What might slower economic growth in Scotland mean for Scotland's income tax revenues?

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Eiser, David (2017) What might slower economic growth in Scotland mean for Scotland's income tax revenues? Fraser of Allander Economic Commentary, 41 (4). pp. 35-45. ISSN 2046-5378

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Abstract

Income tax revenues now account for over 40% of the Scottish resource budget. Under Scotland's Fiscal Framework, the Scottish budget benefits from growth in income tax revenues per capita if they grow faster than the growth in equivalent revenues in the rest of the UK (rUK). Since the beginning of 2015, Scotland's Gross Domestic Product (GDP) per capita has grown significantly slower than the UK's, raising concerns that if this trend continues it may lead to relatively slower growth in the Scottish income tax base and a weaker outlook for the Scottish budget. This paper considers the relationship between GDP per capita and income tax revenues. It argues that, whilst there is a reasonably strong relationship between growth in GDP per capita and tax revenues in the longer-term, the relationship is likely to be significantly weaker in the short-term. Empirically, it finds that whilst Scottish and UK GDP per capita has broadly grown at similar rates between 1999 and 2015, growth in income tax revenues per capita have at times diverged. The paper concludes by considering whether Scotland’s recent slower growth in GDP per capita is likely to continue over the next few years, and, if it does, what this might mean for Scotland's income tax revenues.

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