Sturgeon’s war on business is strangling Scotland’s economy

There was one minor and one big surprise in the Scottish government's latest budget, which was set out by Kate Forbes, the finance secretary, last week.

The minor surprise was the Sturgeon administration's decision to provide less business rates relief, in comparison with England, to the retail, hospitality and leisure sectors during the next financial year. Businesses in Scotland will be eligible for 50 per cent relief, capped at £27,500 per rate payer, but only for the first three months of the 2022-23 financial year. In England, the same businesses will be eligible for 50 per cent relief for the whole financial year.

A winding down of rates relief was anticipated, but the full withdrawal of support just three months into the next financial year was unexpected. It reinforced the sense, especially pertinent in Scotland since Nicola Sturgeon replaced Alex Salmond as first minister, that business and enterprise is a long way down the list of Scottish government priorities.

The big surprise came from the Scottish Fiscal Commission (SFC), Scotland's official economic and fiscal forecaster charged with supplying the government with independently produced numbers for its budgets. One of its tasks is to forecast income tax receipts (income tax was mostly devolved in 2017-18). Having dramatically revised its forecasts from earlier this year, the SFC now expects upcoming Scottish budgets to be lower as a result of income tax devolution, despite the Scottish government pushing those taxes up.

It is worth digging into the numbers. Diverging Edinburgh-London income tax policies mean people in Scotland earning over £27,850 pay higher tax than those in the rest of the UK. On a macro basis that equates to Scots forking out over £500 million more in income tax this year than they would under UK policy. But, and here's the kicker, the Scottish government is set to collect just £6 million more in extra spending this year compared to income tax not being devolved. Scots are paying hundreds of millions of pounds more in tax just to stand still.

Looking ahead, it gets even grimmer. For 2022-23, the SFC is predicting Scotland's budget will be worse off to the tune of £190 million compared to the comparable position were income tax not devolved, with the funding shortfall expected to reach £417 million by 2026-27. The chart below from the SFC shows the negative impact income tax devolution will have on Scotland's budget in coming years.

Income tax net position and illustrative position excluding Scottish policy change

So why the negative impact? It is because Scottish employment and earnings have grown more slowly than in the rest of the UK since Holyrood took control of income tax, and that's even after accounting for differences in population growth.

'From 2022-23, total earnings and employment are expected to continue to grow more slowly in Scotland than in the rest of the UK, and these economic factors are increasingly outweighing the additional income tax revenues from policy changes,' says the SFC.

The Commission says the relatively slower earnings and employment growth in Scotland compared to the UK arises from several underlying factors. These include Scotland’s changing demographics and a faster growing share of the population among older age groups. Falling labour market participation of younger age groups, slow growth in Scottish average earnings, particularly in North East Scotland relating to oil and gas activity, and more rapid growth in earnings in the UK, driven in part by strong growth in financial services, are also to blame.

To move the net position back towards zero or into positive territory, Scotland would need a period of relatively faster growth in income tax revenues per head. That would require a change in tack from the Scottish government — a move away from populist policies towards pragmatic ones. The chances of that seem low.

A direct line can be drawn from populist SNP policies implemented since 2007 and today's increasingly sclerotic economy.

Take one area: education. Between 2008 and 2014, the SNP made cuts to further education colleges that led to a 48 per cent fall in part-time students and a 41 per cent reduction in the number of students aged 25 and over. It did this so it could prioritise free university tuition. But the further education courses (training for would-be chefs, electricians, hairdressers etc) were vital to skilling and re-skilling workers so they could play a productive role in the economy. The impact of those cuts is playing out today.

Scotland has now had 14 years of governance by people whose primary aim is the break-up of the state, and it shows. Scotland needs a period of anti-populism if its economy is to become competitive again, but that looks further away than ever.

Forbes' decision to take a hard line on business rates relief is just the latest signal of an administration that is at best uncomfortable with business, and at worst anti business. There is no stronger confirmation of this than Sturgeon's decision earlier this year to bring the Scottish Greens into government with her.

Populism has scarred Scotland's economy, and it looks like it's going to get worse before it gets better.