Doubling down: Why Shona Robison's economic plan is a failure on two vital fronts

The timing was ominous. No sooner had Labour’s Anas Sarwar and the SNP’s Humza Yousaf unveiled their New Year visions for economic growth than the Stewart Milne Group went into administration.

Addressing an audience in Rutherglen Town Hall, the Scottish Labour leader told how his party would “change this country for the better” and “get our economy back on track” by investing in “the jobs of the future”, scrapping zero-hours contracts and introducing a “genuine living wage”.

A few hours on, the first minister unveiled his vision in front of journalists gathered at the University of Glasgow, promising to use “our resources, advantages, key sectors and talents” to start the “journey to economic normality”.

Hours later it was revealed that Stewart Milne had gone bust.

The construction sector has long been known as a bellwether for the economy; if one of Scotland’s best-known housebuilders has failed that means the economy is in a decidedly difficult place. Yet it is against that backdrop that the Scottish Government will now attempt to push through a budget that has left economists of various stripes scratching their heads.

It was well trailed ahead of the mid-December budget announcement that Scotland faces a funding gap of £1.5bn in the next financial year, with expected income levels falling well short of the spending commitments that had already been made. Worse still, without radical intervention, £1.5bn will grow to £2bn in just a couple of years.

It was no surprise, then, that finance secretary Shona Robison announced changes to the government’s tax-raising efforts when she unveiled her first budget to the chamber. Though the Scottish Fiscal Commission says it will raise only £82m – a drop in the ocean in the context of £2bn – the government plans to raise the top rate of income tax from 47 per cent to 48 per cent and add a new 45p band below it.

Swingeing spending cuts have also been mooted, with economists at the University of Strathclyde’s Fraser of Allander Institute (FAI) noting that “the overall outlook for spending is a tough one”. Money for social security is due to increase by £1bn while health will receive a real-terms boost, but according to the FAI analysis “pretty much all else bears the brunt of the funding constraints”.

That means a reduction in free university places for Scottish-domiciled university students, 6.6 per cent less cash to spend on teaching in Scottish colleges, a cut of almost £200m to the Affordable Housing Supply Programme, and a drop of £150m for local authority capital grants. The list goes on.

Robison was quick to blame her Westminster nemesis Jeremy Hunt for the pain that is going to be inflicted, accusing the UK Chancellor of making decisions that left her trying to balance Scotland’s books “with one hand tied behind our back”. The Scottish Government has long spun a pretty strong line when it comes to blaming Westminster for all its fiscal woes and there is certainly some justification for saying decisions made by MPs have left MSPs with less money to play with.

The amount the government must pay in to ensure it can continue to meet pension promises made to retired police officers, for instance, will rise from £291.4m in the current financial year to £481.4m in 2024-25. The increase is equivalent to the amount being cut from the affordable housing budget, must be factored in for the next several years at least, and is, according to pensions consultant John Ralfe, the result of “changes from the Westminster government on how annual pension costs should be assessed”.

Yet in some respects the Westminster government has done the Scottish Government a favour. The National Insurance cut that came into effect earlier this month means Scottish workers will have a little more to spend in the Scottish economy each month. It will hardly be enough to turbocharge growth, but the sums will be small enough that they will be recycled rather than saved.

And, while there has been some consternation that Robison’s tax changes will further widen the gap between what people pay in Scotland compared to what would be levied if they worked in England, if Hunt does as expected and cuts income taxes when he announces his own budget in March, it would be beneficial for the Scottish Government as it would result in a larger pot of block grant money to play with.

“If England cuts income taxes it will actually help us because it will increase the grant that we get from Westminster,” says University of Stirling economics professor David Bell. “Scotland gets so much of the income tax generated in the UK and the amount is adjusted depending on how much is generated in England. If less is generated in England then less is taken away – we get more, which is good for us.”

There was much talk in the aftermath of Robison’s budget, as there always is when Scotland-only income tax rises are mooted, that the increases at the top end will drive high-earners out of the country. With the changes meaning anyone earning between £100,000 and £125,000 will face a marginal tax rate of 69.5 per cent, Iain Kennedy, chairman of BMA Scotland, said in December there were concerns that senior doctors would begin to vote with their feet. Similarly, Judith Cruickshank, chairwoman of the Scotland board at Royal Bank of Scotland, said such changes made a job in Scottish financial services appear less appealing.

