The Finance Secretary has little wiggle room in this week’s budget, but she does have options, writes TERRY MURDEN
With next year’s allocation of funds from the Chancellor to the Scottish government already all but spent, there is a risk for business that this week’s budget will be a bit of an anti-climax. Once pay deals, social security payments and other commitments are taken into account the Fraser of Allander estimates there is little more than £100m for Shona Robison to play with, and the economy looks like being low on the list of priorities for what is left.
First Minister John Swinney is putting the NHS and child poverty at the centre of Wednesday’s statement and it is a nailed on certainty that despite also pledging to boost the economy, the government will reserve its Christmas gifts for the public sector.
Business lobby groups, with the predictability of a one-horse race, have been calling for help with business rates and property taxes. They want the divergence in income tax thresholds narrowed closer to those south of the border. I wouldn’t be putting too big of a bet on getting anything more than ‘no change’. There is a greater chance that business will be asked to pay even more.
The Scottish Retail Consortium, Prosper, the Chambers of Commerce and the Scottish Hospitality Group all demand more help, particularly for SMEs, and specifically for the retail, hospitality and leisure sectors. They look enviously at the 40% rates relief offered by the Chancellor to businesses south of the border from April, and call on the Scottish Government to do likewise.
Holyrood ministers insist that once other reliefs and benefits are taken into account Scottish firms are not so badly disadvantaged, but of all the demands being made to the Finance Secretary this is one that the she would probably adopt if she could make the sums add up.
And there’s the problem. The Fraser of Allander Institute has warned businesses that replicating the 40% business rates relief would cost Scotland about £73 million more than is received through the Barnett funding. Due to a different system, and because retail, hospitality and leisure makes up a larger share of the tax base, the cost might be as high as £220m compared with a budget of £147m. Finding the extra money when there is already so little wiggle room is nigh on impossible.
Add to that the fact that public sector workers are, on average, paid more in Scotland, it will mean that the challenges are even more acute, given the country’s much larger public sector, accounting for about 22% of the workforce compared with 17% south of the border. Furthermore, the Chancellor has given Holyrood only £300m to meet the estimated £500m in additional costs on national insurance contributions.
In order to balance the books and just to meet its obligations, Ms Robison is expected to allow council taxes to rise though she is likely to resist the nuclear option of raising income taxes further and is unlikely to change the currently overly-complex banding structure.
Nicola Campbell, a partner with Azets, says tax stability and simplicity is vital and she references the recent Institute for Fiscal Studies report that warned of the risk of higher taxes leading to declining revenues, known as the Laffer Curve.
Hard-pressed businesses and other tax-payers will be hoping the Scottish Government realises that the Laffer Curve has been reached, if not passed, says Ms Campbell. Feedback from her clients “is clearly in favour of leaving things alone”.
She points out that in 1988, Nigel Lawson abolished the 60% top rate of income tax, arguing that it reduced tax revenues as labour and businesses switched activities to lower tax areas, left the country or found ways to legally avoid taxes. Research indicates that higher taxes also restrict capital investment, productivity, innovation and investment in skills and training.
Despite the frequent calls from business groups and opposition parties for the devolved government to stimulate growth the fact is that it does not control key economic levers, such as interest rates, employment law, corporation tax, fuel and excise duties, and so its abilities to introduce really meaningful measures to grow the economy are limited. It also explains why income tax, council tax, business rates and the land and buildings transaction tax are forced to take a disproportionate hit. Scottish ministers simply have few choices.
However, they can avoid being anti-growth by adopting policies to improve competitiveness, by reducing costs and regulatory burdens, reforming business rates and council tax, rationalising the enterprise network and by not pandering to the whims of the Green Party or its own internal demands that saddle the economy with freebies and other well-meaning but unaffordable projects.
Westminster allocates funds for overseas aid on behalf of all UK taxpayers. Why does Holyrood also do this? It means Scottish taxpayers are paying twice.
The SNP government could drop its commitment to universal benefits – free travel, free prescriptions, free tuition fees – and adopt more means-tested measures that direct these benefits to those who need them. By clawing back some of this spending it could divert funds into stimulating key public services and the economy.
After all, it argues that those with the broadest shoulders should pay a bit more. Yet it doesn’t apply this principle to benefits. Instead it has gone further down the universal route by reinstating the winter fuel payments when a more targeted approach would have been less costly. This decision was, of course, political. A means to get one over Labour. The cost and logic of the decision were secondary considerations.
There are now calls from the Greens and the Alba party for universal free school meals. Sorry. We can’t afford it. Get on with creating wealth as the best way to lift people out of poverty.
Terry Murden was Editor and Business Editor at The Sunday Times Scotland, Business Editor at The Scotsman, and Business and City Editor at Scotland on Sunday. He is now Editor of Daily Business.
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