STURGEON TAX GRAB DRAGGING US BACK TO THE 70S

DESPITE constant warnings from Scotland’s business community, Finance Secretary Derek Mackay has pressed ahead with increasing some income tax rates.

I fear that his decision to widen the tax gap between Scotland and the rest of the UK on incomes above £26,000 could cause great damage to the Scottish economy and prove a disincentive to investment.

The budget did contain some useful tax measures, such as increasing the business rate by the Consumer Prices Index and not the higher Retail Prices Index, and reducing the rate of income tax to 19 per cent on incomes between £11,850 and £13,850.

But the introduction of a new band of tax at 21 per cent on incomes between £24,000 and £44,273, and increasing the higher and additional rates, risk Scotland being seen as a higher tax country than the rest of the United Kingdom.

The decision to make 45 per cent of people resident in Scotland pay more tax than those in the rest of the UK could well have an adverse effect on international competitiveness, serve to make Scotland a less attractive place for many in which to live, work and do business, and deter investors.

The Scottish Government’s decision last year to freeze the threshold for paying the higher rate of income tax in Scotland at £43,000, while it increased to £45,000 across the rest of the UK, had already made Scotland the highest taxed part of the UK. In 2018, the starting point for the Scottish higher rate will increase to £44,242 but in the rest of the UK it will rise to £46,350.

So, Thursday’s decisions risk causing considerably more damage to our economy.

These tax changes will impact workers on middle incomes who are by no means wealthy and many of whom will already be struggling with significant pressures on their budgets.

The economic impact of the overall balance of tax rises and reductions will be that people will have less money to spend, which is of concern to all businesses who are reliant on consumer spending.

The level of a country’s taxes should be internationally competitive and fair. Bearing in mind the raft of other taxes, including national insurance, that people have to pay out of after-tax income, Scotland’s income tax bands and rates are neither competitive nor fair.

The increases to the higher and additional tax rates are a matter of concern. This decision could over time deter skilled individuals from relocating to Scotland and encourage those who currently live here to move elsewhere. Investors are likely to choose a more competitive location instead.

The Scottish Government has, quite rightly, noted its intention to encourage more skilled workers to move here to support our economy and work in public services such as schools and hospitals. But increasing their taxes will put at serious risk ministers’ ability to achieve this goal.

Workers at all income levels should not be viewed as a cash cow by the Scottish Government. While increases in income tax are likely to raise more money to fund public services in the short term, there is considerable evidence to show that, in the longer term, government revenues could actually decline due to reduced economic growth.

Scotland’s economy is already vulnerable and these proposals will cause further economic under-performance. One only needs to look at the forecast by the Scottish Fiscal Commission.

IN each year to 2022, the Scottish economy is not expected to grow above 1 per cent. Earlier this year, we were already close to recession and I am concerned that this could happen again as a result of these ill-advised tax increases.

An ambitious government would recognise these dangers, keep taxes competitive and focus on growing Scotland’s economy by pursuing the right policies. Increasing taxes runs the risk of damaging our international competitiveness and any prospect of economic recovery.

Last month, I was co-signatory of a letter to Derek Mackay and First Minister Nicola Sturgeon, also signed by former Scottish Enterprise chief executive Jack Perry, construction executive Anthony Rush and former PwC tax partner Rhona Irving, where we expressed concerns about the adverse impact of uncompetitive income tax in Scotland.

We received an unimpressive response from Mr Mackay which stated that the Scottish Government is committed to protecting public services and growing our economy and that income tax rises would only be supported if ‘the accompanying change in public spending supports the economy’.

In a number of key areas, the Scottish budget significantly increases spending on public services such as education and health, which are clearly underperforming. Will the increases make any real difference? There must be some doubt about that.

I would suggest that the best way to grow total income tax revenues over time is to introduce policy measures which boost the economy such as across-theboard income tax reductions now, which would increase the number of people in work and boost the number of businesses.

If Mr Mackay believes that his policies are the right ones, why is Scotland’s economic growth running at about one-third of the UK growth levels?

In the 1970s, Labour prime minister James Callaghan and chancellor Denis Healey learned the hard way that wealth has to be created before it can be spent.

I fear that the Scottish Government risks taking Scotland right back to those days.