THOSE NEW TAX POWERS: BEWARE LAUGHTER IN THE DARK

Barely six months into the Conservative government’s five year term, says our editor BILL JAMIESON, and it looks as if Chancellor George Osborne may already be running out of road.

Latest figures on government borrowing don’t look good. Public sector net borrowing in October came in at £8.2bn – the worst October figure seen since 2009.

He now faces a big problem meeting his budget deficit target. If the pattern of the first seven months continues, the out-turn could be £80.3 billion – £11 billion higher than the £69.5 billion target set only in his budget in July.

Bear in mind, too, that the pace of economic growth has been slowing. His forecasts now have to work on the basis of independent forecasts from the Office for Budget Responsibility , not some massaged numbers cooked up by HM Treasury.

A slower rate of growth could mean lower than hoped-for revenues from Corporation Tax and business levies.

For all these reasons, a tough spending squeeze will be needed in the final five months. But where will the cuts be found? He can’t cut the two big spenders – health and education – these are ring-fenced and protected.

He can’t cut overseas aid. That, too, is protected.

Defence cuts are out of the question. In fact, he’s promised a £10 billion increase here.

Cuts to the welfare bill are already hugely controversial. The House of Lords rejected the Chancellor’s plans for axing £4.4 billion of spending on working tax credit and child tax credit last month.

That leaves a diminishing number of ‘unprotected’ budgets. But here, too, Osborne is boxed in. He has pledged more money for cyber security. But further cuts to policing levels to finance these would create a storm in the wake of the Paris terrorist atrocities.

That’s the trouble with government of whatever hue. Stepping up spending is easy. But when it comes to spending reduction, there’s no lack of voices raised in protest.

In Scotland it’s easy to mock Osborne’s dilemma. Serves him right, many will feel, for pushing on with his “austerity agenda”.

But beware of laughter in the dark.

If we don’t cut the rise in annual borrowing, the debt mountain will continue to rise.

And that’s no statistical abstraction. It means debt interest payments will also keep rising. And the annual debt interest charge is already £47 billion. You could build a fair number of new schools and roads with that.

In Scotland we’ve barely looked at the budget pressures building up on the SNP.  But the Scottish Budget on December 16 is less than a month away.

All the focus has been on “more powers” – with the happy assumption that, rather than contemplate “Tory style austerity cuts”, higher taxes will get Holyrood out of a hole. And by raising taxes for the higher earners, it would score a goal for income equality, too.

What’s not to like?

Well, it’s hardly likely John Swinney will be reaching for the tax scythe soon. The new powers, effective from April next year, will not allow him to vary income tax rates and levels between different bands. That has to await the passage of the Scotland Bill. And he won’t want to alienate voters before the May election by signalling an overall increase in income tax.

Then there’s the problem of behavioural response – how taxpayers react to higher taxes can significantly reduce the proceeds.

Take the new Land & Buildings Transaction Tax – the first devolved tax wholly set by the SNP government. It faces an 18 per cent shortfall in revenue on residential properties compared to what Swinney projected it would make.

The shortfall in cash terms is over £40 million. Scottish Labour has called on the SNP administration to urgently review their projections, and said that the shortfall strengthens the case for a Scottish Office for Budget Responsibility.

That case is further strengthened by the fact that the administration did not undertake any analysis of what the public response might be prior to its introduction.

The tax was brought in with no analysis undertaken of behavioural affects – and the latest evidence is a warning about the adoption of ‘more powers’ without an assessment of the likely consequences.

Labour is right to press the case for an independent Office for Budget Responsibility. But this may work to highlight the mess that the Scottish Labour leader Kezia Dugdale has created for herself.

She says she wants to reintroduce the 50p tax rate of income tax for those earning over £150,000. But the party is still in the dark about how much the hike would actually raise from what is a very small number of mobile taxpayers.

She herself has warned that the rise in the rate could raise zero because of the mechanisms by which people can avoid paying tax.

Instead she would look to an “additional redistributive mechanism” for education – looking at the proceeds of Air Passenger Duty of £250 million, “we could spend that on education inequality.”

Now, in her latest pronouncement, she has pledged to spend the proceeds from the 5p top tax increase on education – despite previously saying they were earmarked for replacing tax credit cuts.

Scottish Labour doesn’t look as if it has learnt from the L&BTT example, taking no account of the risk of a large number of high rate tax payers simply relocating to England rather than pay an extra 5 per cent.

This has presented an open goal for Scottish Conservative enterprise spokesman Murdo Fraser: “Here we have a Labour party who don’t even know themselves how much their tax plans would raise. Their economic plans showcase complete economic illiteracy.

“There is a real risk that many of our top rate of earners would move to England to avoid the tax increase and Kezia Dugdale has even admitted herself that the rate could also raise zero money.

“This is yet more evidence we have a Labour party stuck in the 1980s and determined to drag Scotland dangerously to the Left.”

So: roll on an independent Scottish Fiscal Commission. This would run a slide rule over the administration’s economic forecasts and the likely impacts of tax and spending changes so that budgets can be properly appraised.

Howl though we surely will at Osborne’s Spending Review tomorrow, Scotland will have to undertake a similar searching exercise when deciding how to use those new tax and spending powers.

Until then we are truly shooting in the dark.

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