Issue 12

THE GOVERNMENT OF BUSINESS

By Liz Cameron OBE, Director and Chief Executive, Scottish Chambers of Commerce

Businesses value a clear and predictable political environment. It helps us to plan for the future, identifying and taking advantage of opportunities, whilst managing challenges. However, Scottish and UK politics have been anything but clear and predictable in recent years. There has been the referendum on Scottish independence, where our nation faced a choice of competing visions for our future constitutional direction. Earlier this year there was the UK general election, where the pollsters’ expectations were confounded with the return of a majority Conservative government. Looking ahead we face another referendum, this time to determine whether the UK’s future lies inside or outside of the European Union and, of course, next year will see the Scottish Parliamentary elections.

Decisions that have been and remain to be made by us as voters will have a fundamental impact on how we do business and the elections to the Scottish Parliament are no exception. The next Scottish Parliament will have more powers over taxation than any of its predecessors as a result of the additional powers devolved to it under the Scotland Act 2012 and the new Scotland Bill, which seeks to implement the recommendations of the Smith Commission on further devolution. Given the extent of these new tax powers, it will be important that the MSPs elected in 2016 adopt a new mind-set in terms of their role.

When the Scottish Parliament was created, the job of MSPs, by and large, was to spend the money they were allocated by the UK Government. Increasingly, they are gaining the responsibility of raising it too

When the Scottish Parliament was created, the job of MSPs, by and large, was to spend the money they were allocated by the UK Government. Increasingly, they are gaining the responsibility of raising it too. That matters for businesses. Most businesses already have some experience of the limited tax powers the Scottish Parliament already has, through the payment of Business Rates, but that experience has not been entirely positive. Yes, rates were reduced to match levels in England by 2007 and, yes, the Scottish Government’s Small Business Bonus Scheme helps some smaller businesses but against this, the tax now raises 35% more revenue from businesses than it did five years ago and the burden of contributing to local government finance has swung sharply away from domestic payers – Council Tax bills have been frozen since 2007 – to the commercial. In other words, businesses are being asked to shoulder more of the tax burden in Scotland at a time when we have been working hard to cope with the recession, whilst creating a record number of jobs in the Scottish private sector.

So what should be the focus of the next Scottish Parliament? In short, it should be to make Scotland as attractive and competitive a place to do business as it possibly can be. In doing so, our politicians should remember that it isn’t just about spending money any more, it is about using the tools available on both sides of the budget sheet to support Scotland’s businesses to succeed and to grow.

For example, the devolution of Air Passenger Duty (APD) presents the Scottish Parliament with a major opportunity not only to reduce the cost of air travel for Scots but to make our airports more internationally competitive and better able to win new direct services to target markets across the globe. This would lower some of the barriers to international trade and make Scotland an even more attractive place to invest in and to do business with. I welcome the Scottish Government’s intention to reduce APD by 50% once devolved and the further we can cut this tax, the greater will be the potential benefits for Scotland.

The big ticket item for MSPs will of course be Income Tax. Whilst the Scottish Parliament has had the power to vary the rate of Income Tax in Scotland up or down by 3% since its inception, it has never chosen to do so. The reforms implemented by the 2012 Scotland Act and the current Scotland Bill are very different however and will make it necessary for the Scottish Parliament to set a rate of Income Tax in Scotland each year. We will get the first taste of that when the Scottish Government publishes its Draft Budget for 2016-17 this autumn and has to set a Scottish Rate of Income Tax for the next tax year. Scotland’s opposition parties will also be setting out their plans for Income Tax rates in advance of next year’s elections.

To some extent, the Income Tax powers coming to the Scottish Parliament next year are a bit of a blunt instrument, meaning that a change to the Scottish Rate of Income Tax must be applied across all tax bands. However the new Scotland Bill will present the Parliament with the opportunity to set all thresholds and rates of earned Income Tax in Scotland, with the exception of the Personal Allowance. This opens up the scope for Scotland’s politicians to use its Income Tax powers and, arguably, makes it more likely that they will be varied. We have already seen from the devolution of the tax on property sales, in the form of the Land and Buildings Transaction Tax, that the Scottish Government is not averse to raising tax rates at the higher levels in order to reduce rates at lower levels.

What the Scottish Parliament’s new powers will do is to give it a more direct stake in Scotland’s future economic success. Instead of approaching revenues in the same way it has always approached spending, it must consider the effects of fiscal choices on the Scottish economy

I would counsel caution in tinkering with Income Tax rates without a long-term plan. What the Scottish Parliament’s new powers will do is to give it a more direct stake in Scotland’s future economic success. Instead of approaching revenues in the same way it has always approached spending, it must consider the effects of fiscal choices on the Scottish economy and understand that raising tax rates may not result in higher revenues, just as lowering rates may not result in reduced revenues. Such thinking is nothing new for those of us in business but it will be a different way of working for Scotland’s politicians.

That is why the way our politicians approach their role in the next Scottish Parliament is so important. The next Parliamentary term will see the implementation of a radically different set of responsibilities for MSPs and they will need to think differently and make more strategic decisions about Scotland’s economic future. That means that they must put the last 16 years behind them and approach their role in 2016 with a renewed sense of purpose and a recognition that for Scotland to succeed, our businesses must succeed. Business is great for Scotland and our success will now matter more than ever for our politicians. That is an understanding which must become ingrained within our next Scottish Parliament.

Liz Cameron OBE is Director and Chief Executive. Scottish Chambers of Commerce

By Liz Cameron OBE, Director and Chief Executive, Scottish Chambers of Commerce

Issue 12

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