THE income tax differential between Scotland and England is set to grow much wider much faster as Philip Hammond announced that the age of austerity was finally “coming to an end”.
The unexpected fiscal move by the Chancellor – in the last Budget before Brexit – piles pressure on Derek Mackay, the Scottish Finance Secretary, to act on income tax. He delivers his own financial statement to Holyrood in December.
Earlier this year, Mr Mackay introduced new income tax rates and bands such as the new 19p starter rate for those on low incomes and put a penny on the higher rate of income tax at 41 per cent.
At the time, the Scottish minister said the changes would make the system north of the border “more progressive and deliver additional revenues to invest in public services” but his Conservative opponents claimed the changes were an “unnecessary tax-grab,” that would harm the nation’s economic performance.
Theresa May’s Government had intended to give people in England an effective tax cut by raising the threshold at which they paid the higher rate of income tax[HRT] of 40 per cent to £50,000 in 2020/21. However, Mr Hammond announced that he was bringing this forward to April 2019.
In his Commons statement, he explained how people had told him that to help pay for his promised £20 billion increase to the NHS, he should abandon the Tories’ manifesto pledge on raising HRT and also raising personal allowances and, instead, freeze them to fund the health service spending hike.
But the Chancellor told MPs that unlike his Labour Shadow, John McDonnell, “my idea of ending austerity does not involve increasing people’s tax bills,” and that, because of the improvements to the public finances, he did not need to freeze the rates.
Indeed, he pointed out: “Our careful management of the economy allows me to go further; so I will raise both the personal allowance and the higher rate threshold to these[higher] levels from April 2019, delivering our manifesto commitments one year early.”
To Conservative cheers, Mr Hammond said the measures meant a tax cut for 32 million people and that, since 2015, 1.7m people had been taken out of tax altogether and nearly 1m people out of HRT.
The fast-forwarding of the raising of the higher income tax threshold to £50,000 next spring means a basic rate taxpayer in England will be £1,200 better off while a higher rate taxpayer will be £1,800 better off, the Treasury said.
According to analysis by the Scottish Tories, this means – if Mr Mackay freezes rates and bands next year – then a Scot earning £50,000 a year would be £1,560 worse off than their English counterpart. The respected Fraser of Allander Institute put it lower at £1,100 but still said the Scottish Government would “face a dilemma in deciding how to respond to the increase in rUK” in its December Budget.
Over three years, the Conservatives calculated the cumulative difference to total more than £2,250.
Scottish Tory MP John Lamont said: “Scotland is already the highest taxed part of the UK so the case for more SNP tax rises in the Scottish Government Budget is unsustainable. Nicola Sturgeon needs to rule this out in her Budget and replace it with a plan to support jobs and economic growth.”
But a spokeswoman for the First Minister said: “We set the tax rates in Scotland; we have chosen to take a different path, which is progressive, which means the vast majority of people pay less tax.”
She insisted that the SNP Government had been consistent and did not believe it right for the better-off to get tax cuts while public services were being cut.
“Tory tax cuts for the better-off are not our priority,” she added.
In a 72-minute Budget statement, the Chancellor declared: “Austerity is coming to an end,” and that the perseverance and hard work of the British people had paid off, meaning that he could now set a new path for public spending, one that helped the country’s “strivers, grafters and carers”.
Measures in Mr Hammond’s third Budget amounted to a total £100 billion loosening of the purse-strings over a six-year period.
The extra spending for 2019/20 meant a £1bn knock-on windfall for the Scottish Government, which it can use in any way it chooses.
Yet the spectre of a no-deal Brexit hung over the Chancellor’s Commons statement with the Office for Budget Responsibility[OBR], the Government’s independent economic forecaster, warning that failure to reach agreement with Brussels would hit the economy hard.
A disorderly Brexit, it explained, “could have severe short-term implications for the economy, the exchange rate, asset prices and the public finances”.
It added: “The scale would be very hard to predict, given the lack of precedent.”
Mr Hammond told MPs Britain was at a “turning point in our history” and that “we must resolve to go forwards, not backwards and work together to build a Britain we can all be proud of”.
The Chancellor explained that a £15bn fiscal “buffer” could be spent next year if a Brexit deal were agreed with Brussels in the weeks ahead, while a good deal would lead to a “double deal dividend” that would release billions of pounds for further tax cuts and a boost in funding for other public services.
But he also made clear that if there were a no-deal, then there would be an emergency Budget next spring to reset his economic plans “if the economic or fiscal outlook changes materially in-year”.
However, Jeremy Corbyn branded Mr Hammond’s statement a “broken promise Budget”.
“Whatever the Chancellor claims today, austerity is not over,” declared the Labour leader.
“What we’ve heard today are half measures and quick fixes while austerity grinds on. And far from people’s hard work and sacrifices having paid off, as the Chancellor claims, this Government has frittered it away in ideological tax cuts to the richest in our society,” he added.
Ian Blackford for the SNP said there was no sign in the Chancellor’s statement that austerity was indeed coming to an end and accused Mr Hammond of trying to “pull the wool over our eyes”.
He said: “The Budget exposes to the people of Scotland that there is a choice to build a better future; to turn away from the isolated, economically failed UK and instead look to a more prosperous Scotland in the European Union. Only with independence can we secure a strong future for the Scottish economy and deliver for our communities and families, who are being left behind, scrambling to make ends meet, moving from crisis to crisis at the hands of consecutive failed UK Governments.”
A key part of the Budget were moves to help shore up the beleaguered High Street, which has faced the loss of a number of household names in recent times as shoppers spend more of their money online.
In a linked move designed to put the UK at the forefront of international action to adapt tax systems to the digital age, Mr Hammond announced a new £400 million levy aimed at internet giants such as Google and Facebook. A Treasury source responded to surprise it was so low by saying: “We’re treading softly to start with and will keep it under review.”
In response to criticism from all sides – including from former Prime Minister Sir John Major – the Chancellor promised billions to address concerns about the rollout of the flagship Universal Credit welfare reform.
The announced measures included £1bn over six years to help the transition on to the new system and a £1,000 increase in the amount people can earn before losing benefits, at a cost rising to £1.7bn a year by 2023.
As well as the tax cuts and increased departmental spending, the Chancellor set out one-off bonuses for defence, schools and Local authorities after being given positive forecasts for the public finances by the OBR.
In a major shift, the Chancellor also promised to abolish the use of the private finance initiative.
In terms of the economic statistics, the OBR upgraded its forecast for GDP growth in 2019 from 1.3 per cent to 1.6, then 1.4 in 2020 and 2021, 1.5 in 2022 and 1.6 in 2023.
Borrowing this year will be £11.6bn lower than forecast at the Spring Statement, at 1.2 per cent of GDP, and is then set to fall from £31.8bn in 2019/20 to £19.8bn by 2023/24.
Debt peaked in 2016/17 at 85.2 per cent of GDP and then is due to fall in every year of the forecast to 74.1 per cent in 2023/24, allowing the Government to meet its target to get debt falling three years early.
Meanwhile in a move welcomed by Scottish Tory MPs, he decided to maintain headline tax rates for the North Sea oil and gas industry at their current level and launch a call for evidence on the plan to make Scotland a “global hub for decommissioning”.
He also again decided – “in response to the concerted lobbying of my Scottish Conservative colleagues” – to freeze the duty on Scotch whisky, saying: “So, we can all afford to raise a wee dram to Ruth Davidson on the arrival of baby Finn.”
Source : HeraldScotland