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More than 90% of small business owners in Scotland say they’ve already decided how they are going to vote in the September referendum on Scottish independence. But 48% of them believe independence would be a negative step for their business. 37% thought that independence would represent a positive step for their company, while 10% felt it would have no material impact.

Ingenious Britain Surveyed 1,000 firms

Ingenious Britain
Surveyed 1,000 firms

The finding comes from new research by Ingenious Britain, a small business network which surveyed 1000 small business owners in Scotland. When asked if they believed they had enough information from the different campaigns to make an informed choice about the potential impact of Scottish independence on their business, only 63% said yes compared with 37% who said no.

When it came to investing in the future, 41% felt that independence would make it less likely that they would be able to invest in growing their business. By contrast, 36% felt it made it more likely and 13% thought it would make no difference. They identifies two worrying factors. The first is a fear that business tax increases in an independent Scotland would have a direct impact on their ability to invest. The second concerns exporting to the rest of the UK which could be a big problem if Scotland had to adopt a new currency.

“One thing all businesses need, especially small businesses, is certainty,” said Marlon Wolff, CEO of Ingenious Britain. “There is an indication coming through our research that a sizeable proportion of small business owners have sufficient reservations about the potential negative issues and challenges independence might present to be seriously questioning whether it is really in the interests of their company. However, it is going to be a close decision with many reacting against what they perceive to be status quo in which their needs as Scottish businesses are not reflected or taken into account.”

Tessa Hartmann  Uncertainty having a negative impact

Tessa Hartmann
Uncertainty having a negative impact

However, it’s clear that business owners are as divided as the rest of the population. Dr Tessa Hartmann, who runs Glasgow-based Hartmann Media, a PR and communications company working in the fashion sector, is firm in her belief that independence would be a bad step. “Given the long life cycle in orders that exist within the fashion industry, the uncertainty is already having a negative impact on the sector and affecting our exports, especially as customers don’t know what currency we would be using in an independent Scotland.

“But more than that, Scotland’s long heritage in fashion and textiles has thrived as part of Brand Britain. Remove Scotland from the UK and many of our young designers and fashion companies would become ineligible for much of the crucial support and profile they currently receive from the likes of London Fashion Week and the British Fashion Council.”

However, Rory Haigh, who owns Optimum Underfloor Heating in Inverness, takes the contrary view and believes independence would be a boost for his business. “Scotland has completely different social and economic needs to the south of England,” he explained. “We are a small country with a good track record of entrepreneurship that is not currently being harnessed or promoted. The government of an independent Scotland would be far more proactive in doing that and in addressing the everyday needs and concerns of Scottish businesses.”

By Michael Keating, University of Aberdeen; Chris Whatley, University of Dundee; Jo Armstrong, Glasgow University, and Trevor Salmon, University of Aberdeen

Scots would continue to use the pound as part of a formal currency union after independence, the SNP long argued. But Chancellor George Osborne ruled that out in a recent speech, following advice from Treasury civil servant Sir Nicholas Macpherson.

Since then the issue of currency has been the dominant one in the independence referendum campaign. And the SNP’s case appeared to be strengthened when Beijing-based professor Leslie Young criticised Macpherson’s claims and appeared to suggest that currency union was still viable.

Members of the Scotland Decides ’14 panel assess the state of the currency debate.


Professor Michael Keating, University of Aberdeen

The nationalists have lost the currency union argument because if the Treasury and the Bank of England don’t want to share the currency, they don’t have to. This is not to say that Scotland could not continue to use the pound. It could do so without the consent of the UK but this would mean accepting monetary policy made in London for the rest of the UK.

It’s really not convincing for the Scottish Government to say rUK [the remaining UK] will give way and share the currency with us anyway. It leaves them in a weak position in negotiation if they do not have a fall-back. It also rules out the euro, which nobody wants to talk about at the moment but many want to leave open for the future.

I have not seen many outside the SNP on the yes side who think that currency union should be the only option on the table. There are several other options. One is to opt for a Scottish currency, at least in the longer term.

