During Ms Truss’s campaign, she suggested reversing the 1.25% national insurance increase, effective from 6 April 2022, and which is due to become the health and social care levy in April 2023. She was unclear on whether this meant cutting employee and employer national insurance increases or just employee. She also suggested halting the corporation tax increase to 25%, retaining it at 19%.

Ms Truss also suggested she won’t introduce new taxes, including windfall taxes on energy companies, and doesn’t plan reducing public spending, rather committing to a 10-year public sector reform to improve efficiency and a 10-year plan to achieve an annual average growth rate of 2.5%.

To summarise, Ms Truss plans to cut taxes, maintain or increase public spending and achieve economic growth. To do this, she must take advantage of the UK’s strong covenant by borrowing more and repaying Covid debt over a longer period.

Given the Barnett formula approach to calculating the block grants that form a major part of the Scottish devolved budget is driven by spending policies and decisions, rather than revenue raising policies, i.e. taxes, arguably Scotland’s devolved budget could benefit in the short term from Ms Truss’s apparent strategy of borrowing to spend our way to economic growth.

The challenge for Scotland could arise if Ms Truss successfully delivers improved public sector efficiency. This would inevitably mean reducing UK Government spending, which could reduce future block grant funding for Scotland.

The Scottish Government should therefore consider how it can achieve public spending efficiencies and a balanced budget long term, otherwise it would need to consider how to bridge the gap by increasing tax, which realistically could only involve increasing Scottish Income Taxes to increase spending ability. This will provide the Scottish Government with a future conundrum on income tax strategy, to add to the looming challenge of how to react should the basic rate of income tax band increase to £80,000. Already, Scottish taxpayers start paying 40%+ income tax quicker than the rest of the UK. This differential could become more significant if the Scottish Government doesn’t react quickly to changes which could possibly lead to a middle-income earner brain drain across the border.

Other elements of Ms Truss’s policies could impact the Scottish economy positively, but will be at odds with Scottish policies. For example, she appears keen to optimise output from North Sea oil and gas reserves to ease energy supply concerns. This could bring investment and employment to Scotland, benefitting local businesses. More employment in Scotland means more Scottish Income Tax revenue. However, such a policy directly contradicts the Scottish Government’s climate change policies and may therefore create tension within an already strained relationship.

This certainly feels like an area where collaboration, rather than political point scoring, would benefit the UK as a whole. By working together, we can find a middle ground whereby the UK can secure energy at a time of financially crippling supply shortages, while using fiscal policies to monetise these mature energy assets. The money raised can fund carbon capture and renewable investments, securing the long-term continuity of energy supply.

Decisions made today will affect future generations. We can only get this right with a strong blend of fiscal policy and collaboration between UK and devolved governments, plus support from private sector energy companies.

Ross Stupart, Head of Tax, RSM Scotland

How Truss tax will affect Scotland - Ross Stupart

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