question is whether the potential for behavioural response influenced you. Given that 1 per cent of taxpayers pay 20 per cent of the tax, that will be an issue in future. The point about the SRIT is that the 10p rate applies across all bands. I just wonder whether, in general, there was any consideration of behavioural responses before you decided on the level at which to set the SRIT.
In my decision on the Scottish rate of income tax, I was mindful of the fact—indeed, it was my primary consideration—that, because the lockstep exists, if I increased the SRIT, I would have to increase the tax burden on lower-income individuals. If, in your inquiry about behavioural responses, you are asking whether I thought that it was appropriate to increase the burden on those individuals, the answer is that I did not think that that was appropriate. That was my primary consideration in coming to the decision.
I take it that, with the new taxes that will come in from April next year, you will look more at behavioural responses of different income groups.
Yes.
Because you will not have the lockstep that you mentioned, you will have much more flexibility.
That is an area that I will be working on. You mentioned Professor David Bell earlier. He has published some material on behavioural responses, and my officials are undertaking some work on that because more flexibility is inherent in the income tax variation powers that will come through the Scotland Bill and it is important that, when Parliament makes its judgment on these questions, it is informed by the most advanced behavioural analysis that we can develop.
The reason why I am pushing you on this a wee bit is that there has been all sorts of evidence that, although a difference of 1 or 2 per cent might not make any real difference to behaviour—for example, if it is imposed on higher earners a year from now—a higher difference might have an impact. What is of interest is the level at which that increase would start to have an impact.
On the same theme, are you aware of any impact in relation to the identification of Scottish taxpayers? The Scottish Government has made it clear that there will be no change in the year ahead, but is there any evidence that people are identifying as Scottish taxpayers more or less than would be anticipated? Do we have any information at this early stage on the minority of people who tend to be more mobile?
Nothing is really emerging on that. The expectation was that we will be dealing with about 2.5 million individual taxpayers. That is roughly the number of letters that have been issued by HMRC to identify Scottish taxpayers. I hope that members have all received those letters. The letter was anxiously awaited in the Swinney household to see whether the system was working properly, and it duly arrived.
Nothing that we are seeing so far suggests that the system is delivering any form of differential pattern; what was expected to come back has come back. HMRC was unclear—understandably—about what the dispatch of the letters would generate in terms of traffic and communication, but that has been significantly lower than would have been anticipated. The last information that I had was that the amount of traffic had not been significant and I have not heard anything that would change my view on that.
On tax reliefs, the Revenue Scotland and Tax Powers Act 2014 introduced a general anti-avoidance rule in respect of the devolved taxes. The GAAR is broader in scope than the UK general anti-abuse rules and its focus is on tax avoidance rather than abuse. However, as the SRIT will not be a fully devolved tax, the Scottish GAAR will not apply to it. Is that a concern at all?
I would not say so. The income tax power that we have relates to non-savings and non-dividend income, so it is a much more tangible and identifiable level of income that must be considered as part of the process. Non-savings, non-dividend income tax is at the end of the spectrum where it is more difficult to avoid and to conjure up ways of getting round, so I do not think that a difference arises from the fact that UK legislation will determine those points.
Thank you for that. On the block grant adjustment, which is of paramount importance, you have made it clear that the indexed deduction per capita is the best way to proceed. We have taken significant evidence on that and discussed it in committee and I think that we all agree that that seems to be the fairest method.
However, you mentioned in your opening statement the £600 million one-year agreement on the adjustment in relation to devolved taxes for the year ahead, and I am curious about how that figure was arrived at. As you mentioned, the Scottish Government has forecast revenues of £671 million from LBTT and landfill tax, but the OBR has forecast £627 million. The mid-point for those forecasts is £644 million. I wonder how the adjustment of £600 million was arrived at.
It was arrived at through discussion between the Chief Secretary to the Treasury and me. To be fair to him, one of the issues that he was mindful of was that he did not want me to be in the position that I was in for the previous year whereby, in essence, I had to present a budget to Parliament without knowledge of the block grant adjustment. He was keen to agree a definitive number on which I could base a budget, and I am grateful to him for that understanding.
On how we arrived at the agreement, I do not have the exact wording in front of me, but I stress that it is a without-prejudice agreement that will be reviewed in the light of outturn data after 2016-17. It enables us to set a budget with some confidence around the number. The adjustment was arrived at by looking at the forecast that had been produced by the Office for Budget Responsibility and then looking at the block grant adjustment for 2015-16, which is £494 million. That number clearly had to be inflated or indexed—whichever word we want to use—and we looked at different ways of doing that, such as by increases in the number of transactions or by values. In looking at a number of options, we settled on £600 million as a without-prejudice number to enable us to make progress on these questions. We had the benefit of having outturn data for 2014-15—if my recollection is correct, the figure was £580 million—and we looked at the different factors within that and arrived at a number.
I cannot present to the committee a scientific analysis of how we got to £600 million, but a range of numbers were discussed and we agreed that figure to enable me to make progress in setting the budget with a definitive block grant adjustment for the financial year. It can be reviewed once the financial year is complete.
Thank you for that. The committee raised concerns about the lack of transparency regarding adjustments to the block grant arising from the devolution of further powers, and the Scottish Government consequently agreed to a number of changes to the written agreement, saying that it would
“ensure that the Finance Committee is kept informed of progress on any agreement, or change to existing agreement, with the UK Government on adjustments to the block grant arising from the devolution of further powers.”
I am not sure that that has really happened in the process.
I acknowledge the issue and the agreement that was arrived at with the Finance Committee. Here, we begin to stray into the territory of the fiscal framework, because it has to be considered by the Scottish Parliament, which has to be satisfied with the framework’s contents. The agreement that you mentioned is very much in my mind, as is what will be implicit in the understanding to ensure that the committee is satisfied by the arrangements around future block grant adjustments. The example that we are talking about, like the one for 2015-16, was a one-off agreement around specific numbers and no real process was put in place. However, for the establishment of the fiscal framework, there is a scrutiny process that the Parliament must go through, and it must involve the Finance Committee in some form.
I stress that, at this stage in the proceedings, my preference would be to have a fiscal framework and a block grant adjustment mechanism that we are not constantly revisiting, as that will give us confidence and clarity about how it is operating. However, if it is revisited, the Finance Committee will have to be closely involved and consulted about the issues.
11:30
It is quite clear that there has been significant growth in sales of lower-priced houses and a boost to that market. The committee’s budget adviser, Professor McEwen, has stated that market data shows that there has been a significant reaction to the introduction of LBTT at the higher end, and a significant reduction in higher-end sales as a result.
