SNP’s tax strategy is a missed opportunity

The Scottish government has trumpeted a budget providing record levels of funding for the NHS and councils, universal winter payments for pensioners, and starting the process of ending the two-child cap on universal credit in Scotland.

And comparing the amount the Scottish government plans to spend on public services in 2025-26 with the plans set out in the autumn budget, revision suggests a significant increase of 5.3 per cent in cash terms, or 2.9 per cent after accounting for inflation. On this basis, day-to-day spending on health and social care is set to increase by 3.4 per cent in real terms next year.

Day-to-day spending by the finance and local government portfolio is set to increase by 2.6 per cent in real terms, with councils also free again to increase council tax — something they, although perhaps not their residents, have called for. Not everyone is a winner though, with day-to-day spending by the rural affairs, land reform and islands portfolio set to fall by 3.1 per cent in real terms.

However, buried in the budget documentation is the fact that the Scottish government has yet to allocate about £1.3 billion of funding that it plans to spend this year to specific services. If all of this is indeed spent this year, rather than increasing by 2.9 per cent above inflation next year, day-to-day spending on public services would actually fall by 0.3 per cent in real terms.

Depending on how any further top-ups this year are allocated across services, the increases next year for health and local government highlighted by the finance secretary, Shona Robison, may end up looking rather less impressive, and other portfolios could find themselves joining rural affairs in seeing cuts to day-to-day spending.

The government is planning to carry forward about £400 million of funding it could use this year into next. But if it can, it should try to carry forward more to ease what will otherwise be a much tougher outlook for public spending than the finance secretary suggests.

Carried-forward funding can be used only once, but if spent on investments in infrastructure, equipment, systems and skills that can boost public sector productivity and grow the economy, it could help ease funding pressures down the line. It could also be used to help pay for political priorities, at least in the short term.

With the collapse of the SNP-Green deal, the figures presented by Robison probably won’t be exactly what makes it into legislation.

Alongside the budget, there was a new tax strategy. It says ministers do not intend to increase the rates of income tax or to introduce any new bands. This helps provide clarity to taxpayers, and as we’ve said, further increases in the top rate of income tax are probably best avoided until more information on how taxpayers have responded to the increases so far are available. But ruling out any increase in income tax rates severely limits the government’s options if it needs to raise additional revenue — for example, to fund ambitions to abolish the two-child limit in universal credit in Scotland.

Beyond income tax though, the tax strategy provides little sense of direction on tax policy. On council tax and business rates, for example, there is merely an intention to continue dialogue and engagement.

It does not inspire confidence that much-needed reform will actually happen. And plans to increase the land and buildings transactions tax surcharge paid by landlords and second home buyers from 6 per cent to 8 per cent risk making economic damage even worse.

The intention may be to help first-time buyers and owner-occupiers more generally by reducing the demand for homes by landlords and second-home buyers. But by reducing the supply of rental properties, rents may rise, making life harder for those not in a position to buy.

The strategy is a missed opportunity to set out a long-term plan for growth-enhancing reforms to Scotland’s tax system.

This article was first published by the Times, and is reproduced here with kind permission.