The Scotland Budget – A Simple Guide

The Scotland Budget - A Simple Guide

On the 23rd of February, the Scottish Government’s 2017 Budget will complete Stage 3 proceeding the Scottish Parliament. It is widely expected to pass after the Scottish Government agreed to several amendments proposed by the Scottish Green Party, in return for their support.
As the time for the final vote draws closer, and the details of how this Budget will impact local councils, businesses, and communities emerge, this guide will provide a brief overview of what the Budget does, what it contains and its expected consequences.

The Budget

The Scottish Budget is presented annually to Holyrood by the Scottish Finance Secretary. It sets out Scotland’s tax and spending plans for the upcoming year. The 2017/18 budget was presented to Holyrood by Finance Secretary Derek Mackay on the 15th December 2016.
Significantly, this year’s Budget is different to any of its predecessor. Since the Scottish Government was formed in 1999, it set out its spending plans based upon a fixed budget which was allocated by Westminster. However, the 2016 Scotland Act has given Holyrood more power over income tax rates and thresholds in Scotland, meaning that for the first time, Holyrood will be responsible for raising roughly half of its yearly Budget.
As such, as well as setting out the Scottish Government’s spending plans for next year, this year’s Budget also sets out the Scottish Government’s proposals for income tax in Scotland.

How the Budget Process Works

For the Scottish Budget to be implemented, it first has to be introduced as a Bill and achieve a majority vote within the Scottish Parliament. Like all Bills introduced to the Scottish Parliament, this means that it must pass through the legislative process.
There are three stages to passing a Bill.
Stage One involves sending the Bill to the relevant parliamentary committees who will consider the detail of the bill and submit a report outlining their considerations. The Bill will then be taken to the Scottish Parliament for a first vote which focusses only on its general principles. If this vote passes then the Bill moves on to Stage Two.

Stage Two requires parliament to consider the detail of the Bill. This is the stage where amendments can be made.
Stage Three is the final stage of the legislative process and the last opportunity for MSPs to propose amendments. During Stage Three the Parliament will first consider and decide on any amendments that have been lodged, before they debate on whether the Bill should be passed. The final vote on the bill is taken at Decision Time. If the Parliament does not agree to pass the Bill, it will not become law.

The Scottish Parliament’s electoral system means that progressing a Bill like the Budget through this process successfully can be more challenging than, for example, successfully passing the UK Budget.
This is because the Scottish Parliament uses the Additional Member System to elect MSPs – this is a first past the post system which is ‘topped-up’ by a proportional representation system. Such an electoral system means that it is unlikely that the leading party who forms the government will hold a majority.
As such, getting a Bill as important and controversial as the Budget through the legislative process successfully often requires a great deal of compromise and the acceptance of amendments on the part of the Government.
The 2017/18 Draft Budget has completed Stage Two of the legislative process. It passed Stage One only with the support of the Scottish Green Party who voted with the Government on the condition that a significant package of amendments were added to the Bill. It is expected to pass Stage Three in light of this support from the Scottish Greens.

The Headline Announcements
So what exactly does the Budget, with the Green Party amendments, entail?

• The threshold for the 40p rate of income tax will be frozen at £43,000.

This is a key decision as the Scottish Government had originally planned to raise the threshold only by the rate of inflation, but agreed to amend their original plans in order to pass the Budget. As such, higher-rate tax payers in the rest of the UK will be paying up to £400 less tax every year than people earning the same amount in Scotland.

• The education budget will increase with £120m going directly to head-teachers, to be spent at their discretion, and £60m of investment in early years learning and childcare.

•  £300m will be added to the Scottish NHS funding. This represents a rise of £120m more than inflation.

• Business rates will be re-evaluated and reduced by 3.7% to 46.6p.

• The Small business bonus scheme will see the eligibility threshold for 100% relief increased to £15,000, lifting 100,000 properties out of business rates altogether

• The introduction of a Bill to devolve air passenger duty from 2018, with the Scottish Government confirming their intent to cut, and eventually abolish the tax

• Local Councils will be given the ability to raise council tax by up to 3%, for the first time since 2007.

The Reaction

The biggest reactions from businesses and opposition parties come from the changes to business rates.
Business rates are essentially council tax for businesses. The amount a business pays is based on the valuation of its property, which is in turn based upon a valuation of how much that property is worth in the rental market.

The Scottish Government launched an independent re-evaluation of Business Rates in Scotland and has introduced new measures as part of this year’s Budget. Essentially, there will be a 3.7 per cent drop in the tax rate overall. In addition, the Small Business Bonus Scheme will raise the eligibility threshold to lift 100,000 properties out of paying rates altogether. This will mean that over half of rateable properties pay nothing.

The Scottish Government are not raising any extra money out of these changes and maintain that this makes the system fairer and more efficient.
However, some businesses disagree. They point out that when the evaluation of business rates is carried out, those rates freeze until the next evaluation. As such, it is entirely possible that some sectors might have been enjoying good conditions during that evaluation, but are now struggling. In addition, the rates only reflect the value of a business’s property – not the profitability of the business itself. As such, some companies are now finding that they are having to pay far more in tax than they previously did – which many say they cannot afford.

Ruth Davidson, leader of the Scottish Conservatives, has spoken on this point stating that she has been “inundated with letters from businesses across Scotland who are facing huge increases in their rates”. She has called on the Government to undertake a review into the scheme because it is “clearly unsustainable”.

Indeed, one business is calling for a boycott on paying the rates altogether. Stewart Spence, who owns the five-star Marcliffe Hotel, has said that he will not pay the new rates on his hotel which he says amount to £1000 more per week than he previously paid.
This reflects wider industry concern, with the Scottish Chambers of Commerce saying they received reports from businesses in the hospitality industry who are very worried about the effect of the new rates on the sector as a whole.

In response, the Scottish Government’s finance secretary has attempted to reduce concerns by announcing yesterday, that he will cap increases to 12.5 % for 8,500 firms in the hospitality sector – the sector affected most by the raise.

While most of the parties supported the change to the original plans, The Scottish Conservatives accused the Scottish Government of “being asleep at the wheel” over the issue and Scottish Liberal Democrat leader Willie Rennie questioned where the Scottish Government had found the money to introduce such relief.
In spite of this relief, the Scottish Retail Consortium have described the measures to insulate businesses against the rise in rates as “yet another sticking plaster”. And Mr Spence, the hotelier who called for the boycott, has pledged to go ahead with his plans to oppose any rise in business rates. As such, don’t expect noise around this issue to die down any time soon.

The Scotland Budget will be debated on Thursday the 23rd February 2017 and is expected to pass with the support of the Scottish Green Party

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