Scottish Budget

Robison risks backlash with new income tax band

Shona Robison
Shona Robison will deliver the budget on Tuesday

Scottish ministers are risking a backlash from voters by proposing a hike income tax in next week’s Scottish Budget in order to minimise the impact of cutbacks.

A new tax band is expected to be announced on Tuesday, though sources say it may differ from First Minister Humza Yousaf’s preferred 44p rate for those earning between £75,000 and £125,140 to help tackle a ballooning deficit now standing at £1.5 billion.

Since arriving in Bute House in March he has insisted that those with the deepest pockets should pay more to provide public services and to reduce poverty.

Ministers have said that a 44p tax band would raise £200m but the Fraser of Allander Institute says it would be nearer £40m.

Deputy First Minister and Finance Secretary Shona Robison will announce the government’s decision when she unveils her budget on Tuesday. Aside from the new tax plan, Daily Business understands she will announce some further help to speed up the planning process.

It is expected to show a shortfall in funding for the next financial year due to increased spending pressures and new announcements, according to the Institute, base at the University of Strathclyde.

This represents one of the most challenging fiscal backdrops in the history of Scottish devolution, it says.

In May, Ms Robison projected a £1 billion funding gap on resource spending, rising to £1.5 billion when capital commitments are included.

Since this announcement, there have been improvements from better-than-expected income tax revenues, and more funding from the UK Government. However, spending on pay awards has been much higher than was budgeted for in May, though the Institute says more data is required to assess the impact of pay deals.

Fully funding local authorities for the freeze in council tax, announced by Mr Yousaf at the party’s conference in Aberdeen, will most likely cost over £300m.

A further £100m is committed to cutting NHS waiting lists and £325m of spending has been moved from this financial year into 2024-25 in order to balance the budget.

Put together with the initial funding gap, the economists expect the shortfall to be back to around £1.5bn, of which £800m is on day-to-day spending and £700m is on capital investment.

Professor Mairi Spowage, director of the Institute, said: “This large funding gap will mean difficult choices for the Scottish Government on what to prioritise. In a devolved context, this gap cannot be allowed to manifest in practice, so steps will need to be taken to address it.

Mairi Spowage: significant cuts are likely (pic: Terry Murden)

“Of course, the DFM may choose to use powers over income tax to raise more revenue to plug this gap, but it is unlikely that this would be sufficient in isolation.

“Significant spending cuts are also likely to be required – the DFM has the unenviable task of choosing where the axe will fall.”

In a briefing with journalists she played down suggestions that the new tax band would cause any significant exodus of workers from Scotland, saying they were more likely to change their working arrangements, such as reducing their hours or incorporating, to deal with tax changes.

The report also looks at the spending trends on areas such as the NHS and social security, and analyses how much might be raised by a series of income tax measures.

João Sousa, deputy director of the Institute, said: “There has been a huge amount of speculation on whether new income tax bands will be introduced to help with the government’s funding position.

“In our report, we analyse many of the options that have been discussed. It is important – always – to remember how much these measures will raise when likely behavioural responses are taken into account.

“For example, a new 44p rate above £75,000 will raise around £40m – not insignificant of course, but nowhere near sufficient to balance the books.”

Businesses demand more help

Business groups are opposed to the higher tax and are also calling for no change to the business rate as well as the introduction of similar rates reliefs on offer to businesses in England.

A letter signed by 400 owners and senior staff at pubs, bars, restaurants and hotels warns that many companies will not survive unless additional help is offered. They want an emergency 75% business rates relief to match the support that hospitality businesses in England & Wales received this yeer, and a new hospitality category for business rates.

The letter states: “We can’t go on like this. Scotland’s hospitality sector is now at a crossroads. We can either be supported to survive and flourish, or suffer further decline. Our venues, our livelihoods, and our jobs – which support the communities we serve – are on the line.”

Signatories include the Scottish Hospitality Group director Stephen Montgomery, Michael Kill, chief executive of the Night Time Industries Association, whisky consultant Blair Bowman and the MasterChef finalist Dean Banks.

Mr Montgomery said: “The Scottish Government claims it wants a new relationship with the business community. It’s time to put their money where their mouth is.” 

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