Fiscal policy Finance

Five Priorities for the Scottish Budget

We outline five ambitious recommendations for the forthcoming Scottish Budget.

Five Priorities for the Scottish Budget

By Laurie Macfarlane and Miriam Brett

30 November 2024

On December 4th, the Scottish Government will set out its Budget for the next financial year. The past 12 months have been the most challenging period for Scotland’s public finances since the creation of the Scottish Parliament. In September, the Finance Secretary was forced to announce £500m of emergency cuts in response to squeezed revenues and growing spending pressures. 

The UK Government October’s Budget provided some moderate relief, with the tax and spending increases expected to provide an additional £3.4bn of funding to Scotland next year through the Barnett formula. While elements of the UK Budget delivered a commendable break with the past, the crisis facing Scotland’s public finances is far from over after more than a decade of austerity. Much of the additional funding is expected to rightly be invested in keeping frontline public services such as health and education afloat, leaving little spare for spending in other areas. 

In this context, it is critical that the Budget contains ambitious measures to promote the First Minister’s other missions – eradicating child poverty, tackling the climate emergency and growing the economy. Here we outline five priorities for the Budget to advance these goals. 

1. Replace Council Tax

Council Tax has long been known to be a highly regressive and inefficient tax. Since the creation of devolution, there have been repeated pledges from various political parties to abolish the tax, but despite this being a devolved matter for the Scottish Government, it has been retained.  

As such, replacing Council Tax with a fairer and more efficient alternative is long overdue – and the growing financial pressures on the Scottish Government and local authorities means that action can no longer be delayed. While there are a number of different options for property tax reform, we consider that the most effective solution is to replace Council Tax with a Land Value Tax (LVT). As we outlined in our recent land reform paper, this could deliver the triple benefits of raising revenue, tackling inequalities and creating a more efficient property market. It could also be designed to promote energy efficiency in support of Scotland’s just transition. 

However, any substantial overhaul of Council Tax – including a LVT – would take time to implement. While announcing this should be a key priority for the Budget, it would not raise revenue for the next financial year. As such, as an interim revenue-raising measure, we recommend that the Scottish Government increases Council Tax on higher value properties. 

In July 2023, the Scottish Government consulted on proposals to increase Council Tax in Bands E, F, G and H by 7.5%, 12.5%,17.5% and 22.5% respectively. These plans were subsequently scrapped in October 2023, when the First Minister announced a Council Tax freeze. However, it is clear that the freezing of Council Tax has benefited higher income households more than lower income ones, and has done little to help those on the lowest incomes, many of whom do not pay any Council Tax.

In the forthcoming Budget, we therefore recommend that the Scottish Government implements the Council Tax changes it previously consulted on. As most homes in Scotland are in Council Tax bands A to D, the graduated increases in bands E to H would only affect around 25% of households, who predominantly live in higher value properties. Our modelling estimates that these reforms would raise around £200m of additional revenue, providing additional funding to invest in measures such as tackling child poverty. 

Crucially however, this measure should be viewed as a stop-gap, and must be accompanied by a clear commitment to replace Council Tax with a fairer and more efficient alternative as soon as possible.

2. Raise the Scottish Child Payment by £10

Today 240,000 children – 24% of all children – live in poverty, and the First Minister has said that addressing this is his “greatest priority”. The Scottish Child Payment, a weekly payment of £26.70 to low-income households for every child under 16, has been the Scottish Government’s flagship policy for tackling child poverty. 

The Scottish Government estimates that the existing Scottish Child Payment of £26.70 will reduce the relative child poverty rate by 6% this year, meaning it will keep 60,000 children out of relative poverty. While this is welcome, the Scottish Government must do much more to meet its target of reducing child poverty to 10% by 2030. 

Our modelling estimates that raising the Scottish Child Payment by a further £10, therefore reaching £36.70, would lift another 20,000 children out of relative poverty. Implementing this would cost £190m – roughly matching the revenue raised from the council tax reforms outlined above, meaning the two policies combined would be fiscally neutral.

Living in poverty holds back children in a myriad of ways – including negatively impacting health, cognitive and social development, and educational outcomes. As such, investing in alleviating child poverty is one of the best investments Scotland can make in its economic future.

3. Invest in affordable housing

Scotland’s housing crisis continues to be one of the greatest barriers to raising living standards and tackling poverty. A chronic lack of affordable housing also holds back the economic potential of communities across Scotland, particularly in rural areas.

