The Fiscal Context
The COVID-19 pandemic has caused a global economic downturn and has pushed up borrowing and public finances into deficit the world over. All European countries, including the UK, have taken unprecedented steps to fund the health and care response and to support businesses and individuals to deal with the sudden reduction in economic activity necessitated by measures taken to manage the pandemic. The UK Government's emergency response has been welcome but it is coming to an end, and the future recovery package, equivalent to 1% of UK GDP, lacks the ambition of responses that we have seen from the EU and some other countries.
In Scotland we have committed to spending all £6.5 billion of the funding we have received through the Barnett formula to tackle the effects this crisis has had on our health service and economy. Our business support measures complement the UK Government's support to furloughed workers to ensure that the economic harm of the pandemic is reduced as far as possible and to enable a quicker recovery.
Before the crisis hit, the 2020‑21 Scottish Budget had set out an ambitious expenditure programme in the context of the economic damage caused by Brexit. COVID-19 has required the Scottish Government and its delivery partners to work differently and to integrate resources and decision making to tackle the public health crisis.
Key economic levers, including the vast majority of tax levers and almost all borrowing powers, lie with the UK Government. Their decisions still determine, in large part, the size and shape of the Scottish budget and therefore by extension the resources we have to respond to the economic crisis. The Fiscal Framework agreement with the UK Government gives us only very limited borrowing powers for capital expenditure and on resource only for the purposes of cash management or to deal with forecast errors relating to tax receipts, social security expenditure and the block grant adjustment.
The Scottish Government's ability to fulfil its devolved responsibilities remains hampered by a centralised UK budgeting approach that leaves little fiscal flexibility to the devolved administrations. We need greater fiscal flexibility to tackle this economic crisis; and so the UK Government must give the Scottish Government either the additional funding or the powers needed to respond to these challenges.
In addition to these more significant changes we will continue to press HM Treasury for additional fiscal powers, which would allow the Scottish Government to take some measures to manage our existing budget more effectively; for example, the flexibility to reallocate any unused capital funding to day‑to‑day spending and to borrow up to £500 million this year. In the longer term, supporting the recovery and renewal of the Scottish economy after COVID-19 will require a much broader range of devolved fiscal powers than the Scottish Parliament currently has.
Responding to the crisis and supporting recovery
We have already called for the UK Government to match the ambition of comparable countries and support a recovery package worth £80 billion, 4% of UK GDP. This would allow administrations across the UK to support their communities, businesses and public services to get back on their feet. The last thing that is needed, or wanted, is more UK Government driven austerity; we know it would simply cause more harm.
Building fiscal resilience
The current fiscal framework is built on the assumption that shocks affect the countries of the UK in a similar way.
The Fiscal Framework protects Scotland against some shocks, but it limits Scotland's policy autonomy in the face of a crisis. The block grant adjustment mechanism means that UK tax and social security decisions have a direct impact on the Scottish budget, even though the respective tax and social security powers are devolved. This could lead to our budget reducing as a result of taking decisions to manage the crisis that are right for Scotland, but different to those taken by the UK Government. So we have the policy powers to act but our hands are tied by the constraints on our fiscal powers. It is clear that the Fiscal Framework is not fit for purpose. It therefore needs to be urgently and thoroughly reviewed. We will ensure that this comprehensive review of the Fiscal Framework takes place as quickly as possible and takes into account not just the views of the Scottish Parliament but of a wide range of stakeholders here in Scotland.
In the meantime, we will continue to press the UK Government to agree the temporary flexibilities that we and the other Devolved Administrations have requested. Ultimately, without a significant change to the Fiscal Framework the Scottish Government, and Parliament, is hamstrung in its response to the crisis. The UK Government has massively increased its borrowing this year to pay for schemes like the furlough scheme. This type of approach is unavailable to the Scottish Government and will inevitably mean difficult decisions over the coming months in how we balance our response to the crisis with our wider policy commitments and ambitions to renew our communities and economy.
