No one doubts that council tax needs reform. A system that dates back to 1991, based on property values that have changed out of all recognition, needs a root and branch appraisal. The SNP pledged, as far back as 2007, to get rid of the “unfair” tax, and criticised Labour for appearing to favour minor adjustment over full-scale replacement.
The difficulties it encountered in finding an alternative were laid bare in 2009, after the defeat of its budget in the Scottish parliament. Its favoured option was a local income tax of 3p, which was pitched lower than the experts’ recommendation of 5p. What emerged was that this would not bring in enough, and the Scottish government would face paying £500 million a year extra in subsidies to Scotland’s 32 councils. Under the Barnett formula, Scotland’s grant from the Treasury would be cut by up to £1 billion over the coming two financial years, according to the finance secretary John Swinney. The measure was abandoned.
What has filled the policy vacuum since has been the SNP government’s council tax freeze, a politically popular move, announced each year in a budget statement, with government stepping in to fill the gap in council finances. Except that it has not succeeded in doing so. Local authorities have been facing substantial budget cuts — the axe falling on education projects, libraries, social care and other services. Mr Swinney had to admit that his last budget would be tough for councils to swallow; others put it more harshly – “the worst I have seen in my career” was how one official described it.
Time then for the radical approach that the SNP has promised. Instead, what has emerged is a ratcheting up of rates, which is crude, heavy-handed and amounts to no kind of replacement at all. The council tax has survived intact; there are to be no new upper bands, no revaluation of outdated property prices. Instead, those living within Scotland’s four highest council tax bands are to pay up to £517 more a year.
Of course, there is to be protection for those whose properties have increased in value, but whose income is still low; so for 54,000 households in bands E to H, including pensioner households, there is to be an exemption through the council tax reduction scheme. The reforms would also provide support to families on low incomes, by extending the relief available to households with children. This sounds complicated, expensive, and open to challenge at every level.
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However advantageous this may be for a government about to fight a national election — we will tax those most able to afford it, will be the cry — it does nothing to tackle the basic unfairness of the council tax . Secondly, it provides an awful foretaste of the direction this government is likely to take when it confronts the issue of income tax.
Ministers have concealed their hand on the implementation of the Smith proposals. The deal cut last week between Holyrood and Westminster will devolve substantial powers to future Scottish parliaments to raise or lower taxes. It will transfer a wide range of new financial powers including the power to set rates for income tax. The parliament will keep all the money raised in Scotland. These powers will define the fiscal approach of the nation, and will test whether we are to have a high taxing regime, with a heavily subsidised public sector, or a more liberated economy which will allow small and medium-sized companies to compete more effectively.
To judge by the approach to council tax, the SNP’s direction of travel is becoming all too apparent. If this is the kind of model it favours, then what is likely to emerge is a crude manipulation of tax bands in order to hit the largest earners hardest. The SNP will call it “progressive” taxation. There is nothing progressive about a top-heavy taxation system that drives business and investment away.