PAYING FOR LOCAL GOVERNMENT, WATER AND SEWERAGE SERVICES FAIRLY: THE CASE FOR A SCOTTISH SERVICE TAX AND SCOTTISH WATER CHARGE

As devolution is a dynamic process, with changes and pressures for developments in other parts of the UK significant drivers for what happens in Scotland, we suggest that once the Government grasp the need for a Barnett Formula within England to improve the distribution of resources across the English regions, there will be a wider debate on the merits of expanding the 'single pot' which has been introduced for the regional development agencies (RDAs) there. Moving towards a more transparent fiscal system for the constituent parts of the UK would involve an improved understanding of the need for greater fiscal autonomy everywhere at sub-national (UK) level and the advantages of devolving power within this most centralised of states. Although many of these arguments were rehearsed in the original report, the greater flexibility offered by these recent Treasury inspired changes open up the opportunity to consider further changes. Second, some of the other arguments put forward by Professor Midwinter to the Local Government Committee (11 December 2001) appear to suggest the possibility to retain the Council Tax Benefit (discussed below) by continuing Council Tax in parallel with a local income tax, implying that there may well be more flexibility in the arrangements with Westminster than expected. Indeed, neither he nor the Committee had verified whether the Parliament could give tax varying powers to local authorities with regard to a local income tax (Col 247 9). That this has not been explored appears to be a very important omission as it undermines one of the three reasons he has given for not supporting the SST (Col 246 5). As the loss of Council Tax Benefit was another criticism, this leaves only the third: the question of whether we require all taxes to be progressive, dealt with in Section 3 above.

The practical issues of administering a Scottish Service Tax have been addressed already in the mechanisms put in place for handling the changes to the Income Tax Acts necessitated by an implementation of the Scottish Parliament's tax varying power. The Scottish Service Tax would specifically and exclusively fund local authority expenditure. In our opinion, it is therefore legally competent for the Scottish Parliament to implement such a proposal under the terms of the Scotland Act.

As anticipated in the first report, a criticism of the proposals to implement the Scottish Service Tax could be that even more of the local control over raising of local authority finance was being removed. To promote local democratic accountability, it was proposed that non-domestic tax policy and business rate levels should be returned to local authority control in the immediate term. This was supported by the Local Government Committee with their recommendation that the non-domestic rate should be returned to local authority control (6th Report 2002, Report on Inquiry into Local Government Finance. Volume 1 : Report . By suggesting that the Business Rate would be set, collected and retained locally the loss of direct control over their revenues raised from domestic residents would be replaced by greater autonomy with the return of this tax power. Local authorities already bill and collect non-domestic rates and this return of control therefore creates no problems in relation to the mechanisms required. We make further proposals below for a land value tax, initially to supplement and then to replace the UBR. Also, it seems to us a rather restricted view of local democracy to judge that the citizens will only make electoral choices based on taxes and not also on the quality, efficiency, equity and economy of service delivery. More strongly, there should be a recognition that expenditure decisions and priorities are just as legitimate areas for the electorate to discriminate between parties and for local authorities to intervene in their communities according to the expressed wishes of their residents. Exclusive focus on local taxes unnecessarily restricts consideration of the role of local councils, and itself undermines democracy.

The amount of finance raised in each area would be taken into account in a new distribution formula for supporting all local government in Scotland based on a new needs assessment, which would be weighted much more towards tackling deprivation and meeting needs than is currently the case.