Another is to leave things open and say it will be up to a future Scottish Parliament to decide, although this would be risky politically.

The SNP argument that it’s as much Scotland’s currency and so London has no right to say it belongs to them is more of a moral argument than a legal one. If you withdraw from the state, you withdraw from the currency.

But the SNP’s threat to not take on any UK debt is certainly a counter argument. The UK has already said it will pay the debt and then ask the Scottish Government to pay their share. That allows the Scottish Government to say they will withhold their share, which puts them in a stronger position. That might give an independent Scotland a battering in the financial markets, but it might only be temporary.

Having said that, it’s a kind of nuclear weapon, because it might invite all kinds of retaliation and open up conflicts in other fields.

Professor Jo Armstrong, University of Glasgow

The Leslie Young report was useful because it neatly highlights there is more than one set of answers to the questions posed (and then answered) by Sir Nicholas MacPherson on the key issues surrounding Scotland joining a formal currency union with the rest of the UK.

The key questions were: “Are the fiscal rules that will be required and the monetary conditions sufficiently tight that an independent Scotland would be able and willing to comply?”

Young implies that the fiscal and monetary rules would need to be sufficiently tight, or the markets would react negatively against Scotland. Hence a key reason against Scotland formally sharing the pound, he suggests, falls away.

But using his article as evidence in support of sharing the pound runs counter to the idea that Scotland wants to have its own fiscal levers, particularly around corporation tax. Would the Bank of England be comfortable with that? Macpherson’s letter suggests not.

Macpherson also highlighted that Scotland’s banking system is too large for Scotland to be able to provide the necessary guarantees, and would need to rely on the rest of the UK to provide such insurance, which would not be desirable to London.

Young suggests this banking issue will not be a problem as he envisages the banking sector in Scotland will become smaller, if the lender of last resort is the Bank of England.

Given limited fiscal manoeuvring and a largely local banking sector, it is somewhat unexpected that the Scottish Government is arguing this paper cuts a swathe across the Treasury’s arguments for not having a currency union. Is the Scottish Government really arguing for a formal sterling currency union based on Young’s propositions?

Professor Chris Whatley, University of Dundee

Some say the English are bullying the Scots with issues like the currency union, but I don’t think so. George Osborne and the Treasury are entitled to say: “If you guys and girls go for independence and separatism, that’s fine, but these will be the consequences.” This is just stating the facts of economic life.

It was exactly the same in 1707. The Scots knew that there would be consequences from not being in the union. One of the reasons why some Scots went into the union in the first place was because there was a threat that England would close the border to Scottish goods or increase the taxes on them, which was actually already happening.

There has always been that animosity, that contest and even dislike between England and Scotland. Now that rivalry is re-emerging. There were sensible people around in 1707 who recognised that it wasn’t good for either country.


Will the pound save the union?
The Laird of Oldham, CC BY-SA

That was one of the reasons why some people supported the union in the first place, including the then monarch, Queen Anne. We seem to be slipping back and reopening some of those festering wounds. It’s not a good place to go to.

So if there’s caution about independence this shouldn’t necessarily be interpreted as being “feart”. It’s about being prudent, asking whether an entire breach of the union is worth the dislocation this will cause.

Professor Trevor Salmon, University of Aberdeen

If we go for currency union, an English Government that agreed to it would lose the next election. People in England have high antagonism towards the Scots and Alex Salmond. It’s not going to be equal partners negotiating.

I don’t think Alex Salmond quite understands what the English think of him and Scotland. Too much debate is intelligent and rational, but at the end of the day it’s perception that counts.

The perception is that the Scots are getting about £1200 more per head than England. The more concessions that the prime minister makes, the more support he will lose among the voters.

The Conversation

Michael Keating receives funding from the Economic and Social Research Council.

Chris Whatley, Jo Armstrong, and Trevor Salmon do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.

This article was originally published on The Conversation.
Read the original article.

