scotlands-rorschachThe SNP has been widely criticised for failing to propose a replacement of the Council Tax. This follows the previous Labour-LibDem administration’s failure to introduce any local tax reform. In this piece I argue that while politicians’ caution is understandable, there will be many more challenging issues like the Council Tax to address as the Scottish Parliament gains further powers. If these politically challenging issues are to be addressed and if a more convincing reform programme for a post-Indy Scotland is to be devised in anticipation of a second referendum then there is a need for far more strategic thinking, policy development and consensus building. In other countries, and in Ireland in particular, such work is undertaken by an economic and social council. This mechanism may provide the institutional basis for scoping out and debating the structural reforms that Scotland needs.

Earlier this month the Scottish Government unveiled its proposals for the reform of Council Tax. The system will be made somewhat more progressive as “band multipliers” in the highest four bands will be increased. As a consequence properties in the lowest of these bands will be taxed (on average) by an additional £105 per year; and those in the top band by £517. However, the system overall will still remain regressive, in the sense that more expensive properties will continue to be taxed at a lower rate than cheaper ones.

The SNP proposals are sensitive to the impact of change on people with modest incomes. Households living in houses subject to the new multipliers who are on below median incomes will be exempted from the increase. The child element within the rebate scheme (which has already been protected against the cuts imposed by the UK Government when responsibility for it was passed to the devolved administrations and English local authorities) will be increased by one quarter – benefitting 140,000 children living in 77,000 households to the tune of £173 a year.

The Council Tax freeze, whose cumulative cost has reached £2.5 billion and increases by £70 million each year has been in place since 2007, will end in 2017, at which point local authorities will be able to increase the tax by up to three percent a year.

With the additional £100 million brought in by taxing the higher bands more heavily, and the cumulative effect of annual increases of three per cent, local government Council Tax revenue would rise by around one-fifth over five years.

However, there is to be no revaluation, so the tax will continue to be based on values that are now one-quarter of a century out of date. As a result, according to research conducted for the Commission on Local Taxation, most (57%) of properties are currently in the “wrong” band. This surely means that the proposed reforms can only be regarded as an interim measure.

Further reforms are mooted. It is suggested that one-quarter of income tax receipts will be assigned to local authorities, seemingly on a national basis. Scottish income tax payers will soon be given an “S” code by HMRC, but there is as yet no provision to identify their local authority of residence. A potentially far-reaching proposal lurks in the small print of the announcement: a consultation on a development tax and vacant and derelict land “to reduce land banking and increase the supply of homes.” Allowing land taxation onto the agenda is a potentially important development, and implies challenging the housebuilders’ business model that relies on rising land values.

Whilst the Daily Mail predictably reported that “Middle Scotland [will be] Punished with Tax Hike” as “hard working families” face “spiralling bills”, the overwhelming response of commentators has been to condemn the announcement for its timidity.

Lesley Riddoch, a former BBC journalist turned freelance commentator, described the changes as “tinkering”. Jim Gallagher, a retired civil servant who is now a visiting academic at Glasgow University, wrote that the proposals have “got a lot to be modest about.” For another intellectual-come-commentator, Gerry Hassan, the failure to take a “bold” initiative is emblematic of the Scottish political classes’ failure to match radical rhetoric with redistributive policies.

Nor have the SNP’s rival parties been prepared to give any quarter. The Scottish Labour Party accused the SNP of having “broken their promise to abolish the Council Tax”, a sentiment echoed in the Conservatives’ detection of “hypocrisy”. The Liberal Democrat leader Willie Rennie described the reforms as being “timid and tardy”, whilst Maggie Chapman, co-convenor of the Scottish Greens claimed, “The SNP refusal to grasp the thistle of local taxation makes it impossible to cushion the blow of Tory cuts, and that has a real human cost. We see suicide rates increasing…”

In response Marco Biagi, the outgoing Minister responsible for local government, accused the other parties of “posturing”, and pointed out that none of them had (at that point) actually advanced proposals of their own. Meanwhile David O’Neill, the Leader of COSLA, the body which represents most of Scotland’s 32 local authorities, described the measures as “an offence against local democracy”.

