I’d like to share a recent article published by the Institute for Fiscal Studies (IFS – see below). Reading it triggered the thought that it must be a horrendously difficult ongoing task for a Scottish Government to keep abreast of – and ensure appropriate modelling of – the impact of Westminster’s tax and benefit changes. These changes not only affect the Scottish Government’s budget but also, crucially they affect the household incomes of the least well-off in Scotland.
In a detailed assessment of what is happening to the UK’s complex personal tax and benefit systems, the IFS identifies significant changes underway which, it argues, are occurring substantially by stealth.
Source: Waters and Wernham (2022) Reforms, roll-outs and freezes in the tax and benefit system, Institute for Fiscal Studies (https://ifs.org.uk/sites/default/files/2022-10/Reforms%2C%20roll-outs%20and%20freezes%20in%20the%20tax%20and%20benefit%20system_0.pdf )
For context the IFS article notes: ’Many tax and benefit thresholds, allowances and amounts (‘parameters’) are by default uprated every year in line with prices or in some cases earnings. But others are frozen in cash terms, sometimes temporarily by explicit policy choices but often indefinitely.
‘Compared with uprating, such freezes reduce household incomes and strengthen the public finances – all the more so in the high-inflation environment we currently find ourselves in.
”THESE FREEZES – WHICH REPRESENT A STEALTHY AND ARBITRARY WAY TO RAISE TAX REVENUE – OFTEN HAVE A BIGGER IMPACT ON HOUSEHOLD INCOMES THAN MORE EYE-CATCHING DISCRETIONARY MEASURES. Several benefit reforms are also being rolled out over the coming years, which also overall act to reduce household incomes.’ (my emphasis)
And: ‘The range of frozen parameters is wide, covering many aspects of the tax and benefit system. ….’
The IFS article expresses concerns: ‘Planned discretionary reforms to taxes are returning money to households, with THE RICHEST GAINING THE MOST. But at the same time, FREEZES TO TAX AND BENEFIT PARAMETERS ARE SIGNIFICANTLY AND STEALTHILY CHANGING THE SCOPE AND SIZE OF TAXES AND BENEFITS OVER TIME.
‘As prices increase, they DRAG MORE PEOPLE INTO THE TAX SYSTEM and into higher rates of tax, increasing the tax burden, while ERODING THE VALUE OF BENEFITS and REDUCING THE NUMBER OF PEOPLE ELIGIBLE.
‘THE MAGNITUDE OF THESE SUBTLE CHANGES SHOULD NOT BE UNDERSTATED, as they MORE THAN CANCEL OUT the impact of the two high-profile explicit policy reforms – the planned cuts to the rates of National Insurance and income tax.
‘FOR EVERY £1 HOUSEHOLDS ON AVERAGE WILL GAIN FROM THESE PLANNED TAX CUTS IN 2025–26, THEY WILL LOSE £2 AS A RESULT OF POLICY ROLL-OUTS AND FREEZES TO TAX AND BENEFIT PARAMETERS. Overall, the progressive effect of freezes and policy roll-outs is more than outweighed by the impact of the discretionary tax changes, making the combined impact of changes to the system broadly regressive.
The IFS adds: ‘The government should by default index all tax–benefit parameters to a well-chosen index, and it should avoid long freezes, ideally never announcing a freeze that runs for more than one year hence.
‘That there appears to be an increasing trend of introducing new parameters to the system that are by default frozen, and a greater tendency to use time-limited (but quite long) freezes to existing parameters, SMACKS OF LAZY POLICYMAKING AND IS CONCERNING.
‘The government should kick this habit. If it wants to raise taxes or cut benefits, IT SHOULD TELL US WHAT REAL VALUE IT THINKS THE PARAMETER IN QUESTION SHOULD BE, and NOT LET IT BE UNPREDICTABLY BUFFETED AROUND BY INFLATION.’
The IFS is focused here on Westminster’s tax and benefit schemes and practices. Whilst there are differences – including mitigations – in Scotland, the Scottish Government and Parliament will not always be able to protect less well-off households in Scotland from this trajectory of regressive tax and benefit policies emanating from Westminster.