A potential new income tax band on high earners will raise “nowhere near enough” to dent a £1.5billion black hole in the Scottish Government’s finances, economists have warned.

In a new report today, the respected Fraser of Allander Institute says “significant spending cuts” will also be required in Humza Yousaf’s first budget next week.

It said inflation and policy choices such as generous public sector pay deals, a council tax freeze and £100m to cut NHS waiting lists had contributed to a £1.5bn shortfall for 2024/25.

Of this, some £800m was in day-to-day resource spending, while £700m was in capital expenditure needed for building projects and infrastructure maintenance.

Without extra funding from Westminster the picture was “extremely challenging”.  

The Scottish Government yesterday refused to deny a report in the Times that Mr Yousaf’s cabinet had agreed to introduce a sixth income tax band aimed at high earners.

The First Minister previously expressed interest in a proposal from the STUC to create a 44p band on earnings between £75,000 and the £125,140 additional rate threshold.

Research commissioned by the trade union group suggested this could raise £200m a year.

However the Fraser of Allander estimated the true figure would be £41m once “behavioural responses”, such as people declining extra work to avoid paying it, were factored in.

It said 135,000 people would have to pay such a tax, around 100,000 of them earning up to £125,140 and the 35,000 who earned more.

Deputy director João Sousa said: “A new 44p rate above £75,000 will raise around £40m - not insignificant of course, but nowhere near sufficient to balance the books.”

The idea of creating a new band was also criticised by former SNP finance secretary Kate Forbes, opposition parties and business leaders.

Anyone earning less than £27,800 in Scotland currently pays a few pounds less in income tax than their counterparts south of the border.

However, anyone earning above £27,800 pays more, with someone earning £50,000 in Scotland paying around £1,500 more than in England and Wales.

If a sixth band is added on the STUC model, someone earning £100,000 in Scotland would be some £3,600 worse off than in England.

Deputy First Minister and finance secretary Shona Robison, who will deliver the budget on Tuesday, refused to deny there would be a new band when asked by the media at Holyrood.

The Fraser of Allander said the budget was expected to be one of the toughest of devolution.

Ms Robison first said in May the spending gap would be around £1.5bn.

The Institute said this later shrank to around £600m thanks to improved tax data and spending cuts and deferrals, but other commitments had pushed it back up to £1.5bn.

These included public sector pay deals, which Ms Robison said were £800m more than expected, and a council tax freeze estimated to cost more than £300m.

The economists also said the Scottish Government’s attempt to save money now by deferring spending to future years was only storing up trouble, and such savings were “more than likely to be permanent” unless substantial extra money could be found.

Institute director Professor Mairi Spowage said: “This large funding gap will mean difficult choices for the Scottish Government on what to prioritise. 

"The Deputy FM may choose to use powers over income tax to raise more revenue to plug this gap, but it is unlikely that this would be sufficient in isolation.

“Significant spending cuts are also likely to be required – the Deputy FM has the unenviable task of choosing where the axe will fall.”

Tory MSP Liz Smith said: “This eye-watering report only highlights the SNP’s astonishing mismanagement of Scotland’s finances. All the signs are pointing towards Humza Yousaf trying to tax his way out of an ever-growing financial black hole.

“That would be naïve in the extreme and as the Fraser of Allander point out, a new higher tax band would barely make a dent in that deficit.

“Coupled with savage cuts to frontline services that are already buckling on the SNP’s watch this would represent a devastating blow to the prospects of growth in Scotland’s economy.”

Speaking to ITV Border, Ms Forbes cautioned against a complicated sixth tax band on high earners, while England and Wales has a simpler and less expensive three-band system.

She said: "I personally don’t think that it delivers additional revenue. It’s very difficult to protect against behavioural change when it comes to increasing income tax.

“We already have significantly increased tax rates and bands here in Scotland and therefore I think we have to be very careful about not ultimately reducing public revenue with what we do with our rates and bands.”

In a public letter, business leaders urged the SNP-Green Government to "avoid measures in the budget that may make Scotland less competitive, particularly in relation to any decisions on income tax rates and thresholds".

The signatories, who included Scottish Financial Enterprise, the Scottish Chambers of Commerce and the Institute of Directors, said they were concerned about “further divergence with the rest of the UK”.

They warned it coud “damage business confidence, remove money from the real economy, disincentivise investment in Scotland and inhibit our ability to create jobs and attract and retain the talent our economy and society needs".

A Scottish Government spokesperson said: "The Deputy First Minister has been very clear Scotland is facing one of the most challenging budget settlements since devolution as a result of sustained high inflation and a UK Government Autumn Statement that failed to deliver the investment needed in Scotland's public services. 

“The Scottish Budget will [be] outlining the tough choices that have been required to target funding at our three key missions – equality, community and opportunity.”