Scotland faces £200m budget cut as income tax generates £941m less than forecast

The Scottish Government’s budget will be cut by more than £200 million next year to help compensate for an income tax take of £941 million less than forecast.

The Treasury said sluggish growth in the Scottish economy compared to the rest of the UK hit tax receipts and led to the gap.

Scottish Finance Secretary Derek Mackay said his reserve and borrowing powers are “sufficient to manage” the impact but called for a rethink of restrictions on these, branding them “not fit for purpose”.

He said combined higher and additional rate taxpayers in Scotland – those earning more than £43,000 in 2017/2018 – grew faster than in the rest of the UK, meaning fears of these people leaving Scotland after higher tax rates were introduced were “unfounded”.

The Scottish Government increased higher rates and brought in two additional bands in a 2017 income tax reform.

These changes came into force in April 2017 and the tax raised that financial year was £941 million less than expected, new HMRC figures show.

Through the reconciliation process, part of the fiscal framework agreed between Holyrood and Westminster when income tax powers were devolved through the 2016 Scotland Act, this will be partly offset by a £737 million increase to the Scottish block grant, funded by the UK Government.

This leaves a reduction in funding for Scottish public services of £204 million for 2020/21.

Mr Mackay said: “Whilst these figures show our reserves and borrowing capacity are sufficient to manage the 2017/18 reconciliation, I will make a decision as part of the budget and spending review process on how to manage any reconciliation in a fiscally responsible way that supports our vital public services.

“However, the volatility the current system places on Scotland’s spending means the fiscal framework review must consider the current limits on the use of the reserve and borrowing powers which are clearly not fit for purpose.”

Chief Secretary to the Treasury Liz Truss said the 2016 Scotland Act gave Holyrood ministers “substantial powers over taxes and spending for Scotland while still being supported by the broad shoulders of the UK”.

She added: “But with those new powers, Scottish ministers should take responsibility and focus on the decisions necessary to get Scotland’s economy growing faster to avoid shortfalls in tax receipts.”

HMRC figures
HMRC figures

The HMRC figures show the number of income tax payers in Scotland fell 0.6% to 2,513,000 between 2016/17 and 2017/18 while in the rest of the UK they rose 0.5%.

The amount of tax collected in Scotland rose 1.8% to £10,916 million in the same period, while the rest of the UK was up 3% to £154,199 million.

North of the border, basic rate taxpayers fell 1.3% compared to a 0.9% increase in the rest of the UK.

Higher rate taxpayers were up 4.8% in Scotland but fell 2% in the rest of the UK, while for the additional rate there were 3.9% and 6.5% rises respectively.

Official statistics published today by HMRC show that income tax revenues grew by 1.8%, to £10.9 billion in 2017-18, with growth driven primarily by an increase in contributions from higher and additional rate taxpayers.

Read @DerekMackaySNP's response 👇

— ScotGovEconomy (@scotgoveconomy) July 18, 2019

Public spending statistics also released indicate spending in Scotland rose to by £275 per person between 2016/17 and 2017/18 to £10,881, compared to a UK average of £9,350 per head in 2017/18.

Mr Mackay said: “These statistics show that the Scottish Government’s choices on taxation are helping to create a more progressive tax system at the same time as our economy is growing with low unemployment.

“These figures demonstrate that concerns taxpayers would relocate as a result of our tax policy choices were unfounded.

“While we support changes to the personal allowance, it has reduced the number of basic rate taxpayers in Scotland by a greater degree than across the rest of the UK.

“We have yet to receive the additional funding that should come as a result of that UK policy decision.

“I remain of the view that it would be beneficial for the people of Scotland if we had full control all aspects of the income tax system.”