FOR Scottish businesses and households, the election campaign thus far has presented a monumental puzzle.
On the one hand, each day brings fresh declarations of spending commitments and pledges. The most outstanding so far are extra funding for the NHS, measures to end child poverty, action to bear down on zero hours contracts and extensions of the Living Wage.
On the other hand are earnest promises that key tax rates will not be increased – income tax, National Insurance, VAT and corporation tax being among the most prominent.
So where does all this leave the fiscal arithmetic after 7 May? How can such pledges be fulfilled while still bearing down on the budget deficit and overall government debt? What taxes could be raised without breaking the election promises to forego increases in the main sources of tax income?
As if all this is not puzzle enough, consider how things might look with the extra powers a Scottish Government will have over a wide range of tax instruments. What are the levers for which a future Holyrood administration would reach after 2016? After Land and Buildings Transaction Tax, could rises in council tax be the next step?
If all this is difficult enough for household financial planning, how much more problematic it is set to prove for firms, large and small obliged to plan ahead for the next financial year and beyond.
Business has to operate under firm accounting rules for budget planning. If the company is quoted on the Stock Exchange the accounts have to be audited and verified. Political parties do not have to operate under the same conditions.
The Budget “Red Book” is the nearest we get to detailed forecasts on government spending, tax receipts and borrowing. But even here such projections can prove fallible even within a year of their compilation, never mind those five-year projections of disappearing deficit.
What are the facts, and how do matters stand now? The latest Budget Red Book showed that for the current tax year – 2015-16 – total government receipts are forecast at £667.4 billion. Total Managed Expenditure is reckoned at £742.6bn. Shortfall: £75.2bn.
This need not matter much, so long as it is on a downward trend. But for the time being it adds to the totality of government debt. This currently stands at £1.53 trillion, or 80.2 per cent of GDP.
Again, this need not matter much so long as it is falling. But the projections show that it will carry on rising to £1.63 trillion in 2019-20.
Again, this need not matter much so long as the debt interest burden does not heavily impinge on government spending. But this year the annual debt interest charge will suck £46bn out of the government accounts. This figure is forecast to rise to £57.4bn by 2019-20.
For Scotland, the fiscal arithmetic is even more problematic. According to the Institute for Fiscal Studies, full fiscal autonomy would cost Scotland £7.6bn, with a budget deficit markedly higher than that for the UK.
Given this backcloth, it almost beggars belief that extra spending pledges keep piling up in this election.
These include so far (from Scottish Labour) an increase in the minimum wage, extension of the Living Wage, a £175 million anti-poverty fund, and at national level an extra £1bn for the NHS, £800m for “social justice”, a freeze on gas and electricity charges until 2017 and all aged 75 and over to be put on the cheapest tariff.
From the SNP we have, so far: an increase in the minimum wage to £8.70; a crackdown on zero hours contracts; free child care raised from 600 hours to 1,100 hours a year, uprating of child tax credits and child benefit, an extra £9.5bn funding for the NHS across the UK (a £2bn increase in Scotland by 2020); and free school meals extended to 135,000 pupils worth £330 per child. Add to this cross-party commitments to housebuilding and extra police officers
So which taxes may be raised for this largesse? Even before the party manifestos have been published, the two main UK parties have explicitly ruled out raising VAT and National Insurance. There is a general understanding that neither corporation tax nor the basic rate of income tax will be raised.
As the latest bulletin from Fiscal Affairs Scotland points out, this precludes raising tax on the four biggest sources of UK revenue, although there may still be scope for the higher rate of income tax to be increased and/or for the tax bandings to change.
“This”, says FAS, “leaves only one third of the current total of revenues open to upward adjustment, and within that sub-total are revenue sources such as council tax.
For remaining taxes, each accounts for no more than 5 per cent of the total – “so large increases, or increases across a number of taxes, would be required to raise substantial levels of additional taxes as a contribution to achieving fiscal balance”.
A favourite phrase of the high- spending parties is that “those with the broadest shoulders should bear the greater burden”. But only 13,000 Scottish taxpayers were liable for the top rate of tax in 2010-11, and this would imply that all those already paying the higher 40 per cent tax rate may be deemed to have “broad shoulders”.
Otherwise, two options remain. One is that election pledges disappear – in the manner of that Lib Dem pledge on tuition fees. The other is cutting spending from other departments. Where Scotland has control over the allocation of expenditure, enterprise and economic development have fared better than the rest of the UK. However, as FAS notes, “this is very much a relative benefit as spending in this budget area has been cut dramatically at both the Scottish and UK levels”.
That leaves that perennial last fig leaf of politicians – “savings and efficiencies”, referred to by political opponents as “cuts”. But as almost all the opposition parties are opposed to “austerity cuts” isn’t this where we came in? It’s time for political parties to fess up on where all the money will come from. «