Scotland enters new era of higher taxes

The Scottish Parliament’s decision to raise income tax by £428m is a historic one – that could backfire

Make no mistake, Scotland has entered a new era. For the first time, the Scottish Parliament voted – by 67 to 50 – to use its “tartan tax” powers to raise extra revenue.

Higher earners in Scotland will now pay more income tax than those on the same salary in the rest of the UK after what finance secretary Derek Mackay hailed as an “important day for Scotland’s future”. Few would disagree with him on that point.

The SNP stressed that seven out of ten Scots taxpayers will be better off from next year because of the decision, which will see a new 19p starter rate, but also a 21p rate for those on middling incomes and upper bands of 41p and 46p, compared to England’s 40p and 45p.

Many will hardly notice the changes in tax – up or down – and the total amount of money raised by the income tax changes – about £428 million – is quite modest. The Scottish Government said the cash would be used to increase the health budget by £400m, protect public services like free prescriptions and personal care, and provide “above inflation investment” in the police, education and local government.

The danger for the SNP is that the NHS will swallow up the extra revenue and maintaining existing services will not be seen by voters as much of a boon, while Scotland gains a reputation as a place where higher earners are taxed more heavily. That may lead to concern that this tentative step is simply the Scottish Government testing the water and bigger rises could be in the post. This could put wealthier people off coming to live in Scotland and persuade others to leave.

The impact on Scotland’s anaemic growth must also be considered for, ultimately, it is only greater economic success that can lift Scotland out of austerity.

Scotland’s growth rate in the year to September was just 0.6 per cent, less than half the figure for the UK as a whole. Business groups have warned higher taxes could depress this further.

Politically, the SNP finds itself hammered by the Conservatives for raising tax from one side, and attacked by Labour for not raising them enough on the other. Both main opposition parties can see opportunities to pick up votes.

What is clear is that the Rubicon has been crossed; Scotland is now a higher tax nation and it may come to regret a fateful day that could have profound consequences for its ailing economy.