How to pay for a Minimum Income Guarantee

Introduction

The independent Minimum Income Guarantee Expert Group (referred to as ‘the Expert Group’) is considering potential ways to raise tax revenue for any spending increases that result from providing a Minimum Income Guarantee (MIG). These considerations will inform a report and recommendations to the Scottish Government. The aim of a MIG is to provide a universal guarantee of financial security. This is achieved through an income floor beneath which no one would be allowed to fall. The vision for a MIG in Scotland is about not just increasing the generosity of the social security system, but also widening mutually supportive areas that would form the basis of creating a MIG in Scotland. These include:

• reforming the social security system so it provides a level of support and income which enables dignity, and which sets an agreed standard for quality of life;
• making a fairer labour market, in particular to boost quality and security of work and to promote access; and
• expanding free and/or affordable services and the potential regulation of costs of essentials, including those that promote labour market access, such as childcare and transport.

It is expected that the MIG would vary by need and the mix of interventions across social security, work and essential services and costs would vary for different groups in society.

These changes to Scotland’s social policy and economic model are naturally longer term implementation goals and the Expert Group will set out a roadmap in their report towards this.

One of the main challenges for implementing a MIG is that its long term viability is dependent upon adequate devolved powers, especially revenue-raising powers. The Expert Group is developing a road map for a MIG, outlining a vision for the first, next and further steps that can deliver a MIG. Achieving all these steps will depend on new powers becoming available to the Scottish Parliament; with nearer term steps tied closely to the existing devolution settlement and longer term steps looking at what might be achieved with more extensive devolved powers.

In previous research commissioned by the Expert Group, WPI Economics highlighted that one of the ways to meet the cost of implementing a MIG is through higher taxes. These tax increases could be significant in order to fully fund a MIG. This research suggested that increasing taxes to pay for MIG-type policies could lead to adverse employment effects for every income group due to higher taxes, which would be needed to ensure fiscal sustainability. It also found that, in the longer term, tax-funded MIG-type policies that are designed to boost overall employment can lead to higher incomes and higher tax revenues among people in the bottom income deciles. However, our review cautioned that increasing taxes and the decision of exactly which taxes to increase is just one option that policymakers would need to consider when deciding how to fund and implement a MIG, and that the specifics of policy design are critical to informing funding options.^[19]

This report builds upon WPI Economics’ previous research to consider more fully some of the revenue-raising options that are available to fund a MIG. This report will provide:

• an assessment of the key current tax mechanisms and other existing powers available to the Scottish Government to raise additional finance in the nearer term to fund the additional cost elements of a MIG and any other options;
• a consideration of changes to rates within the existing structure of taxes but also potential options to change tax allowances, reliefs and the tax base more broadly;
• a summary of longer-term options for reform to the tax system, including options which require further powers being devolved to Scotland, that would allow a policy like a MIG to be financed;
• a review of international comparisons that can tell us how other countries raise greater revenue than Scotland (and the UK), in particular to fund greater social security spending in a fairer way; and
• based on these reviews, an analysis of the options available to the Scottish Government to finance a MIG in Scotland.

It is important to specify that this report is concerned solely with revenue-raising choices that could fund a MIG. It does not specifically link these to spending choices. It explores a range of different options across different tax groups, and how different levels of powers would influence what the Scottish Government and Scottish Parliament could do with these taxes.