Beyond this immediate change, it can be argued that the development of a betterment tax or other form of land value taxation proposal should begin forthwith, with serious consideration of exemptions being made available to small businesses with a low turnover and low profit level. A sensible and fair rebate scheme would assist the small business sector, and would be in keeping with the business start-up and aftercare programmes of the Executive, Scottish Enterprise and local government for small and new businesses (Danson et al, 2000), while the betterment tax concept would ensure that appropriate revenue is raised from larger enterprises and from land speculation activity. Land Reform Scotland has argued this case at length through written and verbal evidence to the Local Government Committee. As a useful introduction to the principles of land value taxation we commend their website and submissions to the Committee. In the longer term we support such a move to raising public finances for local government in Scotland. We also note that this is supported by the Liberal Democrats; Bob Kiley backs a land tax to pay for the investment required for the London Underground; and the RICS is organising a major conference to explore such issues. The SNP's proposed charge on parking spaces at out-of-town shopping centres likewise is a form of LVT, albeit ad hoc and lacking a comprehensive framework. In evidence to the Local Government Committee, Professor Brown of Liverpool John Moores University reported an expectation that tax rates would converge for mobile factors of production. This suggests that tax on the immobile factor ? land ? offers the only long term flexibility in revenue generation to local and regional governments in the new Europe. LVT also is claimed to have no disincentive effects on labour or capital, so protecting growth and development within Scotland.

Nevertheless, although it seems agreed that doing nothing is not a realistic option for local government finance in Scotland, some argue that neither is radical change likely to be successful (Midwinter in evidence to the Local Government Committee, December 2001). The SST presents itself as a medium term initiative to address social justice; other more radical measures may take longer to become acceptable on their own.

The latest estimates of the demographic composition of Scotland in 1999-2000, the year for which the analysis in this paper has been constructed, are provided by the Scottish Household Survey (available on www.scotland.gov.uk/library2/doc06/hsb02-03.htm). These allow a consideration of the composition of households and their incomes. Recalling that a prime objective of a move from the regressive Council Tax to a redistributive Scottish Service Tax is to alleviate poverty, it is important to recognise the scale of the problem. Almost half, 46%, of all households in Scotland in 1999-2000 had a household income of less than £10,000. Where there was only one adult in the house, then nearly three-quarters (73%) had an income of less than £6,000. Amongst pensioners and lone parents, incomes were particularly low, with 85% of all single pensioners, 54% of all other pensioner-only households, and 66% of all lone parent households having incomes of less than £10,000. By contrast, where there were children in the household and two adults (i.e. small families) the proportion below this threshold was 16% and 14% where there were three or more adults (large families); for those without children, 25% of two adult households had an income of less than £10,000 and 14% where there were more than two adults living together.

As well as focusing on many of the individuals and families prioritised in the social inclusion and social justice agenda, there is an important gender dimension to household incomes. Although 35% of households with male heads had an income below £10,000, for female headed households it was 61%.

As the Scottish Service Tax is to be levied on the incomes of individuals and not households, the above analysis of the Scottish Household Survey can only provide an indication of the sorts of numbers who will be exempted from the SST. However, the figures do confirm that for households with only one adult or with no adult working, between half and two-thirds would be below the £10,000 threshold and so would not pay SST, nor would they be means tested outwith the inland revenue returns that many complete anyway.

Figures recently published on 1999-2000 earnings of men and women in Scotland (Social Focus on Women and Men 2002, Scottish Executive, 2002), confirm that there are significant gender imbalances in the incomes of individuals. On average, men working full-time were paid £21,996 per annum in that year, women earned £16,437 or 75%. This significant difference will have been exacerbated by the higher proportions of women either working part-time hours or unable to work a full year because of caring responsibilities. For manual women workers, the average pay was £11,230,

Table 6: Average Gross Weekly Earnings of full-time employees by occupational group, Scotland, April 2000

Source: New Earnings Survey, Office for National Statistics

suggesting that most were under or only just above the £10,000 threshold to be applied under the SST.

A measure which sought to tackle poverty directly by leaving more income in the hands of the poor without resorting to a targeted means tested system of benefits would therefore assist many of the poorest families in Scotland. It would also address the need for greater transparency in support for women without perpetuating institutional discrimination through the welfare system and redistribute incomes in their favour directly and without exclusively relying on benefits and other forms of handouts.

