Hammond delivers for Scotland – but can MacKay?

Hammond delivers for Scotland – but can MacKay?

by Murdo Fraser
article from Friday 2, November, 2018

THE CHANCELLOR OF THE EXCHEQUER Philip Hammond is a man with the demeanour of a small-town undertaker. He seems an unlikely character to be the bearer of good news. And yet, in his Budget delivered to the House of Commons on Monday, there was much for Scotland to celebrate.

Fuel duty has been frozen for the ninthyear in a row, giving a real benefit to businesses and motorists across the country. After extensive lobbying by Scottish Conservative MPs at Westminster, the duty on spirits has once again been frozen, delivering a real boon to the ever-expanding whisky and gin industries, not to mention putting a smile on the faces of consumers.

We saw further announcements on a number of city and growth deals, most notably the Tay Cities Deal, which has now been confirmed at £350 million. We will get the full details of this in the coming week, but this initiative has the ability to be transformative in the economy of Dundee, Angus, Perth & Kinross, and North East Fife.

Perhaps most significant of all, there was an announcement of substantial Barnett consequentials arising primarily from increased health funding in England, amounting to some £950 million in total. This means that the Scottish Government’s block grant will increase in both cash and real termsfrom this year to the next.

To say that this caught the SNP on the hop would be something of an understatement. Its media office frantically rushed out a statement claiming that Scotland’s budget had in fact been cut by some £1.9 billion. This was a claim actually repeated in the Scottish Parliament Chamber by the Economy Minister Paul Wheelhouse on Wednesday, and again by the First Minister Nicola Sturgeon on Thursday.

Embarrassingly for both, the claim is simply untrue. 

As the Fraser of Allander Institute has pointed out, the Scottish Government’s total budget, comprising Resource DEL (Departmental Expenditure Limits), Capital DEL, AME (Account Managed Expenditure), Borrowing, and Financial Transactions, is up in real terms compared to 2010 – which was until now the high point of spending over the last few decades. Even on the narrow measure of Resource DEL where the SNP claims there have been cuts, the amount that Derek Mackay has to spend for 2019-20 is higher than his predecessor John Swinney had to spend when the SNP first came to power in 2007-08.

Attention now turns to the Finance Secretary to see where he will spend the money. 

The Scottish Conservatives have already called on him to ensure that all Barnett consequentials from increased health spending south of the Border are invested in health here. We have also argued for a ring-fenced pothole fund, with the Barnett consequentials of increased road funding announced by Philip Hammond. 

And, as the Chancellor has delivered an advantageous package of business rates reduction targeted at high street retailers, we have called for the SNP to follow suit there too. For too long Scottish businesses have been put at a competitive disadvantage as against those in England, and with the growing threat of online retail affecting our traditional high streets, the SNP cannot afford ignore this area.

But it is on the question of tax where much of the interest will concentrate. Philip Hammond announced an increase in the personal allowance to £12,500, which will apply right across the UK, delivering an income tax cut for everyone. But rates and thresholds above that level are devolved to Scotland, so the uprating of thresholds announced by the Chancellor won’t apply here.

The danger is that the gap that has already opened up in income tax between the rates payable in Scotland, and those payable elsewhere in the UK, could widen still. This will have a particular impact on those earning in the bracket between £43,000 and £50,000, hardly the super wealthy, a category that includes promoted police officers, teachers and nurses. In this bracket, the tax differential is now £1200 per year, which is starting to sound like a significant chunk of money for anyone.

The interaction between tax and national insurance now means that those in this bracket are paying a marginal tax rate of 53% on any pay increases, a level hardly likely to act as an incentive for anyone to work extra hours or pursue promotion.

There has always been a danger that differential income tax rates have an economic impact. Already businesses are warning of the difficulties they are having in recruiting talented staff to come and work in Scotland, with the higher tax rates here. 

This doesn’t just apply in the private sector – a public service like the NHS relies upon highly qualified, well-paid medical staff, who could face paying thousands of additional sums in income tax to work in Scotland compared to the rest of the UK, on top of higher LBTT rates if they wish to purchase a substantial property. And leaders in education are warning that higher taxes will make head teacher positions less attractive for talented teachers, when we already have too many vacancies to fill.

So Derek Mackay now has not only to spend the extra money he has been given as effectively as possible, and not squander it, but also ensure that Scotland remains competitive when it comes to personal taxation. It will be quite a challenge for the SNP government to live up to what a Conservative government in Westminster has just delivered for the benefit of the Scottish people.





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