Scottish Budget: Tax avoidance does not mean the government has no choice but to make major spending cuts – Peter Kelly

As Finance Secretary Shona Robison prepares her budget, she should resist calls for major spending cuts to balance the books

People voted to re-establish a Scottish Parliament in the hope that it would help create a better society for all of us. In his opening day speech, First Minister Donald Dewar said: “This is about more than our politics and our laws. This is about who we are, how we carry ourselves… today there is a new voice in the land… a voice to shape Scotland, a voice for the future.”

The Scottish Parliament’s Finance Committee recently published a report looking into the ‘Sustainability of Scotland’s Finances’. It paints a dark, bleak future. The committee said it was “concerned” about long-term economic growth and highlighted projections of a £1.9 billion hole in Scottish Government social investment by 2027-28. “Difficult decisions lie ahead,” the MSPs said.

The Poverty Alliance agrees. That’s why we joined Oxfam, IPPR Scotland and more than 50 other organisations across civic Scotland to offer some hope, with plans to raise an extra £1.5 billion for the Scottish Budget every year. As the STUC has done in the past, we showed how progressive changes could boost social investment to reduce poverty and climate emissions, provide more and better care and childcare, tackle gender inequality, and realise human rights. A better, fairer Scotland with well-being at its heart.

Finance Secretary Shona Robison, seen with Humza Yousaf, faces 'difficult decisions' as she prepares the Scottish Budget (Picture: Jeff J Mitchell/Getty Images)

Tax avoidance strategies

MSPs on the committee don’t recommend that to ministers. They highlight the need for the Scottish Government to “explicitly” identify areas for more spending cuts. When we gave evidence to the committee, there seemed to be a feeling that we were wrong – perhaps even naïve – to propose strengthening social investment.

Committee convener Kenneth Gibson said: “Everybody wants to tackle poverty, create better-paid jobs and have more money for the health service, but how do we realistically fund that when the impact of behavioural change is so fundamental to doing that? You can raise tax as much as you like, but if the money goes elsewhere, how do you deliver?”

Mr Gibson was referring to evidence that ‘behavioural change’ – especially by the highest earners – could reduce by around 30 per cent the amount of money we proposed to raise. The Scottish Fiscal Commission (SFC) highlights some examples of the way people can pay less tax: they can change how much they earn by reducing their hours; they can stop working in Scotland, perhaps by going into education, or becoming a full-time carer, or by leaving the country altogether; or they can change when they get paid – bringing forward some of their income to this current tax year so that they can pay a lower tax on it.

Other methods might involve more direct tax avoidance – for example, taking the money you get from your work as ‘dividends’ rather than ‘income’. In fact, Professor Alan Manning of the London School of Economics has said that when it comes to behavioural change around tax in the UK – tax avoidance is of more importance than changes like reducing working hours.

Compassion and justice

Tax avoidance is taken into account when the Scottish Fiscal Commission forecasts how behavioural change might affect Scottish income tax revenue. Every economist and the SFC acknowledges that there is a high degree of uncertainty around the effects of tax avoidance on Scottish tax revenue, but we shouldn’t use it as a reason not to raise more investment for the public good.

Compassion and justice are at the heart of the Poverty Alliance’s work. We believe in our mutual responsibility to provide a solid foundation for all of us to develop and thrive. When those values are put into practice, we achieve things like social security, the NHS, social care, public education, public transport, public roads, public libraries, public swimming baths.

We all support that public good. People on the lowest incomes contribute to that social investment through things like VAT and council fees and charges. Often, the amount they pay as a percentage of their income is more than some of the richer people in society, partly because the richest people in our society have wealth that is under-taxed.

We don’t talk about this enough. The foundation of our society and our economy is the public good we’ve created together. And as Sir Tim Besley, professor of economics and political science at the London School of Economics has shown, when we talk about that kind of reciprocity more, it can help reduce tax avoidance by making it more socially unacceptable. We all pay in, and we all benefit.

Making poverty a thing of the past

Businesses and employers across Scotland are key beneficiaries. Without public education, there would be fewer workers with the skills they need to expand. Public transport helps their staff get to and from work. Without public roads, their goods and services wouldn’t be able to get where they need to go. Without the NHS, their workers would be off sick for longer, or might not be able to return to work at all.

There is also evidence – highlighted by the Office of the Chief Economic Advisor to the Scottish Government – that the risks of tax-avoiding behaviour may be cushioned by strengthening the public good. When people feel the benefits of social investment, the less likely it may be that they’ll avoid making it.

Whatever influence this report has on the next Scottish Budget, the Poverty Alliance will carry on telling parliament and government that they have a responsibility to fill the holes in our national revenue, and build a strong social foundation for Scotland where poverty is a thing of the past. We will carry on calling on them to once again find a voice to shape Scotland’s future for the better.

And we will carry on encouraging them to forge a path towards a country with well-being at its heart, that can proudly tell the world: “This is who we are and this is how we carry ourselves.”

Peter Kelly is director of the Poverty Alliance