Mackay’s Budget is no Laffer matter

Mackay’s Budget is no Laffer matter

by Murdo Fraser
article from Friday 16, December, 2016

ALEX SALMOND, the former SNP First Minister of Scotland, has many failings, but at least he knows something about economics. His favourite economic theory is that of the Laffer Curve, the details of which he would regularly bore the Scottish Parliament with. This is what lay behind the SNP’s policy of cutting Corporation Tax by 3 per cent in Scotland, with a view to growing the Scottish economy and increasing tax revenues.

The Laffer Curve seems to have gone out of fashion in SNP circles. The policy of cutting Corporation Tax, a prominent feature of the 2014 White Paper on Independence, has been quietly shelved. And the current Finance Secretary, Derek Mackay, claimed not even to have heard of the Laffer Curve when I challenged him on the issue at Holyrood’s Finance Committee a few weeks’ ago.

The reason the economics of Arthur Laffer have become so relevant to political debate in Scotland again is the new economic and fiscal environment that we find ourselves in. No longer does the Scottish Parliament depend upon a block grant from Westminster to fund the Scottish public services. Financial devolution, delivered by a Conservative Government at Westminster, now means that approximately 50 per cent of the sums spent by the Scottish Government are raised in Scotland, by way of income tax, the Aggregates Levy, Air Passenger Duty, Lands and Buildings Transaction Tax (LBTT), with an assignation of VAT proceeds shortly to follow.

What this means, in practical terms, is that from now onwards it is the performance of the Scottish economy, relative to the rest of the UK, which will determine how much money the Scottish Government has to spend on vital public services.

And the Scottish economy is not performing well. Despite a shallower recession in Scotland, economic recovery has been weaker than the UK’s, and economic growth in real terms has been lagging behind the UK since Quarter 4 of 2009. This week’s unemployment statistics tell us that unemployment is higher in Scotland than the rest of the UK, and is rising here while it is falling elsewhere. Economic activity is lower, productivity is lower, and business confidence is lower, and is now at its lowest point since the 2008 recession. Overall, out of thirty economic indicators, the Scottish economy lags that of the UK on twenty-five.

That made this week’s Budget from Finance Secretary Derek Mackay all the more crucial. It was a Budget that had to be focussed on turning around our economic underperformance, on growing the Scottish economy, and on therefore growing our tax receipts.

In advance of the Budget statement on Thursday, we called on the SNP to deliver a competitive Scotland; one where tax rates on Scottish families and businesses were no higher than in the rest of the UK. We argued that this was a way to grow the economy, to attract individuals to live, work and invest in Scotland, and grow our tax base.

The SNP fought this year’s election on a pledge not to match the UK Government’s plans to increase the threshold for the higher rate (40%) of tax, with the intention of creating a clear tax differential with the rest of the United Kingdom. In the first year of operation, this tax differential raises a mere £79 million extra, a small sum in the context of the overall Scottish budget, hardly worth the trouble of sending out a message that Scotland was an expensive place to do business.

We heard from Scottish businesses their concern that they would have to pay a “Scottish Supplement” to attract the best talent here, to compensate for higher tax rates. The same principle applies to the public services, where already the NHS in Scotland is in competition with the NHS down south for top consultants, and our universities are in competition for top academics. So not only would there be a cost the wider economy with these tax rises, but there would also be a cost to the public sector.

It was not just on personal taxation where the SNP has been getting it wrong. The doubling of the Large Business Supplement creates a competitive disadvantage for businesses, particularly in retail, compared to those South of the Border. In September thirteen Scottish business leaders wrote to the Finance Secretary calling for the Scottish Government to level the playing field. And we have seen retail businesses like McEwan’s of Perth and McAree Brothers in Stirling closing their doors with the tax burden being a key factor.

In his Budget on Thursday, Derek Mackay confirmed that personal taxation for the 14% of Scottish tax payers paying the higher rate would be higher than in England, and that the Large Business Supplement would continue. He seems to have learned nothing from his former boss, Alex Salmond, on the benefits of the Laffer Curve. He risks choking off any prospect of economic recovery.

Earlier this week the current First Minister’s hand-picked Chair of the SNP’s new Growth Commission, Andrew Wilson, made clear that he still understood the benefits of the Laffer Curve, making the case that the way to increase tax revenue was to increase the number of high earning tax payers. It was Andrew Wilson who quoted the excellent example of residential LBTT, which when introduced was supposed to be revenue neutral, but the tax take from which in the first year was £32 million lower than originally expected. This has been attributed to the then Finance Secretary, John Swinney, being too greedy in setting the rates at the upper end too high, causing a slowdown in the market, and as a result the tax take being lower than it should have been.

What a pity that the party of Alex Salmond and Andrew Wilson has now become the party of Nicola Sturgeon and Derek Mackay. The SNP have lurched to the left, and are determined to hike taxes of hardworking Scottish families and businesses. The result will be not higher tax revenues, but an underperforming Scottish economy, and a shrinking tax base.

The Finance Secretary told us this week that he wanted to deliver a budget that was pro-enterprise, pro-entrepreneur, and pro-growth. By hitting the Scottish economy with higher taxes, he has failed on all three counts.

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