Scotland’s independent think tank
Scotland’s independent think tank

Budget Deal Obscures Economic Fundamentals – Ewan MacDonald-Russell

With Scottish Budgets now being announced in Mid-December, it’s easy to confuse the Government’s fiscal giveaways with the more traditional festive gift-giving. The Finance Secretary stands up and lets businesses and the public sector know who’s going to get more than an orange for Christmas. It’s an opportunity to let the Government look munificent, and helpfully due to the season possibly escape some scrutiny from distracted voters.

This year that approach has been rudely disturbed by the reality of minority Government. The intransigence of opposition parties meant Derek Mackay was forced to rely on the votes of the Scottish Greens to pass the legislation. That deal has come at a cost.  New proposals giving powers to local authorities to allow them to raise Council Tax levels, a tourist tax, and introduce a range of levies, including the already infamous workplace parking charge, have been greeted by a barrage of complaints. 

However, for all the legitimate examination this deal will now be subject to, it shouldn’t prevent more detailed scrutiny of the main Budget proposals. There were some major announcements, and just as crucially an update on the expected performance of the Scottish economy.

The scene was set by the publication of the Scottish Fiscal Commission’s growth projections. Whilst no one would claim statistical bulletins were the most exciting of measures, the anaemic growth projections of barely a smidgen over one percent over the next five years were certainly sobering. Those projections matter because they show how little headroom the Finance Secretary has over that time. Weak growth means private sector revenues are unlikely to rise significantly, which means there will be little extra money for the next few Budgets.

That growth gap should be the focus of Scottish Government policy over the next few years. Without economic growth everything else becomes much harder, whether that’s investing in the health service or bringing forward ambitious public policy. The reality, and the retail industry is very conscious of this, is many of the Government’s proposed policy initiatives, from obesity to the environment, have significant costs to businesses. Ratcheting up those costs in an environment where businesses are making minimal profits is unlikely to help either the economy or deliver effective policy.

Within the Budget itself there were some positive moves to help businesses. Most importantly this Government is making headway on business rates. That’s an urgent priority. Retailers pay 22 percent of all business rates. Since 2010 the headline poundage rate has risen from 40.7 percent to 48 percent this year. Of course, since 2016 that’s been exacerbated for 22,000 Scottish businesses who are subject to the Large Business Supplement – whose rate last year was over 50%. 

Therefore, it was prescient to take a decision to bear down on the poundage rate. Whilst it’s still an increase, the below-inflation rise means the headline rate will be a touch below that in England. If not for the Large Business Supplement being so high here, the argument over the most competitive rates system could have been settled.

Regardless it’s an important step, and one the Finance Secretary deserves praise for. It’s also necessary as other Ministers appear relentless in their attempts to increase the cost of business. That’s why the Budget is so important to our Members. It’s the opportunity to offset some of those increases, and to consequently balance the cost of business.

Like other Governments in the UK, Mr Mackay hasn’t really gone far enough. The rates announcement isn’t even a tax break, after all rates bills will still rise by 2.1 percent next year (for comparison Scottish retail sales increased by 0.5 % in 2018). When the £65 million per year cost of the Large Business Supplement being higher than England is added, it’s clear there is plenty of room for more to be done to improve the competitive environment.

That may need to happen swiftly. The retail industry went through a bruising 2018, with a number of well known brands stumbling and tumbling as they dealt with the challenges of digital disruption and a volatile economy. Consumers too are feeling the pinch as their Council Tax and other bills rise above inflation. The continued uncertainty around Brexit is another concern – but it’s partly masking the wider structural issues affecting both retail as well as the wider economy.

The Finance Secretary is in a difficult position. Years of rising costs mean many businesses have cut back, reducing his overall revenue stream. Yet to stimulate growth he may need to take a short term hit through measures which help businesses.  That’s ever-harder in a political environment which seems more focused around zero-sum antagonism than cooperative alignment. The focus upon the short term adds an unhelpful element of volatility and makes challenging structural issues significantly harder.

There will be a lot of headlines around levies and charges over the next few weeks. But it’s much more important the Scottish Government takes a wider, holistic view of the economy, and focuses its efforts on giving businesses the space to succeed. Ultimately, that’s the only way to generate the money which can go on the annual Budget splurge.