Scottish Budget: Wrong answers to the wrong questions from Humza Yousaf and Shona Robison - Brian Monteith

Any future Scotland-only personal tax rate will only result in making our nation’s public finances much worse, warns Brian Monteith

It is widely expected a new additional – Scotland-only – personal tax rate will be introduced by the SNP-Greens as means to try and fill the £1.5bn shortfall – the “black hole” – that has been growing in Holyrood’s public finances over the last decade and more.

If it does happen it will be the wrong answer to the wrong question.

It will be an act of wilful self-harm that will only make the public finances worse. Exact details will not be available until tomorrow’s budget announcement but the essence of the proposal appears to be to tax those earning above £50,000 or maybe £70,000 at 45%. Considering NI, that means a marginal tax rate of 47%, rising to 67% at earnings of £100,000.

Humza Yousaf and finance secretary Shona Robison will be under pressure to deliver in the Scottish Budget. Picture: Jeff J Mitchell/Getty Images

The Fraser of Allander Institute reckons – after taking account of human behaviour – a new higher tax bracket will bring only £40M extra in annual revenue. I believe it will lead before too long to a fall in revenues.

Why ? Simple, human behaviour means rather than see revenues rise by taxing the highest paid workers more, such people will find ways to protect their incomes by removing themselves and their assets outside of the Scottish Government’s jurisdiction. This can be achieved easily without leaving the UK. Moreover, fewer talented individuals will move to Scotland, turning our country into even more of a low-earning backwater.

Let’s remember Scottish tax residency depends mainly on whether your main home is in Scotland. HMRC rules state, “Your main home may even be the home where you spend less time if that’s where: most of your possessions are; your family lives; your bank account is registered or you’re a member of clubs.”

This means if you are one of those targeted by the SNP-Greens, you could get a job in England, or alternatively keep your high-paying Scottish job but work from home in England. Live in Berwick-on-Tweed or Carlisle and you can still easily commute occasionally to Edinburgh or Glasgow by train – or keep a small flat in Scotland and spend the bulk of the week there. In the case of uncertainty, the rules provide the number of days spent in Scotland is the key factor. There are lots of possible ways to change residency and no-one can police them properly when there is no hard border.

Now, consider for each 1,000-2,000 who change residency, Scotland will lose at least 1% of its income tax base, probably more, as highest taxpayers tend to act first.

This would likely reduce Scotland’s tax base by at least £100m per annum in respect of income tax on earnings only, with further loses when tax on savings and dividend income is considered. When the additional direct and assigned Scottish tax revenues on economic activity of the departing tax refugees is figured – such as on VAT and property taxes – the total hit could be in the range of £300m to £400m per annum, or more

It also follows if enough of Scotland’s top tax taxpayers leave, including company owners and directors, some of their companies will also leave, and with them lots of other people and suppliers who pay income and other types of taxes – not to mention the taxes lost from people who lose their jobs as a result. That is how a tax base disappears – and it has of course been happening already, but would now accelerate.

This is why the right question is to ask why are Scotland’s public finances in such a bad state, and the right answer is for Holyrood (not just the SNP-Greens) to recognise it has been authorising the Scottish Government to live beyond its means for many, many years. Accepting the right answer to the right question means four things must follow.

First, the SNP-Greens must introduce significant savings in public spending across all departments, with no exceptions, but especially in the luxury spending – this can chiefly be described as political hobbyhorses such as independence fripperies such as faux embassies, departments working on maintaining an independence campaign at the expense of vital public services such as healthcare, education, policing and housing.

Other luxuries include forcing public buildings to switch to hugely expensive heat pumps when perfectly affordable gas boilers remain available. The example of Elgin’s Prosecutors’ office heat pump costing £3.5M is typical of self-indulgent political hubris.

Second, business tax cuts must be given a priority so investment is rewarded by profits, the economy grows, jobs are created and earnings rise – bringing higher tax revenues from wealthier humans and businesses in every tax bracket. Freezing the headline business rate (already at a 24 year high), restoring the level playing field with England on the Higher Property Business Rate (which costs retail £9 million annually) and passing on Westminster’s fully-funded 75% rates relief to the hospitality trade, have been recommended by Scotland’s retailers – our largest private sector employer.

Thirdly, the SNP-Greens must seek to de-regulate the Scottish economy – removing onerous burdens on businesses and employers suppressing economic growth. Supply-side restrictions such as tying business rate reliefs and licensing permissions to paying “real” living wages actually results in no wages paid – as jobs are not created (or are lost).

Fourthly, public sector compulsory redundancies must be found, going beyond natural wastage and regular employee relocation. Our public administration is too large and too inefficient, carrying jobs that are not a necessity but a political indulgence. Public jobs that are a net consumer of the (higher) taxes they require to exist force private sector economic activity and jobs (that are a net contributor to public finances) to relocate outside Scotland.

The right questions and answers do not change under devolution or “independence”. Tax rates higher than those of a neighbouring jurisdiction shrink a tax base and reduce the revenues supporting public services, whereas lower taxes will increase the tax base and resulting revenues. Political beliefs do not come into it – simply put, do the SNP-Greens understand human behaviour.