How to pay for a Minimum Income Guarantee
On behalf of the independent Minimum Income Guarantee Expert Group, WPI Economics delivered a report which provides key recommendations around how the revenue could be raised to pay for a Minimum Income Guarantee.
Executive Summary
Introduction
The independent Minimum Income Guarantee Expert Group is developing a road map for providing a Minimum Income Guarantee (MIG) in Scotland and the immediate, intermediate and further steps that are necessary to deliver a MIG. This will form a report and set of recommendations made to the Scottish Government.
The aim of a MIG is to provide a universal guarantee of financial security achieved through an income floor beneath which no one would be allowed to fall. The vision for a MIG in Scotland is not just about increasing the generosity of the social security system, but a wider set of mutually supportive areas including improving the fairness of the labour market, the availability and affordability of key services and action to regulate the cost of essentials.
The Scottish Government would need adequate devolved powers to deliver and implement a MIG. In particular, further devolution of revenue-raising powers would be especially important in order to meet the increased spending needs for the Expert Group’s proposed changes to Scotland’s social and fiscal policy from implementing a MIG.
This summary report provides an overview of Scotland’s existing revenue-raising context and an analysis of some of the revenue-raising options that are available to pay for a MIG, and the degree of devolved powers needed at different stages of a MIGs implementation journey. It then concludes with key recommendations the independent Expert Group should consider when recommending revenue-raising options to pay for a MIG.
How much will a MIG cost?
The Expert Group has mapped a potentially staged approach to implementing a MIG scheme in Scotland. This would see a MIG gradually rolled out, taking into account the feasibility of implementing aspects of a MIG in the short term, before increasing the scope and scale of the scheme over the longer term. As the scope and scale of the scheme increases, so will how much additional revenue would be needed to pay for a MIG.
This staged roll out will be tied to the powers available to the Scottish Parliament, with nearer term steps tied closely to the existing political settlement, with longer term steps needing further and more extensive devolved powers. This includes the extent of devolved powers over taxation.
In Table 1 we set out a three-staged approach to funding a MIG, the lower and upper estimates for the cost of providing a MIG at these different stages (as determined by the Expert Group) and the revenue-raising powers Scotland could use to raise additional revenue at different stages. This three-staged approach forms the basis of our analysis of a selection of different possible scenarios.
| Stage | Expected MIG design | Expected timeframe | Lower revenue-raising target | Upper revenue-raising target | Revenue-raising powers and context |
|---|---|---|---|---|---|
| 1 | Likely to focus on building the ‘Guarantee’ element of the MIG. | 2 years + | £0.3bn | £1bn | Changing the rates, thresholds and exemptions for the taxes which the Scottish Government currently has powers over. |
| 2 | Likely to focus on strengthening the ‘Guarantee’ element of the MIG for specific at-risk groups. | 5 years + | £1bn | £2.5bn | Creation of new local taxes or gaining consent of UK Government for further devolution to existing powers or new national taxes. |
| 3 | Likely to focus on the Scottish Government implementing a ‘full’ MIG through reforms to social security, labour market policy and essential services and costs. | 10 years + | £2.5bn | £10bn | Scottish Government having significant or full control over most taxes, through extensive devolution or change to constitutional arrangement. |
Scotland’s current revenue-raising powers
As of 2024, the Scottish Government receives or collects fiscal revenue from three primary sources: devolved Scottish taxes; funding from the UK Government through the Block Grant; and borrowing (which is limited by the Fiscal Framework agreement between the UK and Scottish Governments).
The Block Grant is the most significant of the three sources of fiscal revenue, with Scotland receiving £47.6bn in funding from this source in 2025-26.[1] By comparison, £24.6bn is forecast to be raised from devolved taxes in 2025-26.[2] Scottish Income Tax is the biggest revenue source amongst devolved taxes, accounting for 83% of the total revenue from devolved taxes in 2025-26.[3]
As of 2024, devolved taxes fall under three categories:
1. Full powers: The Scottish Government has full powers over setting the rates, thresholds and exemptions for the following taxes: Land and Buildings Transaction Tax (which replaced UK Stamp Duty Land Tax); Scottish Landfill Tax (which replaced UK Landfill Tax); council tax; and non-domestic rates.
