Brexit 'utter madness', Scottish income tax fears - poll

It signals an overwhelming belief the prospects of a second independence referendum have diminished in the past 12 months.

And the poll reveals a firm view the Scottish Government is not correct to use its devolved powers to levy greater income tax on higher earners.

Asked if she was surprised by any of the responses, nations director for Scotland at the Institute of Directors Catherine McWilliam said: “The way members responded is a fairly accurate representation of the informal conversations they are already having with us. It’s clear that our members have strong views and are looking for an outlet to share them and to be heard.”

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She flagged “dissatisfaction” among members that their views were not being heard by politicians.

McWilliam said: “We’re in a General Election year, and when we emerge from that, we’ll be closing in on a Scottish election. There’s a lot of discussion around tactical voting, voter turnout, and a lack of confidence in the current set-up. The views expressed in this survey are likely reflective of the wider business community in Scotland, who are all voting constituents, so their voices are crucial.”

She added: “Members are articulating a level of dissatisfaction that their views aren’t being heard at government level. While steps are being taken to rectify this, the New Deal for Business Group as an example, there is concern over the lack of action.”

The New Deal for Business Group was established by Humza Yousaf shortly after he became First Minister in the spring of last year.

IoD Scotland membership continues to be predominantly from the private sector, which accounts for 79% of the base.

In the survey, 68% of the respondents were from firms with 100 or fewer employees.

The poll was conducted between January 22 and March 4.

Asked for their views on whether Brexit had hindered or helped the Scottish economy, or neither, 101 of 133 respondents, 76%, said it had been a hindrance. Only 4% believed it had helped, and 20% opted for “neither”.

One respondent said: “Brexit is a real and ongoing issue for Scottish companies operating in Europe. It has affected every facet of business from bidding for contracts to importing and exporting through to hiring staff.”

The IoD Scotland member who made the “laughing stock” assertion declared: “The current UK Government makes our whole country a laughing stock in the various [countries] in which I work. Building on Brexit, policies such as the Rwanda scheme make this worse.”

And a third respondent declared: “As a commercial landlord many of our tenants have been hit by significant costs as a result of Brexit, including a more than 100% increase in haulage costs. This, coupled with inflation, particularly in raw materials, has made some businesses unviable. We are seeing far more businesses contracting – as evidenced by reducing the amount of commercial property they lease – and expect this to accelerate in coming months as business leaders’ personal loans run out.”

Among other hard-hitting criticisms of Brexit, the respondent who characterised it as “utter madness” said: “Ninety per cent of our business comes from international trade. Brexit has severely impacted our ability to do business in Europe by creating barriers to demand in the minds of European distributors as well as adding significant time and financial costs to trading in the EU. Brexit has been massively harmful to Scotland’s craft spirits industry by placing additional burdens on the sector.

“Craft distillers who are the length and breadth of this country creating rural jobs are now under pressure from the cost of living crisis, facing a local UK market which is in decline and now struggle to access one of the world’s largest economies which is right on our doorstep. Utter madness.”

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Another respondent, from the university sector, highlighted reduced opportunities for UK students arising from the UK’s departure from the European Union. This IoD Scotland member declared: “I am responding as a university employee and educationalist who has seen reducing opportunity for students as a result of Brexit and reducing incoming skills through European students choosing to study in Scotland.”

Another respondent said: “We lost work in Europe due to their decision to look after European country companies first and with Brexit we no longer should be used. Contract offshore Germany was therefore lost.”

While the comments on Brexit were overwhelmingly negative, one highlighted a belief “threats” relating to independence were greater. This IoD Scotland member said: “As the biggest share of trade is across the UK border, Scexit threats are greater.

“We trade with Europe and after a brief period of disruption Brexit has had little impact as the additional paperwork for exporting to the EU was already in place for exports to other non-EU countries.”

Mr Yousaf declared in a speech last month to the London School of Economics and Political Science’s European Institute that Scotland had been deprived of £1.6 billion of devolved public spending in calendar year 2023 as a direct result of Brexit.

SCOTLAND'S MISSING MONEY

The National Institute of Economic and Social Research think-tank calculated the loss at £1.2bn, still a very significant number in relation to the Scottish Budget, which has been set at £59.7bn for fiscal year 2024/25.

Richard Hughes, chairman of the Office for Budget Responsibility, said last spring of Brexit’s effect: “We think that in the long run it reduces our overall output by around 4% compared with had we remained in the EU.”

The OBR was set up in 2010 to provide independent economic forecasts, by former Conservative chancellor George Osborne.

Centre for European Reform associate fellow John Springford estimates Brexit had by the second quarter of 2022 reduced the UK’s GDP by 5.5%.

Meanwhile, economists at US investment bank Goldman Sachs have calculated the UK’s economic output has fallen short of that of similar countries by about 5% since the 2016 Brexit referendum.

Goldman economists James Moberly and Sven Jari Stehn declared in a research paper published on February 9: “The UK has significantly underperformed other advanced economies since the 2016 EU referendum, with lower growth and higher inflation.”

In the 2016 Brexit referendum, 62% of people who voted in Scotland wished to remain, while 38% wanted to leave.

