Analysis of Reform UK proposal for income tax cuts in Scotland

Reform UK have announced plans for cuts to income tax in Scotland if they were to win the Scottish Parliament elections in May. They say they would start by realigning Scotland’s tax rates and bands with those in the rest of the UK and then cut all rates by 1 percentage point. They would aim to further cut rates so that by the end of the upcoming parliamentary term in 2031, rates would be 3 percentage points below those in the rest of the UK.

Reform UK have costed the first two changes (realigning rates and bands, and the first 1 percentage point cut) at £2 billion. This is a reasonable estimate in the short term, although costs would increase over time – to perhaps £2.3 to £2.4 billion per year by 2030–31. The full 3 percentage point cut would cost an additional £1.7 billion (or around £4 billion in total).  

The biggest direct beneficiaries of such a change would be the high-income taxpayers who currently pay substantially more in income tax than in the rest of the UK: for example, someone on £50,000 a year currently pays around £1,500 a year more than in the rest of the UK, while someone on £125,000 pays around £5,200 a year more. If Reform UK’s ambitions for Scottish income tax were fully realised, they would instead pay around £1,100 and £3,700 a year less, respectively, than they would in the rest of the UK. Reform UK hope that there could be wider indirect benefits from making Scotland more attractive to high-income individuals.

It is a legitimate and indeed feasible goal to cut income tax rates to below prevailing rates in the rest of the UK. But doing so requires a credible plan for cutting spending, and a recognition that this would involve difficult choices over service provision.

Reform UK say they would fund the initial £2 billion cost by reducing the £9 billion that they estimate is currently spent on environmental protection, economic development and what they term ‘unaccountable Quangos’. But this does not properly confront the challenges they would face in finding £2 billion or more of spending cuts in the coming parliament. The ‘Quangos’ (arm’s-length public bodies funding or delivering services on behalf of the government) include such bodies as the Scottish Funding Council, which funds colleges and universities, and Healthcare Improvement Scotland, which carries out inspections of health and social care facilities. Many of these have already been set targets to improve efficiency and productivity that outpace what has been achieved in the past as part of the Scottish Spending Review. Further cuts in spending would make it even more likely that services would need to be cut back.

In addition, much of the spending on environmental protection and economic development takes the form of capital investment. The Scottish fiscal framework prevents funding provided by the UK government for capital investment from being used to fund day-to-day spending or cuts to devolved taxes (which help fund day-to-day spending). If Reform UK envisage using cuts to investment in energy efficiency, insulation and offshore wind  to help fund their tax cuts, they might find themselves unable to do so unless they can persuade the UK government to change the fiscal framework.

Scotland can have lower taxes if it chooses to – but that would require a reduction in the range and scope of public services and social security benefits provided to residents.