In the previous reports to the Scottish Socialist Party (1999) and to the Local Government Committee of the Scottish Parliament (18 January 2001), illustrations were produced of possible marginal SST rates. These suggested that sufficient income could be raised to more than match the revenue produced by the Council Tax for local authorities, while meeting all associated charges. This paper now updates this earlier research by using more recently available income figures from the Inland Revenue and also addresses the possible need to increase the tax take from the SST to cover the loss of Council Tax Benefit, if the Treasury and Whitehall departments (especially Department of Works and Pensions) were unwilling to continue to transfer to Scotland the equivalent of this sum (estimated to be about £276m in 1999/2000).

Each of these potential needs to update the previous analysis was recognised in the earlier reports. Further, it was argued that there are a number of problems with the data required to establish the operation and rates of the Scottish Service Tax:

• There are no comprehensive figures available which combine all forms of income, disaggregated into income groups; however, the Inland Revenue have now provided more comprehensive figures for 1998-1999 and 1999-2000, with a greater degree of desired disaggregation at the upper income levels for the latter tax year.
• The most recent reliable income statistics are still two or three years old, though as the revenue actually collected from Council Tax is often uncertain until well after the end of the financial year, this is not overly constraining on the analysis.
• In determining the impact of a change to SST, there are no comprehensive data on the incidence of Council Tax disaggregated into income groups.

In the previous analysis, data from the Inland Revenue were applied, and it assumed that (a) the distribution of Scottish unearned income relative to the UK as a whole was the same as the relative distribution of earned income; in effect it was assumed that Scots received less in terms of both earned and unearned income, and so for both PAYE and taxed investment income; (b) within each income band, incomes were evenly distributed around the mid-point of that band, apart from the highest band where a conservative assumption was made of the distribution of incomes; (c) the Treasury increased the Scottish Block Grant by the equivalent of the Council Tax Benefit foregone with the movement from Council Tax to the Scottish Service Tax.

From the updated Inland Revenue figures, which cover all taxpayers in Scotland, these data have addressed points (a) and (b) above, with the inclusion of all incomes liable to income tax.

In the analysis below, we review the marginal rates and revenues for the SST applying the updated Inland Revenue figures for 1998-99 and 1999-2000, and then extend the analysis to incorporate the potential need to meet the loss of income to the local authority finances from the failure of the Department of Works & Pensions (DWP) in Whitehall to transfer the equivalent of the Council Tax Benefit to the Scottish Exchequer.

Statistics for individuals' incomes in Scotland in 1998-99 have been supplied, through SPICE, and these allow an update to the estimated revenues for that year. The Inland Revenue identified 2.3 million income taxpayers in Scotland, paying £6,460 million income tax. The improved disaggregation of information on higher income groups showed that their average income before tax were appreciably greater than had been believed in the first report. The average incomes of those 13 thousand individuals earning over £90,000 was in excess of £183 thousand in 1998-99. At the other end of the scale, there were 882 thousand people with incomes between £4,195 (the lower tax threshold) and £10,000.

As before, additional costs would be incurred by the Inland Revenue in collecting the new tax, and it is suggested that these would be met from the Scottish Budget centrally. According to estimates collated by Jackson, this would be a relatively small amount of £15m annualised, with perhaps the same again for companies. It has been assumed that this would be deducted from the block grant estimate

In the year 1999-2000, the direct costs of collecting Council Tax were of the order of £33.5m, with some £35m spent on administering Housing and Council Tax Benefit. These sums have been fairly stable in recent years, suggesting that they would continue at these rates in the near future.

To undertake the analysis, we were asked to assume that the lower threshold at which the Scottish Service Tax would apply would continue to be £10,000; this would ensure that in effect all those existing on basic pensions alone or with modest occupational pensions, on state benefits, those paid less than £192 per week and students would be exempt, and where applicable they would have been released from paying the Council Tax and so have seen their disposable income increase.

