Scotland’s tax receipts could be unprotected if coronavirus hits the country’s economy harder than in the rest of the UK, a think tank has said.
Under the terms of the Smith Commission in 2014, the UK Government will offset any drop in tax revenues due to an “economic shock” by increasing annual funding sent to Scotland, a new article from the Fraser of Allander Institute states.
But funding will only be provided in line with the shock felt in the rest of the UK, it says, meaning Scotland’s finances could be depleted if Covid-19 has a more detrimental effect in Scotland than the rest of the UK.
In recent weeks, First Minister Nicola Sturgeon has said she is open to straying from the UK response on the virus in terms of reopening businesses and schools.
The think tank said: “Whilst the Scottish budget is protected against the risk of fiscal shocks that impact Scotland in proportionately the same way as the UK, it is not insured against the risk that the virus might have a disproportionate fiscal impact on Scotland.
“So far there is no indication that the health impact of the virus will be higher in Scotland than in the UK as a whole – although it is early days and Scotland is believed to be two to three weeks behind London in terms of the health incidence so this could change.”
The article states there could be a decline in Scottish income tax revenues if the economy is more reliant on sectors that have been shut down, such as tourism and retail, than the rest of the UK.
The article adds revenues could decline if the rest of the UK rescinds lockdown orders earlier while some sectors of the economy continue to remain closed in Scotland.
The think tank said a drop in oil prices and job losses in the North Sea could add to a shrink in tax revenues.
The article points to a reduction in tax receipts during the downturn of 2014, when the oil price fell from 110 dollars a barrel to 40 dollars in 12 months, resulting in revenues growing at a quarter of the rate experienced in the rest of the UK.
Despite the warnings, the think tank said it is unlikely the effects of the coronavirus will be seen in this financial year.
It also called for the Scottish Government to provide “regular and comprehensive updates about changes to its funding position, its spending decisions and the evolving budgetary risks” as a result of the outbreak.
Support The Courier today.
The Courier is committed to delivering quality content to our communities and right now that’s more important than ever — which is why our key content is free. However, you can support us and access premium content by subscribing to The Courier from just £5.99 a month. Because Local Matters.Subscribe