Unanswered questions of Scotland’s economy

‘Why has wage growth been languishing since the mid 2000s, why has productivity collapsed, what does this mean for our longterm economic future in the world?’

That’s the economist David Eiser speaking. We met him before the 2016 Scottish elections shifted the political landscape and then Brexit turned it upside down. But fundamental challenges remain for Scotland’s economy so, while politics dominate the headlines, we revisit the economics that won’t go away….is raising the basic rate of tax the answer. Is a progressive Scotland prepared for progressive taxes? 

Here, as the Scottish Parliament debates the SNP Government’s draft budget we provide a transcript of our recorded interview with David Eiser who is an Adviser to the Scottish Parliament’s Finance Committee and a Fellow of the Centre on Constitutional Change. In June 2016 he joined the Fraser of Allander Institute to lead the Institute’s work on Fiscal Policy.  

In the interview – which took place at Stirling University –  editor David Gow began by asking what challenges faced an incoming Scottish Government. 

David Eiser: Longer term there are some really big challenges around public finances…how we deal with an ageing population, the fall in productivity growth and wage growth and how we deal with that.

The idea that we solve any of these problems by arguing whether the basic rate should be 20p or 21p or the additional rate should be 45p or 50p… is nonsense

David Gow: So what kind of thing should people be thinking about to deal with these problems?

David Eiser:  A very simple way of looking at that is if your block grant is going to be cut by £1bn you’ve got to at least raise £1bn with your new tax powers. That’s not actually too difficult to do but probably a bit bolder than most of the parties are being so far. But in terms of the longer term challenges if we are not prepared to have really quite substantial tax increases we need to be thinking about different funding models for some public services.

We need to be having a much more honest and open debate around which kind of public services we think should be universal, the extent to which we are prepared to accept charging for certain things. Those are the kind of big important things we need to think about but in an election campaign inevitably we get sidetracked by these exciting new powers around income tax that are very visible and that’s why they were devolved to the Scottish Parliament in the first place

They are very visible, people know how much income tax they pay so they are keen to have a debate on that. But this debate around should we have extra 1p or not isn’t really dealing with those longer term challenges.

Income tax has been cut steadily for seven years

The other thing to note just in context, we’re having all this discussion about income tax – income tax has already been cut pretty substantially just in the period since 2010 and the way it’s been cut has largely been through big increases in personal allowance above the rate of inflation.

So back in 2010 the personal allowance was around £6,000. It’s now £11,000, the UK government wants to raise it to £12.500 by 2020. The SNP actually wants to go a bit further and raise it to £12,750.  These sound like small changes but because they apply to all tax payers they cost an incredible amount in terms of lost revenue – so you are only partially undoing that by saying well what about an extra 1p on the basic rate?

There’s a background context there which is that the main tax which has been devolved is one which has been cut, or revenues from it have been cut quite substantially in the last five or six years and will continue to be cut going forward. So that provides context to the longer term challenges that we face.

David Gow: Is there a prospect of Scotland using the new powers they’ve got to undertake that kind of fairly radical look at the long term that you’re talking about ?

Guinea pig Scotland?

David Eiser: No government wants to volunteer itself to be a guinea pig but it might be that a future SG says, OK, there’s a lot of uncertainty around what would happen if we increased the additional rate of tax from 45p to even just 46 or 47p? in terms of how people will respond, we really have very little idea about that.

If a Scottish Government did decide to make that change and it was a change that was imposed in Scotland but not necessarily in the rest of the UK that would at least give us a bit more information after 1,2,3 years about what the effects might be. It wouldn’t give us a definite answer but it would give us some information. And in other areas as well, you know, different delivery models or the health service or so on, having different policies in different parts of the country might give you some evidence about the effect of those policies.

Of course you never get definite answers because you can always argue the context is different but that certainly is one of the arguments for devolution

You can listen to the interview in full – and hear what Kirstein Rummery and Paul Cairney predicted for the new Scottish Government.


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