Tax reform 'kicked down the road' as finance secretary warns of 'spending reset' at next budget

Ministers are facing a £1bn funding gap next year, rising to almost £2bn by 2027/28.

Humza Yousaf has been accused of kicking tax reform and a larger tax burden for higher earners “down the road” as his finance secretary set out a painful outlook for Scotland’s finances.

Shona Robison told MSPs on Thursday the Government would be faced with a gap of around £1 billion when it comes to set the Budget for the next financial year, likely requiring significant cuts, indicated by a reference to a “spending reset”.

Without a move to cut costs or significantly increase taxes over the next five years, the resource budget gap is set to rise to £1.9bn by 2027/28, in addition to a £900m black hole in the capital budget by 2025/26.

First Minister Humza Yousaf and Deputy First Minister Shona Robison (right) arrive for First Minister's Questions (FMQs) in the main chamber of the Scottish Parliament in Edinburgh

In the short term, real disposable incomes are set to drop by historically high levels, with a fall of 4.1 per cent due to inflationary pressures, not recovering to pre-pandemic lessons until 2026/27.

The potential for higher taxes and tax reform, including a wealth tax pledged by Mr Yousaf during his leadership campaign, appear to have been shelved until next year.

It comes as the finance secretary said she would set out an updated tax strategy to Parliament at the next medium term financial strategy, most likely in May 2024, and in the meantime work with an advisory group on next steps.

Any changes to tax policy such as the implementation of a new band for those earning between £75,000 and £125,000 would then only come into force for the 2025/26 budget, outlined in December next year.

Ms Robison said there would be a “laser-like focus” on public spending and called on the UK Government to provide additional funding or devolve powers around economic “levers”. She said the Government would ensure “the burden of taxation is placed on those with the broadest shoulders”.

However, general secretary of the Scottish Trades Union Congress, Roz Foyer, said the lack of urgent movement demonstrated a “worrying lack of ambition” from ministers.

She said: “The Cabinet secretary for finance is in a slightly better budgetary position than was predicted this time last year. However, she rightly points out that UK Government austerity and its manufactured cost-of-living crisis continue to hit Scotland hard.

“However, this is not an excuse for inaction. There is a worrying lack of ambition from Government ministers, which cannot be condoned.

“Tax reform cannot be kicked down the road for another year. To protect services and pay, the Scottish Government must make good on the First Minister’s pledge to leave no stone unturned in seeking to raise additional income by rebalancing wealth. This means committing now to the policy changes required to introduce wealth and property taxes as the STUC has advocated.”

The Institute for Fiscal Studies warned the scale of the gap between available funding and spending plans meant cuts to key public services or increases in taxes would be required.

The research institute also highlighted the potential for the Government to scale back its universal offering on some benefits and moving to a targeted or means-tested system, something already floated by the First Minister.

Scottish Labour’s finance spokesperson Michael Marra said the SNP must “start being honest with the public about what they are planning” in regards to tax and spending. Liz Smith, the Scottish Conservative finance spokesperson, said the statement was “proof of the SNP’s failure to address the really big issues”.

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