Fiscal Policy and Tax, Scottish Budget

Income tax increases on their own are not a solution for Scotland’s spending challenge

The Scottish budget faces a substantial challenge. Between now and the end of the parliament in 2021/22 the resources available to the government are projected to decline by about 3% in real terms.

This might not sound like much. But at the same time as the budget is declining, the health budget (which accounts for almost half of government spending) will increase by 3%. Whilst this might sound generous, a 3% increase is only just sufficient to keep up with a growing and ageing population (notwithstanding the general inflationary pressures facing the health service).

Furthermore, a range of other spending commitments have been made, on services ranging from childcare to policing, tuition fees to care for the elderly.

The implication is that many unprotected areas of the budget will face substantial funding cuts; although many of the ‘protected’ areas are not exactly seeing generous increases in the context of the cost pressures they face.

What’s more, this spending constraint comes on the back of seven years of spending consolidation. Since 2010, the Scottish resource budget has declined by around £1 billion. During this time, whilst health spending has been ‘protected’, the population has been increasing.

Over the course of the decade therefore, the Scottish Government’s non-health spending per capita is on course to decline by a fifth in real terms.

This is the context within which the Scottish Government today published its paper setting out the potential role of income tax policy in Scotland’s Budget. The government should be commended for publishing the options and their implications in such a transparent and rigorous manner.

The government’s own view is clear. They believe that increases in income tax on the top-earning half of taxpayers is an appropriate policy to protect the integrity of public services in the face of ongoing constraint.

Labour, the Liberal Democrats and the Greens also argue in favour of raising the overall burden of income taxation. These parties proposed in their manifestos plans to raise reasonably significant sums (up to £600 million per year in Labour’s case) from broad based tax increases.

The Conservatives argue that whilst investment in public services is desirable, raising the tax burden poses a risk to growth and the tax base.

But with the Parliamentary arithmetic as it is, the way is now paved for some form of tax increase in the Scottish budget when it is presented to parliament in December.

However, it would be wrong to see this as signalling a conclusion or solution to Scotland’s budget challenge. The ‘alternative approaches’ set out in Chapter 7 of the government’s tax paper – which do not constitute ‘firm policy proposals’ but will be interpreted as providing an indication of the government’s current thinking – raise in the region of £100 million to £300 million per annum.

This might sound a lot. But by the end of the parliament, the Scottish budget on current projections is likely to be £600 – £700 million smaller per annum than it is today. The proposals for income tax increases should be seen in this context.

Indeed, it would appear that the Scottish Government is wary about the implications for the economy of significant tax increases, although it acknowledges that forecasting the impact of tax policy change on economic growth is extremely difficult. Hence the government’s tendency to err on the side of caution.

So whilst it is very welcome to have a transparent debate on what some of the options for income tax are, there remains a gulf between the government’s spending challenge and the role that income tax changes can play in addressing this.

The notion that ‘difficult decisions’ (as the First Minister called them) on income tax can absolve us from difficult decisions on the spending side of the budget seems somewhat optimistic.

The government’s tax paper admirably sets out the options on tax. But we shouldn’t lose sight of the wider picture. And this is that tax decisions can’t be made in a vacuum from decisions on what the overall spending envelope should be.

As a result of today’s paper, we know more about how the size of the budget envelope might be varied; but the debate on how large that budget envelope should be – and what it should fund – has barely begun.


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The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.