John Swinney does not rule out tax hikes in Scotland

First Minister John Swinney has refused to rule out tax increases in next year’s Scottish Budget.

His government has been warned it could face a £1bn funding shortfall if the UK government raises income tax rates in England, Wales and Northern Ireland.

Chancellor Rachel Reeves has fuelled speculation that she is considering such a move, which would lead to an automatic deduction from Scotland’s funding from the Treasury.

Swinney – who last week insisted he would not raise income tax – told MSPs he was waiting to see the “implications” of the UK government budget, which will be announced later this month.

At First Minister’s Questions, Scottish Conservative leader Russell Findlay asked Swinney to give a “cast-iron guarantee” that he would not increase income, business or property taxes.

Swinney said his government would reveal its tax and spending plans when it announced its budget on 13 January.

The Scottish government has used its devolved powers to create what it describes as a fairer, more progressive income tax system.

The first minister said that allowed the government to help fund free university tuition, prescriptions, free bus travel for under-22s and action against child poverty.

He added: “We will bring forward orderly budget provisions which will relate to the tax and spending commitments so that we can fund our public services and fund the investments in the Scottish economy.”

Findlay warned that a tax rise would be a “hammer blow to Scots”.

The Tory MSP said hikes were “unsustainable”, adding: “People deserve to keep more of their hard-earned cash.”

In Scotland, people earning below about £30,300 pay slightly less income tax than they would elsewhere in the UK, with a maximum saving of about £28.

Above that threshold they pay increasingly more as earnings increase. Someone on £50,000 in Scotland pays £1,528 more than they would in the rest of the UK. That rises to £5,207 for someone on £125,000.

Last week, Swinney told a conference organised by the think-tank IPPR Scotland that the government was standing by its commitment not to change income tax rates before the end of the parliamentary term in May next year.

Speculation that the Scottish government may have to increases taxes mounted after Reeves refused to rule out hikes south of the border.

The chancellor pledged that she would do what was “necessary” to protect public finances.

A change to UK income tax – which applies in England, Wales and Northern Ireland – would not directly affect Scottish taxpayers, but an increase would lead to an automatic deduction from the block grant that the Scottish government receives from the Treasury.

That is because the UK government is able to deduct funds from the block grant that it estimates it would have received if tax-raising powers were not devolved to Holyrood.

The Fraser of Allander Institute, an independent economic research unit at the University of Strathclyde, has estimated that a two percentage point increase in the basic rate of UK income tax would lead to a cut of about £1bn in Scotland’s block grant in each of the next three financial years.

Despite this, Swinney has repeatedly called on the UK government to raise income tax, claiming it could raise revenues and negate the need for budget cuts.