That is reflected in the evidence that the committee has taken from witnesses, who have said that there has been a positive impact on the middle and lower tiers of the market, with
“a new lease of life under the new tax regime”
and
“property sales in Scotland for first-time buyers and home movers ... increasing three times faster than the rest of the UK.”
The exact opposite appears to be mirrored in the more expensive households. Obviously that will have an impact not only on the market, making it more sluggish at that end, but on revenue for the Scottish Government. Why is the Scottish Government not considering—albeit that the taxes have been in place only since April last year—a change in the tax level for those more expensive houses?
First, I am confident that the evidence shows that, in general, the tax take that will come from the devolved taxes will fulfil the requirements of the budget. The shape of that, as things stand just now, appears to be different from what was envisaged, with more taxation being generated through non-residential land and buildings transaction tax and landfill tax than was predicted and less emerging from residential transactions.
The shortfall in residential transactions is broadly comparable at this stage with the level of forestalling that was identified or suggested by the OBR. I accept that there has been an effect of forestalling—one cannot look at the data without seeing that there is a clear impact from forestalling, which in my estimation came to a conclusion in August in terms of the impact on the market.
That is my explanation for the numbers. Overall, we are going to reach the revenue that is required to support the budget, and I suspect that we will exceed that total. Secondly, the mix will be different, and thirdly, the effect of forestalling is tangible in the figures on residential transactions.
In the final part of your question, you asked why the Government has not revisited those things. I looked at quite a bit of the evidence that the committee had taken—it was helpful to have that—and my assessment was that individuals in the sector were saying, “Let’s just see what an overall year-long position does and then we can revisit that.”
Given that the forestalling effect is so tangible, it would be prudent to wait and see the completion of a full year, and perhaps to wait even longer. I would be interested to see what a whole year looks like without any question of forestalling implicit in the system in order to come to such a judgment.
That is a very fair assessment of the evidence. Most of our witnesses said that they were not necessarily calling outright for a change at this point, but they certainly wanted the situation to be kept under review because there were some alarm bells ringing. Perhaps a full year’s data would be helpful.
The Scottish Fiscal Commission raised some concerns about the available outturn data for 2015-16 not feeding into forecasts for land and buildings transaction tax, whereas it feeds into the forecasts for landfill tax. Why would that be the case? Why would you look at outturn data for one and not the other?
Our challenge with landfill tax specifically is that we have not had disaggregated data, or any way of creating a particularly robust disaggregated data picture, for landfill tax within Scotland as part of the UK landfill tax system. There has been a particular deficiency in that respect. I have the 2014-15 forecast in front of me. The number was about £117 million and I would be surprised if we did not end up somewhere round about £140 million. That is quite a significant difference. I would be the first to accept that we did not have a particularly aggregated base from which to arrive at that estimate. Therefore, seeing the pattern of experience, it would be prudent to take that forward for 2016-17.
However, on land and buildings transactions tax, we have a model that has been built up from granular data based on the property transactions that have been undertaken in Scotland over many years. That much more robust, empirical base of information would enable us to form a judgment on those questions.
Given what I have just said about the significant effect of forestalling, I would be loth to attach too much significance to the outturn position on 2015-16 at this stage, because that could give a distorted picture of what the market would look like.
Staying with LBTT, the SFC raised a number of issues. It said:
“there may be longer-term behavioural responses to the new tax which the current forecasting approach does not allow for.”
It recommended that behavioural factors should be included in the forecasting methodology as soon as practicable. However, despite those concerns, the methodology still does not account for any behavioural response.
I am committed to further development work on behavioural responses. We have published the forecasting methodology paper, which the committee will have seen. That goes through in some detail our modelling approach, as well as our approach to behavioural questions. A section on page 11 of the document around land and buildings transaction tax explores some of the questions around behavioural response and forestalling. I am committed to enhancing the regime.
On the particular question of the LBTT supplement, I have applied significant behavioural questions to the assessment of that tax. Indeed, an analysis that took no account of behavioural responses suggested that the revenue generated in 2016-17 could be between £45 million and £70 million. However, once the variety of behavioural responses was taken into account, a more appropriate range appeared to be £17 million to £29 million. I have, of course, settled on £23 million as what we could reasonably expect to be generated by the supplement. Therefore, significant account has been taken of behavioural factors in that analysis.
In this financial year, the effect of forestalling is of some significance. I want to ensure that we do not attach undue significance to the data that comes out of this year, which may be influenced by the effect of forestalling.
Thank you very much—the position is clear now.
I do not want to go into the LBTT supplement in any great depth, because we will take evidence on it specifically. However, Professor McEwen has provided the committee with a briefing that looks at the potential difficulties with realising even the £23 million that you have just mentioned because of a host of measures that could be taken to avoid that tax; for example, property could be let through a company, because the supplement does not apply to companies. How concerned are you that what should be a fairly straightforward measure could become quite complex if the Scottish Government has to quickly introduce legislation to prevent such blatant avoidance?
To be honest, as I look more and more at tax questions, I do not think that there is anything simple about tax. If that is the holy grail that we are after, we will have a long search.
I accept that there is a need for us to take care in trying to take forward what, on the face of it, seems to be a simple proposition. We are engaging in consultation on these points. Obviously, the committee will exercise scrutiny and, as always, I will be keen to hear the committee’s views. It will be important to consider some of the analysis that is provided to you by Professor McEwen.
We have to ensure that we design a proposition that can meet the purpose that is inherent in the legislation, and that that can deliver the level of taxation that we envisage. We have to ensure that we do not inadvertently take steps that could make that task more difficult.
The Scottish landfill communities fund will remain at 5.6 per cent, compared with the UK’s rate of 4.2 per cent. What was your thinking behind that?
I have been impressed by a lot of the projects that are supported by that measure. I said that I would set the Scottish landfill communities credit at 10 per cent above the UK rate. However, when the UK reduced its level, I thought that it was reasonable for us to sustain the level of support that we had in place and ensure that the sums of money that are critically important to some community projects can be sustained in the years to come.
Good morning, cabinet secretary. We have been considering the issue of whether the Scottish rate of income tax is progressive or regressive. The convener is convinced that it is regressive and I am convinced that it is progressive.
I am glad to hear that there is such unity at the heart of the Scottish National Party members of the committee.
We are all independently minded here.
