Scottish Budget: High tax future requires 'honest' government over the choices made - John McLaren

The latest Scottish Budget highlighted the trade-offs that need to be made as a result of two strong forces.

The first is the tight spending plans inherited from the UK Government. The second is the priority choices being instigated by the Scottish Government.

The first factor is well known, long expected and likely to be an enduring factor in coming Budgets, even if the UK Government is led by a different political party.

The second factor is an evolving series of decisions that are starting to make Scotland diverge in its public spending patterns from those seen in England.

Humza Yousaf watches as his deputy and Finance Secretary Shona Robison delivers the Scottish Budget. Picture: Andy Buchanan/AFP via Getty Images

While the NHS is a top priority both north and south of the border, the Scottish Government is increasingly, where it can, making different choices with regards to spending on social security benefits – for example with regards to disability and child payments – public sector wages and council tax. This, in turn, requires higher taxes, along with cuts in other budgets to balance the books.

The biggest and most persistent extra costs relate to social security spending. The Scottish Fiscal Commission (SFC) estimates that such additional costs – that is over and above what is provided by the UK Government – will amount to £1.1 billion by 2024/25, £200 million more than was needed in 2023/24.

On top of that, the Scottish Government needs to find extra money to fund the council tax freeze and higher than expected, and UK level, public wage settlements.

As a result, new tax increases have been introduced which raise another £82 million. Even then many budgets will be cut in real, after adjusting for inflation, terms – that is, their spending power will be reduced. The Scottish Fiscal Commission (SFC) calculates that “after accounting for social security spending and non-domestic rate revenues, which must be returned to local authorities, resource (day-to-day spending) funding for other areas is set to fall by 0.3 per cent in real terms between 2023/24 and 2024/25”.

So what are the pros and cons of these trade-offs?

Clearly higher social security benefits will improve the financial position of many families, especially less well-off ones. The downside is falling real-terms budgets in areas like mental health funding, higher and further education funding – which restricts the number of Scottish students – sporting and cultural activities, economic support, rural support etc.

There are also hidden choices within budget totals. The Fraser of Allander recently pointed out that while NHS staffing across the UK as a whole has increased by 30 per cent over the past ten years, in Scotland the figure was half that, at only 15 per cent, but Scottish NHS staff were seeing higher pay increases. Which approach results in better outcomes?

It is probably too early to tell, but given that the higher wage bill for the Scottish NHS will now be ongoing, it would be very much worthwhile undertaking some research to try and find out.

That is the public services side. On the revenue side the evolving higher income tax environment, compared to the UK, also has an impact. While the position for taxpayers north and south of the border is next to neutral for those earning under £40,000 a year, at £50,000 it amounts to over £1,500 (3 per cent) extra tax in Scotland and at £150,000 to nigh on £6,000 a year (4 per cent) more. The behavioural impacts of such a differential for Scottish residents may not kick in until very high wages are reached, given the costs of upheaval.

However, even at £50,000 they may have a significant impact on people who are thinking of moving to Scotland to work. Given the new ‘general’ salary threshold for long-term work visas to the UK is due to increase to £38,700, then the attractiveness of Scotland to migrant workers, which the Scottish Government professes to be keen to promote, may be waning.

These difficult choices and trade-offs are going to continue going forward. The SFC estimates that in five years’ time, by 2028/29, unfunded social security payments will have risen by a further 38 per cent, in cash terms, over 2024/25 levels. The overall resource (day-to-day spending) will have risen by 14 per cent. On top of that, the capital budget is predicted to have fallen over the same period by 12 per cent in cash terms and a whopping 20 per cent in ‘real’ terms.

In other words to keep up this pace of shift away from past patterns of spend, it will require an ongoing squeeze on other budgets AND ever increasing tax rises, above those seen elsewhere in the UK.

At some point it seems inevitable these tax rises will need to apply to all taxpayers, not just the wealthiest. This need not be a problem as it would simply mimic what happens in other high tax countries where, as the Institute for Fiscal Studies (IFS) has reported, the differential between higher and average tax payers tends to be lower than it is in the UK. This works in such higher social support countries because where those taxes are ultimately spent is more progressive.

But to enact this societal change, this needs better signalling. It needs a convincing story that such a future is a stable and viable one to be travelling towards.

It needs a government that is “open and honest with the public about the choices that we have made” and will need to continue to make.