Barnett and Tax Credits
Confused by the Barnett and Tax Credit debate? Kimberley Cadden attempts to clarify it all.
Recent tax credit proposals by Scottish Labour are outdone in their lack of detail only by the lack of scrutiny they have received by the ever subservient Scottish mainstream media; who incidentally seem intent on demonstrating both the ineptitude and humiliation of forever being a flunkey. To most of them, it seems, regurgitation is journalism.
Well I am someone who has had to live on tax credits much of the time and indeed have been on and off them for years, so the detail of this policy actually matters to me, and it increasingly seems as though people who live in poverty like myself have to start scrutinising for ourselves. This is due in no small part to the fact that the realities of our lives are largely lost in superficial point-scoring politics, and indeed the egos of narcissistic newspaper editors. So in frustration I decided to look at the detail of what the Labour party has said they are going to do for people like me.
The first crucial point is that Labour have been clear they are not talking about mitigating cuts like the Scottish government have been doing, but rather have promised to ‘reverse’ and ‘restore’ tax credit cuts in full; including for those who have completely lost entitlement at UK level. Indeed this has been backed up by vow-insurer Gordon Brown, who has said that tax credit cuts can now be ‘repealed’ and thus the vow has been delivered; apparently confirming part of the purpose of the vow was to force the Scottish government to pay for more with less, screwing not just them but the Scottish people over in the process.
Since the UK government have confirmed they intend to allow the Scottish government to reverse tax credits via amendments they made to the Scotland Bill permitting the creation of new benefits (and assuming the new powers do in fact actually allow this) the pertinent question is, then, whether or not we can afford to pay for it; and to understand how Scottish Labour plan to do this, we have to look at their recent policy proposals.
Kezia Dugdale announced that Labour would commit to a 50p top rate of income tax in Scotland, which is a policy the IFS has said would only bring in roughly £8 million per year (they projected £100 million for the UK as a whole) although this was in the event that the UK as a whole adopted the policy. Indeed Kezia herself acknowledged that introducing this measure solely in Scotland may not even bring in a penny, and yet she has proposed that it would pay for a £78 million ‘fair start fund’.
Then we move on to Air Passenger Duty, which the SNP has committed to cutting by 50% in Scotland in 2018. Kezia has claimed that by not cutting APD, £250 million in extra cash would be freed up, of which she said the following in Holyrood Magazine:
“we also have an additional redistributive mechanism which we would use for education, which is to scrap the APD measure which would bring £250 million and we would spend that on educational inequality”.
Confusingly she has since gone on to say that these funds would solely go towards paying for the reversal of tax credit cuts. The problem with this, besides the fact she has spent the same money twice, is that not cutting a tax doesn’t create additional funds; in order to create additional funds it would have to be a reversal of a tax cut that had already been made – i.e. a tax increase.
To make this as clear as possible it’s important to look at how our block grant will be revised in the first year after we receive our new powers.
Both the Smith Agreement and the Scotland Bill make it clear that neither party (the Scottish parliament nor the UK parliament) will be at a loss as a result of the new devolved powers. They further clarify that as a result, revenue removed from the UK due to the transfer of tax powers will be taken off the Scottish block grant pound for pound. In addition, expenditure removed from the UK as a result of the transfer of spending powers will be added to the block grant, pound for pound. Since those revenues and expenditures are based on UK policies, whether or not we can increase income to the Scottish parliament via tax receipts after the transfer of powers will depend on the policies we inherit and indeed the scope they leave for tax increases.
