The role of income tax: speech

Good morning everyone. Many thanks for coming along today.

Thanks also to the Royal Society of Edinburgh for hosting us.

One of the founding members of this Society was Adam Smith.

His thoughts on the subject I am speaking about today are worth reflecting on.

Adam Smith observed that:

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities..."

That may seem like a statement of the obvious, but it goes to the heart of the discussion we want to have about fair and proportionate taxation - and about how, particularly in a time of austerity, we can continue to make the vital investments that enable our economy to grow and our public services to deliver the support that all of us rely upon.

Scotland's tax powers remain limited. More than 60% of Scotland's spending power is still dependent on decisions taken at Westminster.

However, it is the case that Scotland now has a greater measure of fiscal control than at any time since the start of devolution.

By far the biggest fiscal lever we have is income tax - with 30% of Scotland's budget now coming from income tax receipts.

Of course, with that greater ability to levy tax comes a corresponding duty to do so responsibly and in a balanced way, and my Government will always do exactly that.

In our recent Programme for Government, I expressed the view that the time is right to consider afresh the role of tax in our budget decision.

And I made a commitment to publish a discussion paper ahead of the draft budget in December.

Today we meet that commitment, with the publication of this document: The role of income tax in scotland's budget.

Before I talk about the paper in more detail, it is worth reflecting on the financial context and wider backdrop to the decision that Scotland faces.

The UK Government has imposed almost a decade of cuts to Scotland's budget.

The cut to the Scottish Government's discretionary budget between 2010 and 2020 will amount to £2.9 billion in real terms.

As well as continued austerity, we also face the damaging impact of Brexit.

Previous analysis indicates that Brexit could cost 80,000 Scottish jobs over a decade, with more than £11 billion a year wiped off our economy by 2030.

So there is no doubt that Brexit - coupled with austerity - will make the job of properly funding our public services in the years ahead more difficult.

And all of this comes at a time when an ageing population - a good thing - is placing ever greater demands on services like the NHS, social care and housing.

Over the past few years, we have worked hard - with significant success - to balance all of these pressures.

Despite cuts to Scotland's budget, we have protected NHS funding. We have shielded local services as best we can.

We have continued to invest in the small business bonus and in the infrastructure and business development support that the economy needs.

We have mitigated the worst impact of Tory welfare cuts.

And we have safeguarded the social contract - delivering public service provision and a range of social benefits that far exceeds what is available anywhere else in the UK.

Indeed, it is worth pointing out that the value of university tuition, personal care, prescriptions and eye tests far outweighs the impact of any of the four possible alternative approaches discussed in Chapter 7 of this paper.

So I am proud of what we have been able to deliver in the most difficult of circumstances.

That progress, though, has involved sacrifices on the part of some, and it is important that we remember that.

Our public sector workers, for example, have had years of pay restraint.

So as the impact of austerity, Brexit and changing demographics bears down even harder, it is now time to ask ourselves some tough questions.

None of us want to see our cherished public services increasingly constrained in what they can deliver.

Very few people, if any, will want to see the social contract eroded, with young people having to pay thousands of pounds a year to go to university or older people having to pay for personal care.

And it would not be in the country's best interests to scale back on some of our vital ambitions for the future - like increasing the NHS budget to meet the demand of an ageing population, expanding childcare, giving headteachers more money for our classrooms, extending broadband, building more affordable houses, giving public sector workers a fair pay rise, and investing in the transport infrastructure, research and development and support for entrepreneurs that the economy needs.

It is crucial that we protect the next steps in creating that better future for our nation.

So with all the pressures we now face, we must consider if the time has come for those who earn the most to pay a modest amount more to enable us to do so.

It is to help aid and inform that discussion that this consultation paper is being published today.

The paper explains the composition of the Scottish budget and how it is changing.

It looks at the operation of the fiscal framework and sets out our high-level expectations of the UK budget later this month.

