A sideshow shambles... and a blow to all our aspirations

THE word most used to describe Derek Mackay’s budget in the run-up to his big day yesterday was ‘sideshow’. What, we all asked, could he possibly say or do that would be of interest to anyone given the other more exciting and rather more important things happening in UK politics?

If there was an answer to that, he didn’t give it.

For the Finance Secretary this is a nightmare time to even be a sideshow in the world of money. Financial forecasting is a fairly hopeless activity at the best of times, but having to base your spending plans on forecasts amid the political confusion of Brexit is nigh impossible.

Growth numbers are concerning all over Europe. Growth could be peaking in the US and one of the most reliable global recessionary indicators (global chemical industry capacity utilisation) is flashing very red indeed.

At the same time, the decade-long ‘everything bubble’ that lifted all asset boats since 2008-9 is over and nearly all markets are showing negative returns on the year.

All this does not augur well for Scotland. This country has a large budget deficit (just over 7 per cent, but it is a notional concept as long as Scotland stays within the UK) yet its government still talks a good game about having a more redistributative tax system. The problem is that it is hard to see how it can have the first without ending up with more of the second.

BEFORE this Budget, we knew that the highestearning 15 per cent of Scottish taxpayers pay 60 per cent of all income taxes and that those who earn more than £26,000 already pay more tax than they would if they lived in another part of the UK.

They still do – but the gap is now rather wider.

In his Budget, UK Chancellor Philip Hammond announced that from April, the threshold for paying the higher rate of income tax would rise to £50,000. This did not apply in Scotland as income tax bands and rates are devolved to Holyrood.

But hard-working families had hoped that Mr Mackay might follow Hammond’s lead. He did not. The higher rate threshold here remains unchanged at £43,430 – £6,570 lower.

Earn £50,000 in England, Wales or Northern Ireland and you will pay £7,500 in income tax from 2019-20. Earn £50,000 in Scotland and you will pay £9,044 that’s £1,544 extra. Real money.

To add insult to injury, the fall in National Insurance from 12 per cent to 2 per cent comes with the UK threshold. So Scottish taxpayers earning between £43,430 and £50,000 will now pay a marginal tax rate of 53 per cent on that chunk of their hard-won salaries. How’s that for a Christmas present?

It is possible to argue that it doesn’t really matter – to say that the well-off aren’t going to leave Scotland with its goodvalue private schools and high standards of living for a couple of grand here or there.

That’s probably partially true. Some – perhaps those not entangled in the education or property markets – might move to Berwick or Cumbria, working remotely from home and travelling in to Scotland for meetings. Others might shift their earnings from salary to dividends to enjoy a lower tax rate.

But overall, at these rates those numbers should be small.

However, there are other issues. Scotland already has very few higher and additional rate taxpayers and they shoulder a huge part of the public spending burden (15 per cent of taxpayers pay 60 per cent of the bill).

So the big concern, given we want to see real economic growth and rises in tax revenues sooner rather than later if we want to continue to finance our ageing population and the welfare state, should be to nurture and attract more higher earners.

Think, then, about a highly paid and entrepreneurial graduate with a student loan to pay off. They are offered a job in Edinburgh and one in Bristol – both on £50,000.

Given the current net pay differential of £1,544 and the direction of travel Mr Mackay has laid out, which one will win? Quite.

Now ask Scotland’s thriving tech sector how they feel about that, given how hard it is to hire top talent already. People react to financial incentives.

You might not think they should – I am told over and over again that people should be happy to pay more for better public services – but they do.

This Budget sent some appeasing signals to first-time buyers and to those fretting about public services (various real terms rises in health and education spending); and business.

As this newspaper predicted, there is to be no out-of-town retailer levy; business rates are to go up slightly less than inflation (2.1 per cent rather than 2.3 per cent); and there is to be a £50million fund to support town centres.

YET Mr Mackay may struggle to get his Budget through – he needs the support of another party for that and the Greens are cross they can’t see any progress on ‘meaningful’ change on council tax, so may not vote with him.

But either way it has sent one clear message – under this Government Scotland’s tax-andspend system is going to get both more complicated and more ‘progressive’.

If you are the kind of person or business that drives the kind of growth Scotland so very badly needs, neither of those things is going to sound good to you.