Boy, how our cups runneth over – but not necessarily with joy. A hike in interest rates, the Scottish government unveiling “warm up” proposals for income tax rises – and black clouds of uncertainty over Brexit.
For the past two years the prevailing concern across politics and business has been the squeeze on household incomes, weak consumer confidence and concern that high street spending – one of the great drivers of business and economic growth – has been flat-lining.
It helps to count our blessings. Outright recession has been avoided; we may be at, or close to, “peak inflation” if the fall in the pound has run its course; figures last Friday showed activity in the UK’s dominant services sector grew at the fastest rate for six months in October, helped by stronger order books and “resilient” demand. New orders are rising at the fastest pace since May.
Government borrowing is not only falling but also running lower than forecast in the spring budget. And this has fuelled hopes that Chancellor Philip Hammond will signal business-boosting measures in the Autumn Statement barely five weeks away.
We should also keep the rate rise in proportion. A fractional 0.25 per cent rise in rates to 0.5 per cent still leaves borrowing costs way below the long run average of 4.5 per cent, and with consensus expectation of no further rise until well into next year.
All the Bank of England has done is to reverse the post-Brexit vote rate cut to counter fears at the time of an imminent plunge into recession – one that never came. We are still in historically ultra-low interest rate mode. It can hardly be described as a hammer blow to business investment, while for households there are growing signs of a palpable, albeit slow, rise in average earnings.
But seldom has there been a stronger need for a confidence boost to lift us out of a low growth rut. For Scottish households the combination of a rise in rates and the prospect of higher income tax is likely to have the opposite effect.
As it is, official estimates of economic growth showed an increase of just 0.1 per cent in the second quarter, while growth in the first quarter has also been revised down to 0.6 per cent from 0.8 per cent. Forecasts by Inverness economist Tony Mackay predict 1.2 per cent growth this year, 1.5 per cent in 2018 and 1.7 per cent in 2019. The Fraser of Allander forecasts are little better.
This is the backcloth to the Scottish Government’s position paper on income tax rises. First Minister Nicola Sturgeon declared that “the time is right” for income tax hikes. But her policy paper including options for those earning as little as £24,000 to pay more income tax was maladroitly unveiled within hours of the Bank of England’s interest rate hike, raising mortgage costs for hundreds of thousands of households across the country.
The paper’s four scenario proposals included rises in the 40p higher rate and 45p top rate of income tax in April next year, with three of them also backing a penny rise in the 20p basic rate and a 50p top rate. One proposal argued for the creation of three additional income tax bands, making a total of six rates.
The plans, if introduced, would mean anyone earning more than £24,000 paying higher tax; those earning £50,000 would pay up to £260 more, while a higher earner on £90,000 could face an increase of £810. But the First Minister described the increases as “modest” and said they were needed to maintain vital public services.
The case for them rests on two broad assumptions: first, that they would enjoy widespread public support; and second, that they would work to boost economic growth.
There is a strong predisposition across much of Holyrood for tax rises – championed by Green MSP Patrick Harvie, while Scottish Labour’s tax rise proposals would go even further. Many lower income households would support greater spending on social protection and welfare, while public sector workers would cheer an end to the one per cent limit on pay rises.
But it is one thing for voters to cheer higher public spending; supporting tax rises is quite another. Voter approval for such measures tends to cool in the privacy of the polling booth – as the SNP found to its cost in its “penny for Scotland” campaign in 1999, which was quickly dropped a year later.
And would the outlined rises be enough to meet Holyrood’s spending ambitions? Scottish Labour’s Jackie Baillie argued last week that the SNP’s tax rises would not be enough. “To end austerity,” she declared, “you need to raise more than £800 million in revenue over the next two years; that’s before we consider additional commitments.” Yet the government’s paper “raises a maximum of £290 million”.
There would also be questions about likely behavioural response: hefty tax rises at the top end would see high earners taking steps to mitigate the effects – switching from conventional earnings, for example, to more tax sheltered dividend payments, accepting lower pay in return for other forms of remuneration, or moving domicile. And if the proposed higher tax rates do not yield the anticipated amount, this opens the prospect of higher taxes lower down the income scale, or other tax raising proposals.
As for beneficial macro-economic effects, it is hard to see how higher tax rates would incentivise people to work harder or longer. And how would Scotland be able to attract middle and high earners from the rest of the UK to move here?
Business reaction is notably apprehensive. Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “Given the options presented, it is possible that over one million Scots could see a cut in their take-home pay… Many households will already be looking at tightening discretionary spending. Therefore, increasing income taxes at a time of already squeezed household incomes may not be the route of enabling economic growth.”
David Lonsdale, director of the Scottish Retail Consortium, has warned: “Many workers are already contending with rising inflation, higher council tax and pension contributions, causing them to carefully consider what purchases they can afford.”
And Andy Willox, Scottish policy convener of the Federation of Small Businesses, added: “With domestic spending power already under pressure, is this the time to take more from household budgets?”
Debate on these tax raising options must range far wider and deeper than just the Holyrood big spenders.