Agenda item 2 is consideration of the Auditor General for Scotland’s report, “Financial sustainability and taxes”.
I am pleased to welcome to the committee the Auditor General for Scotland, Stephen Boyle. Alongside the Auditor General, we have Richard Robinson, senior manager, and Thomas Charman, senior auditor, both from Audit Scotland. We have quite a number of questions to put to you this morning on the report, Auditor General, but before we get to those, I invite you to make an opening statement.
Good morning. As you said, convener, I am bringing to the committee my audit report, “Financial sustainability and taxes”. The report examines the Scottish Government’s use of devolved tax powers and the extent to which they are supporting fiscal sustainability.
Devolved taxes have contributed positively to Scottish budgets and are forecast to continue doing so, but their contribution is constrained by a relatively weaker Scottish tax base compared with the rest of the United Kingdom because of factors such as slower earnings and employment growth.
In the 2025-26 financial year, the Scottish Government expects to raise up to £1.7 billion from its Scottish income tax policy choices, but the overall benefit to the Scottish budget is projected to be much less, at £616 million. Our audit found that the Scottish Government has been not transparent enough about that difference, why it arises and to what extent it can be addressed by its tax and economic strategies.
The Scottish Government faces a growing fiscal challenge, with the gap between its resource funding and spending plans forecast to rise from £1 billion in 2026-27 to £2.6 billion by 2029-30.
Tax and economic growth are key pillars of the Scottish Government’s medium-term financial strategy, but we also found that the Government has not been clear enough about the role that tax is expected to play over the medium term, with the current strategy largely focused on controlling public spending.
The Scottish Government’s financial plans do not sufficiently address the fiscal risks arising from devolved taxes and how it plans to manage them. Its tax policy commitments mean that improving economic performance is crucial to further growth in tax revenues. The fiscal sustainability delivery plan draws on actions within the national strategy for economic transformation, but the alignment of those two strategies needs to be improved.
This is an important time for the Scottish Government in its fiscal calendar, ahead of next month’s 2026-27 Scottish budget. Clear and consistent communication is key to supporting public and parliamentary understanding and parliamentary scrutiny of budget choices and fiscal plans. My report includes recommendations to the Scottish Government to support transparency.
As ever, Richard Robinson, Thomas Charman and I will do our utmost to answer the committee’s questions.
Thank you for that introduction. I will go straight to the deputy convener to kick off the questioning.
Thank you, convener. Good morning. The report highlights the perilous state of Scotland’s finances in relation to devolved taxes. In your opening statement, you said that the Scottish Government is not being transparent and clear enough with the public about additional taxes paid in Scotland relative to the net benefit to the Scottish Government. Indeed, you said that the contribution of devolved taxes, or additional taxes paid by Scots, is constrained. Why is that the case?
Good morning. There are a couple of points in your question, and I will look to address both of them.
The first point is about transparency. We note in the report that the Scottish Government expects to derive £1.7 billion from Scottish income tax, but the benefit accruing to the Scottish budget will be a lot less. A general phrase attributed to the performance of the tax base that brings us to an understanding of how the fiscal framework operates between the two Governments is that there is no detriment to either side. I will bring in colleagues to elaborate on that in a bit of detail. We might use some technical language this morning, but it is probably quite helpful to get into that.
The transparency point matters. We found that, in the budget document, although it is clear what the anticipated tax revenues will be, it is much harder to see what the assumed benefit to the budget will be. Those two figures are not presented side by side. Instead, there is one figure at the front, but what it means for the budget is in one of the annexes. We think that that could and should be addressed more clearly in the presentation.
Why does that arise? In the report, we talk about complexity. In some places, we say that this is highly complex and relates to the impact of the labour market in Scotland relative to the rest of the UK, the distribution of different types of jobs—highly paid jobs—and where they sit, in London and the south-east of England, relative to the spread of such roles in Scotland. I know that the committee is familiar with this as some of it was set out in oral and then written evidence that the committee took from the director general for Scottish exchequer earlier this year in response to the evidence that you took from us and the National Audit Office on tax arrangements.
That brings us to one of the recommendations that we make in the report, which I touched on in my opening remarks. If devolved taxes are to play such an important role in fiscal sustainability, there needs to be a clearer understanding of the impact of the levers of economic choices and more transparency around the expected benefit from them. Whether that complexity can be addressed will be a key factor in shaping fiscal revenues in the years to come.
If you are content for me to do so, I will bring in Richard Robinson to elaborate briefly, if that is helpful.
Thank you very much, Auditor General.
In paragraph 39 of the report, we set out that the prominence, for want of a better word, or presentation of the total up to the £1.7 billion figure alongside what it is anticipated to contribute to the Scottish budget in terms of additional spending power would help to provide clarity around the difference between those two figures.
On page 18, we talk about what is called the tax base performance gap. Each year, to reflect the tax that has been foregone to the UK Government budget, a block grant adjustment will be made. That block grant adjustment is based on the change in UK taxation on a per capita basis. To manage that, the like-for-like growth in Scotland would have to match it. Currently, it does not. Mostly that is due to the difference in earnings and employment growth in Scotland compared with the rest of the UK. That means that some of the tax policy benefits are being used to offset that gap, with the remainder being available as additional spending for the Scottish budget. We also set that out in exhibit number 7.
Thank you for those answers.
