Scotland’s finance secretary has admitted she may have to raise income tax because of a deal agreed by First Minister John Swinney nearly a decade ago when more tax powers were devolved to Holyrood.
Shona Robison said she faces a “nightmare situation” which could see Scotland suffer a £1 billion lower contribution from Westminster if the Chancellor raises income tax in her Budget this month.
This is because of adjustments that would be made to the block grant under a complex fiscal framework agreed by Mr Swinney.
The funding Holyrood receives from Westminster via the block grant adjustment is reduced to take into the account money the Scottish government is now able to raise directly.
The Fraser of Allander Institute has estimated a 2p rise in the basic rate of tax elsewhere in the UK could cut Scotland’s finances by £1bn, unless the Scottish government matches the increase with its own tax rises.
During First Minister’s Questions last week, Mr Swinney indicated that the government may have to raise income taxes.
Ms Robison today today added to that likelihood, saying she was “anxious” about the chancellor’s Autumn Budget on 26 November amid speculation she will raise the basic rate of income tax by 2p. She may offset this by a similar cut in employee national insurance contributions in a so-called “two up, two down” plan.
The knock-on effect on Scotland’s finances means Ms Robison might have to reconsider a previous pledge not to change income tax levels when she sets her own budget in January.
“We don’t want to raise taxes. We’ve already set out in the tax strategy that we want to see that stability until the end of the parliament,” she said. “But in the event of unforeseen, exceptional circumstances clearly we would have to revisit that.
“This is uncharted territory here, and it is not one that the Fiscal Framework ever envisaged.”
Economist Sir Anton Muscatelli will say in a report to be published on Monday that the current pressure on budgets means there must be greater focus on growth rather than just relying on taxes to fund public services.
The former Glasgow University principal, who has served as an economic adviser to the Scottish government, has been commissioned by Scottish Labour to produce a report on regional economic development in Scotland, due to be published on Monday.
Since April 2017, the Scottish government has been able to set its own income tax rates and bands.
Those living in Scotland earning below about £30,300 pay slightly less income tax than they would elsewhere in the UK, with a maximum saving of about £28.
Above that threshold they pay increasingly more as earnings increase. Someone on £50,000 in Scotland pays £1,528 more than they would in the rest of the UK. That rises to £5,207 for someone on £125,000.
The Scottish government says workers in Scotland benefit from services such as free university tuition and no prescription charges on medicines, although 95% of prescriptions in England are also free.
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