Tax hikes on wealthy ‘will not be enough to plug Scotland’s £1 billion funding gap’

The Fraser of Allander Institute said public spending is projected to significantly outstrip the funds available

Picture: John Devlin

Tax hikes for higher earners will not raise enough to plug a looming £1 billion gap in the Scottish Government’s finances, an economic think tank has warned.

The Fraser of Allander Institute (FAI) said public spending in Scotland is currently projected to significantly outstrip the funds available.

It said further additions to the higher and top rates of income tax are “unlikely to be able to yield large amounts of revenue”, while wealth taxes “look very difficult in a devolved context”.

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First Minister Humza Yousaf has pledged to “go further” on progressive taxation, and has expressed an interest in proposals – put forward by the Scottish Trades Union Congress – to introduce a new income tax band at £75,000 and up the rate by 2p.

But in its latest economic commentary, the FAI warned: “The new ready reckoners published by the Scottish Government recently show that even if the whole of the higher rate tax band is upped by 2p, this will raise £176 million – not an insignificant amount of money, but not enough to deal with the funding gap outlined in the MTFS [Medium Term Financial Strategy].”

The think tank, based at Strathclyde University, said Scotland’s resource spending requirements could exceed central funding projections by £1 billion in 2024-25, rising to £1.9 billion in 2027-28.

Conservative MSP Liz Smith said: “This analysis makes it clear that Humza Yousaf’s instinctive approach – clobbering Scottish taxpayers with yet more rates and rises – would be nowhere near enough to deal with the £ 1billion funding gap identified by the Medium Term Financial Strategy.

“As the Fraser of Allander Institute’s independent report points out, even a 2p hike on the whole of the higher tax rate would bring in less than a fifth of that total. What’s more, the SNP government’s creation, and widening, of a tax gap with the rest of the UK is likely to be counterproductive, by discouraging the skilled workers essential for future growth and productivity.

“Growth is vital for Scotland’s ability to fund public services, but the Institute is now pessimistic about this happening. Against that background, it would be not only pointless, but potentially very damaging, for Humza Yousaf to continue increasing taxes even further.”