Tory tax plans will see £420m budget hole or end of lower tax for most Scots, analysis shows

The Scottish Government will be forced to choose between higher taxes for all Scots or a £420 million hole in its budget as part of its response to income tax proposals from the UK Conservative leadership contenders, new analysis states.

Rishi Sunak, the former chancellor who is trailing behind foreign secretary Liz Truss in the race to become the next prime minister, committed to an income tax cut while he was in government.

This cut, of 1p to 19p for basic ratepayers, would be the first step towards a further cut to 16p within seven years.

Ms Truss has committed to £30 billion worth of tax cuts, mostly in cuts to corporation tax and by reversing the increase in National Insurance contributions.

Analysis by the Fraser of Allander Institute states a cut to income tax for the rest of the United Kingdom would strengthen Scotland’s budget in terms of the block grant, assuming no changes to departmental savings by Westminster.

However, not following the tax cut would have political ramifications.

This is due to the fact that not following such a cut would see no Scottish income taxpayers paying less income tax than their counterparts in the rest of the UK.

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As Chancellor, Rishi Sunak committed to lowering the basic rate of income tax to 19p.

The SNP has regularly defended higher tax rates for those on higher salaries by stating that Scottish taxpayers with incomes below the median pay less tax than if they lived in England, Wales or Northern Ireland.

If the Scottish Government decided to follow the tax cut and reduce the starter, basic and intermediate rates of tax to 18p, 19p, and 20p respectively, it would see the SNP be able to continue making the claim that over half of Scots pay less tax than if they moved across the border.

However, it would see the Scottish Government face a £420m gap in its projected spending plans, the analysis states.

David Eiser, a senior knowledge exchange fellow at Fraser of Allander, said: “The Scottish budget would be around £420m lower in 2024/25 than it would be relative to the ‘no policy change’ scenario set out above.

"This comparison is important because the Scottish Government’s spending plans for 2024/25, as set out in its Spending Review in May, are predicated on the assumption that the UK Government does reduce the basic rate to 19p, but Scottish tax rates remain unchanged.”

He added: “Despite the complexity of the fiscal framework, the trade-off facing the Scottish Government is intuitive.

"The more closely that it tries to match, or even surpass, tax cuts made by the UK Government, the less revenue it will have to fund public services in Scotland.”

A Scottish Government spokesperson said: “Ministers’ decision to create a fairer tax system in Scotland has protected lower earners while raising additional money to invest in vital public services.

“Speculation about potential tax cuts by UK Ministers at some point in the future only distracts attention from the practical steps the UK Government must take now to support people struggling through the cost of living crisis.

“Tax policy will continue to be set as part of the Scottish Budget process and will follow our Framework for Tax, the foundation from which tax policy is designed to support the country’s recovery and pursue a fairer, greener and more proposer Scotland for everyone."

The second episode of the brand new limited series podcast, How to be an independent country: Scotland’s Choices, is out now.

It is available wherever you get your podcasts, including Apple Podcasts and Spotify.

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