Shirley Mcintosh

Written by: Shirley McIntosh

Shirley McIntosh

Partner

Budgeting is never easy…

The announcement that there would be no Autumn budget this year has been greeted in some quarters with relief. Some of the uncertainty around potential tax increases to fund the coronavirus pandemic response has been removed – or at least the can has been kicked down the road for now.

In Scotland, however, the consequences are more stark. While certain fiscal powers are devolved to the Scottish Government, Scottish finances are still inextricably linked to the UK.  The lack of a UK budget, potentially until March, leaves the Scottish Government with insufficient time to approve and set its own budget before the start of the new tax year, and before the Parliament dissolves prior to elections on 6 May 2021. It will once again be faced with setting its own budget based on estimates.

This challenge has been highlighted by the recent publication of the Scottish income tax outturn reconciliation for 2018/19. The Scottish budget includes estimates of income tax revenues from Scottish taxpayers and the continued funding from Westminster through the Block Grant. The budget for 2018/19 was based on estimates made by the Scottish Fiscal Commission in late 2017. The net result of the reconciliation is that the original figures were overestimated by £309m, an amount that must be repaid through a reduction in the Block Grant in 2021/22.

How this can be done is an interesting question. 

To put it in context, the restructuring of rate bands and increase of 1 percent in the higher and additional rates raised an additional £119m. As with the rest of the UK, there have been calls for the wealthy to pay more tax.  But in Scotland only 15,000 paid tax at the highest 46 per cent rate on income above £150,000, contributing 17.4 per cent of the total tax raised. Compare this to the UK, where 332,000 taxpayers earning at this level contributed 31 per cent of the total. 

This highlights the gap in earning levels between Scotland and the rest of the UK, where high earners in London and the South East have a disproportionate effect on the figures. To get to similar tax proportions in Scotland, the tax raised from those 15,000 taxpayers would need to more than double to generate an additional £2.5bn in tax – an increase in their average tax bill of over £160,000 per person! Fears of flight would be well founded.

Even in the pre-coronavirus world, forecasting has been difficult. The reduction in earnings in the current tax year for many households is likely to create a shortfall in tax receipts which could result in more retrospective adjustments to the Scottish budget in future years. The public forum which the forthcoming election provides will inevitably reflect on the experience of partially devolved fiscal levers and the complexity of the interaction with UK economic performance, adding fuel to the ongoing Independence debate. Budgeting is never easy, but the Scottish Government is probably facing its biggest budgeting challenge to date.

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