It was not meant to be like this.

Everyone knows that local government finance in Scotland is in need of reform – for reasons outlined in this briefing by Scottish Property Tax Reform. With the exception of the Conservatives, who devised the Council Tax in response to the public outcry about the Poll Tax, all other parties agree that the Council Tax is unfair. Further the Council Tax freeze is becoming cumulatively more expensive, making local government finances unsustainable.

But the SNP is only the latest party to find that it is devilishly difficult to replace.

At a UK level, the last Labour Government presided over an unreformed Council Tax for 13 years and abandoned a revaluation at the last minute in 2005. The only mention of the Council Tax in the UK Labour’s 2015 manifesto was a proposal to introduce higher rates for long-term empty properties. In Wales new bands were added to the Council Tax in 2005, when it was revalued, but since then “the nerve of Welsh politicians has failed” and there has been no further revaluation.

Back in Scotland in 2006, then First Minister Jack McConnell dismissed the recommendation of a committee he had appointed which had recommended replacing the Council Tax with a proportionate Property Value Tax, before the proposal had even been published. “There is no way that Labour ministers will support a 1% home tax,” he said. On that occasion all the other main parties agreed with him.

The minority SNP government, elected in 2007 with a commitment to replacing Council tax with a Local Income Tax, found that it did not have a majority in Holyrood to enact that proposal by making use of its national income-tax powers. Hence, the SNP’s 2011 manifesto adopted a different position: “…we will consult with others to produce a fairer system based on ability to pay to replace the Council Tax. We will put this to the people at the next election…”

To this end the Scottish Government appointed a cross-party Commission on Local Tax Reform in February 2015, chaired jointly by Local Government Minister Marco Biagi and COSLA’s David O’Neill. With the exception of the Conservatives, all other parties with representation at Holyrood participated. Its remit was to examine “alternatives that would deliver a fairer system of local taxation to support the funding of services delivered by Local Government.”

The Commission, reporting in December 2015, agreed that “the present Council Tax system must end”. Its “predominant [not unanimous] view … is that any reform of local tax has to include recurrent tax on domestic property”. The tax should have a “more progressive” liability base; “if it could be proved feasible, [the tax base should] be broadened to include income”; whilst it added land taxation is “promising”. In a break from previous reports on local tax reform, the Commission also suggested that “we are not persuaded that a single tax instrument can simultaneously deliver greater equity for taxpayers and autonomy for Local Government…”. In short, the report suggested that local government’s tax base should be based on property, whilst it would be desirable to have greater regard to income.

In retrospect it is clear that there was, in fact, little real agreement within the Commission. At the time, I commented that the report marked “an important first step in the process of reforming local government taxation”. This judgement was largely derived from the clear signal that the SNP had shifted away from its support for a Local Income Tax, accepting instead the need for property taxation. In a globalising world it is widely recognised by international institutions such as the OECD and IMF that governments need to extend, not retreat, from the use of land and property as a tax base – for the simple reason that they cannot be moved to another jurisdiction, or offshored to a tax haven. In the Scottish context, where the Government has control over only a perilously narrow part of the tax base – income tax – the case for land and property taxation is stronger still. Quite why the far Left in Scottish politics is wedded to taxing income while ignoring land and property wealth remains one of life’s mysteries.

However, at the time of the Commission’s report, I also recorded disappointment that agreement had not been reached “at least on the outline of a replacement”.

Yet the commentators who condemned the Scottish Government’s timidity have not paused to consider why these proposals are so limited.

So when critics encourage the SNP to be “courageous” – suggesting that it should make use of its political capital, which potentially means sacrificing its lead in the polls – the first thing the First Minister’s advisors are likely to suggest would come straight from Yes Minister. As Sir Humphrey Appleby once explained to his younger colleague,

“If you want to be really sure that the Minister doesn’t accept it you must say the decision is ‘courageous’… ‘Controversial’ only means this will lose you votes. ‘Courageous’ means that this will lose you the election.”

