The First Minister was told by one of the country’s most prominent business organisations that her plans to increase income tax risked “long-term damage” to the economy which would take years to repair.
The high-profile warning was delivered by Tim Allan, the president of the Scottish Chambers of Commerce, when he made his first Annual Business Address at the Hilton Hotel in Glasgow.
It came as new analysis by the EY Scottish ITEM Club predicted that the Edinburgh and Glasgow economies would help power Scottish output growth to 1.4 per cent in 2018, matching the UK figure. Ms Sturgeon was among those at the event, which is one of the highlights of the social calendar for Scottish business.
Mr Allan warned against “careering towards tax rises” in the absence of independent economic impact assessments.
“Our concern is that, at a time of sluggish growth and faltering business investment, a competitive Scotland cannot afford to be associated with higher taxes than elsewhere in the UK,” Mr Allan said.
“A high-tax Scotland would be easy to achieve but the damage could take years to repair.
“Unless tax revenues were ring-fenced to drive growth and job creation, the cost for a small nation in terms of lost investment is incalculable.
“We want a level playing field on tax throughout the UK to keep Scotland competitive.”
On Thursday next week, Derek Mackay will unveil a Scottish budget which is widely predicted to use Holyrood’s new tax raising powers to raise more income tax.
Higher rate income tax payers in Scotland already contribute more than their counterparts south of the Border as a result of the Scottish Government’s refusal to pass on tax breaks announced by the Chancellor.
Scots earning more than £43,000 already pay more income tax after the Scottish Government froze the salary threshold for the 40p higher rate band. The Chancellor has announced that the threshold will go up to £46,350 south of the Border.
Ms Sturgeon has signalled that more hikes will be on the way next week after she published a paper suggesting that those earning £24,000 would be hit by tax rises.
The paper outlined a series of scenarios, all of which involved increasing the 40p higher rate and 45p top rate of income tax in April next year.
Three of the scenarios suggested 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.
Mr Allan also expressed dismay that Ms Sturgeon’s administration’s plans to cut the levy paid by air passengers had been delayed.
Ministers had promised to replace Air Passenger Duty with a discounted, devolved alternative Air Departure Tax. The plans, however, have been delayed because proposals to maintain an exemption for those flying from Highlands and Islands airports require EU approval.
Mr Allan said: “We can’t hide our disappointment that the pledge to reduce and eliminate Air Passenger Duty in Scotland has been postponed, due to legal technicalities. The economic case has been made, accepted by government, so let’s get on with it and remove this growth inhibitor to trade.”
On Brexit, he called on the Scottish and UK governments to work on a framework that would allow the country to retain the talent it attracts from the EU and around the world.
Last night Scottish Conservative shadow finance secretary Murdo Fraser said: “This is another expert view from the world of business that Nicola Sturgeon cannot afford to ignore. Tax hikes would be a disaster not just for hard workers, but businesses right across the country. Neither will forgive the SNP for hitting them in the pocket, should the party choose to do so in next week’s budget.”
Mr Allan’s remarks on income tax came as the Scottish Government’s stewardship of the tax system came under fire. An Audit Scotland report looking at business rates found a deficit of £297 million at the end of 2016-17 when the amount of the levy redistributed to local authorities was compared with the sum raised by councils.
The report said: “This means the Scottish Government has redistributed more to councils in recent years than councils have collected in receipts. In February 2017, the Scottish Government signalled its intention to bring the account into balance over a number of years but there is no formal plan in place.”
Mr Fraser warned the deficit must not result in further cuts to council budgets. “This exposes huge incompetence at the heart of this SNP government,” Mr Fraser said. “It has misjudged income from these rates by the biggest margin ever.”
Scottish Labour’s economy spokesperson Jackie Baillie said: “This report shows there is a clear problem in financial forecasting by the Scottish Government, with government handing out more money than councils are collecting.
“The SNP government, earlier this year, proposed to claw this money back from councils, but at a time when our local authorities are already seeing their budgets slashed and having to cut back on vital public services as a result, questions must be asked about whether this is really the right route to go down.”
In her speech at the Glasgow event, Ms Sturgeon said the Scottish Government would focus on making Scotland the best place in the UK to do business.
She also repeated her view that the UK should remain in the customs union and single market, despite Brexit.
The First Minister said: “By far the best – or rather, the least worst – way of delivering Brexit is for the UK as a whole to remain in the customs union and the single market. The events of this week have simply increased the urgency of ensuring that that place in the single market is maintained, which is essential for jobs, investment and living standards. However, whatever happens under Brexit, the Scottish Government will continue to focus on making Scotland the best place in the UK to do business.
“Next week, we will publish our draft budget for the year ahead. We’ll set out how – at a time when our block grant for day-to-day expenditure is declining in real terms – we intend to fund first class public services, a fair social security system, and how we achieve our ambitions for Scotland’s economy.
“In doing that, we recognise the crucial importance of providing a good environment for all businesses here in Scotland.”