With the fall-out from the “meaningful vote” at Westminster on Prime Minister Theresa May’s withdrawal deal, Mackay presents his draft Scottish budget on Wednesday – an event set to be drowned out by a deafening cacophony elsewhere.
The first contentious item could see above-average earners facing a higher income tax charge compared with their counterparts south of the border – this under the stealthy guise of “no change”.
Scots earning £33,000 and over already pay more than elsewhere in the UK in the wake of tax band changes introduced by the SNP administration last year.
This gap is set to widen after Chancellor Philip Hammond announced plans in his recent autumn budget to raise the higher 40p threshold south of the border to salaries of £50,000 and above.
In Scotland, this rate, set at 41p, applies at salaries of £43,430 and upwards. Even if the Scottish income tax bands only move with inflation, higher earners here face a tax bill of £1, 300 more than their UK counterparts from next April.
All that the Holyrood Finance Minister has to do is quietly announce “no change in tax rates and levels” to create the highest tax discrimination yet.
I say “yet” because he is under pressure from left-wing Scottish Greens and the IPPR Scotland lobby group to go further – possibly by increasing the higher rate itself from 46 pence to 47 pence or block the automatic rise in the higher rate threshold in line with inflation.
Theoretically, there is nothing stopping the SNP-Green alliance from raising tax levels even further for above-average earners. But this would almost certainly risk “behavioural response”. It could take several forms – fewer higher earners opting to move here, people switching the way they are paid, or claiming tax relief on bigger pension contributions or simply moving out of Scotland altogether. Such is the direction of tax travel; many will be tempted.
The outcome would be lower tax revenues than forecast – and Holyrood having to cut back plans for ever higher public spending or to raise taxes elsewhere.
Mackay said last week he was committed to “progressive taxation” but added he would not raise taxes if this meant lower revenues. Asked whether he thought Scotland is still some way from this, he responded, “That is my sense.”
Scottish Conservative shadow finance secretary Murdo Fraser saw this as “a clear hint from Derek Mackay that he’s considering even higher taxes for Scotland.
“We’ve already heard from numerous businesses warning against this, pointing out the damage a tax differential would do to Scotland’s economy. The SNP government has also been told about the damage to public sector recruitment which could be caused by further tax hikes.” So a deceptive “no change” announcement cannot be taken at face value.
The second item of “bad news” concerns the outlook for Scotland’s economy, with the latest forecasts from the EY Scottish Item Club released last week pointing to a slowdown ahead in 2019.
Here Mackay could fairly soften his remarks by reference to the better than expected performance of our economy this year – better than the forecasts given by the Scottish Fiscal Commission at the time of last year’s budget, and certainly better than the doom-laden prognostications of Brexit minister Michael Russell, who has lost no opportunity over the past 18 months to fill us with Brexit gloom and foreboding.
As the EY report pointed out, Scotland’s economy has outperformed the UK this year, with 1.6 per cent growth in Gross Value Added versus 1.3 per cent for the UK overall. And the outturn is set to be almost double that forecast by the Scottish Fiscal Commission, which predicted growth this year of just 0.7 per cent.
However, while cause for relief, this is well below what we could have achieved had business confidence and investment not been dragged lower due to Brexit uncertainties and fear of destabilising political turmoil ahead.
EY warns that the tables are set to turn next year with Scotland’s real growth predicted to slow by 0.6 per cent to one per cent in 2019. In contrast, a modest increase in growth is expected across the UK from 1.3 per cent to 1.5 per cent for the same period.
While business investment is set to remain subdued and labour market pressures to intensify, the private services sector, says EY, will continue to drive growth across Scotland, contributing more than 70 per cent of GVA growth in 2019. And construction is the sector expected to drive most growth in 2019.
Consumer spending is predicted to make a significant contribution to the Scottish economy in 2019. However, this is due to be fuelled by consumers running down their savings rather than through a growth in wages, with personal disposable income forecast at 0.9 per cent and consumer expenditure at 1 per cent. Employment growth is also projected to be lacklustre, growing by 0.3 per cent in 2019.
Mark Gregory, EY’s chief economist, said: “The pace of economic growth achieved in Scotland during the past year appears to be unsustainable as pressure mounts on the already delicate labour market and business investment remains subdued. Scotland has proved it can grow its economy faster than the UK but failing to invest in capital at this time will limit future growth and the possibility of outpacing the UK.”
A further warning of a slowdown in store came with the UK-wide services sector purchasing managers’ report showing that growth in this dominant sector slowed to a 28-month low last month. This came on the heels of a sharply weakened November CBI quarterly survey for the services sector.
How more helpful it would be if we could be sure on Wednesday, in the aftermath of the Commons vote, that the Brexit travesty was subsiding, and the road ahead clearer for businesses and households.
Instead, the uncertainty and chaos are more likely to hit a new peak: the worst background imaginable for Scotland’s Finance Minister as he rises to present his budget.