RBS – £550m in bonuses despite huge losses

Why is it that banks are so convinced that the best way for them to succeed is to offer mega-bonuses to their senior staff?

David Cameron Wanted to veto big bonuses

David Cameron
Wanted to veto big bonuses

The Royal Bank of Scotland had to get approval from the Treasury for its plan to pay about £550 million pounds in staff bonuses for 2013 – all this despite expected losses estimated at around £8 billion. It’s understood that the details will emerge tomorrow (Thursday) when the bank plans to unveil a ‘strategic review’ of its investment banking and international operations. If reports are correct, this could lead to the the group cutting up to a quarter of its workforce, currently some 120,000 people.

The news comes despite the Prime Minister, David Cameron, promising last month that the government would use it power as an 81% shareholder to block such a move. Labour has already called on the Government to stop RBS from paying its top staff bonuses worth twice their salary.

Barclays LogoRBS is not alone in prompting an angry reaction from the public, politicians and trade unions over the issue. Barclays announced that it would increase its bonuses by 13% to £2.4 billion, despite announcing plans to cut 12,000 jobs. Another bank to bring public opprobrium on its own head was HSBC when it confirmed that it would pay its chief executive, Stuart Gulliver, allowances worth £32,000 a week – on top of his £1.2m salary. The idea was to get around the EU’s cap on bonuses. Others are expected to follow suit.

But it’s worth recalling a talk given during one of the TED conferences. Dan Pink’s analysis came at the height of the financial crisis and is a damning critique of what he describes as the failed policy of rewarding people with bonuses – and he presented the evidence to prove it. It seems that the bankers just haven’t been listening to the scientific proof. It’s worth hearing again exactly what he said.

Growth in employment at its highest for seven years

The latest figures of the Office for National Statistics show that unemployment in Scotland has fallen again. The number out of work fell by 3,000 to 195,000 between October and December – a jobless rate of 7.1%. Not only that but the level of employment in Scotland increased by 9,000 over the quarter and now stands at over 2.5 million.

Alex Salmond Scotland could 'go much further'

Alex Salmond
Scotland could ‘go much further’

In a statement, the Scottish government said that the increase in employment in Scotland of 92,000 over the last 12 months was the largest in nearly seven years. First Minister, Alex Salmond, described it as “a demonstration of this government’s commitment to creating jobs and boosting the economy”. However, he said Scotland could go much further, insisting that “only with the full fiscal and economic powers of independence can we can take a different approach.”

By contrast, the Scottish Secretary, Alistair Carmichael, said that Scotland benefited from being part of the UK. “With business confidence continuing to grow,” he said, “more jobs are being created, and inflation is now below the 2% government target. Together with the Bank of England is revising up its forecast for GDP growth in 2014 it is clear that being part of a large UK single market and an influential EU member benefits Scotland. Our economy is growing because we are part of the UK.”

Liz Cameron Recovery continuing

Liz Cameron
Recovery continuing

Business leaders welcomed the new. Liz Cameron, chief executive of Scottish Chambers of Commerce, that that more and more indicators were “pointing towards the economic recovery continuing in 2014 and many businesses are actively recruiting new staff or working to increase productivity levels of existing workers. It is time for government to focus its attention on getting the skills strategy right and ensuring that our schools, colleges and universities are delivering the skills that business needs to take Scotland’s economy forward and fulfilling the potential of our people.”

And Andy Willox, Scottish policy convenor of the Federation of Small Businesses, added that every Scottish employer who chooses to take someone on, and every person that chooses to set-up on their own, played a part in this result. “However,” he said, “the recovery isn’t uniform. We need to see local decision-makers and their business community working closely to ensure that no part of the country is left behind. Feedback from our membership shows that Scottish small businesses are feeling more confident about the future and that they plan to boost capital investment and increase staff numbers during 2014. With the right support, there’s no doubt the small business community can continue to create jobs and drive growth, and that we can increase the pace of employment growth.”

