Between the Lines: Local income tax is not a Purpose-built vote winner

Published on Wednesday 26 November 2008 20:12

IT IS always referred to by Scottish Government ministers as "the Purpose" with that sinister capital P. It is what might be called the mission statement of the SNP Holyrood administration.

The Purpose of Alex Salmond's government, its over-riding objective, is this: "To focus government and public services on creating a more successful country, with opportunities for all of Scotland to flourish, through increasing sustainable economic growth."

Under that, the Nationalist administration has what it calls "Strategic Objective 1", another clunking piece of jargon, but there you go.

The objective of that objective is to make Scotland "wealthier and fairer", and to "enable businesses and people to increase their wealth and more people to share fairly in that wealth".

Some might say that, as with many such attempts to capture the essence of an organisation's objective in words, this is typically bland, a statement of the bleedin' obvious.

However, in insisting that this "philosophy", if one can dignify it with such a term, is at the heart of everything it does across every area of policy it is responsible for – ranging from education to justice – it does tell us something about the SNP's intent.

It is a message which speaks to a business community suspicious not only of the Nationalists' constitutional ambitions but worried by the party's previous left-of-centre stance which had suggested it might pay less attention to enterprise and entrepreneurship than to achieving social justice.

But fine declarations of capital P Purpose are all very well. We should judge politicians not by their words but by their actions.

And there is one action that the SNP appears set on which just about everyone in the world of business believes would cause severe damage at a time of intense difficulty – the introduction of a local income tax (LIT).

To say that there is anger within the world of business over the impact that LIT would have on Scotland's claim to be an enterprising nation is something of an understatement. Fury expresses it better.

And frustration that the SNP, including finance secretary John Swinney – who has a background in the financial services industry – does not appear to recognise the danger LIT poses to Scotland plc.

Swinney is today expected to be told in polite but emphatic terms that Scottish business is united in its opposition to LIT.

In a meeting between the minister and the "group of six" bodies that represent business, he will be left in no doubt that they believe the SNP government must drop the plan.

This group consists of the CBI, the Institute of Directors, the chambers of commerce, the Federation of Small Businesses, Scottish Financial Enterprise and the Scottish Council for Development and Industry.

That is a powerful coalition Swinney would be unwise to ignore. Their protestations have taken on an added urgency thanks to the collapse of the world economy, and the expected lurch into recession of Scotland, along with the whole of the UK.

At a time like this, they will tell Swinney, Scotland must not set itself up as a country where medium to high earners – those who generate much of the country's wealth – will have to pay up to 3p more in the pound on their income tax.

They may not quite put it like this, but their case is that the SNP government is, in effect, about to change the signs at the English Border to say "Welcome to Scotland, the highest taxed part of the UK."

Beyond the broad principle – that higher taxes would deter high earners coming to Scotland or could make them leave – there is the also issue of the cost to business of LIT.

Sir Peter Burt may have retired (hurt) from his attempt along with Sir George Mathewson to smoke out an alternative bid for HBOS, but it could be that his legacy to Scottish public life is not in saving a venerable financial institution.

Burt's extremely thorough report into the alternatives to the council tax, published in 2006, should be required reading for Swinney and the Scottish Government.

In it he set out five reasons for ruling out local income tax. The most pertinent of those for business was the conclusion that an increase in income tax on earned income would be a disincentive to work and the disincentive would increase as the working-age population shrinks.

Burt also went into the likely administrative cost of LIT. There could be a set-up cost of between 55million and 60m for employers and annual additional costs of between 17m and 28m.

On top of that is the complication of UK businesses which have only some employees in Scotland having to alter their systems for some, not all, of their staff.

And there is a further potential problem – the proposal by the UK government to introduce a new top band tax rate of 45 per cent, as well as the current 20p and 40p levels.

The Burt estimates were calculated before this proposed change. No-one can be sure at this stage what extra burden this could place on businesses, if any, but it is a further uncertainty.

Put all this in the context of the effect that the global slowdown is going to have on Scotland – and on its financial services industry in particular – the last thing that the country needs is to be seen as the home of higher income tax.

Swinney should recognise the strength of the argument that will be put to him today by the doughty half dozen. The conclusion he has to come to is obvious: local income tax is not fit for Purpose.