Scots income tax plan ‘could affect poorer areas’

Poorer areas could suffer under radical proposals to hand Scottish councils a share of income tax raised in their area, senior economists have warned.

The move would mean local authorities covering affluent neighbourhoods such as Bearsden in East Dunbartonshire or Newton Mearns in East Renfrewshire could thrive, while unemployment blackspots such as Ayrshire or Argyll and Bute could be left trailing behind.

Economists also claimed such a scheme is also unlikely to achieve its stated aim of boosting local growth.

The policy was unveiled by Finance Secretary John Swinney as he announced swingeing cuts to local councils in his recent budget. Professor Jim Gallagher, who was formerly Whitehall’s most senior civil servant involved with devolution and is now a research fellow at Oxford University, said: “This is a very poor policy idea that councils should be wary of.

“First of all, we have no good information on what income tax revenues are at each local authority area, and no reliable way of finding out.

“Second, even if we did, it’s not at all clear that economic development by one local authority produces more tax revenue in its area.

“People don’t always work in the same place they live. Economic development in Glasgow, for example, might produce more tax revenue in Bearsden. Generally speaking, local authorities with a lot of income tax will have fewer spending needs and vice versa. That could lead to un fairness.”

Prof Gallagher, a former Labour adviser, said if councils start receiving a cut of income tax it would mean their block grant from central government would have to be cut. This could lead to clashes over the size of the reduction involved.

Mr Swinney has told MSPs he would consult councils about the “possible future assignation of a proportion of income tax receipts, thereby giving local authorities an incentive to boost economic growth”.

But concerns it may lead to winners and losers, depending on income levels, were echoed by David Bell, professor of economics at Stirling University. “Low income areas might lose out – [it] depends how the Scottish Government adjusts block grants,” he said. “It may be it is not the level of income tax that matters, but how fast the local authority is able to make it grow.”

Cara Heaney, director of people advisory services at financial services giant EY, said the success of the policy would hinge on finding a fair way to work out the distribution mechanism.