Derek Mackay advised against 'substantial divergence' from UK tax rates by top Scottish Government adviser

Finance Secretary Derek Mackay has been warned against setting income tax bands at a "substantially" different rate than the rest of the UK, it has been revealed.

Scotland's chief economist Gary Gillespie revealed his advice, which was informed by the government's council of economic advisers.

It is thought Mackay's budget will introduce different income tax rates in Scotland for the first time since devolution, with Labour and the Scottish Greens urging an increase in tax for those who earn more.

Gillespie has published a report into the potential impact of raising the Additional Rate of Income Tax in Scotland which looked at the possibility of raising the top rate from 45p to 50p.

It warned "there is likely to be significant revenue and policy risk associated with any substantial divergence from the equivalent rate in the rest of the UK" but adds "smaller changes" could have a positive impact.

Gillespie said: “The analysis shows that Additional Rate taxpayers tend to be more mobile and have more opportunities to reduce their tax bill compared to those on lower incomes. As such, an increase in the Additional Rate is likely to generate a larger behavioural response than changes to the basic or higher rates.

“However our analysis also notes that a lower increase in the additional rate could mitigate the behavioural response and provide a greater opportunity to raise revenues."

One of the members of the council of economic advisers, top economist Anton Muscatelli, has called for a "slight increase" in taxes for what he describes as “the cost of living in a civilised society”. 

Writing for the Policy Scotland website, the Glasgow University principal said: "Raising additional revenues through income tax – if done properly – doesn’t just have the potential to reduce inequality and support public services, but gives the Scottish Government vital room to invest in support for key sectors which could secure the future of our economy for generations."

The Federation of Small Businesses and the Scottish Chambers of Commerce have warned against tax rises, while Strathclyde University's Fraser of Allander Institute think tank advised Mackay to focus on growth amid Brexit uncertainty.

Other economic think tanks have also produced reports. IPPR Scotland warned that without tax rises there would be cuts of £1.3bn to non-protected departments per year, which would only be mitigated by a 4p increase in the basic rate.

"Tax rises alone are unlikely to end the cuts we face for long," said director Russell Gunson.

“Any increase in tax may only buy us a year or two of protection from cuts on this scale. Either we will need to see further tax rises over the coming years or find ways to deliver a significantly stronger Scotland economy, and increased tax receipts."

Reform Scotland, meanwhile, have argued Scotland should not alter its income tax rates from UK levels until other taxes such as VAT and business tax are also devolved.

Chairman Alan McFarlane said: "“Altering the Income Tax rate to make it different from Westminster, far from being beneficial, could be detrimental to Scotland’s economic performance and lead to a drop in revenue available to spend on public services. The Scottish Government has itself acknowledged the potential for adverse behavioural change in response to income tax policies.
 
“We need more tax levers to equip us to introduce coherent reform. There are viable options with precedent, including VAT and Corporation Tax."