Previously, we noted that the Treasury had seen its revenues increase by 9% in 1999-2000 alone, due to higher than expected wage rises, bonus payments in the City and higher sales of drink and tobacco. This would suggest an availability of tax revenues to meet the modest Council Tax Benefit obligation, while the advantages of an automatic stabiliser in the Scottish economy could be significant. Nevertheless, the uncertainty over the future of the Council Tax Benefit payments requires some caution in assuming the equivalence of their continuing flow to Scotland.

Incorporating these statistics and assumptions into the calculations for the Scottish Service Tax in 1998-99 (Table 13.2 in the original report) suggests that, compared with the anticipated Council Tax collected over that period of between £1.2 and £1.4 billion, the SST would have realised £1.3 billion, a gain of between £123 and £172 million. The marginal rates have been maintained at the previous levels and the increase in the surplus over the previous estimates of £50 million is due to the general rise in incomes and the better estimates of higher incomes. These figures exclude Council Tax Benefit of £266 million, from both Council Tax and SST revenues.

While the data from the Inland Revenue for 1998-99 presented information on all incomes, the statistics supplied for 1999-2000 only cover incomes of taxpayers. However, for this more recent year, greater degrees of disaggregation of the higher middle income salary band have been provided, with the £30-50,000 group being subdivided into three bands. This allows both more precise estimates of tax impacts within this range and a more detailed exploration of the effects of the SST and Water Charges on these taxpayers. These data suggest that there were 2,260 million taxpayers in Scotland with aggregate incomes of £40,300 million, paying £6,420 billion in income tax. As these totals are slightly below those of the previous year, when the UK and Scottish economies were believed to be expanding, there is some caution required in interpreting the following results. However, as illustrations of what are the likely yields of a Scottish Service Tax, the analysis is rigorous.

Since 1997, there have been improved collection rates of council tax; while in 1999-2000, incomes, council tax rates and receipts have all increased compared with the previous year. A further complication in comparing one financial year with another is that the local authorities continue to collect arrears of council tax over several years so that the apparent revenues for any particular year will vary with the date of assessing the totals of actual council tax received. Moreover, some of the analyses (and responses to our initial paper) of the effects of council tax have relied on the amounts billed rather than collected, while others have failed to separate out the council tax benefit. The following results are presented using the best estimates for 1999-2000 currently available (20 February 2002) of actual council tax receipts, council tax benefits paid, and incomes.

The estimates for the SST in 1999-2000 suggest that £1,473 million could have been raised by applying the marginal rates shown in Table 7 compared with the actual council tax receipts of £1,193 million (excluding Council Tax Benefit). On average those liable to pay income tax in Scotland would be subject to a SST charge of £652 or 3.7%. Addressing the comments after the initial proposals that fewer marginal rates would be preferable, although this may introduce certain relatively high increases at particular incomes, there are only four non-zero rates proposed. Starting at 4.5% on incomes between £10,000 and £30,000, the marginal SST rate increases to 15% for that part of an individual's income between £30,000 and £50,000, to 18% between £50,000 and £90,000, and is then levied at 20% for all income beyond £90,000. Coupled with the highest rate of income tax of 40%, this implies that the maximum marginal rate in Scotland would be 60%, the same as in 1988-89 and lower than in many other social democrat members of the EU. With an aggregate gain of about £280 million, this demonstrates the robustness of the SST over time in securing local authority income at non-punitive rates of tax. The figures presented here are for illustration only and represent the minimal revenues anticipated from the SST at the rates given, higher marginal rates may have a disincentive effect or lead to fiscal flight ? but not to the extent of undermining the principle or viability of the SST. The highest rates of tax presented here also compare with rates in areas of Denmark, for instance, where local and regional taxes are about 20% and 11% respectively, with progression ensured solely through the national tax rates.

In the previous report, it was argued that it would have been unacceptable for the Treasury to remove the equivalent of Council Tax Benefit from the aggregate of public expenditure in Scotland just because a different way was being used to raise the finance for local authority services. Although it was demonstrated that protecting this element of the Social Security system would have no net adverse effects on the UK Exchequer, while the monies would continue to be dedicated to Scottish local authority expenditure, debate in the Local Government Committee and in the media and Scottish Parliament regarding the introduction of free care for the elderly now suggest that there would not be a compensating transfer to the Scottish Block Grant to compensate the Scottish budget. This debate is ongoing, nevertheless. In these circumstances it has been necessary to consider how the lost £276 million in 1999-2000 could be raised from within the SST revenues.

