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Are high taxes really hitting Scotland’s growth?

Terry smiling headAn effective rise in income tax for thousands of Scottish higher earners, coming into effect for the new financial year, could not have come at a worse time.

The Scottish economy is contracting and the Scottish Government’s high taxes have been picked out as a factor.

Scottish Chambers of Commerce chief executive Liz Cameron led the charge calling for change. In a thunderous reaction to the chief statistician’s data, she said it was now time for the Scottish government to “abandon this high tax agenda”.

Her tirade included an attack on the Holyrood administration for hiking business rates and planning fees and for having a more punitive regime for collection of the Apprenticeship Levy.

Ms Cameron has a point, though she must not get carried away.

By and large, the tax rises she addresses have yet to kick in. It’s a bit rich to claim that withholding an increase in the income tax threshold, effective from today (6 April) could have had any impact on output figures for the economy that relate to the three months October to December last year.

Her comments, of course, are a warning of worse to come as a consequence of the tax rises lying in wait. The message is clear: increase the cost to business of operating in Scotland and business will look elsewhere.

This is a shared view. For instance, property developers now have to pay rates on empty premises. That has led many to demolish perfectly good property, or else not to build it in the first place unless they have a tenant lined up. This means there is less speculative space available for incoming and growing companies. I’m told the government is “thinking about” this. It needs to stop thinking and take action.

Aside from examples like this, a weakness in Ms Cameron’s case is that it is still too early to judge the overall impact of tax rises. Her claim that the government’s policies “risk driving investment out of Scotland” runs counter to Scotland’s recent record for inward investment.

Scotland achieved record-breaking levels of overseas interest in 2015, the latest figures available, with an all-time high for the number of foreign direct investment projects.

A total of 119 projects were secured – a significant 51% increase on the previous year, and more than double the UK’s 20% increase.

Figures for 2016 are due next month and will show the first effects of the Brexit vote. On this point the Finance Secretary Derek Mackay should stop blaming the EU decision for Scotland’s woes. Any effect that Brexit might have will be felt across the UK, not just Scotland.

He should also stop trotting out this drivel about Europe being Scotland’s biggest market. The rest of the UK is four times bigger to Scotland than the EU and, in any case, only 3% of Scottish companies export, a much bigger concern.

On the evidence of the past week, Scotland should feel reasonably confident about continuing to attract investors, despite the much-repeated political uncertainty. The First Minister’s trip to the US has coincided with a flurry of announcements. Four US companies have unveiled expansion plans in the past week alone. This also comes on the back of the Genpact announcement last week.

There are two factors which arguably trump the tax case. While tax is clearly a consideration for investors, the low value of sterling is currently a big driver of investment into the UK, particularly in mergers and acquisitions. Sterling won’t stay low forever, and is forecast to rise by the end of the year, and the SNP must consider how investment might be affected if Scotland abandoned sterling.

The other factor is the slump in oil. Undoubtedly the decline in the North Sea has been infectious. The cancelling of orders and loss of jobs was almost certainty the main factor behind the data on the economy released yesterday.

In her letter, Ms Cameron refers to the fall in the oil price but then raises concerns about the slowdown in production, construction and services as if they are not also affected by the oil slump. Her members in the north east working in the hotels and building industries will tell her that for every pound lost in the oil sector, they also suffer from a slowdown in spending.

So is criticism being aimed at the wrong target? The Scottish Government might like to beat its chest when the going is good, but its inability to employ the real levers of the economy – in this case the currency and oil taxes – means there is not a lot it can do to influence economic growth and improve those output figures.

 

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