Next Scottish Government faces £2bn funding gap, warns IPPR Scotland

The next Scottish Government faces a funding gap of more than £2bn per year by 2020, a leading think-tank has warned, claiming tax rises alone are “very unlikely” to cancel out imminent spending and benefits cuts.

A report published by the Institute of Public Policy Research (IPPR) Scotland sets out options for using new powers over tax and benefits amid UK-wide benefit cuts of around £600m per year by 2020 as well as public spending cuts to Holyrood’s budget of £1.2bn, combined with potential tax cuts.

The report argues the balance between tax rises and public spending cuts underpins the “£2bn question” facing political parties going into May’s election, given new powers under the Scotland Bill will see Scotland receive almost half of its budget from devolved tax revenues.

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“To avoid this next parliament being just about mitigating austerity and managing decline, we must explore all the options available,” said IPPR Scotland director Russell Gunson.

The scale of the funding gap facing the next Scottish Government mean that none of the announcements on tax already made by Holyrood parties will be enough in themselves, the think-tank warned.  

IPPR Scotland sets out six key challenges facing the next Scottish Parliament, including what, if anything, should be done to reverse UK-wide benefit cuts as well as what level should higher and additional-rate thresholds be set for higher earning Scottish taxpayers.

Matching UK Government plans to raise the higher income tax rate threshold to £50,000 would cost £300m in Scotland per year, whereas freezing the higher rate threshold in cash terms at its 2017/18 £43,600 level would raise £300m per year by 2020.

This would mainly affect the highest earning households and would not affect the tax rates of the poorest 30 per cent of households, added IPPR Scotland.

Meanwhile, reversing the cuts to the Universal Credit working allowances would cost £200m in Scotland per year by 2020, as would reversing the freeze in in-work benefits.

Increasing disability benefits in line with earnings rather than inflation would cost around £100m a year and see disability benefits increase by 11 per cent in real terms by 2020.  

Gunson said: “With public spending cuts, benefits cuts and proposed tax cuts in the rest of the UK, the scale of the decisions facing the next Scottish Parliament are very significant.

“Ahead of May’s elections all the political parties need to be clear how they will meet this funding gap, what balance of tax rises or spending cuts they will look to make, and the reforms they consider necessary to services in Scotland.

“The scale of the challenge means tax rises alone are very unlikely to make spending and benefits cuts go away entirely, but they can certainly make a contribution. Our report shows the new powers open up some possibilities on reforming tax and benefits that weren’t there before.”