Tax rates Scotland: Will there be a hike in income taxes to pay for Humza Yousaf's anti-poverty agenda?

The Scottish Government faces difficult choices to pay for the Programme for Government

On a day when Humza Yousaf set out the defining missions that will shape his inaugural Programme for Government, it was the elephant in the room. The First Ministerspoke at length about his progressive agenda, stressing his administration was “unashamedly anti-poverty and pro-growth”. But there was little in the way of detail around a certain three-letter word. Tax. Or to be more specific, income tax.

Eagle eyed observers pointed to a letter sent on Tuesday by Mr Yousaf to his deputy, Shona Robison, which set out the ‘outcomes’ to be delivered across her finance brief over the coming year. In it, the First Minister noted the Government would “use our tax powers in the setting of the 2024/25 budget to further progress delivery of the most progressive tax system in the UK by making tax policy choices that are informed by public and stakeholder views”.

As far as Mr Yousaf’s political adversaries at Holyrood are concerned, such vague and inconclusive remarks should be interpreted as a thinly veiled admission that future income tax rises are coming. The Scottish Conservatives, whose leader, Douglas Ross, described Mr Yousaf as “high-tax Humza”, pointed to “very clear hunts that further income tax rises are in the pipeline”.

Anas Sarwar, his Scottish Labour counterpart, warned families needed a government focused on reducing the burdens on their household incomes in the middle of a cost-of-living crisis. “Instead,” he added, “they get a Government that will hit them with council tax and income tax rises”.

Politically, the issue is undoubtedly sensitive for Mr Yousaf, who is intent on securing the backing of middle class Scotland. But with a looming £1 billion shortfall in the Government’s budget, economic realities cannot be ignored. So if there are to be changes to the tax system, how might they look?

Thankfully, we need only revisit the SNP leadership contest earlier this year to understand what Mr Yousaf is thinking. As things stand, Holyrood has introduced five different income tax bands, but Mr Yousaf, who has repeatedly stressed the need for a “progressive” tax system, appears keen to make amendments.

Back in March, he told a hustings that he would consider a proposal put forward by the Scottish Trades Union Congress (STUC) for a new 44 per cent income tax band, which would sit between the current higher rate of 42 per cent and the top rate of 47 per cent – chargeable on annual income between £75,000 and £125,140. The STUC proposal, drawn up by economist Howard Reed, also advocated a 2 pence increase for all incomes above £40,000 a year.

Could that change provide the windfall that is needed? Several experts have doubts. Political economist John McLaren told The Scotsman that even if Mr Yousaf was intent on pursuing the STUC tax plan, he “couldn’t fund much with it”, explaining: “He may want to do it, but it doesn’t get you much money.”

Similarly, Mairi Spowage, director of the Fraser of Allander Institute, and a former deputy chief executive of the Scottish Fiscal Commission, has said even if the whole of the higher rate tax band is upped by 2p, in line with the previously mentioned proposals, it would only raise £176 million. That, said Ms Spowage, is not an insignificant amount of money, but it is “not enough” to deal with the funding gap outlined in the Government’s medium-term financial strategy.

It may be Mr Yousaf’s views have changed, or could change. A significant development has been the creation of a new advisory group on tax strategy. Chaired by Ms Robison, its membership includes leading economists, academics and figures from the private, public and third sectors. Together, they are tasked with considering how best to engage with the public and other stakeholders on future tax policy, including whether a “national conversation” on tax is required.

The group met for the first time in July, with a further two meetings scheduled in the lead up to the new Budget. So what other possible options could they be mulling over?

Well, according to the Government’s own research, there are numerous options available. A 1p increase on the intermediate rate would realise additional revenue of £164m, while increasing the higher rate by the same amount would bring in £88m. If the top rate is increased by the same amount, however, it would only raise around £5m.

Mr McLaren pointed out: “You don’t get much money from income tax unless you raise the basic/intermediate rate. The higher tax bracket you go, the less money you get.” So does that mean there could be even bigger changes coming? Raising the basic rate of tax by 1p would be a radical move, but one that would bring in £213m, according to the Government’s own futures.

For his part, Mr McLaren said the Government’s stance that Scotland was not a high-tax country was ultimately incompatible with its rollout of devolved benefits, stressing it could “dance on the head of a pin” for only so long. Asked what movement he anticipated from Mr Yousaf around income tax, he added: “It would be a big change for an SNP Government to say basic rate taxpayers are going to have to pay more. Maybe he will do that, he does seem to have changed the SNP’s stance around a lot of things compared to Nicola Sturgeon.

“In high tax, high social benefit countries, you raise the basic rate, which hurts everybody. But it’s where you spend that money that matters. If you spend it on anti-poverty measures, it’s progressive. The tax rise might be regressive, but put together with the spending pattern, it can become progressive.

"That’s what they do in Scandinavia. But the Scottish Government has never done that, and adopted the pretend position of doing one thing, but not the other.”