One witness gave us an example concerning someone with an annual income of £25,000 and someone who is on £125,000 a year—obviously, one of those people is earning five times the wage of the other. The witness said that adding 1.5p on the SRIT would mean that the person on the lower wage would pay £216 extra, while the one on the higher wage would pay £1,875, which is eight times more. That shows that, although the tax is not extremely progressive, when the income goes up five times, the tax that is paid goes up eight times, which strikes me as progressive. How would you respond to that?
I am tempted to respond.
I am grateful to Mr Mason for inviting me to intrude into this private debate between him and the convener.
I will give an honest and straightforward answer—that is what I always do in committees, but I suspect that it might incur the wrath of the convener this time. I view the Scottish rate of income tax as a progressive power, on the basis of the sort of analysis that Mr Mason has outlined, although I do not have that particular example in front of me. Clearly, people on higher incomes will pay comparatively more than people on lower incomes.
Two issues were on my mind and influenced my decision. The first was that the lockstep would involve increasing tax for people on low incomes. I take the view of the STUC that this is not the moment to do that, as people are finding things hard enough. The second point was that, if I had increased the Scottish rate of income tax beyond 10p, as a percentage of current income tax, the increase in individuals’ tax bills would have been greater for those on lower incomes than it would have been for those on higher incomes. On those two grounds, I felt that it was not an appropriate step to take.
I understand that and I accept that the majority of witnesses have taken that view.
Including the STUC.
11:45
Yes. However, NHS Health Scotland argued that even though it would mean taxing people at the bottom end, using that money to help those at the bottom end, both earning and non-earning, could be compensatory and an overall benefit.
There is an interesting and substantial debate to be had here. The issue that would trouble me about what you describe is that it would require a very refined form of targeting to support incomes, and I do not think that at this stage we have the powers that would enable us to have such a refined impact on people’s incomes. If I understand the rationale of the argument, it is almost about compensating some individuals for a tax increase that all individuals would have. I would not be confident that we have the powers to put in place such a refined mechanism.
The tax credit debate provides examples of the type of devices that could be taken forward to try to get to that refined proposition. That power is not with us today, and I do not see anything like it being in our range of powers. I may have discussed with the committee before the challenges that I faced in dealing with the reduction in the council tax benefit payments that was put in place by the UK Government. The minute that I went anywhere near the B word—the benefit word—I was in territory that I am not permitted to go into, which is why we ended up with a council tax reduction scheme. I am perfectly entitled, if Parliament authorises it, to reduce people’s council tax, so we did that.
However, on having a very refined mechanism of almost compensating certain individuals—crucially, it would be just certain individuals and not all individuals—I do not think that we would have the legislative competence to do that.
That is fair enough.
On the Scottish rate of income tax, questions have already been raised about behavioural response and it has been suggested that there will be more. Professor Bell suggested that we ca cannie and be careful, even two years down the line when we have the powers. Do you have any feeling as to whether we could safely increase income tax by, say, 2 per cent and whether that would have much impact on behavioural response? Or are you not prepared to commit to a figure in that regard?
When we look at some of the analysis that has been undertaken by HMRC to inform this discussion—admittedly, this is about the SRIT and not about the powers recommended by the Smith commission—the estimated behavioural effects of a variation in the rate do not appear to me to be particularly significant. Even if there was a variation of 2 per cent, it does not look as though that would be particularly significant. However, that is about the SRIT. I think that both the committee and Professor Bell have explored different questions. Professor Bell explores different questions in his paper around some of the other opportunities and possibilities that exist through the wider powers from the Smith commission. That is why, before we come to exercise those powers, we have to do further work on the potential behavioural response to make sure that we come to properly informed conclusions.
I totally agree that we should do that work before coming to conclusions, but the question has been raised with us about the point of our having all those powers—I realise that it is early days—if we are doing the same as the UK on LBTT, landfill tax and income tax.
I take a different view. On LBTT—
The UK followed us.
We are now at the stage where the convener is feeding me lines. [Laughter.] That is very encouraging. However, the convener is absolutely correct.
We undertook a very significant reform of land and buildings transaction tax when it was implemented, and yes, the UK Government went for a similar system. I have taken steps in the supplement, for particular reasons, to try to avoid a situation whereby the market in Scotland was distorted by a change that took place south of the border. My rationale for the Scottish rate of income tax is not that I want to keep it the same as the rest of the UK. My rationale is that I am concerned that the exercise of the power in that respect would impose a burden on people who I do not think are in a strong position to pay it at this stage, and we do not have the fine-tuned measures to take account of that.
On land and buildings transaction tax, there will now be 3 per cent extra for second homes. Can you tell me why there is a £40,000 minimum and why that figure was chosen, rather than nil or some other figure?
It was chosen on the basis that there are very few properties below £40,000 that are selling on the market. Secondly, I wanted it to apply essentially across all transactions, which is why the £40,000 level was, in my view, an appropriate one to set it at.
Would nil not have worked just as well?
I suppose that there is an argument for that, which the committee could consider in relation to the legislation.
You said that you are consulting as we go forward, and there will obviously be separate legislation. Are you consulting Westminster, which is obviously doing something similar? Will there be a joined-up approach, or will we do something entirely separate from what Westminster does?
We will take our own decisions. The Westminster Government has produced a consultation document that sets out some of its thinking, and we will continue to consider that and other issues, but we will take the relevant decisions here.
On the more general tax, we have heard from various witnesses, quite a few of whom represent the property sector and people at the higher end of the property sector and who seemed to think that it was a bad thing that there might be fewer transactions over £1 million. My feeling is that, if there were no transactions over £1 million, that would be a good thing, because that would show that society was fairer and more equal, but I also accept that that means that you would get less tax, at least in the short term. In one sense, if the top end is being squeezed and the bottom end is being helped, that is good, and that is what the tax was meant to do, but how do you balance that up against actually seeing the revenues coming in?
That is where we have got to make a considered judgment in the round. I am pleased with the effect of land and buildings transaction tax on the lower end and middle part of the market. Encouraging trends have developed and have provided new opportunities for people in Scotland, which is helping the volume of transactions. Indeed, in the most recent quarter for which figures are available, July to September 2015, house sales reached the highest volume for any quarter since April to June 2008. There is movement in the housing market in Scotland at a level that we have not seen since the financial crash, so that is a helpful indicator.
In the first six months of LBTT, more than 5,700 additional house properties have been taken out of tax. All of that has taken place within a context in which the tax that I estimated would be raised, and which underpins the budget, is going to be raised. The housing market is stimulated, transactions have been taken out of tax that were not previously out of tax, so people have not had to pay that, which helps them into the market, and we have managed to raise the necessary tax to support public services and public finances. That is a pretty encouraging start to the exercise of the powers around land and buildings transaction tax.
