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23/02/16 21:17

First Minister's David Hume Institute speech

This is the third time I’ve delivered one of these lectures so it is a real privilege to be here again.

The David Hume Institute has been at the forefront of public debate in Scotland for more than 30 years. These “meet the leader” sessions are an important part of that and a highly valuable part of our discourse and debate. I value – as I am sure all the party leaders do – the opportunity to discuss with you some of the key issues facing Scotland for the future.

In my opening remarks today I want to focus on a hugely important and very topical issue - how the Scottish Parliament should use its new powers in the years ahead. As part of that, I will talk about future plans for social security, council tax and income tax.

But fundamentally much of my speech tackles a much broader question and one which must be of concern to progressive politicians and policy makers the world over –how we balance world-class public services and strong social protections, with the right incentives for enterprise, wealth creation and sustainable growth. What does social democracy mean in practice?

SG economic policy

And I want to start with a very basic point, which is that taxation policy, like economic policy more generally, is really just a means to an end but not an end in itself. Ultimately it’s one of the means by which – through the collective contribution of all of us as individuals – Governments help people to live happy, healthy fulfilling lives. It’s therefore impossible to separate a debate on the tax and welfare system we want to establish, from a vision of the society we want to create.

And one of the themes which was central to the referendum debate - and I am of course talking about the Scottish referendum debate, not the one that lies before us - and to politics in Scotland subsequently has been the desire, indeed the yearning, of many people to live in a fairer society, as well as in a more prosperous one.

That desire is not confined to one party, and it wasn’t confined to one side during the referendum – it was widespread and deeply felt and I think it continues to be so.

That’s one reason why last year, when we revised the Scottish Government’s Economic Strategy, we placed the pursuit of fairness and competitiveness on an equal footing. Something that is quite pioneering in terms of international standing. One does not – should not – take priority over the other. They are two sides of the same coin.

There’s strong international evidence to back up that view. In fact two years ago, the Organisation for Economic Co-operation and Development estimated that, between 1999 and 2010, inequality reduced the UK’s economic growth by 9 percentage points– that’s equivalent to £1,500 per person. The price of inequality.

So, that is why Scotland is – in many respects – leading the way when it comes to inclusive growth: because if we have a more progressive society, we have a fairer one. This is something that became obvious to me when, last year, I discussed our approach with the World Bank and the IMF.

We know that we need a strong business sector to create skilled job opportunities, and to generate the revenues on which good public services depend.

That’s why the Scottish Government and our enterprise agencies support thousands of companies every year to innovate, export and expand. Just last week, we launched a new manufacturing action plan – setting out concrete proposals to boost a sector which is responsible for half of Scotland’s exports and more than half of our R&D investment. It’s part of this Government’s ambition for Scotland to be the best place in the UK to do business.

However we also know that a strong, growing and sustainable economy also depends on creating a more equal society, where everyone can participate to their full potential. Workers who are well educated and trained, well paid and highly valued and supported, will be more productive than those who aren't. They’ll also, of course, be happier, healthier and enjoy a better quality of life.

Indeed it is the desire to realise such long-term economic dividends that – at least in part – lies behind some of the Scottish Government’s most important social investments. For example, we have worked hard over the last few years to expand childcare provisions over the last few years and we have now promised to almost double the level of free childcare available for three and four year olds, and some two year olds – from 600 hours a year now to 1140 hours by the end of the next parliament. We intend to ensure that this care is delivered flexibly, in a way which meets parents’ needs, but also to ensure that it is of a high quality in order that it meets the needs of children too.

This expansion of childcare can be and should be a defining legacy of the next parliament – an investment which helps parents into work, gives children the best possible start in life, and helps to make Scotland a wealthier and fairer country.

Our plans for childcare will also support our ambitions for raising attainment in all of our schools. We have published a national improvement framework and directed additional resources to schools in areas of greatest disadvantage, where they are needed most. I’ve made clear my personal determination to narrow and then close the gap in attainment between children in the most affluent parts of Scotland, and those in the least affluent areas.

Education and childcare - perhaps above all else – are the building blocks of a fairer society. Our investments here are essential to delivering true equality of opportunity and driving future economic success.

In recent years we have also placed, very deliberately, a growing emphasis on Fair Work. We have brought government, trade unions and businesses together to encourage progressive workplace practices and to improve productivity.

