Scottish Budget Under Pressure Despite Higher Tax Revenues

20th December 2023

The Scottish Fiscal Commission today said that the Scottish Government's budget next year is set to increase by £1.3 billion from the latest figure for 2023-24. This is a rise of 2.6 per cent in cash terms or 0.9 percent after accounting for inflation.

Most of this increase in funding comes from income tax. A combination of the Scottish Governments policy choices, high inflation, fixed tax thresholds in cash terms (i.e. fiscal drag) and relatively strong earnings growth in Scotland have all contributed to a sharp increase in income tax funding.

However, the ongoing consequences of Scottish Government changes to social security and the linking of payment rates to inflation have increased spending commitments. Other Scottish Government policies such as the Council Tax freeze and increasing public sector pay have further added to the Scottish Government's commitments.

Capital spending is set to fall by 4 per cent in real terms between 2023-24 and 2024-25.

The Commission forecasts that economic growth will remain fragile in the near term with living standards set to fall between 2021-22 and 2023-24 by the largest recorded amount and not returning to their 2021-22 level until 2026-27.

The Scottish Government has introduced a new 45 per cent income tax band starting at £75,000 and also increased the top rate of income tax by 1 percentage point. These policies affect the top 5 per cent of taxpayers in Scotland. After taking account of behavioural changes, the Commission estimates that these policies will raise an extra £82 million in 2024-25.

Scottish Government changes to income tax policy since 2017 mean someone in Scotland earning £100,000 will now pay £3,346 more in income tax than they would in the rest of the UK.

The Commission's chair, Professor Graeme Roy, said, "Whilst resource funding will increase next year, and by more than we predicted in May, spending commitments including social security, public sector pay and the council tax freeze will mean individual Cabinet Secretaries will face some difficult choices.

"The Scottish Government has introduced a new tax band in Scotland further increasing the tax differential with the rest of the UK on high earners. This policy, along with the effects of fiscal drag, is forecast to boost income tax revenues in Scotland"

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