Why the SNP ruling out income tax rise may come back to bite - John McLaren

The Scottish Government’s Budget for 2022-23 began the start of a period of difficult decisions, with disappointing outcomes for many areas already beginning to be seen.

A tax rise would have broken an SNP manifesto pledge

The Health and Social Care sector may be happy with their additional £800 million, but overall this is unlikely to stop the trend decline in Scotland’s spending per person advantage seen over the rest of the UK.

The IFS estimates that the extra health spending per person in Scotland, over England, has dwindled from around 17 per cent in 2006-07 to around 4 per cent in 2020-21. How much longer can this go on for?

A maximum public sector pay uplift of £775 is just over 3 per cent for those earning £25,000, but still below inflation, which could peak at 5 per cent (CPI) or even 7 per cent (RPI) next year. For those earning £35,000 the increase will be 2 per cent. Will this be enough to head off further industrial action?

While the Local Government overall funding package is claimed to have risen by an inflation busting 7.7 per cent, most of this extra cash is for additional commitments (extra teachers, a higher Living Wage etc), such that the core Local Government budget rise is a mere 0.2 per cent, in other words a big real terms cut.

Income tax is largely unchanged, to help protect against a rising cost of living, but “councils will have complete flexibility to set the Council Rate tax that is appropriate”, which seems like a ‘passing the buck’ exercise.

It is unclear what the Greens brought to the party in terms of protecting Local Government spending or raising top-end taxes/addressing a regressive Council Tax system.

Some supporters might wonder why the SNP and the Greens have ruled out any income tax rise at such a time of multiple claims for crisis funding. In particular, a temporary increase in order to meet catch up costs relating to the NHS, schools and the courts system might have been proposed.

Clearly this would break an SNP Manifesto pledge but times remain uncertain and extraordinary. Other small European countries manage to have higher taxes and remain economically competitive so it is not an impossible ask and if not now then when?

Further bad news awaits down the line according to the Scottish Fiscal Commission. It highlights two upcoming budget restricting problems. First, increasingly large negative Block Grant Adjustments, as result of a slower growing economy compared to the UK as a whole. So far, these costs have been kicked into the long grass (for future Scottish residents to pay for) via more borrowing but the SFC believe that they will become so large that this will no longer be possible.

Second, the SFC see the Scottish Government approaching its capital borrowing limit over the next five years, cutting off a funding source which has been utilised to its maximum in recent years.

This Budget was a prelude to next year’s Scottish Spending Review. If the Scottish Government does not raise taxes, or persuade the UK Government to allow it greater borrowing with regards to day-to-day spending, then those budgets without a high priority (i.e. those not associated with reducing inequalities in health, education and income) seem likely to face a tough future involving further real terms cuts.

John McLaren is an independent economist at Scottish Trends