As things stand we will inherit APD at its current level (i.e. the level Scottish Labour wishes to keep it at), a higher tax rate
threshold of £43,000 (which comes into effect from April 2016 and is again the level at which Scottish Labour wishes to keep it) and a 45p top rate of tax. Therefore whoever the Scottish government is in 2016 (and thus the governing party when the new powers are transferred in 2017) they will be unable to create any additional cash of any kind through simply continuing these policies. Professor Jim Gallagher confirms this: “If a Scottish government leaves tax rates unchanged, the only changes to its revenue will be from how much more or less the Scottish tax bases…grows compared to the same UK tax bases. Over time, that could be significant, but over the first few years will not be large”. Thus the only way to bring in significant additional cash from these taxes in the course of the next parliament will be to raise them and indeed the only tax here that Labour proposes to raise is the top rate of tax, which – as outlined above – will bring in anything from zero to a measly £8 million.
Although the higher rate tax threshold is set to rise to £50,000 by 2020 in the UK, it’s doubtful that this will have gone up considerably, if at all, before the transfer of tax powers in 2017; therefore as things stand, based on current UK policies and what they will mean for our choices post the devolution of our new powers, Scottish Labour proposes that £768 million worth of policies (£78 million ‘fair start fund’, £250 million for ‘educational inequality’, and £440 million for tax credit cuts ‘reversal’) will be paid for with anything from zero to £8 million. Even if we get lucky and the higher rate threshold is raised a little between 2016 and 2017, this still wouldn’t raise a substantial amount of money if it were reversed, and certainly nothing like what Labour needs for their policies.
This isn’t only a disaster for the credibility of Scottish Labour’s policy platform. Their false statements regarding APD (which the UK government has no policy to change at present) can only be down to either a failure to understand how Barnett works (which would be rather incredible) or that they are deliberately lying to the Scottish public, exploiting the hardship of people like me in order to make political capital by proposing invalid policies purely to win votes; despite the fact that their failure to account for themselves only creates more distress in those whose hopes they initially raised. This is damning.
It’s worth mentioning here that cutting APD is a SNP policy aimed at stimulating economic growth. An in-depth Edinburgh Airport study suggests that a 50% decrease in APD will result in increases in tourism as well as the creation of around 3,800 jobs. According to their analysis, when the amount lost due to forgone APD is compared to the economic benefit of the policy (GVA), in the first five years the Scottish economy stands to benefit by £350 million. Of course this would also lead to higher tax receipts in the form of income tax, VAT and likely lower spending in the form of savings on devolved welfare. It remains to be seen whether the benefits actually live up to those which are projected, however what we cannot at all take as certain at this point is that a cut in APD will lead to less revenue for the Scottish government and indeed it could well lead to the opposite; but what we can know for certain is that the measure will grow our economy.
For anyone doubting the credibility of a study carried out on APD by an airport, PwC – one of the ‘big four’ auditors – undertook an even more in depth study for UK and Irish airliners on the outcome of abolishing APD in the UK and they came to very similar findings, not least of which was that income from resultant increases in income tax, corporation tax and VAT receipts would more than cover the loss in tax receipts from foregone APD. This highlights one of the many inadequacies of the Scotland Bill; whilst our economy stands to benefit greatly from cutting APD (that is if these studies are even remotely correct) we cannot reap some additional rewards of our policy as some of the increases in VAT receipts and all of the increase in corporation tax receipts will go to the UK government, which the Tories can then spend as they please. Therefore being in the UK without the full devolution of tax leads to this situation where some of the most significant benefits of our growth policies will go towards the Tory project of a budget surplus (which itself will only increase private debt) rather than back into public services and investment in Scotland; or indeed towards helping with the mitigation of welfare cuts.
Without much in the way of overall additional revenue via rising tax receipts (due both to inadequate tax powers and minimal scope for raising taxes) if the Scottish government is to mitigate welfare cuts it will likely still have to find most of the money from other parts of the budget where funding has already been cut and money is extremely tight. In the case of tax credits, if any Scottish government were to reimburse for the cuts in full, this would cost hundreds of millions of pounds, not just in terms of covering lost benefits, but in administering a completely new and complex claims system. This is presumably why the Scottish government have been clear for months now that whilst their efforts will always be to mitigate cuts as much as possible, it will take much time and investigation to figure out how fully any further cuts can be covered. And of course they have known for less than a week that they can create new benefits, which is necessary if cuts to tax credits are to be mitigated anywhere close to in full.
