The dream of transforming Scotland into a modern, northern European social democracy with excellent public services has long been at the heart of the SNP’s vision for the country. Nicola Sturgeon and co have been coy about the higher taxes that would be needed to fund this - until now. As MSPs last week voted in favour of income tax rises, Finance Secretary Derek MacKay told Parliament that Scotland’s “excellent quality of life” will continue to see it attract the best workers, stating: “I say to the country that all taxpayers in Scotland benefit from access to more free-at-the-point-of-use public services than are available in the rest of the UK.”
Mr MacKay was giving voice to a chorus which is likely to become increasingly familiar in the coming years as higher income tax rates are set to become a reality north of the border. The vote at Holyrood was only advisory, but came after Ms Sturgeon said recently that she is now open to the prospect of tax increases in order to offset the impact of ongoing austerity. Many feel this is as much about politics as public need, with the SNP keen to avoid being outflanked on the left by Labour in Scotland as Jeremy Corbyn helps revive the socialist solidarity that once saw the party dominate vast swathes of central Scotland. But the situation facing Scotland’s public services was thrown into sharp focus this week as the Fraser of Allander Institute warned that vital areas such as social work, child poverty and transport could see their funding axed to the tune of 20 per cent over the decade to 2021 amid Brexit uncertainty, while Westminster spending cuts continued to bite. Holyrood’s £30 billion annual budget will no longer be “sustainable” unless the situation is addressed.
It is this stark reality which prompted Ms Sturgeon to tell MSPs earlier this month that she is now actively looking at income tax hikes to tackle the impact of fresh cuts and will publish a “discussion paper” on the issue ahead of the budget in December. She has even urged opposition partes - most of whom back increases - to get involved. This should be a fair indication of the way the wind is blowing.
The SNP of course, did rule out a blanket rise in the current basic rate going into last year’s Holyrood election, but Ms Sturgeon has options. The new tax powers which came to Holyrood last year allow ministers to adjust not just the rates, but create new bands as well. It’s conceivable that ministers could, for example, create a new intermediate band which would allow the basic rate to remain at 20 per cent for the lowest earners up to, say, £20,000. An increase of 1 per cent could be implemented above this where the new rate kicks in. It means the lowest earners would still be protected and could win the support of Labour, the Greens and Liberal Democrats.
The Tories, of course, are adamantly opposed to tax hikes of any kind. To this extent the Scottish Government is “damned if you do and damned if you don’t.” On the one hand the SNP - the party of independence and Scotland choosing its own path - is accused of failing to use the powers at its disposal to fight austerity, while on the other they are warned against hitting hard pressed Scottish families in the pocket. The average Scots salary was £22,900 last year, about £200 below the UK average. Scottish pay levels, though, are highest in the UK outside London and the South East. An extra penny on the basic rate would mean those earning £28,000 would pay just over £1 more a week in income tax, or £65 a year. Someone earning £41,000 would be paying an extra £3.90 a week.
At a time when public services are in desperate need of investment, a growing political consensus says it is now right to make more use of Holyrood’s tax powers - and more importantly, that Scots can be persuaded to support this. Of course middle-earning Scots already face a marginally higher tax burden than those elsewhere in the rest of the UK, after the wage at which they start paying the 40p rate of income tax was frozen at £43,000 this year while extending to £45,000 south of the border. But a flat increase in the rate of income tax is a significant move and would mark a real declaration of intent. Of course, Ms Sturgeon could opt to increase the top rate for high earners making over £150,000, from 45p pence to 50 pence. But there are widespread concerns that this measure could result in many of this group, representing fewer than 1 per cent of all tax payers, simply re-arrange their tax affairs south of the border and avoid tax hikes completely. This is why Ms Sturgeon previously ruled out such a move.
Many business leaders in Scotland feel they have been frozen out of the debate so far. They fear the inevitable knock-on of tax hikes will be to damage economic growth. This leads to firms going bust or laying off staff and to an overall fall in income tax even if the rate is increased slightly. A quarter of a million Scots rely on the retail industry - shops and supermarkets - for their livelihoods. But the High Street is struggling with lacklustre sales and there are fears that further pressure on family budgets from tax hikes could cause real damage.
Scots already face rising inflation, council tax hikes and higher employee pension contributions, while a rise in interest rates now just seems like a matter of time. To push up taxes will have an inevitable knock-on consumer spending which may drag down the country’s erratic economy, already struggling to shake off the impact of the North Sea oil and gas crash.
These issues appeared to be at the heart of the concerns set out by Chancellor Philip Hammond when he visited Scotland earlier this week and urged caution against the prospect of tax rises. It may the type of retort you would expect from a Tory Chancellor, but his comments made it clear that there’s no chance of similar income tax rises happening south of the border next year. It remains to be seen if Holyrood politicians can convince Scots workers that they should be happy to pay more than their counterparts elsewhere in the UK.