SNP forced to drop flagship tax policy

In a surprise statement that shocked the parliament chamber, the finance secretary admitted to MSPs that he just did not have enough support at Holyrood to get a flat-rate increase in Scottish income tax of 3p in the pound through.

He said his controversial plan would now be shelved – at least until after the next election.

The U-turn represents a humiliating reverse, both for the finance secretary and for Alex Salmond, the First Minister, both of whom had insisted they would push forward with the tax despite the widespread opposition they faced inside and outside parliament.

Was the Scottish Government right to shelve its local income tax plans? Vote here

Mr Swinney told MSPs he was determined to go into the next election campaigning for a local income tax, but he admitted that he had now come to the conclusion that it would have to be dropped for the remaining two years of this parliament.

He blamed "parliamentary arithmetic" for what he described as a "pragmatic" decision, saying: "We cannot put together a stable majority to enable us successfully to steer detailed local income tax legislation through this parliament."

And he went on: "The Cabinet has therefore decided not to introduce legislation to abolish the unfair council tax and replace it with a local income tax until after the election 2011."

The SNP will now go into the next Scottish election on a policy of scrapping the council tax and replacing it with a local income tax in what is certain to be a key battleground in that campaign.

The finance secretary acknowledged that the policy was barely affordable, blaming the expected 500 million cut in next year's Scottish block grant for the decision. He said this "fundamental financial shift" had made the policy impossible to fund.

Mr Swinney denied, however, that he had been influenced by the welter of criticism that was directed at the policy through the consultation process last year, opposition that included students, the Ministry of Defence, business organisations and The Scotsman.

Last night, those business leaders, trade unionists and opposition politicians who campaigned against a local income tax expressed their relief and delight at the SNP's U-turn.

Business analysts had warned the move would be an extra tax on earners – just at a time when the country was struggling economically – and that this would deter businesses from setting up in Scotland and could persuade existing companies to relocate to England.

The Federation of Small Businesses called the decision a "relief" for business and said it was "delighted" Mr Swinney had backed down.

The Scottish Council for Development and Industry said ministers had made "the right decision" and CBI Scotland said the move would be "warmly welcomed" by business.

The trade union Unison said the tax would have had "a disastrous effect on jobs and services", while Glasgow City Council said it would have had "dire consequences" for the delivery of services had the Scottish Government brought it in.

Labour said the Scottish Government's credibility had "died" as a result of the decision.

Iain Gray, the Scottish Labour leader, said: "The SNP really have none of the significant policies left that it stood on in the last election. This is a government in meltdown."

The Tories said Mr Salmond had been "humiliated". Derek Brownlee, the Scottish Conservatives' finance spokesman, claimed local income tax had been a "very, very flawed policy" and he said ditching the proposals had been "long overdue".

However, the Liberal Democrats, the only other party in the parliament that supported the controversial tax, accused Mr Swinney of a "gross betrayal of the voters".

Local income tax is the latest in a series of major policies that the SNP campaigned on during the 2007 election campaign, but which they have been unable to get through the parliament.

The Nationalists said they would abolish student debt and introduce a 2,000 grant for first-time house buyers, but neither of these policies was brought before the parliament.

Local income tax was different, however. It was one of the SNP's flagship policies and one that was pursued through a consultation process, with the bill due to be unveiled in June this year.

Its failure leaves the SNP with two remaining heavyweight policies to be enacted – a referendum on independence and the creation of a Scottish Futures Trust to build major infrastructure projects.

There is not enough parliamentary support for the independence referendum and the futures trust, when it gets going, will be a shadow of the great bond-selling organisation it was originally supposed to be.

As a result, the Nationalists risk going into the 2011 Scottish elections having achieved their smaller, populist policies – such as scrapping bridge tolls and prescription charges – but having failed with their big ticket items.

Part of this is undoubtedly because it is a minority government, and there is a lack of support across the chamber for these big policy ideas.

But it also comes down to the sheer impracticality of the schemes proposed by the SNP government.

Senior government sources admitted last night that one of the central reasons why the proposed local income tax has been dropped was because it was simply unaffordable.

Ministers had been counting on getting 400 million a year from the UK Treasury to make up for the council tax benefit they would lose in introducing the new tax, but UK ministers repeatedly made it clear that money would not be coming to Scotland.

Given that the Scottish Government was having to find 281 million a year just to meet the amount generated at the moment by the council tax, and given that income tax rates are shrinking, Mr Swinney was looking at a 1 billion bill just to get the tax introduced.

With his Scottish block grant expected to be trimmed by some 500 million a year for the next two years, the local income tax was virtually unaffordable – something Mr Swinney started to realise over the past few weeks.