Yet by ending the Council Tax freeze, the Scottish Government has surrendered “one of the SNP’s most popular policies.” That, in the eyes of any election strategist, is likely to be regarded as “controversial”. Indeed, the commentator Iain Macwhirter, last December described ending the freeze as being “too hot to handle”.

So what seems like caution to those of us outside the system is likely to look very different from within it.
But what of the other parties?

The Greens are most likely to come up with a package that includes a commitment to more radical reform having long flirted with the historic Liberal policy of land value taxation. The LibDems adopted local income tax in the 1980s, but their position now is less than clear. It is also very unclear as to what the Labour Party will come up with. But with the “normal” rules of politics applying to abnormal times, Labour knows it cannot win, and even fears being overtaken by the Tories, so they now have the luxury of adopting policies they will never be called upon to introduce.

However, whilst it is clearly in the Green’s electoral interest to position itself on the radical side of the SNP, as part of its overt strategy of persuading people who vote SNP in the constituencies and vote Green on the list, it is far from clear that Labour will benefit from attempting to occupy this position. Its widely promoted new policy of adding a penny to income tax has so far made no difference to the polls.

Labour’s proposals for domestic local taxation are difficult to position in the left-right spectrum. They involve the replacement of the Council Tax with another system which has been presented misleadingly as a pure Property Tax. In fact it is a hybrid – partly a property value tax, and party a fixed charge.

Unlike the SNP, Labour has committed itself to the revaluation that the system needs, with the property element having two tax rates. For properties worth up to £180,000, a tax rate of 0.35% would be applied; for those over £180,000, a higher tax rate of 0.9% would apply to the portion over £180,000. However, the progressive nature of this element is severely curtailed by the maximum overall bill being set at £3,000, which kicks in when property values reach £400,000. In effect, the property tax is limited to £2,550 due to the flat-charge (see below). Thus the property tax rate is 0.35% up to £180,000, rising to a maximum of 0.65% at £390,000, then falling to 0.5% at £500,000. Owners of properties worth £720,000 pay the same rate (0.35%) as those worth £180,000 or less. By the time property values reach £1 million, the rate falls to 0.26%.

If this were the whole system, it would indeed represent an advance. But it’s not. Little attention has been given to a flat rate charge of £450 per household, which is embedded within Labour’s proposed system. Unrelated either to property value or household income it is reminiscent of the Poll Tax. The effect is that the tax burden for someone in a modestly valued property is predominantly made up of the flat rate charge. So, for someone living in a £50,000 property, more than 70% of their tax would, in effect, be a household Poll Tax. Indeed it is only when property values exceed £130,000 that the property tax element matches the flat charge. The flat charge bottoms out at 15% of tax liability at the point that the £3,000 cap applies (properties worth £400,000 or more).

If we take the two elements of the tax together, properties valued at £100,000 would be taxed at 0.8% of their value, declining to 0.6% at £180,000, then rising to 0.8% at £390,000. The effect of the ceiling is to reduce the incidence of the tax to 0.6% at £500,000, 0.4% at £750,000 and 0.3% at £1 million. Details of the rebate system and whether a single person deduction would be retained are sparse. However, Labour’s claim that 80% of households would be gainers seems surprising, especially given the proposed revaluation and its knock-on effect on grant distribution between authorities. Details of the rebate scheme are hard to come by. If there were a serious prospect of Labour winning the election, this is a policy that would surely be subject to greater and intense scrutiny.

The Greens are better positioned to exploit the territory to the left of the SNP because they aligned themselves with the SNP in the referendum, and can therefore talk of being part of a pro-independence majority in Holyrood. In contrast, Labour has found itself on the wrong side of a brutally rapid political re-alignment arising from the Referendum. The long-term centre left consensus within Scottish politics has been subsumed within a new political fissure based on the polarised position about the constitution. In the 2015 UK election, some Labour candidates found themselves in the hitherto unimaginable position of courting tactical pro-union voting from Conservatives. As the dominant partner in the Referendum campaign, the SNP has so far been able to count on the lion’s share of the pro-independence vote, to which it can add those who are sympathetic, but unpersuaded by the case for independence, to create a “Stronger for Scotland” majority.

