THE decision not to increase the higher rate threshold by as much in Scotland as in the rest of the UK marked a historic divergence in tax regimes north and south of the border.
However, the adjustments to the thresholds will only increase Scotland’s budget by £125 million. The Scottish Government forecast is that total income tax revenue will amount to only £11.8 billion from a total Scottish Government budget of £37.9bn in 2017-18.
Inevitably, it was the other sources of revenue – mainly the block grant from Westminster – that will mainly determine how much is available to meet spending priorities.
Read more: Derek Mackay uses new powers to make Scotland highest taxed part of UK
It is planning to increase the budget by £800m in 2017-18. This is largely driven by an initial rise in Scotland’s grant from Westminster of £660m, supplemented by a further £400m from the Barnett consequentials of spending decisions taken recently by the UK Government.
The Scottish Government has opted to make next year’s budget the most generous between 2017-18 and 2019-20. A real increase of 0.8 per cent in 2017-18 is expected to be offset by falls of 0.3 per cent in 2018-19 and 0.8 per cent in 2019-20. Public spending in Scotland will be under pressure for the rest of the decade. It’s estimated to be 7.2 per cent lower in real terms than in 2010-11. Such a significant decline over a long period in the funding of public services is unprecedented in post-war history.
Read more: Derek Mackay uses new powers to make Scotland highest taxed part of UK
This is the backdrop against which Scotland will be exercising its new tax powers, which will be supplemented in 2019-20 by £5bn worth of VAT.
Given the continuing contraction in funding from Westminster, it’s difficult to see how the Scottish Government can engineer any reduction in headline income tax rates.
Instead, it may edge rates up hoping it can protect public services. But the risk is income tax revenues in Scotland fail to keep pace with those south of the Border, threatening its ability to support public services.
Read more: Derek Mackay uses new powers to make Scotland highest taxed part of UK
David Bell is professor of economics at Stirling University
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