Are you not worried about the top end of the market?
I have already conceded that there was a very clear forestalling effect in the first few months of 2015-16 and in the last quarter of 2014-15. I cannot escape the conclusion that from January 2015 to August 2015 forestalling has had a significant on the higher end of the market. Now that that opportunity for forestalling has gone, over the period that lies ahead we will begin to see what the effect is on the market.
If nothing else was changing, we would be able to look back and see that in itself, but we now have the 3 per cent supplement coming in, and presumably there will also be forestalling in relation to that. Will they start getting mixed up with each other?
I am not so worried about the forestalling on the LBTT supplement, because we will get the benefit of that.
Yes, but will it perhaps be harder to measure?
I am just trying to recall the exact volume of such transactions. I do not have the precise number at the front of my mind, but I am pretty sure—and I can be corrected if I am wrong—that the transactions that will involve the 3 per cent LBTT supplement represent less than 10 per cent of the market. I cannot give you the exact number, but I can say that it is not fundamental, and also we will get the benefit of that.
On that point, I thought that Westminster would refund us for the previous forestalling because it got the extra tax in 2014-15 that we have lost for 2015-16. When will a figure be agreed and when will Westminster pay it?
Those issues are tied up in the block grant adjustment discussions.
Fair enough.
The Scottish Fiscal Commission mentioned that for landfill tax, the target equals the forecast. Our target is to get landfill waste down by a certain amount over a period and that is the same as the forecast. The SFC questions whether the target and the forecast should be different. Are you totally convinced that the target will be achieved?
Those are two different questions. It is right to link the revenue to be raised with the achievement of the targets, because if we did not do that, we could have an expectation of generating higher tax. Our objective for landfill tax is for the volume of landfill to come down. As the committee will see from the forward estimates, they are for landfill tax to go from £142 million—if the first two quarters are replicated for the remainder of the year—down to £94 million in 2020-21. If we did not have a relationship between the tax to be generated and the exercise of the landfill tax policy, we could end up expecting more tax than there could be any reasonable expectation of being generated.
I was just thinking that, if we are expecting a reduction every year, that might vary by 1 or 2 per cent more or less.
That is undeniable. However, we now have better data and information on which to base our predictions; we can now see what we are generating in landfill tax much more clearly and we can also get more detailed information on the volume of landfill activity around Scotland. If we apply the right estimations of the pattern of landfill reduction, we should be able to get a better picture of what is involved.
Thank you. You have already been asked about the block grant adjustment, but I want to clarify a point. You said that the 2016-17 adjustment is £600 billion—I think that I mean million.
I hope that it is £600 million not £600 billion.
You said that the adjustment can be reviewed afterwards, but I take it that it will not be changed afterwards. However, if it turns out to be different, will it affect the next year’s adjustment? They will not go back and change the adjustment for 2016-17, will they?
12:00
Well, we have agreed a provisional number to enable me to settle the budget and I have to accept that there is the opportunity for a provisional number to be reviewed. That would happen with the benefit of outturn data for 2014-15, 2015-16 and 2016-17. Therefore, the number could be reviewed if there were a better figure.
If we did better for land and buildings transaction tax in 2016-17 than we are budgeting for, could that be taken back off us?
There is an interaction between the tax raised and the level of the block grant adjustment. Terminology such as
“could ... be taken back off us”
is difficult because we have a provisional block grant adjustment number and a provisional tax expectation number and we have agreed that those can be reconciled with outturn data once we see the pattern of the performance on tax. Therefore, there is the potential for those numbers to be revisited. That would be informed by the outcome of the fiscal framework negotiations.
Yes, but our long-term hope is that there would be a fixed agreement and it would not be changed retrospectively.
Those comments apply only to the £600 million figure for 2016-17—it is just for that one year. My hope is that we will have a fiscal framework that operates mechanically.
We had a good session last week with the Scottish Fiscal Commission, which has been quite challenging to the Government in some of the discussions that have gone on over the year. For example, one of the things that the commission said was:
“Progress overall in developing the forecasting methodologies has been slower than the Commission had hoped.”
Leaving aside the substance of that, I think that it is good that the commission has been asking such questions and challenging the Government. If it was doing the forecasts, who would challenge it in that way?
Anyone who reads the material that the Fiscal Commission has published and looks at the interaction cannot come to any conclusion other than that it has been a vigorous process of challenge. Admittedly, it has been shouldered more by my officials than by me, but it has been a challenge. The Fiscal Commission has provided a sustained challenge. That is exactly what we set it up to do and it has served Scotland well in exercising that degree of challenge. I welcome it.
Mr Mason raises an issue about who, if the Fiscal Commission were producing the forecasts, would challenge it and who could do so as effectively as it has challenged the Government. Lady Rice and Professor Hughes Hallett made that comment to the committee, and that is a real issue.
Out of curiosity, I will start off where John Mason left off on the Scottish rate of income tax. Cabinet secretary, you said that you did not have the range of finessed powers to compensate people. You gave the example of the council tax reduction scheme, but we could have landed on the bedroom tax. Might local government not have a set of powers that you could have sought to use?
For the sums of income involved, it requires a fine level of accuracy and precision to make it possible and practical to try directly to compensate people. There are eligibility criteria that drive the two schemes that Jackie Baillie cites. On the council tax reduction scheme, we have, in essence, had to mirror the council tax benefit arrangements in an almost flip-side fashion. That has been a helpful navigation through the issue, to make sure that, broadly, we got council tax reduction to the people who required it. We would have found that more difficult using the income measure, and there would also need to be a statutory basis for paying it.
The statutory basis exists for discretionary housing payments for bedroom tax, and it exists for council tax reduction, because we have legislative competence over the council tax. I would be interested to hear how we might arrange income compensation, outwith a provision such as the Scottish welfare fund, but it strikes me as being quite difficult for us to find a practical way to do that within legislative competence.
I would interpret that as meaning not so much that there is no power but that there is not a sufficiently finessed power. Would that be fair?
I am not sure that there is much difference between the two. The point that I am making is that, to address the challenge that John Mason has set, a proposition needs to be put forward that is very individually focused and targeted. I do not think that the powers exist that would enable us to do that—at this stage.
I turn to LBTT, with a focus on the residential element, because that is where there is concern. The non-residential element seems to be performing reasonably well, indeed better than forecast.
