Adding a new higher-rate income tax band in Scotland might only raise £60m, a leading fiscal think tank has warned.
The Scottish government is reportedly considering introducing a new tax level in a bid to plug a gap in its budget.
The Fraser of Allander Institute (FAI) said the funding shortfall was around £1.5bn, between day-to-day spending commitments and capital projects.
But the group said adding a new 45% tax band for earnings over £75,000 would only raise around £60m for spending.
Finance Secretary Shona Robison will set out her budget proposals on Tuesday and has referred to the reports about tax rises as “speculation”.
Ms Robison has said the 2024-25 budget is being set amid some of the most difficult financial conditions in the history of devolution.
The FAI agreed in its pre-budget report that ministers face “difficult choices” in terms of what to prioritise.
The think tank said the gulf between expected income and existing spending proposals had increased to £1.5bn.
The figure has been affected by big public sector pay deals driven by inflation, and the Scottish government has complained of a lack of extra funding flowing from Westminster due to spending decisions made by Chancellor Jeremy Hunt.
However the FAI noted that ministers had also made a number of big spending pledges, including a council tax freeze which is forecast to cost at least £300m.
The government has also pledged to spend an extra £100m on cutting NHS waiting lists, and the FAI said that £325m of “savings” identified for the current financial year had effectively been taken out of the budget now being drawn up, because spending had been pushed back.
Ms Robison has the option of increasing taxes to help fill this gap – and indeed the FAI said the devolved income tax system has brought in an extra £600m for next year’s budget, thanks to better than expected tax forecasts.
A series of cabinet meetings have been held to discuss the budget, and the Times newspaper claimed the first minister had settled on a move similar to one suggested by the STUC union, which would see a new 45% tax band introduced for earnings over £75,000.
The FAI said that accounting for behavioural change – the idea that people could reduce their hours or income in the face of large tax increases – such a move would raise about £60m for the budget.
Director Prof Mairi Spowage said: “The deputy first minister may choose to use powers over income tax to raise more revenue to plug the gap, but it is unlikely that this would be sufficient in isolation.
“Significant spending cuts are also likely to be required – the deputy first minister has the unenviable task of choosing where the axe will fall.”
The health service will be protected, while ministers have committed to spending extra cash on social security, having expanded benefits like the Scottish Child Payment.
But they have warned that tough choices will have to be made about which other portfolios are prioritised.
‘Worst-case scenario’
Scotland’s councils have been pushing for extra funding for local services, with umbrella body Cosla warning that some face the prospect of running out of money.
Ms Robison has also told BBC Scotland that the public sector workforce will have to shrink, outside of health, with the pay bill rising in light of recent pay deals.
Her predecessor as finance sectretary, Kate Forbes, has warned against income tax rises, saying they would not deliver extra revenue due to behavioural changes.
And the Scottish Conservatives said it would be “naive in the extreme” of the government to try to “tax its way out of an ever-growing black hole”.
On Thursday, Ms Robison told MSPs that the Autumn Statement had been a “worst-case scenario” for her spending plans, blaming “Tory economic incompetence impacting on Scotland’s budget”.
A Scottish government spokesperson added: “The deputy first minister has been very clear Scotland is facing one of the most challenging budget settlements since devolution as a result of sustained high inflation and a UK government Autumn Statement that failed to deliver the investment needed in Scotland’s public services.
“In May, the deputy first minister set out in our medium-term financial strategy how we will ensure Scotland’s finances remain on a sustainable footing. The Scottish Budget will build on this, outlining the tough choices that have been required to target funding at our three key missions – equality, community and opportunity.”
Source: BBC
