Can Nicola Sturgeon raise taxes – and get away with it?

The Scottish government looks set to raise taxes. The impact will be both economic and psychological. 

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Nicola Sturgeon is asking Scots a big question: will you put your money where your mouth is? After years of complaints from the jockerati about the impact of Westminster austerity and demands for an approach to public spending that is more Scandinavian in hue, the First Minister is, it seems, about to call their bluff. It is time, she has said, to “open a discussion about… responsible and progressive use” of Holyrood’s tax powers, which, after the Scotland Act 2016, now includes income-tax bands and rates. “Most people would think right now that there is a case for those with the broadest shoulders paying a little bit more,” Sturgeon told me when I interviewed her in September.

At the beginning of November, the Scottish National Party administration – commendably, it should be said - published a discussion paper proposing four different options for varying income tax, all of which would mean rises for the better-off and would, the paper estimated, increase the amount of revenue raised annually by between £80m and £290m. The document also set out four principles that will guide the final decision in December’s Budget: protect and improve public services in the face of UK spending cuts; protect the incomes of low earners; make the tax system more progressive and reduce inequality; and support the economy.

The SNP has indulged in a cute bit of politics by asking the other parties to submit their own ideas too. Given the make-up of Holyrood, there will be safety in numbers: in Richard Leonard, Scottish Labour looks set to elect a facsimile of Jeremy Corbyn as its new leader and if anything will accuse Sturgeon of not going far enough. Similarly, the Greens want a 60p top rate north of the border, while the Lib Dems have long backed a 1p increase to pay for higher spending on education. Only Ruth Davidson’s Tories will resist. The outcome is therefore already decided, with just the details to be finalised: Scots are about to start paying higher income tax than their counterparts elsewhere in the UK.

It should be said that some already do: when the UK Treasury moved the threshold for the 40p tax rate up to £45,000, the SNP decided to raise it by no more than the rate of inflation - to £43,430 in 2017/18. But the change that comes in December will be of a different order, both economically and psychologically. And it raises some important questions.

First, will it work? There are around 20,000 top-rate payers in Scotland, many of whom are likely to tweak their tax arrangements to limit their exposure to the change. Icas, a body representing chartered accountants, has warned that if Finance Secretary Derek Mackay “fails to increase revenues, he’ll be unable to protect public services… if he raises taxes too far on high-earning Scottish taxpayers… individuals might incorporate existing businesses to move income from Scottish income tax into UK corporation tax, they might convert earnings into dividend income, or they might simply migrate south of the border.” What signal will be sent to potential inward investors and their senior staff?

Second, is it the right time? With economic growth weak, wage growth continuing to lag inflation, with the Bank of England finally moving to put up interest rates, and with the uncertainty of Brexit hanging in the air, a further squeeze on household incomes is at least risky and could seriously backfire. Why make Scotland less competitive right now?

Third, will voters tolerate it? Scots talk a good progressive game, but they’ve rarely had to make the sacrifice of putting their principles into action. Ruth Davidson’s popularity shows an appetite for moderate Tory policies and, one presumes, sound budgeting. If December is seen to usher in an era of ever higher taxes, of the SNP, Labour and the Greens attempting to “out-Corbyn” one another, of special interest groups demanding ever more state cash to ease their pain, an electoral backlash is entirely possible. It could also be argued that greater effort might be put into stimulating economic growth, and that some of the ideological largesse practiced by the Scottish government, such as free university tuition and GP prescriptions, could be reined in and the money used more fruitfully.

One suspects Sturgeon is aware of all these risks: she has been getting her arguments in early. “For 10 years,” she told me, “we have done a pretty good job of protecting public services as best we can in a period of austerity, while keeping the taxes that we’ve been responsible for low. We’re now at a stage where austerity’s continued, we’re going to have economic consequences from Brexit, we all want good public services, we want the NHS to continue to have strong investment, we want our public-sector workers to be paid more, we want businesses to have the right infrastructure.”

Further, she insists, “it’s the whole package that determines whether Scotland is an attractive place to live and invest in and work in. It’s seeing it in the round. The competitiveness of your tax arrangements are part of what makes you attractive or not, but it’s not the only part.”

A cynic might suggest that the longer-term prize for separatists comes from setting Scotland on a financial trajectory quite distinct from that of the rest of the UK. The British government intends to increase the higher rate threshold to £50,000 by 2020, while the Scottish government will increase it by no more than inflation over the same period. When it’s all taken into account, the tax affairs of Scots could look quite different to those of their English counterparts in a few years. Sturgeon recently announced a pilot study into universal basic income, which gives another indication of where she sees the nation heading.

Perhaps the First Minister will in time create something like the Scandinavian Nirvana so desired by her followers. Alternatively, she may be about to learn that economic reality can be a cruel mistress.

 

Chris Deerin is the New Statesman's contributing editor (Scotland).