Scottish Budget: Five key areas ministers need to consider - from income tax to council tax freeze and public service cuts

Humza Yousaf is struggling to balance the books in the face of a £1 billion black hole

Humza Yousaf is struggling to balance the books in the face of a £1 billion black hole in the Scottish Government’s finances.

The First Minister and his deputy, Shona Robison, have yet to conclude discussions with SNP and Green ministers ahead of the Budget on December 19. Insiders say it is proving difficult to “square the circle” amid a grim financial backdrop.

In a highly unusual move, a special Cabinet meeting is being held on Thursday evening in a bid to thrash out the details of the £60 billion tax and spending plans.

Humza Yousaf and his deputy Shona Robison. Picture: Jeff J Mitchell/Getty Images

Ms Robison has warned it will be one of the most difficult Budgets under devolution, pointing to funding pressures and inflation-driven pay deals. But what are some of the key areas ministers will need to consider?

Economic outlook

Mr Yousaf and his deputy will, of course, have to make decisions within the context of Scotland’s wider economic outlook. The independent Scottish Fiscal Commission will publish its forecasts on the same day as the Budget.

In a recent blog post, the respected Fraser of Allander Institute (FAI) at Strathclyde University said the economy had recovered more quickly than anticipated from the pandemic, but growth “has not been particularly great”. Inflation has become “embedded” and living standards are facing a record hit.

First Minister Humza Yousaf during First Minster's Questions at the Scottish Parliament. Picture: Jane Barlow/PA Wire

"The story of the Scottish economy in the last 24 months has been one of essentially flat-lining,” the FAI said. Ms Robison, who is also the finance secretary, “will need to deliver a budget that takes all these constraints into account”. She is also operating within a system in which a large part of her funding is determined by the UK Government.

Income tax

This is always the one that grabs newspaper headlines. Will the First Minister decide to hike income tax to raise some extra money?

Those earning more than £28,000 a year already pay more tax in Scotland than they would in England.

Mr Yousaf is reportedly considering introducing a new tax band between the present higher and top rates. However, no decisions have been made, and ministers will be painfully aware of the potential for an electoral backlash. This is particularly true given the expected general election next year.

The FAI said the Budget “could present an opportunity for the Scottish Government to think about its income tax policy more broadly”. Any decisions in this area will be closely scrutinised.

Council tax freeze

Mr Yousaf has already pledged to freeze council tax next year to help people cope with the cost-of-living crisis.

The First Minister scrapped proposals to hike council tax by as much as 22.5 per cent for homes in higher bands, which could have raised an additional £176 million for local authorities.

"That’s the SNP delivering for people when they need it the most,” he told his party’s conference in October. He said the freeze would be fully funded to ensure councils “can continue providing the services on which we all rely”.

However, local authority leaders were not made aware of the decision in advance and have warned they are at risk of bankruptcy if their funding from the Government fails to match cost pressures. So what exactly does “fully funded” mean in cash terms? And will it be enough to keep council bosses happy?

Public services

Recent weeks have seen a deluge of grim warnings from public bodies about the state of their finances.

As mentioned above, council leaders have sounded the alarm loud and clear. Elsewhere, Police Scotland has warned officer numbers could drop by almost 1,500 and the force could move to a “reduced attendance model” nationwide if it does not receive extra funding from the Scottish Government.

It said a “flat cash” funding settlement in 2024/25 – where the settlement remains the same in cash terms as the previous year – would cause “a significant disruption to services”.

Ms Robison said the size of the public sector workforce “will have to reduce”, but added the Scottish Government wants to avoid compulsory redundancies.

There are real concerns in Scotland’s struggling culture sector, too. It’s clear ministers will find it impossible to keep everyone happy. But where will the axe fall?

Businesses

Mr Yousaf has made an effort to reset the Scottish Government’s relationship with business leaders since he took over as First Minister.

His predecessor, Nicola Sturgeon, was often criticised for her lack of engagement with the sector. The Scottish Government will be under pressure to replicate Chancellor Jeremy Hunt’s tax breaks for businesses down south.

Mr Hunt said the 75 per cent discount for retail, hospitality and leisure businesses will be extended for another year in England and Wales. Scottish ministers chose not to pass this on last year. There will be anger if they go down the same route later this month.