The evidence that high-earning, high-spending workers up sticks as a result of tax divergence between neighbouring countries is limited, though, according to Francis Breedon, professor of economics and finance at Queen Mary University of London and a member of the Scottish Fiscal Commission.

“We spoke to people in countries where there are different tax rates across regions and we found that the effect is relatively small,” he says. “People are surprisingly loath to move out of a region they are already in – in the US, where there is a millionaires tax, people stayed in the states that have that – and the big behavioural impact tends to happen quite quickly.”

Yet while the tax differential is unlikely to see swathes of economically active people leaving the country, Bell believes it could dissuade people from moving here. The Scottish Government has long made the point that, given its ageing population, Scotland needs to dramatically grow the working-age cohort to pay for the elderly’s needs – something it believes it could achieve if it had control of its own migration policies.

But at a time when the UK Government is seeking to move high-value jobs from England to Scotland as part of its levelling-up agenda, Bell says the widening tax differential north and south of the border is likely to make people think twice about making the move. Notably, the Foreign, Commonwealth and Development Office has already been unable to redeploy a planned 500 roles to Scotland and is moving its Scottish base from East Kilbride to Glasgow in a bid to make the offer more attractive.

Yet Jeanette Findlay, professor of economics at the University of Glasgow’s Adam Smith Business School, says Robison’s tax changes do not go far enough and are going to prove woefully inadequate. Citing a report compiled for the STUC by Howard Reed of Landman Economics, Findlay says the Scottish Government could have used the budget to propose far more progressive tax measures that would give it greater spending power in the short term and enable it to lift people out of poverty – improving their economic opportunities and so the country’s economic performance – in the longer term.

In his report, Raising taxes to deliver for Scotland, Reed suggests a range of income tax reforms similar to Robison’s, including lowering the higher-rate threshold to £40,000, increasing the higher and top rates by a penny, and introducing a new 45p rate that would apply to earnings of £58,000.

If that came into effect from April this year and was coupled with increases to Land and Buildings Transactions Tax, the Additional Dwellings Supplement and Scottish landfill tax it would immediately give the government an additional £1.1bn to spend, Reed reckons. A further £2.6bn a year could be generated by, among other things, introducing a wealth tax, replacing council tax with a proportional property tax and introducing green levies on private jets and frequent fliers.

“Productive spending is spending on things that will increase the performance of the Scottish economy as opposed to things that are about alleviating poverty and inequality, but I don’t think it’s a useful way to look at things,” Findlay says. “Alleviating extreme poverty has massive potential for increasing productivity. Cuts to the health service, cuts to higher and further education – all these things have an impact on productivity. 

“If you bring up children in poverty that causes problems for education, which has an impact on future productivity. There are long-term health problems associated with raising children in poverty and the state then needs to deal with that. It’s a mistake to think that those aren’t good things to focus on for long-term improvements to the economy […] The Scottish Government tells us ‘this is the position we are in because we don’t control the budget’, but they do control things. It has to go beyond a new band of tax or an increase in the top rate.”

Generating more money for the system would also help stimulate economic growth in the shorter term as it would free up capital budgets and encourage private-sector spending. Local authority umbrella group Cosla said that the planned cuts to councils’ capital budgets are “particularly devastating” as they “put at risk several significant capital projects which would promote inclusive growth across Scotland”. Indeed, large-scale building projects such as the replacement for HMP Barlinnie are already looking under threat, and Bell says private sector employers need certainty that such projects are secure before they will be willing to invest in the economy.

“There’s a capital plan for improving the infrastructure of the country and if the government sticks to that the private sector investment will follow,” he says. “The public sector isn’t in a position where on its own it can drive growth, but certainty and little bits of investment trigger bigger money coming in.”

When Yousaf finished giving his big economic speech a senior SNP communications officer posted on social media platform X that “economic plans are not the sexiest, but they ARE important”. It was economically illiterate, but she got one thing right – this is a perilous time for the Scottish economy, and it is hugely important that the government gets its plans for stability and growth right. There’s no need for sexy to come into it.