Blog: Time to take the right decisions on tax to grow the Scottish Economy

By David Lonsdale, director of the Scottish Retail Consortium

There is no doubt the political world was shaken with the result of the EU Referendum. The debate over Britain, and indeed Scotland’s, future relationship with Europe is now front and centre.

That’s understandable. But it’s resulted in less prominence for the vital debate around how the Scottish Government might better manage the economy. It’s something retailers are very conscious of, as the choices made by Finance Secretary Derek Mackay will have a significant impact on our businesses, and more importantly our customers.

We already know the impact on customers will be significant The Government has announced it will lift the council tax freeze and revise the banding system, affecting disposable incomes next year by up to £170 million. On income tax, whilst tax rates are expected to remain in line with the rest of the UK, certain thresholds are likely to change at a different pace. Of course with a minority government, other parties have further plans to increase personal taxes.

There’s a risk to this. The more money taken from households, the less discretionary spending is available. The increased taxes already envisaged are equivalent to over one percent of retail spending in Scotland. It may not sound much but equates to a third of average net profitability within the industry. Lower spending by customers means retailers will find it harder to invest in their stores, training, or wages.

Further risk comes from the perpetually increasing burden of business rates, which now account for £2.7 billion a year; a quarter of which is paid by retailers. In the last seven years tax revenue from rates has risen by 42.5 percent, with the system still based on property values from before the financial crisis hit.

This burden is why the SRC was at the vanguard of calls for reform. Scottish Ministers listened and agreed to a review, headed up by Ken Barclay. The SRC has submitted its response to this review, calling for a fairer, more flexible, and simpler system which lowers the burden on businesses.

Our key argument is there needs to be a realistic look at the impact of high business rates on the economy, and a much more competitive rates system. Continually increasing the poundage rate to try to increase revenue will ultimately lead to diminishing returns. It makes operating from physical premises more expensive, and provides an incentive to move operations either online or away from Scotland.

This is acute at a time when the industry is going through transformational change. Led by customers, retailers are becoming more agile, more efficient, and more productive. That process has so far been beneficial to customers. Tough competition has led to effective price deflation, even in food. The arrival of digital technology means customers can get what they want, when they want it, wherever is most convenient.

But nothing comes without consequences. The combination of change and public policy is forcing retailers to take hard decisions. With retail margins so low, there is often an incentive to move to more digital solutions. Extra government costs, such as the doubling of the Large Business Rates Supplement and the Apprenticeship Levy, make that process even more appealing.

Those are some of the factors behind official figures which show 1,700 shops have closed in the last seven years. More troublingly 10,000 jobs have gone in that time. But things could get tougher, and these figures may only be the tip of the iceberg. Without changes in public policy, over a fifth of Scottish shops could be at risk of closure over the decade ahead, putting thousands of jobs at risk.

That would be catastrophic for High Streets across Scotland. It would be hard on customers, with fewer shops and less choice, especially in rural communities. For the government there would be serious implications for tax revenues, further stretching tight resources.

So the Scottish Government has a choice. It can take a Micawberish approach of continuing to increase the tax rate, accepting more businesses may close, and hoping something turns up.

Or they can look to take the right decision for the Scottish economy and find a better balance of taxation. One that accepts simply increasing taxes on people or businesses will have a diminishing return. To look past short-termism towards a coherent approach, with a road map to tax reform, aimed at delivering a competitive economy which drives innovation, productivity, and growth. It’s time to make that happen.