We know that tax is complex, but the public out there are trying to make sense of what is going on with the Scottish Government’s finances. The key takeaway from the report seems to be that the Scottish Government might claim that the tax decisions that it makes are raising huge amounts of cash, to the tune of £1.7 billion in a single year, which is more than what people would normally pay in tax if Scotland followed the rest of the UK’s tax bands and rates. That gives the impression that there is more money sloshing around the Scottish treasury to spend on public services for example, but the reality is that, for every £1.70 raised, 61p is available to the Government. There is a huge disparity in what people think the Government is raising from people paying more tax—and people will have a view on that—and the reality is that people are not getting back what they are paying into the system.
Your report seems to highlight some worrying reasons for that: people in Scotland have weaker earnings; we have lower economic growth; there are behavioural changes in response to increased taxes; and, as we know from this week, some sectors are dying before our eyes, such as the oil and gas sector in the north-east. All of that is having an effect on the Scottish economy.
What does the Scottish Government need to do to restore public trust and confidence in the statistics that it is using?
There are a few things to address before I signpost the committee to the recommendations in the report.
There is inevitably some uncertainty in dealing with forecasts. I know that the committee will be familiar with this through its scrutiny of Scottish income tax reports. There are a number of time differences; it can sometimes take two to two and a half years before there is certainty following the forecasts. Due to the nature of the tax system, especially the self-assessment component, there are time lags before there is real, clear data. However, the forecasts matter.
On the move from £1.7 billion raised to the anticipated benefit of £616 million, even that number changed—it was initially £830 million. Another complicating factor is that not just one set of forecasts from the Scottish Fiscal Commission shapes the Scottish Government’s results; the work of the Office for Budget Responsibility also has an influence. We touch on that in aspects of the report and we can come back to it if that would be helpful.
Behavioural change is another complexity—there is no doubt about that. Individuals make decisions informed by a range of factors. The Scottish Fiscal Commission and others have done modelling on that. We think that a better understanding of the impact of tax and economic levers is the key route to improved clarity. Only 50 per cent of people say that they understand how the tax system operates—that is from the Scottish Government’s own survey analysis, and it is different from the figure of around 40 per cent in other parts of the UK.
There are gaps to be addressed, but the most important one is on the point that you are touching on; “tax base performance gap” is the phrase that captures the difference between the two numbers for tax benefit and what comes through to the Scottish budget. Analysis of the national strategy for economic transformation, the tax strategy and the fiscal sustainability delivery plan should show how all those plans are aligning so that there is a better understanding of what difference the economic changes that are intended will make to the tax benefits that eventually accrue. Those are the recommendations that we are making in today’s report.
I think that you are right. I think, too, that people would understand that, for every pound raised, not exactly a pound would go full circle and come back to the Scottish Government. There is an element of acceptance that there is a complex settlement agreement and that the financial relationship between the UK Government and the Scottish Government is complicated, and that calculation is not always obvious to the public, as you have alluded to. However, people might be surprised about how little comes back—based on the statistic that you mentioned in your opening statement, it is about 30 per cent of the extra money, which they pay. We are talking about people who go out to work, pay their taxes and assume that most of that money will come full circle and go back to the Government that is taxing them in the first place, given that these are devolved decisions. The fact that so little of it comes back to the Government is what people will be surprised about. They will want to understand why so little of that extra money that they are giving to the Government is available to it to spend on public services. That may affect people’s choices—it may affect their ability to have faith in paying more tax, if you like.
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The statistics suggest that 50 per cent of people do not understand this, which is a key point. That is a significant knowledge gap that needs to be bridged. People need to have a better understanding of how tax operates, its connection to public spending and, of course, what that means—and not in an abstract way—for the delivery of public services.
This is bound up in the issue of the existing arrangements. Between the two Governments there is a fiscal framework, the second iteration of which was agreed in 2023. It is not formally due for renewal until 2028, although whether that timeline remains or is amended is subject to agreement between the two Governments.
Some small things could be done better to help people understand and scrutinise, and to help Parliament scrutinise. I will not labour the point, but setting things out in the budget documentation clearly, side by side, would be a helpful start.
In terms of the economic and tax strategies, there is work to be done to more clearly map out which of the economic interventions will make the biggest difference, or what differences the economic interventions are expected to make to the resultant tax take.
There is no doubt that the complexity is there—there will always be complexity around tax affairs and economic interventions, and what they mean for public spending. However, as a result of how industries and jobs are distributed across the UK relative to how the fiscal framework operates, we think that a gap exists that could be filled, or at least that more of it could be filled than is currently happening.
Exhibit 2 in the report may help to clarify things. If we look at exhibit 2, in terms of the outturn figures and the difference that they make to the budget, we can clearly see a marked change in the net contribution that the taxes will make to the budget once it gets to 2023-24. Some of that is due to more recent divergences in Scottish income tax. We can also see in exhibit 9, further on in the report, an expected positive contribution to the Scottish budget over the medium term. Therefore, taxes are contributing towards an improved Scottish budget position.
The fiscal framework is designed to reflect an element of that relative economic performance through tax take. It will depend on the extent to which the Scottish Government is planning how it will address that gap, because, potentially, it could go the other way. If tax-based performance growth in Scotland were stronger over time compared to that in the rest of the UK, it could go the other way and be a benefit to the budget. The bottom line is the extent to which the Scottish Government has enough information about the fiscal risks and the links between its economic plans and its tax policy plans to give it a full understanding of some of the structural and other risks that the Auditor General mentioned and the extent to which those can be mitigated, tolerated or reversed.
The graphs in the report are helpful for understanding something that is quite complex.
Auditor General, the current Scottish Government was elected in 2021. In advance of that election, it made the following statement—a promise, I suppose—to the public. It said that it would
“freeze income tax rates and bands and increase thresholds by a maximum of inflation”.
