Extra income from Scots tax rises ‘wiped out by slow wage growth’

The extra £500 million collected by the Scottish Government through rises in income tax has been effectively wiped out by stagnant wage growth north of the Border, research published today has found.

Scottish Government finance secretary Derek Mackay
Scottish Government finance secretary Derek Mackay

Economists at the Fraser of Allander Institute (FAI) questioned whether Holyrood’s new fiscal powers were suitable to manage the risks involved with using them.

In its latest economic commentary, the research unit at the University of Strathclyde said much of the recent growth in Scotland’s economy was likely to have stemmed from companies implementing contingency plans for a possible no-deal Brexit, with underlying growth in key sectors of the economy remaining fragile.

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The FAI also assessed Scotland’s budget regarding the possibility emerging of £1 billion in income tax reconciliations likely to reduce the resources available to Holyrood ministers in the future.

Scottish Government finance secretary Derek Mackay

FAI director Professor Graeme Roy warned that the Scottish Parliament’s increased tax powers brought with them risks which the existing fiscal framework may struggle to mitigate.

He said: “The Smith Commission was designed to bring autonomy and accountability to Holyrood with new responsibilities, including over income tax and social security. But it also brought risks – risks that MSPs were happy to trade off for the goal of more powers.

“Much of the debate so far has centred upon how to use these new powers. But the risks inherent in the fiscal framework are now surfacing.”

The FAI commentary noted there was a “serious underlying risk to the long-term health of the Scottish budget” as earnings north of the Border continue to grow more slowly than those in the rest of the UK.

The analysis highlighted that while Scots income taxpayers were paying some £500m more in income tax than they would pay under the UK policy, this had been completely offset by the relatively weaker performance of the Scottish tax base.

Prof Roy said: “At the heart of the framework is a risk that, with the exception of population, the Scottish budget bears the full cost of any divergence between Scottish and UK income tax performance, no matter its source or the ability of Holyrood to mitigate its impact.

“Whether or not the framework is sufficiently flexible to manage these and other risks is open to debate. At the very least, it deserves much more effective scrutiny.”