Scottish taxation policy
Where the Scottish Government does have the powers to act, we have a strong track record of using these powers to make taxation fairer and more progressive. We have also taken a more open, consultative approach to taxation - something we will continue to do in relation to the COVID-19 recovery and in the lead up to the Scottish Budget 2021‑22. To that end, we will launch an open call for Budget representations, Budget 2021‑22: Supporting the COVID-19 Recovery - Scotland's Taxes and Fiscal Framework, seeking in advance of the Budget the widest possible range of views on the role of our devolved taxes and the Fiscal Framework in the COVID-19 recovery.
We have taken swift and significant action on Land and Buildings Transaction Tax (LBTT) to help homebuyers and support Scotland's housing market in response to the impact of COVID-19. The increase in the starting rate threshold for LBTT to £250,000 until the end of next March, means that, excluding the Additional Dwelling Supplement (ADS), some eight of out ten homebuyers and an estimated nine out of ten first‑time buyers currently pay no LBTT.
We have a strong record of delivering a competitive non‑domestic rates regime. We have offered the most generous relief package in the UK for a number of years, and the lowest poundage for 95% of properties.
On 11 March 2020, the Non‑Domestic Rates (Scotland) Act 2020 received Royal Assent to deliver the legislative framework necessary to enable a number of the Barclay Review recommendations to be implemented. The Act delivers the move to a three‑year revaluation cycle and reforms to the appeals system as well as new powers to assessors, local authorities and ministers to improve the administration of the system and to tackle tax avoidance.
On the same day that the Act received Royal Assent, the World Health Organisation (WHO) declared COVID-19 to be a pandemic. The Scottish Government responded swiftly and as part of our over £2.3 billion investment in Scottish business we have effectively underwritten £1 billion of non‑domestic rates income for Local Government in 2020‑21, by introducing new reliefs - including a universal 1.6% rates relief for all non‑domestic properties across Scotland, and a 100% relief for properties in the retail, hospitality, leisure and aviation sectors from which an estimated 30,000 properties will benefit. These decisions have protected businesses and, unlike in England, also protected council funding due to the Scottish Government's policy to guarantee the level of funding provided by Non‑Domestic Rates and General Revenue Grant combined.
The next non‑domestic rates revaluation in Scotland will take effect in 2023, the same year as in England and Wales, but will be based on rental values as at 1 April 2022, and not 1 April 2020. This will mean that properties' rateable values will better reflect true market conditions, taking into account any COVID-19 effects, and delivers our commitment to move to revaluations with a one‑year tone date two years ahead of schedule.
We have used our powers over Income Tax to create the most fair and progressive system in the UK, protecting lower and middle income taxpayers while raising additional revenue to support our economy. Our approach has ensured that for the third consecutive year, the majority of people in Scotland will pay less tax than they would if they lived elsewhere in the UK.
With outstanding state aid issues related to the UK Aggregates Levy now resolved and the UK Government review complete, we will work closely with stakeholders in the coming months to consider policy options and develop the necessary evidence base to support the introduction of a devolved levy in Scotland. This will build on the research recently published by the Scottish Government. However, it will be for the next Scottish Parliament to consider the legislation that would be required to provide for a levy in Scotland.
We also remain fully committed to introducing the Air Departure Tax (ADT) when a solution to the Highlands and Islands exemption issue has been found. We will engage with the HM Treasury on their consultation on Air Passenger Duty reform and will work with stakeholders to find a solution for aviation that remains consistent with our climate ambitions.
Plans for the implementation of a Transient Visitor Levy were put on hold as part of our response to the COVID-19 crisis and in recognition of the severe economic impact COVID-19 has had on the sector. Our priority right now is to work with the sector to ensure a vibrant and sustainable future for the tourism industry in Scotland and future consideration of the levy will take account of the changed context the industry is operating in.
The Scottish Government is working with the UK Government to develop an agreed methodology for VAT assignment. This process has been complicated by the economic shock as a result of COVID-19 and we are focused on ensuring that we get the best deal for Scotland.