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Weaker economic growth costing Scottish Government almost £700m, say experts

The Scottish Fiscal Commission has outlined the financial position facing the Scottish Government (PA)
The Scottish Fiscal Commission has outlined the financial position facing the Scottish Government (PA)

The Scottish Government could be losing out on almost £700 million of revenue from income tax because of weaker economic growth north of the border.

The Scottish Fiscal Commission (SFC) – which as part of its remit forecasts how much tax policies will raise for ministers – said differences in tax policy between Scotland and the rest of the UK  “should be contributing around £1 billion to the income tax net position in 2023-24”.

When the draft budget for 2023-24 was announced last month, Deputy First Minister John Swinney insisted it would “raise around £1 billion more next year than if we had followed UK tax decisions”.

Changes announced as part of that budget will see higher rate taxpayers in Scotland earning £43,663 a year or more paying tax at 42p instead of 41p, while top earners on £125,140 or more will  pay income tax at 47p, up from 46p, from 2023-24.

Deputy First Minister John Swinney unveiled his draft budget for 2023-24 to MSPs in December (Andrew Cowan/Scottish Parliament/ PA)

The rises are being introduced as part of an ongoing policy from the Scottish Government that seeks to reduce taxes for the lower paid, while asking wealthier citizens to contribute more than they would south of the border to raise additional cash to help fund public services.

Speaking about the Government, SFC chair Professor Graeme Roy said: “In practice they are probably only raising about £300 million more, and that is because weaker economic performance over the last few years.”

According to the SFC, income tax policies north of the border should net an additional £994 million for the Scottish Government – but the total is £325 million, a gap of £669 million.

The economics expert told the PA news agency: “We think purely on a policy only point of view, they should be raising about £1 billion more in revenue.”

Prof Roy said achieving this is dependent on economic performance in Scotland matching that in the rest of the UK, and added: “Scotland has lagged behind the UK for a long period of time.”

One of the “key drivers” of this is the faster population growth in the UK, meaning “the totality of their economy has been growing much bigger because they have been having faster population growth”, he added.

The shortfall between the amount that could be raised from income tax in Scotland and the amount being raised comes at the same time as the Scottish Government faces a growing bill for social security spending.

The SFC has forecast that by 2027-28, spending on devolved benefits in Scotland will be £1.4 billion more than the cash it receives from the UK for welfare spend.

Where benefits have been devolved, Westminster provides the Scottish Government with cash equivalent to how much it would have spent.

But with ministers at Holyrood being “more open to people coming forward” and “encouraging people to apply for certain benefits”, spending will exceed the amount awarded by Westminster.

Prof Roy said one of the “key pressures” here could be the Adult Disability Payment – which replaces the UK Government’s Personal Independence Payment, and will see cash given to those with a disability, long-term physical or mental health condition, or a terminal illness.

By 2027-28, spending on this could be £780 million more than the amount received from the UK Government, the SFC has forecast.

Meanwhile spending on new benefits north of the border – such as the Scottish Child Payment – which do not have an equivalent payment in the rest of the UK and do not therefore attract any UK Government funding, could amount to £600 million by 2027-28.

Prof Roy said: “In total you could be looking at about £1.4 billion by the end of our forecast period, and that has to be found from somewhere, that has to be found from within existing budgets or has to be found from within tax.”

Overall spending on social security in Scotland is forecast to increase from £4.2 billion in 2022-23 to £7.3 billion in 2027-28.

A Scottish Government spokesperson said: “While the economic outlook remains highly uncertain, the SFC expects nominal earnings in Scotland to go through a period of higher growth relative to the rest of the UK over the next five years, supporting our economy and the public finances.

“We will continue to deliver against the ambitious objectives in the National Strategy for Economic Transformation, ensuring we have a strong economy able to respond to the challenges of the decade ahead and supporting sustained growth in Scottish Income Tax revenues.

“A number of the factors driving Scotland’s tax performance in recent years are beyond the control of the Scottish Government.

“Independence will give Scotland the full range of economic and other policy tools – including over immigration – to take decisions based on our own needs and will allow us the chance to replicate the success of many neighbouring countries which are more prosperous, productive and fairer than the UK.”