This was in stark contrast to the narrow 52% to 48% vote for Brexit in the UK as a whole.

Asked if the Scottish Government is doing a better or worse job on business and the economy than the UK Government, or whether their performances are similar, 68% of the 133 respondents, 91 in all, said “worse”, 13% declared “better” and 19% believed “similar”.

The UK economy fell into recession in the final three months of last year with a second consecutive quarterly contraction in output. In 2023 as a whole, the UK recorded economic growth of just 0.1%.

Scotland’s gross domestic product fell by 0.6% quarter-on-quarter during the final three months of 2023, a steeper drop than the corresponding decline of 0.3% in the UK as a whole, official figures show.

Over last year as a whole, the Scottish economy grew by 0.2%, double the rate of the UK’s very modest expansion.

The International Monetary Fund forecasts the UK economy will in 2024 record the second-weakest growth among the Group of Seven leading industrialised nations.

The UK is expected by the IMF to expand by 0.6% this year, marginally ahead of the 0.5% expansion forecast for Germany. France is forecast by the IMF to grow by 1% this year. The US is projected by the IMF to expand by 2.1% this year.

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One respondent to the questions posed by The Herald and IoD Scotland said: “At a time when business is grappling with [the] cost of living crisis and all the impacts, reducing the frictional costs of business should be a key focus of government. At present with the increased tax complexity, the implementation of short-term lets policy, the living wage impact on tenders, etc, it appears that the Scottish Government is constantly increasing red tape and friction.”

Another declared: “The current SNP Government seems completely disinterested in business and more concerned with championing minority issues.”

Another IoD Scotland member said: “The Scottish Government has missed the opportunity to use devolution to our advantage and has now overseen an economic decline relative to our UK counterparts. Scotland is starting to look like a rudderless high-tax, low-growth, peripheral state with declining, expensive public services.”

Another of the respondents declared: “The focus of the Scottish Government seems to be on providing more benefits for the less economically active. However, we need a strong, and growing, [economically] active portion of the population if you are to truly provide progressive policies.

“These policies require significant new cash, and squeezing the existing taxpayers ever harder is like milking the cow dry.”

However, another IoD Scotland member said: “Business and growth never seems to be on top of the agenda of any UK government and our infrastructure is very poor compared to international standards.”

Meanwhile, another respondent declared: “Measures by SG (the Scottish Government) have mitigated increasing poverty levels but not by much. Poverty levels and increasing child poverty and homelessness pose significant challenges to equitable economic development and growth.”

Asked if the Scottish Government is right to use its income tax powers to raise additional tax from higher earners, 78% or 103 of the 132 respondents said it was “not right”. Meanwhile, 22% or 29 respondents said it was right.

One IoD Scotland member said on the taxation issue: “Staff are no longer bound by location to work – we will see higher-earning staff move to England, pay less tax, but continue to work in the same roles on a hybrid basis. The differential between tax authorities is becoming too wide.”

Another declared: “As a lifelong SNP supporter I can no longer support a party that is hell-bent on providing freebies in an attempt to ‘fairly’ distribute wealth, rather than actually looking to increase the overall wealth of the nation.

“Moving funds from one group to the other in the name of equality is not the answer. Their policy to tax the ‘rich’ will drive many, many people who create wealth and jobs out of the country.”

Meanwhile, another IoD Scotland member opined: “Differential personal taxation is economic suicide for Scotland, as is the ‘red line’ around free university education. The current Scottish Government is ignoring reality, and business, in most of its current policies.”

The latest Scottish Budget, unveiled in December last year, increased further the differential between the tax paid by high earners in Scotland and those in the rest of the UK.

Another respondent said: “Business needs a return on its investments, and this is constantly stifled by this Government. Waste like the ferries, the failure to control projects like NHS and hospitals etc, shows a lack of understanding and failure on their part. We are being taxed out of existence for the benefit of those unemployed or unwilling to work, along with incompetence.”

Meanwhile, another IoD Scotland member flagged tax planning they were undertaking, declaring: “Personally, I have made decisions on tax planning to mitigate and further reduce the tax burden as a direct result of the proposed tax amendments. I know others seeking to relocate and predict tax gain to be minimal as a result. Beyond this, colleagues working in the central belt can consider moving south and travel for office days to avoid significant tax penalties.”

And another respondent said: “Higher taxes gives a clear message to entrepreneurs, employers and employees: take your business elsewhere.”

However, another IoD Scotland member said: “The questions are a bit more complex especially around tax.”

And another respondent declared: “I have no issue with SG levying more tax but would like to see a clear plan for higher tax resulting in better outcomes and services. Education is in a mess, NHS is overstretched and the additional tax appears to be filling a black hole.” One IoD Scotland member commented: “The increased tax itself isn’t a problem but the perception could be.”

Income tax north of the Border has been a hot topic recently.

Kate Forbes, the former cabinet secretary for finance and the economy who lost out in the SNP leadership contest to Mr Yousaf, set the cat among the pigeons earlier this year by questioning the Scottish Government’s policy on income tax.

