Analysis by the Fraser of Allander Institute suggests that weak growth in the Scottish income tax base compared to the rest of the UK will diminish the Scottish Government’s ability to fund public services.
Although income tax outturn figures for 2017-18 will not be published until the summer, early data on the number and average income of taxpayers who make contributions through PAYE paints “a concerning picture”, the institute said.
A breakdown of the figures from HMRC shows total PAYE employment income per head growing more slowly in Scotland than the rest of the UK.
In 2017-18, income per capita grew by 2.4% in Scotland compared to 3.7% elsewhere in the country. That trend continued in the first half of 2018-19, with growth north of border at 2% and 3.9% in the first two quarters of the year, well behind the comparable figures of 3.6% and 4.7% in the rest of the UK.
The data suggests previous income tax forecasts may have been overoptimistic, leaving the Scottish Government to plug gaps in its budget for the next two years through borrowing, reduced spending, tax rises or use of the Scotland Reserve.
Slow wage growth predated the devolution of tax powers and so has not been caused by a behavioural response to the Scottish Government’s tax policy, which has seen the introduction of a new five band system under which higher earners pay more.
Rather, the institute said, it was “a much longer term challenge”, possibly related to the decline in the oil sector.
Concern over earnings has already been reflected in Scotland’s budget for 2019-20, in which a £500m boost in revenues as a result of Scottish income tax policy was largely offset by weak underlying income growth.
The extent of Scotland’s under-performance in this area should not be underestimated, it said.
Scotland has been at the bottom of the UK’s regional league table for average pay from PAYE earnings since 2015 and there was now an “urgent need” to understand the drivers behind the trend.
“Whatever the reason for this weaker performance, it doesn’t represent good news for the Scottish budget,” the institute said.
“The indications are that the Scottish income tax base is growing more weakly in Scotland than in the rest of the UK, with implications for the resources available to fund public services.”
A spokesperson for the Scottish Government said the analysis referenced the latest forecasts for reconciliation, which were likely to change again before the release of final outturn figures.
“Each Scottish Government budget is based on the best forecasts, made with the most up to date information available at the time, and we will manage all future reconciliations in a fiscally responsible way,” he said.
As the institute itself had highlighted, the data published by HMRC was based on PAYE and did not paint the full picture of Scottish tax receipts as it excluded self-assessment or occupational pension income.
“[It] also points out that the data relates to average earnings, and so tells us nothing about the wider income distribution and how it is changing over the year,” he said.
