U.K. ‘Mini Budget’ Likely Just Dealt Scotland A Fiscal Time Bomb

The United Kingdom’s finance chief just dealt an economic blow to Scotland.

It’ll likely be a slow burn problem for the Scottish National Party, but it could end up being devastating.

Late last week Kwasi Kwarteng, the chancellor of the exchequer (a.k.a. finance boss,) unveiled what commentators are calling it a mini budget, which details the government’s revenue and spending plans.

One key thing in the announcement eliminated the top tax rate of 45% for England, Wales, and Northern Ireland. That means the most everyone in those countries won’t pay more than 40% in taxes.

Eye-popping Taxes Remain for Scotland

However, the same is not true in Scotland because the Scottish parliament holds powers to determine what tax rates to charge. It has pledged to keep its top rate at the eye-popping high rate of 46% for those earning more then £150,000 ($150,000.) The next highest is 41% versus 40% in the rest of the UK.

That means top earners in Scotland will pay six percentage points more than those in the rest of the U.K. And therein lies the problem.

For most of those highest earners, the previous one percent difference (46% in Scotland versus 45% elsewhere) wasn’t an issue.

However, a 6% difference will likely prompt some of the well-heeled in Scotland to relocate, probably to south of the border in England.

Economic history suggests that such a big difference will cause a significant portion of the top rate tax payers and so leave a hole in the Scottish budget.

Such a deficit would likely fall more on the next highest payers — those in the 41% bracket — with even higher rates. And the cycle will continue with many of the highest earners fleeing the country.

That’s a huge problem because 59.8% of income tax revenue in Scotland for the year 2020-21 comes from people in the 41% and 46% tax brackets, according to government data. Such people tend to be highly skilled and able to work anywhere they choose. Its my guess that at least some, and maybe a lot, of those people will leave for England or possibly elsewhere.

Needless to say, there will be little the Scottish government will do to stop brain drain and the capital flight.

Sturgeon Outraged

Scottish first minister Nicola Sturgeon said the move by Westminster was outraged by the mini budget. “We’ll take a sensible approach, which will be in stark contrast to the one we’re seeing from the UK Government,” she said.

The left-leaning politician also wants to see less income inequality with higher income households paying significantly more than those with low incomes.

While that desire for increased income equality may be considered noble by some, the results will likely result in an economic disaster for Scotland. Similar happened in the 1970s to the U.K. when tax rates hit nose bleed levels and saw a brain-drain of epic proportions.