Concern over Scottish VAT ‘volatility’

15 Mar 19

The assignation of VAT revenues to the Scottish Government could expose the Scottish budget to risk because of the difficulty in producing robust estimates, tax experts have warned.  

The move, which will see the Scottish Government’s budget partially determined from next year by the forecast and final estimated VAT receipts in Scotland, is the next major step towards fiscal devolution.

But Graeme Roy, director of the Fraser of Allander Institute, told members of the Scottish Parliament’s finance and constitution committee that there was a “big issue” over the accuracy of estimates, with a potential divergence of “a couple of hundred million either side” because of statistical uncertainty.

“The potential for variability within these estimates is significant,” he said.

“There’s a question for parliament to think about the level of risk it wants to take on, given that level of uncertainty that exists, purely from a statistical point of view, irrespective of volatility in the economy.”

Under the new system, the Scottish Government will be assigned the first 10p of standard rate of VAT, and the first 2.5p of the reduced rate, while seeing an equivalent reduction in its block grant from Westminster.

Although the Scottish Government will have no power to vary the rate of VAT, the Scottish budget will be influenced by the growth of assigned VAT revenues compared to that of revenues in the rest of the UK.  

John Ireland, chief executive of the Scottish Fiscal Commission – the body responsible for providing official forecasts for the Scottish Government - said the statistical model that would underpin the assignation of VAT revenues involved a degree of “noise”, which was difficult to predict.

“The job of the commission will be not just to estimate the underlying trend [in VAT revenues] but to forecast the random error in the assignment model, and that’s very hard,” he said.

Scottish Green MSP Patrick Harvie, who sat on the Smith Commission which had recommended the assignation of VAT revenues, suggested that proposal could be reconsidered as part of the forthcoming review of the fiscal framework.  

“In the absence of any ability to use policy levers to change the rates or bands or to redesign VAT…what are we actually going to achieve by doing this, and if it’s ended up being more complicated and less convincing than we thought it might have done, should we step back and think again?” he asked.

SNP MSP Tom Arthur said there was a case for increasing the Scotland Reserve to give the Scottish Government greater flexibility in the face of uncertain tax receipts, and asked whether the assignation of VAT revenues should be delayed until the level of volatility was clear.

“That is a significant element of public spending that’s up in the air,” he said.

“If we are to take on VAT assignment, do we have to relook at the fiscal framework and the provisions around the Scotland Reserve to give greater flexibility?”

Publication of the VAT assignment model is expected later in the Spring.

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