Mackay widens tax gap for middle earners
● Finance secretary refuses to raise higher rate threshold ● Hundreds of thousands of Scots miss out on UK tax breaks ● Cross-border gap widens, prompting recruitment fears
Derek Mackay has unveiled a draft budget for next year that will see further divergence between the tax systems of Scotland and rest of the UK.
The finance secretary said he would not pass on tax breaks for higher and middle earners set out in October by Chancellor Philiphammondforworkers south of the Border.
Business organisations fear the largest tax burden in the UK will discourage talent from moving north. But Mr Mackay said: “Now is not the time to cut tax for the highest earners at the expense of public services.
“Instead I will be using the additional resource raised through my tax decisions in the budget to support our public services and ensure our health service gets all the additional money that was promised.”
First Minister Nicola Sturgeon described the draft budget as an example of “strong and stable government”.
Hundreds of thousands of higher-earning Scots will miss out on a tax break being handed to those elsewhere in the UK after finance secretary Derek Mackay confirmed yesterday he will not raise the higher rate threshold.
It means the tax gap between Scotland and the rest of the UK will again widen, with Scots workers on higher salaries facing an annual tax bill hundreds of pounds greater than those south of the Border.
Mr Mackay insisted 99 per cent of Scots will not pay any more and it is the UK government which is cutting tax. Ongoing austerity cuts and Brexit uncertainty means it is not the time to be handing tax breaks to higher earners, he told MSPS as he set out his budget for 2019-20.
But business organisations fear higher-earning Scots facing the largest tax burden in the UK will discourage talent from moving north. There is even a warning from the government’s own economic watchdog that the tax regime will prompt some high earners to start moving away.
The finance secretary revealed the higher rate threshold will be frozen at £43,430 north of the Border, affecting about 367,000 Scots.
In so doing he refused to pass on an effective tax cut coming to workers south of the Border who will only start paying this rate at a salary of £50,000 next year after changes unveiled by Chancellor Philip Hammond in his UK Budget in October.
In Scotland the higher rate is set at 41p in the pound compared with 40p elsewhere in the UK.
Mr Mackay’s move is intended to raise an extra £68 million in revenues for public services.
The SNP Cabinet secretary defended the move as he unveiled his spending plans for 2019-20 at Holyrood yesterday.
“Now is not the time to cut tax for the highest earners at the expense of public services,” he said.
“Instead I will be using the additional resource raised through my tax decisions in the budget to support our public services and ensure our health service gets all the additional money that was promised.”
But the move is already raising concerns that Scots higher earners now face a greater tax burden than elsewhere in the UK.
Scots will start paying more in tax on a salary of £27,000 than UK workers making the same. However, a majority (55 per cent) of Scotland’s 2.6 million-strong workforce does pay slightly less in tax.
The changes set out by the Scottish Government means a £30,000 salary will result in a £30 higher tax bill than south of the Border, and a £45,000 salary will mean an additional bill of £494.
And there are also concerns that workers north of the Border caught in the £43,340£50,000 bracket will face a tax double whammy as a result of national insurance contributions (NICS).
Scots in this bracket are subject to an effective tax rate of 53 per cent – among the highest in the UK – because NICS only drop from 12 per cent to 2 per cent on earnings above the UK higher tax threshold of £50,000.
Income tax has dominated the Scottish budget process since the Scottish Government decided to overhaul the system and introduce five tax bands last year. It means Scotland
“I will be using the additional resource raised to support our public services and ensure our health service gets the money that was promised” DEREK MACKAY Finance secretary
has a significantly different system from the rest of the UK.
The Scottish Government also points to the fact that council tax rates are lower on average in Scotland. As well as this, the universal benefits available such as free university education, personal care for the elderly and prescriptions are also popular with Scots, according to polling.
First Minister Nicola Sturgeon hailed the draft Budget as an example of “strong and stable government” and contrasted it with Westminster’s Brexit “shambles”.
Ms Sturgeon tweeted that it was “a strong and progres-
sive @scotgov budget in difficult circumstances from @Derekmackaysnp – protecting public services, supporting the economy and delivering fair tax”.
She added: “What a contrast to the Westminster shambles. This is what strong and stable government really looks like!”
Sharon Bain, tax manager at PWC, said: “While it remains difficult to quantify the impact the divergence in income tax will have on attracting talent and skills to Scotland, there also remains a potential headache of tax equalisation for employers, who may find themselves being asked to foot the bill.
“In the context of funding local services, especially adult social care, there is evidence that people would be prepared to contribute more but for many, today’s announcements make Scotland a more expensive place to live, adding further complications to businesses’ ability to attract talent south of the Border to move to Scotland.”
These days, you can’t look away for five minutes.
The dramatic delay of the crunch EU withdrawal agreement vote in the Commons; Theresa May’s desperate whistlestop mission around European capitals, as embarrassing to watch as it was humiliating to endure; a no-confidence vote triggered by rebellious Tory MPS; then, just before the 9am news yesterday the Downing Street rostrum is trundled out for the PM’S “I’m fighting on” declaration.
