Scotland’s tax gap is the Scottish Government’s own stupid fault

Audit Scotland has published a study on the differential impact between the amount Scotland's tax system was expected to rise and how much it actually rose. It is likely that most people in Scotland will misunderstand what that report says.

It probably sounds to you like the report states 'the expected tax take based on projected GDP growth was £X but because the economy grew less than expected it was £Y less'. But that is not what it says at all.

The giveaway is that what the report is highlighting is the differential GDP growth between Scotland and the rest of the UK, not the size of the Scottish economy in its own right. This should seem like an anomaly to you – when the Office for Budget Responsibility creates tax revenue estimates for the UK it does not need to compare us to France or Ireland first.

Why? Because the economic performance of the UK is a self-contained question. It is our economy and we tax it as we see fit up to our national borders. The UK's tax receipts are purely a function of tax rates, GDP and how permissive we are towards tax evasion and avoidance. It has nothing to do with anyone else's economy.

That is not how Scotland's taxes are calculated. This is a result of a fairly obscure document known as the Scottish Fiscal Framework. That was the outcome of the Smith Commission, which in turn was the outcome of 'the Vow', a Daily Record news stunt which, on the eve of the independence referendum, promised that Scotland would get significant new powers.

It didn't really work out that way. In fact while tax and social security powers were expanded slightly, both came with a sting in the tail. With social security it was straightforward; Scotland got new powers but not new tax revenue to pay for them. We were left having to divert money from the devolved budget if we wanted to change this previous-reserved policy.

But the sting in the tail with tax was worse, because it is much harder to understand. A proposal was created that did give Scotland some additional tax powers but with a built-in rule which was designed to punish Scotland if it did. It was a reconciliation formula which linked Scotland's tax revenue to the differential between Scottish and UK economic performance.

Simply put, this ideological initiative added a step in our budget calculations which means that Scotland gets more tax revenue if its economy grows faster than the UK but is punished if it grows slower than the UK. This is a kind of colonial neoliberalism as constitution – an assumption about growth being the primary purpose of government is built in, as is an assumption that Scotland's worth is always only relative to that of the UK as a whole.

This is all measured in the most simplistic of manners – per capita tax receipts. If we raise more tax per person not from higher rates but from higher economic growth, we gain. There is of course a problem; most of the policy levers that drive the economy are reserved. Scotland can't actually manage its own economy to try and gain from this arrangement.

There are other problems; the UK is the most regionally unequal country in Europe and London hoovers up inordinate shares of the UK's wealth. It means that no economic region of the UK other than London and the South East (there are 13, Scotland is one) generally achieves even average UK GDP growth never mind above average growth. Scotland is in an economy structured in a way that keeps Scotland 'below the average' and we can't do anything about it.

What did this look like in practice? The last time this was measured in detail it concluded that over the first three years the system was in place (2017/18 to 2019/20) Scotland ought to have raised £900 million in tax, but only raised £170 million. The missing £730 million was our 'punishment' for being in an extremely regionally unequal nation state.

It is therefore likely that by now Scotland has lost billions of pounds out of this arrangement. Which begs the question; why did Scotland sign up to this in the first place? This is the question Common Weal has been asking for a decade. Or, more to the point, it is almost exactly two years since we asked why on earth we had signed up to this again.

The Scottish Government seems to have been been completely bamboozled during negotiations and seems to have failed to understand what was happening. Common Weal urged them to rectify this crazy error when the policy came up for a built-in review two years ago. They promised an open and transparent process then reneged on that promise and signed on to the same deal, unchanged and in secret.

Common Weal described this as 'turkeys who voted for Christmas – twice'. We accused the Scottish Government of secrecy, dereliction of duty, breaking promises and incompetent negotiation. This is one of the most significant budgetary issues facing Scotland yet no-one talks about it.

Scotland's tax receipts are lower today than they should be not because of economic performance in the last year but because of incompetent negotiation 12 years ago and inexplicable dereliction of duty two years ago.

If you want to understand what is happening with public finance in Scotland, you need to understand this terrible policy that penalises Scotland brutally – and, inexplicably, with our full consent.