Scottish Budget: Will people move to London if taxes rise?

DOORSTEP ANSWER:

Income tax is lower in Scotland for those on the lowest incomes while inward investment is at record levels, showing business likes being here. On top of that, more people move to Scotland from England every year than leave.

WHO IS IAN MURRAY?

Ian Murray is Labour’s shadow Scottish secretary and MP for the middle-class Edinburgh South constituency.

Murray was elected first in 2010, replacing the disgraced Labour minister Nigel Griffiths – who was caught with a prostitute in his Westminster office. Murray became Labour’s only Scottish MP and default shadow secretary after sweeping SNP gains in 2015.

He resigned his shadow cabinet post in 2016, in an attempted coup against Jeremy Corbyn’s leadership. He then nominated the forgotten Owen Smith (now a paid lobbyist) in the latter’s failed leadership bid. In 2020, Murray stood for Labour deputy leader, coming fourth.

On December 14, Murray garnered media attention by claiming that if the Scottish Government creates a new tax band it will cause a "brain drain" to England. Finance Secretary Shona Robison is rumoured (according to The Times newspaper) to be considering a new income tax band for higher earners in the forthcoming Holyrood budget.

MURRAY’S CLAIMS:

In what is clearly a pre-emptive strike, or mischief making, Murray told the London media: “The SNP already have Scots paying the highest tax rates anywhere in the UK, and their failure to grow Scotland’s economy means they’re looking to increase it even more.”

He added: “They need to grow the tax base not milk it with the consequence of more brain drain to London.”

Murray was responding to a speculative pre-budget analysis by the Fraser of Allander Institute (FAI). The FAI claims that the Scottish Government faces a funding shortfall of around £1.5bn as a result, among other things, of public sector wage increases.

Speculating on ways that a possible shortfall could be funded, the FAI suggested that introducing a new 45% cent tax band for earnings over £75,000 would only raise around £60m for spending – a negligible amount.

Shona Robison has said that the 2024-25 budget is being set amid some of the most difficult financial conditions in the history of devolution. It is noteworthy that Murray chose to make speculative attacks on the SNP government rather than criticise the UK Treasury for underfunding Holyrood.

WHAT IS THE TRUTH ABOUT SCOTTISH-UK MIGRATION?

According to the most up-to-date figures – for 2019, the year before the pandemic – there was a net inflow of people into Scotland from the rest of the UK of 10,000. There were inward and outward flows of 47,500 and 37,400, respectively.

Net overseas migration was +20,200, with inward and outward flows of 39,900 and 19,700. In other words, there is no exodus from Scotland – quite the reverse.

IS SCOTLAND OVER-TAXED?

While the Scottish Government sets income tax rates, most UK taxes – especially business taxes – are set by the UK Treasury.

According to the House of Commons Library, in 2022/23 the Tory government raised over £1017 billion in receipts. This is equivalent to around 40 per cent of the size of the UK economy, which is the highest taxation burden since the 1980s. Despite this, there was net immigration into the UK last year of 745,000 – suggesting tax rates are not a deterrent.

The population of Scotland grew by 141,000 (2.7%) in the decade to 2022, during which there was an SNP government. Again, this offers no proof that a rising tax burden chases people away.

However, if we compare the respective English and Scottish tax burdens, there is a slight advantage to living north of the Border.

For income tax year 2022-23, those on lower incomes in Scotland paid a tiny bit less than in the rest of the UK (according to a calculation by Deloitte).

Medium earners (those above £33,000) paid a marginal extra £51.50. Higher earners (over £50,000) paid £1489.10 more in tax as a resident of Scotland. The highest earners (above £200,000) paid £3168.80 extra.

Against this must be balanced the financial and living standard gains to living north of the Border. Those with student-age children do not pay university tuition fees. Universities in England charge students up to £9250 a year for undergraduate tuition. So the highest earners in Scotland save the equivalent of three years of the UK income tax premium per student.

WOULD RAISING INCOME TAX CHASE HIGH EARNERS AWAY?

Both Ian Murray and the FAI claim raising income tax would lead to high earners quitting Scotland. They do so based on estimates made by the Scottish Fiscal Commission (SFC), a body appointed to advise Scottish ministers.

However, the SFC itself treats all estimates of how taxpayers respond to a tax change with great caution: “Taxpayer behavioural responses are uncertain and therefore hard to quantify, even when good historic data are available … Because of the difficulty of identifying and quantifying taxpayer behavioural change, our approach is necessarily broad-brush …"

In other words, Ian Murray is using problematic data as if it were a certain prediction.

The SFC also says that most of the impact of attempts to avoid higher income taxes involves individuals shifting from being paid a salary to receiving dividend income or capital gains: “In the UK, some of the loss of tax revenues … will be recouped elsewhere, for example through taxes on dividends, Corporate Taxes and Capital Gains tax.”

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The major problem arising from higher income earners in Scotland attempting to avoid paying an income tax increase is not the threat of an exodus to England. Rather it arises from the UK Treasury’s anomalous refusal to hand over responsibility for taxing capital gains and dividend income to Holyrood.

A good proxy for determining the attractiveness of a jurisdiction to businesses or senior managers (who pay high income tax rates) is the level of inward foreign investment.

Punitive income tax rates would be expected to deter inward investment to Scotland. But Scotland remains the most attractive location in the UK outside of London for foreign investment, according to the latest survey from accountants Ernst & Young.

This shows a record 126 inward investment projects were secured by Scotland in 2022, a 3.3% increase compared to 2021. Scotland increased its share of the total inward investment projects attracted by the UK, from 12.3 per cent to 13.6 per cent.

ARE THERE ALTERNATIVE SOURCES OF TAX INCOME?

There is no doubt that Scotland has a smaller proportion of high earners (and taxpayers) than England. This limits the tax take as a whole. However, GDP per head is higher in Scotland than every English region except London and the Southeast. This suggests there is significant hidden wealth in Scotland that goes untaxed.

Prior to the SNP government’s latest budget, the Scottish Trades Union Congress (STUC) has published proposals showing how an extra £3.7bn could be raised per annum using Scotland’s existing tax powers. The report recommends the introduction of a wealth tax and replacing the council tax with a proportional property tax, to raise an additional £2.6bn per year annum.

FACT CHECK RATING:

Ian Murray gets one for audacity but zero for tax knowledge.

We note shadow chancellor Rachel Reeves is promising more austerity if Labour wins the General Election.