Based on your analysis of the Scottish budget over the past couple of years, has that been the case?
I am not sure that I have the facts and figures at my fingertips to give you a definitive answer.
What I am getting at is whether bands or rates have changed, and whether thresholds have increased by a maximum of inflation over that period.
Maybe I can give you a factual answer. Exhibit 4 sets out the differentials between Scotland and the rest of the UK—to be precise, it sets out the differentials between Scotland and England and Northern Ireland, given that there are some separate tax arrangements that exist in Wales. Exhibit 4 illustrates the change in tax for income tax bands in Scotland relative to those in England and Northern Ireland. Scotland operates with six income tax bands, from the starter rate through to the basic rate, the rates for higher earners and then the advanced rates. There are differences between Scotland and England and Northern Ireland. Perhaps that is illustrated in the tax strategy that the Scottish Government produced last year, I think—colleagues can keep me right about that. The strategy sets out the Government’s intentions for tax, and it is very clear, as we set out on page 13 of the report, that the Scottish Government wishes to introduce a progressive tax arrangement, whereby people will pay more tax as their income increases. That leads to differentials between the rates that Scottish income tax payers pay compared to the rates paid by income tax payers in England and Northern Ireland.
In the report before you today, we have not referenced the inflationary differences compared to other parts of the UK, which is what I think you are asking for. Rather, the report sets out the changes that are made through the tax strategy and what that signals for the future.
My original question was whether it is Audit Scotland’s understanding that changes have occurred to tax bands, rates and thresholds since 2021. My understanding is that that has happened.
That is correct; I am happy to say that that is the case.
That is interesting, because on 13 November, the current First Minister said to Parliament:
“We have maintained our manifesto commitments in relation to taxation.”—[Official Report, 13 November 2025; c 19.]
Those commitments were to
“freeze income tax rates and bands”
for the duration of the parliamentary session, and to
“increase thresholds by a maximum of inflation”.
In your judgment, was the First Minister being accurate and transparent in making that statement?
I would need to again refer you to the exhibit in the report where we set out the changes to tax bands that have occurred, along with the tax strategy that has been set out. I will maybe let others form a view as to whether that is a different position from what has been said elsewhere, but I am content that our report reflects factually the changes over the past few years.
A key element of your report is about transparency and accuracy for the public. The statement was repeated last week during First Minister’s questions, so it is an issue that comes up regularly at the forefront of political debate. Not for the sake of political debate but for the sake of transparency with the public, if the person in charge of the country is making statements about taxation and the state of Scotland’s finances, surely, in terms of accuracy and transparency, they have to be 100 per cent open, honest and clear.
We are very clear in today’s report about the need for better communication and transparency in terms of tax. I do not mean all tax; we are primarily talking about income tax arrangements, although I am sure that the committee will have seen that the report covers other devolved taxes—land and buildings transaction tax, landfill tax and so forth—that make a contribution, albeit a considerably smaller one, to the Scottish budget.
As I set out my opening remarks, I think that there is a lack of understanding among the general public about how income tax arrangements work and how they inform public spending opportunities in Scotland. There are opportunities to have clearer communications and clearer budget documentation to bridge some of that gap.
Thank you. I will let others come in, convener.
Thank you very much.
The key facts at the start of the report make the point that you have just alluded to, Auditor General, which is that although there is a 1.6 per cent contribution from land and buildings transaction tax and a 0.1 per cent contribution from the landfill tax, by far and away what we are talking about this morning is income tax, is it not? Income tax makes up almost a third of the Scottish budget. We need to be clear in our evidence session this morning that, first and foremost, we are talking about income tax.
Some of your recommendations are primarily about the Government’s approach to income tax. What struck me is that the six recommendations that you make on page 6 of the report, which are all directed at the Scottish Government, all talk about transparency and things being set out more clearly. They talk about information being more “accessible and transparent”, set out “more transparently”, and being stated “clearly”, to
“support transparency and public understanding.”
There is a bit of a problem here, is there not? The current approach is opaque.
To address both your points, convener, exhibit 2 in the report captures that. You can barely see in the coloured graph the relative contributions. Although the devolved taxes are important, in terms of the scale of their impact, what has a direct bearing on the Scottish budget almost all comes from Scottish income tax.
There is a need for better transparency and clarity, and you are right that we capture that language in the report. I do not say this glibly, convener, but this is complicated. Many of the reasons for the differences are structural, and it will take time to better analyse and investigate some of the differences in the job market and the distribution of different industries between Scotland and the rest of the UK. However, that will never provide absolute certainty, and I do not think the report is suggesting that. There are timing differences that have to dealt with, as well as forecasts from the two official forecasting bodies. Nonetheless, more could be done to bring improved understanding for the public and to support parliamentary scrutiny. Ultimately, we hope that our recommendations benefit the Scottish Government in allowing that clearer understanding of how tax strategies, the delivery of fiscal sustainability and the national strategy for economic transformation align, which could ultimately lead to closing some of that gap. What we are capturing here is the tax performance base gap.
I think that it is correct to say that transparency is a theme. That is why we talk about the presentation of figures and so on, which we touched on earlier.
There is a dynamic theme to the recommendations, which is about—I go back here to the purpose of the audit—the impact of tax on fiscal sustainability and how the Scottish Government is maximising that impact. The recommendation that relates to understanding structural economic differences and the contributing factors, and how we strategise to improve the impact that taxes can have on that basis, is important. That is why we bring up the need for a closer alignment of economic strategies and tax strategies, which would enable people to clearly see, off the back of the economic pillars of fiscal sustainability, what impact we expect in terms of changes in the tax revenue raised and how that will support the medium-term position. Although transparency is an important dynamic, there are also some specific recommendations that are geared towards helping the Scottish Government to have better data, understanding and strategy around how to increase the impact that tax could have.