As part of that, we have provided strong encouragement for the living wage. Back in 2014, when I became First Minister, there were 78 accredited living wage employers in Scotland. Now there are more than 470. Indeed, Scotland now has a higher population of workers paid the living wage than any other UK nation.

We have also published new procurement guidance which explicitly recognises fair work - including payment of the living wage - as a vitally important consideration when decisions about how public sector contracts are awarded are being taken and using public money in that way.

Our overall approach is perhaps encapsulated by the Scottish Business Pledge. More than 200 companies have now signed up to the pledge and it celebrates companies which are committed to employee engagement, gender equality and payment of the living wage, and are also ambitious about internationalisation and innovation.

It’s intended to send a powerful message that progressive business practices are something to be celebrated – not simply because they’re good in themselves, though they are - but also because they contribute to long-term commercial success. For businesses, good business practices represent enlightened self-interest. It’s an important part of our drive to create a high wage and high productivity society – one where everyone has a fair chance to contribute to economic success, and where everyone receives a fair reward.

Principles of taxation policy

So it is that principle of inclusive growth that defines our economic strategy.

And so it follows from that that, as the Scottish Parliament does assume new fiscal powers over the next couple of years, our approach to the use of these powers should also be consistent with that approach. We will, in deciding how to use those powers, recognise, as we do in our economic strategy, the interdependence of greater equality and higher growth. It will strike a balance between encouraging enterprise and promoting fairness.

And it will, notwithstanding the limitations of our tax powers, seek to establish a modern taxation system on enduring Scottish principles. David Hume’s great friend, Adam Smith, set out four guidelines for taxes which still hold true today. He argued that taxes should be certain, convenient, administratively efficient and proportionate to the ability to pay. Those principles underpin the Scottish Government’s approach and will continue to do so.

And there are two additional points which are also worth emphasising. The first is that tax avoidance undermines all of Adam Smith’s principles. It also corrodes public trust – not just in business, but in government and society more widely.

That’s why we have already passed legislation enabling Revenue Scotland to take action against tax arrangements which are “artificial”. That’s a broader test than the UK’s need to prove “abuse”. It demonstrates our determination to ensure that the burden of tax is shared fairly, and that people and companies pay in the way that the Scottish Parliament intends to pay. This is a really important principle in ensuring trust.

The second point is that when it comes to developing our tax policies, we are committed to a collaborative approach. We consult regularly with tax payers, industry, academics and professional bodies.

One of the failings of UK tax policy is its management of tax changes – especially the nature of its budget day rituals. Too often, tax and benefit changes get announced in order to produce rabbits out of a hat - to wrong-foot the opposition and surprise the media –– rather than as a result of consultation and engagement and well-thought out proposals.

A good example of this was the increase in supplementary charges for the oil and gas industry in 2011 was an especially damaging example; the unravelling of the Chancellor’s proposed cuts to tax credits this year is another.

Of course, it’s not always possible to announce tax changes in advance – but in general, consultation and predictability are virtues rather than vices. They shoulde, wherever possible, at the heart of Scotland’s approach to taxation. That makes it more likely that changes will work, and less likely that decisions will have to be reversed when they prove to be unworkable.

Past SG decisions on tax policy

I’ll show how those principles apply to future policies in a moment, but it’s maybe worth looking first at the decisions about taxation that the Scottish Government has already made.

One of our early steps, on taking office in 2007, was to lower business rates – answering widespread calls from the business community - and introduce the small business bonus. That bonus currently helps approximately 100,000 premises across the country – from corner shops to high-tech start-ups. It’s one way of giving a helping hand to the smaller companies which are such an important engine of our economic growth.

We have also announced our intention to reduce Air Passenger Duty in the next parliament. We will consult on how to apply that reduction. Air Passenger Duty in the UK is the most expensive tax of its kind in Europe.

For Scotland – as a country which is at the periphery of Europe – it has an especially big impact on business competitiveness. So the reduction we propose is a sensible way of addressing a specific problem to help businesses, boost tourism and support wider economic growth.

And we are increasing the rate of landfill tax in this year’s budget. It’s a measure which will raise revenue in the short term, of course, but it will also encourage in future an even greater shift towards the recycling and reuse of materials.

Last week, I announced £70 million of support for developing the circular economy. That’s where products are designed in a way which enables materials to be reused at the end of their life.

A more circular economy, where we make things last, helps companies to eradicate waste and reduce costs. It conserves resources, supports jobs and improves our quality of life. It is increasingly becoming an environmental and moral necessity – and also a major economic opportunity.

