Scottish voters will be crucial in the upcoming election, with the SNP poised to take many of Labour’s seats north of the border. The future of Scotland will depend on which party comes to power and what decisions are made with regards to its finances.
Nicola Sturgeon wants government spending and taxation powers transferred to the Scottish Parliament, but would this mean spending cuts and tax rises for the Scottish people? Ed Miliband, Labour’s leader has been vocal in pointing out what this might mean, with cuts to pensions or raising taxes. However, given that it is Labour that is facing the biggest threat from the SNP, it is perhaps hardly surprising.
However, as the first video below shows, there would be an estimated £7.6bn deficit in Scotland, according to the IFS if spending and taxing was to be transferred here. This is because the tax revenues raised in Scotland are lower per person and spending per person is higher than across the whole of the UK. Oil prices are extremely low at present and hence this is reducing tax revenues. When the oil price does rise, revenues will increase and so if the split in finances was to occur this would reduce that deficit somewhat, but it would still leave a rather large hole in Scotland’s finances. The following videos and articles consider the SNP’s plans.
Videos
SNP fiscal autonomy plan: What would it do to Scotland’s finances? BBC News, Robert Peston (10/4/15)
Labour attacks SNP’s ‘devastating’ economic plans BBC News (10/4/15)
Articles
Ed Miliband attacks SNP plan for Scottish fiscal autonomy The Guardian, Severin Carrell (10/4/15)
Ed Miliband wars pensions will be cut under SNP plans The Telegraph, Auslan Cramb (10/4/15)
SNP fails to account for billions in welfare and pensions pledge, says IFS The Guardian, Severin Carrell (10/4/15)
Questions
- What is a budget deficit?
- What does fiscal autonomy for Scotland actually mean?
- The IFS suggests that there will be a large deficit in Scottish finances if they gain autonomy. How could this gap be reduced?
- Why has Labour claimed that tax rises would occur under the SNP’s plans? What could this mean for Scottish growth?
- Why do lower oil prices reduce tax revenues for Scotland?
- If Scotland had control over its finances, it could influence where government spending goes. Which industries would you invest in if you were in charge?
Child Benefit is a universal benefit, which means it is awarded on the basis of having a certain contingency (a child!) and not on the basis of a contributions record or an income test. It is for this latter reason that the equity and efficiency of child benefit has come into question.
Is it really equitable or a good use of money for a family earning £200,000 per year to receive child benefit of £20.30 per week for the first child and £13.40 each week for every subsequent child? Do these families really need the money, or would it be better spent on education, healthcare etc? This question became even more pertinent with the growing budget deficit facing the UK and the Coalition’s policy of cutting the deficit and hence cutting government expenditure.
Child benefit was one of the benefits targeted by the Coalition. It would be removed from higher rate tax payers. Those earning more than £44,000 would no longer be eligible to receive it. For some this seems like a good policy – the benefit is being targeted at those who need it most – it is becoming more vertically efficient. However, for others this presents a problem, not least because it looks at individual income and not family income. If there is a 2 parent household, with each parent earning, say, £40,000 then total household income is £80,000. Yet, this family is still eligible to receive child benefit, as neither of their incomes exceed £44,000. However, a 2 parent household, where one person works and earns £45,000 and the other only works part time and earns £5,000 would not receive child benefit, despite their total household income being only £50,000. This policy, unsurprisingly, faced criticisms of inequity and that middle income households would be the ones who saw their income squeezed and were made significantly worse off.
Amid these criticisms, David Cameron has admitted that there is an issue with the threshold and those facing the cliff edge of becoming a higher rate tax payer and losing the benefit. The Chancellor is unlikely to be in favour of any significant changes that will reduce the projected £2.5bn savings the policy will make. Although the policy still looks set to go ahead, following the Coalition’s defeat in the House of Lords concerning cuts to welfare and Cameron’s desire to retain the loyalty of Conservative supporters, we may still see some revisions to the initial proposal. The following articles consider this highly charged issue.
Webcasts
Child benefit cut will go ahead, says Osborne BBC News (13/1/12)
George Osborne: child benefit plans will go ahead The Telegraph, Robert Winnett (9/5/11)
Child benefit cut to hit 1.5 million families, says IFS BBC News (13/1/12)
Articles
Osborne sticks to child benefit cut The Press Association (13/1/12)
Middle-class parents could keep their child benefit after all Independent, Andrew Grice (13/1/12)
Welfare payment cap poses ‘real risks to children’s rights’ Guardian, Randeep Ramesh (11/1/12)
Universal child benefit has had its day Mail Online, Janice Atkinson-Small (13/1/12)
Questions
- What is the difference between a benefit such as income support and child benefit?
- Define the terms horizontal and vertical efficiency and horizontal and vertical equity.
- To what extent does child benefit (as a universal benefit) conform with your definitions above? Would the new means tested child benefit meet the objectives of horizontal and vertical efficiency and horizontal and vertical equity any better?
- Why are middle-income families and women likely to be the most affected by the proposed changes to child benefit?
- Why is there a growing pressure on the Coalition government to rethink the proposal?