Commentators such as Lesley Riddoch hope that by voting Green on the list, the party will hold the balance in the next Holyrood Parliament and thus embolden the SNP on this and a range of other issues most notably fracking and land reform. I am not convinced this is the best way to secure long-term structural reform in what are technically complex and politically hazardous areas such as local government taxation, and the wider fiscal framework. Moreover, radical tax reform, that will entail far-reaching distributional consequences, is likely to be phased in over a long period, possibly exceeding a decade. Of course fracking is technically complex, but the decision – to allow it or ban it – is not.

The Greens might be able to extract some concessions from the SNP on local taxation, but these are likely to be limited for the simple reason that it is unimaginable that a party that had won more than 40% of the vote would agree to a policy promoted by one that had secured less than 10%. It is not difficult to see the Greens dragging the SNP over hot coals on fracking, but would the Greens be prepared to go to vote against an SNP budget if it did not include revaluation? I would not bet on it.

So if competition between the parties either impedes or cannot bring about radical reforms that almost everyone agrees are needed, how are these to be achieved?

There are a variety of models for introducing radical reforms. Radicals like to dream of a party, with an advanced programme, sweeping to victory on a popular mandate. The unique 1945 Labour Government conforms most closely to such a model. However, as Paul Addison argued in The Road to 1945, the electorate did not need to be led, as the Mass Observation surveys conducted throughout the war demonstrated the national appetite was for what became the Welfare State. The Beveridge Report had been a best seller, and pro-Beveridge candidates won a series of by-elections throughout the war. Self-evidently, this does not apply in Scotland today.

Significant reforms are sometimes introduced by means of progressive elite consensus. The reforms to the Scottish homelessness legislation arose from a taskforce composed of NGOs, experts and politicians. As a result, Scotland now has the strongest rights for homeless people in the world. The greater availability of social rented housing compared to England helps in this regard. Arguably, the series of reforms to the private rented sector over the last five years, culminating in an entirely new tenancy regime, display a similar genus.

However, such an approach is unlikely to work for a policy reform where there is evidently little consensus on alternatives and has proved so politically toxic in the recent past. This is why the “independent” expert committee pursued by McConnell failed so spectacularly.
An alternative model is is founded on consensus building. This was clearly the idea behind the cross-party Commission, jointly chaired by the Scottish Government and COSLA, with a few experts thrown in. Yet this approach also failed to come up with anything more than a vague set of approaches. The Commission was disbanded as soon as its report was launched, and its co-chairs are now at each other’s throats. What the internal dynamics of the group were, we do not know, yet functioned on either side of the 2015 UK election during which time the Westminster representation of two of the parties on the Commission were all but wiped out might not have helped. By the time it reported, all parties were again preparing for yet another electoral contest. Perhaps had Labour and LibDems still been in with a realistic chance of governing after the election, and the SNP less dominant, then the Commission might have gone further. But even then its proposals would still have merely reflect the views of a small narrow political class.

Clearly, Scotland lacks obvious mechanisms to devise long-term solutions to challenging problems and then build a consensus behind them. To some extent the Constitutional Convention achieved such an approach back in the 1980s and 1990s as it offered worked up, detailed proposals for the Scottish Parliament. In marked contrast to the sharp divisions that plagued the 1979 Referendum on devolution, by the time the second Referendum came, a Scottish Parliament blueprint was on the table and was endorsed with little fuss.

The experience of the Council Tax to date also suggests we need a body that is capable of building consensus around such challenging but critical issues. There will be more of these as the Scottish Parliament gains more powers, and if a more convincing programme for a post-indy Scotland is to be devised in anticipation of a second Referendum.

