Warning of '£1.3bn black hole' in spending

Published on Monday 21 July 2008 22:13

THE Scottish Government's proposed local income tax (LIT) could leave a £1.3 billion black hole in public finances, according to leadi ng local government officials.

John Swinney, the finance secretary, will be warned today that to set a rate of 3p in the pound may result in a deficit of 742 million on calculations based on the expenditure for 2008-9.

The report is part of a joint submission to the consultation on local income tax from the Chartered Institute of Public Finance and Accountancy (CIPFA), the Society of Local Authority Chief Executives, and all 32 finance directors of Scotland's councils. They calculate the deficit would rise to 1.3 billion if Mr Swinney fails to overcome the Scottish Government's limitations on varying income tax.

Under the terms of the Scotland Act only the 20p base rate can be varied by up to 3p while the higher 40p rate, which starts at earnings over 40,800, cannot be touched.

Officials have called for the SNP to abandon LIT and instead produce a reformed property tax, joining business organisations, unions, councils and other experts who have attacked the controversial policy.

And they warned that the spending gap would increase as Scotland's population continues to age.

The report emphasises that based on the 2008-9 figures Mr Swinney would have to set LIT at 4.5p to make the books balance and that would have to be even higher if he was not able to raise the 40p rate.

The three organisations highlighted concerns about the legality of LIT and suggested it would not have as efficient a collection rate as the council tax.

Angela Scott, head of CIPFA in Scotland said: "Our independent calculations have raised some important issues for ministers to consider, not least the potential funding gap. It is critically important that they address these issues."

However, Mr Swinney insists he will press ahead with the policy, and yesterday a Scottish Government spokesman said: "Four out of five households across Scotland will be better or no worse off under LIT. Our proposal to replace the regressive council tax with a fair 3p local income tax is based on ability to pay and represents a 281 million cut in local taxation."

PricewaterhouseCoopers also published its response yesterday, questioning whether LIT is workable, and suggesting that it may cost more to collect than the council tax and may drive business away from Scotland.

WHAT NEXT?

Friday, 18 July, 2008 – The consultation into the plans to replace the council tax with a local income tax closed. Almost all responses were negative.

August to December, 2008 – Holyrood's local government committee is set to continue its own look at the tax. It is likely to use its findings as the basis of scrutinising the bill brought forward by the Scottish Government.

Early 2009 – Finance secretary John Swinney said he intends to introduce the bill to reform local taxation early in the year. He may try to strike a deal with the Lib Dems and Greens to get something through and get rid of the council tax.

1 April, 2011 – If the SNP is successful, this will be the first day that people start paying a 3p addition to their income tax instead of the council tax.