It provides detail about the income tax base in Scotland - who pays what and how much each group contributes to the overall budget.

It looks at the scale and scope of our income tax powers, the limitations on them and how they interact with reserved powers. It also sets out some international comparisons.

And, crucially - indeed, in my view most importantly of all - it sets out four key tests that we believe any responsible and progressive use of Scotland's tax powers must meet.

In line with these tests, any alterations to tax rates will need to:

• maintain and promote the level of public services that the people of Scotland expect
• ensure that lowest earning taxpayers are protected and don't see their taxes increase
• make the tax system more progressive and reduce inequality
• together with our corresponding decisions on spending, support the economy

I believe that these tests reflect the views of the majority of people in Scotland – namely, that we want world-class public services; that we shouldn't ask the lowest earners to shoulder more of the burden; we should do all we can to make the system fairer and reduce inequality; and that supporting the economy and sustainable growth should be absolutely central to our approach.

This paper analyses and applies these four key tests to the tax policies of each of the main parties in last year's Scottish election.

And, in chapter seven, it applies these same tests to four possible alternative approaches, which consider a range of alterations to both tax rates and tax bands.

Let me stress that these alternative approaches are not at this stage firm policy proposals - that will come in the budget. Nor do they form an exhaustive list.

They simply illustrate some of the options open to us.

We do however believe that the alternatives outlined in chapter seven better meet the four key tests than any of the parties' manifesto commitments from last year.

And they provide a starting point for discussion.

We go into these discussions with an open mind and a willingness to listen - but the four key tests we set out today are the criteria that will now guide our decisions.

In respect of the first test, all of the alternative proposals in chapter seven raise additional revenue for investment in public services and the economy.

Indeed that is also true, to varying degrees, of all the parties' manifesto proposals, with the exception of the Tories who would cut the money available for public spending.

Looking at the second test, all of the four alternative approaches - at the least - protect those earning less than the median income, which is £24,000.

Indeed, when the increase to the personal allowance is taken into account, none of these approaches would see anyone earning up to £31,000 pay a penny more than they do now.

And in all four approaches, more than 70% of all adults would continue to pay no tax at all or no more tax than they do today.

All the alternative approaches would also satisfy the third test in that they would make the tax system more progressive than it is now and help to tackle inequality.

The fourth test relates to our duty to support the economy through both our tax and our spending decisions.

This Government is totally committed to supporting sustainable growth and to giving businesses the best possible opportunity to contribute to that growth.

We have delivered substantial savings through initiatives like the Small Business Bonus. We have invested heavily in the infrastructure business needs to thrive. And we have taken a range of actions to support employment.

But too often, in my view, the relationship between growth and tax is mischaracterised.

Debates about tax become falsely polarised between the needs of the economy on the one hand and the needs of our public services on the other.

I think that is the wrong approach. The taxes we pay fund the support for business and the economy, as well as our public services.

And our competitiveness as a country is about more than just our tax rates.

It also depends on the strength of our public services, the skills of our people and the quality of our infrastructure.

Everybody knows that a good society needs a strong economy.

But it is equally true that no economy will reach its full potential without a strong, fair, inclusive society.

That's the question that should drive this debate - and unite us all - that question is that of what kind of country do we want Scotland to be.

I hope this paper will help inform that debate.

As a Government, we will not propose alterations to income tax lightly.

But after rigorous, careful and considered discussion, we will bring forward policy proposals that we consider to be in the interests of the country as a whole.

My final point is this. In publishing this paper today, I acknowledge we are a minority administration. That means we must always look to build consensus.

If all parties stick doggedly and rigidly to their manifesto positions, our Parliament will not be able to pass a budget, and that would be to fail in our duty to the Scottish people.

Today, I am making clear our willingness to compromise - I hope other parties will do likewise.

And then, together, we can work to build consensus around a fair and balanced tax policy and a budget that works for all the people of Scotland.