I am struggling a bit to understand what that alignment between tax and economic strategy looks like. For example, the report alludes to the Government’s stated aim to reduce the size of the public sector workforce. Is that based on a theory of crowding out, with the private sector mopping up those jobs? Is it based on an understanding that if you have fewer people in work, income tax receipts are likely to fall? What about earnings growth? There has been some talk about public sector pay settlements. We will take evidence in our next evidence session this morning from people from the college sector, and college pay rises have been cited as one of the reasons why the further education sector is struggling a bit financially.
Are you suggesting or recommending that, as part of aligning economic strategy with tax, there is some straightforward analysis of what those public policy decisions mean for tax receipts?
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That, and on a much wider scale, too. The Government’s stated ambition to reduce the size of the public sector workforce in Scotland is set out in its public service reform strategy, which talks about a 0.5 per cent reduction over a period of time. However, I think that we are drawing a wider picture of the need for alignment.
A few years ago, we brought to the committee a paper in which we analysed progress against the national strategy for economic transformation. The paper identified many ambitions, some with indicators that were clear and some that needed a clearer description, and the Government has been reporting progress on them. We think there is a gap between the clear intended outcomes from the NSET and what they mean for tax receipts. I do not think that that is stated clearly enough. It is that particular alignment that we are referring to.
Thomas Charman or Richard Robinson might want to come in on this point as well. I have made the observation that the current focus on fiscal sustainability is, in our view, more predominantly based on controlling public spending rather than on what benefit NSET and those interventions will have in relation to growing the tax base, together with some of the analysis that we have talked about. For example, we have talked about having a better understanding of the levers that Government can deploy, behavioural change and some of the structural issues to do with where industries and highly paid jobs exist across the country, so that there is clarity and better understanding to support decision makers, public understanding and the scrutiny of public spending. The public sector workforce is a part of it, but we think a wider component exists alongside that.
Thomas Charman or Richard Robinson may want to say a bit more.
I will start and then hand over to Thomas Charman.
I think that the Auditor General is correct. Spending and income are related when it comes to the budget. A public sector workforce, if you have one, pays taxes, and so on. Part of the medium-term financial strategy and the three-pillar approach is to consider each element in turn—the spending, the economy and the taxes—and how they relate to one another.
In our report, we are saying that the detail, granularity and focus are on the spending. When it comes to by how much and when the tax is changed beyond the contribution that it already makes, how much that will help to support the remaining fiscal gap could be clearer. That is why we are looking for more alignment between the economic strategy and the links with tax.
I will hand over to Tom Charman to talk a bit more about the pillar approach.
Thank you. In the second pillar on the economy in its fiscal sustainability delivery plan, the Scottish Government sets out a range of actions that it believes will grow the tax base, mostly drawn from the national strategy for economic transformation. However, our view is that the Government needs to go further and explain exactly which of those interventions will grow the tax base and over what timescale any benefits might be expected to materialise. It also needs to try to quantify the impact of that on tax receipts against part of its medium-term financial planning.
I will move on to an area that is highlighted in your report in exhibit 1, which is titled, “Progress on implementing devolved taxes in Scotland has been slower than planned”. That might be a bit of an understatement. For example, you refer to the devolved air departure tax, which was expected to be introduced on 1 April 2018. You refer to the assignment of VAT receipts, which was supposed to be sorted out with a transition year in 2019 and implemented by 2020. We are talking about seven and five years ago and neither of those taxes has been implemented. Could you shed some light on why there have been those delays, what the problems are, and who, if anybody, is to blame?
I will say a word or two and then bring colleagues in to set out some of the detail.
I will comment on VAT first, convener. I think that I have said the word a couple of times already, but there has been real complexity in the substance of trying to move beyond the ambitions in the Scotland Act 2016 and the Smith commission that preceded it and which was the origin of the assignation of VAT receipts, rather than an intention to give powers to the Scottish Parliament to set a differential VAT rate. Therein lies the complexity as to how His Majesty’s Revenue and Customs records exist. In essence, it is not always clear where a transaction originated. Did it take place in Scotland or was it in another part of the UK? That is the barrier to applying that part of the 2016 act, which it was the intention to do.
I do not know whether I can give any clarity or assurance to the committee about what will happen next. It feels as though there are some significant hurdles to the assignation of VAT being part of the day-to-day powers of the Scottish Parliament. You are not the first parliamentary body to raise concerns about that, convener. The Scottish Affairs Committee in Westminster raised similar concerns in its report in July of this year, in looking for clarity as to whether the timescales and, indeed, implementation in the round are realistic.
Richard may want to say a bit more about that, if there is anything else, and about the other powers that have not yet been implemented.
Thank you, Auditor General. I do not have much to add. The issue is around the methodology of the assignment, as you might expect with VAT. It is a value-added tax on a series of transactions, which can lead to complexities, especially for cross-border transactions. I understand that there has been a host of communication over time about the best methodology to use that both parties will be comfortable with. Part of that is about clarity around what the tax would generate and part is to do with managing fluctuations in what could potentially be large amounts of money that could vary considerably between years. The Scottish Government will probably be in a better position to talk you through more of the detail about where it has got to with the methodology, but you are right to point out that implementation is significantly behind the planned transitional year.
