Economy bombshell for SNP
Experts predict that growth will be ‘weak’ for the next two years
SCOTLAND’s economy will remain ‘weak’ for the next two years unless the SNP takes urgent action in this week’s Budget, economists have warned.
The Fraser of Allander Institute (FAI) has raised concerns that the country is facing continuing sluggish rates of growth until 2019.
It said our economy is growing at only one-third the rate of the whole of the UK’s – and called on the Scottish Government to use its new tax powers to help close the gap.
The report, published ahead of Finance Secretary Derek Mackay’s 2017-18 Scottish Budget on Thursday, also predicted that unemployment would soar in the coming years as economic conditions worsen.
Critics said the findings showed the SNP must do more to stimulate the economy.
FAI director Graeme Roy said: ‘The Scottish economy has remained relatively resilient in the face of challenging headwinds, with growth returning in the second quarter of 2016. Most indicators point to this growth having continued through the remainder of the year.
‘But growth in the Scottish economy continues to lag behind the rest of the UK; driven in part, but not entirely, by the ongoing challenges in the oil and gas sector.
‘Over both the last 18 months and the first six months of 2016, Scotland’s growth rate has been around a third of that for the UK as a whole.
‘The Finance Secretary will be thinking hard about how best to use his Budget on Thursday to narrow this gap and, crucially, whether or not to follow the UK Chancellor’s lead with a package of support to help business and boost productivity.’
The FAI report predicted Scotland’s economy will grow by 1.1 per cent next year, then by 1.3 per cent in 2018 and 1.6 per cent in 2019.
It also estimated that the country’s unemployment rate, which has been declining in recent quarters, will rise from 151,100 (5.6 per cent) next year to 166,400 (5.9 per cent) in 2019.
The researchers said that the Scottish Government’s Budget would increase in real terms next year, but
‘It is vital that the gap is closed’
is on track to decline by more than 3 per cent in real terms by the end of the current parliamentary term in 2021.
The report said: ‘With new tax powers coming onstream in April, it is vital that the gap with the UK is closed.’
Nicola Sturgeon has already announced she will increase the threshold for paying the higher 40p rate of tax only in line with inflation, which will take it to £43,430.
That will mean people in the higher rate band will pay more in Scotland than the rest of the UK, where the threshold will rise to £45,000 from April.
Scottish Conservative finance spokesman Murdo Fraser said: ‘Now the SNP has so many economic levers, it should use them to boost Scotland’s economy.
‘As these experts state, we need to start closing the fiscal gap with the rest of the UK. By pursuing an antibusiness and tax-raising agenda, the Scottish Government will only make that position worse.’
The FAI also predicted that the prospects of a ‘transition rather than “cliff-edge” Brexit’ will grow, meaning it has improved some of its forecasts for 2017 and 2018.
Scottish Labour economy spokesman Jackie Baillie said: ‘This report shows that the uncertainty provided by Brexit will need a change of direction from the SNP Government and that we don’t need the uncertainty of a second independence referendum.
‘Labour’s Brexit action plan includes support for at-risk sectors and front-loading infrastructure projects, with a specific focus on housebuilding, to stimulate growth.
‘The SNP has presided over a weak economy and now the experts are forecasting even less growth in the future and weaker growth than the rest of the UK.
‘In the Budget on Thursday, Derek Mackay can either carry on with the cuts which are slowing down Scotland – or choose to invest in services and protect jobs.’
A Scottish Government spokesman said: ‘As the Fraser of Allander report acknowledges, Scotland’s economy has shown resilience despite the UK Government’s austerity regime and determination to pursue a hard Brexit, both of which are putting pressure on household incomes and discouraging investment across the UK.
‘Brexit is by far the biggest threat to Scotland’s jobs, prosperity and economy, which is why we have always been clear that remaining members of the EU – and members of the world’s largest single market of more than 500million people – is the best option for our future.
‘The Finance Secretary will publish the Scottish Draft Budget later this week that will support our economy, tackle inequality and provide highquality public services for all.’
IT was in protest at Labour’s 95 per cent ‘super tax’ that George Harrison wrote Taxman for the Beatles’ classic Revolver album. The fabulously waspish lyric describes the mindset of the tax collector: ‘If you drive a car, I’ll tax the street; if you try to sit, I’ll tax your seat.’
There may have been varying levels of public sympathy for rich rock stars back in 1966 but the song’s refrain, ‘I’m the taxman and you’re working for no one but me’, struck a chord for millions.
The SNP is not quite in the same league as that Labour government, but its tax-grab philosophy and the stultified thinking that underpins it doubtless would have appealed to Harold Wilson.
Derek Mackay, the Finance Secretary, is expected to use Thursday’s draft Scottish Budget to announce the threshold for the 40p higher rate income tax band will increase only in line with inflation to £43,487, compared with £45,000 in England. It will mean someone earning £50,000 will pay £323 more income tax next year in Scotland than in England, with the gap rising to £800 in 2020-21, when the threshold south of the Border is expected to rise to £50,000.
Chancellor Philip Hammond has pointed out that earnings tend to increase more rapidly than inflation, meaning more Scottish middleearners will be dragged into paying the 40p rate. Rightly, he has warned that higher-rate taxpayers could be put off moving north of the Border, while many who are living here already may leave for the more favourable tax regime in England.