Grahame Smith STUC Risky to read too much into one set of figures

Grahame Smith STUC
Risky to read too much into one set of figures

However, Grahame Smith, General Secretary of the Scottish Trades Union Congress, said it was “always dangerous to read too much into one set of ONS figures but today’s report does provide some cause for sober reflection. The big fall in unemployment witnessed in last month’s figures hasn’t been sustained with the Scottish rate now back to over 3% above its trough of summer 2008. It is becoming a concern that the strong momentum of the first half of last year doesn’t appear to have carried through into the second.”

There were also calls for great collaboration between business and the academic worlds. Interface – the knowledge connection for business – said that Scotland’s universities, students and business leaders were being called upon to guarantee employability was top of the agenda and to ensure graduate employment continues to drive the economy and create new jobs.

Dr. Siobhán Jordan, the organisation’s director, pointed out that “both businesses and students need to take responsibility for ensuring that Scotland continues to produce talented and skilled graduates. Excellent schemes, such as Heriot-Watt’s company-led Engineering Design Projects, are in place across Scotland’s universities which help to bridge the gap between academics and industry.”

Scotland doesn’t need permission to use the Pound

There’s been a lot of hot air and printer’s ink spilled over the past few days over the contentious issues of Scotland’s future currency and its membership of the EU.

George Osborne Could block a formal union

George Osborne
Could block a formal union

Even the London media seemed to agree in part that the Chancellor, George Orborne, came to Edinburgh to “bully” the Scots. His message was unequivocal – if you leave the Union, you leave the Pound as well.

There was a similar message from the EU. Commission President, José Manuel Barroso, told the BBC’s Andrew Marr that it would be ‘extremely difficult’ for an independent Scotland to join the European club because it would need the unanimous approval of all existing members.

The Chancellor’s speech had been thoroughly trailed well in advance. He argued that there was no legal reason why Scots should keep the pound if they voted for independence. The trouble with this is that any decision on whether Scotland uses the Pound or not may not be his to take.

What he CAN do is block any move towards an official currency union. But he cannot stop any other country using the Pound as its currency without fundamentally changing the nature of the Pound itself.

The Pound could continue to be used in Scotland

The Pound could continue to be used in Scotland

Sterling is a reserve currency. It is the third most popular such currency in the World. It is also one of the most traded currencies globally. Both politicians and civil servants in London have stressed time and again their commitment to open markets and free trade. There’s no way they could stop Scots using the Pound without undermining this principle.

Even the Financial Times accepts that no-one in England can stop an independent Scotland from using the currency for transactions and savings. “The country would simply have an informal currency union like Panama or Hong Kong do with the US,” it explained, adding: “Scotland could circulate uncollateralised sterling. Alternatively, it could use Scottish pounds exchangeable at parity and backed by sterling reserves.” In other words, business largely as usual.

However, it’s worth asking if a formal currency union is actually worth the effort and perhaps the heartache. Just remember what the Governor of the Bank of England said a short time before – that such a union would require “some ceding of national sovereignty”.

The Bank of England could ignore Scotland's needs even in a currency union

The Bank of England could ignore Scotland’s needs even in a currency union

If there has to be a ‘Plan B’, could it not be such an informal union? It would mean that John Swinney or his successors would have the control over the financial levers that he so desires – or at least much more control than he’d be allowed under a formal agreement.

Even with a seat on the Bank of England’s top table, the Scots would have to accept the monetary and fiscal restrictions imposed on them which, as now, appear to depend more on conditions in the South East of England than any other part of the country.

And one of the real concerns about a formal union would quickly turn into reality if Holyrood pursued social democratic policies while Westminster (now permanently Tory perhaps?) followed a diametrically opposite path. As we saw when the old Czechoslovakia split in two, a currency union can’t work when two countries pursue very different political and economic solutions.

Could Scotland also use the Euro?

Could Scotland also use the Euro?

So an INFORMAL currency union could have benefits.

