A separate Scotland could require to double income tax

A separate Scotland could require to double income tax

by Danielle Boxall
article from Tuesday 23, March, 2021

SINCE OUR INCEPTION, the TaxPayers’ Alliance has campaigned across the length and breadth of the UK. Folks in Perth are just as likely to see us in the newspapers, or a street stall in their town, as their cousins in Plymouth or Pontypridd. We scrutinise the politicians and bureaucrats at every level of government, from Boris Johnson in Number 10 and the grandiose mandarins of Whitehall, right down to your local community or parish councillors.

Our last Town Hall Rich List revealed that 12 employees at Glasgow City Council earn over £150,000 – the largest of any local authority in the UK. Over to the capital in the east, the City of Edinburgh Council paid a bonus of almost £50,000 to its managing director – another nationwide high. Bureaucrats have to travel a long way to escape the eyes of our freedom of information requests.

However, while the national media pour over the nation’s finances and Westminster tax decisions, the same issues in Scotland receive a fraction of the attention – we believe this needs to change. In a paper released yesterday, our chairman and a former economist at HM Treasury, Mike Denham, dives deep into Scotland’s public finances.

Successive Scottish governments have a lot to answer for. Scotland's fiscal deficit remains high and excessive by international standards: 14 times higher than the European average, and at a whopping 8.6 per cent of GDP – the highest of any OECD country. Just as worrying, the deficit has recovered more slowly than countries that were devastated by 2008’s crash, including Greece, Ireland and Spain.

Due to the impact of the pandemic, the deficit is likely to reach 25 per cent of GDP this year and remain around 10 per cent until at least the middle of this decade. North Sea Oil revenues will not provide a silver bullet, despite the claims of some nationalists. Scotland ran a fiscal deficit even when oil prices exceeded $100 per barrel, and the oil fields are fast depleting, with those being decommissioned attracting tax relief rather than delivering tax revenues.

But this should not come as a shock. Although Scotland’s deficit is more akin to a southern European country, Scotland’s politicians have long expressed a desire to follow the Scandinavian model for high state spending – including if the country went independent. We don’t take a view on Scottish independence, or indeed the timing of a future referendum, as that should be resolved at the ballot box. Nevertheless, we passionately believe that, whatever their position on the Union, Scottish politicians must be honest with the public about the state of the public finances.

Scottish fiscal policy is already quite distinct from the rest of the UK’s. Its existing deficit is driven by excessive spending levels relative to both tax revenues and spending elsewhere in the UK. Scotland’s per capita public spending remains around 20 per cent higher than England's. In 2018-19, the average Scottish resident was seeing nearly £2,000 more public spending than their English counterparts, with well-known examples including free personal care for all pensioners (in England care is heavily means-tested), free university tuition for all its students (in England home students are charged up to £9,250 a year) and free prescriptions for all (in England there's a charge of £9.15 per item). This spending has driven the fiscal debate. Indeed, if Scotland’s public spending per head had been in line with England’s, then Scotland’s deficit would not have been significantly out of line with the UK’s. 

The cost of the excess spending over recent years has averaged close to 6 per cent of GDP, almost exactly mirroring the margin by which the Scottish deficit exceeded the UK’s.

So how close is Scotland to the Scandinavian blueprint? As a percentage of GDP Scotland’s spending is only five percentage points below average Scandinavian levels – but revenues are 16 percentage points less. To put this in perspective, on average Scandinavian countries have a 2.6 per cent surplus between the amount raised in tax and their spending; while Scotland has a colossal 8.7 per cent deficit.

For those who think an independent Scotland should model itself on Scandinavia, there’s an obvious conclusion – it’s not spending cuts that are needed, but tax increases. To eliminate the deficit, those increases would need to be big enough to boost tax revenues by around a quarter.

To balance the books a separate Scotland would need to increase taxes by at least 10 per cent of GDP. That would be equivalent to raising the basic rate of income tax to 46 pence in the pound or VAT to 49 per cent. The fact that the basic rate of income tax would need to be more than doubled has been conveniently forgotten by politicians determined to avoid an honest debate about independence. With 44 per cent of Scottish income taxpayers already pay higher rates than elsewhere in the UK, and these politicians realise that further increases on the scale required would devastate taxpayers, seriously undermine economic growth prospects and ultimately see them punished at the ballot box. 

With separatism pushed back on the table, this perilous position cannot be ignored any longer. Scottish taxpayers deserve to know what impact it would have on the country’s finances. The Scottish government’s fiscal framework, managed in agreement with HM Treasury, underpins the tax and welfare spending powers that have been devolved. If Scotland were to become independent, it could enjoy both freedoms and responsibilities outside this current framework. But an independent Scotland would start life with a perilous fiscal deficit, with tax revenues that fall well short. Conversely, remaining within the Union and the current fiscal framework agreed with the Westminster government preserves a status quo involving extraordinary fiscal deficit, driven by excessive spending levels. 

Scottish taxpayers expect their leaders to get to grips with the reality of the country’s fiscal position – independence or not. 

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Danielle Boxall is Media Campaign Manager at the TaxPayers' Alliance, promoting the TPA’s values and research in print, broadcast and online. She previously worked at the online magazine UnHerd making podcasts and videos as their Audiovisual Producer. 

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