Scottish Budget: Why income tax rises made by John Swinney are 'meek' compared to task at hand

John Swinney’s latest Budget statement was never going to be easy. Nevertheless, the tax changes seem meek compared to the task at hand.

The Scottish Government boasts that “in total, the decisions we have taken since the devolution of tax powers, will raise around £1 billion”.

What it doesn’t go on to say is the Scottish Fiscal Commission (SFC) calculate that, largely due to poorer growth in the Scottish economy, the net gain – over what would have been available in the absence of the partial devolution of income tax – will be only £325 million, less than a third of the intended gain.

Altogether, the SFC reckons the income tax changes announced this time result in an extra £129m in revenue for 2023/24. That is about 0.3 per cent of the resource, day-to-day spending, budget. So not a game changer.

Deputy Scottish First Minister John Swinney arriving to deliver the Scottish Budget. Picture: Andrew Cowan - Pool/Getty Images

The reason for this small impact is that raising the higher and top rates by 1p, according to the Scottish Government’s own ‘Income Tax Ready Reckoners’, only garners an extra £70m and near zero amounts respectively.

The big money comes from an increase in the intermediate and basic rate, where an extra 1p would have brought in around £150m and £200m respectively.

Such an approach would have had a negative impact on most households disposable income, but when two of your top three priorities are to ‘eradicate child poverty’ and to ‘strengthen public services’ then that difficult trade off may have been seen as worth it.

This low-risk approach has led to an underwhelming boost to many budgets which are struggling with higher inflation.

While the SFC estimates the resource budget in 2023/24 is up by 0.6 per cent in real terms (i.e. after adjusting for inflation), this calculation depends on using the GDP deflator.

If the CPI measure of inflation was used instead, the real change in the value of the total resource budget would have been a fall of over 1 per cent in 2023/24.

The SFC also estimates CPI inflation to be 5.5 per cent in 2023/24.

Using this as a basis for determining whether the real spending power of a budget is rising or falling shows that for the NHS, at 5.6 per cent, it is just – and no more – rising. For GPs, it is falling (3.7 per cent).

For some health-related spending areas, it is even flat in cash terms, including digital health and care, early years, and mental health services. In each case such a freeze seems short sighted.

Each of the three Enterprise bodies experiences a cash terms cut in 2023/24.

Local government day-to-day spending sees about a 3 per cent rise, well below inflation. However, it has a get-out clause whereby it can now increase council tax by as much as it likes.

Never mind the Scottish Government itself won’t hit most households with higher taxes, it is inviting local councils to feel free to do this for themselves.

The Scottish Government doesn’t look beyond 2023/24, but the SFC does, up to 2027/28. It doesn’t look good.

Resource funding only rises by 4 per cent, in real terms, between 2023/24 and 2027/28, about 1 per cent a year.

Once you take out above inflation settlements for health and social security, then most other budgets will be seeing year-on-year cuts for another four years.

Even these numbers may be optimistic as the Fiscal Commission is forecasting growth in Scottish earnings and employment to be better than the UK over the next five years, as opposed to lagging, as they have been in the recent past.

On wages and staffing, we are little the wiser. The Scottish Government decided not to publish its usual public sector pay policy guidance this year.

Fair enough, its not easy at present. However, this leaves us struggling to understand its overall staffing policy, which, last year, was for a reduction in staff based on a frozen wage bill. What now?

Is all this sustainable?

It seems unlikely. Even if the Scottish Government gets more funding top-ups from the UK Government in future Budgets, things are looking pretty tight all round.

The scope for reducing current waiting lists across public services seems meagre.

That is why the small tax hike applied only to higher earners looks like an inadequate response. It may well have to be revisited if the UK Government persists with its current approach to public sector pay and its tax and spend policies more widely.

Scottish voters may start to ask themselves, if the SNP wont seriously use the tax powers available to the Scottish Government, who will?

Without extra funds coming from somewhere, then the future for public sector services seems bleak. Even the NHS will continue to struggle with near inflation rises.

Others seem destined to reduce further the scope or the quality of services provided.

This means that instead of the stated intention to ‘strengthen public services’, they are at risk of being further weakened. This, in turn, could put at risk another stated priority of the Scottish Government, to reduce child poverty, at least in its widest sense.

With the economic and political world in turmoil, much could still change, for good or ill.

Nevertheless, it seems likely that eventually a decision will need to be made over whether to raise Scottish controlled taxes further, and more widely across households, or to effectively follow a milder form of the UK Government’s approach to public finances.

- John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for several economic think-tanks.