Scotland facing income tax shortfall
SNP are failing to address how they will pay for their social security largesse
The Scottish Fiscal Commission (SFC) forecast publication raises alarming questions for the long term health of Scottish budgets that the SNP are refusing to answer.
According to the SFC December 9th forecasts, Scotland faces an income tax shortfall at the same time as the Scottish Government is spending more on welfare than it receives from Westminster. This poses significant challenges in future Scottish Government budgets, and the SNP are keeping suspiciously quiet about it.
Since the SNP came to power in 2007 they have introduced many reforms to devolved social security. These reforms include replacing the DWP administering these payments on ScotGov’s behalf with the new ‘Social Security Scotland’. The SFC explains that
“As well as reforming the administration of these payments with an ambition to improve take-up of payments, the Scottish Government has, for many payments, expanded the number of people eligible and increased payment amounts”
So the SNP have overhauled how social security is administered, and expanded eligibility, therefore increasing the overall cost of social security in future Holyrood budgets.
Now, there is nothing wrong with expanding eligibility to social security if you can afford and budget for it. Everybody loves to be kind and generous - especially politicians in liberal democracies hoping to get re-elected.
But the SFC raises questions about how sustainable is the SNP’s largesse. Devolved social security spending is set to increase from £4.1bn 2022-23 to £5.5bn in 2025-26. And the SFC makes clear that this rising cost is actually higher than they anticipated back in January of this year
“Overall, our forecast of spending in 2025-26 has increased by £1.0 billion since January 2021”
So social security costs are rising, and rising faster than the SFC originally anticipated. And let there be little confusion as to why the forecast spending on social security is rising faster than expectations…
“This increase primarily occurs because the Scottish Government plans to launch new payments which are more generous or received by more people. In addition, most payments are uprated by inflation and the higher inflation forecast therefore increases spending. By 2025-26, our forecast is £190 million higher than in January 2021 because of higher inflation”
New payments, greater eligibility coupled with the impact of inflation (which is currently rising above Bank of England targets).
And the SNP cannot be blaming Westminster in the future when the financial impacts of their largesse is felt, after all by 2026-27 approximately 73 per cent of social security spending will be handled by Social Security Scotland, and based on Scottish Government policy.
If we look at the SFC’s outline for social security spending in Scotland, we can identify where the largest costs are and whether or not they’re related to devolved (SNP) or reserved (UK Government) policies.
The bit I want you to focus on from the figure above is the ‘Adult Disability Payment’ (ADP). It is a valuable benefit that will help many people live more healthy and productive lives in the community. However, it is not related to economic performance, instead relating to demographics. Or put simply, older people are more likely to receive ADP “and therefore a combination of an aging population and increases in the state pension age mean we expect the number of people receiving ADP to increase over the next five years”.
This is worth bearing in mind since increasing eligibility to social security benefits will have significant longer term economic consequences given we are living longer. More people receiving ADP (which is replacing the Personal Independence Allowance) means more people drawing on it and for longer. This is not necessarily a problem … except … it is far from clear the SNP government can afford it.
This is because Scotland receives Block Grant Adjustment (BGA) funding from the UK Government based on spending on the original DWP payments. So the SNP’s newly introduced payments must be met entirely from the Scottish Government budget. It will not be covered by the BGA.
And according to the SFC
“Combining completely new payments and payments with BGA funding, we expect that by 2026-27 spending on the Scottish Government’s social security benefits will be £760 million more than the corresponding funding received, reducing the funding available for other parts of the Scottish Budget.”
So SNP is spending £760m more than they receive amid their largesse. That’s quite the number, especially given it means less funding for other Scottish budget items. But this all becomes really scary when we also look at the SFC’s findings relating to income tax revenues.
Scottish income tax revenues are expected to be less than the block grant adjustment (BGA) over the next five years
Just so we’re clear about how to read the above graph, the net position for a tax is the difference between the BGA and revenues. So a positive net position means revenues are greater than the BGA, thus delivering a positive contribution to the Scottish budget. Whereas a negative net position means revenues are less than the BGA therefore reducing the budget.
Scottish income tax revenues are negative net positions, meaning they will be contributing less not more to future ScotGov budgets. In fact, the SFC spells out the income tax shortfall crisis quite clearly
“But the income tax position is forecast to be negative and this is the dominant factor. With the exception of 2024-25, the overall net position for tax is negative for the next five years.
Scottish income tax revenues in 2022-23 are expected to be £190 million less than the income tax Block Grant Adjustment (BGA) – the amount subtracted from the Scottish Budget to account for the devolution of income tax.”
So while the SNP are increasing devolved spending on social security, promoting their largesse as progressive, they are totally unable to actually pay for it. Not least since income tax revenues are forcast to be contributing less not adding to future budgets.
As if that isn’t bad enough, it turns out that that the SFC expects this income tax shortfall to increase over the next five years, despite taxpayers earning over £27,850 paying higher levels of income tax in Scotland than in the rest of the UK.
So higher income earners are paying more in Scotland than the rest of the UK already and it is still not enough to cover SNP overspending.
In fact, the net position facing Scotland would have been -£742 million (note the minus, so net negative). The SFC explains
“Figure 4 shows the income tax net position and an illustrative calculation of what the income tax net position would have been without changes in Scottish income tax policy raising additional revenues. We estimate that in 2022-23, without cumulative Scottish income tax policy changes introduced since 2017-18, the net position would have been -£742 million.”
So how does SNP Finance Secretary Kate Forbes plan on resolving the shortfall of income tax combined with the rising costs of SNP social security spending? How does she and Nicola Sturgeon plan on resolving the negative forecast facing Scots? They’re already taxing higher income earning Scots more than anywhere else in the UK, so this incredibly negative economic picture already includes ‘taxing the wealthy’.
Just look at the graph below showing the income tax shortfalls being forecast - all while the SNP is spending £760m more on social security than the block grant adjudgment provides for.
So given all of this, can we finally and forever put to bed SNP nonsense about ‘Scotland paying its way’ et cetera. Scotland faces rising social security costs (that will only continue to rise), amid falling income tax revenues (projected to keep getting worse)
Perhaps the Scottish Government can tell us all how they plan to address this woeful economic outlook - undoubtedly going to be made worse amid the fallout from covid and brexit and rising inflationary pressures in the economy. So far all we’ve had is silence from Nicola Sturgeon and Kate Forbes.
But these questions won’t wait, time stops for no man. Not even for a nationalist government convinced of its own virtuosity. Although, it is worth noticing the SNP published their budget on the same day as the Scottish Fiscal Commission published this forecast. Funny that. Must be one of life’s little coincidences.
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