NICOLA Sturgeon’s plans to raise taxes for high earners under the Smith Commission’s new powers will not make any “material” difference to Scotland’s public spending coffers, a former Scottish Government economic adviser has warned.
Professor John Kay has dismissed claims that the new powers will lead to a “radically progressive” tax system in Scotland.
Only a big hike in the bottom rate, in line with high-tax Scandinavian nations, will provide a real boost to public spending, he said.
Scotland is also likely to face greater austerity under the Smith powers, which will place a greater squeeze on the country’s funding black hole.
“The freedoms which are being described are perhaps exaggerated,” Prof Kay, a former member of the government’s Council of Economic Advisers, told a Scotsman conference in Edinburgh yesterday.
It came as Lord Smith told MSPs that the plans set out last week to give Scotland control over income tax rates and bands, as well as air passenger duty, are “implementable” – and urged them to ensure they become a reality.
The peer said the agreement unveiled last week will give Scotland a “huge amount” of power.
Income tax raises about £10.9 billion in Scotland. Of the two million taxpayers in Scotland, only 18,000 pay the 45 pence top rate for incomes over £150,000 a year.
“The instinct of the Scottish Government is going to be to say ‘Squeeze the rich’,” Prof Kay said.
“The problem with squeezing the rich is that there aren’t as many as you think there are. If you squeeze them, they tend to pop up somewhere else.”
Nicola Sturgeon has said she backs a five pence raise in the top rate of tax to 50p, as does Labour. But this would only raise another £100 million – and if just 1,000 top earners moved away, it would mean no extra revenue at all.
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“The notion that we’re going to find it easy to implement some radically more progressive structure of income tax in Scotland as a result of the power contained in the Smith report is something that falls on any analysis of the numbers,” Prof Kay said.
“If we’re to increase Scottish Government revenue in any material way then we have to be looking at the basic rate of income tax.”
He suggested the “extreme of what might be possible in Scotland” would be a 5 pence hike in basic rate tax from 20 to 25 pence and at the higher rate from 40 to 45 pence, rasing an additional £2bn to £3bn.
“That is what we could anticipate doing if we were moving to a more Scandinavian world of decidedly higher taxation and decidedly higher public expenditure,” he said.
This would mean a 7 per cent increase in public spending levels and would “probably be the limit of what we could do”.
Scotland currently spends about £65bn on public services, but taxes only raise about £52bn – leaving a deficit of £13bn. Under Smith, the Scottish Government will raise about half of its £38.5bn devolved budget through new tax powers, making it less reliant on the current grant it gets from Westminster.
“The central thing we should notice is that the tax revenue in Scotland would in future be more dependent on Scotland’s own economic performance than has been true historically,” he said.
“It’s likely that there will be more convergence and more squeeze on public expenditure than there has been in the past.”
It came as John Swinney told MSPs in a Holyrood statement yesterday on the Smith Commission that the Scottish Government will continue to argue for more powers through the process.
“Whilst the Commission may not have given us all the tools we want and for which we will continue to argue, we in the Scottish Government stand ready to play our part, and we now look forward to the next steps in Scotland’s journey” Mr Swinney said.
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