UPDATED 4 NOV: The Scottish government is facing hikes in income tax or spending cuts if the Chancellor goes ahead with rumoured changes in the budget.
Rachel Reeves is said to be considering a 2p rise in the basic rate of income tax which would impact on the Scottish budget by reducing the block grant adjustment (BGA) by about £1 billion, according to the Fraser of Allander Institute.
Its estimate came ahead of a rare pre-budget speech by the Chancellor in Downing Street on Tuesday in which she will lay out the economic choices “to cut hospital waiting lists, cut the national debt and cut the cost of living.”
She said: “I will make the choices necessary to deliver strong foundations for our economy – for this year, and years to come.
“It will be a budget led by this government’s values, of fairness and opportunity and focused squarely on the priorities of the British people.
“You will all have heard a lot of speculation about the choices I will make. I understand that – these are important choices that will shape our economy for years to come.
“But it is important that people understand the circumstances we are facing, the principles guiding my choices – and why I believe they will be the right choices for the country.”
Her comments have been taken as “code” for preparing the country for tax rises, with the focus on income tax and NICs. Any changes will have an impact on the Scottish budget.
Full report on the Chancellor’s speech here
The BGA is a proxy for how much revenue would be raised in the absence of devolution of income tax. If the UK Government raises rates, then a non-devolved system would have raised more money – and so the deduction is larger.
Joao Sousa, deputy director of the Fraser of Allander Institute says: “If UK income tax rates are raised, either the Scottish Government will have to spend less or Scottish taxpayers will also have to pay more tax – it’s just arithmetic.”
It has now emerged that the Chancellor is considering a ‘two up, two down proposal’ which would see UK income tax rise by 2p and National Insurance rates lowered by two percentage points.
On the face of it, an increase in income tax would breach Labour’s pledge to not tax “working people”. But under this proposal employees would not see any change in their overall tax take as the NI cut and income tax rise would cancel each other out.
The attraction for the Treasury is that it would raise about £6bn from 2027-28 onwards, on top of reducing the gap between employee and self-employment tax – which some would see as a good thing for the efficiency of the tax system.
Mr Sousa says the Scottish Government would continue to face the same block grant issue.
Those most impacted by the Chancellor’s proposal would be pensioners, landlords, savers and some self-employed individuals, who are liable for income tax but do not need to make NI contributions.
Analysis by investment platform AJ Bell indicates that someone with a retirement income of £35,000 – and who does not pay NI – would see their overall annual tax bill rise by almost £450.
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