Scottish Budget: Why SNP is going to have to put up income tax for most of us or make devastating cuts
Don’t expect any big tax shocks in the Scottish Budget, but sooner or later, politicians are going to have to be honest about the government’s difficult fiscal position
When Finance Secretary Shona Robison unveils the Budget this week, it is unlikely to attract much controversy. With the election looming in May, it would take a brave politician to raise taxes just as campaigning begins.
But while the Scottish Government may be able to avoid difficult decisions this time, it will not be able to do so for much longer. Rising demand for health, care and welfare services is placing severe pressure on devolved budgets. The Scottish Government estimates there will be a £2.6 billion funding shortfall by 2029–30 if existing services are merely maintained. Improving the NHS, tackling poverty and delivering net zero would require substantially more revenue.
The obvious question, then, is where this additional revenue will come from. Given the UK Government’s stringent fiscal rules, it’s highly unlikely it will turn on the funding taps anytime soon.
This means that, sooner or later, Scotland’s politicians will need to have an honest conversation with the public. If the state is to sustain the services we all rely on, taxes will have to rise. If they don’t, then devastating cuts are an inevitability.
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Overdue tax reforms
If tax revenue is to rise, the key question is: which taxes, and on whom? There is no silver bullet solution, but there is some low-hanging fruit.
That council tax remains in place 27 years after the creation of the Scottish Parliament is a damning reflection on our politics. It is deeply unfair and inefficient, and – more absurdly still – is based on property values from 1991.
Despite repeated pledges to abolish it, council tax has survived largely unchanged. Replacing it with a fairer, modern property tax could raise revenue, reduce inequality, and improve the functioning of the housing market.
But we shouldn’t stop at local taxation. In practice, nearly all devolved taxes are ripe for reform. Land and Buildings Transaction Tax (LBTT) is clumsy and inefficient, constraining labour mobility and growth.
While business rates are based on more recent revaluations, arbitrary reliefs cost the exchequer hundreds of millions of pounds each year. Meanwhile, the Scottish Government has held powers over the taxation of air travel for years, yet has still failed to use them.
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The elephant in the room
While reforming these smaller taxes can help, alone they will not solve Scotland’s fiscal headache. While some have called for a new wealth tax, only the UK Government could implement and administer one. That brings us to the elephant in the room: income tax.
The Scottish Government’s use of income tax powers to date has focused on increasing taxes for high earners. While this may have been justified, it is no longer a viable strategy. There are simply not enough high earners in Scotland to raise the sums required – or anything close to it.
If Scotland wants to maintain its proud social contract, we must confront an uncomfortable truth: most of us will need to pay a little more income tax. Given existing inequalities, this must be done in a fair and progressive manner.
Although it will be unpopular, the truth is it is unavoidable. Those who oppose broader-based tax rises should be clear about which public services they would instead choose to cut.
Maintaining the status quo is simply not an option. The sooner our politicians acknowledge this, the better.
Laurie Macfarlane is co-director at Future Economy Scotland
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