Scotland could lose £2 billion over five years due to weaker income tax growth

Scotland could lose out on almost £2 billion over the next five years due to weaker income tax growth compared to the rest of the UK, a leading think tank has warned.

Cabinet Secretary for Finance, Economy and Fair Work Derek Mackay delivers the Scottish Government's Stage 1 budget at the Scottish Parliament in Edinburgh. Picture: Jane Barlow/PA Wire

All the extra cash expected to be raised though income tax rises on workers north of the Border is expected to be “fully lost”, according to a report by the IPPR.

The Scottish Government is now being urged to take action to tackle low pay, arguing wage growth of 1 per cent above projections for each of the next three years could lead to £750 million more tax revenue by 2022-23, almost twice the amount raised by a 1 per cent tax rise.

It comes after a recent warning from the Scottish Government’s own economic watchdog that it was facing a £1 billion “black hole” in its budget over the next three years as a result of the widening tax base between Scotland and the rest of the UK.

Today’s report, entitled How Productivity Could Deliver Inclusive Growth in Scotland, found Finance Secretary Derek Mackay will lose just under £1.8 billion through weaker growth in income tax revenues per head of population than in the rest of the UK.

“Scotland is running to stand still,” said Rachel Statham, economic analyst at IPPR Scotland, on the recent income tax rises.

“Despite welcome income tax rises in Scotland in recent years, we’re due to be worse off because of weaker income growth in Scotland compared to the rest of the UK.

“Our analysis shows that efforts to make our economy fairer will also deliver stronger economic performance in Scotland.

“Boosting the performance of lower-paid sectors by raising productivity could lead to a win-win-win – reducing inequality by tackling low pay, increasing tax revenues and strengthening the whole economy.

“This is the prize the Scottish government’s inclusive growth agenda could hold but we need to give it teeth through bold policy action.”

The report calls for “urgent action” to refocus Scotland’s economic strategy on its lower-paid sectors.

A Scottish Government spokeswoman said: “Our decisions on taxation have resulted in a more progressive tax system, protecting those lower and middle income taxpayers, while raising additional revenue for the budget to invest in our public services and the Scottish economy. Despite a £2 billion reduction in Scotland’s block grant, we are committed to delivering an economy that is fair and delivers greater prosperity and equality.”

The Fair Work Action Plan also ensures workers have more security, decent pay and a greater voice, she added.