SNP ministers could raise income tax rates in Scotland again to plug a growing black hole in their spending plans, a financial think tank has warned.
The impartial Institute for Fiscal Studies warned that soaring spending on benefits “will reduce the amount available for public service spending”.
The IFS said spending on services will fall by 1.6 per cent in 2023/24, when expenditure on higher Scottish benefits and inflation are taken into account. It warned that if health and net zero spending is protected, other Scottish government departments would face 13 per cent cuts to their budgets by 2027.
In the longer term, the report said spending was on course be almost almost two per cent lower by 2027/28, but this drop could increase to five per cent if official forecasts predicting a “significant improvement” in income tax revenues fail to materialise.
The think tank warned that SNP ministers could make good the shortfall by increasing income tax again, but slower growth in employment rates north of the border has wiped out a lot of the revenues from increases already imposed.
Middle-class Scots are also on course to pay hundreds of pounds more income tax from April after Nicola Sturgeon’s government added a penny to the top two rates.
The higher rate in Scotland will rise from 41p to 42p, while the top rate will increase from 46p to 47p, despite official forecasts predicting the latter hike will only generate £3 million because of behavioural changes by the wealthiest Scots.
Both the higher and top rates will be 2p lower in England, widening the cross-border tax gap. Anyone in Scotland earning more than £27,850 pays more income tax than they would if they lived south of the border.
Bee Boileau, a research economist at the IFS and the report’s author, highlighted her forecasts of two per cent or five per cent spending cuts depending on income tax revenues.
She said: “If either of these scenarios were borne out, the Scottish government would likely need to make significant cuts to a range of public services. Further big increases in devolved tax rates would be one way to avoid such cuts.
“The Scottish government will instead be hoping for additional funding from the UK Government – which may not be in vain as the UK Government would also need to make cuts to many services if it sticks to the plans for spending it has pencilled in.”
The IFS found earnings have grown more slowly in Scotland than in the rest of the UK since income tax was devolved. There has also been slower employment growth, leading to smaller increases in the tax base.
It said the latter “was expected to have cost the equivalent of more than 10 per cent of forecast income tax revenues in that year and, essentially, all the net income tax raising measures were essentially ‘running to stand still’ in terms of income tax revenues”.
A Scottish government spokesman said: “The IFS analysis shows the difficult choices faced as a result of a UK Government settlement that is not enough to meet the needs of public services in Scotland and fund a response to the cost of living crisis.”