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Councils will be made to suffer Mackay’s tax failings

Brian Monteith portraitFinance Secretary Derek Mackay is paying the price for his failure to heed warnings about his tax raising policies.

Over-estimating the number of higher rate tax payers, and the amount the government would raise, has left a £550 million blackhole in the government’s budget which will prompt some anxious number crunching ahead of Mr Mackay’s set-piece statement at the end of the year.

Economists and the Conservative finance spokesman Murdo Fraser are among those who cautioned against targeting high earners, pointing out that raising tax levels for this group would lead to lower revenues as they sought to post their tax returns from other jurisdictions, or found ways of avoiding the additional levies.

Mr Mackay, and First Minister Nicola Sturgeon, continue to believe that raising taxes will increase revenues. Even Alex Salmond, when First Minister, championed Professor Arthur Laffer’s theory that it was possible to increase the tax take by cutting the marginal rate.

This was because it gave these tax payers the incentive to create more wealth (because they would get to keep more) and that some people would relocate to a lower taxed Scotland.

We will never know if Mr Salmond would have tested the theory, but we do know that Mr Mackay was unaware of the Laffer curve when previously asked about it, which told us everything we needed to know about the ingénue finance minister’s grasp of his brief.

How does he resolve this shortfall? There are three solutions; borrow more, cut public spending further or he  could do the unthinkable and behave like a free marketeer by cutting taxes!

The one likely outcome is that local councils will again be the losers, with more cuts and further increases in council tax.

Carney’s drum of despair

In London the failure to predict public finances with any degree of accuracy is being rewarded with the culprit keeping his job.

It is a commonly held view, from those on either side of the Brexit debate that during the Referendum campaign the Chancellor, George Osborne,  and Bank of England Governor, Mark Carney, skipped along hand-in-hand in their efforts to deliver the Treasury’s Project Fear. Mutually supporting statements, interviews and speeches – with matching biblical-scale warnings – were delivered by both.

When the result was known it was not long before Mr Osborne was toast (although he had hoped to stay on) but Mr Carney continued and was given a year’s extension. He has now been given a further extension – on both occasions the explanation is that he delivers certainty and stability. The number of people buying this argument is diminishing every time it is trotted out.

The problem is that the Governor has politicised his role and as such is now a legitimate target. His supporters argue he managed the Brexit result well by cutting interest rates but the truth is that he wholly misjudged how the markets would react and that a fall in the value of sterling could only be a bad thing.  

A period of quiet, of keeping his counsel, would have been the best policy to gain friends and sympathy, but no, Mr Carney has continued to bang the drum of despair, talking market prospects down and risking the very thing he is meant to protect against – a loss of business confidence. 

His predecessor, Lord Mervyn King, made it plain this week that far more could have been done to bolster Britain’s Brexit defences – calling them “incompetent” and by comparison it struck a chord with many who are now circling the Prime Minister from the sky above.

Mr Carney’s survival is wrapped up in the survival of Theresa May and Philip Hammond. If we have a new prime minister this side of Christmas I would expect to be seeing a new Governor too.

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