Think-tank warns Holyrood facing £2bn funding gap by 2020

THE NEXT Scottish Government faces a funding gap of more than £2 billion each year by 2020, with tax rises alone unlikely to eliminate spending and welfare cuts entirely, an economic think-tank has found.

Scottish Parliament. Picture: Andrew O'Brien

A report from the Institute for Public Policy Research (IPPR) looked at how Holyrood’s new powers over tax and benefits could be used to chart a different course from that of Westminster during the next Scottish Parliament.

As it stands, Scottish households face a further five years of cuts to key welfare benefits, worth £600 million per year until 2020/21, according to the report.

In addition, the UK Government is planning significant tax cuts, including higher tax rate threshold increases, which would see a reduction in income tax revenues of about £300 million from Scottish taxpayers by 2020/21.

At the same time, under the existing spending framework, the Scottish block grant is due to reduce by £1.2 billion per year by 2020/21.

Under the Scotland Bill, Holyrood will receive almost half of its budget from devolved tax revenues, with the power to vary both income tax rates and bands.

It will also have powers over existing disability and caring benefits, and the ability to top up and create benefits.

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The IPPR found that increasing income tax rates would raise more revenue from higher-earning households than lower-earning households, with a 1p rise raising £500 million across all bands, or £100 million for an increase in 1p only on the higher rate of tax.

Matching UK Government plans to raise the higher rate threshold to £50,000 would cost £300 million in Scotland per year whereas freezing the higher rate threshold at its 2017/18 £43,600 level would raise £300 million per year by 2020.

This would mainly affect the highest-earning households and would not affect the tax rates of the poorest 30% of households.

Increasing council tax by inflation or earnings would see an additional £100 million and £200 million per year respectively by 2020.

Meanwhile, a full reversal of the cuts to universal credit work allowances would cost £200 million per year by 2020/21, as would reversing the freeze on working-age benefits.

Increasing disability benefits in line with earnings rather than inflation would cost around £100 million a year and see disability benefits increase by 11% in real terms by 2020.

IPPR Scotland director Russell Gunson said: “With public spending cuts, benefits cuts and proposed tax cuts in the rest of the UK, the scale of the decisions facing the next Scottish Parliament are very significant.

“Ahead of May’s elections all the political parties need to be clear how they will meet this funding gap, what balance of tax rises or spending cuts they will look to make, and the reforms they consider necessary to services in Scotland.

“The scale of the challenge means tax rises alone are very unlikely to make spending and benefits cuts go away entirely, but they can certainly make a contribution. Our report shows the new powers open up some possibilities on reforming tax and benefits that weren’t there before.

“To avoid this next parliament being just about mitigating austerity and managing decline, we must explore all the options available.”

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