And might other options not be considered? What if Scotland were to move to a cashless society? What if Scotland were to adopt more than one currency – both the Pound and the Euro for instance? Might the country decide on the ‘Bitcoin’ as an alternative? With electronic trading, these solutions need not be so far-fatched!

Then there’s the on-going question of EU membership. This has been a bone of contention for months.

The Scottish Government has argued that both successor states after separation would be members. However, the Commission President clearly disagrees.

José Manuel Barroso 'Extremely difficult' for Scotland to join the EU

José Manuel Barroso
‘Extremely difficult’ for Scotland to join the EU

It is probable that José Manuel Barroso is worried by the growing number of secessionist movements around Europe, especially in Spain and Italy. He will be concerned that, with the EU already in a fragile state after the financial crisis, nothing else should undermine the Union as it currently exists.

But once again, shouldn’t Scotland be thinking laterally? Norway appears to be Alex Salmond’s favourite Scandinavian country. It is not a member of the EU – and although some Norwegian ministers have acknowledged some disadvantages, there are also advantages and the lack doesn’t seem to have done the country any harm.

One could argue that NOT being a member of the European club could have some positive results for at least some Scottish sectors.

Scotland's fishing industry suffered under the CFP

Scotland’s fishing industry suffered under the CFP

Fishing for instance has been hard done by as a result of the Common Fisheries Policy. One could imagine Scotland making common cause with Norway and Iceland to declare a controlled, more protected zone in the North East Atlantic and the North Sea.

Unlike England where there’s a strong movement to leave the EU, most Scots would prefer to remain within the club. But if that offer is not on the table, would it really matter? Trade is carried out between companies – not countries. That would continue unabated.

There may be advantages for business. The European Commission has long been blamed for imposing excessive regulation and red-tape and making corporate administration more costly. An independent Scotland outside the EU could choose more freely what it needed to adopt.

The First Minister will deliver his speech to ‘deconstruct’ George Osborne’s arguments shortly. He also expected to deal with the European issue, something ministers have already dismissed as ‘pretty preposterous’. But it may be worth throwing other ideas into the mix. After all, there are still over six months before Scotland goes to the polls – and an awful lot can happen in that time.

Scotland would ‘walk away’ from the pound after a ‘Yes’ vote

So – the gloves are off. The Westminster politicians have changed their tactics – from charm offensive to plain offensive. And it’s all happened so quickly.

David Cameron Stay - for the sake of the family

David Cameron
Stay – for the sake of the family

First, we had the Prime Minister choosing the rather curious location of the velodrome in London’s Olympic Park to send out an ‘emotional, patriotic’ appeal to Scots to stay in the union. David Cameron stressed that he wanted Scots to realise that people in England, Wales and Northern Ireland were not looking the other way. As his put it, “it’s so important for Scotland to realise that the rest of the family see this as a very important family decision.”

Shortly before that, the Governor of the Bank of England, Mark Carney, had been to Edinburgh where he didn’t appear to rule out the prospect of a currency union after a ‘Yes’ vote in September. What he DID say was that an independent Scotland would need to give up some power to make such a currency union UK work. Again in his words, the proposal from the Scottish Government “requires some ceding of national sovereignty”.

Thus far, so friendly! Then the Chancellor, George Osborne, comes to town. His message was rather like Margaret Thatcher at an EU Summit – No, No, NO! He insisted that a vote for independence would mean Scotland walking away from the pound. Indeed, he said that was “no legal reason” why the rest of the UK would want to share sterling with an independent Scotland.

George Osborne Why would the rest of the UK want to share the pound?

George Osborne
Why would the rest of the UK want to share the pound?

“When the Nationalists say the pound is as much ours as the rest of the UK’s,” he asked, “are they really saying that an independent Scotland could insist that taxpayers in a nation it had just voted to leave had to continue to back the currency of this new, foreign country? Had to consider the circumstances of this foreign country when setting their interest rates? Stand behind the banks of this foreign country as a lender of last resort? Or stand behind its foreign government when it needed public spending support?”

