UK Budget: Why Labour still need to learn about the problem with tax rises
Both Labour and the SNP should be prioritising economic growth that would provide extra money for public services
Just one week out from the Chancellor’s Budget, and it is already shaping up to be a disaster. We have had weeks of briefing and counter-briefing, piling uncertainty on uncertainty, leaving everyone wondering what exactly Rachel Reeves has in store, and what impact it is likely to have on the already dismal rate of economic growth we see both in Scotland and across the UK.
It will certainly be welcome to have some clarity on what exactly her plans are. The mixed messages coming out from the Treasury are too numerous to document here, with suggestions over the past few weeks of a whole range of measures to be introduced: firstly income tax was going up, then it wasn’t; national insurance was to be cut, then remain the same; there might be changes to inheritance tax or capital gains tax; tax thresholds might be frozen; and there might be a mansion tax or a wealth tax.
All this speculation and uncertainty has spooked investors, with the stock market currently looking very jittery. Even amongst those not directly investing, there is a real sense of spending decisions being postponed.
Can Labour afford to increase spending?
One housebuilder I spoke to last week was very concerned that the confusion around what might happen with interest rates in the future was contributing to a situation where there were very few enquiries for new properties.
The one thing that is certain is that Reeves has a major headache, with a multi-billion-pound black hole in the public finances to fill, mainly as a result of Labour’s failure to take the tough decisions necessary to reduce spending.
Incredibly, Labour figures are now even talking about the possibility of increasing spending by, for example, removing the two-child benefit cap. How exactly this can be afforded on top of the existing deficit is a mystery.
The latest figures show the economy barely growing at all, with unemployment rising to its highest level since before Covid. The Chancellor cannot avoid responsibility for this situation.
Her ruinous decision in last year’s Budget to increase employers’ national insurance – a literal ‘tax on jobs’ – means that many businesses cannot afford to take on extra staff, contributing to the rising unemployment numbers.
The best thing that the Chancellor could do in her Budget is reverse the national insurance increase and give businesses a boost, but she is far more likely to go in the other direction and raise taxes, which will have a negative impact on an economy that’s already struggling.
Swinney’s tax rethink
Whatever she decides, there will be consequences for the Scottish Government’s own Budget, which we expect in January. Having previously called for income tax increases by the UK Government, John Swinney now seems to have had a rethink, realising that that would create problems for the Scottish Government under the fiscal framework, meaning that the Westminster block grant would be reduced unless any increases were matched here.
We already see the consequences of the higher income taxes introduced here compared to England. The majority of Scottish workers now pay higher tax than their counterparts south of the Border, making it harder to attract talent to come to live and work in Scotland.
The SNP had a manifesto pledge in 2021 not to increase income tax, stating at the time: “Over the course of the next parliament we will freeze income tax rates and bands.” That pledge was broken by John Swinney himself when he was acting Finance Secretary in December 2022.
Now, there are real concerns that the SNP might do the same again and increase taxes yet further, which is the last thing our struggling economy needs.
Taxpayers not getting their money’s worth
We have not even seen the benefit of the increased taxes being levied. As the public spending watchdog Audit Scotland pointed out last week, in the current financial year the Scottish Government expects to raise an additional £1.7 billion from its income tax increases.
That is money directly coming out of the pockets of Scottish workers which otherwise could be spent paying household bills or stimulating local economies. However, the Scottish Budget is only projected to benefit from these tax differentials by some £616 million, barely a third of the total, due to the poorer relative performance of the Scottish economy compared to the UK as a whole.
Because Scottish earnings are not growing as fast as the UK average, under the fiscal framework this negatively impacts on the block grant. So Scottish taxpayers are literally paying more, but getting less in return.
This all lies against a backdrop where, thanks to the Barnett Formula, spending here is around 20 per cent higher than the UK average, and substantially greater than that in England. And yet we do not see measurably better outcomes on health, education, policing, or across a range of public services. It seems that the more money the SNP have at their disposal, the poorer they are at delivery.
Go for growth
What the Chancellor should be doing next week is putting economic growth first, bearing down on spending (when she seems minded to go in the opposite direction) and supporting the very businesses that we need to help deliver economic growth.
And when it comes to the Scottish Budget in January, rather than breaking more election promises, what the SNP should do is concentrate on economic growth, so our economy performs at least as well as the UK average. That is the way we would have more money to spend on public services without having to increase tax rates further.
That is the approach the Scottish Conservatives would take, making Scotland more competitive on tax, attracting investment and talent, and increasing tax revenue through a faster growing economy. Sadly I fear that our pleas will fall on deaf ears, but we will find out over the next few weeks.
Murdo Fraser is a Scottish Conservative MSP for Mid-Scotland and Fife
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