What can we learn from the Scottish governments Framework for Tax

In his March 2022 Spring Statement, the Chancellor of the Exchequer proudly announced the UK government’s tax plan. This provides a high-level summary of intended UK-wide tax policy changes, but it is thin on the thinking behind these measures. In contrast the Scottish government published its Framework for Tax in December 2021, after a consultation process earlier in the year, setting out the principles and strategic objectives behind its intended tax policymaking. The Scottish government says it wants to create a sustainable fiscal environment in Scotland that embodies fairness and equality, but is this possible within the current economic landscape, with limited devolved powers and in light of the latest Scottish productivity data?

A foundation for Scottish tax policymaking

The Scottish Finance Minister, Kate Forbes, stated that the framework will provide the Scottish government with, ‘the foundation from which we can design and deliver tax policies that support the recovery, national outcomes and our pursuit of a fairer, greener and more prosperous Scotland for everyone… The Framework for Tax gives us a platform for best practice in tax policy making, to deliver our Scottish Approach to Taxation.’

The framework document states that the Scottish government wants to create a sustainable fiscal environment in Scotland that embodies fairness and promotes equality. To achieve this it intends to apply a set of guiding principles laid out in the framework to achieve its strategic objectives for tax which are:

• generating stable revenues to fund public services and support social renewal;
• supporting a wellbeing economy by helping to deliver a sustainable and inclusive economic recovery;
• delivering national outcomes by reducing inequality and funding public services; and
• delivering a tax system with the ability to respond to societal and economic shifts.

Redistribution or wealth creation?

The framework document identifies the redistribution of wealth as a function of a progressive tax system. However, too much focus on redistribution and not enough focus on policies that promote the creation of wealth could negatively impact on productivity and the pool of wealth available within Scotland to redistribute. Therefore, the effectiveness of the Framework for Tax will be heavily influenced by the Scottish government’s ability to stimulate the Scottish economy. The latest productivity data for Scotland suggests that it still lags behind productivity in other parts of the UK. And productivity is needed to drive the creation of wealth.

The 2011 Institute of Fiscal Studies (IFS) review on the design of tax systems chaired by Sir James Mirrlees argues that a progressive tax system does not mean that every single tax must be progressive. This review indicates that taxes should be designed to fit together as a cohesive progressive system rather than taxes being individually designed in isolation.

A cohesive tax framework for Scotland

Without more control over taxes or a fundamental shift in stance where the UK and Scottish governments work more collaboratively to drive tax policy affecting Scotland, it may be difficult for the tax system affecting Scotland as a whole to achieve all the aims and objectives set out by the Scottish government.

This therefore raises questions around the purpose and current value of the Framework for Tax, given the limited control the Scottish government has over taxes. Whilst the framework document is well written and positive in terms of content, it could feel to some more like a theoretical statement for political purposes rather than something that will have a fundamentally positive impact on the Scottish economy and fiscal responsibility at the moment.

The IFS has described the changes to the Scottish income tax system as being progressive but complicated, stating that the system has achieved ‘very little except as a political statement.’ Is this more of the same? We will have to wait and see but, given the publication of the Framework for Tax and the surrounding fanfare, it seems reasonable to conclude that more responsibility for taxes and tax policy in Scotland will be on the Scottish government’s agenda over the coming years. Affected businesses and individuals should, therefore, be prepared for change.

For more information please get in touch with Ross Stupart or your usual RSM contact.