What made this speech more important in the independence debate than that (say) of David Cameron was a series of hints that this was not his view alone. The Chief Secretary to the Treasury, the Liberal Democrat MP Danny Alexander, appears to support Mr Osborne’s position, as indeed may Labour’s shadow chancellor, Ed Balls.

It would therefore seem that the politicians from London are playing ‘good cop, bad cop’. But the risk they run is a hardening of feeling on both sides. After all, the Deputy First Minister, Nicola Sturgeon, has warned that if UK ministers decided to hold to this position, then an independent Scotland could retaliate by refusing to accept a share of UK debt.

It doesn’t bode well for the likely tone of the Independence Referendum campaigns as we move towards September.

The Bank of Scotland’s surveys have produced consistently positive economic news

The Bank of Scotland’s Purchasing Managers’ Index (PMI) has shown that growth in the Scottish economy gained momentum at the start of the year, picking up after easing back a little at the end of last year. Indeed, January saw the “most marked increase” in manufacturing and service sectors for three months.

Professor Donald Macrae 'Growth momentum into 2014'

Professor Donald Macrae
‘Growth momentum into 2014′

According to the bank’s chief economist, Professor Donald MacRae, the index was at its highest level for three months and back to the highs of last summer. “Output grew strongly in both manufacturing and service sectors,” he said, accompanied by rising employment and increasing levels of new business. The growth in new export orders after two months of decline is particularly welcome. Business confidence continues to increase ensuring the Scottish economy not only continues the recovery but enters 2014 with growth momentum.”

Scotland’s Finance Secretary, John Swinney, described it as a solid start to the year. “The continued progress in Scotland’s economic recovery,” he said, “is helping to create more jobs and opportunities, with Scotland outperforming the UK in terms of employment, unemployment and inactivity rates. We know challenges will still remain as the recovery progresses, and that’s why there will be no let-up in the Scottish government’s determination to secure economic growth through our investment programme in skills and capital projects.”

Scotland Office minister David Mundell insisted that it proved that the country continued to do well as part of the UK. “We are providing the conditions for Scottish businesses to grow and create jobs because we are part of a strong, secure and influential UK economy,” he said. There is no room for complacency however, and we must continue to do everything we can to support Scottish business up and down the country. That is why from April we are introducing our employment allowance which provides Scotland with a boost of £100m by cutting the National Insurance bill of every Scottish business.”

Technical discussions about a currency union

When making their minds up about how to vote in this year’s Independence Referendum, the question of what currency Scotland will use in the event of a “Yes” result is not necessarily at the forefront of everyone’s mind. Indeed, in a recent survey those asked indicated quite clearly that it was well down their list of priorities.

The Scottish Government wants to keep the pound

The Scottish Government wants to keep the pound

However, this is one of those seemingly technical issues which will be causing many civil servants and politicians to have sleepless nights. In its White Paper published last year, the Scottish government indicated a clear preference for keeping the Pound. Its argument was simple and focused on the fact that it would be in the best interests of both countries for the existing arrangements to continue.

By contrast, a number of those ‘experts’ based in London have insisted that such a currency union would be at best difficult and at worst impossible! They point out that a future government in an independent Scotland would in effect be handing power over its currency to a foreign state – in this case England. This would mean that Scottish ministers did not have, as they’ve long desired, full control over the “levers of economic power”. They’re also worried by what might happen if a left-leaning government in Scotland adopted economic policies at odds with a right-leaning government in Westminster.

Mark Carney Governor of the Bank of England

Mark Carney
Governor of the Bank of England

The arrival of the Governor of the Bank of England, Mark Carney, to speak at an event in Edinburgh has helped to focus minds. Mr Carney had travelled north at the invitation of the Scottish Council for Development and Industry. He was keen to stress that the final decision would not be his but would be taken by the Parliaments of the two countries – but he went on to emphasise that this would require careful consideration as part of what he described as “the necessary foundations for a durable union.”

