Scott Macnab: A tartan tax hike that could test devolution

Finance Secretary Derek Mackay delivers his Scottish Budget statement tomorrow (Picture: Lisa Ferguson)
Finance Secretary Derek Mackay delivers his Scottish Budget statement tomorrow (Picture: Lisa Ferguson)
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Finance Secretary Derek Mackay is poised to make history by increasing income tax in Scotland, writes Scott Macnab.

As Derek Mackay grapples with the prospect of claiming his own small piece of political history in tomorrow’s budget by raising the income tax of Scots workers above the rest of the UK, the competing demands for extra cash are already deafening.

Anything from £80 million to £290m could be raised under the Scottish Government’s proposals, which involve re-drawing the system of income tax rates north of the border. Chancellor Philip Hammond opted against such a move in the rest of the UK and even warned the SNP against it at a time of struggling growth. But there seems little doubt that Nicola Sturgeon is poised to press ahead.

So where will the extra cash go? Councils are at the head of the queue, insisting they need an extra £545m just to make up for swingeing cuts they have suffered in the era of austerity. The bunfight between the Scottish Government and town hall chiefs over their settlement has become a staple of the annual budget process, but this time councils are warning “enough is enough”.

As pressures grow on public services as a result of factors like the ageing population, it seems further cuts can only hit the frontline. Children’s services are likely to suffer at time when more than 15,000 youngsters are on the protection register, while areas of social work care will also be hit.

READ MORE: Nicola Sturgeon hints at tax rise for higher earners

Affordable housing and efforts to tackle homelessness could also be squeezed, along with welfare advice and support at a time of rising debts. Bin collections could become less frequent to save cash, while facilities like libraries, leisure centres and museums could all come under pressure. Ministers have insisted that councils have been handed a fair deal in recent years, but most independent analysts say local authorities have lost out. Mr Mackay is also under pressure to lift the cap on public sector pay which could account for another couple of hundred million pounds.

The First Minister told MSPs at Holyrood in September that “nurses, teachers, police officers and firefighters deserve a fairer deal” after seeing their increases capped at 1% in recent years. SNP ministers had been expecting a similar approach from Mr Hammond in his budget last month, but it never happened. Mr Mackay has since been backtracking on the issue, warning that a fresh bout of austerity from the Chancellor would limit his ability to increase public sector wages. But with nurses this week warning they are at “breaking point” over low wages, failure to deliver on the charged public sector pay issue could prompt more unsavoury headlines.

One thing the Chancellor did provide in his Budget was a tax break for first-time buyers by axing stamp duty on homes up to £300,000. It put immediate pressure on the Scottish Government to provide similar assistance north of the border. Ms Sturgeon told MSPs last month she was considering fresh help for first-time buyers, suggesting that houses up to a value of £175,000 could be exempt in Scotland as this better reflects the lower price houses north of the border.

READ MORE: Budget 2017: Call for income tax rise in Scotland to be ditched

On top of all this, the creme of Scotland’s literati have been on the warpath over cuts to the arts. Val McDermid and Ian Rankin have been among those warning that cuts to mentoring schemes, support grants and even libraries closures could see Scotland robbed of the next Robert Louis Stevenson or Muriel Spark.

The prospect of tax rises has certainly brought home the reality of these new fiscal powers. Never has the debate been so charged around the Scottish budget. Mr Mackay is in reality only grappling with the kind of dilemmas which his counterparts in finance ministries around the globe must deal with. The growing headache for Mr Mackay seems to be the extent to which tax rises alone can offset austerity and minimise the impact on frontline services. Business leaders and leading economists have warned this week that such a move could damage Scotland’s already struggling growth which would in turn lead to less tax being collected overall. There are even fears that the new Scottish Fiscal Commission, tasked by ministers with providing economic forecasting for the year ahead, will warn that tax revenues will be lower than expected next year. The respected Fraser of Allander Institute warned this week that this could “offset”, at least in part, any tax hike set out by Mr Mackay. It was a grim outlook from the think tank which also warned that Scotland faced weak growth, cuts from Westminster, a decline in the working-age population and the continuing woes of the oil and gas industry in the years ahead.

And it went from bad to worse with a warning that the extent of the cuts to public spending could be as high as £1.3 billion. The IPPR think tank went onto claim that tax rises of about 4p on the basic rate would needed to allay the impact of this. Without a marked improvement in economic performance, Scotland could be facing further tax rises in the years ahead to deal with the impact of such cuts.

So while tax rises may seem an attractive solution to problem of cash-starved services, it doesn’t appear a long-term one. Academic literature on the issue suggests that they generally have a damaging effect on economic growth, with negative impacts also measured in investment as well as output per worker. Of course this is as much about politics as fiscal prudence. Ms Sturgeon is under pressure on the left from a Labour revival in Scotland. Jeremy Corbyn’s success in this year’s election has been followed by the election of a socialist leader, Richard Leonard, to carry the torch for the party in Scotland.

With the Liberal Democrats and Greens also clamouring for tax hikes, the SNP increasingly has nowhere to turn. Ms Sturgeon cannot forever complain of Westminster cuts without using her own powers at Holyrood to intervene. How Scots workers react at the ballot box to the reality of higher taxes will be a landmark test of devolution.