David Lonsdale

BUSINESSES will have had two reactions to the staggering news that the Scottish Government faces a £1 billion funding gap next year. Firstly, a sense of astonishment that government can overspend to that degree, and secondly an instant fear that they will be asked to cover the difference.

The projected shortfall equates to a third of annual business rates revenues. It is due to a cocktail of factors including inflation, a weak economy, and greater outlays on health, social security, and public sector pay.

Even when set against the devolved government’s £51 billion annual spend the gap is enormous. It’s also forecast to widen in later years.

How that shortfall will be plugged remains to be seen, as does whether spending restraint or taxation will make up the bulk of the necessary action. A timely spurt in economic growth would help but seems unlikely. What is needed is a plan to eliminate the gap and put government finances on a sustainable path. Tax will form a part of the solution.

The Finance Secretary, Shona Robison, has been admirably clear about the problem but her preferred solution remains opaque. This will be resolved at the Scottish Budget.

There were pointers in the Finance Secretary’s fiscal update to MSPs, including working with councils to “explore revenue raising opportunities”. Presumably, any new taxes will be over and above the proposed tourism visitor levy and extra council tax on second homes. Presumably it would come on top of any workplace parking levies that councils are already empowered to introduce.

Ministers and CoSLA may seek to dust down previous studies. Some recommendations from their 2015 Commission on Local Tax Reform were implemented, but ministers rightly gave short shrift to its idea of a local sales tax. They may look to Wales which is undertaking a council tax revaluation.

The other reason to be sure tax will form part of the solution to plugging the fiscal gap is because the First Minister has been transparent in saying he’ll pursue a more “progressive” approach to tax. It is unclear whether this solely applies to income tax or might extend to other taxes.

Meanwhile, a chunky rise in business rates has been pencilled in by the Scottish Fiscal Commission, which could add £34 million to retailers’ rates bills next Spring.

There are trade-offs of course, as higher taxes could curb commercial investment or lower consumer spending. So difficult tax decisions lie ahead and will come on top of this year’s rises in council tax and income tax rates, which will crimp consumer spending by £250 million. Hopefully, the Budget’s tax changes won’t impair economic growth which would exacerbate the issue.

Extra tax alone is unlikely to be enough to plug the shortfall. It should go hand in hand with a review of spending and new thinking about how services are provided. Retailers know all about having to cut their cloth in the face of spiralling costs, having dealt with a tsunami of hikes in commodity and supply chain prices with various statutory burdens sprinkled on top.

Instead, a more frugal approach to spending and a reduction in the cost of government should form the bulk of the necessary budgetary action. This would help militate against the need for tax rises which could stymie economic recovery.

Business recognises there are few palatable options for our politicians. But government needs to think differently about how and which services they deliver, and how they deploy their resources efficiently. The Independent Budget Review undertaken by Crawford Beveridge a decade ago should be dusted down, to see whether the structural changes to public services and savings it identified ought to be implemented.

The number of public bodies could be reduced. The NHS could make more use of community pharmacists and opticians to reduce the pressure on GPs over minor ailments. Government premises surplus to requirements should be disposed of, and the policy of no compulsory redundancies rescinded.

If action isn’t taken on public spending then the pressure for even higher taxes in subsequent years will grow. Commerce has a direct stake in this debate, which is why the Scottish Retail Consortium will unveil its Budget recommendations this autumn.

David Lonsdale is director of the Scottish Retail Consortium