The policy has also started to look incredibly shaky as the economic downturn has started to bite, with financial experts warning that the last thing Scotland needed was to have higher income tax rates than the rest of the UK.

David Maddox: A simple plan fraught with complexities

THE local income tax, as set out by the SNP, was designed to be simple but ran into many complications.

The plan involved introducing a flat-rate increase in Scottish income tax of 3p in the pound.

The rate was designed to bring a 270 million cut in taxation and also make it simpler and less expensive to raise. The SNP argued that varied rates across 32 different councils would have increased bureaucracy.

It said it would have been raised as a supplement using the existing PAYE method through HM Revenue and Customs, although HMRC has said that it would not collect LIT. Some critics argued that the flat rate took away the ability of councils to set their own rates and as a result broke European law on local government.

The Liberal Democrats, the only other supporters of LIT, were trying to negotiate a deal whereby councils could set their own rates after an introductory period.

The rate seemed to have been decided on the basis that the Scottish Parliament has powers to vary income tax in Scotland by up to 3p.

However, the SNP wanted to go beyond the "tartan tax" powers of Holyrood and add 3p to the higher 40p tax rate as well. The Treasury suggested this was illegal.

A further complication was that the SNP wanted the money (400 million) paid to people receiving council tax benefit to be added to the Scottish block grant.

However, because the money only goes to individuals and not to councils or devolved governments, the Westminster government insisted that this money would no longer come to Scotland if the council tax was abolished.

Some calculations suggested that the gap in public funds from the loss of council tax benefit, higher rate tax increases and a basic shortfall could be as much as 1.5 billion.

Hamish Macdonell: The bottom line is money, or lack of it, caused U-turn

JOHN Swinney could be forgiven for experiencing more than a little sense of deja vu yesterday. After all, this is not the first time he has had to conduct a U-turn on a major tax policy – a tax policy he championed to the skies.

Back in 1999 Mr Swinney, then the SNP's finance spokesman, and Alex Salmond, then the party leader (sound familiar?) came up with the idea of raising income tax by 1p in the pound to counter an income tax cut announced by Gordon Brown in the Budget.

This "penny for Scotland" idea was the centrepiece of the SNP's election campaign for the 1999 election but it did not go down too well with the voters.

Mr Swinney then dropped the idea before the next election, deciding it had become just too much of a liability.

Fast forward to this week's Cabinet meeting and Mr Swinney again announces to his colleagues that he is to ditch a tax plan he had been the strongest supporter of. It cannot have been easy.

But where this leaves the SNP's overall policy platform is another question. The Nationalists came to power with a host of relatively minor, populist, policies such as saving accident and emergency departments and scrapping tolls on bridges.

Most of these could be done without legislation and that is what happened. For the first year, the Scottish Government rode high on a feel-good wave of popular support engendered by these achievements.

While this was happening, the really big ticket items were being dealt with more slowly and running into criticism. The big three, in descending order, were: an independence referendum, the local income tax and the Scottish Futures Trust, to build schools and hospitals.

There was a theory circulating at Holyrood yesterday that this move to drop the LIT was intended to "clear the decks" before next year's push to get the independence referendum through, that Mr Salmond would not like to be fighting on two fronts at once when the referendum bill comes before parliament.

That may be a side issue but the real reason is practical. Local income tax has been dropped because it is unaffordable, at least on current budgets.

The Tories crunched the numbers yesterday and worked out that there is now a 1 billion black hole in the SNP's plans, caused in part by their failure to get council tax benefit money from the UK Treasury, in part because the LIT will need to be subsidised to generate as much as council tax produces, and partly because income tax rates are falling – dramatically.

If Mr Swinney is having trouble finding the 2 billion over several years he needs for the new Forth road bridge then he certainly can't find 1 billion a year extra to pay for this one policy.

The finance secretary may have dressed it up in more colourful and political language, but the bottom line is money, or a lack of it, and that is what has caused the U-turn.

The end result is that the SNP will go into the 2011 election campaigning for a local income tax but the party will also have to go into that election admitting that it has failed to get a raft of major policies through the parliament.

So although the Nationalists will go into the election on a clear policy platform, they will also go into that campaign using the frustrations of the past four years as justification for them to be given a bigger majority.

There is also a side effect of all this, though. Mr Salmond wanted a coalition government because he knew it would be more stable than minority government, but he could not form one.

After circumstances forced his hand he was content to run a minority administration, particularly when he could rule by diktat, without having to go through parliament.

What this latest episode has shown Mr Salmond, however, is that it might well be worth going that extra mile to get a coalition agreed. So maybe the recent rapprochement with the Liberal Democrats is the start of something bigger after all?

We will not know that until after the 2011 election.