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Scottish Budget challenges

Mackay warned he may need to raise taxes or cut services

Derek Mackay

Derek Mackay: facing some big challenges (pic: Terry Murden)


 

Scottish Finance Secretary Derek Mackay may require a rethink in policy areas such as student tuition fees to avoid cuts in services.

A pre-Scottish Budget report from the Fraser of Allander Institute notes that outlook over the remaining years of the parliament has improved since last year, following the announcement of significant Barnett Formula consequentials in last month’s UK Budget.

However, the Institute also cautions that some of this improvement is likely to be offset by weaker income tax forecasts should the Scottish Fiscal Commission continue with their relatively pessimistic outlook for Scotland’s public finances.

Despite this, the Scottish budget on a like-for-like basis is now projected to rise by 3% between 2018/19 and the end of the parliament. But it will remain below its 2010/11 peak and, in per capita terms, it will be around 7% lower than it was at the start of the austerity period.

Professor Graeme Roy, Director of the Fraser of Allander Institute said: “Whilst the outlook for public spending in Scotland next year has improved compared to what Mr Mackay will have been planning for this time last year, for many parts of the public sector austerity will be far from over.”

“Public spending since 2010 has been focused on core areas of health, education and social care. This pattern is set to continue and whilst the outlook for unprotected areas has improved, further cuts cannot be avoided.” 

The report’s authors find that – based on current plans of both the UK and Scottish Governments – health spending will account for almost 50% of the Scottish Government’s resource budget by the end of this parliament, if not before.

This trend is only likely to continue, with any further increases in health spending to meet projected growth in demand, only leading to an even tighter squeeze elsewhere. 




Faced with such an outlook, the report considers options to help deliver greater sustainability to Scotland’s devolved public finances.

David Eiser, the report’s lead author added: “Over time, such incremental changes to spending priorities are amounting to a substantial change in the distribution of the Scottish budget.

“In the last two Scottish budgets, the Finance Secretary raised money from income tax. These changes have been progressive across the distribution, but opened up a tax differential with the rest of the UK that is increasingly visible for Scotland’s 14% highest income taxpayers.

“Income tax choices will be hotly debated again this year, with the Finance Secretary likely to come under pressure to at least partly close the income tax gap with the rest of the UK. But this would come with a big price tag. Matching the UK Higher Rate Threshold of £50,000 would cost around £280 million.

“The Finance Secretary does have other options to raise revenue, but may need to consider bolder ideas over the longer-term. Perhaps given the parliamentary arithmetic, 2019/20 will be the year we see steps towards genuine reform of local taxation. 

“Austerity may be ending, but the Scottish Government will still face challenging decisions on revenue raising and the distribution of expenditure.”

 



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