Guest Blog by Fred Harrison, Land Research Trust.

Scotland’s First Minister has created an awkward rod for her political back. Her attack on the Coalition Government’s “austerity” policies renders the SNP vulnerable to its enemies in Westminster. Speaking in London on Wednesday (video above, text here), Nicola Sturgeon trashed the UK Government’s policies on three counts. She condemned the economic policies pursued by David Cameron for failing to deliver long-term growth, increased productivity and fairness. Her own government in Holyrood will now be judged on those tests.

Fortunately for the SNP, the new powers on taxation that are being devolved to Scotland will enable her to undertake reforms that can shift Scotland in the direction of an alternative economic path. But this will require a major change to the way Scotland funds its public services. The taxes employed by the London government certainly fail the first test: long-term growth. Tax policies are rigged against people who earn their incomes by working and saving. The revenue system is biased to favour land as an investment asset. And the pages of history leave us in no doubt that those fiscal policies drive the boom/bust business cycle that terminates long-term growth.

The productivity test is an awkward one. How inefficient is the current tax regime? I will explore that issue at a public conference in Glasgow on 25th February. But there is no doubt that performance of the Scottish economy could be dramatically enhanced if the Sturgeon government decides to rebalance the tax regime. It will need to shift the emphasis away from Income Tax and onto a re-based property tax.

There is no ambiguity about the third test: fairness. At present, the tax regime discriminates against families that rent their homes, and favours the owners of residential property. So the SNP’s commitment to land reform will challenge Ms Sturgeon to find a way of shifting the structure of taxation so that people are treated as equals.

In her London speech, Ms Sturgeon pointed out that the austerity programme was being forcefully opposed throughout Europe. But she is now in a unique position. Unlike the newly elected Greek government, the SNP administration does not have to secure the permission of others to change course. It has the political mandate to launch the reforms that would shift Scotland onto the high productivity growth path. Those reforms would be fair to everyone willing to work by adding to the sum total of Scotland’s wealth and welfare.

Ironically, the SNP government’s enemies within Scotland will not invoke Nicola’s three tests. Already, the opponents of land reform are mobilising their ammunition to try and defend the status quo. The last thing they want is a shift in the direction of efficiency and fairness! The tax regime, after all, was created by those who sought privileged treatment, and to hell with the unfair impact on others. So it will be up to Nicola’s friends to hold her to account, by invoking the three tests to measure the performance of the SNP government.

The following Media Release was issued by the Scottish Land Revenue Group today

The £60bn Route to Scotland’s Economic Independence

Devolution of new financial powers to Holyrood could lay the foundations for an independent Scottish economy within the UK, according to a new Glasgow-based think-tank.

The Scottish Land Revenue Group (SLRG) estimates that Scotland’s government could expand the economy by £59.8bn over the 5 years up to the Holyrood election in 2021 if, as expected, it is given control of the Income Tax.

The forecast assumes that the government would use its powers to rebalance the tax system. The process would begin by zero-rating the Income Tax, scrapping the existing property taxes and replacing the revenue with a new charge on location rents.

The Income Tax now yields £11.5 bn. Studies commissioned by the SLRG show that replacing Income Tax with one charge on land rents would boost employment by 55,000 jobs.

According to Dr Roger Sandilands, emeritus professor of economics at Strathclyde University: “This is not a revenue-neutral policy. By switching the way revenue is raised, the losses caused by the Income Tax are turned into financial gains.

“This is an anti-austerity strategy,” Dr Sandilands stresses. “The tax shift means that government does not have to cut public services. Tax cuts would be self-funding. Under current policies, when taxes are cut, the money does not stay in people’s pockets. Ultimately, it flows into the land market. People have to pay more to buy or rent homes or commercial properties. By collecting that revenue in the form of location rents, government can maintain current spending on services like the NHS.

“So why switch the way revenue is raised? There are two benefits. First, without reducing people’s take-home pay, it becomes cheaper to hire people. Scotland would become a magnet for investors wanting to create enterprises within the UK. This reverses the drift to London and the South-east.

“Secondly, the so-called ‘deadweight losses’ caused by bad taxes would be reduced. There is a net gain to the economy. We estimate that, if Holyrood exercised its power to zero-rate the income tax, the Scottish economy would expand faster than the UK average. GDP would increase in a virtuous cycle of growth. The boom/bust property cycle would be damped down in Scotland, and our economy would leave the rest of the UK behind.”

These themes will be explored at an SLRG conference at The National Piping Centre in Glasgow on February 25. Speakers will discuss how communities can be rebuilt, trust restored in the institutions of governance, and investment in the economy can be increased without incurring government debt.

Conference Programme

Contact SLRG to book a place

Rewards from Eliminating Deadweight Taxes: The hidden potential of Scotland’s land and natural resource rents
by Professor Roger Sandilands.

Image: Chart from OBR Economic & Fiscal Outlook December 2014. Click for larger image.

Following the changes to stamp duty announced by George Osborne in the Autumn Statement, the Scottish Conservative Party has published proposals to change the proposed Scottish replacement – Land and Buildings Transaction Tax – due to be introduced in April 2015. The topic was raised at First Ministers Questions today (col. 14)

The Tory proposals include halving the rate between purchases of between £250,000 and £500,000 from 10% to 5%. The party claims that its proposals “would mean 97 per cent of transactions, including all those below £500,000, will leave house-buyers better off.”

This claim (and similar claims by the Scottish Government) that cuts in stamp duty rates represent a saving to housebuyers is misleading and wrong. It is a symptom of widespread illiteracy around the fiscal dimensions of land and property.

In broad terms, people have a fixed budget when they buy a house. They can, perhaps afford £150,000 made up of a loan and capital of their own. This sum has to cover the costs of acquisition (fees and stamp duty) and the sum paid to the seller for the house. If stamp duty rates are reduced it follows that more money is available for the other costs (fees and the price paid). Assuming that fees remain fixed (such as land registration fees) and others (survey fees and conveyancing costs) remain unchanged (either as a fixed sum or as a percentage of purchase price), the money saved in stamp duty will be available to bid up prices.(1)

This is a straightforward economic principle that was the subject of this useful analysis by Shelter and is noted by the Office of Budget responsibility in its Economic and Fiscal Outlook December 2014 on page 126 as follows.

The OBR analysis makes clear that the cuts proposed by George Osborne and the Scottish Conservatives will be more than offset by higher house prices. Those higher prices will, in many cases be financed by loans, the interest on which will be higher over many decades. A small saving in a one-off transaction tax will not simply be more than offset by higher house prices but by ongoing, compounded and volatile interest payments to financial corporations.

The best solution (and the one I advocated two years ago and is recommended by one of the Scottish Government’s own economic advisers – Sir James Mirrlees) is to abolish this transaction tax in its entirety and replace the volatile yield with a better-designed system of recurrent taxation of land and property. The Mirrlees Review (Chapter 16 pg 404) noted that,

If the Scottish Conservative (and indeed other parties) want to be truly radical, they would be well-advised to stop tinkering with rates (that will not have the claimed effects), abolish stamp duty and its associated bureaucracy, and agree to far more fundamental reform in fiscal policy relating to land and property.

(1) Of course, buyers are often sellers and will receive higher bids for the property that they are selling. But given that most buyers who are sellers are trading up, this merely exacerbates the inflation in prices.