Matthew Lynn

The last thing the UK needs is higher Scottish taxes

The last thing the UK needs is higher Scottish taxes
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A top rate of 50 percent? A wider range of tax bands? Lower allowances? Or some combination of all three? When it unveils its Budget on Thursday, the Scottish National Party is just about certain to use its power to increase income taxes. The only real debate is about who will take the hit.

On the day, Nicola Sturgeon will no doubt wheel out the usual lines about the need to ‘invest’ in public services, reverse ‘Tory cuts’, and perhaps add in a sound-bite or two about the damage done by a ‘hard Brexit’. And yet, in fact higher taxes will only damage the Scottish economy, and by extension the whole of the UK. We will all end paying a price for the SNP’s recklessness.

Even if you exclude oil, Scotland has always been one of the more successful part of the UK economy. Edinburgh is a major financial centre and Glasgow is not far behind. Whisky is the UK’s most important net export. Parts of the North have had significant economic problems for three decades. But across the border, everyone has been doing fine.

But there is mounting evidence it is starting to under-perform. For starters, growth is now significantly lower. Year on year Scotland is only growing by 0.5 percent against 1.5 percent for the UK as a whole. In the latest quarter, it expanded by a mere 0.1 percent. Productivity has started to lag significantly behind the rest of the country. The rate of start-ups is miserable, while they are booming in England. It is not a catastrophe yet. It takes a long time to ruin an economy. And yet there are worrying signs that Scotland is now on a path of relative decline, which it never was in the past.

True, the fall in the oil price has not helped. But neither has the SNP. It has already imposed a re-heated 1970s statism, with national investment banks, higher levies on business, and more green taxes. In the background, its never-ending campaign for independence adds a layer of uncertainty that most businesses could probably do without. Now it seems intent on the most radical split with the rest of the UK yet. Income taxes were already slightly higher because Scotland has not matched increases in top-rate thresholds. But now it looks set to add higher headline rates as well.

The can only have one outcome. It will make the country poorer. After all, why pay higher tax in Edinburgh when you can keep more of your salary a few miles to the south? Lots of countries have different income taxes by region or state – the United States, for example, or Switzerland. And they all show clearly that there is – surprise, surprise – a steady drift of people and companies from the high tax to the low tax region. Scotland is not going to be any different.

That might be good news for estate agents in Manchester or London, or wherever those Scottish companies go. But it will be bad for the country as a whole. If Scotland carries on underperforming, then its subsidies from the rest of the country increase. And it will become a drag on overall UK growth. Scotland is an important market for any British company. As it stagnates, sales will suffer. If and when Scottish taxes are increased later this week, everyone in the rest of the country may well breath a sigh of relief that at least it doesn’t apply to them. But in fact, it will end up making the whole of the UK poorer – and that is the last thing anyone needs.