I am pleased that the OBR has revised its forestalling figures; that will benefit the Scottish Government financially. There is, nevertheless, a shortfall forecast to the end of the year. I have sat with you here before when you have, with some justification, accused the OBR of being incredibly optimistic in some of its forecasting. I now sit here and look at page 16 of the Scottish Parliament information centre’s briefing—you may have had an opportunity to look at it; I recommend it to you—which shows a complete reversal of that situation. The OBR is much less optimistic than the Scottish Government. For 2016-17, the OBR estimates that there will be £40 million less revenue from residential transactions. In that table, which is figure 7 on page 16 of the briefing, the Scottish Government figures are helpfully in blue while the OBR figures are in pink. The difference in the figures, by the time you get to 2020-21, is more than £70 million.
Let me put that in the context of your modelling. In your paper on the forecasting methodology, in table 7 on page 9, your forecast of the annual growth in volume of residential transactions, although positive overall, is declining. It goes from 5 per cent this year down to 1 per cent in 2020-21. I am trying to understand. Has the OBR suddenly become much more pessimistic, and on what basis? Why has the Scottish Government, given what we know about likely shortfalls this year, become so optimistic in the face of the evidence that it has presented about the declining volume of sales?
The first thing that I should say is that I do not expect there to be any shortfall in revenue this year over the devolved taxes that underpin the budget of the Scottish Government. Our budget requires £498 million in revenue to be raised and I am confident that that will be exceeded. I foresee no shortfall in the devolved tax revenues for 2015-16.
Is that overall?
Yes.
My question was about residential LBTT.
Yes. For the sake of clarity I say that I do not envisage any shortfall in 2015-16.
We are currently about £31 million adrift on residential LBTT. The estimate of forestalling has now been revised up by the OBR to between £20 million and £40 million—a mid-range of £30 million. What that says to me is that the estimates that we have put in place, while taking into account the issue of forestalling, are in the right scope.
I read with interest the contribution that Robert Chote made to the committee last week. It was an interesting discussion. I should point out that the estimate for 2015-16 from the OBR at the autumn budget revision was substantially revised down from the position that it took in July, and much more in line with the forecast that we have been making, which has been validated as reasonable by the Scottish Fiscal Commission. I think that all of the changes that we have seen happening are welcome.
Looking at the forward revenue forecasts over the next five years, I note that Mr Chote ascribed the difference to the Scottish Government
“assuming slightly more rapid increases in house prices over the period”,
and to a higher assessment of the increase in the number of transactions over the period. The latter point is essentially us assuming that we will return to the average number of house transactions in Scotland that we have seen over some years.
In characterising the difference between the OBR forecasts and the Scottish Government’s forecasts for the next five years, Mr Chote said:
“I would not regard the difference between the two as being large compared with the uncertainty that lies around either of the forecasts in isolation.”—[Official Report, Finance Committee, 6 January 2016; c 10-11.]
That puts the matter in its proper context.
This is the first time that we have done a forward forecast for five years, but the OBR has done—I think—one before, and the most recent one was a substantial revision downwards of the figures that it had previously, which is much more in line with our expectations.
I observe that Mr Chote was diplomatic and acknowledged that different forecasting models are deployed. It will be interesting for us, as anoraks, to consider which is the more accurate as we move forward. I assume that you and the Government will want to get your estimates of yield as near perfect as possible. You said that you think—
May I make a comment? I accept that. It is incredibly difficult to be absolutely precise about all the figures in our predictions, particularly when we start to look five years hence. However, the evidence that I would marshal on our plans for 2015-16 and the way I would summarise things is that our residential forecasts have been undermined by forestalling and our non-residential estimates and landfill tax expectations have been exceeded by performance. In the round, we are going to generate the amount of revenue that is required to support public services in Scotland. For our first year of estimating and predicting tax, I think that that is quite an encouraging position to be in.
My questions related to residential transactions because that is where there is a differential that is worth exploring. I think that you said that the estimate is based on returning to an average volume of house sales. Is that correct? My concern about the data is that, under your forecasting methodology, the forecast volume of sales is set to decline—while still remaining positive, which is good news—from 5.43 per cent this year to 1.25 per cent. That must have an impact on the forecast revenue that the Government is assuming.
That is about a growth rate. I assume that you have seen our forecasting methodology paper, which shows how the Government estimates that as a result of the growth that takes place over the next number of years we will end up in a position in which we have returned to average annual growth in volume of residential transactions. As we can see from the table on page 9 of the paper, you are absolutely correct to say that the growth rate in transactions is slowing. However, that growth rate will get us to the average volume of residential transactions.
12:15
What is the average?
It is 6 per cent.
And will we get to that? That is not evident from the table.
It is shown in the graph in figure 1 on page 9 of “Scottish Budget Draft Budget 2016-17: Devolved Taxes—Forecasting Methodology”, and the detail that underpins that is in table 7. The information is taken from Registers of Scotland and the register of sasines.
I just think that it is quite optimistic, given where we are. However, your response is interesting—
I will go back to the point that I discussed with Mr Mason. The Scottish Fiscal Commission has put the Government through the wringer—if I may talk in a language that we all understand—and has judged our forecasts to be reasonable.
With all due respect, it also judged that two years running it had not had an adequate response to the additional request to model the behavioural response to LBTT. In relation to the action plan that was presented late in the day, I do not want to put words in the SFC’s mouth, but I think that its annoyance that so little progress had been made on such an important item was evident from our dialogue with it last week.
The Government’s modelling paper contains extensive detail on behavioural analysis. I am not for a moment suggesting that this is the end of the story. I accept that we must continue to refine our approach to behavioural analysis and I do not want in any way to suggest that we are not doing so. The commission is quite right to tell us that we must do more and I accept that. We will do more.
There was a sense of urgency about that, rather than it being something for the long term. If you are reflecting that urgency, that is very welcome.
Let us move on to borrowing. In the budget you committed to using the limit of your borrowing powers, which is £316 million in 2016-17. I understand that the figure for this year was about £320 million, give or take—
It is £304 million.
Thank you, cabinet secretary. None of that has yet been drawn down and I am not sure whether you have established the mechanism by which you would do that. Is the issue caught up in the fiscal framework discussions? Do you intend to draw the money down? If so, when, and what are you likely to spend it on?
I will take your questions in reverse order. We will spend it on our capital programme—in essence, the borrowing facility is there to fund our capital programme.