To use my old trade union terminology, is this just a long-term negotiation? Is there a dispute? At what level is the dispute? Is it at ministerial level? Is it at official level? What is the role of HMRC in this? HMRC obviously has relationships with the UK Government, the Treasury and the Scottish Government, and has had for quite a number of years.
As Richard said, it is probably for the Scottish Government to update the committee on where discussions currently are. We are not sighted on any revised timeline or understanding of implementation and how that is progressing. What we take from the engagement that we have had is that there are complexity barriers that will need to be overcome, if they can be overcome, for this part of the Scotland Act 2016 to be implemented. It is probably for the Scottish Government to share with the committee any indication that those complexities can be set aside.
I will bring Graham Simpson in, but before I do, I have one final question. I mentioned at the start that landfill taxation brings in 0.1 per cent of the Scottish Government budget and Scottish income tax brings in over 32 per cent—almost a third. Where would VAT assignments sit in that range?
I am not sure. Richard, do you know?
I think that the Scottish Fiscal Commission has some provisional figures. Do you have any more detail on that, Tom?
I believe that VAT assignments would be the second largest revenue source, behind Scottish income tax, but we do not have the exact figures in front of us.
We can quickly come back to the committee in writing on that.
That is fine. I appreciate that. Thank you. Graham Simpson has some questions.
Thanks, convener. I want to stick to the VAT question. Was the proposal to allow the Scottish Government to keep all VAT receipts raised in Scotland, or was it to do that and be able to set its own rate of VAT?
It was the former: it was a share of the VAT receipts. The intention was not for the Scottish Parliament to set its own or differential rate of VAT.
Listening to the convener asking about VAT, I was thinking that assignment would be really difficult, given the way trade works. If you think about online selling, if someone buys something that comes from England, say, but they live in Scotland, how would you work out where the VAT goes? I guess that that is the kind of complexity that you are talking about.
It is. Also, although this is for tax experts, not me, to brief or advise the committee on, even since the Scotland Act 2016 came into force, we have seen changes such as the UK leaving the European Union and the application of the United Kingdom Internal Market Act 2020. All those factors are relevant, Mr Simpson. We say at paragraph 5 of today’s report that
“there is still no clear plan for its introduction”,
and it feels like the ambition for the assignation of VAT receipts to apply to the Scottish budget is there, but there is no clear sense of a timeline for it.
Do you get the impression that both Governments have just given up on it?
That will be for them to answer. We are saying that we are not clear on what comes next or whether the complexity that we have described and that you and the convener are asking about can be overcome.
I will go back to the key messages. I think that the key message is the first one, where you say:
“For example, in 2025/26 alone, the Scottish Government expects to raise up to £1.7 billion from Scottish Income Tax through its policy choices, yet the Scottish Budget is only projected to benefit by £616 million.”
There we have a gap of around about £1 billion. What happens to that money?
First, to be clear, that £1.7 billion is collected. There is no sense that the money is not levied and collected. You will probably see from the language of the key message that there are a couple of caveats here. One is that the amount is “up to” £1.7 billion. That is based on our forecasts. The other caveat is that the budget is “projected” to benefit by only £616 million. That will become known in due course—I have talked about the time lag that exists primarily as a result of the time that it takes for self-assessment to be completed.
What then follows is why there is a differential. I will bring in Thomas or Richard to talk about how the fiscal framework is applied to block grant adjustments, which is the root of why there is a difference. Colleagues can come in with more detail, but in essence the fiscal framework talks about there being “no detriment” to either the Scottish or the UK Government, going back to the initial transfer of powers.
Richard quite rightly makes the point that the projections are clear that Scottish income tax is forecast to make a significant impact upon the Scottish budget. I think that I said that in my opening remarks. The application of the framework, however, and the differences in salary growth and employment numbers in different parts of the UK compared to Scotland are at the root of the complexity. It is complex. There is no doubt about why the numbers exist. Our recommendation is that there needs to be a better understanding of that, and of how and whether the Scottish Government’s economic growth intentions will have a direct bearing on the tax take in due course. If it will be helpful, Mr Simpson, we could turn to my colleagues for a moment, if you want to know more about that.
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Before we do that, I am trying to get an explanation in layman’s terms, for anyone watching, about why we can raise up to £1.7 billion and yet have only £616 million to play with. I am paraphrasing. The money has been raised. The money is somewhere. Where is it? Who has it?
Taxes are collected by HMRC. After the end of the financial year, after self-assessment and all the rest of it is collected, HMRC will work out, based on S codes and a variety of other things, what amount of that relates to Scotland. That becomes the outturn figure. The outturn figure is then added to the Scottish budget in its entirety.
The issue here is about the pace of the growth of the block grant adjustment, which means that the spending power of the Scottish budget overall, which is the net of those two sums, may be less than the total amount—effectively the total additional amount from policy choices. There are two factors. The first is policy choices and the difference that they make compared to the rest of the UK. For instance, do you tax more or less? The other factor is how the relative tax performance growth in Scotland is going compared to the rest of the UK. It is the net amount of those two factors. Because earnings and employment growth is slower in Scotland, the block grant adjustment is netting off more of the additional £1.7 billion raised, so the amount that is left is less than £1.7 billion. It is currently about £616 million. There is more information about the different factors affecting the growth in the tax base in the report, from paragraph 32.
I am looking at paragraph 32. It says that factors include
“• weaker earnings and employment growth
• behavioural responses from taxpayers ... such as choosing to work fewer hours or exiting the workforce
• differences in the sectoral make-up of the economy, such as the sensitivity of the oil and gas industry in Scotland”,
which is going through a really tough time at the moment, and
“• a different distribution of incomes in Scotland compared to the rest of the UK.”
