Humza Yousaf urged to set out plans for tax as additional band could 'bring 20,000 children out of poverty'

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Humza Yousaf should set out his plans for the devolution of tax powers to Holyrood as soon as possible to help broaden the tax base, a think-tank has said, as he is told his plans for more progressive taxation could lift 20,000 children out of poverty.

A new paper from Reform Scotland has called on the First Minister to consider whether the devolution of VAT, which could happen as part of the review of the fiscal framework, should go ahead.

In the dying days of the SNP leadership contest, Mr Yousaf also pledged to introduce a brand new tax band £43,662 and £125,140 in a bid to raise more money to tackle child poverty.

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Such a move would not be possible until the next Scottish Budget in December, but critics have warned it would have the opposite effect and result in poverty being compounded due to the potential impact on the wider economy.

First Minister of Scotland Humza Yousaf during a visit to a school holiday club at Ayr Academy in Ayr, to announce additional funding to support families.First Minister of Scotland Humza Yousaf during a visit to a school holiday club at Ayr Academy in Ayr, to announce additional funding to support families.
First Minister of Scotland Humza Yousaf during a visit to a school holiday club at Ayr Academy in Ayr, to announce additional funding to support families.

Heather McCauley, a former Scottish Government civil servant, writes in her paper for Reform Scotland the full devolution of VAT may not be able to help the Government fund its own spending, benefit from improved economic performance, and improve its financial resilience.

Instead, she suggests a better move would be to concentrate on the devolution on taxes, which focus on wealth or the creation of such taxes.

She states: “There has long been talk about the assignation or devolution of VAT, and provision was made for assignation in the 2016 Scotland Act, but nothing has yet actually happened. The Scottish Government has called for full devolution of VAT to be considered as part of the Fiscal Framework Review currently underway.

"An examination of other countries suggests that devolution of VAT is feasible, but could be complex and impose significant additional costs on business, without fundamentally broadening the Scottish Government's tax base.

“Rather than pursuing VAT devolution, it may be more useful to assess the relative merits of extending the Scottish Government's tax powers to include other forms of income taxation, particularly on savings and dividends, and either devolving or creating taxes on wealth, as potentially better ways to increase financial resilience and accountability.”

Chris Deerin, the director of the think-tank, said with the right policies the Scottish Government should be able to enjoy the benefits of economic growth and that it should be “responsible to a greater degree than it is” for raising revenue.

He said: “Humza Yousaf should tell us whether he supports the devolution of VAT, as has been part of the negotiations with the UK Treasury during the ongoing Fiscal Framework Review, and which other taxes he thinks would enhance the Scottish tax base were they to be devolved.

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“A little more risk and responsibility and a little less comfort and complacency would benefit Scotland’s devolved democracy more than two decades into its existence.”

Another think-tank, the Institute for Public Policy Research Scotland, said the First Minister’s pledge to introduce a new tax band between the top two tax bands would result in lifting thousands of children out of poverty if the funds were used to increase the Scottish Child Payment.

Such a tax band would cover earnings between £43,662 and £125,140, with IPPR Scotland assuming a new income tax rate of 45 per cent for those who earn above £58,285, a three-percentage point increase on the current rate.

This, the think-tank said, would raise around £257m, £4m below the amount needed to increase the Scottish Child Payment to £40 a week. IPPR Scotland said such a move would lift 20,000 more children out of poverty in addition to the 40,000 who are already set to be lifted out of poverty with the current £25 per week payment.

Philip Whyte, director of IPPR Scotland, said: “Lifting 60,000 children in Scotland out of poverty is not only morally right, but it would also ensure Scotland meets its interim child poverty target in the coming year and set a clearer path towards our final targets in 2030. But political will, investment and action is needed.

“While we won’t be able to see any change to tax rates until the next Budget, this shows what is possible – but it also shouldn't stand in the way of moving quickly where we can now, including further increases for the Scottish Child Payment.

“The evidence is clear – going further on progressive taxes in Scotland can loosen the grip of child poverty. Humza Yousaf made ambitious proposals to tackle child poverty in his leadership pitch – he must now deliver them in Government.”

However, the finance spokesperson for the Scottish Conservatives, Liz Smith, said an additional tax rate would “compound poverty rather than reduce it”.

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She said: “The SNP has already made us the highest-taxed part of the UK, discouraging skilled workers and undermining economic growth. The Institute for Fiscal Studies has only just shown that Scotland’s deficit will continue being much worse than the rest of the UK’s. Despite the First Minister’s false claims, its growth has been little more than half theirs.

“Hammering Scots taxpayers for an additional £257m would only increase the tax gap and further hamstring Scotland’s economy. The poorest, who have already seen essential services cut under the SNP’s financial mismanagement, will be hit hardest.”

A Scottish Government spokesperson said it remained committed to working with the UK Government ahead of the review of the fiscal framework. They said: “Scottish ministers’ position is that all tax powers should sit with the Scottish Parliament as part of an independent Scotland, so that decisions that affect Scottish taxpayers are made here.

“The Scottish Government remains committed to working with the UK Government ahead of the review of the fiscal framework, which is an opportunity to consider the future of Scotland’s funding arrangements in the interest of fairness, accountability and governance.

“Ministers have been clear that this should include looking at the case for the devolution of further tax powers.”

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