£1 billion black hole and the risk of a downward economic spiral – but SNP are in denial Murdo Fraser
Our system of tax devolution in Scotland is still in its infancy. It is barely two years since Holyrood was given powers over non-savings, non-dividend income tax, with a right to vary bands or rates. This is a power that has already been used by the SNP Government to create a significant tax gap between Scotland and the rest of the UK, for those earning over £43,000 annually.
Tax devolution gives the Scottish Government the opportunity to vary the size of its overall budget by changing tax rates. It also creates a direct link between Scotland’s economic performance and tax take. So a growing economy will generally lead to increased tax revenues, whilst a shrinking one will lead to reductions. There is a clear incentive to ensure we have the right conditions for economic growth.
With Scotland as part of the UK, the correlation between Scottish economic performance and tax revenue growth is not simple. In terms of the Fiscal Framework negotiated between the UK and Scottish Governments, it is Scotland’s economic performance relative to the rest of the UK that is key: grow faster than the UK average and we benefit, grow more slowly and our tax revenues take a hit.
It is against this backdrop that the Scottish Fiscal Commission published its latest economic growth and tax forecasts. The SFC estimates that Scottish growth will lag behind the UK as a whole in each of the next four years. Because Scottish wages are predicted to grow more slowly compared to the UK average than previously expected, this adds up to a fall in projected tax revenue, creating a black hole in the Scottish public finances amounting to a cool £1 billion over the next three years.
No one should be in any doubt about the significance of these figures. While the Scottish Government does have borrowing powers which would allow the impact to be smoothed over several years, these are insufficient to meet the scale of the predicted deficit. So this will mean either cuts in public spending, or yet more tax increases, or a mixture of both.
It might have been expected,
therefore, that when reporting to Parliament on these figures, the Finance Secretary Derek Mackay would have set out the response to this serious situation. But in his statement on the Medium Term Financial Strategy, he had nothing whatsoever to say on the matter.
This silence drew criticism from the respected Fraser of Allander Institute, who commented on Mr Mackay’s statement: “You might also think that a Medium Term Financial Strategy document might detail how it will manage such a hit to revenues. But it doesn’t.”
In relation to the Government’s
spending priorities, they went on to say: “This year’s MTFS says nothing whatsoever: what areas will be prioritised, what the strategy is for non-priority areas, and how spending objectives will be prioritised under different risk scenarios.”
The SNP’S default position is to blame the situation on Brexit. But while Brexit is certainly a risk, it is a risk too for the UK, as Fraser of Allander pointed out. According to the Fiscal Commission, it is not the only reason for slower growth in Scotland compared to the rest of the UK. Tax devolution does mean new responsibilities for the Scottish
Government. It means that the most significant factor in determining the overall size of the Scottish Government’s budget is Scotland’s relative economic performance. It also means that the Finance Secretary has to take responsibility for delivering a balanced budget, cutting his spending cloth according to the revenues being raised. That we are not being told by the SNP how a pending £1 billion black hole in the public finances might be addressed is a dereliction of duty.
There are serious concerns from business about the growing tax gap between Scotland and the rest of the
UK. Firms worry about their ability to attract talented individuals to work in Scotland when the tax bill is higher here. There is a real danger that if the tax gap widens, there will be a discernible impact on Scotland’s economic performance, and we end up in a vicious circle of slowing economic performance, declining tax revenues, and increasing tax rates to plug the gap.
If the SNP want to be taken seriously as stewards of Scotland’s public finances, they need to start doing better than this, and being straight with the Scottish people about what the future holds.