Those are the factors that influence how the fiscal framework and block grant adjustments work. Looking at what the Scottish Government thinks can be done to bridge the gap between the impact that the projected block grant adjustment is having, relative to the anticipated benefit that Scottish income tax will have on the budget, we have seen some of that detail coming through in the letter that I referred to. We set out in paragraph 35 of the report, where we refer to the letter that the committee received from the former director general for the Scottish exchequer, some of the behavioural change, the factors and the structural changes. I do not wish to labour the point but, essentially, the Scottish budget will benefit from bringing in not just higher taxes, but better-paid jobs to Scotland. That will be the driver that will have the key benefit of closing the differential that is set out in how the fiscal framework and the resultant block grant adjustments work.
Yes, we need to attract higher paid people, essentially.
And there are complexities in that, in terms of where jobs and industries are distributed around the UK and how the fiscal framework operates—that principle of no detriment—but better-paid jobs will be the driver that will make a difference.
We have spoken before about the different tax rates north and south of the border and how they affect people; for example, whether higher earners leave because they do not want to pay as much tax. We have talked about those things before.
I want to ask about a couple of other areas. One is the transparency question. Between paragraphs 36 and 37 you say:
“The Scottish Government is not sufficiently transparent in explaining how taxes contribute to the Scottish Budget.”
I know that you have spoken about this already, but I want to know what it is that the Scottish Government is not being transparent about. What does the Scottish Government need to do to please you, Auditor General?
There are a few things that the Scottish Government could do to be transparent in order to support scrutiny and public understanding. People are telling the Scottish Government through its own survey that only about half of the Scottish population understands how taxes work and the benefit that accrues from that. There is an opportunity to support public understanding, the use of public services and engagement in public processes.
I will turn to Thomas to talk about documentation. We looked at transparency as part of our work on some of the budget documentation and how figures are presented, whether in the main body of the papers or the annexes. The tax benefit figure and the assumed performance gap figure are both in the papers but they are not presented side by side. That feels like a significant opportunity to support parliamentary understanding and public consumption of how tax and public spending operate. I will turn to Thomas first.
As the Auditor General and Richard Robinson have already mentioned, there is a section on tax at the very beginning of the budget documents. We find that the Scottish Government tends to present the additional tax rate—in this case, for 2025-26 that is £1.7 billion—but the net position, which is the amount that the Scottish budget benefits by as a result of tax devolution, is in the annexes at the back of the budget. In our report, we say that the budget does not present the two figures side by side, nor does it explain their relationship. Why is that £1.7 billion different from the £616 million net tax figure? That is the kind of transparency that we are calling for, to make the reasons behind those differences clearer.
It could be, of course, because it is a little bit embarrassing for the Scottish Government. Maybe the Government just does not want to be as up front as you would like—you do not have to comment on that.
I will ask you about something else: land and buildings transactions tax, which is the Scottish equivalent of stamp duty. Perhaps you can help us here. Do more people pay LBTT in Scotland than pay stamp duty in England?
I will bring colleagues in on some of the detail.
As with income tax, there are different rates for property transaction taxes in Scotland compared to England and Northern Ireland—just to be precise about what we are comparing here. I will not read it out, but exhibit 6 in the report sets out the differentials between the rates, and there will be variables. There is a distinct and different arrangement in Scotland. As to how that translates into the revenue that is associated with it and the number of transactions, I will bring in Richard Robinson again.
We speak about that in paragraphs 28 to 30. There are differences in the point at which people pay and in the rates that they pay, as is illustrated in exhibit 6. There are also some differences in the additional dwelling supplement and the rates for first-time buyers. A slight difference with fully devolved taxes, which is what LBTT is, is that reconciliations can be applied quickly. The time lapses that we talked about for Scottish income tax before a reconciliation is applied to the budget do not apply to LBTT in the same way, which probably makes it slightly easier for Revenue Scotland and the Scottish Government to manage.
We will just plough on, despite the noise in the background.
Our report looks at the contribution that devolved taxes make to fiscal sustainability. We note that there are differences between land and buildings transaction tax in Scotland and stamp duty land tax in England and Northern Ireland. I signpost the committee again to exhibit 2, which shows that, within the totality of the impact that devolved taxes are having on overall fiscal sustainability, property taxes make a relatively small contribution across the piece. It is much more about the impact that income tax is having and, as Thomas Charman mentioned ,the potential impact that VAT assignation could have were that issue to be resolved.
I get that, but my original question—and maybe you do not have the answer—is whether more people pay LBTT in Scotland, as a percentage of the population, than pay stamp duty in England and Northern Ireland? Do we know?
It will depend on the number of transactions. People in Scotland will pay different rates. Is the heart of your question about whether this is having a bearing on the number of property transactions in Scotland compared to England and Wales? That data is available, but I do not think that we have it to hand. We can come back to the committee in writing.
Thank you.
Thank you very much indeed. I am now going to turn to Colin Beattie, who has some questions for you.
Auditor General, I found your report interesting. It is one of the most clearly set out documents that I have seen on this subject. I would like to look at one or two of the issues arising in connection with fiscal sustainability, which have been touched on to some extent already. Your report highlights five specific challenges that are contributing to the financial pressures, such as Scotland having a larger and better-paid public sector, the Scottish population being older and sicker, a real-terms cut to the capital block grant, slow real-terms growth in resources funding through the block grant and, of course, spending on Scottish Government policy commitments. Do you have a sense of the relative proportion that each of those elements contributes to anticipated funding pressures?
We have not analysed the factors to map or quantify their relative impact.
