Decorative - picture of the budget document

Scottish Budget 2023-24: Pulling the income tax lever

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This is an initial blog analysis of the 2023-24 Budget. More detailed SPICe briefings and additional blogs will follow in due course.

This is an extended blogpost, so we’ve added a contents popout here to make navigation easier.

Yesterday, the Deputy First Minister and interim Cabinet Secretary for Finance, John Swinney MSP, presented the Scottish Government’s tax and spending plans for 2023-24 to the Parliament. Detailed SPICe briefings and infographics will follow, but the overall spending numbers presented in the budget document for 2023-24 compared to this year (2022-23) are shown in the following infographic. 

Infographic showing make-up of Scottish Budget. otal Managed Expenditure (TME) comprises Resource, non-cash Resource, Capital and Annually Managed Expenditure (AME), and totals £59.8 billion in 2023-24.

Resource (which covers day-to-day expenditure) and Capital (covering infrastructure expenditure) are the elements of the budget over which the Scottish Government has discretion. As we can see from the chart, Resource is due to increase by 3.7% in real terms in 2023-24 and Capital is set to fall by 2.9% in real terms.

Total Managed Expenditure (TME) comprises Resource, non-cash Resource, Capital and Annually Managed Expenditure (AME), and totals £59.8 billion in 2023-24.

Resource (which covers day-to-day expenditure) and Capital (covering infrastructure expenditure) are the elements of the budget over which the Scottish Government has discretion. As we can see from the chart, Resource is due to increase by 3.7% in real terms in 2023-24 and Capital is set to fall by 2.9% in real terms.

AME is expenditure which is difficult to predict precisely, but where there is a commitment to spend or pay a charge, for example, pensions for public sector employees. Pensions in AME are fully funded by HM Treasury, so do not impact on the Scottish Government’s spending power. Non-Domestic Rates are also classed as an AME item in the budget and form part of local government spending.

These plans were underpinned by Scottish Fiscal Commission (SFC) forecasts for economic growth and devolved tax revenues and social security spend. As explained in our blog earlier this week, SFC forecast judgements are key to determining the size of the initial Scottish spending envelope in 2023-24.

Let’s look at these judgements. 

SFC forecasts

Inflation continues to cause economic havoc

On a day when the Bank of England increased interest rates by 0.5 percentage points to 3.5%, in a move designed to reduce inflationary pressures in the economy, the SFC reiterated the impacts of inflation across all areas they forecast.

Higher energy costs have fed through to general inflation. The SFC, like the Office for Budget Responsibility (OBR) for the UK, now judge that Scotland has entered a recession which will last for six quarters, with a total fall in GDP of 1.8%. Indeed, the SFC are now not expecting the Scottish economy to return to pre-pandemic levels until Q3 2025 as a result of recession followed by slow growth.

Because of this, the SFC forecasts that Scottish households can expect to see the biggest real-terms (inflation adjusted) fall in their disposable income since Scottish records began in 1998.

As has been widely discussed, this inflationary pressure feeds through to government spending, especially in areas like public sector pay where the Scottish Government faces demand for higher public sector wages.

With inflation pushing up earnings across the economy, there have, on the plus side, been upward revisions to the SFC’s income tax forecasts compared to previously.  With income tax thresholds frozen, wages growth pushes taxpayers into higher tax brackets.  However, wages, and thus tax receipts, are still not growing fast enough to offset the impacts of inflation, which the SFC expects to peak at 11% in Q4 of 2022.

A quick note on inflation measures

As we set out in our briefing on the resource spending review, when we talk about “real terms” figures in the Budget, and in public spending in general, we generally use the GDP deflator to calculate the real terms figures.  This is standard practice because the GDP deflator normally better reflects changes in the prices of goods and services that governments purchase, in contrast to the Consumer Prices Index (CPI), which is designed to capture changes in consumer prices.  But, as the Budget states:

“While the GDP deflator is the usual comparator for analysing real terms changes in public spending, as highlighted by the OBR and SFC, it may not fully capture the inflationary pressures faced by the public sector in the current environment.”

At the moment, the gap between the GDP deflator and the CPI measure of inflation is wider than normal, so the impact of this differential is greater than would normally be the case. This is because the current high CPI inflation is being driven by high energy prices which is an import cost, not covered by the GDP deflator.  

As the Government has done, SPICe will continue to use the GDP deflator. However, this wider point should be noted when looking at real terms analysis.

Tax policies

The key lever the Scottish Government has for increasing the size of the Scottish budget is tax policy, in particular income tax policy. So, what has been proposed?

Income tax

In his Budget speech, Mr Swinney was keen to emphasise the “choice” the government was taking on tax to fund public services, and the Scottish Government is now proposing to increase the divergence between Scotland and the rest of the UK (rUK).

