By David Lonsdale

The dust may now have settled on the Scottish Government’s Budget, however the frustration felt across the business community has not.

There was no doubt Finance Secretary Shona Robison had a challenging fiscal backdrop to grapple with. This was due to factors including tepid economic growth, elevated inflation, and several chunky spending commitments.

A slew of tax rises and spending cuts were unveiled to deliver a fiscally balanced one-year Budget. However, difficult decisions to make major structural changes to the way the public sector is organised and run, e.g. fewer public bodies or a rescinding of the no compulsory redundancies policy, were put off till a later date or apparently not considered. This risks a fiscal gap in subsequent years. Many workers and businesses have been left with a bad feeling Ministers will be back for more in tax at the next Budget.

There were some positives in the Budget. More money for the police could help bear down on spiralling levels of shoplifting. The council tax freeze should support consumer spending, albeit the decisions on income tax - including on thresholds – will impact the money available to spend in shops. The freeze to the headline business rate – which the Scottish Retail Consortium was in the vanguard of championing - will benefit modestly-sized stores.

However, a perennial problem with Budgets is they often look less positive once the small print is digested.

Firms occupying medium-sized and larger premises won’t just miss out on a rate freeze, instead they are staring down the barrel of a 7% hike in rates bills from April. 22,000 commercial premises are affected, a quarter of these are shops.

Ministers drew the ire of the smallest retailers by not matching Wales and England in offering a temporary rates discount. This despite the increase in the National Living Wage being at the top end of what most retailers can swallow.

There was precious little else in the Budget to mitigate rising costs. For some it was much worse, with a potentially painful sting in the tail to deal with.

In the depths of the 136-page Budget document, unheralded either in the speech to MSPs or in any accompanying press statement, was a pledge to consider a business rates surtax on grocers.

Not that long ago grocers were lauded for their efforts to keep people fed during Covid. More recently they’ve been praised for efforts to keep down shop prices during the costs crunch.

So why the change of heart from Ministers? The Budget document explicitly says it’s all about raising extra tax revenue for the devolved administration. This would be more persuasive if a greater emphasis had been placed on cutting the cost of running government. There’s plenty of scope as the spending review eighteen months ago identified an astonishing total of 129 public bodies under the purview of the Scottish Government.

There are myriad problems with any potential new grocers’ tax.

Firstly, the announcement came without warning. This falls woefully short of the principles of the New Deal for Business which includes ‘no surprises’ and the involvement of business at the inception of policy development. It suggests more than a whiff of a predetermined outcome.

Secondly, any new surtax would come on top of an already onerous rates burden. For many firms the business rate will rise to a 25-year high this spring. A new levy would be wholly at odds with the Scottish Government’s pledge to ‘maintain a competitive non-domestic rates regime’, as well as the thrust of the Barclay Rates Review which was about minimising complexity and ensuring competitiveness in the rates system.

More worryingly for the wider economy, this arbitrary move sends a message about the predictability or otherwise of devolved policy making on tax. Businesses make long term investment decisions based on the costs of operating and the predictability of tax and regulatory decisions. A more ad hoc and less predictable approach towards levying taxes aimed at specific sectors rings alarm bells. It’s likely to affect commercial decisions and make economic recovery more arduous.

A new levy on grocers’ smacks of incoherent policy making within government. It’s a bizarre way to behave when other ministers are looking to grocers for help to implement new regulatory measures including in-store restrictions on alcohol marketing, curbs on selling products high in salt and sugar, and a likely rise in alcohol minimum unit pricing. It comes months after the deposit return scheme farrago stiffed grocers with a bill for tens of millions of pounds.

A surtax could also have consequences for the state of our high streets and town centres. Escalating rates bills even further could undermine support at future ballots for business improvement districts (BIDs). It's not difficult to see bumper increases in rates bills causing those affected to start voting consistently against BIDs, which are usually funded by a surcharge on the business rate.

Finally, shop staff themselves may not be immune from the impact of any new surtax. That’s because staff bonuses at some retailers are dependent on the ‘profit and loss’ performance of their own individual store.

At this moment it is unclear how developed government’s thinking on all this is. We don’t know the scope of the proposed levy, how it might work, how much affected retailers would be expected to stump up, whether it would be a slab tax like the higher property rate, and how long it would apply for. We’ve written to the Finance Secretary seeking for clarification.

What is clear is that Scotland’s economy isn’t in great shape just now. The Budget seems set to make things more challenging still.

David Lonsdale is director of the Scottish Retail Consortium