Scotland could face a shortfall of hundreds of millions of pounds in crucial funds for public services as a result of “structural issues” in the framework that determines Holyrood’s annual budget.
The dearth of high earners in Scotland compared with elsewhere in the UK is at the heart of the problem and Holyrood’s finance committee is now calling for a review of the “fiscal framework” that calculates the annual budget of about £35 billion.
The Scottish Government was left reeling this year when it emerged that Scotland was facing a £1 billion shortfall in its budget over the next three years.
This was largely down to the divergence in the number of higher rate taxpayers based in England – mainly in the south-east – which meant Scotland’s tax take was lower then expected.
Finance and constitution committee convener Bruce Crawford said: “A key element of the fiscal framework is that it is intended to incentivise the Scottish Government to increase economic growth relative to the UK economy.
“After one year’s outturn data for Scottish income tax, our committee is warning that it is too simplistic to assume that faster relative economic growth will indeed result in an increase to the size of the Scottish Government’s budget.”
UK growth outperformed Scottish in 2017/18, but in 2018/19 the Scottish economy matched the overall performance of the UK economy and was stronger per capita. But Scotland lost out in both years, a report published by the committee today finds.
Mr Crawford said: “Our pre-budget report notes that there may be potential structural issues affecting how the fiscal framework operates, arising from the extent to which the make-up of the tax base is ‘more unequal’ in the rest of the UK compared with Scotland. As such, we recommend that the review of Scotland’s fiscal framework – due to happen in 2020/21 – should consider the impact of differences in the Scottish income tax base relative to the rest of the UK.”
Scotland has recently taken on fresh powers over income tax and next year, 2020/21, will mark the first time that new “reconciliations” are imposed, which mean the Scottish Government must tailor its public spending to keep this in line with devolved taxes being raised.
But Scotland faces an income tax shortfall of £229 million next year, estimates show. This stems from the taxes raised by the SNP in 2017/18, as there is a three-year lag in discovering the actual tax data.
The black hole rises to £608 million in 2021/22 and £188 million the year after that, the figures show.
Finance Secretary Derek Mackay has previously said the Scottish Government has been putting cash into the Scottish reserve to manage volatility and there are borrowing powers which could be considered.