For 2023-24, the Cabinet Secretary announced his intention to increase the higher and top rate of Scottish income tax to 42p and 47p respectively. As well as widening the gap in the top rate of tax (now 47p compared with 45p for the additional rate in rUK) he also opted to replicate the rUK policy of lowering the threshold at which the top rate is payable from £150,000 to £125,140. The Scottish Government also plans to increase the higher rate of income tax from 41p to 42p (compared to 40p in rUK) and freeze other thresholds.  The combined impact of all these changes, according to the SFC, is an additional £129 million in income tax revenues next year (after taking account of any behavioural changes that might result).

The amount by which SFC forecasts are higher than the Block Grant Adjustment (BGA) removed from the Budget (see an earlier blog for more details) results in what is known as the net income tax position.

The net income tax position for the Scottish budget is now much improved on previous SFC forecasts. This is due to a combination of the above-mentioned policy divergence, but also revised data and shifts in the relative economic outlook with the UK since the last forecasts were produced.  However, the SFC note that the position is highly sensitive to economic forecasts which, in turn, are subject to particular uncertainty at the present time.

With a net income tax position of £325 million, this is a welcome boost for the Scottish Budget. In other words, income tax revenues are expected to exceed the amount removed from the Scottish Budget for income tax devolution by £325 million. However, it is important to note that in return for this extra resource, Scottish taxpayers are paying £1 billion extra in taxation than they would be under the rUK income tax policy, reflecting the slower growth in the Scottish tax revenues (per head) since income tax was devolved in 2017-18.

What do these changes mean for individual income taxpayers?

The Scottish Government’s income tax proposals mean that all taxpayers earning below £27,850 will pay less income tax in Scotland than they would if they lived elsewhere in the UK.  However, the differences are small for this group of taxpayers – only £22 per year.  For those earning above this amount, the gap between what they pay in Scotland and what they would pay elsewhere in the UK widens rapidly as earnings increase.  Those earning £50,000 will pay around £1,500 more in Scotland than they would elsewhere in the UK, while someone earning £150,000 will pay almost £4,000 more over the year.

otal Managed Expenditure (TME) comprises Resource, non-cash Resource, Capital and Annually Managed Expenditure (AME), and totals £59.8 billion in 2023-24.

Resource (which covers day-to-day expenditure) and Capital (covering infrastructure expenditure) are the elements of the budget over which the Scottish Government has discretion. As we can see from the chart, Resource is due to increase by 3.7% in real terms in 2023-24 and Capital is set to fall by 2.9% in real terms.

Other tax policies

In terms of the other devolved tax powers, Mr Swinney proposed no change to the main residential and non-residential tax rates and bands next year. He did propose an increase to the Additional Dwelling Supplement (charges on purchases of second homes) from 4% to 6%, raising an additional £34 million in revenue next year. The intention is for this to be introduced for contracts entered after 16 December 2022.

On Non-domestic rates (NDR), the Cabinet Secretary proposed a freeze to the Basic Property Rate, ensuring that “Scotland has the lowest poundage in the UK for the fifth year in a row and is forecast to save ratepayers £308 million compared to an inflationary increase.”  For NDR payers, bills next year will also be affected by the revaluation of non-domestic properties and (for smaller properties) changes to the Small Business Bonus Scheme.  Transitional relief schemes have been announced to limit the impact of these changes on individual properties.

The Cabinet Secretary also announced an intention to use NDR as a vehicle for incentivising investments in renewables through the introduction of new prescribed plant and machinery exemptions for onsite renewable energy generation and storage.


We turn now to the budget choices of the Scottish Government, and how they propose to distribute the public spending envelope highlighted at the start of this blog. We will cover this is more detail in our upcoming Briefings and spreadsheets, but a summary is provided below.

What are the Budget priorities?

The Budget states that the Government’s priorities are:

  • eradicating child poverty
  • transforming the economy to deliver a just transition to Net Zero
  • providing sustainable public services.

These priorities are similarly worded to those set out in the 2022-23 Budget and the Resource Spending Review.  But what is interesting to note is the change of emphasis in relation to child poverty – from “reducing” to “tackling” to “eradicating”, and on public services, from “protecting and rebuilding” to “excellent” to “sustainable” across these three documents.  The change of emphasis may well be due to the much-changed economic circumstances since December 2021.  But this is something committees may wish to return to in their year-round scrutiny of the government’s spending plans.

The opening chapters of the Budget 2023-24 set out a range of policy interventions and funding allocations under each of these priorities.  SPICe will return to these in more detail in briefings to come.  But on the spending side most notable again is the priority given to health (covered below).

The budget document states that: “The Scottish Budget directs spend in a way that promotes the 11 outcomes of the National Performance Framework (NPF) and its overall purpose.” In a continuation of the approach of the last two years, each portfolio includes a table on “intended contribution to the national outcomes”, split into “primary” and “secondary” outcomes. This is a useful overview, as far as it goes. However given the high level nature of both the outcomes and the portfolios, it is questionable how useful this will be for scrutiny. 

