As I See It
Mackay should demand a more productive public sector
Derek Mackay will become the first Finance Secretary to use the Scottish Parliament’s newly-extended tax powers, though his place in history would be most favourable if he chooses to make no change to the rates and bands. On the available evidence that doesn’t look likely.
Despite a need to make up for a fall in revenue from Westminster, business groups are desperate for Mr Mackay to resist the temptation to raise the tax take, warning of damage to investment, the housing market and household spending.
Even his own chief economist warns that hiking the additional tax by the full 5p would actually reduce the government’s income as higher rate earners find ways of reducing their liability.
So what will he do?
Mr Mackay is said to be in search of £260m to make up his shortfall and analysts believe 50% of taxpayers will be hit by an increase as the Scottish government breaks with the UK system for the first time and introduces up to five tax bands.
Shirley McIntosh, tax partner at RSM is expecting tax to increase for those earning more than £24,000 with small percentage increases at each rate band.
It’s thought Mr Mackay could hike the additional rate, though not by the full 5p favoured by Labour, and on the advice of his chief economist, Gary Gillespie.
A 5% increase would see someone earning £200,000 each year paying an extra £2,500, while those earning a £1m salary would face an additional £42,500 tax bill, though there are not many Scottish taxpayers earning that much.
Many of these higher earners will be able to mitigate these increase as they are likely to be owners of small companies and could take a dividend instead of salary to reduce their tax liabilities.
As Mr Gillespie has warned, this would have the opposite of the desired effect and decrease the tax take in Scotland. He says Mr Mackay could get away with a small increase to perhaps 46p or 47p. The question is whether it would be worth troubling HMRC, given that it would not raise a significant sum.
The alternative to meeting his budget targets would be for Mr Mackay to do the unthinkable and cut services. This would risk civil war in his party and across the country, though it would help him balance his budget. The Fraser of Allander Institute spelled out how the Scottish government has a higher spend per capita than the UK average because of its commitments to public services.
First Minister Nicola Sturgeon has said she makes no apology for spending on public services and would probably rather invite Theresa May for afternoon tea than see a penny cut.
While this commitment may be an admirable ambition the plain facts are that Scotland is struggling to afford them unless, of course, it can find ways of making them work for the taxpayer. Cutting out waste and improving the efficiency of public services through better use of technology and higher productivity should be a key plank of Mr Mackay’s calculations.
From inefficient planning departments to spending on superfluous road signage, wasteful spending by local authorities and other public bodies is weighing on the public purse. Some tightening up would put a little less pressure on Mr Mackay to raise taxes at all.