Can we accelerate economic growth by having a more competitive tax landscape?

At a moment of profound change and global economic uncertainty, we face a simple but fundamental question: how do we accelerate growth, productivity and the creation of high-quality jobs on which our prosperity – and the funding of our public services – ultimately depends? In an era where capital and talent are more mobile than ever, the competition for investment has moved beyond our borders and onto the global stage.

The answer should not be controversial. While government plays a vital role in setting the framework and maintaining the rule of law, it is businesses – large and small, new and old, domestic and international – that create wealth, innovate, invest and grow the economy. When business flourishes, so too does the tax base on which our schools, hospitals and other public services rely. The private sector is not a tap that can be turned on and off at will; it is an ecosystem that requires the right nutrients – chiefly stability and incentive – to thrive and expand.

Of course, being a devolved nation, the Scottish Government only has certain levers on which it can pull, but at present we have yet to find the right combination to unlock sustainable growth. In Scotland, we have the highest and most complex tax system in the UK, which arguably acts as a psychological and financial barrier. Equally arguably, this  complexity disincentivises high earners and businesses from locating north of the border. When a surgeon, a software engineer, or a renewable energy specialist looks at their take-home pay and realises they will be significantly worse off living in Scotland than in Manchester or London, we potentially face a “brain drain” that we simply cannot afford. We are effectively taxing the very productivity we claim to want to encourage.

There is a different approach which must be seriously considered: making Scotland the most competitively taxed nation in the UK. This is something that all parties, regardless of leaning, should be striving to achieve if they are serious about national renewal. What does this mean in practice? In essence, it means using the tax system as a strategic tool, not a political one, and developing a policy that makes Scotland competitive in the UK and international environments in which businesses operate, while encouraging businesses that are already here to grow and stay. For too long, tax policy has been used as a virtue-signalling exercise rather than an economic engine. We have the devolved powers to create a business environment which nurtures and grows businesses, and yet we choose not to use them effectively. We must stop viewing “profit, dividends, investors and wealth” as dirty words and start viewing them as the prerequisite for public spending.

The lowering of non-domestic rates would be a start. High business rates penalise those who invest in physical presence, from our struggling high streets to our vital manufacturing hubs. Streamlining the planning process would also help businesses to know that they are able to invest in our nation without being bogged down by years of bureaucratic inertia. Speed and size are a competitive advantage, and Scotland should be able to take advantage of both.

Each of these measures would incentivise businesses to create good, well-paying jobs which much of Scotland sadly lacks. There will be some who point out that lowering tax creates issues in funding the public services that we all use. However, this is not the case, as the more well-paying jobs there are in Scotland, the higher the tax take from the population. By lowering the rate, we would increase economic activity and our GDP would respond accordingly. A smaller slice of a rapidly growing pie will always provide more revenue for our NHS than a large slice of a shrinking one. If we want better public services, we must first build the economy that can afford them.

Sandy Begbie FRSE, Chief Executive, Scottish Financial Enterprise

The RSE’s blog series offers personal views on a variety of issues. These views are not those of the RSE and are intended to offer different perspectives on a range of current issues.