By Professor Graeme Roy, Director, Fraser of Allander Institute
On Thursday, the Scottish Government will publish its Draft Budget for 2018-19.The Budget will outline how Scottish Ministers intend to spend over £30 billion on devolved areas like health, education, enterprise, digital and transport infrastructure.
At the same time, the government will set out their tax plans. This is the 2nd year of the new Smith Commission powers which gave the Scottish Parliament much greater fiscal responsibility – including the ability to vary the thresholds and rates on non-savings non-dividends income tax.
Much of the focus is likely to be on the government’s announcement on taxation.
Firstly, the amount of funding the government has at its disposal now depends not just on the traditional block grant from Westminster, but also on the revenues raised from devolved taxes. The newly established Scottish Fiscal Commission will publish forecasts of how much they think will be generated from these taxes alongside the Budget. As we discuss in our latest Fraser of Allander Economic Commentary report – supported by Deloitte – economic growth in Scotland has remained fragile and this is likely to impact on the amount of money raised.
Secondly, the government has indicated that they are considering using their new tax powers to raise additional revenues. For 2017-18, the government chose to freeze the higher rate threshold at £43,000 (rather than matching the UK rate of £45,000). As a result, higher rate taxpayers in Scotland now pay £400 more than their counterparts in the rest of the UK. Indications are that more radical options are being considered for 2018-19, including the creation of new bands of income tax.
The government faces a careful balancing act as it seeks to maintain investment in public services whilst ensuring Scotland remains a competitive place to do business. Tax rises might raise additional revenue in the short-term, but over-time growing the tax base is just as important.
As a minority administration, they will also require the support from at least one other party in Holyrood. The aim of the Smith Commission was to make the Scottish Parliament more accountable for the money it spends. Whatever decisions are taken this week, the debate over tax will ensure that Holyrood moves on from simply being a Parliament that discusses how to spend money to one that also thinks hard about how best to generate it.