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The Scottish government must recognise its tax policy is not working and address divergence with the rest of the UK, the financial services industry has said.
Scottish Financial Enterprise (SFE) said rates should be brought more closely in line with those south of the border when Shona Robison, the finance secretary, delivers her budget proposals on Wednesday next week.
It referred to a recent report from the Institute for Fiscal Studies which said Scotland’s top rate of income tax may have slightly reduced revenues rather than increasing them. The SFE said the government should resist calls for further income tax rises.
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Sandy Begbie, the chief executive of SFE, said: “SFE has consistently stressed the risk of income tax divergence shrinking the Scottish tax base.
“We have pursued an evidence-based approach on this issue which has now been vindicated by the Institute for Fiscal Studies.
“It is essential that the Scottish government resists calls for even further income tax rises. It may be inconvenient for some, but the data strongly suggests that further tax rises would be counterproductive.
“The government must instead recognise that its divergence policy is not working and take action to begin changing course.
“We recognise that divergence cannot be unpicked overnight, but bringing even some income tax rates more closely in line with the rest of the UK would be a step in the right direction and a clear signal that the Scottish government recognises the concerns of business and its ability to grow, invest and attract and retain talent.”
The IFS analysis, published before the Holyrood budget, said that the UK government had significantly increased the amount of money available to Scottish ministers. However, it warned the mid-term tax and spending plans outlined by Rachel Reeves, the chancellor, would mean this cash injection would dwindle in the coming years.
It urged Scottish ministers to “bank” some of the additional cash and use it to safeguard longer-term projects, such as the ScotWind investment.
A Scottish government spokesman said: “Scotland’s tax policies are grounded in evidence and carefully balance the need to raise revenue with the impacts on taxpayers and the economy.
“Our tax base continues to grow strongly, with data from the RTI PAYE system showing Scotland experienced faster earnings and tax per head growth than the rest of the UK in both 2022-23 and 2023-24.”