However the SNP did present what would be a good solution to this during the Smith negotiations, where they argued for the devolution of welfare. This of course isn’t happening due to the unionist parties who continue to argue against it, despite the fact that the SNP have had a clear mandate to pursue this on behalf of the Scottish people since May 2015. Thus, unsurprisingly, the SNP have since called for the specific devolution of tax credits.
Why is this a better option? Crucially, due to the way Scotland will be compensated for additional expenditure, by taking control of tax credits we will receive funds to administer the benefit. Indeed the Smith Commission agreed “(For spending powers, an increase to the block grant would be made) equivalent to the existing level of Scottish expenditure by the UK Government, including any identified administrative savings arising to the UK Government from no longer delivering the devolved activity, and a share of the associated implementation and running costs in the policy area being devolved, sufficient to support the functions being transferred, at the point of transfer”.
In other words, by taking control of tax credits we will have much more money to mitigate the cuts by not having to also find money in our budget to cover what would be the substantial operational costs of creating a new benefit of this kind in Scotland. Indeed we would have the costs of administering around £3 billion worth of benefit added to our block grant, so then all the money we could find in our budget to mitigate cuts would go directly to claimants, rather than much of it being used for managing their claims, thereby either reducing what we could mitigate, or further reducing other Scottish budgets. And of course there would also be considerable scope for making efficiency savings. This is clearly, then, the best option available if your most important goal is to be best placed to help the poorest as much as possible.
Thus at this point I must arrive at the conclusion that this is not the goal of the Scottish Labour party. Not only do they exploit the circumstances of the very people they claim to wish to protect, but they voted against the one amendment that would have given the Scottish government the most money to mitigate tax credit cuts, and would have ensured that any mitigation didn’t end up reducing universal credit payments from the UK government, thus cancelling out their Scottish benefit; and they did this to protect the union (and likely also because they don’t want the Scottish government to look good). This is why Labour cannot be trusted.
Being in favour of the union doesn’t simply mean Labour had to campaign for a no vote in a referendum over a year ago; it means that they have to prefer options at each and every turn that are bad for Scotland; options which incidentally have nothing to do with solidarity across these islands and everything to do with making sure power resides at Westminster, available only to two parties. Not devolving tax credits isn’t an act of solidarity – it doesn’t benefit tax credit claimants in the rest of the UK; rather it’s an act of spectacular political selfishness, and it’s people like me who will pay for it. And as long as Labour are a unionist party in this United Kingdom, it will always be thus.
Whereas the SNP are free to always campaign for the best option for Scotland, and this is why they are advantaged and will very likely be our government until Independence; people tend to vote for parties who genuinely try to protect them. Of course their continued success will be in spite of the hostility of our largely unionist media, who have utterly failed to scrutinise Scottish Labour’s proposals and instead have found a more superficial level of engaging with Scottish politics than I had previously even thought possible.
The sheer number of mainstream journalists who don’t understand how the block grant works and/or who are simply happy to collude in Labour’s duplicity is one thing; but the fact that there are journalists across the political spectrum who choose to denote a party’s left wing credentials not by its actions, nor by the validity of its policies, but simply by what it says on the tin, is utterly confounding. In this case it’s also the equivalent of speaking to an empty room. The left in Scotland is alive and kicking; debating with itself, working in many ways to contribute to a new, hopefully before too long independent, Scotland. Labour simply isn’t part of the conversation, and neither are people who think Labour are left wing simply because they decided to say whatever they think it takes to win votes. And this isn’t down to any form of exclusion; it’s down to irrelevance.
Until such journalists show more interest in seriously scrutinising our political parties than they do in preserving the union, or taking a partisan line, or finding the easiest angle; or indeed in spending their time ridiculing every ordinary person on Twitter who happens to disagree with them and dares to express it; they and their publications will continue to talk about shadows on the wall while the real world changes without them.