With a proposed surplus of £280 million in 1999-2000 realised by the replacement of Council Tax with SST, it could be argued that this simply could be applied to address this shortfall, setting the same marginal rates. The surplus to the local authorities would then be £4 million in 1999-2000 over what they actually have collected in council tax and council tax benefit for that year by early 2002. Alternatively, the marginal rates could be increased to maintain the higher funding available to local authorities under SST.

Finally in this consideration of the implications of a failure to deliver the equivalent of current council tax benefit to the Scottish local authorities, of the £276 million savings to the UK Exchequer Scotland could expect to receive about 8% of this or £22 million through lower general taxes or increased public expenditure through the Barnett Formula. The net gain to the Scottish budget from the introduction of the SST after consideration of the CTB would thus be between £4 million and £26 million, depending on the decisions of the UK Chancellor.

In the research conducted for this potential tax, a number of conditions were incorporated into the proposed Scottish Service Tax. In particular, it was proposed that it should: increase revenues beyond the levels of the Council Tax; provide exemptions for certain groups; meet the classical criteria for a local tax; and be progressive. The updates to 1999-2000 have retained these working assumptions and demonstrated that a Scottish Service Tax levied on the individual income taxpayer in Scotland, even under conditions most favourable to the Council Tax, could still raise equivalent amounts without encouraging fiscal flight, excessive costs or problems for UK demand management.

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Following parallel arguments to the establishment of the SST, this section will consider the introduction of a progressive water charge, and in particular will address the costs of collection, the possible marginal rates, and the resulting tax revenues. Finally, the results for the SST and Water Charge will be combined to illustrate the likely aggregate effects on individuals and households of a move to a progressive system for funding local government and water and sewerage in Scotland.

At present the costs incurred at the retail level, across the three water authorities for billing, bad debts etc., are about £45 million. If collected as per the SST through an Inland Revenue centralised system, already prepared for the 'tartan tax', these would be reduced significantly and so represent potential savings to the industry and taxpayer. It is our understanding that no social security benefits are available nor proposed (Scottish Executive 2000) for covering all or any of the costs of water charges so that there would be no potential loss of income to the Scottish economy from a movement from the present system of water charges to one of a progressive income related system. The effects of a change to a progressive system, therefore, would be redistributive only, though there may be the possibility of some fiscal flight generated by high levels of water charges; the estimates below have taken into account the impacts of any out-migration by incorporating lower margin al rates into the analysis than apply elsewhere.

To undertake the analysis based on the updated income figures discussed above, certain limitations facing the research must be recognised:

1. there have been continuing differential movements in earnings for different income groups since 1999-2000 so that we focus on that year in particular to illustrate the sorts of rates required to meet the funding needs of Scottish Water;
2. the water industry in Scotland is in a great state of flux with proposals for a single water authority to cover the whole country. With suggested harmonisation of charges across Scotland and a high degree of investment being proposed in the light of EU and other directives, this effectively means substantial increases 2001/02 ? 2004/05 in water charges of 19.9% on average (ranging from a decrease of 2.1% in the North to increases of 27.1% in the East and 28.8% in the West of Scotland.) In 2005-06 (there would be no increases in this final year), harmonised domestic charges would be approximately £343 per Band D household (Water Commissioner Scotland, 2001). This compares to the current (2001-2002) Band D charge in the East of Scotland Water Authority of £270.00; in the West of Scotland Water Authority of £266.40; and in the North of Scotland Water Authority of £350.18. Comparing the position in 1999-2000 to these rapidly changing circumstances creates problems for any analysis of impacts on council tax or income tax payers. To address the possible implications of these significant changes in domestic bills two scenarios are considered ? matching the actual water charge collected in 1999-2000 and meeting a higher funding target to reflect the long term investment needs of the sector.
3. revenues across the three Scottish water authorities have increased by 57.2% over the period 1996/97 (audited) - 2001/02 (budgeted), with 37.8% of that rise being imposed since 1998/99. Over the whole period, the increases faced by domestic users have been 105.2% while non-domestic users have seen a 16.1% rise. So, there are two issues here, the relative charges of domestic and non-domestic users in the coming years and the scheduling and time lags of changes in incomes and charges.

