Bernard Ponsonby: Will John Swinney increase taxes in Scottish Government budget?

As John Swinney prepares to deliver the Scottish Government’s budget for 2023-24 this Thursday, the pre-announcement chat is peppered with those old staples like ‘challenging’ and ‘difficult’, which is just a way of saying some will not be very happy with the outcome.

Set against a backdrop of public sector unrest over pay, and a sense that the infrastructure of public services from the NHS to the education system to the transport network is falling apart, Swinney has an unenviable task.

The most basic question he will face ahead of the statement is whether to hike taxes, given the UK tax burden is at a post-war high.

Jeremy Hunt, the chancellor, recently announced a whole swathe of tax rises to plug a gaping hole in UK finances.

His prime weapon of choice was to hardwire stealth taxes by ensuring that the phenomenon known as ‘fiscal drag’ would ensnare many more workers into paying tax for the first time or being kicked into the higher-rate bracket as allowances are frozen for years to come.

One of the problems Swinney has is that ‘fiscal drag’ has been the favoured policy of the Scottish Government for several years and to extend it would mean taxpayers in Scotland earning over £43,662 being materially worse off than people doing a similar job in England, where the higher rate does not kick in until earnings hit £50,270.

The Scottish Trade Unions Congress have gone further in their advice to Swinney, arguing that the higher rate should kick in above £40,000 and that it should be increased by 2p in the pound. That proposition would seem to me to be a non-starter since it would clobber people on earnings that can in no sense be regarded as high.

Indeed, some of the rationale in the union proposals is to raise more, in part, to fund higher pay awards. But why raise money for higher pay by taxing the very increases you give? It seems all so contradictory.

Both in Scotland and indeed UK-wide, the clamour is to make those with the broadest shoulders carry the burden of higher taxes.

As a mantra, it commands broad support, but the problem for those who decide on the purse strings is that quite a lot of the burden is falling on shoulders that can hardly be described as broad.

Ministers say that Scotland has a ‘progressive’ tax system now, which really means many taxpayers already pay more than people in England on the same salary.

So, does that signal that Swinney is unlikely to do nothing on tax?

No, it does not, but I suspect the proposals of some for materially higher taxes will fall on deaf ears.

So where will Swinney go?

I think cutting the rate at which the top rate of tax is paid is a given, which means it will kick in at £125,000 rather than £150,000 and be levied at 46p in the pound, perhaps even higher.

Fewer than 15,000 people in Scotland are top-rate taxpayers, so the yield to the government by dragging more taxpayers into this band is likely to be around only £40m.

The point at which the higher rate kicks in (£43,662 in Scotland) I think will be frozen yet again in another round of fiscal drag which will usher more Scots into the higher-rate band.

By 2027/28, the Scottish Fiscal Commission estimates that some 697,000 taxpayers (17% of all taxpayers) will pay the higher rate.

Not that long ago that figure was only 7% of all taxpayers in Scotland. Fiscal drag is leading to an explosion in the numbers.

The question is whether he increases the rate at which the higher rate is paid. It currently stands at 41p.

In fact, the consequence of paying the higher rate at a lower level of salary in Scotland allied to a higher rate (41p in Scotland as opposed to 40p in England) means that someone on a salary of £50,000 pays around £1,500 per year more north of the border.

If Swinney continues to squeeze this group, the difference in household incomes north and south of the border could reach such a gap that professionals just might start to entertain the idea of seeking a job elsewhere.

This group are also likely to be paying hefty mortgages and in property in higher council tax bands. They have every reason to approach Thursday’s announcement with a sense of trepidation.

Of course, rampant inflation is a disaster for the Scottish budget. Although UK ministers point to large hikes in cash terms, once inflation is considered, the purchasing power of that additional money is severely curtailed.

The Fraser of Allander Institute, in a pre-budget commentary today, say that financial consequentials for Scotland flowing from the chancellor’s autumn statement mean that income in the next two years is substantially protected from the projected levels of inflation.

Against this backdrop, spending squeezes are almost inevitable and once again it could be Scotland’s councils who will be on the frontline of what will amount to real-terms cuts.

Councils could go for large hikes in council tax, so it will be interesting to see if Swinney attempts to cap any increases, mindful that large hikes will not sit well with voters who are quite frankly being battered by higher bills at every turn of everyday life.

My hunch is that the broad thrust of the message will be a familiar one. The Scottish Government will prioritise the poorest and look to those with the broadest financial shoulders to pay a bit more.

The problem in the current climate is in defining who has those broad shoulders. Targeting the very highest earners delivers very little since there are so few of them.

Targeting basic-rate taxpayers is a political non-starter in the current climate, so yet again it looks as if the burden might fall on higher-rate taxpayers.