He pointed out that failure to agree such foundations would be fraught with risk, adding that the problems faced by the Eurozone clearly illustrated what could happen. “The euro area,” he said, “is now beginning to rectify its institutional shortcomings, but further, very significant steps must be taken to expand the sharing of risks and pooling of fiscal resources. In short, a durable, successful currency union requires some ceding of national sovereignty. It is likely that similar institutional arrangements would be necessary to support a monetary union between an independent Scotland and the rest of the UK.”

John Swinney MSP

John Swinney MSP

Scotland’s Finance Secretary, John Swinney, argued that the Bank of England would implement whatever monetary arrangements were agreed, adding that the benefits of a currency union were clear for both sides “…in terms of issues like promoting investment eliminating transaction costs, reducing borrowing costs and facilitating the movement of labour and capital, and we welcome the Governor’s recognition of these benefits.”

What Mr Carney has agreed to do is to continue a dialogue started by his predecessor, in which the Bank will provide “technical analysis” of the issues affecting the final decisions over the currency before the referendum. Before his speech, he had a private meeting with First Minister Alex Salmond who later described the outcome as having gone “extremely well”.

In a statement, the Prime Minister’s office said it was “no surprise” that the Governor had wanted to set out his views on such technical issues. It went on to acknowledge that the issue around currency was an important part of the debate currently going on in Scotland, adding that the people of Scotland would want to be as well informed as possible before taking the decision in September.

By Paul Johnson, Institute for Fiscal Studies and David Phillips, Institute for Fiscal Studies

Ed Balls, the shadow chancellor, has announced that if elected a Labour government would return the rate of income tax payable on incomes above £150,000 to 50%. What would the effect of this be?

The contention is that it would raise a meaningful sum of money to help reduce the budget deficit and make for a fairer tax system. The contention of their opponents is that it could result in an exodus of talent from the UK, a reduction in entrepreneurial drive, and an increase in tax avoidance and evasion, and may actually reduce the amount of tax paid.

Who is right is important not just for the lucky few who have incomes high enough that they would be directly affected. It matters for everyone because the exchequer is, perhaps worryingly, reliant on this very small group of individuals for a very large fraction of revenue: the 1% of income tax payers with incomes in excess of £150,000 pay somewhere between 25 and 30% of all income tax. How these people would respond to a change in tax rates can therefore have big implications for overall tax revenues.

Perhaps the best evidence we have at present is that produced by HMRC in 2012, and signed off by the Office for Budget Responsibility. This suggested that cutting the 50p rate to 45p could reduce revenue by about £3.5 billion in 2015–16 if there was no change in behaviour by those affected. However, once you allow for behavioural response, their central estimate was a cost of just £100 million – a very small amount of money. The best available estimate of what reversing the cut would raise is therefore about £100 million too.

But it is important to bear in mind that there is substantial uncertainty around this central estimate. Calculating the revenue effects allowing for behavioural response requires one to estimate the “taxable income elasticity” – the extent to which taxable income changes when the tax rate changes.

HMRC’s central estimate is that this elasticity was 0.45, which is broadly in line with estimates by IFS researchers based on the last time the top rate of income tax changed in the 1980s, and with estimates from a number of other countries. If instead the true elasticity was 0.35 (which is well within the range of uncertainty), reducing the top rate of tax from 50p to 45p will have cost the exchequer about £700m, while if the true elasticity was 0.55 (again, within the range of uncertainty), it will have actually raised about £600m.

In other words cutting the top rate of tax may have cost the government a bit more than it thought or actually raised a bit. This evidence led the OBR chairman Robert Chote to conclude that, whatever the precise answer, we were “strolling across the summit of the Laffer curve” (the relationship between tax rates and revenue).

Has anything changed since then? Ed Balls and Ed Miliband have suggested that the most recent HMRC statistics show those paying 50% income tax have paid some £10 billion more over the three years to 2012–13 than was thought back in 2012 when HMRC did their analysis.