2. Partial powers: The Scottish Government can set rates, thresholds and create new tax bands for Scottish Income Tax applied to non-savings and non-dividend income. However, the Scottish Government does not have powers over the tax regime for income from savings and dividends, and also cannot change the level the personal allowance is set at. Unlike the fully devolved national taxes, Scottish Income Tax is administered and collected by HMRC not Revenue Scotland.
3. Yet to be implemented: The Scotland Act 2016 also fully devolved powers to the Scottish Government for Air Departure Tax (to replace Air Passenger Duty) and Scottish Aggregates Tax (to replace the Aggregates Levy), and legislated for VAT assignment for Scotland. Scottish Aggregates Tax is due to come into force in April 2026, whereas Air Department Tax and VAT assignment are yet to be implemented.
In addition, the Scottish Government has the powers to create new local taxes (administered by local authorities) and can request new national devolved taxes to be created with the consent of the UK Government. The proposed introduction of a new Scottish Building Safety Levy to provide funding for remediating buildings fitted with unsafe cladding is an example of the Scottish Government using this power.[4]
UK and Scottish tax policy in international context
Paying for a MIG will require an increase in Scotland’s tax take in both the nearer and longer term. Despite the Office for Budget Responsibility forecasting the UK’s tax-to-GDP ratio will reach a ‘historic high’ of 37.7% of GDP in 2029-30, this is still comparatively low compared to other G7 countries and the ‘EU 14’ of Western European countries.[5] In addition, the UK ranks 18th out of 38 OECD countries in terms of the tax-to-GDP ratio.[6]
As a result, many countries with advanced economies raise considerably more tax than the UK, in part to pay for more generous social security systems. In previous research for the Expert Group, we explored the different MIG-type schemes of eight European countries: Belgium, France, Italy, Malta, Netherlands, Poland, Spain and Sweden.[7] Although this is only a small sample of countries with a MIG-type scheme, it is notable that all of those countries have tax-to-GDP ratios consistently above both tax-to-GDP ratio of the UK and the OECD average.
Institute for Fiscal Studies research has noted some key differences between the UK and countries with a higher tax burden:[8]
1. Greater revenue is raised through social security contributions, especially from employers.
2. Personal taxes are often levied less progressively in higher-tax European countries than is the case in the UK. Median earners in higher-tax European countries often pay a higher rate of income tax and social security contributions than is the case in the UK.
3. The standard VAT rate in the UK is below the European average and the UK has a narrower VAT base than most other countries because it applies zero rates more widely.
Previous analysis of OECD data has also found the UK’s tax system differs to other OECD countries by: having less focus on taxing corporate income, gains and profits than the OECD average; having a greater focus on property taxes than the OECD average; raising remarkably little from local government taxation compared to most OECD countries; and having lower levels of disposable income than high tax countries in the OECD such as France, Germany and the Nordic countries.[9]
International comparisons are helpful to illustrate what is possible when considering the tax base, rates and thresholds across different types of taxation, but do not necessarily provide the exact model a future Scottish tax system needs to follow.
Possible revenue-raising options
There are a wide range of revenue-raising options that are open to the Scottish Government across different taxes, all requiring different levels of devolved powers. In the main report we outline the full range of options across different types of taxes as they were grouped under the Mirrlees Review, including: income tax; National Insurance contributions (NICs); council tax; business taxes; wealth and capital taxes; Value Added Tax (VAT); and other indirect taxes.[10]
From this full-range of options, seven scenarios were selected for detailed assessments. These scenarios were selected as they cover the most significant tax bases that the Scottish Government potentially has at its disposal, across both the nearer and longer term.
For each of these scenarios we explore: the overall purpose of the option; delivery and implementation considerations including administrative feasibility, political desirability and policy viability; static estimates of the expected additional revenue raised from the scenario; the distributional impacts (in cash and proportional terms) of the scenario across income decline; and the anticipated wider impacts from economic theory and expected behavioural changes.[11]
Table 2 summarises details of the scenarios that were assessed alongside estimates of each scenario’s revenue-raising potential and distributional impact.
