Scots are being denied the full benefit of higher income tax because revenue raised is being used to cover for weak economic growth.
Under the Fiscal Framework, a complex formula agreed by First Minister John Swinney, Westminster reduces Scotland’s annual block grant to reflect the money now raised north of the Border.
The Scottish Government expects to raise £1.7 billion more through income tax in 2025/26, but it will gain just £616 million because of slow growth and receipts being used to cover block grant reductions, according to Audit Scotland.
Opposition parties said it was a result of the SNP’s “depressing doom loop” with weak growth limiting tax returns, and higher taxes in turn restraining the economy further.
Stephen Boyle, the auditor general, said Scotland’s slower growth in tax income is mainly down to weaker wage and job growth, fewer very high earners, and volatility in sectors key sectors such as oil & gas.
It also warned that some higher earners are changing their behaviour — for example by working less or moving income around — in response to higher tax rates.
In the 2023 Budget, the SNP Government created a new “advanced” rate of 45% on incomes between £75,000 and £125,140, and increased the top rate to 48%.
Mr Boyle said: “Devolved taxes are growing Holyrood’s budget, but their impact is weakened by Scotland’s lower earnings and employment growth compared with the rest of the UK.
“The Scottish Government needs to be more transparent with the public and Parliament about the net impact of its tax choices on the Scottish Budget.
“It also needs to better align its tax and economic strategies and set out which of its economic interventions are specifically expected to help grow the Scottish tax base.”
The Scottish government has repeatedly said most taxpayers in Scotland pay less than they would if they lived elsewhere in the UK.
However, it was claimed this week by the independent Scottish Fiscal Commission that the number of taxpayers earning above the threshold at which they paid more tax was higher than those below it.
Scottish Conservative finance spokesman Craig Hoy said: “The Scottish Conservatives pointed out months ago that the SNP’s tax rises would damage growth and as a result raise £1 billion less than they claimed they would. Now Scotland’s Auditor General has confirmed that we were right.
“The SNP’s incompetence has trapped our economy in a depressing doom loop—the slower it grows, the more they tax, and the more they tax, the slower it grows.
“Audit Scotland’s damning judgment makes it clear that John Swinney’s government has no idea how to close the growing gap in their budget and no understanding of the damage inflicted by their high-tax policies.”
Scottish Labour finance spokesperson Michael Marra said: “This damning report lays bare the damage the SNP’s economic failure has done to the public finances and our public services.
“The SNP’s low-growth economy has left Scotland more than a billion pounds worse off this year alone—meaning less money for our NHS, schools, housing, policing and more.
“Not only has the SNP starved our public services of funding, but it has failed to be straight with the public about the facts.”
Scottish Liberal Democrat economy spokesperson Jamie Greene said: “Much of the information contained in this report is seriously worrying, particularly regarding the impact that lower earnings and employment growth are having in Scotland. Scots are paying more and more taxes but that is not translating into more money to spend on public services.
“It is also extremely frustrating to hear that information provided by the Scottish Government was insufficient and that Scottish taxpayers are not as informed about the tax we pay as we should be. We should be able to see where every penny of our money is being spent.”
Reform MSP Graham Simpson described the findings as a “damning indictment” of the Scottish Government’s economic management. “They have raised taxes but the Scottish Budget is not seeing the benefit. That is a betrayal of taxpayers,” he said.
A Scottish Government spokesman said: “The Scottish Government’s tax decisions enable us to deliver higher investment in the NHS and policies like free tuition not available anywhere else in the UK, while ensuring the majority of taxpayers pay less income tax than elsewhere in the UK.
“Since 2007, GDP per person in Scotland has grown faster than the UK, with productivity increasing at more than twice the rate of the UK as a whole, and we will continue to work closely with businesses to drive economic growth and prosperity.”
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