Mackay misses the mark with his first budget

Scotland risks reputational damage through the finance secretary’s choice to not pass on an income tax break for higher earners

The draft 2017-18 budget announced yesterday by finance secretary Derek Mackay was a historic one. Not only was it Mackay’s first shot at laying out Scotland’s financial future, it was also the first Scottish budget to come with extensive new economic levers.

As a result of the more powers “vow” made in the run-up to the 2014 independence referendum, the Scottish Parliament now has had the powers to set its own income tax bands and rates.

For that reason alone, yesterday’s budget was a landmark one. The Scottish Government’s refusal to pass on the UK government’s tax break for higher earners means that for the first time we will see a divergence in income tax policy north and south of the Border.

Mackay’s budget debut was also important for a host of other reasons – not least the very real economic challenges that are facing Scotland at the moment.

Economic growth is lagging behind the rest of the UK and this week’s unemployment figures made for grim reading, with the jobless total jumping by 14,000 to 145,000.

Therefore it was important that Mackay produced a budget that would work for Scotland. Given the extent of the economic challenges he faces it is difficult to escape the verdict that he has failed to do so.

Admittedly, Mackay should be given credit for resisting calls from Labour, the Greens and the Liberal Democrats for increasing tax more than he has done so.

Against this, however, is his failure to pass on Chancellor Philip Hammond’s tax break for higher earners.

Just what effect Mackay’s refusal to raise the 40p threshold will have on the Scottish economy remains to be seen. But the relatively small amount of money that the policy will raise is unlikely to mitigate the unwelcoming message it sends to those seeking to invest in Scotland.

Writing elsewhere in these pages, Professor David Bell of Stirling University makes the point that the small reduction in take home pay is unlikely to lead to families trooping south of the Border.

But, as Bell also points out, it is the “reputational effect” that could prove damaging as Scotland becomes known as a high tax jurisdiction.

On top of the income tax changes are Mackay’s warnings of another council tax rise, a move that will also have a “reputational effect”.

However, there was some good new for entrepreneurs, with the business rates poundage being reduced by 3.7 per cent and the decision to lift around 100,000 properties out of the levy altogether.

Furthermore there was a £500 million Scottish Growth Scheme in 2017, which, Mackay said, offered financial support for business investment – a scheme that might look good on paper but lacks detail.

Overall, however, given the rocky road ahead there was a feeling that this historic occasion was an opportunity missed.