A penny hike in Scotland’s basic rate of income tax and a return to the 50p top rate of tax for higher earners: Scottish Labour leader Kezia Dugdale’s plans to amend the Holyrood budget look all too predictable – and will, almost as predictably, be defeated.
But that does not remove the threat of higher taxes in Scotland. Indeed, there is every likelihood these in one form or another will be forthcoming from the SNP administration in the period ahead.
First Minister Nicola Sturgeon may have ruled out an increase in the basic rate for the five year lifetime of the parliament. But the option of upping the top rate has only been disavowed for the first year. And meanwhile the burden of business rates continues to rise.
There’s no doubt the figures are grim. The recent Government Expenditure and Revenue report for Scotland left little doubt that pressure for tax rises will intensify in the coming period.
The SNP administration has a massive £14.9 billion budget deficit to contend with – 9.5 per cent of its Gross Domestic Product (GDP) – more than double the four per cent estimate for the UK as a whole and higher even than that of Greece!
The collapse of North Sea oil revenues is a key reason. But the Scottish government’s relentless programme of giveaways and higher spending on pet programmes has added considerably to the fiscal mess.
Says economist Tony Mackay, “The SNP government needs to take urgent action to reduce the deficit. That involves reducing spending and increasing revenue.”
That sounds uncomfortably like tartanised austerity. Little wonder the administration prefers to look elsewhere.
“The First Minister”, says Mackay, “is giving the impression that she intends to try to use the Brexit arguments to delay further the difficult decisions on reducing the deficit. However, the latter will almost certainly worsen over the next few years without effective action.
“That action”, he concludes, “must include significant tax increases.”
But does it have to be like this – Scotland going one way on tax and the rest of the UK another? Looking at the snail’s pace performance of Scotland’s economy, it’s tax cuts that should be on the agenda – not tax rises.
Tax rises would hit business hard. They would add to the pressures on household budgets – taking out, on the Labour leader’s own calculations, £1.2 billion that Scots would otherwise have been free to spend on their own. And there are compelling reasons why adding to the top rate of tax may prove counter-productive.
Income tax will be by far the biggest tax devolved to Scotland, raising almost £11 billion in 2013-14. Tempting though it may be for Scottish Labour and the heavily Left-leaning SNP to target “the rich”, there are just 17,000 additional rate taxpayers in Scotland. In comparison with the UK as a whole, Scotland has a smaller proportion of middle income and highest income taxpayers – just 14.8 per cent in 2015-16 paid the higher rate and 0.7 per cent the additional rate. The equivalent UK percentages are 15.7 per cent and 1.1 per cent.
The most striking feature of our tax system is that those additional rate taxpayers representing just 0.7 per cent of the total contribute more than £1.5 billion or 13.9 per cent of total income tax.
Such is the relatively small number making that big contribution that any changes in that number would have a notable effect on revenue. Given this sensitivity, behavioural consequences need to be considered in any changes to this top rate.
For example, an obvious reaction would be for top rate taxpayers to pay themselves by way of dividend distribution, or to step up their pension contribution, thus collecting tax relief at the full rate while reducing the income available to be taxed.
Another response is migration. The economist Professor David Bell, in an international analysis of behavioural responses to tax rate changes, pointed to evidence from Denmark “that high earners respond to tax incentives by changing their migration behaviour. If it is the case that the costs of migration have fallen in recent years, then there is a strong case for moving cautiously when considering changes to the higher rates of income tax in Scotland.”
Dugdale may well find that raising the top rate will backfire – a lesson that should not be lost on the SNP administration were it to pursue this route in later years.
Scotland the land of ever rising taxes? It doesn’t have to be like this.
So Labour’s shadow chancellor John McDonnell wants a massive spending spree. Is it to be £200 billion? Is it £500 billion? Does it matter? Well, it does. Former Shadow Chancellor Chris Leslie says the figure of £500 billion spending plan cited would double all taxes.
“The worry that I have”, he declared, “is this suggestion of £500 billion. I mean, that’s an awful lot of either borrowing or extra taxation. In order to raise it you’d have to double income tax. You’d have to double National Insurance. You’d have to double council tax. And you’d have to double VAT as well.”
What a negative way to look at things. It’s not at all in the new Labour spirit. Everyone’s now in favour of higher spending, says the shadow chancellor. But it’s surely a matter of scale, isn’t it?