Derek Mackay will have an increased Budget next year, Scotland’s leading economic think-tank confirms today, making it far harder for the Finance Secretary to justify any tax increases.

In its latest economic commentary, the Fraser of Allander Institute also says the Scottish economy is on track to grow at its fastest rate since 2014. Provided there is not a chaotic Brexit, the backdrop is the most auspicious for Mr Mackay since he was put in charge of the finance brief four years ago.

READ MORE: Derek Mackay urged to pass on £1.6bn of UK funding to public services 

The upbeat forecast adds to the pressure on the Finance Secretary not to widen the income tax gap with south of the Border when he proposes the higher rate threshold for 2019/20.

Chancellor Philip Hammond has announced the threshold will rise to £50,000 in April.
In Scotland, it is currently £43,430, and if held steady or increased by inflation alone, someone on £50,000 in Scotland will pay £1,350 more than their English counterpart.
The Tories have pushed Mr Mackay to follow the Chancellor’s lead, but Mr Mackay has so far refused to do so, saying now is not the right time to give tax breaks to the better off. 

Mr Mackay is under pressure from the Scottish Greens, who back higher income tax and supported the minority SNP government in the last two Budgets, to start overhauling council tax and give more money to councils. 

But in a move likely to antagonise the Greens, it emerged yesterday that Mr Mackay has bowed to pressure from big business, and intends to shelve a so-called “Amazon tax” on big out-of-town and online retailers. 

The council-set business rates surcharge was to have been piloted in three local authorities, with the money raised invested in struggling town centres, but the idea was fiercely opposed by retailers and business leaders.

However, the Scottish Government has dropped it in favour of the Chancellor’s plan for a £400 million UK-wide “digital services tax”.

SNP ministers failed to warn councils of the change before it was revealed in the media, leading to anger among local authorities. 

The Fraser of Allander says the outlook for the Scottish Budget next year has improved thanks to two significant “windfalls”, but says one of these relies on the current tax gap.

First, UK spending increases that generate “consequentials” for Holyrood through the Barnett funding formula and Mr Hammond raising the higher rate threshold for income tax  –  a tax cut for higher earners south of the Border – leaving Scotland about £200m relatively better off. 

David Eiser, of the Fraser of Allander, said some of the windfall was likely to off-set traditionally gloomy forecasts of the Scottish Fiscal Commission, which determine the scope of the Budget, but added: “Even so, the Budget in 2019/20 is likely to end up slightly higher than it was the previous year.”

John Macintosh, tax partner at Economic Commentary sponsor Deloitte, said: “As the country’s productivity growth continues to struggle, it is vital Scotland is seen as an attractive place for people and businesses. 

“We have an ageing population, a shrinking working age population and it is crucial for our future that we do not deter people from choosing to come to Scotland.”

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “We are confident this Budget will reflect the ambitions and aspirations of Scotland’s business communities. A competitive business environment is more important than ever before and companies need unequivocal signals that Scotland is open for business.”

Fraser of Allander director Graeme Roy said its Scottish growth forecasts of 1.4, 1.5 and 1.4% for the next three years were based on an orderly Brexit.

He said a No Deal would be “a substantial economic shock” and many businesses in Scotland were “ill-prepared for such a disruptive change”.

Tory MSP Murdo Fraser said the SNP had been warned its Amazon tax was too “complicated and expensive” for months, adding: “The SNP Government have now been forced in to another embarrassing u-turn. They must now use the Scottish budget to support business and hardworking Scottish taxpayers.”

David Lonsdale, director of the Scottish Retail Consortium, called for business rates parity with England, and no more tax rises.

He said: “If it is true Scottish ministers are scrapping a new rates levy on out of town and online businesses that is hugely welcome and positive. It would suggest the Finance Secretary has listened to the retail industry and the growing chorus from across business and commercial life who have spoken up against this costly and complex new tax.” 

The Government said it was still considering business rate options. 

A spokesperson said: “We are currently considering consultation responses on the recommendations of the Barclay Review [on business rates], including a proposal to introduce a pilot scheme allowing councils to charge a modest business rates supplement to online or out-of-town businesses in up to three towns. 

“The consultation, which closed in September, also sought views on appropriate safeguards for this scheme and a decision will be made following full analysis of the responses.”