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Scottish tax policy is about being different not being fairer

Brian Monteith portraitFrom the moment Philip Hammond announced plans to raise income tax thresholds in this week’s budget the spotlight was turned on the SNP, and how it would respond. The party has got itself in a bind, and it has no one to blame other than itself, or more particularly, its Finance Secretary, Derek MacKay.

Now that there are more powers to vary taxes in Scotland the opportunity is not being lost to do so, but rather than use them to entice a new generation of investors and highly paid workers, the government at Holyrood is intent on burdening the country with higher taxes than those south of the border. Derek Mackay has already hinted that he will not pass on the full benefit of Hammond’s increase in the higher tax threshold to £50,000 next April. 

Last year MacKay froze the higher rate threshold at £43,340 with a rate of 41p up to £150,000 while taxpayers elsewhere in the UK pay tax at 40p beyond earnings of £46,350. There is now a risk that this gap will widen further. 

By not matching the latest changes made by the Chancellor – even if it is only an uprating for inflation, or in this case raising the start of the higher rate  – means the Scottish personal tax burden grows. This is the politics of being different rather than the economics required to solve problems.

The issue with freezing tax thresholds is compounded for higher earners in Scotland because Hammond is also increasing the 12% National Insurance Contribution band to £50,000. As the Scottish Government has no power to vary NIC bands (because the benefits are the same across the UK, so too are the contributions), some Scots could end up contributing more NIC but not receive the UK’s tax cut to help pay it. Unless Derek MacKay intervenes the marginal tax rate for some earners in Scotland could be 53% when in England it will be 42%.

The SNP likes to claim it is giving Scotland a more progressive and fairer tax system, but there is nothing progressive about encouraging our graduates to locate abroad or in the rest of the UK where the rewards will be greater.

Likewise, for all the SNP talks about having a different immigration policy so as to encourage more people to locate in Scotland, its policies are designed to discourage people making that journey. Two officials at the UK government adviser, the Office for Budget Responsibility, have warned that many higher paid workers may drift south if the tax differential continues to widen. That is likely to include doctors, teachers and others who are being caught in Holyrood’s tax trap.

Every time a Conservative government makes a tax cut (and I have little doubt there will be more as we go into post-Brexit mode) the SNP puts distance between the economic circumstances of the Scottish people and the rest of the UK. The natural rise in inflation will push the tax thresholds apart – making Scotland look progressively less attractive to the people we need to encourage to stay or relocate.

When the SNP eventually leaves government – as it must at some point – any new administration will have a huge job just restoring tax equity, never mind competitiveness, with the rest of the UK. This will cost millions, if not billions within a Scottish budget that already relies upon a generous fiscal transfer from the rest of the UK.

Not all taxes in Scotland need to be the same as the rest of the UK, some might be marginally higher and others marginally lower. But it is a sad reflection on our current political culture that rather than let our economic needs shape policy – such as cutting personal taxes to attract skilled workers – the politics of shaming ‘the other’, be it “the Tories” or “Westminster” or “England” is given priority – to the impoverishment of us all.

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