Is it doable?
If it were possible to quantify that, it would be an economic and forecasting matter for the Scottish Government together with the Scottish Fiscal Commission. The Fiscal Commission’s modelling takes account of those factors and the anticipated behavioural changes to some extent—it would be for the Fiscal Commission to speak to that. In exhibit 8 on page 21, which is what I think that you are referring to, we sought to set out some of the context for the budget pressures together with the implications for the budget, as the Scottish Government is looking to address both the revenue and capital challenges that it set out in its own documentation through the medium-term financial strategy. Next month’s budget, together with the Scottish spending review, will give a clearer indication about what comes next for some of the ambitions that are set out in the public service reform strategy—some in relation to the national health service, which is the biggest consumer of public spending in Scotland through public health interventions and the preventative models that are intended—and what bearing they will have on future fiscal sustainability. We will look to those events next month through the Government’s forecast and spending review and the Fiscal Commission’s forecast to give us clearer insight into the impact of those levers and what difference they are expected to make.
10:30
The question of whether behaviour has changed has been considerably explored over a number of years. The last time we spoke to HMRC, it indicated that there was some sign of behavioural change. Here we are looking at something rather more concrete. In 2023-24, the increase in the additional rate and the lowering of the threshold was expected to raise £65 million but, due to behavioural responses, only £11 million was raised, and in 2024-25 the increase to the top rate was intended to raise £53 million but raised only £8 million. Both cases represented a more than 80 per cent divergence in the amount of tax received. Are we getting to the point where we bring out the old Laffer curve and say that tax rises are no longer effective?
You beat me to the Laffer curve. There are many tax and economic theories about how far Governments around the world can go with tax rises. Ultimately, these are political choices and decisions for the Parliament and for the Scottish Government to make in presenting its budget. However, there is clear evidence that those taxpayers with the most resources at their disposal, top-rate and higher-rate taxpayers, are better placed to make decisions about where their income is captured and where they reside. What we are seeing from some of the evidence that is set out in exhibit 10—and there will be many other sources for this—is that it is challenging for Governments to generate tax revenues beyond a certain point. To come back to some of our wider considerations in this paper, what does that mean alongside the pillars of public service delivery, public service expenditure and economic growth and how do those strategies align?
There is an opportunity for the Government to be clearer in order to be successful in its ambitions to deliver public services. The evidence that there is limited scope for tax rises to generate the assumed benefit is, as we have touched on a number of times this morning, perhaps best illustrated by the differential between the £1.7 billion tax take and what then comes through the Scottish budget.
If we look at those two issues, which are the only ones that we have any detail on, does the calculation of how much was raised depend purely on income tax or does it take into account the knock-on effect of a reduction in expenditure, which would lead to a drop in VAT income?
The former, I think. Richard Robinson can confirm that, but I think that we are pretty clear about it. The analysis that we set out in the table relates only to income tax, but there are potential wider implications of how and where people are based that could have a bearing on other taxes. As it relates to our considerations, we were looking only at the application of devolved taxes, but there may be other factors. I do not know whether Richard Robinson wants to comment briefly on that.
Exhibit 10 shows the Scottish Fiscal Commission’s modelling, which is in effect a forecast of what the impact could be. Part of the issue with any element of behavioural change is that there are assumptions and forecasts about what is going to happen and then, once the actual figures are in, there is an exercise of seeing how they relate back to the forecasts. The committee will be aware, not just from this report but from the annual Scottish income tax additional assurance work and from the National Audit Office, that there is a backward-looking dimension in which HMRC along with Scottish Government asks what we are seeing in changes to, say, cross-border migration or whatever. An issue that arises is the time lag. The latest information that you are looking at is from 2023-24. Some of the more notable tax policy differences were coming in around then and the year after, which means that there may be a time lag until we know exactly what the impact has been in terms of behavioural change. Because it is such an important area and we know that some work is on-going, one of the issues that we are raising in the report is the need to continue that work, grow it and get the best information possible about the impact of taxes on behaviour. The Auditor General has pointed out that the impact may differ from decision to decision and based on a number of things, such as demographics, sectors and whether individuals are high earners.
In past meetings of this committee, we have discussed the impact of cross-border migration, but I understand—I do not know whether this is still the case—that we can count the number of bodies coming across but we cannot work out what the revenue from that is compared with the revenue from people going the other way, so we do not have a net figure for that. Is that still the case?
I would need to refer back to the correspondence and the Official Report of the committee’s evidence session with the Scottish Government and HMRC on those factors. I broadly agree with the point that you made earlier about HMRC’s contribution. I am happy to correct this, but I think that there was not a lot of evidence to support either compliance risks or significant behavioural change as a result of Scottish income tax differentials from elsewhere in the UK but that HMRC was increasing its compliance activity. I would need to refer to the records and the evidence that the committee took, but I suspect that it is likely to be a fluid situation, which the Scottish Government and HMRC are better placed than Audit Scotland to advise the committee on.
If you decide to tax people’s assets, that will reduce the income from those assets, so income tax will go down. That is logical. It is as if you are blocking yourself into a canyon.
Your point illustrates the complexity: taxes are interconnected. The Scottish Government’s tax strategy sets out its intention while recognising the interconnection and complexity of taxes, such as income tax, VAT and property taxes. How those strategies align with the economic strategies is what we sought to look at most closely in today’s report, together with the recommendations for clarity, as Thomas Charman mentioned. Some of the detail of the next steps and the implications of that alignment will support our better understanding and bridge some of the gaps.