Ambitions
In addition, local authority bosses have said Nicola Sturgeon’s council tax plans will see the bills of some residents in larger homes increase by 25 per cent next April.
The heady days following the independence referendum, when the transfer of tax powers to Holyrood was first proposed, now seem a long way off.
It transpires that all of those noble ambitions of a Scottish parliament finally standing on its own two feet, ready for a bright new future, were really about a much older political idea: tax hikes.
Admittedly, Miss Sturgeon’s minority SNP Government may face a struggle to get the Budget passed, with the Tories opposed to Scots paying more tax than the English – and the other opposition parties demanding higher taxes and spending.
Some alarm bells have sounded for the First Minister, whose Left-wing power base would view any retreat on the higher rate tax threat as an unforgivable surrender to malign Tories.
Andrew Wilson, a former Royal Bank of Scotland economist who chairs the SNP’s ‘growth commission’, cautioned this weekend that ‘tax policy is… a message to a large group of people thinking about Scotland as a place to live and work’.
Hardly a ringing endorsement of Nationalist strategy, but the polarised nature of the debate allows the SNP to portray the Tories as bogeymen intent on undermining their promised socialist nirvana.
Self-restraint in the face of such an open goal is unlikely.
That socialist paradise is, of course, rather costly, given that the SNP’s overriding aim has been to stymie every attempt by the Tories at Westminster to rein in out-of-control welfare spending, currently running to £23billion a year in Scotland.
Taxpayers foot a benefits bill equivalent to £4,332 per head north of the Border – £300 more than the UK average.
Devolution was a chance to tackle Scotland’s toxic dependency culture – but it is another challenge the SNP has ducked. Social Security Minister Jeane Freeman has ludicrously called for the word ‘benefits’ to be banned, in case it stigmatises the unemployed.
In addition, a damning Tory dossier revealed this week that Nationalist ministers have wasted almost £1billion on department and project overspends since taking power.
Meanwhile, the public sector remains bloated, fed by the fruit of the magic money tree – forever yielding an endless harvest of taxpayers’ funds.
But the higher rate taxpayers in the SNP’s crosshairs, who have the privilege of bankrolling the benefits splurge, are hardly living high on the hog with disposable incomes to spare – this is indeed the whole point of the UK Government’s tax band changes.
There are 2.15million paying the basic rate in Scotland and 356,000 are liable for the higher rate, while 18,000 pay the ‘additional’ rate of 45 per cent, which applies to those earning more than £150,000.
This allows the Left to paint higher-rate taxpayers as an entitled minority bleating about losing a small portion of their supposed fortunes, rather than people who have worked hard and in many cases created jobs – and therefore more taxpayers.
In 2014, higher rate taxpayers across the UK began contributing more in tax than those on the basic rate for the first time, which prompted the UK Government to tackle the problem of ‘fiscal drag’ – where more and more professionals are drawn into the higher rate.
It is worth remembering that Miss Sturgeon has not ruled out increasing that ‘additional’ rate from 45p to 50p, a return to the discredited policy that was abolished by George Osborne in 2012.
Exodus
Reinstituting that rate would lead to an exodus of the demonised ‘wealthy’ at a time when, following our impending withdrawal from the EU, we have to be at the top of our entrepreneurial and trading game.
Of course, if our politicians had any courage or vision, Holyrood would be debating not just whether to adopt the UK Government’s higher rate tax arrangements but tax reductions across the board.
The howls of anguish from the SNP and its supporters would be deafening – but the lesson from history is clear.
In 1961, John F Kennedy inherited a top rate of income tax of 91 per cent and faced Republican opposition in reducing it to 70 per cent.
His policy resulted in the US moving from deficit to £2.4billion surplus by 1965 – and the rich paid more.
Those earning more than £32,000 had paid 12 per cent of revenues in 1963 but were paying 15 per cent by 1966.
Tax revenues shifted from £54billion in 1964 to £76billion only four years later.
In 1981 and 1986, Ronald Reagan employed the same policy, reducing income taxes to 15 per cent for those in low and middle tax brackets and from 70 per cent to 28 per cent for top rates.
The top 1 per cent of earners in the US in 1981 paid nearly 18 per cent of taxes – but by 1988 their share had jumped to nearly 28 per cent.
As former Tory MSP Brian Monteith has said: ‘Cutting taxes and especially the top rates of tax can bring greater revenues that can ameliorate the sharp cuts being faced by the poorest sections of our society – or be used to accelerate the move towards a fiscal surplus that will reduce the nation’s debt.’
Counter-intuitive it may be but allowing people to keep more of their wealth incentivises greater productivity, kick-starting the economy and helping to balance the nation’s books. That said, don’t hold your breath for tax cuts on Thursday.
After all, logic has never played a significant part in the decision-making process of our green-eyed, Left-wing parliamentarians – who view ‘wealth’ as something to be confiscated rather than celebrated.
Harrison’s bitter warning about the taxman’s avarice is just as relevant today as it was 50 years ago: ‘Now my advice for those who die – declare the pennies on your eyes.’