Chamber and committees

In exhibit 8, you discuss some of the pressures on the Scottish Government. I will not go through them all. While you say that the whole of the UK is impacted by inflation and demand-led spending, in relation to Scotland you mention a real-terms cut in the Scottish Government’s capital block grant over the next five years and a

“slow real-terms growth rate in resource funding through the block grant, at 1 per cent per annum”

over the same period. In previous questions, we have touched on your emphasis on the point that you make in paragraph 54—namely, that

“in the short to medium term, public spending will be the main lever by which it can improve fiscal sustainability.”

What milestones do you expect the Scottish Government to provide? In paragraph 55, you say that the Scottish Government needs to include

“timescales and milestones against which progress will be measured.”

What timescales do you have in mind? Craig Hoy rightly mentioned the £2.6 billion gap in resource funding and the £2.1 billion gap in capital funding that will exist by 2029-30. What kind of milestones are you looking for against which you can measure the Government’s success?

The reason I ask is that the Scottish tax system is bolted on to the UK system. Some of our previous witnesses over the years—Professor Heald is an obvious example—have talked about the fact that the UK system is not progressive. We have seen graphs that show that, for example, when your income reaches a certain level, you lose the child benefit. That applies to one person and not another—blah, blah, blah. How can the Scottish system be made more progressive if it has to interact with a system that is not progressive? Do you get what I am saying? I may not have put it very clearly. With a progressive tax system, everybody thinks that, as earnings go up, their share of tax goes up, but that does not happen. It goes up, it stays level and then it goes down—and we see the same picture in Scotland.

From an audit perspective, how can the system be made more progressive in the Scottish context, given the backdrop that we have to work with?

I will move on to that in a wee second. The reason I am trying to get your view on this is that in paragraph 24 of your report, you talk about the higher rate of tax in Scotland, which begins at £43,663, compared to £50,271 in the rest of the UK. What about the impact of national insurance and tax combined? If you think about it, people earning between those two figures in Scotland will pay 8 per cent national insurance, plus the higher rate of tax at 42 per cent—effectively, a marginal rate of half. However, when their income goes over £50,000, their tax drops, and so the system becomes less progressive. People who earn £51,000 will pay a lower marginal rate of tax than people who earn £44,000. Is that not right?

I know that you are trying not to get too deep into policy matters.

I am keen to let colleagues in, so I will ask about just one other area, which is behavioural change. You have made it clear that some of the taxes that the Scottish Government has levied in recent years have been impacted quite significantly by behavioural change. For example, you talk about that in paragraph 35, where you say

“of a £617 million tax base performance gap, £159 million ... was due to behavioural change ... £320 million was due to differences in how income was distributed ... and £137 million was due to other factors”.

You could maybe tell us what the other factors are, because that is quite a significant amount. When you are looking at that behavioural change, are you looking specifically at income tax, or are you looking at income tax and land and buildings transaction tax?

Hold on. We do not have any control in Scotland over oil prices, but you report mentions

“the sensitivity of the oil and gas industry ... to changes in global oil prices.”

Surely if you are mentioning global oil prices, you need to look at the issue in the round and talk about the impact of things such as the energy profits levy.

It would be good if you could do that. I could understand if it was £5 million, but 22 per cent of the amount that we are talking about is something on which clarification would be appreciated.

Why has behaviour change in relation to LBTT not been looked at?

That concludes questions from colleagues. I have one or two additional questions.

Over the years, I have known a few folk who moved to London, not for tax purposes but for big pay rises, only to find that they had no disposable income after they had paid the horrendous housing and day-to-day living costs. Quite a few of them have returned to Scotland somewhat chastened, having learned that everything is not so wonderful in the UK capital. Yesterday, I read an interesting article that said that, in Haringey, a family with five children would have to earn £88,000 per year to be better off working than they would be living off benefits. In addition, housing costs are significantly higher there in relation to housing benefit.

Given that your report is about the future role of taxes in delivering fiscal sustainability, what impact do you think that the benefit changes that have taken place recently and that will take place as a result of announcements by the First Minister and others will have on tax revenue and fiscal sustainability?

Good morning and welcome to the 34th meeting in 2025 of the Finance and Public Administration Committee. We have one public item on our agenda, which is an evidence session on the Auditor General for Scotland’s report “Financial sustainability and taxes”, published on 13 November 2025. I welcome to the meeting Stephen Boyle, Auditor General for Scotland, and Richard Robinson, senior manager, Audit Scotland.

Before we move to questions, I invite the auditor general to make a short opening statement. Good morning, Auditor General.

It is like someone earning £99,500 and not wanting to be promoted because then they will lose their £12,570 tax-free allowance, for example. That is obviously under UK control, of course.

The statistics that you mention in exhibit 10 are interesting. It was hoped that £65 million would be raised when the additional rate increased and the threshold was lowered in 2023-24, but 83 per cent of that was lost due to behavioural change, leaving only £11 million. The following year, when the top rate was increased, 85 per cent was lost—these are quite significant figures—and effectively only £5 million was brought in. Taxes are being levied that obviously cause some individuals pain, and the money is effectively being lost. I have no doubt that there is an impact on productivity if folk are working fewer hours and so on as well.