Economic and social councils exist in a number of countries including the Netherlands and Ireland, and these may provide the missing ingredient in Scotland.

The National Economic and Social Council in Ireland was established in 1973 to provide advice to the Taoiseach “on strategic policy issues relating to sustainable economic, social and environmental development.” It is essentially a corporatist body with the main social and economic interests, as well as civil society represented on its Council. Its membership was broadened to include NGOs in the mid-1990s, with an environmental pillar added in 2011.

The NESC has since evolved, having begun principally as a means of bringing together trade unions and employer at a time of industrial strife. Whilst it did not meet with early success, from the mid-1980s it was able to lay the foundations for the social pacts concerning wage rates and a range of other social and economic policy from 1987 right up until the economic crisis hit in 2008. It had little, if any, influence as the austerity programme imposed by the “Troika” (European Commission, European Central Bank and the International Monetary Fund) in return for a €67 billion loan negotiated during the crisis, but as the country’s economy has recovered and exited from the “programme”, the NESC is again beginning to assert influence in what its Director, Rory O’Donnell, has called “detailed sectoral issues”, including addressing Ireland’s acute housing crisis.

Its ability to influence policy is derived, in part, from the ability of its secretariat to produce robust empirical analysis. As I noted in a previous blog, the Commission on Local Taxation in Scotland was severely hampered by a lack of an evidence base. Although heroic progress was made by the secretariat working with my colleague Chris Leishman, what could be modelled was constrained by the available data. Currently, Scotland has no statistically representative household survey that reliably allows us to match household incomes with property values, and certainly not one that is representative at a local authority level. Thus the best the Commission could say about Land Value Tax was that it was “promising”. My proposal – given in both oral and written evidence – for a hybrid income and property tax could not be modelled to any acceptable degree of accuracy. Hence, despite nine months’ deliberation, the Commission still could not tell whether local income tax was actually a technically feasible option. Any politician wanting radically reform of local taxation would clearly be advised such a move would not just be “courageous”, but also a leap in the dark.

The role of an economic and social council extends beyond providing an evidence base and conducting strategic thinking. As Ireland illustrates NESC has become adept at “framing” and “reframing” problems in ways in which actors find it easier to properly engage with. O’Donnell argues that this approach “calls for analysts who combine technical proficiency with a degree of creativity.” A further gap in the kind of approach, which dominates British academia and academically-driven institutes like the Institute for Fiscal Studies, is that while analysts are proficient at identifying problems and critiquing proposed policies, they are far less adept at finding or even offering solutions, and when they attempt to do so, they often have little or no regard for actual implementation.

I do not share the pessimism of commentators who believe that devolution has been a failure and that neither the new powers, nor independence will result in a different society. When I presented an overview of housing policies in Scotland to an London audience recently, they appeared to think I had arrived from Planet Zog. Here’s why. In Scotland, the Government is committed to increasing the output of social rented housing. In England all subsidies have been withdrawn. Scotland has the most extensive set of enforceable rights for homeless people in the world. In England homeless people can now be housed in insecure private rentals. England has the bedroom tax. Scotland currently mitigates it, and shortly will abolish it. Private tenancies will remain insecure in England. In Scotland they new legislation will make them significantly more secure. In England private rents remain uncontrolled. In Scotland provision for their rent regulation is being introduced. In Scotland the “Right to Buy” is about to be abolished. In England it has been “reinvigorated” as the UK Government tries to extend it to housing associations. These reforms represent huge differences, although the full devolution of Housing Benefit impedes a comprehensive restructuring of subsidies and will become a real political challenge for Scottish housing policy.

Overall, we still lack the “Big Picture” thinking, associated policy development and consideration of implementation that is needed to move us beyond a series of ad hoc progressive developments, the “easy hits” with their symbolic resonance. We need to tackle the more difficult issues – including Scotland’s economic structure and its management – where greater political consensus and public understanding and support is required for pursuing major structural reforms that may well take a decade or more to implement.

Likes(0)Dislikes(0)