Brian Monteith: The Scotland-England tax divide

Scottish finance secretary John Swinney first mooted local income tax more than ten years ago. Picture: Phil Wilkinson

WHEN George Osborne delivered his Autumn Statement last week, he did so to influence the battle lines for the coming general election. Little did he probably realise that what he has done is set out how the Holyrood elections will be fought in 2016.

While he has failed to meet his own revised targets for the reduction in public borrowing and overshot his timescale for moving the deficit into surplus so that the national debt can be reduced, there were a great many highly politicised sweeteners to cheer up supporters and swing voters. Savings were reshuffled or funding reprogrammed to provide the NHS money pit with a further £2 billion and announce a roads programme of £15bn, but the most impressive move was his reform of stamp duty.

By abolishing the ridiculous slab system, where the selling price of a property moved above a particular threshold so the whole transaction would then be taxed at the higher rate, he has brought greater fairness to the tax, made it more affordable to house buyers and removed the price distortions in property purchasing that it caused.

A similar reform had already been announced by Scottish finance secretary John Swinney when he unveiled the thresholds and rates for his new Land and Buildings Transaction Tax, but in setting lower rates that climb at a softer gradient, Osborne has created a tax divide between Scotland and the rest of the UK. Scottish middle classes will be rewarded by the Conservatives from now until the end of next March but punished by the nationalists from April onwards – one month before the general election. As more fiscal powers arrive at the Scottish Parliament, so these type of comparisons in taxes are likely to grow, creating competition between the different jurisdictions that allow politicians to appeal to voters who support higher or lower taxes.

There is already a consensus developing across Scottish political parties that air passenger duty should be abolished to encourage greater use of our airports, a measure that in the current financial climate is unlikely to be matched by Westminster, leaving Scotland with a medium-term advantage. But that is where the consensus ends.

Scottish Conservative leader Ruth Davidson is already committed to reducing Scottish income tax by at least a penny off the standard rate and with the demands for genuine reform of Scottish business rates mounting, we should expect more of a clear choice for the electorate between the parties on a range of taxes.

Labour’s silence on Scotland’s looming stamp duty disadvantage was instructive. Whoever wins the Scottish Labour leadership will be left siding with the nationalists advocating more punitive Scottish taxes and yet facing, as Professor John Kay has explained, a migration south by tartan tax victims if redistribution of earnings becomes onerous. There are only 18,000 Scots taxpayers paying the top rate and losing 1,000 could cancel out any revenue gains – so where would that leave any plans for the funding of welfare benefit top-ups that some parties favour?

On personal taxation, there are those in both the SNP and Scottish Labour who are attracted to the idea of high earners in Scotland facing higher tax rates than even Ed Milband would entertain, if given the keys to Downing Street. This could be done by raising the top tax rates, setting the thresholds at lower levels or a combination of both.

Such a development on personal taxation would undoubtedly give English employers an advantage and present Ruth Davidson with the political opening that she and her party have been looking for. For the self-employed, higher personal tax rates in Scotland would be bad news because income tax is essentially a tax on their profits, discouraging enterprise and productivity growth that the Scottish economy needs.

The potential contrast with the rest of the UK does not end there. The SNP’s proposal for a local income tax will only add to the financial burden of those paying income tax, for they alone will be asked to contribute to council services, whereas council tax collects its revenue from across a wider sector of the community. When John Swinney first proposed his local income tax a dozen years ago, it would have cost every Scottish income tax payer a further 5p in the pound. Since then there have been significant tax changes that suggest a new local income tax would need to be set at a higher rate, bringing misery to Scottish working families.

Firstly, the raising of the personal allowance to £12,000 by the coalition government has taken millions of people out of income tax altogether – these people will not be liable for local income tax and therefore the same amount of money to fund councils will have to be collected from a smaller pool of people – pushing up the rate in the pound. Secondly, the SNP’s own policy of freezing council tax across Scotland has placed great financial pressures upon local councils. When the restraint of the freeze is released we can expect councils to seek to increase the budgets of services they have protected, again pushing the local income tax poundage higher.

On business taxation we can already see the drift towards a highly taxed Scotland. True, there is a small business bonus scheme but this is entirely funded by forcing larger businesses to pay more through a higher poundage. The reality is that transitional rate relief has been abolished in Scotland and business rate revenues are planned to rise by 61 per cent from £1.72bn in 2007-08 to £2.77bn in 2015-16 – about double the expected rate of inflation over that period.

Nicola Sturgeon can tell business leaders that equality and economic growth are not mutually exclusive but her government’s policies are stoking poverty and inequality by making Scottish business less competitive within the UK and the rest of the world.

With the Smith Commission having reported and the legislative process still to be followed through, it is easy to think that constitutional issues will continue to dominate Scotland’s political scene – but the potential for the pain of higher taxes on working people, self-employed entrepreneurs and our business community to rise up the political agenda should not be discounted. If political parties give Scottish voters a genuine choice on taxes we should not be surprised if they take it.