The scenario presented here using 1999-2000 income data shows how the actual amount (£329.4 million) collected in that year by the existing Water and Sewerage Charge could have been raised more equitably and efficiently with a progressive water tax. A small surplus of £10 million is also generated with these rates, sufficient to cover any contingencies and set-up costs of the new system not explicitly recognised. Table 8 shows the effects of adopting a progressive Water Tax with marginal rates of 0% for incomes under £10,000, 1.5% on incomes between £10,000 and £40,000, and 3% on those bands of marginal income over £40,000. For someone on an income of £12,500 the charge would be under £40; for an individual on £25,000 the charge would be £250; and for an individual on £50,000 the cost would be £750. These compare with actual charges of £209.75 (North), £186.00 (East), £189.10 (West) for a Band D house in the three water authority areas in that year.

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The legislation introducing the merger of the three Scottish water authorities is partly predicated on the need to address forthcoming challenges from private(ised) companies entering the market here. Such competition is reckoned to be especially threatened to supply water and sewerage services to large industrial and commercial complexes in central Scotland. This potential threat to the economies of scale currently enjoyed by provider and user presents these large consumers with a good deal of bargaining power. A consequence of this is that charges on new non-domestic users have hardly risen in real terms in the last decade, if at all. The need to retain a high proportion of the non-domestic contracts in the public domain requires that a balance has to be struck between optimising user charges, reflecting the contestable market challenges, while protecting and continuing to realise the lower costs of large scale provision offered by the publicly owned water authorities. At the same time, and not inconsistently, the need to conserve water, to reduce effluent and other sewerage disposals, and to protect the environment suggests that metering of non-domestic consumers should be completed ? many businesses already being metered. By mirroring the disciplinary methods of the market, and promoting conservation, the installation of metering should align user charges and real social costs more closely. Further study on these aspects of the development and investment imperatives of the water sector in Scotland are required, not least to explore the likely strategies of market entrants.

Analogous to the impacts of LVT promoted above, therefore, the wider application of water metering for non-domestic consumers should enhance the use and conservation of Scotland's natural resources. This system should evolve over time in light of market challenges and be based on encouraging sustainable growth and development of the Scottish economy.

Given the various assumptions made above, as both are based on current taxable incomes, with consistent banding for tax purposes, the impacts of the introduction of the Scottish Service Tax and the Scottish Water Charge can be considered together. Each is a progressive tax based on income and the same income bands have been applied in both cases.

Table 9 presents the results for individual incomes for 1999-2000, and so combines Tables 7 and 8. This analysis suggests that all the public expenditure of local authorities and the three water authorities in Scotland in 1999-2000 funded by the council tax, council tax benefit, and domestic water and sewerage charges would have been covered by the combined SST & WC, with further expansion of budgets of £4 million and £10 million, respectively. In addition, Scotland's share of the £276 million (about £22 million) no longer paid as Council Tax Benefit would be available in some form of public expenditure or tax savings.

