TORY Chancellor Philip Hammond’s Budget last week has thrown into sharp focus the diverging policy choices made by the UK and Scottish Governments on tax.
For the first eighteen years of devolution, MSPs had the power to vary the basic rate of income tax, but they never took advantage of the opportunity.
Raising a rate paid by around two millions taxpayers in Scotland was not politically attractive as it applied to workers on modest means.
As a result of the Smith Commission, set up in the wake of the independence referendum, Holyrood was given full control of income tax rates and bands, with the exception of the tax-free personal allowance
The two Budgets last year – Mr Hammond’s in Westminster, and SNP Finance Secretary’s Derek Mackay’s statement in Edinburgh – showed that the Scottish and UK Governments had a different philosophy on income tax.
Mr Mackay introduced a new 19p starter rate for low earners, while at the same time adding a penny on to the 20p, 40p and 45p rates. Mr Hammond kept the three UK rates unchanged. His Tory colleagues at Holyrood accused the SNP of jacking up taxes.
But it is a different tax change that has dominated Holyrood this week and given rise to concerns of a talent brain drain from Scotland.
In trying to make progress towards meeting a Tory manifesto promise, Mr Hammond last year raised the level at which taxpayers were liable for the 40p ‘higher’ rate of income tax – from £45,000 to £46,350. The policy was explicitly aimed at reducing the tax bills of middle-income voters.
Mr Mackay, by contrast, only increased the higher rate threshold to £43,340, which meant taxpayers in Scotland would pay a bigger chunk of their income – nearly £3,000 – at the 41p level.
The gap widened when Mr Hammond raised the threshold from £46,350 to £50,000 last week. If the SNP Government maintains the allowance at £43,340 in its December Budget, workers earning £50,000 in Scotland will pay over £1,100 more in tax than their counterparts south of the border.
Education Secretary John Swinney was informed last week that the tax gap could harm headteacher recruitment, but will the divergence lead to higher-income earners leaving Scotland?
Charandeep Singh, the Head of External Relations at Scottish Chambers of Commerce, said it is critical that Scottish businesses are “able to attract and retain world-class talent”.
But while his organisation remained “alert” to tax changes which could have the “potential to further exacerbate the challenge of recruiting and retaining staff”, he did not predict a brain drain.
David Watt at the Institute of Directors also took a balanced approach. He said the IoD has a “real concern” about how higher earners are treated and added that politicians should be aware of the “risk of behavioural change” if people perceive they are paying “more than than their fair share of the pot”.
However, he also said: “The other big point for the IoD is how the tax take is spent and if it considered to be wisely [spent] then there may be some support for increases in taxation.”
Colin Borland, Director of Devolved Nations at the Federation of Small Businesses , said that for most small business owners being caught out by where the higher rate of income tax kicks in “is a problem they aspire to have”.
He explained: “Under a quarter of them are higher rate taxpayers [23%]. About two thirds [65%] of them are basic rate taxpayers and only 1.6% pay the additional rate.
“So, their concerns about rising taxes aren’t so much about their own pockets, as their customers’ and the effects on the wider economy.”
Dr Lewis Morrison, the chair of BMA Scotland, which represents doctors, said that it is for governments across the UK to make tax decisions that reflect the priorities of the public.
Rather than citing income tax changes, he said years of “real terms pay cuts” was the issue for doctors:
“Our priority would be the reversal of this trend and a pay and reward package – including pension contribution arrangements – which ensures Scotland is able to recruit and retain the doctors it needs.”
And Tracy Black at CBI Scotland spoke in general terms about the differing tax policies.
She said competitiveness required a “full of suite of interventions” and urged Scotland to develop its workforce, deliver first-class infrastructure and invest in R&D.
She added that local businesses will be “wary” of any moves that “widen divergence between Scotland and the rest of the UK” as the firms will fear it could make the country less attractive to investors and talent.
The tax gap row will rumble on into Mr Mackay’s budget and will give the Tories ammunition to fire at the SNP at the next Holyrood election.
But the groups who represent some of the taxpayers affected by the change, while expressing concern about the direction of Travel, offer a less alarmist analysis than some of the politicians.
WHY IS IT AN ISSUE?
The row over the level of the higher income tax threshold is more political than economic.
According to official figures, 2.2m adults – 47.9% of the total – were expected pay the basic rate of tax in Scotland this year. Around 2m people would pay nothing at all. Only 346,000 individuals – around 8% – would pay the higher rate.
However, while only 8% pay the 41% rate, the same group is likely to constitute a higher proportion of adults who turn out to vote. People who are comfortable financially are more likely to take part in the democratic process than the poor.
This 8% cohort, who will pay more in tax than middle class professionals in England, will be a key target for the Tories as they try to win the next Holyrood election.
THE COST OF FOLLOWING SUIT
At a glance, the argument seems straightforward. Why does SNP Finance Secretary Derek Mackay not copy the Chancellor and raise the income tax threshold to £50,000?
The answer is that doing so is very expensive. According to figures obtained by Labour MSP Kezia Dugdale from the Scottish Parliament, replicating the tax change without indexing other Scottish tax thresholds would cost an estimated £410m.
Such a sum is more than three times the value of the Pupil Equity Fund budget, which was introduced to help poorer pupils.
It is also more than the maintenance backlog in Scotland’s colleges, which currently stands at £360m. And it is significantly more than the budget of the Scottish Ambulance Service, not to mention the Scottish Fire and Rescue Service.
WHAT WILL HAPPEN NOW?
The Scottish Parliament’s political composition means the chances of MSPs raising the threshold to £50,000 are non-existent.
Nicola Sturgeon, who leads the largest group by far at Holyrood, has derided the Tories for a policy she believes helps the well-off.
Scottish Labour, despite shadow chancellor John McDonnell supporting the Tories on this specific measure, are also hostile.
The Scottish Greens believe tax changes should help the least well-off, and the Liberal Democrats are also highly unlikely to be receptive to the policy.
It leaves the Conservatives – who have 31 of 129 MSPs – as the only party calling for the tax threshold to be raised substantially.
What is likely to happen? A sizeable number of middle class Scots vote SNP, so Sturgeon will not pretend the row has no merit. Expect the threshold to be uprated in line with inflation, or slightly above it.
Source : HeraldScotland