The Housing (Scotland) Bill, introduced by the Scottish Government in March, includes some welcome measures to tackle affordability issues, including long overdue provisions to introduce long-term rent controls. Ultimately however, there is no way out of Scotland’s housing crisis that does not involve significantly scaling up affordable housing. 

In 2021 the Scottish Government pledged to build 110,000 affordable, energy efficient homes by 2032 – with at least 70% of these in the social rented sector and 10% in remote, rural and island communities. In recent years however, progress towards this target has slowed. This was further undermined by the £200m cut to the Affordable Housing Supply Programme (AHSP) in last year’s Budget. In April, the Scottish Government announced an £80m uplift over two years for acquisitions, with up to £40m of this available in the current year.

In the upcoming Budget, we recommend that the Scottish Government utilises its increased capital budget to raise funding for the AHSP by £200m, increasing total funding for the programme to around £800m next year. This should be accompanied by measures to reduce Scotland’s reliance on the speculative model of private development, which is failing to deliver the affordable housing that Scotland needs. As outlined in our recent land reform paper, the delivery of affordable housing could be greatly accelerated by introducing a new form of public-led development, empowering public authorities to acquire land at low cost (without having to pay 'hope value') to build affordable housing.

4. Introduce a Frequent Flyer Tax

The decision in April to drop Scotland’s 2030 emissions reduction target represented a major setback for Scotland’s status as a global climate leader. Although Scotland’s target to reach net zero by 2045 is still well within reach, achieving it will require more assertive action to decarbonise key sectors. Transport remains Scotland’s highest-emitting sector, and one of the most pressing priorities is to rapidly reduce emissions from aviation. 

Today people in the UK take among the most international flights in the world, however these emissions are not spread equally among the population. Inherently linked to inequalities, the causes and distributional consequences of climate breakdown are unjust and uneven. Future Economy Scotland research found that the richest 5% of households consume 11 times more carbon from aviation than the poorest 5% of households. Despite taxation having the potential to play a key role driving emission-related behavioural change, the Scottish Government has refrained from maximising its devolved powers in this respect.

As part of the Scotland Act 2016, the responsibility for taxing passenger air travel was devolved to the Scottish Parliament. The Scottish Government had proposed to replace Air Passenger Duty (APD) with a new levy, Air Departure Tax (ADT), for flights beginning in Scotland. 

The Scottish Government initially planned to cut the new ADT by 50% – as a step towards abolishing it – but rightly scrapped the planned cut in 2019 owing to concerns about the emissions implications of incentivising more flights. In April 2019, the Scottish Government deferred the introduction of ADT, and to date a replacement for the UK’s APD has not been introduced.

In the forthcoming Budget, we recommend that the Scottish Government replaces APD (and the previous plans to introduce the ADT) with a Frequent Flyer Tax (FFT). Under an FFT, a person’s first flight in a year would be charged low or no departure tax, however every subsequent flight would be charged at an escalating rate. Appropriate and considerate exemptions should be applied for a FFT, for example, for those unable to take alternative modes of transport and for island communities that depend on flights for lifeline services.

An FFT represents an effective way to disincentivise regular flying while embedding the ‘polluter pays’ principle, ensuring the costs of decarbonisation are shared in a way that is fair and just. With little excuse for delay, the Scottish Government should pledge to introduce an FFT as soon as possible, demonstrating a steadfast commitment to its legally binding net zero targets.

5. Scale up the Just Transition Fund 

Delivering a just transition is not just a climate imperative – it is also Scotland’s greatest economic opportunity. However, seizing this opportunity will involve a major restructuring of Scotland’s labour market, shifting employment from carbon intensive sectors to low carbon industries. Left to market forces however, this process could result in significant economic dislocation, skills mismatches, unemployment and regional decline – particularly in parts of Scotland currently reliant on the fossil fuel sector. 

In 2021, the Scottish Government announced a 10-year £500 million Just Transition Fund (JTF) to support the North East of Scotland transition away from carbon-intensive industries. However, last year’s Budget cut funding allocated to the JTF by 75%, falling from £50m to just £12m, representing a major setback for delivering a just transition in the North East. In  the upcoming Budget, we recommend that funding for the JTF is increased to £80m, with a particular focus on developing new green industries and supply chains, and reskilling workers. 

The Budget should also be used to signal the arrival of a more proactive role for the state in the economy. In September, the Scottish Government published a paper outlining its new green industrial strategy, which – although limited in scope – represents an important step in the right direction. However, implementing an industrial strategy in practice requires changes to the way that policies are delivered, the way that resources are allocated, and the way that government and public institutions operate. Future Economy Scotland will be publishing more research on what this means over the coming months. 

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