Scotland faces budget black hole in tax revenues

The impact of income tax rises in this week’s Scottish budget may be blunted because ministers face the prospect of a multimillion-pound black hole, economists have warned.

Finance Secretary Derek Mackay is poised to unveil plans to raise income tax levels in Scotland above the UK rate for the first time when he unveils his spending plans in Thursday.

But Scotland could be facing a shortfall in the devolved taxes likely to be raised next year which could “offset”, at least in part, any tax hike proposed by the Scottish Government, the Fraser of Allander Institute (FAI) has warned.

Mr Mackay is now being warned that his budget comes at critical time with Scotland stuck in a “cycle of weak growth” behind the rest of the UK, with the FAI today cutting it’s GDP estimates for the year ahead.

And they warn more bad new is looming when the Scottish Fiscal Commission, the new independent body tasked with providing economic forecasts for ministers, reports on Thursday.

The Commission is likely to “forecast weaker devolved tax revenues than had been expected this time last year,” according to a report published yesterday by the FAI.

“It is not inconceivable that weaker revenue forecasts from the Scottish Fiscal Commission could offset, least in part, some of any tax hike proposed by the Scottish Government,” it adds.

Mr Mackay could raise up to £290 million in extra revenues under a range of proposals set out by Nicola Sturgeon earlier this year which would see the introduction of new tax bands in Scotland. It is likely to mean low-paid workers would escape a tax hike while middle earners, possibly those on more than £30,000 a year, will end up paying more.

Graeme Roy, FAI director, added: “With the Scottish budget now much more dependent upon the tax revenues generated in Scotland, boosting Scotland’s fragile economy will be crucial in helping to alleviate budget constraints over the long-term.”