The amount of borrowing that we draw down will depend on the amount of funds that we require to support capital projects within a year, so you will understand that I will not borrow any money that I do not require to use. If I had capital projects that were not required to be paid this year, there would be no sense in my borrowing the money. There is no sense in my borrowing £304 million if I do not need to spend £304 million, for example because the wet weather has slowed up a project and not much money is going out of the door on that particular project—or whatever the reason happens to be.
The issues are not tied up in the fiscal framework. The arrangements are in place, and we will borrow at the cheapest rate; whatever route we take will be the cheapest, in terms of repayments. We will borrow the amount of money that we require to support our plans between now and the end of the financial year, and I will update Parliament about the steps that we take in that respect.
At what stage will you arrive at a conclusion, given that we are well into the budget process?
That is an active issue on my agenda, and I am looking at it on an almost daily basis.
So the Government’s response is, “Soon.”
Oh, no. I know what the Government response “soon” means, and it will be much earlier than that.
Oh, that is even better. Soonest. There we go.
I would like to explore a borrowing power that the Government currently has for revenue. I listened carefully to what you said, and that power gives you the ability to borrow revenue up to £200 million in a given year if your receipts are less than were anticipated. You are confident that, in all areas, your receipts will exceed expectations overall.
Yes, I am.
You have no concerns about non-domestic rates or, indeed, the LBTT residential element.
I can use that resource-borrowing facility only for devolved taxes; I cannot use it for non-domestic rates.
That is fine. Let us move on to non-domestic rates. There is a forecast fall in revenue of 2.8 per cent in real terms. That is quite substantial and I think that it is the first time that a fall has been estimated for 2016-17. Is that the influence of the Fiscal Commission saying that your buoyancy estimates were too optimistic? Or is there something else going on that has led to that?
Two things are affecting the non-domestic rates pool. First, there is the effect of inflation, which is much lower than was predicted when we made our estimates of non-domestic rates. For example, the inflation forecast for 2015 reduced from 3.3 to 2.1 per cent, which has a substantial effect on the amount of non-domestic rates that we could expect to come forward. Secondly, the buoyancy estimate for 2014-15—which, you will recall, we reduced after the Fiscal Commission suggested it was optimistic—was 1.55 per cent but it actually translated to 0.82 per cent, which has an effect on our estimates. I would characterise the fall as being down to the effect of those factors rather than the estimation.
That is helpful to know. You have set a large business supplement at 2.6p, which, I understand, is double the comparable rate in the UK for similar-sized properties. You have kept quite a close correlation between the UK and Scotland on income tax, LBTT and landfill tax. Why have you approached non-domestic rates differently? I assume that you are collecting, in totality, the same amount but you are placing the burden in different places. Is that a fair assumption?
It is roughly the same amount, yes. In some cases, there are similarities between the approach that we have taken here and the approach that is being taken in the rest of the United Kingdom, but in others we have taken a dramatically different approach. For example, we have taken a dramatically different approach on the small business support scheme, as our scheme has been significantly more generous than the scheme in the rest of the United Kingdom. We are at the more generous end of the spectrum in that respect.
I faced difficult choices and came to the conclusion that, on the specific issue that you raise, I would have to take steps to strengthen the volume of revenue raised by non-domestic rates. I therefore decided to apply a higher business supplement for large business properties. That translates to a total increase of 3.4 per cent in the rates bill for a company that pays the large business supplement combined with its core business rate compared to an annual increase in 2015-16 of 2.3 per cent.
If we look back over the last few years, in 2011-12 the increase in the rates bill for a company that was paying the large business supplement was 4.6 per cent, and in 2012-13 it was 5.8 per cent. Set within that context—particularly when we have had pretty low levels of business rates increase because inflation has been reducing those increases—I think that 3.4 per cent is a not unreasonable charge for us to make.
I think that businesses might take a slightly different view. I have had a letter from Asda that states that it would pay 2.6 per cent higher rates in Scotland than in the rest of the UK. Businesses reference the commitment that you and the First Minister gave to ensure that the rates regime is the same north and south of the border. You would not want to create any disincentives for business, so you would want rates to be kept in line with the rest of the UK. There are genuine concerns from businesses about the investment decisions that they will make on the back of that.
I understand those concerns and I do not in any way dismiss them. I would just say that our commitment has never been to have the same business rates regime as England, because, as I have explained already in relation to the small business bonus scheme, we have had a significantly more generous scheme in place. Our commitment has been to maintain the uniform business rate, which we have maintained at 48.4p. However, I took a decision that it was possible to increase the large business supplement to strengthen the non-domestic rates pool.
A lot of ground has been covered already, so I have only a couple of questions.
Cabinet secretary, you mentioned the impact of forestalling and said that that is forming part the discussions that are taking place with Treasury ministers on block grant adjustments.
I wonder whether the Treasury has given any indication of its numbers related to the impact of forestalling, particularly in its March figures. We have had figures put before us that show a quite substantial forestalling on £1 million-plus properties in the March period, which I imagine led to quite a boon for the Treasury in that period as well. Has there been any indication from the Treasury on that?
Not from the Treasury. Obviously the OBR forecast has increased, which I think is an independent validation of all those questions.
Let me think. The data on the number of transactions must be—will be—available to us; I am just looking at my papers. In Registers of Scotland’s statistical release for July to September, there is such data, but I do not know whether it goes down to the degree of detail on price bracket that you are asking about. I do not think it does in this publication, but I am pretty sure that Registers of Scotland—
If I can be helpful, the numbers that were put before us were from a Your Move/Acadata examination of house transactions. They indicated that 90 £1 million-plus sales took place in March and none in April.
As I said, I accept that forestalling had an impact, where transactions took place between January and March, and that will have had an effect on the market. I have made no attempt to avoid that point.
No, indeed. I was merely asking whether the Treasury had given you a look at what data it had on the impact on stamp duty land tax during that period.
No.
That is helpful in that respect.
On the SRIT and the on-going budget discussions, I know that you have always said at budget time that if other parties in the Parliament have alternative approaches or would wish to see something different being done, your door is open to them. Leaving aside any comments from the deputy convener, have you received any other opinions or views in relation to what you should be doing on the SRIT at this stage?
It is early days. [Laughter.]
12:30
Finally, to wrap up the issue of forestalling and behavioural response and so on, there is a contrast between the approach taken at Westminster, where the chancellor stands at the dispatch box and says, “I am announcing a change and it is effective as of midnight,” which is a bid to prevent a forestalling effect, and the approach taken by the Scottish Parliament that is a legacy of the parliamentary approach to budget scrutiny. I know that you are very keen to respect the views and wishes of Parliament on that. Given that, as we get more powers over areas of taxation the likelihood of behavioural response to pre-announced changes increases, do you have a view on whether there is a more helpful approach that could be taken?
