The first minister resisted heavy pressure from Labour and the Lib Dems to raise taxes, opting instead to push the threshold for the 40p higher rate up by inflation next year. She chose not to mirror George Osborne’s £2,000 increase in the threshold.
Sturgeon promised before last year’s general election she would back a 50p additional rate for the highest earners, but that proposal has been dropped. She will instead freeze the 45p top rate threshold at £150,000.
Sturgeon admitted that she had rejected proposals to increase the additional rate to 50p because she feared the flight of high-earning executives outside Scotland. She said a new 50p rate would only be effective if it was introduced UK-wide, a policy she continues to support.
The first minister insisted that overall, her strategy would increase revenues for Holyrood by about £1bn over the next parliament compared with the chancellor’s decision to raise the 40p threshold to £45,000. She would also slowly raise the basic rate threshold to £12,750 by 2021, £250 higher than Osborne has promised.
“By adopting a different path to the UK government, we could generate more than £1bn of additional revenues, enabling us to protect the public services we all rely on,” Sturgeon said on Tuesday. “We believe that this proposal is reasonable. It is balanced and it is fair.”
But her caution was lambasted by opposition parties; the Lib Dems, Labour and the Scottish TUC accused her of being “pathetically timid” and of passing on Tory cuts. The Scottish Tories accused Sturgeon of overseeing the most highly taxed part of the UK.
Prof David Bell, an economist with the University of Stirling and the Institute for Fiscal Studies, said Sturgeon’s decision to reject Osborne’s new £45,000 threshold for the 40p rate would mean the 340,000 Scots earning over £43,000 would pay an effective tax rate of 52p for every pound they earned between £43,000 and £45,000. This would be 20p higher than the same taxpayers in the rest of the UK, because Osborne has tied the higher rate of national insurance to his new £45,000 threshold, changing the bands on which national insurance is calculated. “So if you were offered a promotion which took you from earning £43,000, to £44,000 you may think, ‘Oh my God [, is it worth it],’” Bell said.
Kezia Dugdale, the Scottish Labour leader, contrasted Sturgeon’s stance with Labour’s pledge to immediately add 1p to all Scottish rates using partial powers that come into force this April, then set a new 50p rate next year, and with Labour’s promise on Tuesday to scrap the council tax and replace it with a more progressive property and land tax.
Dugdale said Sturgeon had the chance to be bold but instead had “bottled it”. “What’s clear is that the SNP will make no significant changes to income tax and have broken their promise to scrap the unfair council tax,” she said. “This means billions of pounds of Tory cuts passed on to Scotland’s public services. Nicola Sturgeon must now tell people where these cuts will fall.”
After announcing his own plans in January for a 1p rise across the board to raise £475m for education spending, Willie Rennie, the Scottish Lib Dem leader, added: “This is a missed opportunity. The SNP are refusing to use the full set of new tax powers coming to us at Holyrood.”
Ruth Davidson, the Scottish Tory leader, said failing to raise the 40p threshold to the same level as Osborne meant that Sturgeon had ignored the fact that wage inflation since it was last increased in 2010 had dragged 140,000 Scots into the 40p band, including nurses, teachers and police officers.
Davidson has been forced to jettison her own plans to cut Scottish rates below the UK’s because of deeper Treasury spending cuts, but she said Sturgeon’s refusal to pass on Osborne’s cuts was “bad for the Scottish economy and bad for Scottish jobs”. “At least the SNP has seen fit to acknowledge that raising the additional rate of tax would cost Scotland millions of pounds, exactly as we have been warning.”
Even though the SNP is on the brink of a winning a second successive overall majority at the Holyrood elections in May, Sturgeon’s stance represents a calculated risk. It is likely to disappoint centre-left voters, including new leftwing SNP members, but Sturgeon and her finance secretary, John Swinney, will calculate that their overall policy portfolio and track record will secure many of those votes and help secure aspirational and middle-class votes.
From 1 April 2017, when Holyrood will get full control over about £11bn worth of income tax levied on all earnings by setting its own Scottish rate of income tax, or SRIT, the 40p threshold will rise to £43,387, under Sturgeon’s plans. Under current inflation rates, that would rise by £817 by 2021.
Her officials had warned that only 6% of Scotland’s small number of highest-rate taxpayers would need to “relocate” their incomes outside Scotland for a new 50p rate to raise nothing more at all. If 7% did so, Holyrood would lose £30m in revenues.
“Given the need for stable and predictable revenues in the next parliament, given the responsibility we have to public services, that is a risk that in my judgment it would be irresponsible to take,” she said.
Failing to increase the highest 45p threshold by inflation will increase the number of people pulled into that tax band through what is known as fiscal drag: if the threshold for that rate remains static, more higher earners cross over the £150,000 threshold as their salaries rise.
guardian.co.uk © Guardian News and Media Limited 2010