Scotland is not the first country to be wrestling with its taxation policy and how to raise sufficient revenue to do what it needs to do. Are there any other countries that have handled it better? Have any other countries had better outcomes than we have?
That would be for others to answer. We did not look to do an international comparison of taxes, whether reserved or devolved, as part of this audit. However, you are right that there are probably many examples of different jurisdictions, whether national or sub-national, that have made different tax choices, some of which may bring opportunities and risk. Whether there are opportunities to learn from other jurisdictions is something for Scottish Government officials and ministers to consider. It was not a feature of this audit.
Thank you. We now have a final set of questions from Joe FitzPatrick.
I will follow up on some of Colin Beattie’s questions, which covered some areas I would have liked to go into—that has saved me a bit of time.
Your report includes a lot of tables that are very clearly labelled as modelling. Those tables are often taken as expressing fact by others, but that is not the case. You mentioned exhibit 10, which is very clearly labelled
“modelled impact of behavioural change”.
However, we can look at some of the facts. Just yesterday or today, we received the figures for population increase in Scotland last year. Last year, the population of Scotland went up to 5.55 million—the highest figure ever—and most of the migration came from the rest of the UK. So, we are now seeing that, when folk look at the whole basket of changes in taxation and other life changes, the behavioural change is that, on balance, people are choosing to move to Scotland.
That is there in the population figures, but it is not reflected in the modelling that we are seeing from others. That is fine, because I guess that, sometimes, there has to be a cautious approach, but when would we see those figures coming through into what that population increase has meant in terms of more people living and working in Scotland and Scotland having a higher employment rate than the rest of the UK? We have a challenge in that London and the south-east are different from everywhere else—they are effectively overheated—so, when we compare Scotland with the rest of the UK, we are actually really comparing Scotland with that overheated part of the rest of the UK.
I hope that we have been clear in the report that it contains a combination of actual results and forecasts and that there are time lags. The committee will have seen the same thing over a number of years, particularly in evidence that you have taken from the Scottish Government and HMRC. Budgets rely heavily on forecasts and what comes in due course through in block grant adjustments, and the associated reconciliations can swing significantly. In recent times, we have had large positive reconciliations and very significant negative reconciliations, which we touch on in the report. All of that is bound by the fiscal framework between the two Governments.
You also mentioned other changes. I think that I touched earlier on how Scotland has set out different approaches to what devolution is about and has made different policy, spending and tax decisions. Through its tax strategy, the Scottish Government has set out plans for a progressive tax regime, and that has been reflected in the different bands.
On the point about the structural employment and earnings differences between the rest of the UK and Scotland, considering London and the south-east, I think back to the letter from the former director general of the Scottish exchequer, whose evidence talked about how, although the financial services industries are both well represented and strong contributors to economic and tax revenues in Scotland, especially in Edinburgh, salaries in the same industries in London and the south-east are significantly higher. Whether and how that situation could be overcome is part of the analysis that needs to be taken forward.
We understand the essence of the point that you make. I do not wish to repeat myself, Mr FitzPatrick, but there is complexity here, and forecasts will always be a feature of how many of these arrangements work.
That is helpful. Your report is clear about where things are modelled or not, which is helpful, but I felt that that should be put on the record.
This is my final question. The recommendations at the start of the report are all about transparency. Have you had any response from the Government?
For all our reports, the recommendations are fact checked with public bodies. Should the committee decide to take evidence from the Scottish Government, there will be an opportunity for the Government to put on record its formal response to the report. As with all our reports, we would then go into our follow-up process, take the opportunity to audit and, in due course, report publicly on whether the recommendations were implemented as we set out.
Okay. Thank you very much.
We have time for one final question, and I am going to indulge the deputy convener.
Thank you, convener. This is one question in two parts. The first part is about the fiscal framework. In your view, is it fit for purpose? Secondly, there has, of late, been much conversation about whether people in Scotland pay more or less tax than people other parts of the UK, and it has been very difficult to get a straight, honest answer about that. It depends on whom you ask. We are trying to get to the bottom of it, being as neutral and politically independent as we can be, so that we, as an audit committee, have facts rather than conjecture. I still cannot answer that question, and I wonder whether you can.
10:45
I will take those questions in reverse order, if I may. On who pays what in Scotland relative to other parts of the UK, I signpost the committee’s attention to exhibit 5, which sets out for different income brackets whether Scottish taxpayers pay more or less. Of course, there are caveats around that, but it is drawn from the Scottish Government’s own reporting on it. I am making generalisations—forgive me for that—but, broadly, it sets out that, up to around the £30,000 mark of income, you will pay less tax in Scotland and that, if you go above that mark, you will begin to pay more, although in quite small amounts at the start. As we have touched on already, that is the intention of the progressive tax regime in Scotland.
On your question about the fiscal framework, it is absolutely a matter for the Scottish Government and the UK Government, through their discussions—whether through the timetabled review for 2028 or earlier—to reach a view together about how the fiscal framework operates. You will have seen that, through the previous iteration, in 2023, there were changes to some of the different rates, the amounts that could be drawn down and the circumstances, with the application of limits being inflated through this iteration. So, we saw changes. It really comes down to the negotiations and the consensus between both Governments—it is not for me to say.
Thank you.
That ends this very useful session. I take the opportunity to thank you again, Auditor General, for presenting that evidence and producing the report. I also take the opportunity to thank Thomas Charman and Richard Robinson for their evidence this morning. We need to consider what our next steps are, and we will take a bit of time to look at that.
I will suspend the meeting to allow for a changeover of witnesses.
10:47 Meeting suspended.Air adhart
“The 2023/24 audit of UHI Perth”