Low wage growth weakening tax benefits for Scottish budget, says report

Lower wage growth than the rest of the UK is weakening the tax benefits to the Scottish budget, a watchdog has said.

When some taxes were devolved to Scotland, it was agreed the annual block grant of funding from Westminster would be adjusted to reflect the new revenue stream north of the border.

As a result, the block grant is shifted downwards depending how much the UK Government expected to have raised in tax from Scotland should devolution never have occurred.

But in recent years – according to a report by Audit Scotland – lower wage growth in the rest of the UK has meant the Scottish Government has had to use some of its increased tax take to cover the money lost to the block grant adjustments (BGA).

While the budget has seen a £4.1 billion rise since 2015-16 due to devolved taxation, the figure should be “significantly higher”, with the Government expected to raise £1.7 billion this year alone and only see a £616 million benefit as a result.

According to the report, slower growth in Scotland’s tax base is as a result of poor jobs and wages growth, behavioural shift to increased taxes, differences in the distribution of incomes and volatility in some sectors, such as the oil and gas industry.

Auditor General Stephen Boyle said: “Devolved taxes are growing Holyrood’s budget, but their impact is weakened by Scotland’s lower earnings and employment growth compared with the rest of the UK.

“The Scottish Government needs to be more transparent with the public and Parliament about the net impact of its tax choices on the Scottish budget.

“It also needs to better align its tax and economic strategies and set out which of its economic interventions are specifically expected to help grow the Scottish tax base.”

The report also criticised the Government for a lack of transparency about how taxes will be used to plug the near-£5 billion black hole it is expected to face by the end of the decade.

“Despite tax and economic growth being key pillars of the Scottish Government’s overarching fiscal strategy, its approach to addressing the projected funding gap focuses on controlling public spending,” the report said.

“The Scottish Government has not been clear enough about the degree to which tax is expected to contribute.

“The Scottish Government is facing significant budget pressures, with the gap between its funding and spending for day-to-day activity expected to increase from £1 billion in 2026/27 to £2.6 billion in 2029/30.

“Its financial plans do not sufficiently address the fiscal risks arising from devolved taxes, including significant budget reconciliations, the impact of behavioural change and UK policy changes, and how it plans to manage these.”

A spokesman for the Scottish Government said: “The Scottish Government’s tax decisions enable us to deliver higher investment in the NHS and policies like free tuition not available anywhere else in the UK, while ensuring the majority of taxpayers pay less income tax than elsewhere in the UK.

“Since 2007, GDP per person in Scotland has grown faster than the UK, with productivity increasing at more than twice the rate of the UK as a whole, and we will continue to work closely with businesses to drive economic growth and prosperity.”

Scottish Tory finance spokesman Craig Hoy said the Government had trapped the economy in a “depressing doom loop”.

He said: “The Scottish Conservatives pointed out months ago that the SNP’s tax rises would damage growth and as a result raise £1 billion less than they claimed they would.

“Now Scotland’s Auditor General has confirmed that we were right.

“The SNP’s incompetence has trapped our economy in a depressing doom loop – the slower it grows, the more they tax, and the more they tax, the slower it grows.

“Audit Scotland’s damning judgment makes it clear that John Swinney’s Government has no idea how to close the growing gap in their budget and no understanding of the damage inflicted by their high-tax policies.

“Meanwhile they have done nothing to rein in spending and have wasted billions on a series of blundered projects.”

Scottish Labour finance spokesman Michael Marra said the report is “damning” for the Scottish Government.

“The SNP’s low growth economy has left Scotland more than a billion worse off this year alone – meaning less money for our NHS, schools, housing, policing and more,” he added.

“Not only has the SNP starved our public services of funding, but it has failed to be straight with the public about the facts.

“It’s time for an end to the damaging incompetence and shameless spin of this tired SNP Government.”

Scottish Lib Dem economy spokesman Jamie Greene urged the Scottish Government to take the report “very seriously”, adding: “Much of the information contained in this report is seriously worrying, particularly regarding the impact that lower earnings and employment growth are having in Scotland.

“Scots are paying more and more taxes but that is not translating into more money to spend on public services.”