Income Tax

– in the Scottish Parliament on 25th June 2019.

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Photo of Rachael Hamilton Rachael Hamilton Conservative

1. To ask the Scottish Government what its forecast is for income tax growth in the coming years. (S5T-01728)

Photo of Derek Mackay Derek Mackay Scottish National Party

The Scottish Government does not produce its own income tax forecasts. The independent Scottish Fiscal Commission publishes its official forecasts of Scottish income tax receipts twice per year, and has done so since December 2017. The SFC forecasts annual income tax receipts of £11.5 billion in 2018-19, growing to £14.6 billion in 2024-25, which is an increase of £3.1 billion.

Photo of Rachael Hamilton Rachael Hamilton Conservative

Scotland collects its own income tax, which means that it is more dependent on its own economic performance. The Institute for Public Policy Research suggests that if the tax projections are correct, the Scottish economy could lose £1.8 billion over the next five years through income tax growth that is weaker than in the rest of the United Kingdom.

Despite £360 million of income tax rises in 2019-20, increased income tax growth in the rest of the UK means that the Scottish Government’s budget will be £5 million worse off than it would have been under the previous system.

Without hiding behind a Brexit bush, can the cabinet secretary tell the chamber how the Scottish Government will fill the tank of an economy that is running on empty?

Photo of Derek Mackay Derek Mackay Scottish National Party

The member raises a number of issues. Scotland’s economy is performing well: it has record low unemployment, record high employment and a strong performance on productivity, exports and a number of other economic indicators.

There might be cyclical or distributional issues when it comes to income tax growth. I have explored thoroughly with the Finance and Constitution Committee the fact that there might well be deepening inequality in the rest of the UK, where more higher-rate taxpayers’ increases are going further, and that might well have a negative net impact on Scotland’s income tax rates because of the arrangements in the fiscal framework. However, our economy is growing strongly. If we want to support that on-going economic growth, we need to avert Brexit, because it would have a damaging impact on the whole of the UK, not just Scotland. We want to have a sustainable growth agenda.

I point out that the benefit of having a devolved income tax system is that we can make decisions for ourselves. For example, we have decided to have a more progressive income tax system, in which 55 per cent of Scottish taxpayers pay less than they would have done if they lived south of the border. Those 55 per cent of taxpayers are at the lower end of the income distribution rather than the top end, whereas it is those at the top end to whom the Conservatives seem to want to pander.

Photo of Rachael Hamilton Rachael Hamilton Conservative

The Scottish Fiscal Commission and the Fraser of Allander institute have noted that Scotland’s net tax position is worse because of the downward revisions to Scottish earnings growth, despite the fact that Scottish taxpayers are paying £500 million more in income tax compared with their counterparts in the rest of the UK. Does that mean that the cabinet secretary will have no choice but to increase taxes further, leading to hard-working Scots having less money in their pockets, and to less growth and less revenue, which will ultimately lead Scotland further into a black hole?

Photo of Derek Mackay Derek Mackay Scottish National Party

No, it does not mean that at all. The reality of the income tax reconciliation is that it is down to forecast error at the hands of the Scottish Fiscal Commission and the Office for Budget Responsibility. That issue will be addressed. At the moment, we are talking about forecasts of forecasts. Once we have outturn data, we will know exactly what the position is. At that point, we will be able to more deeply understand the issue—which might be distributional—of the potential growth in higher-rate taxpayers in the rest of the UK compared with Scotland.

The factual position is that income tax is going up year on year. We will collect more in income tax, but we face issues such as the block grant adjustment and UK rates potentially going up more. Those are among the issues that have been addressed by the SFC.

The truth is that the Scottish economy is doing well. The economic indicators are strong. Income tax will be going up. We want to further stimulate growth, but the SFC and the Fraser of Allander institute say that our economic success story is threatened by Brexit, which can still be averted.

Rachael Hamilton’s question was partly about the position of taxpayers. Scotland has a more progressive tax system. The structure is fairer, as are the decisions that we have taken. If, for example, there is a Boris Johnson premiership, it is perfectly clear that the funding will go towards tax cuts for the richest 10 per cent in society. That is unfair and will continue austerity. The Scottish Government will not be making such a choice, because it is not the choice of the Scottish people.

Photo of Kenneth Macintosh Kenneth Macintosh Labour

Three members wish to ask a supplementary, so I hope that they will all be quite succinct.

Photo of James Kelly James Kelly Labour

One of the points that the IPPR makes is that promoting wage growth would boost tax revenue—an increase of 1 per cent in wages would add £750 million to tax revenues.

That is particularly relevant when there are 470,000 people in Scotland not being paid the living wage. Is it not now time for the Scottish Government to change procurement legislation to make it mandatory for anybody who works under a public contract to be paid at least the living wage?

Photo of Derek Mackay Derek Mackay Scottish National Party

We are working within the law to ensure that as many people as possible are paid the living wage. I get advice on what is legal and what is not, and we are doing everything that we can within the law to support the living wage. It is good news that more people are paid the living wage in Scotland than in any other part of the United Kingdom, but of course everyone should be paid at least that.

We have a focus on the living wage and the fair work agenda. Tackling inequality is really important—it is one of the issues that drives the reports that we are hearing about. Inequality is getting deeper in Scotland than elsewhere in the United Kingdom, which is having an impact. Those at the top are being paid disproportionately more, while we are trying to bring those at the bottom of the structure up.

I absolutely agree with James Kelly about the minimum level. It would be better if we had devolution, control and power over employment law and setting the minimum wage in Scotland. However, in the absence of that authority and those powers, we will do everything that we can as a Government to encourage payment of the living wage by those from whom we procure services, as well as more widely.

Photo of Tom Arthur Tom Arthur Scottish National Party

Central to the operation of the fiscal framework is the relative economic performance of Scotland and the rest of the UK. Productivity is a key driver of wage growth and income tax receipts. Will the cabinet secretary outline how Scottish productivity growth compares with that of the rest of the UK?

Photo of Derek Mackay Derek Mackay Scottish National Party

The latest statistics show that, in 2018, Scotland’s productivity grew by 3.8 per cent, compared with 0.5 per cent in the UK as a whole. Further, since 2007, productivity in Scotland has grown by 10.8 per cent compared with 2.7 per cent in the UK as a whole.

Photo of Patrick Harvie Patrick Harvie Green

All Governments face some degree of uncertainty from fiscal forecasting, because there will always be a risk of forecasting errors. The Scottish position now is that we have forecasts from the Scottish Fiscal Commission and the Office for Budget Responsibility; we have two separate sets of fiscal forecasts by separate bodies with separate methodologies. Is it not increasingly clear that the absurdly complex fiscal framework has left Scotland with compounded economic uncertainty in exchange for half measures on fiscal autonomy?

Photo of Derek Mackay Derek Mackay Scottish National Party

That is a good description of the complexity of the system. There is an easy remedy for the complexity of devolution: Scottish independence.