An addition in Budget 2023-24 is the “Climate Change Assessment of the Budget”. This complements the existing taxonomy assessment of the capital budget and the carbon assessment of the budget with a narrative section highlighting spending across portfolios which will contribute to the Scottish Government’s aims for achieving a just transition to net zero. This addition has been informed by the Scottish Government and Parliament’s ongoing Joint Budget Review, which aims to improve the transparency and scrutiny of spending decisions from climate perspective.

Health a Budget priority again

As in previous budgets, the health and social care budget has received significant additional resource.  It grows by 6.2% (2.8% in real terms) in 2023-24. This represents over £1 billion in additional funding and goes beyond the Scottish Government’s commitment to pass on any additional funds that it receives as a result of increased UK government spending on health.  With the pay offer currently on the table for 2022-23 costing an additional £515 million relative to the initial plans for 2022-23, a significant proportion of this extra funding will be absorbed by additional pay costs.  There is also a commitment to increase pay for adult social care workers to £10.90 per hour, which comes at an estimated cost of £100 million.

There has been much criticism of the lack of clarity around the potential costs of the proposed National Care Service (NCS), including from the Parliament’s Finance and Public Administration Committee.  The budget document states that funding has been included in the budget for 2023-24, but it is not clear how much has been set aside for the NCS, as NCS funding is included under the broader heading of ‘National Care Service / Adult Social Care’.  This adds further to the lack of clarity around funding for this flagship policy. 

Social security  

Social security again will see spending increases which exceed the size of the BGA added to the Scottish budget from the UK government’s equivalent spend in 2023-24, and the SFC are forecasting that this will increase in subsequent years of the forecast period. This reflects policy decisions around disability benefits and the increase in both the payment amount and eligibility for the Scottish Child Payment.

The SFC expects Social Security spend to be £0.8 billion above the BGA next year and rise to £1.4 billion more than the BGA by the end of the forecast period in 2027-28.  

In line with the approach taken by the UK Government, the Scottish Government will increase all Social Security benefits over which it has control by the rate of inflation in September of 10.1%.

Local government 

The Deputy First Minister announced that local government will receive an additional £550 million next year in its settlement from the Scottish Government. Although this sounds like a substantial increase – and it is – it still falls short of the £1 billion that COSLA and CIPFA Directors of Finance argued is needed to address the multiple challenges councils are facing. At the time of writing, COSLA has yet to respond to today’s Budget announcement.

In his statement to the Parliament, Mr Swinney mentioned discussions around councils having more flexibility in how they spend their money. However, it is not immediately obvious from the Budget document that there has been any reduction in ring-fencing compared to previous years. Again, this is an issue which COSLA and others will likely explore in the coming weeks and months.

One area where councils will certainly have flexibility is in their ability to increase the Council Tax rate. Over much of the past 15 years, the Scottish Government has sought local government’s agreement to freeze or cap Council Tax. Last year, however, the Cabinet Secretary for Finance and the Economy lifted the freeze stating that councils would have “complete flexibility to set the Council Tax rate that is appropriate for their local authority area”. BBC Scotland published analysis earlier this year showing that all councils, except Shetland, opted for an increase. Mr Swinney again confirmed he would seek no freeze in 2023-24. Therefore, councils must now make the very difficult decision about whether to increase taxes on households already facing hardships and squeezed disposable incomes.

Public sector pay policy and public service reform parked for now

Given the ongoing pay negotiations, the Cabinet Secretary announced that there would not be the usual public sector pay policy document accompanying the Budget.  Given that public sector pay accounts for over £22 billion in spending each year, the lack of a clear position on pay in next year’s budget represents a significant area of uncertainty.

Likewise, previously planned intentions to outline public service reform plans alongside the Budget were a notable omission with the Cabinet Secretary telling Parliament:

“the requirements for public sector reform, set out in the Medium Term Financial Strategy and the Resource Spending Review, will be ever more required in this context and the Government will set out further plans in due course. We will take forward an agenda consistent with the principles of the Christie Commission with a significant emphasis on early intervention and prevention as we work to create person-centred public services.

What next?

We now move to the Parliamentary scrutiny phase of the Government’s budget proposals, where Committee and plenary discussions will focus on weighing up these plans. MSPs have a crucial job in raising questions around whether these are the right choices for delivering the outcomes politicians of all parties want to see.

In light of the Scottish Government and Green Party agreement, this Budget will very likely pass without the need for any post-publication, cross-party horse-trading. However, parliamentary scrutiny and questioning of these proposals is no less important.

Ross Burnside, Allan Campbell, Andrew Feeney-Seale, Nicola Hudson and Greig Liddell, Financial Scrutiny Unit