It raises some issues for Parliament to consider about how we organise ourselves. I am happy to engage in discussion with the committee about those points. The ability of the chancellor to change stamp duty rates that night created a difficulty for us and we can see the effect of that, which is approaching £30 million-worth of a problem for us. It is a tangible issue.
What I am doing with the 3 per cent LBTT supplement requires primary legislation and we are going to have to move at some pace, as the committee may have noticed—he says, delicately. The advantage that we have is that if there is a forestalling issue, we are not at risk, rather we get the benefit, unless, that is, people in England decide to buy holiday homes or buy-to-let properties in Scotland to avoid the George Osborne 3 per cent proposition in the window between January and March. That might happen for properties that would attract an LBTT charge here, but I do not think that it will be on the scale of £30 million.
There is an issue to be explored about our process. We might need a slightly more nimble process to address such questions. That is a discussion that I am happy to engage in with the committee.
The chancellor is not necessarily restricted in when he brings in such changes; as we saw, he did not have to announce the stamp duty change at a specific point in the calendar year. Again, is that something that you are reflecting on or should Parliament be reflecting on the flexibilities within the parliamentary structures to allow for such an approach in future, should the Scottish Government choose to make changes?
Notwithstanding the requirement for us in certain circumstances to respond promptly and swiftly, I take the view in general that it is a good thing to do all such things as part of a budget process and to set out—as I did in December, albeit that it was late in the year—the whole picture of tax, revenue and expenditure all in one go to allow Parliament to consider the issues.
In answer to Jackie Baillie, you said that you think that the devolved taxes for 2015-16 will come in ahead of projections. If that happens, was the block grant adjustment for 2015-16 “without prejudice”, or could it spark a review? Was it slightly different from 2016-17, in that it was absolutely fixed for the year?
My recollection is that it was absolutely fixed.
So there is no risk. However, you said that for 2016-17, the adjustment is, to use your term, “without prejudice”.
That is perhaps to do with the fact that we have had to have a second year of a one-off block grant adjustment. I do not think that anybody wanted that, but it is happening because we do not have agreement on the fiscal framework. The budgets are in two different categories. I am not complaining about any part of it—it is where we are.
The OBR projection is something like £627 million and your projection is £671 million. The £600 million is a good bit below both those estimates, so are we not almost certain to have some kind of adjustment later?
We’ll see. [Laughter.] As a father of numerous children, Mr Brown will know what “We’ll see” means.
We could spend the rest of the day discussing that. I suspect that we will not get much more clarity, so I will move on.
On income tax, you set the 10p rate for 2016-17. My recollection could be wrong—I am going by the statement that you gave to Parliament, which I have not reread in advance of this meeting—but I am 50 per cent sure that you said that the Government will set out its medium-term intentions in the early part of the year. Obviously, there is an election coming up in May, so things will depend on who is running the country after that. Do you intend to set out over the next month or two the Government’s medium-term intentions for income tax?
I would like to be able to quote exactly what I said, but I will struggle to find that part of my statement without keeping the committee waiting. Essentially, what I said was that, subject to securing agreement on a fiscal framework, I will set out our medium-term approach to tax.
I can now confirm that I said:
“I hope that, from 2017-18, the Parliament will have more flexibility in setting income tax rates. However, that will depend on reaching agreement on a new fiscal framework and final passage of the Scotland Bill. I confirm that, subject to achieving those outcomes, the Government will set out its longer-term intentions with regard to income tax ahead of the dissolution of Parliament at the end of March.”—[Official Report, 16 December 2015; c 33.]
I was making the simple point that we will not be able to set out our position if we do not have a fiscal framework because we will not have the Scotland Act. However, if the fiscal framework is agreed by 12 February, which is before dissolution, I will set out my position to Parliament.
We have talked a bit about non-domestic rates. I am looking at page 95 of the budget. From 2015-16 to 2016-17, non-domestic rates appear to go down, not just in real terms but in cash terms, by about £30 million. I assume that included in the figure for 2016-17 is the £130 million or so that you anticipate will be collected.
Yes.
Like for like, non-domestic rates are potentially down by £160 million. Even with an increase in the poundage of 0.8 per cent, taking you to 48.4p, and with the increase in the large business supplement up to 2.6p, we are still down in cash terms by £30 million. Obviously, growth for the economy as a whole for that year is projected to increase. I am at a loss to understand why we are going down in cash terms when we have increased taxes and overall economic growth is projected to be in the region of 2 per cent.
I am exploring the very same questions. I would add into that the pattern of non-residential LBTT transactions, which are very encouraging. I am determined to understand the relationships between all those things. According to figures that have been announced this morning, gross domestic product growth for this quarter is 0.1 per cent. We are at 1.7 per cent annualised growth, which is reasonably healthy. By comparison, the UK is at 2.1 per cent. There is growth in the economy.
Non-residential transactions are performing well—much better than we anticipated. What I do not know is whether they are performing better because our estimate was not good or was not as effectively informed by data as it might have been, or whether it is because the economy is doing well. According to analysis, the availability of property is looking tight again in some parts of the country. A variety of factors make the non-domestic rates position look a bit out of kilter. I am exploring that issue—it is a reasonable issue for Mr Brown to raise.
We are most of the way through the current financial year. Are we on track with regard to the 2015-16 figure for non-domestic rates, or was the position slightly optimistic, with the result that there is an adjustment for 2016-17?
There will be some effect in 2015-16 because of the reduction in inflation. Such factors will begin to play in, as will some of the effects of buoyancy; they will affect the non-domestic rates pool
So, as far as you aware, are we slightly behind schedule for 2015-16, or is it too difficult to say?
It is difficult to be precise about that. We will get a better idea as the year goes on.
You have been asked a couple of questions on the large business supplement. Has a business and regulatory impact assessment been carried out for that? If not, will there be one?
We are in consultation on that. That is the context in which we will consider issues that are relevant to a business and regulatory impact assessment.
I want to focus on the residential aspect of the land and buildings transaction tax. You have made comments about the behavioural impact, and there appears to be a bit of a disagreement. Earlier, you told the convener that you believe that it is, as a general proposition, important to consider the behavioural impact of tax, and that that is something that you will work on year by year. You appear to have put those words into practice in relation to the LBTT supplementary charge, in trying to work out its behavioural impact.
