The Fraser of Allander Institute has warned that under the formula that calculates the Scottish Government’s funding based on the performance of devolved income tax, next year’s budget could see deteriorating tax receipts eat into a boost in the block grant from the UK.
Despite Scotland’s GDP growth performing better than expected, the Scottish Fiscal Commission now forecasts tax receipts to be £400 million lower in 2019-20 as a result of depressed wage growth. Spending announcements by Chancellor Philip Hammond in the UK Budget mean Scotland is set to receive a windfall under the Barnett formula of £720m in 2019-20, most of it destined for the NHS.
However, in its analysis of Mr Mackay’s budget statement last week, the Fraser of Allander warned: “Should the SFC continue to take a relatively pessimistic view of Scotland’s devolved public finances, then the Scottish Government may find that at least some of the boost from the Chancellor’s pre-Brexit giveaway is offset by weaker tax revenues.”
Speaking to the BBC, Mr Mackay said the fiscal framework was “very complex” and insisted that spending on Scottish public services would be lower if tax policy remained solely in the hands of the UK government.
“The debate has been around divergence [in tax rates], but if I followed the UK government’s income tax plans I would actually have half a billion pounds less to spend on Scotland’s public services.”
He added: “If there is a deterioration in income tax in the country, it’s largely because of Brexit, because of the impact on the economy from things like having a smaller working age population impacts on the wider economy, on GDP growth and wage inflation.”
Meanwhile, the Finance Secretary signalled that he was open to calls from the Green Party for reform of council tax in return for their support to pass his budget at Holyrood.
Green Party co-convener Patrick Harvie said abolition of the council tax couldn’t be achieved before the next Holyrood election, but said: “We are asking for solid implementation steps forward, producing legislation that can be introduced after the next election.”
Mr Mackay said he is “open to conversations”, adding: “Specifically on taxation, I’m open to reform. I’m open to further discussions with opposition parties.”