The statistics in question are estimates and projections of tax liabilities based on the Survey of Personal Income, which is itself based on a sample of tax records. The versions of these tables from 2012 and 2013 do show a difference of around £10 billion in the total amount of tax paid by those paying the 50p rate in the years between 2010–11 and 2012–13. So is that an indication that the 50p rate was more successful in raising revenue than HMRC first assumed?

Looking carefully at the notes that accompany the 2012 tables cited by the Labour Party shows that the figures for 2010–11 to 2012–13 were projected tax payments based on how much tax was paid in 2009–10, before the 50p tax rate was introduced. Had the HMRC’s analysis of taxable income elasticity been based on these original, lower, projections for tax revenues then we might have good reason for questioning their analysis. In fact it was not.

In their analysis, HMRC made use of the actual 2010–11 tax returns of people paying by self-assessment (who make up the vast majority of people who paying the 50p rate of tax). This is pretty much the same data (bar a few late filers and those few 50p rate taxpayers not required to fill in a self-assessment form) that then goes into producing the Survey of Personal Income data used in the most recent 2013 tables. These tables show 50p taxpayers paid £34.5 billion in income tax in 2010–11 on an income of £86.5 billion (and HMRC’s analysis assumed their income was £87 billion). So in fact there is little additional evidence to suggest that a 50p rate would raise more than was estimated by HMRC back in 2012.

Of course, even if increasing the top rate of income tax raised little or nothing you might still consider it worthwhile if you have a very strong preference for reducing inequality. Some effect has of course already been felt since the recession hit through the combination of the 45p rate itself, a major reduction in pension tax reliefs, and the withdrawal of the personal income tax allowance for those on high incomes.

Our analysis of the effect of policy changes since the recession suggests people with incomes higher than £100,000 have on average seen a bigger percentage hit to their incomes from tax and benefit policies than people in any other part of the income distribution. But the group with incomes over £150,000 a year remains extremely well off relative to the majority.

The uncertainty around HMRC’s estimates means it is also possible that the 50p rate would be somewhat more effective at raising revenue than their initial analysis suggests. HMRC made their calculations at great speed on the basis of one year’s data that had only just become available. Indeed only around 95% of the data was available at the time they made the calculation.

By now they have data for 2011–12 too, and soon they will have data for 2012–13 as well. Given this, there is certainly a case for HMRC looking again.

But at the moment, the best evidence we have still suggests that raising the top rate of tax would raise little revenue and make, at best, a marginal contribution to reducing the budget deficit an incoming government would face after the next election.


This article first appeared on the IFS website.

The IFS receives core funding from the Economic and Social Research Council.

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The Pound in their pockets could determine the outcome

Looking forward to this year’s independence referendum, it seems that the priorities of the chattering classes are very different to those of many ordinary voters. A report from ScotCen Social Research has found that issues which seem to excite debate on radio television and in the newspapers (things such as what currency Scotland should have and whether this country will automatically be a member of the European Union or not) come well down the list of priorities. Instead, people want to make their minds up based on whether or not they would be better off in an independent country.

Prof John Curtice 'Economic and financial consequences' important to voters

Prof John Curtice
‘Economic and financial consequences’ important to voters

Until now, most polls have fairly consistently shown that around 30% of Scots voters actively support independence. However, the survey found that just over half – 52% – would support a breakup of the union if that meant they were £500 better off. But on the other hand, if people thought they were going to be £500 worse off, then support for independence dropped to just 15% – indeed 72% would actively oppose such a move.

However, this latest survey of 1,497 people was taken between July and October last year – that’s before the Scottish Government published its blueprint for independence. At that time, some 64% of those surveyed where “unsure” of what would happen if Scotland became independent. Only 30% were confident that they knew.

In a statement, Prof John Curtice, who acted as a consultant on this research project, said that “many of the issues that preoccupied those campaigning for and against independence are apparently of peripheral interest to voters. Voters want to hear about the economic and financial consequences of the choice they make, and it is on the outcome of that debate that the result of the referendum is likely to turn.”