| Revenue-raising options | Scenario under consideration | Total additional revenue expected per year[12] | Distributional analysis | Stage of powers required |
|---|---|---|---|---|
| Scenario 1: Reducing Scottish Income Tax thresholds | Reducing the Higher Rate threshold to £40,000. AND Reducing the Additional Rate threshold to £58,285. | £672m | Reducing these Scottish Income Tax thresholds would have a progressive distributional impact, with the 9th and 10th income decile seeing a greater than 1.2% and 1.3% proportional change in disposable income respectively, whereas the bottom five income deciles see a less than 0.2% proportional change. | Stage 1 |
| Scenario 2: Changing the council tax ‘multipliers’ | Increasing council tax across a five-year period by:
|
£163m (Year 1) £242m (Year 2) £322m (Year 3) £406m (Year 4) £497m (Year 5) | In cash terms, the reform has a progressive impact with those in higher income deciles contributing more of their average disposable income across the five-years of the policy. However, the policy has a more mixed proportional impact. In each of the five years, the impact on those in the lowest income deciles is greater than those in the highest income decile. Yet across the five years of the policy, the impact falls the greatest on those in 7th, 8th and 9th income deciles. | Stage 1 |
| Scenario 3: Reducing the Scottish Income Tax personal allowance | Reducing the Scottish Income Tax personal allowance by £5,000 from £12,570 to £7,570. | £2.68bn | The impact of a reduction in the Scottish Income Tax personal allowance would be considered progressive in cash terms with the greatest cash impact falling on those in the 8th and 9th income deciles. Proportionally, however, the impact of the reform falls most heavily on the middle of the income distribution. | Stage 2 |
| Scenario 4: Expanding Scottish Income Tax to dividends and savings | Applying Scottish Income Tax rates, bands and thresholds for earned income to income from savings and dividends. | £81m | Both the cash and proportional impact of this reform falls almost entirely upon those in the 10th income decile. However, only 16% of people within the highest income decile are impacted suggesting that even amongst the highest earners a majority of people still derive their income through earnings. | Stage 2 |
| Scenario 5: Increasing NICs rates | Increasing the main employee rate, employee rate above Upper Earnings Limit and employer rate by 1ppt.[13] | £1.38bn | An increase in employer and employee NICs rate has a progressive impact in both cash and proportional terms. The decile-by-decile impact especially strong between those in the 9th and 10th income decile, with the cash impact almost doubling from -£11.37 to -£21.44. | Stage 3 |
| Scenario 6: Increasing and broadening the VAT base | Increasing the standard and reduced rate of VAT by 1ppt. AND Scrapping the zero rate and setting this at the new reduced rate. | £891m | Increasing and broadening VAT is regressive, with the impact felt more strongly the lower down the income distribution. Consumers in the bottom five income deciles experience an increase in household spending on VAT by over a quarter. The proportional impact of the policy is felt the least by the top two income deciles. | Stage 3 |
| Scenario 7: Increasing excise duties | Increasing fuel, alcohol and tobacco duties by 10%. | £189m | The regressive nature of increasing exercise duties is highlighted by all income deciles experiencing a 10% proportional increase in spending. In cash terms, this has a particularly significant impact on the upper half of the income distribution. | Stage 3 |
The scenarios presented in Table 2 are just some of the ways the taxes we have explored could be reformed. However, these scenarios suggest that securing additional revenue from Scottish Income Tax, council tax, NICs, VAT and excise duties can make a significant contribution to the short, medium and long term revenue-raising targets of a MIG:
- In the short term, implementing our modelled reforms to Scottish Income Tax and council tax could generate an additional £835m per year in revenue.[14] The Scottish Government already has the powers to make these changes, and the scenarios we assess would raise 84% of the £1bn upper estimate for a MIG’s initial stage.
- In the medium term, if the Scottish Government was to ‘complete’ Scottish Income Tax devolution by securing powers over the personal allowance and applying the Scottish Income Tax regime to savings and dividends income, it could generate around £3.75bn per year in additional revenue from expanded Scottish Income Tax powers combined with Stage 1 reforms.[15] This would exceed both the lower and upper estimate for the revenue-raising target at Stage 2, largely as a result of the significant contribution of reducing the personal allowance.
