Weak tax base growth continues to hurt Budget
LAST week’s Budget was set – once again – against a backdrop of relatively fragile growth in the Scottish economy.
Average growth in the decade leading up to the financial crisis was over two per cent a year. Since 2010, it has been tracking at around half that.
Despite some evidence, including from our Scottish Business Monitor, of a pick-up in day-to-day confidence post the General Election, business appetite for investment remains weak.
With this in mind, it was hardly surprising the Scottish Fiscal Commission (SFC) provided a relatively sober assessment of Scotland’s economic prospects. The SFC forecasts growth to remain close to 1% until at least 2024. On the plus side, the SFC remains optimistic about the outlook for employment, which should help boost earnings.
These forecasts do assume a smooth Brexit transition. Just how consistent this is with recent attempts by the Prime Minister and Chancellor to ratchet up the rhetoric around “no deal”, is open to debate. It remains troubling that despite all the evidence of the costs of “no deal”, the politics of Brexit seem to continue to dominate the policy strategy of the UK Government.
All of this now matters for Scotland’s Budget. Under the new Fiscal Framework, the performance of the economy has much more of a bearing on the money available to the Scottish Government each year. In this regard, the SFC’S assessment continues to pose a challenge. Why?
In short, despite raising around an additional £600 million from increased income taxes primarily on higher earners, this is almost fully offset by weak growth in the tax base. This trend is a continuation of previous years.
Indeed, this year’s budget already faced an additional £200m hit to correct for earlier tax forecasts being too optimistic. Rather than meeting this cost now, the Government has chosen to borrow from the Treasury, meaning it will be the next administration after the 2021 election that will pick up the tab.
The SFC’S latest forecasts suggest this position may – if anything – get worse in the short-term, with a further reconciliation payment of £550m likely in 2021/22.
On economic and fiscal policy, the government’s approach remained largely unchanged. The big new development for 2020 will be the launch of the Scottish National Investment Bank. On non-domestic rates, there was a minor change to the “Large Business Supplement”, but little change to the overall package of business support.
On income tax, the government has largely stuck to its guns with those on lower earnings paying less tax than they would in the rest of the UK. But whilst it is factually true that “56% of Scottish taxpayers pay less than they would if they lived elsewhere in the UK”, at a maximum saving of 40p per week, it’s hardly the biggest tax bonanza ever.
Scottish taxpayers with income around £27,000 and above will pay more tax than their counterparts in the rest of the UK. At £50,000, the gap is equivalent to £1,500 more tax.
Local authorities will again have the flexibility to increase council tax by up to 3% above inflation. How consistent this decision to increase a tax known to be regressive is with the government’s wider progressive tax agenda or its efforts to tackle inequality is open to question.
The next stage is to secure parliamentary support. As in previous years, the Greens are likely to be the natural allies. As per normal, the Government will no doubt have squirreled away some cash to help secure a deal, the only question remains what they’re going to be made to spend it on.