Will higher income taxes deter workers moving to Scotland? TERRY MURDEN argues there are other ways to stimulate growth
There is more talk about the impact on the labour market of the income tax differential between Scotland and the rest of the UK, in particular its potential for deterring workers moving north of the border. A new tax band, introduced in the Scottish budget and coming into effect this weekend, is seen by some as the last straw, though evidence of its impact on these changes on the movement of people is yet to be properly assessed. In any case, there are other factors at work.
Sir Tom Hunter, the investor and entrepreneurial advocate, is among those who have criticised the high tax regime adopted by a Scottish Government which believes that higher earners should shoulder more of the responsibility for helping the disadvantaged.
This is also an unproven strategy, as those like Sir Tom would argue that lower taxes all round are the way to increase spending power, employ more people and generate more revenue from tax to invest in helping the poor and boosting public services.
Whether footloose executives would choose Darlington over Dundee or Great Yarmouth over Glasgow because of the extra income they would have to pay in Scotland, will take some time to filter into the data. The SNP-Green government says there are advantages to living and working in Scotland, such as free tuition fees and prescriptions and generally lower housing costs, that offset the additional income tax.
It is actually more complex than that. Despite the downward pressures in the economy, such as declining orders and higher material costs, the UK is effectively experiencing full employment. Demand for specific skills is hugely competitive. This shortage has been exacerbated by Brexit which reduced the movement of people around Europe and therefore created a smaller talent pool.
This in turn is enabling those with the required skills to demand higher pay. Talk of a so-called “Scottish weighting” being demanded to top-up the salary of anyone moving to Scotland is also not proven given that the individuals being targeted could demand a top-up from other parts of the UK simply because they have the skills that employers want and are finding increasingly hard to get. In other words, higher pay demands are not a challenge that is unique to Scotland.
A problem that is more acute north of the border is that it is a largely SME economy and small firms by their nature do not have the resources to meet higher salaries. While governments and others cheer the arrival of a big company promising large numbers of skilled jobs on good wages, the owners of small firms will know that it might just add to their difficulties in attracting the people they need.
Higher taxes may be a factor in this, but just ask the Danes about their experience. Denmark is the highest taxed nation in the world. The average single worker paid a net average tax rate of 35.5% in 2022, compared with the OECD average of 24.6%. That means the take-home pay of an average single worker, after tax and benefits, was 64.5% of their gross wage, compared with the OECD average of 75.4%.
Despite this, Denmark also has some globally successful companies in renewable energy and food and drink. It also provides some of the best public services. And, most importantly, everyone seems happy about it. On this evidence, higher taxes are no bad thing.
Without getting too deep into the merits or otherwise of independence, the Scottish government is trying to build an economy and a wellbeing society with a lop-sided balance sheet that does not allow it to raise funds through the sort of measures available to other governments: corporation tax, for instance. It cannot, therefore, follow the Irish example, let alone build a holistic budget like Denmark which is a country on which it models an independent future.
That said, Scotland does get a favourable benefit from its share of the UK budget and its inability to make the extra taxation it imposes work to the advantage of the country raises more questions, not about its tax policies, but about internal policy and decision making, too many bad laws and its ability to improve the skills base which in turn would create more productivity and higher paid jobs for workers who might be more comfortable with higher taxes.
Even in a flat economy, with a cost of living crisis and high costs of borrowing, demand for holidays is soaring and new car sales are up. These are not people worrying about paying a few extra pounds in income tax. Furthermore, luxury shops such as Gucci, TAG Heuer and Omega are moving to Scotland, presumably because there are consumers with plenty of money to spend. Imagine if the economy was actually booming.
Talk of the damage caused by higher taxes is so far anecdotal and is becoming a self-fulfilling prophecy by the media which feeds off the demands of those in the business community with the loudest voices. What the public demands is a fair deal from government, not a cheap deal, and fairness is judged in many ways.
A survey earlier this year suggested Scots would consider the extra taxation more palatable if there was evidence that it was being spent on better public services. So far, the Danes are winning hands down on that one, too. It is for the Scottish government, therefore, to deliver on its promises to build a fairer and wealthier country. At which point it can justify its demands for higher taxes.
Terry Murden held senior positions at The Sunday Times, The Scotsman, Scotland on Sunday and The Northern Echo and is now editor of Daily Business
I’d be very interested to see a comparison bertwen the percentage of Scots and Danes who pay absolutely nothing in tax and also who are on benefits.
As a frequent visitor to Denmark on business, I’d like to know if readers agree that the reason Danish public services work so well is because the operators take a pride in them, the users respect what they have and culturally there appears to be no problem with vandalism, graffiti or non-payment of fares.
My personal view is that far too many people in Scotland have no agency within their own country. Because the system is easily gamed, it is perfectly normal for many to just take without giving and to blame everyone and everything else for their own shortcomings and the world being imperfect. (Credible mentions of Thatcher and third / fourth generation employment cannot go on forever!)
Imagine a society where EVERYONE of working age had to pay tax – even as little as 1%? Surely that is a way of building agency and inclusivity within the country as a whole.
Right now – we seem to have the worst of all worlds in Scotland. And the opening of niche shops like Gucci and Omega will never convince me otherwise.