Sluggish growth set to slash Scottish tax take

4 Jun 18

Scotland faces a £1.7bn reduction in income tax revenues over the next five years against the backdrop of a “subdued” outlook for its economy.

In its latest set of economic and fiscal forecasts, published last week, the Scottish Fiscal Commission said growth would stay below 1% over the period, meaning Scotland would lag behind the UK as a whole.

Much of that trend would be due to slow productivity growth as well as demographic challenges specific to Scotland, where the working-age population is expected to start shrinking this year although the population overall will continue to grow.

The sluggish forecast has forced the commission to revise down its outlook for real wage growth and, in turn, income tax revenues. Real wages are now anticipated to fall by 0.5% during 2018, before levelling off in 2019 and resuming slow growth from 2020.  

Overall, income tax over is expected to yield a total of £64.4bn up to 2023, down £1.7bn or 2.5% on the commission’s previous estimate in February of just over £66bn.

The income tax forecast for 2018–19 has been revised down by £209m, or 1.7%, compared to the February forecast. The divergence continues to increase until 2022–23, when receipts are expected to fall short by £437m, a reduction of 3% on the previous prediction.

Although the effect of Brexit on the Scottish economy was difficult to forecast, the commission said it expected uncertainty over negotiations and the final settlement to “impact negatively” over the next five years.

Commission chair Dame Susan Rice said the outlook for the economy continued to be “subdued”.

“The economy is growing but the rate of economic growth has been slower over the last decade than historic average rates,” she said. “Our view remains that this pattern of slower growth is likely to persist over the next five years.”

Setting out his medium-term financial strategy yesterday, Scottish finance secretary Derek Mackay accepted that the commission’s forecasts suggested lower growth than in the UK as a whole, but blamed Westminster decisions on immigration, Brexit and austerity, all of which posed “unnecessary risks” to Scotland’s economy and tax base.

“When the effects of population growth are stripped out, Scottish growth is much closer to UK growth,” Mackay said. “That underlines the importance of [the Scottish] Parliament having greater control over immigration.”

On income tax receipts, he said the forecasts provided a basis for the financial scenarios used to indicate the level of funding available to the Scottish government, and would evolve over time.

“By their nature, the scenarios and the forecasts that underpin them contain a degree of uncertainty; as new data becomes available, they are likely to change,” he said.

“When we set the budget for 2019–20, we will have a further set of economic and fiscal forecasts from the Scottish Fiscal Commission, updated block grant adjustments from the UK government, and the outcome of the UK autumn budget – all providing a more robust set of information on which we will make our budget decisions.” 

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