Scotland’s finance secretary was stumped during a recent committee meeting in the Holyrood parliament. The tax that replaced stamp duty, the Land and Buildings Transaction Tax, which estate agents say has killed the market for expensive homes across Scotland, was under discussion.
Scottish Tory finance Murdo Fraser asked Mackay: “Your former boss, Alex Salmond, was a great advocate of the Laffer curve theory of economics. Do you share his enthusiasm for Arthur Laffer’s economic theory?”
It was clear Derek Mackay had no idea what Fraser was talking about – which is a little worrying considering that, since May, he has been Scotland’s finance minister with a £30 billion budget to play with. He was recently given a new train set in the shape of the additional fiscal levers that were devolved via the Smith Commission.
Even a Finance Secretary who doesn’t believe in the Laffer curve – the theory that there is a close relationship between economic activity and the rate of taxation, to the extent that there’s an optimum tax rate which maximises tax revenue – really ought to know what it is.
But Mackay did not. He answered: “I have to say that in my very comprehensive briefing, I do not have the details of such an economic model.” He then pleading with the Conservative for a synopsis.
Fraser explained how the curve is meant to work before adding. “I was interested to know whether you accept the principle that if you set tax rates too high, you receive less revenue as a result, because that suppresses activity.”
Mackay then told Fraser that he accepted the “principle” of the Laffer curve. But there is little evidence that Mackay incorporated much of Arthur Laffer’s thinking into yesterday’s Budget.
While announcing a string of measures which, to some, resembled smoke and mirrors – shuffling budgets around and tinkering around the edges to give the impression his government is doing more than it actually is to support – it was clear he had failed to think long-term.
This may be partly because the SNP is so keen to woo voters in the forthcoming council elections. He also failed to use the tax powers he was recently given in any meaningful way.
It was only really in the area of income tax that Mackay said the government would use newly gained powers, saying it would not be replicating the Treasury’s recent cut for higher rate taxpayers. The UK government plans to raise the threshold for the 40p tax rate to £45,000 and eventually £50,000 but Mackay confirmed that, in Scotland, it would rise with inflation.
So, from April 2017, people living in Scotland earning between £43,430 and £45,000 will pay £323 more each in income tax than their counterparts south of the border, with the tax gap rising to £800 in 2020-21 when the threshold in England and Wales is due rise to £50,000.
This won’t trigger an immediate exodus of higher rate taxpayers but it will be a major negative for anyone whose earnings fall between the two stools. It could mean the sacrifice of a weekend break or part of holiday, and in the long term, as the tax gap grows, will make Scotland a less attractive place to live and work.
With Scotland an “uncompetitive tax jurisdiction” the Tories say it is iniquitous that “Scottish families and businesses” should be taxed more than those elsewhere in the UK.
Responding to the Budget speech, Fraser said that by by hiking income tax for Scots, Mackay was “risking choking off economic recovery and depriving Scottish public services of vital tax revenue”. Fraser added that the Tories would not be supporting the budget – which means the SNP will need Lib Dem, Green or even Labour support.
The Federation of Small Businesses’ Scottish policy convenor Andy Willox agreed, saying: “this is not the time for greater income tax divergence north and south of the border.” But he did welcome other aspects of the Budget including full rate relief to 100,000 Scottish firms and funding for faster broadband.
The divergence on income tax is expected to raise an additional £79m for Scottish Government coffers in 2017-18.
Overall, higher rate taxpayers look to be facing a “triple whammy” as a result of SNP fiscal policies.
First they risk paying more income tax than their counterparts down south.
Second, they are paying more to move house, if their home is worth more than £325,000 and some of the lawyers and estate agents I have spoken to claim LBTT has all but killed the market for homes worth more than £750,000.
Third, cuts imposed on Scotland’s councils – a cut ranging from £182m to £327m next year, depending on whose figures you believe – means council tax is almost certain to rise. For the first time since it was frozen in 2008 councils have been given new powers to increase bands by 3%.
The backdrop to Mackay’s first budget is hardly propitious and there is a high degree of uncertainty in the outlook for the global economy.
Britain is facing massive uncertainty arising from the UK’s plan to leave the EU, including the expectation among economists that inflation will treble next year due to the 15% fall in the value of sterling since the Brexit vote.
Oil prices are rising with the cost of a barrel of Brent crude rising to $56 compared to around $46 in early November. Hopes that a weaker pound would spur export-led growth have failed to materialise
Against this backdrop we should all be concerned about the impending fiasco over the SNP government’s non-profit distributing version of PFI, which was developed by the Scottish Futures Trust when it was chaired by investment banker Sir Angus Grossart.
In a ruling, in July 2015, the Office for National Statistics concluded that the Aberdeen bypass, which has an NPD value of £469 million, had to be reclassified as on-balance sheet. According to the Fraser of Allander Institute this has “highly significant implications for the Scottish Budget”. This was barely mentioned by Mackay in his speech though the footnotes did make reference to it
Overall, Mackay was uninspiring, overly cautious, and lacking in transparency. FAI director Graeme Roy said: “That is not good enough. By setting out spending plans for just one year, a lot of the hard choices have been left for another day.”
This article was the main (Budget) comment piece in the Scottish Daily Mail on 16 December 2016.
Article as published in the Daily Mail
