Government Expenditure & Revenue Scotland 2013-14

CHAPTER 2: DEVOLUTION OF REVENUE AND EXPENDITURE

Devolved & Reserved Revenue in Scotland: 2013-14

Devolved & Reserved Expenditure in Scotland: 2013-14

This is a new chapter for GERS. In response to user demand, the aim of this chapter is to clearly set out the amount of public sector revenue and expenditure currently devolved and how this will change following the implementation of the Scotland Act 2012, and the proposals contained in the Smith Commission's final report.^[11]

Currently Devolved Revenue

At present, Council Tax and Non-Domestic Rates are the only two taxes set and administered by the Scottish Government and Scottish Local Authorities. Collectively the two taxes raised almost £4.0 billion during 2013-14 as outlined in the table below. This is equivalent to 7.7% of Scottish onshore tax revenue in this year.

Table 2.1: Existing Devolved Taxes Revenue: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Council Tax	1,894	1,901	1,914	1,929	1,941
Non Domestic Rates	1,822	1,863	1,933	1,946	1,927
Total	3,716	3,764	3,847	3,875	3,869

Scotland Act 2012

The Scotland Act 2012 gives the Scottish Parliament a number of new powers over taxation.

From April 2015, Stamp Duty Land Tax (SDLT), which is levied by the UK Government on the conveyances and transfers of land and property, will be withdrawn in Scotland and replaced with the Land and Buildings Transaction Tax (LBTT). LBTT bands and rates have been determined by Scottish Ministers and are subject to the scrutiny of the Scottish Parliament. Further information on the reforms, and the bands and rates set, is provided on the Scottish Government website.^[12]

The table below sets out the revenue raised by SDLT in Scotland between 2009-10 and 2013-14. Receipts have been volatile in recent years, reflecting movements in the number of housing transactions and new UK Government policies such as exempting some first-time buyers from the duty.

Table 2.2: Stamp Duty Land Tax Revenue: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Scotland	250	333	274	283	385

Landfill Tax, which is levied on the disposal of waste to landfill, will also be withdrawn in Scotland from April 2015. It will be replaced by a new Scottish Landfill Tax set and administered by the Scottish Government. Landfill Tax is estimated to have raised £105 million in Scotland during 2013-14, as outlined in the table below. Landfill Tax has been on an upward trend since 2009-10. This reflects the UK Government's decision to increase annually the rate of tax on active waste sent to landfill during this period.

Table 2.3: Landfill Tax Revenue: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Scotland	85	97	95	99	105

From April 2016 the basic, higher and additional rates of income tax levied on 'non-savings and non-dividend income' by the UK Government in Scotland will be reduced by 10p. They will be replaced by a new Scottish Rate of Income Tax (SRIT), which will be set by the Scottish Government, although the tax will still be administered and collected by HMRC. If the Scottish Government chooses to set the SRIT at 10p, the basic, higher and additional rates of income tax in Scotland would remain at the same levels as in the rest of the UK.

The SRIT will apply to 'non-savings and non-dividend income' only. This comprises all earnings from employment, profits from self-employment, pensions, taxable social security benefits and income from property.

The table below illustrates the estimated revenue which would have been raised by the SRIT since 2009-10 assuming it was set at 10p in each year, therefore leaving the overall income tax rates unchanged. The table shows that in 2013-14 the SRIT would have generated approximately £4.3 billion.

Table 2.4 Estimated Scottish Rate of Income Tax Liabilities: 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Scottish Rate of Income Tax Liabilities	4,330	4,427	4,267	4,273	4,258

Source: HMRC, OBR

Note: this table shows Scottish Rate of Income Tax liabilities rather than receipts. They are therefore calculated on a different basis to the estimates of total Scottish income tax receipts in Table 3.1.

Smith Commission proposals

The Smith Commission Agreement, published on 27^th November 2014, recommended further devolution over elements of taxation and public spending. The UK Government published draft legislation on 22^nd January 2015^[13] with a view to bring forward a new Scotland Bill after the UK General Election in May 2015. There has been no decision on the date from which these new powers will become available to the Scottish Parliament.

Income Tax

Under the Smith Commission proposals, the power to vary the rates of income tax and the thresholds at which these are paid for the 'non-savings and non-dividend income' of Scottish taxpayers will be fully devolved to the Scottish Parliament. This represents an extension of the income tax powers being devolved under the Scotland Act 2012.