Barely had the day begun than we were reeling from it all. And then what? Yet another extension of Brexit Hell – the crisis with no end.
Pity Scotland’s finance secretary Derek Mackay who had to give his budget to Holyrood amid the din and cacophony of the greatest political crisis for a generation. This was the time for him to hit the high notes. He might have been Chopin playing etudes on the piano. But who could hear a note amid the thunderstorm?
It is hardly surprising, amid this bombardment of events, that a strange paradox in everyday Scottish life has unfolded. It was barely mentioned in the Scottish budget yesterday. It is one that has defied the most sophisticated forecasts and has yet to yield a credible explanation.
Put simply, it is this: how is it that unemployment in Scotland has fallen to the lowest level recorded, and pay growth across the UK has reached the highest level for a decade – and yet spending in our high streets fell last month – this despite a blitz of Black Friday promotions and a rising onslaught of Christmas TV jingles?
By arguably the most important measure of our economic well-being, we have good news to celebrate. Figures this week showed that in the three months August to October, Scotland’s unemployment rate fell to 3.7 per cent, 0.4 percentage points down on the previous quarter. It now stands lower than the UK rate of 4.1 per cent and is the lowest jobless rate in Scotland on record.
Previous Scottish administrations would have declared a national holiday to mark such an achievement. And although overall employment fell very slightly over the quarter, Scotland continues to outperform the UK on employment for females (71.3 per cent against 71.2 per cent for the UK) and for young people (58.8 per cent here compared with 55.9 per cent for the UK overall). Meanwhile, a near-record 848,000 vacancies Uk-wide suggests companies remain keen to employ.
These figures are all the more startling given the relentless gloom and foreboding over Brexit and the black cloud of uncertainty that protracted negotiations with Brussels have cast over business investment and expansion.
Scotland’s Brexit secretary Mike Russell has lost no opportunity to warn of gloom and catastrophe set to befall us on a “no-deal” outcome. In this, he has if anything “out-doomed” the Bank of
England’s Mark Carney. Indeed, if there was ever to be a Central Bank of Scotland, Mr Russell would be the prime candidate for Governor, warning us of our bleak debt-ridden prospects while expounding on the perils of the bond yield curve inversion (as if ).
So, within one paradox lies another: if our future is so appalling, why have so many companies persisted in hiring more staff?
If the fall in unemployment was not cheering enough, pay growth across the UK overall reached the highest level for a decade. Both total and regular annual earnings growth climbed to 3.3 per cent in the three months to October. Regular earnings growth was 3.5 per cent in October while total earnings growth spiked to 3.8 per cent, boosted by higher bonus payments. And real, after-inflation earnings growth is looking healthier, rising to 1.1 per cent in the quarter from 0.1 per cent in June – taking it to the highest levels since late 2016.
Falling unemployment and higher real earnings: what better background could there be for a consumer spending uplift – particularly in the approach to Christmas?
But retail spending is not buoyant at all. Figures released yesterday by the Scottish Retail Consortium showed retail sales in Scotland falling by 2.1 per cent on a like-forlike basis compare to November 2017 (when they were down by 1.3 per cent).
Total sales in Scotland were down by 1.6 per cent on November last year – the deepest decline for 21 months. And even adjusting for the estimated effect of online sales, total non-food sales are down 4.1 per cent on a year ago.
Said SRC director David Lonsdalek “Retailers now have a nervewracking few weeks leading up to the crucial festive season, after what has been a bruising year for many.”
So what might explain the breakdown of the conventionally assumed relationship between employment, average earnings and high street spending? And if the extra money isn’t flowing into retail, where is it going?
Fractured consumer confidence may be part of the answer. Who can be surprised at the absence of a “feel-good factor” when every day – from the first news bulletins in the morning to last thing at night we are soaked in the minutiae of the Brexit imbroglio and are losing the will to live?
Households may well be taking heed of all those warnings of supply breakdowns, disruptions to medical supplies, food rotting in giant lorries on the M25 and companies including food retailers starting to hoard: all this could be impacting on consumer confidence and our predisposition to spend.
It could also be that most of that extra household income has been gobbled up by higher utility bills – gas, water, electricity and other essential spending items such as rail travel.
Apprehensive shoppers may also be holding off spending until the last few days of Christmas or deferring major purchases altogether until the last week of Christmas.
Meanwhile, the Scottish Fiscal Commission will deliver the detail of its economic forecasts today. It predicts economic growth of 1.4 per cent in 2018 and 1.2 per cent in 2019, reflecting stronger recent economic performance, a more positive prospect for earnings over the next few years and the fiscal expansion announced in the UK Autumn Budget.
The Fraser of Allander Institute says Scotland’s economy is on track to grow at its fastest rate since 2014 – assuming no Brexit debacle. What a caveat! Who could possibly assume that after a week like this?