So by raising landfill tax, and simultaneously offering support for the circular economy, we’re providing the right set of incentives for business. It’s an area in which we can use taxation policy to improve sustainability and to encourage efficiency. Tax policy – not as an end in itself – but as a means to a social, economic or, in this case, environmental end.

So where we can, we’ve already demonstrated that we will use the tax system to boost businesses. And as part of that, we want to ensure that the tax system as a whole is progressive - that it addresses rather than aids the inequality which harms our economy; and that it promotes sustainable growth and social inclusion.

The Land and Buildings Transaction Tax – the Scottish Parliament’s first new tax power in more than 300 years – is a good example of that. The stamp duty system we inherited was deeply flawed – for example buyers suddenly went from paying no stamp duty on properties worth £124,000, to paying duty on the entire value of a property worth £125,000. It led to clusters of properties being valued at prices just below the tax thresholds of £125,000 and £250,000.

So we consulted widely about how we could make the system better. We made the Land and Buildings Tax simpler and more progressive than Stamp Duty. We have also ensured that people buying properties worth less than £330,000 – that’s 93% of house buyers - pay no tax or less tax than would have been the case under stamp duty.

This year, we are also introducing a 3% supplement for purchases of additional homes. It’s a step which gives a slight advantage to people with one property – and, importantly, to first-time buyers.

Social security

Let me look now to the future.

In the coming weeks we will publish proposals on three further areas- social security, council tax and income tax where we are gaining new powers.

If you take social security first, when we have been able to do so, the Scottish government has already adopted a different approach to welfare from the UK by retaining key social protections. For example when the UK Government abolished Educational Maintenance Allowances, we maintained and then expanded those. They currently help more than 50,000 young people from poor backgrounds to stay on in education. Something that is vitally important in ensuring that education is the bedrock of Scottish society.

Through the Scotland Bill the Scottish Government will gain responsibility for disability and caring benefits, some flexibilities around the implementation of Universal Credit implementation in Scotland, and control over other certain benefits, including funeral payments and Sure Start Maternity grants as well as cold weather and winter fuel payments.

We have already begun to set out how we will use these additional powers. In December, we announced that Scotland’s new social security powers will be founded on a set of principles that have at their heart a commitment to treat people with dignity and respect.

We believe that social security is an investment in the people of Scotland; so we will replace the work allowance, which in its current form is failing to help people into work. And we will use the new flexibilities within Universal Credit to give people more choice in how they manage their money.

We currently spend £100 m a year to mitigate some of the worst impacts of UK Government welfare policies. Among other things, this ensures that nobody faces eviction as a result of the bedroom tax. We will use our new powers – when we have them – to abolish the bedroom tax completely.

Respect for the dignity of individuals is at the heart of everything we do; so we intend to improve the benefits system for disabled people with long-term health conditions and their carers. For example, we intend to increase the Carers Allowance so that it matches the level of unemployment benefit.

Next week the Scottish Parliament will debate social security. On the day of the debate we will set out some firmer proposals for using our new powers. These proposals have been informed by widespread consultation with individuals and groups across Scotland.

They will demonstrate our determination to develop a social security system which is an investment in the people of Scotland and which helps to tackle poverty, promote fairness and values individual dignity, support people into work when they can, all of which supports our policies of a fair and inclusive society.

Council tax

We will also intend in the next parliament to make changes to the system of local taxation. For the last 9 years, the Council Tax freeze has safeguarded household incomes during tough economic times. The Scottish Government has funded local authorities to deliver that freeze. It is a policy which has helped individuals while maintaining public services.

However the report of the cross-party Commission on Local Tax Reform has made it clear that now is an appropriate time to reform local taxation. The Commission argued for measures which make council tax more progressive; and which give greater assistance to those on low incomes.

Next week we will set out details of how we intend to achieve this from April 2017 onwards.

Those changes will be part of a longer-term plan to increase the accountability of local councils to the population they serve. In particular, we will discuss with local authorities how we can assign, as the Scottish Parliament gains more power over local tax, a share of income tax receipts to the local government budget.

That means that if councils help to boost overall economic growth, and consequently income tax receipts, they will share in some of the benefit. And it also means that local government funding will be more broadly based, which many people think is too narrowly focused, to provide a more equal gain.

This approach will go a long way towards meeting an important concern of the Commission on Local Tax Reform – that income and property-based taxes together would be a better source of revenue than council tax alone. It’s a further example of how considering expert evidence can help us to propose a better tax system.

