Scottish economy 'stuck in doom loop' as low growth weakens tax impact

Holyrood’s budget has been boosted by more than £4 billion since it gained power over some taxes in 2015/16. But this is significantly less than the additional tax raised over the same period, according to Audit Scotland.

In 2025/26 alone, the Scottish Government expects to raise up to an additional £1.7 billion from its income tax rates and bands, but the budget is only projected to benefit by £616 million because of how the fiscal framework operates.

When the taxes were devolved to Scotland, it was agreed the annual block grant of funding from Westminster would be adjusted to reflect the new revenue stream north of the Border.

READ MORE: Scotland-England income tax gap causing difficulties for firms, says City of London

As a result, the block grant is reduced by the amount it is estimated the UK government would have raised had devolution not occurred.

Audit Scotland said the slower growth in Scotland’s tax base is down to poor jobs and wages growth, behavioural shift due to increased taxes, differences in the distribution of incomes and volatility in some sectors, such as the oil and gas industry.

Its report criticised the Government for a lack of transparency about how taxes would be used to plug the near £5bn black hole it is expected to face by the end of the decade.

Scottish Conservative finance spokesman Craig Hoy said: “The SNP’s incompetence has trapped our economy in a depressing doom loop – the slower it grows, the more they tax, and the more they tax, the slower it grows.

“Audit Scotland’s damning judgment makes it clear that John Swinney’s Government has no idea how to close the growing gap in their budget and no understanding of the damage inflicted by their high-tax policies. Meanwhile they have done nothing to rein in spending and have wasted billions on a series of blundered projects.

“The SNP are choking earnings and growth, deterring skilled workers and entrepreneurs and, at the same time, expect taxpayers to pay the bill for their reckless financial mismanagement.”

READ MORE: John Swinney drops commitment not to increase income tax in Scotland

Scottish Labour finance spokesperson Michael Marra said: “This damning report lays bare the damage the SNP’s economic failure has done to the public finances and our public services.”

Stephen Boyle, Auditor General for Scotland, said: “Devolved taxes are growing Holyrood’s budget, but their impact is weakened by Scotland’s lower earnings and employment growth compared with the rest of the UK.

"The Scottish Government needs to be more transparent with the public and Parliament about the net impact of its tax choices on the Scottish Budget.

“It also needs to better align its tax and economic strategies and set out which of its economic interventions are specifically expected to help grow the Scottish tax base.”

A Scottish Government spokesperson said: “The Scottish Government's tax decisions enable us to deliver higher investment in the NHS and policies like free tuition not available anywhere else in the UK, while ensuring the majority of taxpayers pay less income tax than elsewhere in the UK.

“Since 2007, GDP per person in Scotland has grown faster than the UK with productivity increasing at more than twice the rate of the UK as a whole, and we will continue to work closely with businesses to drive economic growth and prosperity.”