Scotland’s finance secretary has indicated she may “have to revisit” a commitment to maintain current income tax levels in Scotland before the next Holyrood election.
Shona Robison expressed concern over a potential £1 billion reduction in funding from Westminster, contingent on decisions Chancellor Rachel Reeves could make in the upcoming Budget.
Speculation is rife that Reeves may raise income tax while simultaneously offsetting the impact on workers through cuts to national insurance contributions.
Robison is seeking an “urgent meeting” with her UK counterpart to discuss the potential ramifications for Scotland’s financial position.
The Treasury has declined to comment on Budget speculation, asserting that its previous “record settlement” for Scotland provides 20% more funding per capita than the rest of the UK.
In an interview with BBC Scotland, Robison conveyed her “anxiety” regarding announcements expected in the chancellor’s Autumn Budget, scheduled for November 26.
She stated that the consequential impact on Scotland’s finances might necessitate a reconsideration of a prior pledge to maintain existing income tax rates when she formulates her own budget in January.
“We don’t want to raise taxes. We’ve already set out in the tax strategy that we want to see that stability until the end of the parliament,” she told The Sunday Show.
“But in the event of unforeseen, exceptional circumstances clearly we would have to revisit that.”
During a pre-Budget address from Downing Street last week, Reeves indicated her intention to make “necessary choices” regarding tax and spending plans, citing recent global challenges.
Some analysts have posited that this could involve a two-pence increase in income tax coupled with an equivalent reduction in national insurance.
While this would have a neutral effect on many working individuals who pay both taxes, it would increase the tax burden on groups such as pensioners and landlords.
It would also significantly affect the financial resources allocated to the Scottish government by Westminster, according to the Fiscal Framework agreement established nearly a decade ago by John Swinney when tax powers were devolved to Holyrood.
The Fraser of Allander Institute estimates that a 2p increase in the basic rate of tax across the UK could reduce Scotland’s finances by £1 billion, unless the Scottish government implements its own corresponding tax increases.
Robison warned of a “nightmare situation” should Reeves reduce both national insurance and income tax without concurrently increasing public spending, which could offset the changes by increasing funding to Scotland through the Barnett Formula.
She is pursuing a meeting with the chancellor, urging her to reconsider her fiscal rules and amend the Fiscal Framework agreement to prevent financial losses for Scotland.
“What we need to see is either them not proceeding in this way and recognising the problem, to include National Insurance as part of the Fiscal Framework, so that if there was a cut to National Insurance we would see the benefit of that, ” she said.
“This is uncharted territory here, and it is not one that the Fiscal Framework ever envisaged.”
Speaking on the same program, economist Sir Anton Muscatelli stated that the Scottish government faces “difficult choices” regarding taxation, citing concerns that higher taxes could discourage individuals from residing in Scotland.
The former Glasgow University principal, who has advised the Scottish government on economic matters, has been commissioned by Scottish Labour to produce a report on regional economic development in Scotland, scheduled for release on Monday.
He said: “We can’t just focus on tax rates, we have to focus on growth.
“The danger is – and this is what I’ve heard from people who I discussed elements of the report with – they’re worried that people are perhaps being put off.”
Scottish Conservative finance spokesman Craig Hoy attributed Robison’s predicament to the SNP’s “reckless and out of control” management of Scotland’s public finances.
He said: “The SNP’s answer to every problem is more spending, more borrowing and no accountability – the same approach that’s left a £1.5bn black hole in their own budget.”
Since April 2017, the Scottish government has had the authority to establish its own multiple income tax rates and bands, implementing these new powers a year later.
Individuals residing in Scotland with earnings below approximately £30,300 pay slightly less income tax than their counterparts in the rest of the UK, with a maximum savings of about £28.
Above that threshold, they pay progressively more as earnings increase. An individual earning £50,000 in Scotland pays £1,528 more than they would in the rest of the UK, rising to £5,207 for someone earning £125,000.
The Scottish government describes this as a “social contract” with the Scottish people, enabling it to provide services such as free university tuition and prescription charge waivers on medicines.
The Treasury stated it could not comment on the chancellor’s plans before her Budget, but said she had outlined the global and long term economic challenges that would influence her decisions.
A spokesperson said the chancellor’s fiscal rules were vital to provide the stability needed to help to keep interest rates low and support long-term growth.
They added: “Our record funding settlement for Scotland will mean over 20% more funding per head than the rest of the UK.
“We have also confirmed £8.3bn in funding for GB Energy-Nuclear and GB Energy in Aberdeen, up to £750m for a new supercomputer at Edinburgh University, and are investing £452m over four years for City and Growth Deals across Scotland.
“This investment is all possible because our fiscal rules are non-negotiable, they are the basis of the stability which underpins growth.”
When the devolved government in Scotland was given more tax raising powers, an agreement called the Fiscal Framework was negotiated, setting out how the new system would work.
Part of that was something called the Block Grant Adjustment (BGA) which meant the funding Holyrood receives from Westminster was reduced to take into the account money the Scottish government was now able to raise directly.
The BGA was intended to work on a “no detriment” principle, to stop either government being better or worse off due to devolution.
It means the UK government is able to deduct funds from the block grant that it estimates it would have received if tax-raising powers were not devolved.
If the chancellor raises income tax, the BGA will also change. However, changes to National Insurance, which is not devolved, do not have an automatic impact.
Robison argues the impact on Scotland of a UK government income tax rise would be mitigated if National Insurance changes were also factored in.
If the chancellor uses extra tax revenue to increase public spending, that could benefit Scotland’s block grant money through Barnett Formula “consequentials”.
But Reeves’ fiscal rules, which she insists are vital for economic stability, mean she has limited options to increase spending.
Faced with a reduction in the block grant, Scotland will then have to generate more tax revenue itself or cut its own public spending in order to avoid a budget shortfall.
Shona Robison is facing what she calls a “nightmare situation”.
A number of financial changes could be made by the chancellor which, once all the complex calculations are done, will result in the Scottish government losing money.
This is how the ‘Fiscal Framework’ works. Though that’s not satisfying Shona Robison, who says the entire formula must be revised.
But the Scottish government can’t entirely wash their hands of this. It was John Swinney who negotiated this framework.
And raising taxes while cutting National Insurance isn’t so unconventional an idea that it could never have possibly been conceived.
The key question now is what does the Scottish government do to plug the potential gap?
Ministers are now openly conceding that a pledge not to raise income tax is being reconsidered.
But governments tend to try and avoid this type of action so close to a Scottish election.
For now, there’s not much Shona Robison can do beyond lobby the chancellor. And try to delicately move the Scottish government away from tax promises it may no longer be able to keep.
Chancellor Rachel Reeves is considering both tax rises and spending cuts in the 26 November Budget.
The levy on oil and gas profits ends in 2030 with the government exploring what might follow it.
Some experts think the government may break its promise not to increase income tax, NI or VAT for working people.
The finance secretary says an increase in income tax south of the border could lead to a £1bn shortfall at Holyrood.
Scotland’s auditor general also revealed that minister recorded a £1bn underspend in 2024-25.