Scotland facing £309m finance blackhole despite rise in tax receipts

Income tax receipts last year were £621m lower than forecast it has been revealed, however the fiscal framework has reduced the shortfall to £309m.

A shortfall in income tax receipts mean Scotland is facing a financial black hole, claims Scottish Labour.

The latest report by HMRC on how much Scotland raised in income tax in the financial year 2018-19, found that revenues totalled £11,556m – rather than the £12,177 forecast by the Scottish Fiscal Commission. However, the fiscal framework agreed between the Scottish and UK government, has seen the deficit reduced to £309m.

The Scottish Government said the figures – the first since it changed specific income tax bands – proved the tax regime was “fairer and more progressive”, but opposition MSPs said that Scotland was facing a financial “blackhole”.

According to the HMRC report, there were 2,524,000 Scottish taxpayers, 8.2% of all UK taxpayers, in 2018-19 with the number of Scottish taxpayers rising by 0.4%, and the amount they paid rising by 5.9% on the previous financial year.

The number of people in the higher tax band, which starts at £43,430, compared to £46,350 in the rest of the UK, rose from 308,000 to 322,000 while 888,000 paid the new intermediate rate which begins at £24,000. A total of 257,000 paid the starter rate which kicks in at earnings of £11,850.

The vast majority, 1,043,000, paid the basic rate of tax on earnings from £13,850, while 15,000 paid tax on earnings above £150,000.

Overall however, there was a gap of £621m between what was predicted to be paid in tax, and what was actually sent to the Treasury.

The Scottish Fiscal Commission, which forecasts income tax receipts for Scottish Government financial planning, said its overestimate in income tax

revenues had combined with an underestimate of growth of the Block Grant Adjustment and both “contributed to the negative reconciliation”

In a letter to Holyrood’s finance committee, Dame Susan Rice, chair of the SFC said: “The Scottish Budget for 2018-19 was set using our income tax forecasts published in February 2018 of £12,177 million. Compared to the outturn data of £11,556 million, our February 2018 forecast had a headline forecast error of £621 million, or 5.4 per cent.

“When we published our February 2018 income tax forecasts HMRC had not yet developed its outturn data on Scottish income tax. Instead, we based our forecast on historical data from a survey estimate of income tax revenues in Scotland, the best information available at the time.

“Our headline budget setting income tax forecast error was an overestimate of £621 million, and the income tax BGA had a forecast error of £312 million. The combined effect of these forecast errors is a negative income tax reconciliation of £309 million.”

Scottish Conservative Finance Spokesperson Murdo Fraser said the figures showed “that the Scottish Budget for next year starts with a blackhole of more than £300 million because the SNP spent more money than they had coming in.”

He added: “We will see lower investment in vital public services such as schools and hospitals as a result of this SNP mismanagement of the public finances. Instead of making Scotland the highest taxed part of the UK and continuing with their drive for independence, it is time they focused on the priorities of our workers, employers and our economy.”

Scottish Labour’s finance spokesperson Jackie Baillie also warned of a “budgetary blackhole" and added: "Scotland now faces the prospect of starting the financial year with a bill for £309 million - a worrying prospect in any situation, but especially so amid an escalating economic crisis.

"As the Scottish economy contracts, Scotland needs to prioritise the creation of jobs and the recovery of the NHS. I would urge both the UK and Scottish Governments to work together to secure additional resources for Scotland and support families and our economy.”

However a Scottish Government spokesperson said that a forthcoming Forecast Evaluation Report from the SFC would "explain the differences between their forecasts and the outturn data.

“The reconciliation is a normal annual part of the fiscal framework, where differences between forecast and outturn are reconciled once outturn figures are published. This figure is not a useful indicator of how Scottish Income Tax performed in 2018-19 as receipts grew by £640m between 2017-18 and 2018-19.

“In 2018-19 we introduced significant reforms to make income tax in Scotland fairer and more progressive, protecting lower and middle income taxpayers while raising additional revenue to invest in public services and Scotland’s economy. Today’s figures show that this approach helped Scotland raise an additional £119 million for public spending.”

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