Writing in a Highland newsletter, the Mail on Sunday reported in February, Ms Forbes declared: “Continually increasing taxes is ultimately counter-productive over the long term, even if you agree with it ideologically, because it ultimately reduces public revenue.

“The forecasts for what the Scottish Government will raise through its latest changes to the top tax bands is just over £80 million. That isn’t to be sniffed at. But the forecasts also suggest they’ll lose £118 million they could have raised because of behavioural change –people leaving or reducing their hours or treating their income differently. That illustrates we need to invest in people, in job creation, and in better wages. That way the tax take will increase.”

The forecast of £118m comes from the Scottish Fiscal Commission and relates to the reduced yield it sees from behavioural change in 2024/25.

Forbes argued that, rather than taxing existing earners more, the best plan was to increase the number of people paying tax in the first place.

She declared: “I’m constantly going on about the tax base. What I am really talking about is people. Calling for a bigger population, through inward migration and retaining our people, is exactly the same thing as wanting to see the tax base increase.”

TAX POLICY IN SPOTLIGHT

In her Budget speech in December, outlining the Scottish Government’s latest decisions in relation to its devolved powers on income tax, Deputy First Minister and Cabinet Secretary for Finance Shona Robison declared: “When public services need investment and protection from UK Government cuts, this Government does believe that those with the broadest shoulders should pay a higher tax rate.

“And, to be clear, by the broadest shoulders, I mean the top-earning taxpayers.”

She announced that a new income tax band would be added to the Scottish system – the advanced rate. This is being set at 45 pence and will apply on incomes between £75,000 and £125,140.

Robison also announced the top rate, applying above £125,140, would be increased by one pence to 48 pence in 2024/25.

She declared the Scottish Government was “taking action to support our colleges, universities and skills system with over £2.4 billion of investment –including protecting free tuition and driving forward our commitment to widening access”.

In The Herald and IoD Scotland poll, 85% of respondents believed the probability of an independence referendum had fallen in the last year.

Of 134 respondents, 114 signalled a belief that this probability had declined. Only 5% thought it had increased. And the remaining 10% believed the probability of an independence referendum had stayed the same.

With the poll having been conducted between January 22 and March 4, this means the “last year” included a period preceding Mr Yousaf taking up the position of First Minister. He was elevated to this post on March 29, 2023. Nicola Sturgeon announced her intention to resign as First Minister on February 15 last year.

Comments from respondents on both sides of the independence debate were robust. One IoD Scotland member said: “Independence is a complete farce and a waste of taxpayers’ money.”

Another declared: “The Scottish Government needs to drop talk of independence and concentrate on running the country.”

And a third respondent said: “Time the Scottish Parliament was abolished. It does no good and costs a fortune to run.”

Another IoD Scotland member opined: “ScotGov is full of unintelligent and/or ill-informed place-(wo)men whose priority is political (especially independence agenda) rather than our economy or the good of the country. This is hugely detrimental to Scotland.”

However, another respondent declared: “Scotland is blessed with an abundance of natural resources, yet the standard of living, economy and other factors are well below those of comparably sized neighbours (Norway, Denmark), because so much benefit is siphoned off down south.

“This needs to end and fairness to prevail. Westminster is unlikely to give away these benefits to it, so independence is the only real route to securing and retaining these benefits within Scotland. Since independence is unlikely to be given by Westminster, it needs to be taken.”

Meanwhile, another respondent said: “Scottish and UK governments should work together better rather than focus on party politics and constitutional rivalry.”

And another IoD Scotland member asked: “What evidence is there that devolution has been a success?”

Asked if the responses to The Herald’s questions to IoD Scotland members suggest the need for specific policy action by either of the Scottish or UK governments and, if so, what that would be in each case, McWilliam replied: “The ask is broadly the same across the board – business leaders need better, more collaborative communication. In the past year, they’ve seen several changes at ministerial and civil servant level, against a backdrop of wider political discord.

“Our members feel that this has hindered progress and stalled productive conversations. Business leaders appreciate consistency and follow-through from decision-makers, which in turn would result in a much-needed increase in business confidence.”

She added: “Having more leaders around the table where decisions are being made would allow for the opportunity to co-design solutions to the big challenges facing business, from net zero and energy to skills and just transition.

“The ask from our members is to involve leaders at the beginning of the policy process, not to be asked for feedback after the implementation stage.

“By creating clear channels of communication and a meaningful opportunity to engage with decision-makers about the opportunities and challenges presented by incoming regulation, policies can deliver real benefit to both government and the business community and, ultimately, the Scottish economy.”

McWilliam observed “the vast majority of IoD members want to be, or already are, highly involved in their communities”.

She added: “We’re settling into the post-Covid age, which is a very different landscape compared to pre-2020.

“There are so many opportunities for leaders to better their businesses through AI (artificial intelligence), net zero, fair work, inclusivity and diversity – but if we can’t get the basics like access to skilled workers and policy implementation right, there is limited opportunity for leaders to explore these other areas of huge potential. “Without change, they will remain as ambitions and not as reality. If we can get the fundamentals right, we can create a thriving economy that will attract talent and investment from the rest of the UK and further afield.”