Scottish Government warned against ‘kneejerk’ approach to tax hikes

The Scottish Government has been urged to exercise caution over any "kneejerk" approach to increasing taxes to offset the economic hit from coronavirus.

Cabinet Secretary for Finance Kate Forbes. Picture: Andrew Cowan/Scottish Parliament
Cabinet Secretary for Finance Kate Forbes. Picture: Andrew Cowan/Scottish Parliament

Holyrood should also establish a stand-alone "tax committee" to enhance scrutiny of any rises and allow MSPs to develop expertise in the field, according to the Institute of Chartered Accountants in Scotland (ICAS).

Finance Secretary Kate Forbes is devising the budget for 2021/22, but the coronavirus pandemic has thrown the annual process into disarray with the volatile nature of the emergency spending announcements rendering much of the figures quickly “out of date”.

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But the impact on public finances is likely to be severe after the country's economy shrank by more than a fifth earlier in the year. This is likely to have a knock-on effect for the country's tax take, with fears of a major increase in unemployment when furlough comes to an end. Taxes could go up to avoid spending cuts.

Finance Secretary Kate Forbes

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But ICAS has warned in a submission to Holyrood's finance committee on next year’s budget that private sector businesses must be robust to "provide employment and wealth creation”.

"Without this, there are limited sources of taxation revenues to provide government funds," the body warns.

It calls for a balance between "any 'kneejerk' reaction to raise taxes to fund the extra borrowing arising from Covid-19", and the need to keep the "tax burden manageable" to support the economy and get people back to work.

"Taxation needs to both collect funds and support the economy or, at the very least, not create economic disincentives or distort behaviour," ICAS said.

There were an estimated 2.6 million taxpayers in Scotland this year (2020/21), with an average salary estimated at £25,200. Just 17,000 paid the top rate of 46p.

"These are small numbers," ICAS states.

"There is the risk that they may be smaller if the economy is restricted and unemployment grows."

The Scottish draft budget is usually published in December, but the process has been thrown into doubt this year, as the economic outlook remains volatile over the impact of the Covid-19 pandemic.

Chancellor Rishi Sunak has extended furlough for another month to cover the national lockdown for England. But it remains unclear what impact this will have on Scotland - and whether the current tiered restrictions will be sufficient to avoid another national lockdown north of the border.

ICAS is now calling for Holyrood to have a greater deliberation on the process of raising the money - through taxes - to fund public services, rather spending cash.

"To support this the Scottish Parliament should institute a tax committee or a tax sub-committee of the Finance and Constitution Committee,” ICAS said. “This would ensure that time would be set aside for scrutiny of tax policy and committee members would be able to further develop their tax expertise."

Ms Forbes has been calling for additional borrowing powers to be devolved to Holyrood as a result of the pandemic, warning the devolved arrangements were not designed for a health emergency and an economic crisis of the current scale.

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