- In the longer term, if the Scottish Government was able to secure powers over a wider range of taxes, £6.39bn per year could be generated from all of the scenarios we have modelled.[16] This additional revenue would account for around two-thirds (64%) of the £10bn upper estimate for a MIG’s third and final stage.
| Stage | Scenarios included | Expected revenue from modelled scenarios | Lower estimate of revenue-raising target | Scenarios % of lower estimate | Upper estimate of revenue-raising target | Scenarios % of upper estimate |
|---|---|---|---|---|---|---|
| 1 | 1 & 2 | £0.84bn | £0.3bn | 278% | £1bn | 84% |
| 2 | 1, 2, 3 & 4 | £3.75bn | £1bn | 375% | £2.5bn | 150% |
| 3 | 1, 2, 3, 4, 5, 6 & 7 | £6.39bn | £2.5bn | 256% | £10bn | 64% |
Conclusions and recommendations
Bringing together these findings, there are ten key conclusions, with a series of recommendations attached, that the Expert Group should consider when making recommendations on both short and longer term revenue raising decisions to pay for a MIG.
1. There are options open to the Scottish Government to increase available additional revenue without needing to increase tax rates. These include changes to the Fiscal Framework with the rest of the UK and ensuring the introduction of a MIG supports wider economic growth as a means to organically grow existing tax receipts. However, these approaches are unlikely to generate the additional revenue needed to fund the longer term ambitions of a MIG.
2. The long term development of a MIG will require an expansion of the Scottish Government’s revenue-raising powers. A clear assessment of the scale of this will be required as well as those taxes that are likely to generally raise the largest amounts.
3. The short term focus should be on a full consideration of what additional revenue could be raised from existing tax powers. It is possible that significant additional revenue could be raised by changes to Scottish Income Tax and council tax using existing powers. However, there are short term political difficulties around utilising existing revenue-raising powers, with the 2024 Scottish Government Tax Strategy committing to no major changes to Scottish Income Tax policy.[17]
4. The scenarios we have modelled can make a significant contribution to the revenue-raising targets for a MIG across the short-, medium- and long term. The lower revenue-raising estimates are exceeded by the scenarios we modelled, and our modelling options would make a considerable contribution to the upper revenue-raising estimates. Indeed, at Stage 2, the upper estimate is in fact exceed largely as a result of the significant revenue raised by our modelled reduction in the Scottish Income Tax personal allowance. However, it is important to note that the scenarios we present do not account for potential behavioural changes or wider fiscal implications for Block Grant Adjustments (BGA).
5. Countries that have successful implemented MIG-type schemes have a tax-to-GDP ratio above that of the UK and the OECD average. As a result, raising upwards of £10bn for the ‘full’ implementation of a MIG would not put Scotland out of line with the level of tax raised in other countries with generous MIG-type policies. Moreover, international comparisons show that those countries that raise more in taxes than the UK often do so by having a broader tax base across different types of taxation, including VAT and employer social security contributions, and higher personal tax rates on lower- and middle-earners than is currently the case in the UK.[18]
6. The raising of additional revenue to specifically fund a policy objective, such as a MIG, is not common practice. International examples also teach us that it would be difficult to align certain tax changes to specific spending changes. Doing so could, in fact, undermine confidence and support for both the tax rise and the policy objective being funded.
7. Not all tax increases that the Scottish Government could introduce will necessarily be directed to the MIG. If the Scottish Government was to receive additional revenue-raising powers, there is likely a number of policy areas that will be under consideration for an increase in public spending. Understanding that there will likely be competing demands for additional revenue will be important when setting the ambition and scope of the MIG, especially in the longer term.
8. The distributional impacts of tax changes should not be considered in isolation, but alongside the impacts and generosity of the MIG. There can often be an undue focus upon the progressivity of taxation, rather than a wider focus on the generosity and progressivity of tax-and-spend decisions. Introducing a MIG can be designed to mitigate any potential regressive tax increases necessary to fund the system.
9. Accounting for behavioural changes is an important element when considering the expected revenue raised and sustainability of changes to tax policy. This is especially the case for income-based taxes, and in light of Scotland’s proximity to the rest of the UK. However, it should be recognised that evidence of behavioural change is built on assumptions that carry a degree of uncertainty.
10. Administrative feasibility matters when considering what tax changes to introduce. Scottish Income Tax, the biggest source of devolved tax revenue, is still mostly collected by HMRC rather than Revenue Scotland. The Scottish Government would need to develop a more robust infrastructure for collecting revenues if significant expansions in tax raising powers were to occur.
Contact
Email: MIGsecretariat@gov.scot