Jeremy Hunt autumn statement: Scotland told to brace for tax rises and spending cuts as inflation bites

Scots should be braced for increased taxes and further cuts to public services due to the impact of inflation, with the Deputy First Minister warning Scotland is likely to face a real-terms cut to its budget next year.

John Swinney, the interim finance secretary, also described the effect of inflation on the Scottish budget as “corrosive”, adding the pressure on public finances and public services was “absolutely colossal”. He now faces the choice of whether to follow the tax increases set out by Chancellor Jeremy Hunt, establish new taxes for additional revenue or cut funding for public services.

The Scottish budget, where the full impact of the autumn statement and the spending constraints on the SNP/Green coalition will be laid out in full, is set to be outlined on December 15.

Nicola Sturgeon said the plans from the UK Government would “worsen the extreme pressures already being faced”, and stressed an alternative approach that would avoid a prolonged recession was needed. She said: “There is an alternative to Tory mismanagement of our economy. It's self management of our economy, otherwise known as independence."

Following the statement, the UK Government claimed around £1.5 billion in Barnett Formula consequentials over the 2023/24 and 2024/25 financial years result from the autumn statement, with around £600 million coming from increased health spending and £385m from education.

Mr Swinney said the Scottish Government was committed to passing on health consequentials, but did not commit to ensuring additional education funding would be spent in Scotland on that sector. It is also not yet clear whether the cuts to public services by Westminster will reduce available funding on other devolved areas such as justice, the environment and transport.

The Fraser of Allander Institute said the autumn statement implied UK departmental budgets other than health and education would face real-terms annual cuts of 0.7 per cent up to 2027/28. This will likely be passed on to the devolved nations.

It is not yet clear whether the Scottish Government will face a cut to its overall budget for 2023/24, though Mr Swinney said he believed it was likely to be a real-terms cut.

The SNP minister also told reporters the autumn statement included no additional funding for the in-year budget and added that agreeing to increased pay deals would require spending cuts. Teachers and NHS staff are set to strike over the Government’s failure to provide inflation-busting pay deals.

The Deputy First Minister said the medium-term outlook for public service spending was “dire” and “dismal” due to inflationary pressures on cash budgets, and pay deals would increase the baseline for future Scottish budgets, increasing fiscal pressure for future years.

“We’ve been very clear that in this financial year – because in the budget statement there is no new money for this financial year – I have no unallocated resources,” he said. “If I want to put any more money into a public sector pay deal, beyond what’s already on the table, I have to cut public expenditure and public services.”

Mr Swinney said the pressure on public finances was “absolutely colossal”. He said: “I have never seen the intense financial pressure that we're wrestling with today.

"The Auditor General’s report this morning, I think, is an entirely dispassionate and accurate assessment of the challenge that I face in this financial year and which I think we will continue to face, because notwithstanding the numbers that have been shared by the Chancellor today, the effect of inflation is absolutely corrosive.

“Public expenditure, whatever its size, has got to deal with much, much more pressure and intense pressure than was the case in previous financial years.”

He indicated it was likely the Scottish Government would follow the UK Government in cutting the threshold for the top rate of tax, stating the approach from the Chancellor was Mr Hunt “recognising some of the principles that have underpinned the tax decisions that we have taken as a government”, ensuring those who earn more, pay more.

Should the Scottish Government choose to follow the Treasury’s decision to cut the threshold for the top rate of tax to £125,140, an estimated £80m over two years is likely to be raised in additional revenue. This would also see an additional 13,000 people brought into the 46 per cent tax bracket.

As it stands, 14,700 taxpayers – around 0.6 per cent in total – contribute £1.11bn to the Scottish exchequer. This is equivalent to 9 per cent of the total income tax take.

Sean Cockburn, chair of the Scottish technical committee of the Chartered Institute of Taxation, said it would be difficult for the Scottish Government to raise income tax thresholds for lower earners with inflation as that would “likely be much more expensive”.

He said not following the UK Government’s cut to the top rate threshold would see the gap between Scotland and the rest of the UK’s tax regime narrow. He said: “Even in the absence of a Scottish response next month, those with earnings above £125,140 and under £150,000 would still pay up to £1,425.80 more than someone earning the same salary south of the border as a result of tax devolution.

“This is less than the £2,669 difference that currently exists, but is unlikely to sit well with the Scottish Government’s progressive approach to taxation, making it likely we will see some sort of reaction in December.”

Philip Whyte, Director of the Institute for Public Policy Research Scotland, said the choice facing Mr Swinney in December was significant. He said: “Looking ahead to the Scottish budget next month, it [the Scottish Government] must ensure it directs all additional funding towards investing in public services and protecting the poorest households, and use its powers to deliver progressive taxation measures which ensure those with the broadest shoulders pay their fair share.

"That is essential if we are to ensure those most vulnerable to the precarious economic climate we currently face are better protected."

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