Lower wages reducing impact of Scottish taxation, Audit Scotland finds

Lower earnings and employment growth in Scotland compared with the rest of the UK is reducing the impact of devolved taxes on the country’s budget, a watchdog has found.

In a new report, Audit Scotland said Holyrood’s budget has been boosted by more than £4bn since the introduction of devolved taxes in 2015-16.

However, that figure is “significantly less” than the additional tax raised over the same period.

Audit Scotland said that trend is likely to continue and called on the Scottish Government to be “more transparent” about the overall impact of its tax decisions on the budget.

Craig Hoy, finance spokesperson for the Scottish Conservatives, said the SNP administration 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”.

Labour’s Michael Marra said: “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.”

But the Scottish Government said its approach to taxation allows the delivery of policies which are “not available anywhere else in the UK”, such as free tuition for students.

Ministers expect to raise up to an additional £1.7bn from Scottish income tax rates and bands in 2025-26.

But Audit Scotland said the budget is only likely to benefit by £616m because of the fiscal framework between the Scottish and UK Governments. It governs the way the budget is determined, including adjustments for devolved tax and welfare powers.

Audit Scotland said the relative performance of the Scottish tax base, such as earnings and employment, is factored into those sums and is a main reason for the difference. And it said the Scottish Government has not been transparent enough about why the difference exists and how it believes it can be addressed. 

It also said that clarity is lacking over whether the government expects tax policy to help close the £2.6bn budget gap expected by 2029-30, or how its economic strategies will increase the tax taken in.

Similar findings have been presented by the Scottish Fiscal Commission.

Stephen Boyle, auditor general for Scotland, 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.” 

Hoy said: “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.

“The SNP are choking earnings and growth, deterring skilled workers and entrepreneurs and, at the same time, expect taxpayers to pay the bill for their reckless financial mismanagement.”

However, a Scottish Government spokesperson 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.”