Certain elements of income tax will continue to be determined by the UK Government. This includes the definition of taxable income, the personal allowance, the ability to introduce or change tax reliefs or exemptions and the taxation of income from savings and dividends. This means that income tax will still apply on a UK-wide basis and thus represents a "shared" tax, although taxpayers may be subject to different rates and thresholds in Scotland.

The table below illustrates the estimated revenue which would have been raised between 2009-10 and 2013-14, assuming tax rates were the same as in the rest of the UK.

Table 2.5: Estimated Devolved Income Tax Liabilities under Smith Commission proposals: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Tax Liabilities: Non-savings and non-dividend income	10,124	10,392	10,584	10,714	10,911

Source: HMRC. Note that this table shows tax liabilities rather than receipts. They are therefore calculated on a different basis to the estimates of total Scottish income tax receipts in Table 3.3

Air Passenger Duty and Aggregates Levy

The Smith Commission recommended that control over air passenger duty for flights from Scottish airports should be devolved to the Scottish Parliament. The amount of revenue generated by the duty is estimated at £251 million in 2013-14. Receipts from air passenger duty have been on an upwards trend in Scotland since 2009-10, reflecting the rise in air travel in recent years as well as increases in the rates over this period.

The Smith Commission also proposed that the aggregates levy, which is an environmental tax payable on commercial exploitation in the UK of rock, sand and gravel, be fully devolved. Aggregates levy receipts are estimated at £50 million in 2013-14.

Collectively, these two taxes are estimated to have raised £301 million in 2013-14.

Table 2.6: Air Passenger Duty and Aggregates Levy: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Air Passenger Duty	162	183	227	234	251
Aggregates Levy	49	55	48	44	50
Total	212	238	275	278	301

VAT Assignment

The Smith Commission proposed that the Scottish Government should be assigned a share of Scottish VAT receipts equivalent to the first 10 percentage points of the revenue raised from this tax in Scotland. The UK Government's draft legislation also proposes assigning the first 2.5 percentage points of revenue raised in Scotland from the 5% reduced rate which applies on certain goods, such as domestic energy. As a result, the Scottish Government would receive 50% of VAT receipts from Scotland. The Scottish Parliament will not have any control over the setting of VAT rates.

Within GERS, VAT is shown gross of VAT refunds to government. This is consistent with the approach taken by the ONS in the UK public sector finances. This figure is higher than the actual amount of VAT received by HMRC, which is VAT net of refunds. Table 2.7 shows the estimated VAT which would be assigned to Scotland on both a gross and net basis.

As set out in more detail in Box A.1 in Annex A, there are some practical challenges in devising an appropriate methodology for apportioning VAT receipts raised in Scotland.

Table 2.7: VAT Assignment: Scotland 2009-10 to 2013-14

	(£ million)
	2009-10	2010-11	2011-12	2012-13	2013-14
Gross VAT	3,663	4,183	4,693	4,784	5,030
Net VAT	3,167	3,611	4,091	4,191	4,432

Devolution of Expenditure Responsibilities

Under the Smith Commission Agreement, a number of elements of the United Kingdom's welfare system will be devolved to Scotland.

Universal Credit, which has started to replace a range of existing mean-tested benefits and tax credits, will remain reserved to the UK Government. However, the Scottish Government will have the power to vary the housing element of Universal Credit. It will also have the power to change the frequency of payments, vary the existing plans for single household payments, and pay landlords direct for housing costs in Scotland.

It should be noted that the existing housing benefit, £1.8 billion^[14] in Scotland in 2013-14, is currently administered by Scottish Local Authorities. Under the GERS methodology, this spending is therefore included in the £41 billion of expenditure by the Scottish Government and Local Authorities, despite the fact that this benefit is not currently devolved to Scotland. The difficulties of defining devolved spending are explored in more detail below.

Other benefits outside of Universal Credit which will be transferred to the Scottish Parliament are summarised in the table below. The proposed package comprises benefits for carers, disabled people and those who are ill as well as benefits included in the Regulated Social Fund, such as the winter fuel payment. In total, these benefits are estimated to have been worth around £2.5 billion in 2013-14. In value terms, the largest of the benefits to be devolved is the Disability Living Allowance, with spending of £1.5 billion in 2013-14, followed by the Attendance Allowance which cost £481 million in Scotland.