However, I want to ask you about something that the Scottish Fiscal Commission said in its report—in paragraph 8.3 on page 37—and reiterated in the committee last week. Last year, the Scottish Fiscal Commission recommended that the behavioural response be considered in relation to LBTT. Now, it says:
“we are increasingly concerned about the residential LBTT forecasts which still assume no behavioural responses.”
Over the piece, the commission has expressed its view pretty strongly. What will the commission have to do before you consider the behavioural response to LBTT?
That work is being undertaken now, in the light of the commission’s recommendations, and it will have an effect on our projections—all of which will have to be tested by the commission.
Instead of just doing single-year projections, you have helpfully set out your projections over the whole five-year period. When we get to £545 million-worth of residential LBTT, your assumption—according to the Scottish Fiscal Commission—is that £188 million of that sum will come from fiscal drag. The commission raises some questions about how viable that is. Is it the Government’s intention that there will—the position will depend on the outcome of the election—be no changes at all to the threshold over that five-year period?
12:45
In the forecasts that we have published, there are no changes to the assumptions. There is a rolling forward of the existing policy precision on LBTT. Of course, I must reserve the Government’s right—if the Government is fortunate enough to be re-elected—to change the provisions if it decides to do so. I do not want the committee to read the estimates as definitive predictions; they are predictions based on application of the current policy framework and the variables that will get us to that point in 2020, for example.
I discussed with Jackie Baillie some of the issues around the number of transactions and assumptions about price, and Robert Chote discussed some of those issues with the committee. We have to be careful about the five-year forecasts: they are just a setting out of what would happen if we did not change anything, but we may well change things, and that will be for the Government to decide in due course. We are setting out a proposition for 2016-17 that underpins a proportion of the budget. That is critical.
As I am sure all the committee members did, I received a letter from Asda about the large business supplement. I observe that, before the Scottish Parliament existed, the differential between rateable value in Scotland and England was dramatic, and not in Scotland’s favour. It was only when you, I think, adjusted the poundage that our rates started to become anywhere close to being equal with those in England. It is worth noting that Asda and other such companies are only just beginning to pay non-domestic rates that are comparable with those in England.
In the interests of fairness and accuracy, I point out that a previous Government—the then Scottish Executive—took such steps in its latter days. I think that those probably happened in 2005-06 or 2006-07.
I think that it might have been 2006-07.
Jean Urquhart is right that, for many years, the poundage rate in Scotland was higher than that in England. The rates were equalised in, I think, 2006-07 and the Government has sustained that since then. I point that out just to be fair.
I am happy to be fair, cabinet secretary.
I will ask about the timelines. You said at the beginning of the meeting that the Scottish Parliament must be satisfied with the fiscal framework and that there would be opportunity for scrutiny. The parliamentary session will cease on 20-something March and you hope to reach agreement on something that you can present to the Parliament on 12 February, so do you hope that scrutiny will be completed and that you will invite the Scottish Parliament to approve the agreement before the Scottish election?
I have made it clear to Parliament and the United Kingdom Government that we will not put a legislative consent motion on the Scotland Bill to Parliament unless we have a fiscal framework that we can recommend to it. Therefore, the timetable dictates that we must have agreement for that in place in time for us to lodge a legislative consent motion by 12 February.
If we get to that point, I will recommend to Parliament a fiscal framework that I have negotiated. I go into that negotiation in good faith to secure an agreement that will implement what was required of us by the Smith commission. There is a possibility that I will not be able to get an agreement that I am satisfied is consistent with the Smith commission’s proposals. If so, I will not come to Parliament with such a recommendation. I hope not to be in that position, because I want us to be able to exercise the powers that we will have under the Smith commission’s proposals.
That is how the sequence of events works. I accept that the committee is not able to see an early, mid or late draft of the agreement for the reason that there is no such draft because we do not have an agreement yet. That is being worked through. I will come to Parliament with a legislative consent motion only if I am satisfied with the detail of the fiscal framework that is before us.
I might be ignorant of the procedures, but will there be any public consultation on the agreement?
No.
What scrutiny opportunities will there be? As you know, a number of economists are anxious about that.
The issues about the fiscal framework have been pretty well aired in the wider media. Indeed, the committee has taken evidence from a range of different experts on the question. The issues are out in the open.
I appreciate that it is not ideal, but throughout the process I have taken part in parliamentary debates and the committee’s inquiries—I have appeared on a number of occasions to give evidence—and I have tried to inform the discussion as much as I can about the issues that are at stake. However, I cannot tell the committee the detail of the agreement. That is not because I am keeping it to myself but because it is not agreed. Nonetheless, I am clear in my mind what has to be in that agreement because the Smith commission set it out. If that is not what is in the agreement, the legislative consent motion will not come to Parliament.
That appears to have concluded questions from the committee. I have one or two questions to follow up. On non-domestic rates, what is the buoyancy rate for 2016-17 and how does it compare with 2015-16?
The buoyancy rate for 2016-17 is 0.97 per cent and for 2015-16 it is 1.25 per cent.
I have a follow-up to a question that Mark McDonald asked. You talked about not having discussions with the Treasury about forestalling. Was that not part of the discussions about the block grant adjustment?
No, Mr McDonald asked me whether I had had discussions about the number of £1 million properties. We and the Treasury have talked about forestalling.
I apologise.
To clarify, convener, my question was about whether the Treasury had given any indication of the impact that forestalling had had on its revenues. The cabinet secretary indicated that that was not the case.
I have a question about the SRIT and whether or not it is regressive. [Laughter.] The Scottish Trades Union Congress has said that the SRIT is regressive. One of the reasons why it said that is that if the basic rate of tax goes up from 20p to 22p, that is a marginal rate of 10 per cent whereas, for higher taxpayers, an increase from 45p to 47p is a marginal rate of 4.4 per cent.
Is that a question?
The question is this: is that the case?
Those factors are absolutely correct, convener, but I cannot deny that the Scottish rate of income tax as it stands is progressive. We have to be careful that, in the decisions that we take, we maintain that progressivity.
Do you wish to add anything before we wind up?
I wish only to say that I look forward to meeting the committee in my constituency on Monday. I am profoundly grateful to the committee for enabling me to welcome it to Pitlochry.
As you know, it is a key marginal seat. We are trying to do all that we can to assist you with the election, which is only a few months away. [Laughter.]
I thank everyone for their questions and contributions.
Meeting closed at 12:54.Previous
United Kingdom Spending Review