In aggregate, £1812 million would have been raised through this combined progressive tax, with all the poorest in society, those with income under £10,000 exempt from the tax, and others contributing according to their ability to pay. On average, Scots actually paying income tax in 1999-2000 would have faced a combined bill of £802 or 4.5% of income. This compares with average council tax of £849 and water and sewerage charges of £209.75 (North), £186.00 (East), £189.10 (West) for Band D householders. For those on incomes over £10,000, the marginal rate varies between 6.0% and 23%, with £150 or 1.2% of income being paid by those on £12500, £900 or 3.6% by those on £25,000, and about £4650 or 9.3% for someone on £50,000 per annum. With an upper combined marginal rate of 23%, the highest aggregate marginal income, SST & WC tax rate would be 63%, or just 3% above the prevailing rate in 1988-89. Comparing not unfavourably with our nearest continental competitors in the EU, these rates appear reasonable and should not generate fiscal flight to a degree that would concern a Scottish chancellor.

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A replacement of the regressive Council Tax and Water and Sewerage charge with a more progressive Scottish Service Tax and Water Charge system is feasible and appears to be legally competent. Increased revenues could be raised by such a tax without a significant danger of fiscal flight, disincentive effects, or unacceptable costs. However, more detailed work is needed to evaluate the full impacts of such change in the taxation system, data inadequacies make more comprehensive analysis impossible here. A range of options is available to policymakers, with different exemptions having implications for the revenues raised and/or the marginal rates to be imposed. A number of issues require further exploration:

• Local Authority Needs Assessment To address the evolving situation with regard to social exclusion, poor housing, city region imbalances, and other problems introduced by local government reorganisation and fiscal flight from the poorer areas, a new needs assessment is required for local government. In particular, it can be argued strongly that the grant aided expenditure distributed to councils on the basis of the 'client group assessment' more closely reflects social inclusion than simple population aggregates.
• Democratic Accountability To improve accountability and to improve the match between the local costs of providing services to businesses and the revenues raised from those businesses, a return to a local system of setting business rates should be explored.
• Rural Scotland ? Sporting Estates As a series of first steps, there seems no reason why taxation of sporting estates should not be reintroduced, with the revenues being retained by the local councils involved. With the abolition of sporting rates in 1995, land in Scotland attracts no tax burden for the first time in a millennium and this anomaly requires redressing.
• Rural Scotland ? Second Homes Similarly, there is a need to ensure that rural communities are compensated for the additional costs imposed on them by the presence of second homes. It is suggested that such accommodation should continue to have a Council Tax imposed, with the local council setting the rate to be levied, and being relieved of the duty of having to reduce the Council Tax billed by 50%. The regulations in England were changed in this regard in 2000 and there is no rationale for a continuation of the 50% reduction, given the services provided for such dwellings. It is interesting that the Local Government Committee in their report on local government finance have adopted our arguments in this regard and recommended that Scotland comes into line with England in this regard (Local Government Committee, 6th Report 2002, Report on Inquiry into Local Government Finance. Volume 1 : Report).

The Scottish Service Tax and Water Charge have the potential to increase local authority and water authority budgets in a period where Scots consistently have demonstrated a willingness to see increased public expenditure, with the positive consequences of increased employment, improved local services and a raising of standards of education, health and housing across Scotland. The academic literature, based on experiences around the world, also points to the positive multiplier effects on the poorest communities, the regions and also the wider national and UK economies which can be realised by such expansion.

Critically, the Scottish Service Tax and Water Charge system is progressive and re-distributive. It places income redistribution at the heart of service provision and delivery, and taxes citizens according to ability to pay. Disposable incomes would be raised in the most disadvantaged areas of Scotland increasing effective demand most strongly where it is needed most and dampening down demand where there is overheating and highest import leakages from the national economy. The new local government tax system would directly raise the standard of life for many of the poorest in Scotland, particularly pensioners and the low paid. Their level of disposable income would be increased by the abolition of the standard Council Tax and the Water and Sewerage charge and their replacement by the SST & WC system. The expansionary multiplier effects on the Scottish economy would be enhanced further by targeting financial assistance on low income groups (McNicoll, 1992) with consequent benefits for the Scottish and UK economies. Moving the tax and benefits system in Scotland towards the mainstream continental approach to funding local and regional public services is a necessary way to improve the competitiveness of the Scottish economy, creating benefits efficiently, equitably and economically.

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