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Scottish Budget: inevitable balancing act unlikely to spread Christmas cheer

As Holyrood prepares to hear the interim finance secretary John Swinney’s budget later this week, many will be second guessing how similar it will sound to the UK Government’s Autumn Statement last month.

In a stark policy u-turn, chancellor Jeremy Hunt’s spending cuts and tax freezes were an attempt to restore market confidence.

In Scotland, there are also difficult decisions to be made.

There are similar black holes in public finances, while households and businesses are experiencing financial insecurity due to inflation and rising fuel costs.

We are likely to see a mixture of spending cuts and tax hikes to balance what has rapidly become a difficult financial situation for Scotland’s devolved finances.

On personal income tax, it seems likely that there will be tax increases for higher earners; but what form will the increases take?

Swinney may choose to follow Westminster and reduce the threshold at which Scottish taxpayers start to pay the 46% rate of tax, from £150,000 to £125,140.

Like Hunt, he could freeze the income tax thresholds which effectively means a tax increase for many as they enter the higher tax bands as their salaries rise – although this would impact all taxpayers, not just the highest earners.

Given the calls for increased costs to be borne by those with the broadest shoulders, a more dramatic change can’t be ruled out, including an increase to the 41% and 46% tax rates, or the introduction of a further band for higher earners.

For businesses, any major headlines may come in the shape of business rates relief, which has been used to give relief to hard hit sectors - particularly retailers and hospitality - in recent years.

There are also calls for reform to the rates system to remove some of the distortions between bricks and mortar retailers and their online counterparts.

The case for at least a freeze on business rates has been made by a particularly wide range of business interests, including trade bodies the CBI and the Institute of Directors.

Aside from the long-discussed reforms to council tax, there are also several policies which have previously been trailed in the Programme for Government which we could see this week.

These include a Local Visitor Levy, also known as a tourist tax, and a devolved Aggregates Levy.

This Scottish budget, delivered during a veritable winter of discontent, will unfortunately be all about preparing for even harder days ahead.

With Christmas right around the corner, Swinney will be hoping to spread some cheer on Thursday, but given the hard decisions he must make; that will be a difficult task indeed.

Vishal Chopra is head of tax for Scotland at KPMG UK

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