Scott Macnab: Scots tax debate falling on deaf ears

Finance secretary Derek Mackay is running out of options to gain support for his budget. Picture: John Devlin

The most important budget since the advent of the Scottish Parliament is becoming an increasingly bitter stand-off, with Finance Secretary Derek Mackay running out of options to strike a deal.

Flanked by political opponents on left and right demanding tax rises on the one hand and cuts on the other, the Finance Secretary’s current spending plans for his 2016/17 budget have been roundly rejected so far. The nightmare scenario looming at the end of this path is a snap Scottish election which Alex Salmond previously threatened to call when the SNP Government last saw its budget rejected in 2008. That seems unlikely less than a year after the last Holyrood vote, while Brexit and the prospect of a second independence referendum dominates the political landscape. But although brinkmanship is normal at budget time two key factors make things different this.

Firstly, the opposition are determined to show that this SNP administration cannot simply do as it pleases at Holyrood after five years of majority rule when measures were “bulldozed” through as ministers pleased. This included the flawed Offensive Behaviour at Football Act aimed at cracking down on sectarian singing at football. This now looks set to be, at least in part, repealed amid concerns it has criminalised young men and failed to stamp out end sectarian chants. Last year’s Holyrood election saw the SNP narrowly lose its majority. The numbers are tight, but if the Tories, Labour, Greens and Liberal Democrats vote together they can defeat Nicola Sturgeon at Holyrood. And it’s already happened, as the opposition have imposed recent defeats on the football act, NHS services and plans to scrap the board of Highlands and Islands Enterprise.

Secondly and more significantly is that this is the budget which will see Holyrood take on sweeping new powers over income tax rates and bands in Scotland. Labour, the Greens and Lib Dems are determined these should be used to fund hard-pressed public services which have been cut to the bone in recent years. Kezia Dugdale and Willie Rennie both back hikes in the basic rate, while Labour and the Greens also want to see 50 and 60 pence top rates for high earners.

They don’t understand why the SNP - such vociferous opponents of austerity in recent years - are not using the powers they finally have at their disposal to act.

The SNP’s plan not to follow an extension of the 40 pence tax rate being introduced elsewhere in the UK to about £45,000 is not deemed to go far enough. In fact this has infuriated Tory leader Ruth Davidson who says her party will oppose a budget containing such measures which would effectively see Scotland become the highest taxed part of the UK.

Of course it’s the kind of dilemma which Parliament’s around the globe must grapple with on an annual basis, but the first time that Holyrood has found itself in this position as the new post-referendum Smith commission powers come into force. Budgets are as much about stimulating economic growth as levying taxes to pump into public services. The more people at work in the country - and paying tax - the more cash will roll into Mr MacKay’s coffers to re-distribute. The finance secretary should focus his thinking on this, as the economic outlook north of the border look increasingly bleak. The country’s dole queue has risen by 11,000 according to the most recent statistics. Perhaps more worrying, the number of “economically active” Scots has slumped by 41,000 over the year, an indication that many are just giving up on trying to get work altogether.

On top of this, Scotland’s GDP is bumping along the bottom, growing at barely a third of the modest UK rate of 2.3 per cent annually. Are tax rises the best way to reverse this? Most literature on the impact of tax rises finds they have a negative impact on growth. The one pence rise on the basic rate might bring in about £300 million, but what impact will it have on jobs? Accountans Johnston Carmichael warned in a stark submission to Holyrood’s finance committee recently that business leaders are becoming increasingly anxious about the growing enthusiasm for tax hikes among politicians at Holyrood. Firms are already looking at the prosect of moving away to avoid a differentiated tax system north and south of the border.

And while Scotland’s growth flatlines, Prime Minister Theresa May this week set out flagship proposals to re-industrialise the UK and shift the balance of the UK economy away from London and the south-east. It includes the city deals which will see Aberdeen and Inverness benefit, as well plans to boost skills, upgrade infrastructure and generally support the growth of firms. Given the grim outlook for the economy north of the border, perhaps a greater focus on addressing this situation and bringing growth more in line with wider UK levels is where Holyrood should be focussing its energies.

The SNP Government has rightly been criticised in recent weeks for attempting to blame Brexit for the state of the economy - while the wider UK remains buoyant despite the looming departure from the EU. Economy Secretary Keith Brown insists a “comprehensive review” is underway in Scotland, but the slump in the oil price has been hitting hard for the best part of two years and a meaningful strategy is now needed north of the border to address this. But that starts with getting the budget passed at Parliament next month. Of course it may be that other parties like the Greens or Liberal Democrats simply abstain when it comes to the crucial vote which would see Mr MacKay’s spending plans passed. But this won’t resolve the widening chasm which has emerged over the past year in Scottish politics between parties battling for the left-wing vote almost out-bidding themselves in demands for tax hikes and the Tories on the right demanding taxes in Scotland must never top the UK level, regardless of the level of need north of the border.

And as Brexit and independence consume everything, there’s a growing sense that this pivotal issue of tax and growth is being lost to the wider public and civic Scotland.