Exclusive:Scotland must raise taxes or face spending cuts, new report warns
Future Economy Scotland set out a package of tax reforms to boost revenue
Scottish ministers must raise taxes or make “harmful” spending cuts in the face of mounting financial pressures, experts have warned.
A new report by the think tank Future Economy Scotland (FES) sets out a package of reforms to raise an additional £2.3 billion per year.
It warns growing budget pressures mean current tax revenues will soon be insufficient to sustain existing services, while relying on “efficiency savings” to plug the gap is not credible.
The net zero transition could intensify pressures, the report says.
“Raising the revenue required to fund a just transition therefore means confronting an uncomfortable truth: most Scots will need to pay a little more tax,” it says.
“Without this broader-based approach, Scotland risks a return to harmful spending cuts that would fall hardest on lower-income households and weaken public support for climate action.”
The report recommends increasing income tax by one percentage point on lower and middle bands and two percentage points on the highest three bands, alongside lowering the higher-rate threshold to £40,000 – raising £1.5 billion annually.
It says the “inefficient” council tax and land and buildings transaction tax should be replaced with a “progressive property tax” based on up-to-date property values, with incentives linked to energy efficiency improvements, raising £220 million annually.
Meanwhile, non-domestic rates could be replaced with a “green land value tax”, helping to improve efficiency while raising an additional £482 million annually over time.
The report estimates a “betterment levy on development”, capturing a share of land value increases resulting from planning permission, would raise £75 million per year.
It also advocates replacing air passenger duty with a system that increases charges for frequent flyers.
Hanna Wheatley, a senior economist at FES, said: “Our analysis finds a growing mismatch between the Scottish Government’s ambitions and the capacity of the public finances to deliver them.
“Even maintaining existing services will require additional revenue in the years ahead, and delivering net zero and stronger public services will require significantly more. Relying on ‘efficiency savings’ to close the gap is not credible.
“Sooner or later, Scotland’s politicians will need to have an honest conversation with the public. If we want strong public services and a fair transition to a greener economy, most Scots will need to pay a little more tax. But this must be done in a way that is fair and progressive.”
Juan-Pedro Castro, an economist with FES, added: “The Scottish Government’s use of devolved tax powers to date has amounted to tinkering rather than fundamental reform. Our report sets out an ambitious but credible package of reforms to put Scotland’s public finances on a sustainable path.
“By raising over £2 billion a year, these reforms would help safeguard Scotland’s social contract while supporting the transition to a fairer, greener economy. Replacing inefficient taxes like Council Tax and LBTT will also help create a more productive and dynamic economy. Crucially, all our reforms fall within Scotland’s existing devolved powers.”
A Scottish government spokesman said it had “delivered a balanced budget every year despite the challenging financial environment”.
He added: “The decisions taken to ask higher earners to pay a little bit more – while ensuring most income tax payers are expected to pay less than in the rest of the UK – support vital public services and provide free tuition, prescriptions and the Scottish Child Payment to help tackle child poverty.
“The Scottish Government focuses resources to support strategic priorities whilst maximising opportunities for economic growth, embedding a strategic approach to tax and reforming public services.”
Last week, the Fraser of Allander Institute urged political parties to “ be honest” with the electorate over the scale of the financial challenges facing Scoland.
The think tank, based at the University ot Strathclyde, warne dof the need for stark choices by whoever takes power after May’s Holyrood election.
It highlighted issues in health, social care, justice and post-school education finances to be tackled by the next administration.
Also last week, the Institue for Fiscal Studies think tank warned the Scottish government would struggle to pay for its flagship policies unless it finds ways to increase tax revenue and improve public service delivery.
The think tank found higher funding relative to England was the main factor allowing Scotland to have more generous public services, including smaller class sizes and free personal care services.
However, it said the funding advantage had decreased considerably in recent years.
The economists found the Scottish government received 26 per cent more per resident for devolved public services than was spent on comparable services in England in 2024-25.
That is down from 32 per cent in 2019–20, with the figure forecast to drop to 23 per cent by 2028-29.
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