Scottish ministers are facing a £1.5bn black hole before next week’s draft budget, as a combination of surging inflation and expensive public sector pay deals put extreme pressure on government spending.
The independent Fraser of Allander Institute describes the situation facing the finance minister, Shona Robison, as “one of the most challenging fiscal backdrops in the history of Scottish devolution” in its annual budget report.
But the institute, part of the University of Strathclyde, warns that plans to create a new higher band of income tax are “nowhere near enough” to balance the books.
With severe cuts anticipated across the public sector to protect frontline areas such as health and social security, Robison has already warned there is “no doubt” that staffing for public services will have to be reduced.
Police Scotland have launched a voluntary redundancy scheme and on Thursday announced that 29 stations, including the former police headquarters at Fettes in Edinburgh, are at risk of closure as it tries to raise funds to plug its budget shortfall.
The UK chancellor’s autumn statement put further pressure on Robison, who described it as the “worst-case scenario for the Scottish budget”
Amid growing speculation the Scottish government will introduce an additional 44p rate on incomes between £75,000 and £125,000, the Fraser of Allander report has lowered its estimate of how much that would raise from £56m to about £41m – well below the £92m suggested by the Scottish Trades Union Congress.
According to the Times Scotland, the proposal caused disputes within the cabinet, with some ministers warning it could alienate middle-income and aspirational voters, but ultimately it was accepted, with the Scottish Fiscal Commission told of the decision last week.
Those earning more than £28,000 already pay more tax in Scotland.
In a sign of the pressures facing the cabinet, a coalition of business networks warned the move would hamper recruitment from elsewhere in the UK, while the former finance secretary and Scottish National party leadership candidate Kate Forbes told ITV Border on Thursday it was “very difficult to protect against behavioural change”.
The move may appease Scotland’s third sector, after Humza Yousaf’s promise at his party’s October conference to freeze council tax was met by a furious backlash from struggling local councils and anti-poverty campaigners.
The rehashed Alex Salmond-era policy was billed as an attempt to win back voters from resurgent Scottish Labour and reversed proposals to increase council tax. Yousaf said it would be fully funded by Holyrood, adding further pressure to his budgets.
Amid continuing negotiations and an emergency cabinet meeting as ministers thrash out these tough choices, Green party ministers face the prospect of presiding over environment cuts, despite championing ambitious plans to tackle the climate and nature crises.
Conservation groups have been told that NatureScot, the official conservation agency, will have its budget cut next year by 15% – a cut exacerbated from the increased wages agreed in recent public sector pay deals.
Scotland’s largest environment groups warned last month that NatureScot’s core funding had already fallen by 40% in real terms over the last decade, raising substantial doubts about its ability to hit challenging climate and nature restoration targets.
Bruce Cartwright, the chief executive of the Institute of Chartered Accountants of Scotland, said an extra tax band would leave Scotland with six income tax bands, adding to the complexities of an already cluttered tax system.
“We have called for tax simplification for many years to make it easier for taxpayers to understand,” he said. “Continually hitting the taxpayer to make up shortfalls is a limited, blunt instrument, which isn’t sustainable.”