Income tax

Finally, before the election we will publish proposals relating to income tax.

The income tax powers the Scottish Parliament was granted under the devolution settlement, and then under the 2012 Scotland Act, are inflexible. The reason for that is that any increase or cut in one tax band automatically applies to all tax bands. So any increased rate affects higher earners, but also inflicts an additional tax burden on anyone earning more than £11,000.

That’s why the Scottish Government has chosen to keep income tax levels unchanged in the current budget.

And of course the inflexibility of current powers is also why Lord Smith recommended further devolution of income tax policy. As a result of his report - agreed by all major parties in Scotland - we expect the Scottish Government in future to be able to adjust tax rates for specific bands, and also to change the thresholds at which people start paying different rates of tax.

During the next four weeks, I will set out in detail how my party proposes to use those powers to create a fairer income tax system for Scotland. Like our proposals on council tax, they will set out – not just the changes we intend to make, but also what effect this will have on public services and also make sure that we are striking that balance between fairness and prosperity in business.

After all, one of the opportunities that we gain with additional powers, is the ability to establish a clearer link between the taxes people pay, and the public services we all use.

So if the Scottish Government takes decisions which raise additional revenues, we have a duty to explain why we are doing that, and how those additional revenues will be spent. Similarly, any party that proposes to cut taxes, will have to explain how those cuts will be paid for.

That greater transparency and accountability, making the Scottish Parliament much more accountable for the money we spend, will be good for democratic debate. Ultimately, it should further improve decision-making.

And as we debate taxation, social security and public services, this Government will continue to make an important argument - not just for high quality services, but for universal services and benefits in many areas.

We’re sometimes criticised for making free prescriptions or university tuition available to all, rather than subjecting them to means testing.

We don’t believe that people on low incomes should feel stigmatised simply for accepting entitlements – one of the difficulties with means-testing. And we want people on higher incomes to benefit from some of the key services they have helped to fund.

Universalism is fundamental to our wider vision of society. We don’t see, and shouldn’t, see society as divided between those who contribute to public services and those who benefit from them. We believe that everyone contributes to society, at different times and in different ways, and that everyone is therefore entitled to certain key benefits.

Fiscal framework

Now I promised, before I finished up, that I’d say a word or two about the fiscal framework because, of course, all of what I’ve been talking about today – income tax, social security, has all been predicated on reaching agreement on a fiscal framework. Basically what we’ve been trying to agree is the principles that were set out in the Smith Commission. It said that there should be a Fiscal Framework to accompany the new powers based on, amongst other things, the principles of no detriment. And what that means in relation to devolving income tax is that, if, as the Scottish Government takes responsibility for income tax, we change the rates up or down or, if we through the decisions we make, fail to match the economic growth rate of rest of UK, then our budget should bear the consequences, or indeed the rewards, of that. But, if we don’t change the rates, and they remain exactly the same as the rest of the UK, and we match the UK economic performance entirely, then there should be no detriment whatsoever to the Scottish budget initially or in the years ahead. That is the principle of no detriment that most people agreed that we were signing up to in the Smith Commission. We’ve been having a tough round of negotiations with the Treasury where, it’s fair to say, they took a different view of no detriment than we did.

What the Treasury were seeking to do was reach an agreement that would see the Scottish budget bear detriment in the years ahead flowing from the fact that our population, as it has done for 300 years, is projected to grow at a slower rate than the rest of the UK population. That is down to deep-seated and long-standing differences in fertility rates, death rates and, of course, it’s driven heavily by migration policy. So they wanted to drive a population detriment through our budget that, based on what they were proposing, would have led to a £7 billion drop over the next 10 years, or based on a modified proposal, would have gone down to £3 billion or £2.5 billion notwithstanding the fact that the Smith Commission doesn’t give us any additional powers to influence or drive population growth.

Thankfully we have managed to reach an agreement and, what I’ve just announced to the Scottish Parliament, is that we’ve reached an agreement that delivers no detriment. That will be done firstly through a six year transitional period, where the block grant adjustment will be done in a way that guarantees this no detriment. We will then review the system but there will not be the ability then to impose any more detriment. It will be for the Scottish Government and we will need to agree any system to replace that at the end of the transitional period.

I’m glad we’re here, because it does allow us to move into the kind of debate that I’ve been talking about – how do we use the powers, albeit the powers with limitations, to continue to build on our work to make Scotland a better place to work and live.

That’s why I look forward to debating in the weeks ahead.