Table 2.8: Devolved Benefits Under Smith Commission Proposals, 2013-14 (£m)

Attendance Allowance	481
Carer's Allowance	182
Disability Living Allowance	1,473
Industrial Injuries Disablement Benefit[15]	83
Personal Independence Payment[16]	17
Severe Disablement Allowance	91
Cold Weather Payment	1
Funeral Payment[17]	4
Sure Start Maternity Grant	3
Winter Fuel Payment	185
Total expenditure on benefits to be devolved	2,521

Finally, the Scottish Government will also be given the power to introduce new benefits in devolved areas of welfare responsibility.

Defining devolved expenditure and revenue

The representation of devolved expenditure in Scotland in GERS is the total managed expenditure of the Scottish Government and Local Authorities shown in Table 5.8, as it is the entire representation of the output and therefore costs of the devolved public sector in Scotland. This figure is produced on a National Accounts basis, and therefore is most comparable to figures for overall UK public spending reported by the ONS.

Table 2.9 compares Scotland's fiscal powers under the Scotland Act 2012 and the Smith Commission proposals.

Table 2.9: Fiscal Powers under Scotland Act and Smith Commission, 2013-14 (£m)

	Scotland Act	Smith Commission
Income Tax Liabilities	4,258	10,911
Stamp Duties (Land and Buildings)	385	385
Air Passenger Duty		251
Landfill Tax	105	105
Aggregates Levy		50
Non-domestic Rates	1,927	1,927
Council Tax	1,941	1,941
Total devolved revenues	8,617	15,571
Devolved revenue as % of non-North Sea Scottish revenue	17%	31%
as % of revenue incl geographical share of North Sea revenue1	16%	29%
Assigned VAT2	0	5,030
Total devolved and assigned revenues	8,617	20,600
Devolved and assigned revenue as % of non-North Sea Scottish revenue	17%	41%
as % of revenue incl geographical share of North Sea revenue1	16%	38%
Devolved expenditure3	40,813	43,334
Devolved revenue as % of estimated devolved expenditure	21%	36%
Devolved and Assigned revenue as % of estimated devolved expenditure	21%	48%

¹ Figures for the shares of devolved revenue as a share of total revenue including a population share of North Sea revenue are the same as the share when excluding North Sea revenue.

² Assigned VAT is on a gross basis, consistent with the National Accounts presentation. If net VAT were to be used, devolved expenditure would also need to be adjusted, as set out in Box 5.2. In this case, devolved and assigned taxes as a share of illustrative devolved expenditure would be 47%. Devolved and assigned revenue as a share of total non-North Sea revenue would still be 41%.

³ Scotland Act figure includes housing benefit administered by Scottish Local Authorities. If this expenditure were removed, devolved revenue as a share of devolved expenditure would be 22%. Devolved and assigned revenue as a share of devolved expenditure would also be 22%.

Box 2.1: Challenges of International Comparisons of Fiscal Decentralisation

In the context of the Smith Commission and further devolution to the Scottish Parliament, there has been considerable interest from users in international comparisons of fiscal devolution. This box discusses ways in which fiscal devolution can be measured, and highlights some of the difficulties that are involved with such comparisons. Measuring the extent of devolution across countries on a comparable basis is a complex concept covering a range of government activities, such as delivery of services, regulation and public finances. There is no single accepted indicator which captures the entirety of powers devolved to the subnational level. The most frequently used indicators in this context are the proportion of the country's total tax revenue which is raised at subnational level and the proportion of total government spending which is undertaken by subnational governments. [18] Nevertheless, international comparisons remain difficult. When comparing internationally, it is important to ensure that the autonomy a government has over different taxes is reflected. For example, under the Smith Commission proposals, the Scottish Parliament will have greater autonomy over air passenger duty than over income tax, and will have no autonomy over VAT. Differences in the level of autonomy over devolved taxes across countries should therefore be considered when comparing devolution, rather than just looking at the proportion of tax revenue which is classed as being devolved. Similarly, defining the extent of devolution of expenditure is not as straightforward as it may initially appear. For example, subnational spending may be strongly influenced by central government regulation or be purely administrative in nature. This is exemplified by the case of housing benefit in Scotland. This is administered by Local Authorities, so when comparing internationally it would be in Local Government spending. However, Local Authorities in Scotland have no control over the spending as it is currently set centrally and is funded through central government budgets. In addition to definitional difficulties, the degree of devolution can also vary within countries. For example, in Spain, the Basque region and Navarre enjoy a relatively greater degree of autonomy than other Spanish regional governments Finally, Scottish figures for devolution tend to include both the Scottish Government and Local Government. It is therefore important to ensure that Local Government is included in any comparison to ensure that it is on a similar basis.