Scottish growth does matter and greater focus is needed

The position in Scotland is hardly any better, with the Scottish economy also still smaller than it was prior to the pandemic.

The UK and Scottish economies used to generate significantly higher growth than they have over the past decade – so what’s happened? Unfortunately, this defies one single and easy explanation.

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Some will claim that the blame lies with Brexit, and while it’s been a headwind, the pace of growth was weak prior to 2020, and indeed 2016. Are policy failures to blame? In part. Are some of the challenges structural? Undoubtedly. Are we focusing enough on generating growth? No. Are those downplaying the importance of economic growth unhelpful? Yes.

If we are serious about improving funding for public services and reducing inequality, we need to get the economy growing far faster than it currently is.

It was striking that despite the performance of the Scottish economy now playing a significant role in determining the resources available to fund public services, the “debate” around the recent Scottish Budget largely focused on claims about how tax powers were being used to grow the budget by increasing income tax.

For example, the Scottish Government plans to continue its policy of freezing the threshold at which someone starts paying higher-rate tax – with more and more people set to be higher-rate taxpayers. The number of higher-rate taxpayers in Scotland is up 23% since 2016/17, at the same time as it has fallen by 10% in the rest of the UK.

To be clear – this is not because taxpayers in Scotland are becoming significantly more prosperous than elsewhere in the UK but because they are being taxed increasingly more than those in the rest of the UK.

This year, many more teachers, NHS staff and those working in the police and fire service are likely to find themselves higher-rate taxpayers, paying a marginal tax rate of 54%. Nearly one in five taxpayers in Scotland are now higher-rate taxpayers.

Someone earning £50,000 in Scotland is paying around £1,500 more in income tax than they would in the rest of the UK.

Some argue that this is the price to help address funding pressures facing public services. But how much do the different tax changes announced in December raise?

Helpfully, the Scottish Fiscal Commission publishes a summary of the impact of the proposed tax policy changes alongside the Budget.

The reduction in the threshold for paying additional rate tax – that’s expected to raise £8 million next year. The increase in the additional rate to 47 pence? That garners another £3m. The increase in the higher rate to 42 pence? That rakes in £92m. Freezing the basic rate band? That provides an additional £18m. Freezing the starter rate band raises another £6m.

But with the Scottish Budget set to nearly £45,000m next year, these additional revenues are tiny in comparison.

Bluntly, we are not going to address Scotland’s public finance challenges through these sorts of tax changes. Instead, we need to get the economy growing far quicker than it has been in recent years.

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One of the claimed “gains” from the Scottish Parliament having additional fiscal levers was that it would focus the minds of our MSPs much more on the performance of the Scottish economy. Recognising that growing the economy expands what can be achieved across all areas of government.

There have been notable attempts over the post-devolution era to do more to stimulate economic growth – all well-intentioned – and some have succeeded, but we seem to have stopped paying much attention to it in recent times. Worse, some seem to be claiming that economic growth doesn’t matter.

If we are serious about increasing investment in public services, we need to start talking about growth.

Stuart McIntyre is professor of economics at the University of Strathclyde