- If child benefit is removed from higher rate tax payers, should other benefits be changed to compensate some families for their losses?
As the new tax year begins, many changes are taking place. In order to cut the large budget deficit, sacrifices have to be made by all. The tax and benefit changes could make households worse off by some £2bn this year – definitely not good news for those households already feeling the squeeze. However, the Coalition say that the poorest households will be made better off relative to the rich.
Personal allowance is increasing by £1,000, which is expected to benefit £800,000 people who will no longer pay any tax. At the same time, the 40% tax bracket is being reduced from £43,875 to £42,475, which will bring another 750,000 people into this higher tax bracket, bringing in much needed revenue for the government. Employee’s national insurance contributions will rise by 1% and according to Credit Action, this will leave households £200 worse off per year. Benefits do rise with inflation, but they are to be indexed against the CPI rather than the RPI. The RPI is usually higher and hence benefits will not increase by as much, again leaving some people worse off. Child benefit will be frozen for all and will then be removed for higher rate tax payers from 2013. According to the Treasury, it is the top 10% of households who will lose the most from these needed changes. However, as Justine Greening, the Economic Secretary to the Treasury said:
‘Labour left behind a complete mess with no plan to deal with it, apart from to run up more debts for the next generation to pay off.’
In order to cut the deficit, which stands at an estimated £146bn, spending must fall and tax revenue for the government must rise. The government argues that if cuts are not made today, even higher cuts will be necessary in the future and this will harm the poorest even more. Whilst the Treasury have accepted that there was a ‘marginal loss’ across the population, it is the highest earning households that will suffer the most.
Wednesday of woe as the taxman bites: Changes could leave you £600 worse off Daily Mail, Becky Barrow (6/4/11)
Benefit cuts: Labour warns of ‘Black Wednesday’ BBC News (6/4/11)
Tax and benefit changes: row over financial impact BBC News (6/4/11)
Black Wednesday will hig millions in tax changes and cuts Metro, John Higginson (5/4/11)
Taxman to take extra £750 from families this year Scotsman, Tom Peterkin and Jeff Salway (6/4/11)
Tax and welfare changes will hit women and children hardest, says Ed Balls Guardian, Helene Mullholland, Polly Curtis and Larry Elliott (6/4/11)
Black Wednesday for millions of British families Telegraph (6/4/11)
Majority of households ‘better off’ The Press Association (6/4/11)
Questions
- Where does the term ‘Black Wednesday’ come from?
- What is the likely impact of the 1% rise in NICs? Think about the income and substitution effects. Can you illustrate the effect using indifference analysis?
- Why are Labour arguing that women and children will be hit the hardest and the coalition arguing that it is the highest income households who will lose the most? Can both parties be right?
- What are the arguments (a) for and (b) against bringing in tax and benefit changes today rather than in a few years?
- How might these changes affect the economic recovery?
- Is it equitable that child benefit should eventually be removed from those paying the higher rates of income tax?
- Why has the government indexed benefit payments to rise in line with the CPI rather than the RPI?
An interesting article by Stephanie Flanders, the BBC’s Economics editor. She asks just how much (or how little) the pound in our pocket is now worth. With inflation above target, growth very slow and tax and benefit changes to cut the government deficit, everyone is feeling the squeeze. A key fact that Flanders identifies is that only those in the highest income quintile have actually lost from changes in the tax and benefits system: everyone else has (or will) gain. A very interesting read!
The shrinking pound in your pocket BBC News, Stephanomics (21/3/11)
Questions
- What are the main factors that have contributed to lower living standards this year? Explain how each factor works.
- What changes to taxes and benefits have occurred and what changes can we expect over the coming months and years? Who is likely (a) benefit and (b) lose from each change?
- Is it right that the richest families have been affected the most? Find an economic argument for both sides of the debate.
- Why have pensioners lost relatively more than other groups?
The final debate between the three party leaders was mainly on the economy. A key issue under debate was how each party would cut the huge budget deficit and how households and businesses would be affected. Something that we may see in the future is a banking levy and possibly new powers given to the Bank of England to ‘ration credit in boom years’. Spending cuts and tax rises are inevitable, but there were differences between the parties as to the extent of these changes and when they are likely to occur. The articles below consider these important issues, as the election entered the final 72 hours.
The broadcast debate
Prime Ministerial Debate: The Economy BBC Election 2010
Articles and podcasts
Economic debate: Banks and a balanced economy BBC News, Peston’s Picks (29/4/10)
General Election 2010: a fact checker for the leaders’ debate on the economy Telegraph (29/4/10)
Tim Harford on the truth behind leaders’ claims BBC Today Programme (30/4/10)
Questions
- It is not unusual for countries to have a budget deficit, so why is the UK’s receiving so much attention in the election?
- What is the difference between retail and investment banking?
- What do you think David Cameron meant by giving the Bank of England power ‘to call time on debt in the economy’?
- What is the difference between the budget deficit and national debt?
- What are the arguments for and against cutting the budget deficit now, as the Conservatives want to do and cutting it in the next financial year, as Labour is suggesting?
